(1) The results of the Closed Block for the period from November 16, 1998 through December 31, 1998 are reported on one line in the Company's consolidated statement of income. Accordingly, the individual line items on the income statement for the year ended December 31, 1998 are not comparable to the prior years presented.
(3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Group Pension Transaction" and Note 10 to the Consolidated Financial Statements.
(4) As a mutual life insurance company, MONY Life was subject to the add-on (surplus) tax imposed on mutual life insurance companies under Section 809 of the Internal Revenue Code of 1986 (the "Code"). Section 809 requires (and the surplus tax results from) the disallowance of a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. The income tax expense amounts include $0.0 million, $(5.8) million, $12.8 million, $0.0 million and $23.0 million of surplus tax for the years ended December 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(9) Includes liabilities transferred in the Group Pension Transaction of $5,678.5 million, $5,638.7 million, $5,544.1 million, $5,855.7 million, and $5,608.0 million at December 31, 1998, 1997, 1996, 1995, and 1994, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Group Pension Transaction" and Note 10 to the Consolidated Financial Statements.
(10) Includes Closed Block liabilities of $7,290.7 million at December 31, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 and Note 20 to the Consolidated Financial Statements.
(12) Prior to 1996, MONY, as a mutual life insurance company, prepared its financial statements in conformity with accounting practices prescribed or permitted by the New York Insurance Department, which accounting practices were considered to be GAAP for mutual life insurance companies. As of January 1, 1996, MONY adopted Financial Accounting Standards Board (FASB) Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises, and Statement of Financial Accounting Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Policies. Interpretation No. 40 and SFAS No. 120 require mutual life insurance companies to adopt all applicable authoritative GAAP pronouncements in their general purpose financial statements. See Note 4 to the Consolidated Financial Statements. Accordingly, the financial information presented in the Selected Consolidated Financial Information for periods prior to 1996 has been derived from financial information of MONY which has been retroactively restated to reflect the adoption of all applicable authoritative GAAP pronouncements. All such applicable pronouncements were adopted as of the effective date originally specified in each such pronouncement. However, if the effective date of a pronouncement was subsequent to the earliest financial information presented herein, MONY 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 MONY and, if applicable, a description of the accounting followed by MONY for periods presented herein prior to the effective date of such pronouncements.
The following discussion addresses the consolidated financial condition and results of operations of the Company for the periods indicated. The discussion of the Company's consolidated financial results of operations is based on the results of the Closed Block for the period from November 16, 1998 through December 31, 1998 combined on a line by line basis with the results of operations outside the Closed Block, as further discussed below. The discussion and analysis of the Company's financial condition and results presented below should be read in conjunction with the "Selected Consolidated Financial Information" and the Consolidated Financial Statements and related footnotes and other financial information included elsewhere herein.
The pre-tax contribution from the Closed Block for the period from November 16, 1998 through December 31, 1998 was $5.7 million. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the business in the Closed Block. As a result, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block.
Universal life and investment-type product policy fees were $151.6 million for 1998, an increase of $24.3 million, or 19.1%, from $127.3 million reported for 1997. This increase was primarily the result of higher fees relating to the Company's flexible premium deferred annuity ("FPVA") business and variable universal life ("VUL") business of $13.4 million and $9.8 million, respectively. The Company reported total fees from its FPVA business of $63.4 million in 1998, as compared to $50.0 million in 1997. The Company reported total fees from its VUL business of $27.5 million in 1998, as compared to $17.7 million in 1997. The increase in the FPVA fees is primarily a result of an increase in the account value of such products during the year of approximately $460.0 million. The increase in account value resulted from new sales and other deposits of $611.7 million, market appreciation of approximately $298.9 million, offset by approximately $450.6 million in withdrawals and surrenders. The average FPVA account value during 1998 was approximately $4.5 billion, as compared to $3.7 billion in 1997. The increase in VUL fees is primarily due to higher cost of insurance charges of approximately $5.5 million, consistent with the in force growth of such business.
Net investment income was $735.7 million for 1998, an increase of $2.7 million, or 0.4%, from $733.0 million reported for 1997. Lower interest rates in 1998 resulted in lower investment income of approximately $22.0 million, while an increase in the Company's average total invested assets during 1998 of approximately $179.9 million, as compared to 1997, and changes in the mix of invested assets from lower yielding real estate to higher yielding fixed maturity securities resulted in an offsetting increase in investment income of approximately $24.7 million. The effect of investing new money of approximately $2.4 billion (including the proceeds from prepayments, sales and maturities of its invested assets, as well as net cash flow from operating activities), reduced the total yield on invested assets by approximately 10 basis points in 1998 compared to 1997. Average total invested assets in 1998 increased, as compared to 1997; primarily as a result of proceeds received in the Offerings and positive cash flow from operations and investing activities. During 1998, the Company's average investment in fixed maturity securities (before unrealized gains or losses) increased by approximately $539.8 million, while its average investment in mortgage loans and real estate decreased by approximately $81.1 million and $435.5 million, respectively. At December 31, 1998, fixed maturity securities, mortgage loans and real estate represented approximately 61.0%, 12.9% and 5.7%, respectively, of total invested assets, as compared to 56.9%, 13.7% and 10.6%, respectively, at December 31, 1997. The annualized yield on the Company's invested assets before and after realized gains/(losses) on investments was 7.0% and 8.6%, respectively, for the year ended December 31, 1998, as compared to 7.1% and 7.8%, respectively, for 1997. See "Investments".
Other income (which consists primarily of fees earned by the Company's mutual fund management, broker-dealer, and insurance brokerage operations, as well as revenues from interest on deposits held under financial reinsurance arrangements, certain other asset management fees, and other miscellaneous revenues) was $163.2 million for 1998, an increase of $17.8 million, or 12.2%, from $145.4 million reported for 1997. The increase was primarily the result of higher commissions earned in 1998 by the Company's broker-dealer operations of $11.1 million, higher fees earned in 1998 by the Company's mutual fund management operations of $19.5 million, offset by a gain of $19.4 million recognized in 1997 relating to certain assets which had appreciated in value and were transferred to partially fund the cost of the indemnity reinsurance purchased in connection with the DI Transaction as hereafter defined. See "DI Transaction". During 1998, the Company's broker-dealer operations reported commission earnings of $43.5 million, as compared to $32.4 million reported in 1997. Also, during 1998, the Company's mutual fund management operations reported $61.8 million in fees
Benefits to policyholders were $789.8 million for 1998, a decrease of $50.3 million, or 6.0%, from $840.1 million reported for 1997. The decrease primarily resulted from the transfer of the Company's disability income insurance business pursuant to the DI Transaction in 1997, as hereafter defined (See "DI Transaction"), and a decrease in reserves and surrenders on traditional business in 1998, offset by higher death benefits claims in 1998. Benefits to policyholders recorded in 1998 relating to the business transferred pursuant to the DI Transaction decreased by $47.7 million to $0.9 million, as compared to $48.6 million recorded in 1997. The change in reserves on traditional business in 1998 decreased $21.2 million to $168.1 million, as compared to $189.3 million reported in 1997. Surrenders on traditional business in 1998 decreased $5.0 million to $322.4 million, as compared to $327.4 million in 1997 and, death benefits in 1998 increased $28.9 million to $230.5 million, as compared to $201.6 million in 1997.
Interest credited to policyholders' account balances was $113.7 million for 1998, a decrease of $12.2 million, or 9.7%, from $125.9 million reported for 1997. The decrease primarily resulted from lower interest crediting across substantially all product lines reflecting current market conditions and the continuing decrease in the Company's single premium deferred annuity business.
Prior to its reorganization pursuant to the Plan, MONY Life was subject to the surplus tax (add-on tax) imposed on mutual life insurance companies under Section 809 of the Code. Section 809 requires (and the surplus tax results from) the disallowance of a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, the MONY Life is no longer subject to the surplus tax.
The $27.2 million and $13.3 million reflected as after-tax demutualization expenses on the Company's consolidated statements of income for the years ended December 31, 1998 and 1997, respectively, were direct nonrecurring costs specifically related to the demutualization. Costs incurred include primarily the fees of financial, legal, actuarial and accounting advisors to the Company and to the New York Insurance Department, as well as printing and postage for communication with policyholders.
Premium revenue was $838.6 million for 1997, a decrease of $21.2 million, or 2.5%, from $859.8 million reported for 1996. The decrease was primarily the result of lower new and renewal premiums of $4.3 million and $23.5 million, respectively, offset by higher sales of single premium individual life insurance of approximately $6.6 million. Management believes that the decrease was consistent with trends in the industry, particularly the continuing shift by consumers from
Net investment income was $733.0 million for 1997, a decrease of $18.6 million, or 2.5%, from $751.6 million reported for 1996. Lower interest rates in 1997 resulted in lower investment income of approximately $10.4 million, while a decrease in the Company's average total invested assets during 1997 of approximately $107.9 million, as compared to 1996, resulted in a further decrease in investment income of approximately $7.8 million. The effect of investing new money of approximately $2.0 billion (including the proceeds from prepayments, sales and maturities of its invested assets, as well as net cash flow from operating activities), in conjunction with a change in the mix of invested assets, reduced the total yield on invested assets by approximately 10 basis points in 1997. Average total invested assets in 1997 decreased, as compared to 1996, primarily as a result of the retirement of the Company's Eurobond debt issuances at their scheduled maturity dates (see Note 16 to the Consolidated Financial Statements). During 1997, the Company's average investment in fixed maturity securities (before unrealized gains or losses) increased by approximately $459.3 million, while its average investment in mortgage loans and real estate decreased by approximately $170.5 million and $390.1 million, respectively. At December 31, 1997, fixed maturity securities, mortgage loans and real estate represented approximately 56.9%, 13.6% and 10.7% of total invested assets, as compared to 52.2%, 15.1 % and 14.4% at December 31, 1996. The yield on the Company's invested assets before and after realized gains (losses) on investments was 7.1% and 7.8%, respectively, for 1997, as compared to 7.2% and 7.9%, respectively, for 1996. See "Investments".
Net realized gains on investments were $72.1 million for 1997, a decrease of $3.8 million, or 5.0%, from $75.9 million reported for 1996. The decrease was due to higher provisions for losses and lower gains on sales of certain partnership interests offset by higher gains on sales of real estate and common stock. Provisions for valuation allowances on real estate to be disposed of aggregated $63.8 million for 1997, as compared to $16.8 million in 1996, primarily as a result of additional properties put up for sale in 1997 that had carrying values in excess of their fair values less costs to sell; realized gains on sales of real estate were $87.6 million in 1997, as compared to $42.8 million in 1996; realized gains on sales of common stock were $39.7 million in 1997, as compared to $31.4 million in 1996; and gains on sales of certain partnership interests totaled $1.3 million in 1997, as compared to $10.5 million in 1996.
Other income was $145.4 million for 1997, an increase of $28.1 million, or 24.0%, as compared to $117.3 million reported in 1996. The increase was primarily the result of higher commissions earned by the Company's broker-dealer operations of $3.5 million, higher fees earned by the Company's mutual fund management operations of $17.2 million and a gain of $19.4 million relating to certain assets which had appreciated in value and were transferred to partially fund the cost of the indemnity reinsurance purchased in connection with the DI Transaction in 1997 (see "The DI Transaction"). These assets had previously been held on deposit by a third party reinsurance company under a financial reinsurance arrangement which was replaced with the aforementioned indemnity reinsurance. Offsetting such increases was miscellaneous non-recurring income of approximately $8.1 million recorded in Other Income in 1996 and lower earnings of approximately $2.7 million relating to an aviation reinsurance pool in which the Company participates. During 1997, the Company's broker-dealer operations reported commission earnings of $32.2 million, as compared to $28.7 million reported in 1996. Also, during 1997, the Company's mutual fund management operations reported $42.3 million in fees from advisory, underwriting and distribution services, as compared to $25.1 million reported in 1996, as assets under management increased to approximately $5.4 billion from $3.5 billion at December 31, 1997 and 1996, respectively.
Interest credited to policyholders' account balances was $125.9 million for 1997, a decrease of $21.0 million, or 14.3%, from $146.9 million reported for 1996. The decrease was comprised of lower interest crediting of $9.5 million and $11.9 million on the Company's SPDAs and retained group pension business, offset by $4.9 million of higher interest crediting on universal life business. The year to year change in interest credited primarily resulted from the change in average account balances for the aforementioned products. The average account balances for such products were $636.5 million, $220.4 million and $496.6 million for 1997, respectively, and $788.0 million, $292.7 million and $470.3 million for 1996, respectively.
Amortization of DAC was $181.2 million for 1997, an increase of $23.0 million, or 14.5%, from $158.2 million reported for 1996. The increase was primarily the result of: (i) charging off approximately $30.7 million of deferred policy acquisition costs relating to the DI Transaction (see the "DI Transaction"), (ii) higher amortization of approximately $11.6 million relating to the Company's FPVA product line and (iii) a decrease in amortization of approximately $21.5 million relating to the Company's traditional life business which resulted from revised projections of the present value of the ultimate profits expected from such business to reflect actual results to date. The increase in amortization relating to FPVAs resulted from higher profits due to an increase in account value of approximately $1,167.5 million during 1997 to $4,314.1 million, as compared to $3,146.6 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $712.7 million and market appreciation of $738.9 million, offset by approximately $284.1 million in withdrawals and surrenders.
The Company's provision for federal income taxes in 1997, including the tax effect of demutualization expenses, of $53.8 million included a benefit relating to the surplus tax of $5.8 million, compared to surplus tax expense incurred of $12.8 million in 1996. The Company's effective tax rate before the surplus tax and extraordinary item was 33.6% in 1997, as compared to approximately 31% in 1996.
In addition, pursuant to the Agreement, the Company agreed to make a $200 million capital investment in AEGON by purchasing $150 million face amount of Series A Notes and $50 million face amount of Series B Notes (hereinafter referred to as the "AEGON Notes"). The Series A Notes pay interest at 6.44 percent per annum and the Series B Notes pay interest at 6.24 percent per annum. Both the Series A Notes and the Series B Notes mature on December 31, 2002. MONY's investment in the Series A Notes was intended to provide AEGON with the funding necessary to capitalize AUSA.
In accordance with GAAP, the transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the transferred business. As a result, the Company continues 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". In addition, the Company reports in its GAAP earnings the profits from such transferred business under the caption entitled, Group Pension Profits (as described below). See Note 10 to the Consolidated Financial Statements.
Earnings which emerge from the Existing Deposits pursuant to the application of the Earnings Formula are recorded in the Company's financial statements only after adjustments (primarily to recognize asset impairments in accordance with SFAS Nos. 114 and 115) to reflect such earnings on a basis in accordance with GAAP (such earnings hereafter referred to as the "Group Pension Profits"). Losses which arise from the application of the Earnings Formula for any annual period will be reflected in the Company's results of operations (after adjustments to reflect such losses in accordance with GAAP) only up to the amount for which the Company is at risk (as described below), which at any time is equal to the then outstanding principal amount of the Series A Notes.
Operating losses reported in any annual period pursuant to the earnings Formula are carried forward to reduce any earnings in subsequent years reported pursuant to the Earnings Formula. Any resultant deficit remaining at December 31, 2002 will be deducted from the Final Value Payment and New Business Growth Payment, if any, due to the Company. If a deficit still remains, it will be applied as an offset against the principal payment due to the Company upon maturity of the Series A Notes. The Series A Notes have been allocated to the Closed Block. See Note 3 to the Consolidated Financial Statements.
(2) Includes separate account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $33.3 million and $31.1 million as of December 31, 1998 and 1997, respectively.
- --------------- (1) See "Investments" for definitions of problem, potential problem, and restructured mortgages.
(2) Problem commercial mortgages included delinquent mortgage loans of $4.4 million, $0.0 million, and $0.0 million at December 31, 1998, 1997 and 1996, respectively, and mortgage loans in foreclosure of $0.0 million, $8.1 million, and $19.3 million at such dates, respectively.
For management and reporting purposes, the Company's business is organized in two principal operating segments, the "Protection Products" segment and the "Accumulation Products" segment. Substantially all of the Company's other business activities are combined and reported in the "Other Products" segment. In its Protection Products segment, the Company offers a wide range of individual life insurance products, including whole life, term life, universal life, variable universal life, last survivor life, group life and group universal life. Also included in the Protection Products segment are the: (i) assets and liabilities transferred pursuant to the Group Pension Transaction, as well as the Group Pension Profits, (ii) the Closed Block assets and liabilities, as well as the Contribution from the Closed Block, and (iii) the Company's disability income insurance business which was transferred in the DI Transaction. In its Accumulation Products segment, the Company offers fixed annuities, single premium deferred annuities, flexible premium deferred annuities, immediate annuities, flexible payment variable annuities and proprietary retail mutual funds. The Company's Other Products segment primarily consists of a securities broker-dealer operation, an insurance brokerage operation and the Run-Off Businesses. In addition to selling the Company's proprietary investment products, the securities broker-dealer operation
The following table presents certain summary financial data for the Company by operating segment as of the dates and for the periods indicated.
(2) Includes Group Pension Profits of $56.8 million, $60.0 million and $59.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. See "-- The Group Pension Transaction".
(3) Includes assets transferred in the Group Pension Transaction of $5,751.8 million, $5,714.9 million and $5,627.6 million as of December 31, 1998, 1997, and 1996, respectively (see Note 10 to the Consolidated Financial Statements).
(5) Includes policyholder liabilities transferred in the Group Pension Transaction of $1,824.9 million, $1,991.0 million and $2,158.1 million as of December 31, 1998, 1997, and 1996, respectively (see Note 10 to the Consolidated Financial Statements).
(6) Each segment includes separate account assets in an amount not less than the corresponding liability reported.
(8) Includes Closed Block assets of $6,161.2 million as of December 31, 1998 (see Note 3 and Note 20 Consolidated Financial Statements).
(9) Includes Closed Block policyholders' liabilities of $7,177.1 million as of December 31, 1998 (see Note 3 and Note 20 Consolidated Financial Statements).
Set forth below is a discussion of the operating results of the Company by segment for the periods indicated.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 -- Protection Products Segment
Universal life policy fees were $86.2 million for 1998, an increase of $11.3 million, or 15.1%, from $74.9 million reported for 1997. This increase was primarily the result of higher fees relating to the Company's VUL business of $9.8 million and approximately $3.2 million relating to corporate sponsored variable universal life ("CSVUL") business, which the Company began offering during the 4th quarter of 1998. For 1998, the Company reported total fees from its VUL business of $27.5 million, as compared to $17.7 million reported for 1997. The increase in VUL fees is primarily due to higher charges for the cost of insurance, administration, and loading of approximately $5.5 million, $0.8 million and $1.8 million, respectively.
Amortization of DAC was $101.4 million for 1998, a decrease of $45.4 million, or 30.9%, from $146.8 million reported for 1997. The decrease primarily resulted from: (i) a non-recurring charge of $33.6 million recorded in 1997 relating to the transfer of the Company's disability income insurance business pursuant to the DI Transaction, (ii) lower amortization of approximately $5.1 million resulting from a revision during the fourth quarter of 1997 of mortality assumptions on the Company universal life business, and (iii) lower amortization of approximately $6.7 million resulting from higher death claims in 1998 as compared to 1997.
Other operating costs and expenses were $288.7 million for 1998, an increase of $7.9 million, or 2.8% from $280.8 million reported for 1997. The increase primarily consists of higher costs incurred in connection with (i) certain strategic initiatives, (ii) the Year 2000 issue (see "-- Year 2000") and, (iii) interest expense on the MONY Notes, offset by lower costs relating to: (iv) the Company's non-qualified pension plan, (v) issuance costs in 1997 relating to the MONY Notes, (vi) cancellation of an information technology service agreement and, (vii) severance charges relating to the DI Transaction.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 -- Protection Products Segment
Premium revenue was $817.0 million for 1997, a decrease of $20.4 million, or 2.4%, from $837.4 million reported for 1996. The decrease was primarily the result of lower new and renewal premiums, offset by higher sales of single premium individual life insurance.
Universal life policy fees were $74.9 million for 1997, an increase of $11.5 million, or 18.1%, from $63.4 million reported for 1996. This increase was primarily the result of an increase in fees relating to the Company's VUL business of $8.9 million. For the year ended December 31, 1997, the Company reported total fees from VUL business of $17.8 million, as compared to $8.9 million reported for the year ended December 31, 1996. VUL account value increased $65.1 million during 1997 to $106.4 million, as compared to $41.3 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $68.3 million and market appreciation of $14.2 million, offset by approximately $17.4 million in withdrawals and surrenders.
Other income was $34.9 million for 1997, an increase of $6.7 million, or 23.8%, as compared to $28.2 million reported in 1996. The increase was primarily the result of a gain of $19.4 million on assets held on deposit under a financial reinsurance contract which was replaced with an indemnity reinsurance contract during 1997, offset by a decrease of $8.1 million relating to miscellaneous non-recurring income recorded in Other Income in 1996 and $4.6 million of other miscellaneous items.
Benefits to policyholders were $776.8 million for 1997, a decrease of $38.2 million, or 4.7%, from $815.0 million reported for 1996. The decrease primarily resulted from favorable mortality in almost all product lines and the DI Transaction. Favorable mortality contributed approximately $15.6 million of the decrease, while the DI Transaction caused a decrease in benefits of approximately $21.6 million. The decrease in benefits caused by the DI Transaction resulted from the difference between the amount of reserves ceded (which approximated $367.5 million) and the cost of such reinsurance (which approximated $345.9 million). However, after the writeoff of associated deferred policy acquisition costs of approximately $30.7 million, the DI Transaction resulted in a loss of approximately $9.1 million.
Interest credited to policyholders' account balances was $44.3 million for 1997, an increase of $5.3 million, or 13.6%, from $39.0 million reported for 1996. The increase was primarily comprised of $4.9 million of higher interest crediting on universal life business. The average interest crediting rates in 1997 on the Company's universal life business was approximately 6.3% in 1997, as compared to 6.0% in 1996. The average account balances for such products were $496.6 million for 1997 and $470.3 million for 1996, respectively.
The following table presents certain summary financial data relating to the Company's Accumulation Products segment for the periods indicated.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 -- Accumulation Products Segment
Net investment income and net realized gains on investments aggregated $136.3 million for 1998, an increase of $4.9 million, or 3.7%, from $131.4 million reported for 1997. The increase was primarily due to higher gains from the sales of real estate which was partially offset by a decrease in yield on investment of new money.
Other income was $72.8 million for 1998, an increase of $20.7 million, or 39.7%, from $52.1 million reported for 1997. The increase was primarily the result of higher fees earned by the Company's mutual fund management operations of $19.5 million. During 1998, the Company's mutual fund management operations reported $61.8 million in fees from advisory, underwriting and distribution services, as compared to $42.3 million reported in 1997 as assets under management increased to approximately $6.9 billion from $5.4 billion at December 31, 1998 and 1997, respectively.
Benefits to policyholders were $19.0 million for 1998, a decrease of $2.2 million, or 10.4%, from $21.2 million reported for 1997. The decrease is primarily due to lower reserves on immediate annuities resulting from lower sales and a decrease in the issuance of supplementary contracts during the period.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 -- Accumulation Products Segment
Premium revenue was $5.0 million for 1997, an increase of $0.8 million, or 19.0% from $4.2 million reported for 1996. The increase primarily resulted from $0.8 million in higher sales of immediate annuities to $5.0 million for 1997, as compared to $4.2 million for 1996.
Investment-type product fees were $50.9 million for 1997, an increase of $14.3 million, or 39.1%, from $36.6 million reported for 1996. This increase was primarily the result of an increase in fees relating to the Company's FPVA business of $14.8 million. For the year ended December 31, 1997, the Company reported total fees in its FPVA business of $50.0 million, as compared to $35.2 million reported for the year ended December 31, 1996. FPVA account value increased $1,167.5 million during 1997 to $4,314.1 million, as compared to $3,146.6 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $712.7 million and market appreciation of $738.9 million, offset by approximately $284.1 million in withdrawals and surrenders.
Benefits to policyholders were $21.2 million for 1997, an increase of $3.3 million, or 18.4%, from $17.9 million reported for 1996. The increase primarily resulted from higher transfers to supplementary contracts of approximately $2.9 million.
Interest credited to policyholders' account balances was $71.4 million for 1997, a decrease of $13.5 million, or 15.9%, from $84.9 million reported for 1996. The decrease was primarily due to lower interest crediting of approximately $9.5 million relating to the Company's SPDA business which resulted from a decrease in SPDA account value of approximately $156.8 million during 1997 to $558.1 million, as compared to $714.9 million at the end of 1996. The decrease in account value in 1997 was primarily due to continuing withdrawals, which management believes partially reflects consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.5% in both 1997 and 1996, respectively.
Other operating costs and expenses were $66.3 million for 1997, an increase of $13.5 million, or 25.6%, from $52.8 million reported for 1996. The increase consisted primarily of higher sub-advisor fees and commissions of approximately $5.1 million and higher operating expenses of approximately $5.9 million incurred by the Company's mutual fund management operations.
The following table presents certain summary financial data relating to the Company's Other Products segment for the periods indicated.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 -- Other Products Segment
Premium revenue was $16.9 million for 1998, an increase of $0.3 million, or 1.8%, from $16.6 million reported for 1997. The increase primarily relates to higher annuitization of pension contracts during the period.
Other income was $61.1 million for 1998, an increase of $8.0 million, or 15.1%, from $53.1 million reported for 1997. The increase primarily related to higher commission revenue reported by the Company's broker-dealer operations of approximately $11.1 million, offset by lower revenues of approximately $3.1 million relating to an aviation reinsurance pool in which the Company participates. During 1998, the Company's broker-dealer operations reported commission revenue of $43.5 million, as compared to $32.2 million in 1997.
Other operating costs and expenses were $80.2 million for 1998, an increase of $14.0 million, or 21.1%, from $66.2 million reported for 1997. The increase primarily consists of higher commission expenses of $7.8 million and higher general expenses of $2.0 million incurred by the Company's broker-dealer operations, as well as an increase in expenses allocated to this segment of approximately $3.9 million.
Investment-type product policy fees were $1.5 million for 1997, an increase of $0.6 million, or 66.7%, from $0.9 million reported for 1996. The increase primarily resulted from higher surrender charges on group annuities relating to the retained group pension business.
Interest credited to policyholders' account balances was $10.4 million for 1997, a decrease of $12.0 million, or 53.6%, from $22.4 million reported for 1996. The decrease was primarily related to lower average account balances on the Company's retained group pension business. The average account balance on such business was $220.4 million and $292.7 million for 1997 and 1996, respectively.
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. See "Investments -- General."
At December 31, 1998, the Company had commitments to contribute capital to its equity partnership investments of $100.8 million.
At December 31, 1998, MONY Life had commitments to issue $39.2 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 6.7% to 7.7%. MONY Life also had commitments outstanding to purchase $76.4 million of commercial mortgage loans as of December 31, 1998 with interest rates ranging from 7.0% to 8.1%. In addition, at that date MONY Life had no outstanding commitments to issue any fixed rate commercial mortgage loans.
In 1994, MONY Life completed the sale of $125.0 million face amount of its 11.25% Surplus Notes due August 15, 2024, which generated net proceeds of $70.0 million after a discount of approximately 42.2% from the principal amount payable at maturity and issuance expenses of approximately $2.3 million. Following the discount accretion period, interest will begin to accrue on August 15, 1999; thereafter, interest is scheduled to be paid on February 15 and August 15 of each year, commencing February 15, 2000, at a rate of 11.25% per annum.
The Company has mortgage loans on certain of its real estate properties. The interest rates on these loans range from 7.9% to 8.7%. Maturities range from June 2000 to July 2009. For the years ended December 31, 1998, 1997 and 1996, interest expense on such mortgage loans aggregated $9.0 million, $12.3 million, and $12.9 million, respectively.
During 1989, the Company entered into a transaction which is accounted for as a financing arrangement involving certain real estate properties held for investment. Pursuant to the terms of the agreement, the Company effectively pledged the real estate properties as collateral for a loan of approximately $35.0 million bearing simple interest at a rate of 8% per annum. Interest is cumulative. Periodic interest payments are not required. All principal and interest are effectively due at the maturity of the obligation (March 30, 2000) which is subject to extension at the option of the creditor. However, interest may be paid periodically subject to available cash flow from the real estate properties. At December 31, 1998, 1997 and 1996, the outstanding balance of the obligation including accrued interest was $42.4 million, $41.3 million and $40.1 million, respectively. Interest expense on the obligation of $3.1 million, $3.0 million, and $2.9 million is reflected in Other Operating Costs and Expenses on the Company's statements of income for the years ended December 31, 1998, 1997 and 1996, respectively.
Among the assets allocated to the Closed Block are the Series A Notes. MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments on the Series A Notes pursuant to the terms thereof, as described in "-- The Group Pension Transaction".
The NAIC established RBC requirements to help state regulators monitor and safeguard life insurers' financial strength by 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.
- --------------- (1) Excludes sales of unconsolidated real estate joint venture interests. Real estate joint venture interests are reported in Other Invested Assets. Gains (losses) from the sales of such interests in 1998, 1997 and 1996 were $19.6 million, $1.1 million and $0.0 million, respectively. See Note 4 to the Consolidated Financial Statements.
In 1996, the Company initiated a formal Year 2000 Project (the "Project") to resolve the Year 2000 issue. The scope of the Project was identified, and funding was established. In early 1997, the Company retained Command Systems, Inc., and Keane, Inc. to assist in bringing the Company's computer and information systems into Year 2000 compliance. The Company's overall goal for information technology ("IT") related items was to have business-critical hardware and software compliant by December 31, 1998, with additional testing and enterprise end-to-end testing occurring in 1999. The Company has also retained a consulting firm to assist in the evaluation of Year 2000 issues affecting the Company's non-IT systems in facilities and equipment which may contain date logic in embedded chips. The Company's overall goal is to have these non-IT systems compliant by mid-1999.
The scope of the Company's Project includes: ensuring the compliance of all applications, operating systems and hardware on mainframe, PC and LAN platforms; ensuring the compliance of voice and data network software and hardware; addressing issues related to non-IT systems in buildings, facilities and equipment which may contain date logic in embedded chips; and addressing the compliance of key vendors and other third parties.
The inventory and assessment phases of the Project were completed prior to mid 1998. At December 31, 1998, all of the Company's application systems had been remediated and current date tested. In addition, approximately 94% of the Company's 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.
Approximately 87% of the operating systems, systems software, and hardware for mainframe, PC and LAN platforms were deemed compliant based on information supplied by vendors verbally, in writing, or on the vendor's Internet site. Essentially all critical hardware and software was compliant and tested by December 31, 1998. The remaining items will be resolved and tested in the first quarter of 1999. Ongoing testing for Year 2000 compliance will take place in 1999 as applications, systems software and hardware is 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 Company believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that the Company's internal systems or equipment or those external parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or external parties' contingency plans will mitigate the effects of any noncompliance. Based upon currently available information and considering the Company's Year 2000 Project status, management believes that the most reasonably likely worst case scenario could result in short-term business interruptions.
On the effective date of the Plan, the Company's invested assets were allocated between the Closed Block and operations outside the Closed Block. In view of the similar asset quality characteristics of the major asset categories in the two portfolios, the invested assets in the Closed Block have been combined with the Company's invested assets outside the Closed Block for purposes of the following discussion and analysis. In addition, the following discussion excludes invested assets transferred in the Group Pension Transaction. Accordingly, this discussion should be read in conjunction with the summary financial information regarding assets transferred in the Group Pension Transaction presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 to the Consolidated Financial Statements.
Generally, subject to certain minimum rates, these cash flow analyses are based on projections of cash flows using ten different interest rate scenarios over ten or more years. First a baseline interest rate is selected based on current rates. Then from the selected baseline rate the ten scenarios are: (i) level, (ii) an immediate increase of 3.0% and then level, (iii) an immediate decrease of 3% and then level, (iv) a uniform increase over ten years of one half a percent per year and then level, (v) a uniform decrease over ten years of one half a percent per year and then level, (vi) a uniform increase of one percent per year over five years followed by a uniform decrease of one percent per year over the next five years and then level, (vii) a uniform decrease of one percent per year over five years followed by a uniform increase of one percent per year over the next five years and then level and (viii) a decrease of 2.0% and then level. In addition, two of the scenarios are run with an inverted yield curve.
Since most of its in force liabilities result from participating whole life insurance and 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. The Company's strategy for the management of investment risk also includes the continuing selective sale of real estate. See "-- Equity Real Estate -- Real Estate Sales".
The Company had total consolidated assets at December 31, 1998 of approximately $25.0 billion. Of the Company's total consolidated assets at such date, approximately $13.1 billion represented assets held in the Company's general account (which includes $6.2 billion of assets in the Closed Block), approximately $5.8 billion represented assets transferred pursuant to the Group Pension Transaction (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 to the Consolidated Financial Statements), and approximately $6.1 billion were held in the Company's separate accounts, for which the Company does not generally bear investment risk.
The table below summarizes the invested assets held in the general account of the Company at the dates indicated.
The following table illustrates the yields on average assets for each of the components of the Company's investment portfolio for the years ended December 31, 1998, 1997 and 1996.
- --------------- (1) Yields are based on annual average asset carrying values, excluding unrealized gains (losses) in the fixed maturity asset category.
(3) Equity real estate income is shown net of operating expenses, depreciation and minority interest.
Fixed maturities consist of publicly traded debt securities, privately placed debt securities and small amounts of redeemable preferred stock, and represented 61.0% and 56.9% of total invested assets at December 31, 1998 and 1997, respectively.
The following tables present the Company's private, public and total fixed maturities by NAIC designation and the equivalent ratings of the Nationally Recognized Securities Rating Organizations as of December 31, 1998 and 1997, as well as the percentage, based on fair value, that each designation comprises.
The Company utilizes its investments in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. These privately placed securities are also used to enhance cash flow as a result of sinking fund payments. Generally, private placements provide the Company with broader access to management information, strengthened negotiated protective covenants, call protection features and, where applicable, a higher level of collateral. They are, however, generally not freely tradable because of restrictions imposed by federal and state securities laws and illiquid trading markets.
The Company defines problem securities in the fixed maturity category as securities (i) as to which principal and/or interest payments are in default or are to be restructured pursuant to commenced negotiations or (ii) issued by a company that went into bankruptcy subsequent to the acquisition of such securities or (iii) are deemed to have other than temporary impairments to value. The fair value of problem fixed maturities was $33.9 million and $30.2 million at December 31, 1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and 1996, $0.9 million, $1.1 million and $5.1 million of interest income was not accrued on problem fixed maturities.
The Company defines potential problem securities in the fixed maturity category as securities that are deemed to be experiencing significant operating problems or difficult industry conditions. Typically these credits are experiencing or anticipating liquidity constraints, having difficulty meeting projections/budgets and would most likely be considered a below investment grade risk. The fair value of potential problem fixed maturities was $82.9 million and $86.2 million at December 31, 1998 and 1997, respectively.
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 $8.6 million and $0.0 million at December 31, 1998 and 1997, respectively.
The following table sets forth the total carrying values of the Company's fixed maturity portfolio, as well as its problem, potential problem and restructured fixed maturities.
At December 31, 1998, the Company's largest unaffiliated single concentration of fixed maturities consists of $195.1 million of face amount of AEGON Notes purchased in connection with the Group Pension Transaction. These AEGON Notes represent approximately 1.8% of total invested assets at December 31, 1998 (See Note 10 to the Consolidated Financial Statements.) No other individual non-government issuer represents more than 0.5% of 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, 1998 and 1997 are as follows:
Mortgage loans comprise 12.9% and 13.7% of total invested assets at December 31, 1998 and 1997, respectively. Mortgage loans consist of commercial, agricultural and residential loans. As of December 31, 1998 and 1997, commercial mortgage loans comprised $886.9 million and $914.9 million or 62.5% and 64.0% of total mortgage loan investments, respectively. Agricultural loans comprised $531.2 million and $512.7 million or 37.4% and 35.8% of total mortgage loans, and residential mortgages comprised $1.9 million and $2.5 million or 0.1% and 0.2% of total mortgage loan investments at the dates indicated.
In 1992, the Company discontinued making new commercial mortgage loans, except to honor outstanding commitments or safeguard the values of existing investments. In 1996, due to improving market conditions, the need to maintain a diversified investment portfolio and advantageous yields, the Company started to originate new commercial mortgage loans. New commercial mortgage loan originations aggregated $279.3 million, $79.9 million and $54.3 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Following is a summary of the Company's commercial mortgage loans by geographic area and property type as of December 31, 1998, 1997 and 1996, respectively.
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 such 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.
The following table presents the disposition of maturities for the years ended December 31, 1998, 1997 and 1996.
The Company reviews its mortgage loan portfolio and analyzes the need for a valuation allowance for any loan which is delinquent for 60 days or more, in process of foreclosure, restructured, on "watchlist", or which currently has a valuation allowance. Loans which are delinquent and loans in process of foreclosure are categorized by the Company as "problem" loans. Loans with valuation allowances, but which are not currently delinquent, and loans which are on watchlist are categorized by the Company as "potential problem" loans. Loans for which the original terms of the mortgages have been modified or for which interest or principal payments have been deferred are categorized by the Company as "restructured" loans.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans' original terms was approximately $17.8 million, $25.0 million and $24.3 million at December 31, 1998, 1997 and 1996, respectively. As a result of the restructurings, the gross interest income recognized in net income at December 31, 1998, 1997 and 1996, respectively, was $12.6 million, $18.6 million and $18.1 million.
(2) Includes impairment writedowns recorded prior to the adoption of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, of $26.3 million and $27.4 million at December 31, 1998 and 1997, respectively.
As illustrated in the table above, at December 31, 1998 and 1997 problem agricultural mortgage loans totaled $2.1 million and $2.1 million, or 0.4% and 0.4% of the total carrying value of agricultural mortgages at such dates. Potential problems (not currently in a delinquent status, but with collateral impairment) totaled $1.7 million and $2.6 million or 0.3% and 0.5% of the total carrying value of agricultural mortgages at such dates, respectively, and restructured mortgages totaled $11.7 million and $17.2 million or 2.2% and 3.4% of the total carrying value of agricultural mortgages at such dates, respectively. Total problem, potential problem and restructured mortgages were $15.5 million and $21.9 million at December 31, 1998 and 1997, respectively, or 2.9% and 4.3% of the total carrying value of agricultural mortgages at such dates, respectively. Total specific asset valuation allowances of $0.4 million as of December 31, 1998 for agricultural mortgages were 2.5% of the carrying value before valuation allowances and writedowns of these total problem agricultural mortgages of $15.9 million.
MONY Life has, from time to time, pooled certain of its 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 such arrangements, MONY Life retains a specified equity interest in the loans in such pools and sells the remaining participation interest. MONY Life is responsible for servicing the individual agricultural mortgage loans in each pool, for which it receives a servicing fee from the third party participants. As of December 31, 1998, the aggregate amount of agricultural mortgage loans in such pools being serviced by MONY Life was approximately $268.0 million.
Equity real estate is categorized as either "Real estate held for investment" or "Real Estate to be disposed of". Real estate to be disposed of consists of properties for which the Company has commenced marketing efforts. The carrying value of real estate held for investment totaled $321.3 million and $495.9 million as of December 31, 1998 and 1997, respectively. The carrying value of real estate to be disposed of aggregated $312.9 million and $621.2 million as of December 31, 1998 and 1997, respectively.
The following table presents the carrying values of the Company's investments in common stocks and limited partnership interests at the dates indicated. Included in common stocks at December 31, 1998 and 1997 are $19.1 million and $0.8 million, respectively, of non-marketable private equity securities.
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of December 31, 1998 and 1997 are shown in the table below.
- --------------- (1) Includes $55.8 million and $110.0 million at December 31, 1998, and 1997, respectively, relating to impairments taken upon foreclosure of mortgage loans.
All of the Company's fixed maturity and equity securities are classified as available for sale and, accordingly, are marked to market, with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. Securities whose value is deemed other than temporarily impaired are written down to fair value. The writedowns are recorded as realized losses and included in earnings. The cost basis of such securities is adjusted to fair value. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 1998, 1997 and 1996, such writedowns aggregated $15.7 million, $10.2 million, and $4.5 million, respectively.
At December 31, 1998 and 1997, 8.1% ($886.9 million) and 8.7% ($914.9 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 $11.7 million, $0.4 million and $(4.2) million, respectively. The carrying value of commercial mortgage loans at December 31, 1998 was $886.9 million, which
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1998, 1997 and 1996, such impairment adjustments aggregated $5.9 million, $0.0 million, and $3.8 million, respectively. At December 31, 1998 and 1997, the carrying value of real estate held for investment was $321.3 million and $495.9 million, or 2.9% and 4.7% of invested assets at such dates, respectively. The aforementioned carrying values are net of cumulative impairments of $87.4 million and $61.7 million, respectively, and net of accumulated depreciation of $153.9 million and $239.3 million, respectively. However, there can be no assurance that additional provisions for impairment adjustments with respect to real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.
The carrying value of real estate to be disposed of at December 31, 1998 and 1997 was $312.9 million and $621.2 million, net of impairment adjustments of $79.1 million and $182.3 million, valuation allowances of $30.6 million and $82.7 million and accumulated depreciation of $136.2 million and $255.1 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs (See Note 4 to the Consolidated Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1998, 1997 and 1996, such increases in valuation allowances aggregated $6.8 million, $63.8 million and $16.8 million, respectively. See "-- Equity Real Estate -- Real Estate Sales".