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 Debt Service Coverage Account (the “DSCA”), pursuant to the terms of the note indenture, to provide collateral for the payment of interest and principal on the Insured Notes and the balance of approximately $232.6 million was distributed to MONY Group in the form of a dividend. The Insured Notes mature on January 21, 2017. The Insured Notes pay interest only through January 21, 2008 at which time principal payments will begin to be made pursuant to an amortization schedule. Interest on the Insured Notes is payable quarterly at an annual rate equal to three month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract (the “Swap”), which locked in a fixed rate of interest on the Insured Notes at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum) (the “Insurance Policy”), which guarantees the scheduled principal and interest payments on the Insured Notes, the all-in cost of the indebtedness is 7.36%. See Note 22 to the MONY Holdings and Subsidiary Consolidated Financial Statements for further information regarding the Insured Notes.
See Part I Item I, “Business”, and Notes 1 and 9 of the MONY Holdings and Subsidiary Consolidated Financial Statements included herein for further information regarding the Company’s business and reportable segments.
the cost of selling and servicing the various products sold by the Company, including commissions to sales representatives (net of any deferrals), and general business expenses.
The Company’s profitability depends in large part upon (i) price movements and trends in the securities markets, (ii) the amount of its assets and its third-party assets under management, (iii) the adequacy of its product pricing (which is primarily a function of competitive conditions, management’s ability to assess and manage trends in mortality and morbidity experience as compared to the level of benefit payments, and its ability to maintain expenses within pricing assumptions), (iv) supply and demand for the kinds of products and services offered by the Company (see Note 9 to the MONY Holdings and Subsidiary Consolidated Financial Statements included herein for the principal products and services offered by the Company), (v) the maintenance of the Company’s target spreads between credited rates on policyholders’ account balances and the rate of earnings on its investments, (vi) the amount of time purchasers of the Company’s insurance and annuity products hold and renew their contracts with the Company (referred to as “persistency”), which affects the Company’s ability to recover the costs incurred to sell such policies and contracts, (vii) the ability to manage the market and credit risks associated with its invested assets, (viii) returns on venture capital investments, and (ix) the investment performance of its mutual fund and variable product offerings. External factors, such as general economic conditions and the securities markets, as well as legislation and regulation of the insurance marketplace and products, may also affect the Company’s profitability. In addition, downgrades of the claims paying ability ratings of the Company’s insurance subsidiaries by Nationally Recognized Statistical Rating Organizations may affect the Company’s ability to compete in the marketplace for its products and services. Similarly, downgrades of MONY Group’s credit ratings may affect the Company’s ability to access the debt markets to raise additional capital, which could affect the Company’s liquidity and ability to support the capital of its insurance subsidiaries.
If a majority of the outstanding shares are not voted in favor of the proposed merger with AXA Financial or if the AXA Financial merger transaction does not close for any reason, both the profitability and the financial condition of the Company could suffer severely. A.M. Best, Moody’s, S&P and Fitch have all recently lowered MONY Group’s ratings and/or their outlook on MONY Group’s ratings. It is likely that, in the event the proposed merger is not approved by MONY Group’s shareholders, the rating agencies would promptly further lower their ratings and/or their ratings outlook of MONY Group’s debt obligations and their financial strength ratings of its domestic insurance subsidiaries. This action could cause the Company either (a) to lose business to competitors, given that MONY Life’s distribution includes third-party channels with access to other, higher rated providers, or (b) to pay higher gross concessions to its distributors to maintain premium volume, resulting in lower profits. In addition, among other things, lower ratings could increase the rate of policy surrenders to MONY Life, thereby reducing revenue to a level that would require a write-down of deferred policy acquisition costs (“DPAC”). A ratings downgrade could also undermine MONY Life’s relationships with its distributors and, thus, its attractiveness to third parties as an acquisition candidate. Further, such a downgrade could impair MONY Group’s ability to borrow money or to raise money by selling additional equity. This, in turn, could have a negative effect on the Company’s liquidity or the Company’s cost of capital.
While the Company’s current best estimate for the ultimate investment return underlying this business is 8.0%, a sustained deterioration in the securities markets (whether with regard to investment returns or asset valuations) could require the Company to revise its estimate of the ultimate profitability of this business. This could result in accelerated amortization and/or a charge to earnings to reflect the amount of DPAC which may not be recoverable from the estimated present value of future profits expected to emerge from this business. Such an event, should it occur, may materially affect the Company’s financial position and results of operations.
The Company’s calculation of variable annuity product DPAC asset balances as of December 31, 2003 incorporated an asset growth assumption of 9.6% in 2004, gradually decreasing to 8.0% in 2013 and thereafter, for all funds underlying variable annuity products. This assumption is consistent with the “reversion to the mean” method described above. The assumption of future returns impacts the Company’s expectation of both future fee income and future expenses, including the cost of guaranteed minimum death benefits
Management’s assessment of whether an investment in a debt or equity security is other than temporarily impaired is based primarily on the following factors:
Changes in the factors discussed above (particularly, a sustained or continuing decline in the prices of securities or a deterioration in the credit quality of issuers or a deterioration in industry or issuer fundamentals or in the macro economic outlook) may significantly affect the Company’s determination of whether a security is “other than temporarily impaired”, which may require the Company to recognize an “other than temporary impairment” charge that could be material to its financial position and results of operations. See - Summary of Investments - Other Than Temporary Impairment Charges On Investments in Fixed Maturity Securities and Common Stocks.
• Certain of the Company’s annuity products have contractual provisions which guarantee minimum death benefits. These provisions require the Company to pay the beneficiary any excess of the guaranteed minimum benefit over the fund value of the annuity contract in addition to the payment of the fund value. It is the Company’s practice to establish reserves for the payment of any guaranteed minimum death benefit claims on the basis of its outlook for mortality experience and the amount at risk on the annuity contracts. At December 31, 2003, the Company’s net amount at risk (or the aggregate amount by which the guaranteed values exceeded the fund values of the Company’s in force annuity contracts) totaled approximately $418.0 million. At December 31, 2003, the Company carried a reserve of approximately $4.0 million with respect to such claims. However, additional reserves for such claims may need to be established, particularly if there is a sustained deterioration in the securities markets. In addition, the American Institute of Certified Public Accountants (the “AICPA”) has issued guidance concerning the establishment of such reserves. This guidance requires the Company to change its methodology for determining the amount of reserves that should be established for such claims. Accordingly, upon the adoption of the new guidance issued by the AICPA, effective for financial statements for fiscal years beginning after December 15, 2003, the Company will have to establish additional reserves. The Company estimates that under the new AICPA guidance it will have to establish additional reserves of approximately $0.8 million at January 1, 2004.
The Company’s business is organized in two principal reportable 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. Certain amounts, which are not allocated to the segments, are reported as reconciling items. Reconciling items are principally comprised of: (i) revenues and expenses associated with contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of MONY Holdings, since its formation and commencement of operations in 2002 - see Note 1 to the MONY Holdings and Subsidiary Consolidated Financial Statements, (iii) certain charges associated with the Company’s reorganization activities - see Note 26 to the MONY Holdings and Subsidiary Consolidated Financial Statements, and (iv) merger related expenses incurred in connection with the pending merger of the MONY Group with AXA Financial - see Note 2 to the MONY Holdings and Subsidiary Consolidated Financial Statements.
The following is a discussion of the critical accounting policies that, in the Company’s view, require significant use of judgment. See Note 4 to the MONY Holdings and Subsidiary Consolidated Financial Statements for a complete description of the Company’s significant accounting policies.
The Company records investments in fixed maturity securities and equity securities available-for-sale, trading securities and certain investments in venture capital partnerships at fair value in its consolidated balance
The Company values DPAC and insurance reserves in accordance with the relevant GAAP pronouncements: generally SFAS 60 for term and whole life insurance products, SFAS 97 for universal life and investment-type contracts, and SFAS 120 for traditional participating life insurance contracts. The valuation of DPAC and insurance reserves requires management to assume future investment yields, mortality rates, lapse rates, expense levels, policyholder dividends and where flexibility is allowed, policyholder premium payment behavior. For many of the Company’s products, amortization of DPAC varies with profit margins of the policies and contracts supporting the DPAC balances. The Company must periodically evaluate the recoverability of DPAC and the adequacy of its reserves based on historical and projected future results. Changes in management’s assumptions or actual results that differ significantly from management’s estimates may materially affect the Company’s financial position and results of operations. See - Potential Forward Looking Risks Affecting Profitability.
Accounting for litigation, contingencies and restructuring charges requires the Company to estimate the expected costs of events which have already occurred but which the Company has not completely resolved. As discussed in Note 18 to the Mony Holdings and Subsidiary Consolidated Financial Statements, the Company is party to various legal actions and proceedings in connection with its businesses. To the extent the losses are
The Company’s assumption with respect to the rate of future compensation increases was made by management based on future expected salary trends.
• Public common stock - The fair values of public common stock investments are determined based on quoted market prices.
• 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.
During 2003, the Company recorded charges aggregating $5.8 million as part of the Company’s continuing initiative to enhance operating efficiency and effectively allocate resources. These charges consisted of: (i) severance and related benefits of $1.1 million incurred in connection with the merger of MONY Asset Management, Inc.’s (“MAM”) operations into Boston Advisors a subsidiary of The Advest Group, Inc. and the resulting termination of certain employees of Mony Life that provided professional services to MAM pursuant to a service agreement between MAM and MONY Life; (ii) losses from the abandonment of leased offices of $1.3 million; (iii) losses from the abandonment of leased space in the Company’s home office of $2.0 million; (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”).
During the fourth quarter of 2002 and 2001, the Company recorded reorganization and other charges aggregating approximately $7.2 million and $144.4 million, respectively, as part of the Company’s initiative to enhance operating efficiency, more effectively allocate resources and capital, and discontinue certain non-core operations. Of these charges, $7.2 million and $19.0 million, respectively, met the definition of “restructure charges” as defined by Emerging Issues Task Force Consensus 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The 2002 restructure charge consisted of severance and related benefits resulting from headcount reductions of 161 and 26 in the Company’s home office and career agency system, respectively, as well as losses from the abandonment of certain leased offices and equipment. The 2001 restructure charge consisted of severance and related benefits of $10.3 million resulting from headcount reductions of 117 and 240 in the Company’s home office and career agency system, respectively, and $8.7 million of other miscellaneous items. These actions were substantially completed in 2002. The remaining restructuring reserves primarily relate to lease abandonment costs and are expected to run-off through 2007. The balance of the charge in 2001, $125.4 million, was unrelated to the Company’s restructure activities and consisted of: (i) impairments of certain invested assets and valuation related write-downs of private equity securities held in the Company’s equity method venture capital portfolio; (ii) the write-off of deferred sales charges in the Company’s mutual fund business to reflect revised estimates of recoverability which are principally due to the decline in the value of the Company’s internet funds; (iii) write-downs of certain information technology assets; and (iv) other miscellaneous items.
(3) See Note 13 to the MONY Holdings and Subsidiary Consolidated Financial Statements.
Premium revenue in the Protection Products segment, excluding USFL, decreased $20.6 million, primarily due to a reduction of $16.7 million in renewal premiums on individual life, attributable mostly to the run-off of the Closed Block business, partially offset by an increase in renewal premiums on level term and whole life business outside the Closed Block. An increase in premiums ceded of $7.3 million, attributable to an increase in new and renewal premiums outside the Closed Block, also contributed to the decrease in premium revenue. The year over year increase in new premiums on individual life products outside the Closed Block was $5.3 million, primarily due to growth in the Level Term and Whole Life product lines.
The decrease in the Accumulation Products segment was primarily due to lower Flexible Premium Variable Annuity (“FPVA”) surrender charges of $3.2 million attributable to a negative market value adjustment and lower surrender rates, a decrease in mortality and expense charges of $1.7 million due to lower average FPVA separate account asset under management balances, and a $1.2 million increase in reinsurance charges attributable to an increase in the assets under management on the new Variable Annuity (VA) product introduced in January 2002. The average FPVA separate account assets under management balance for 2003 was $2.8 billion compared to $3.0 billion for 2002. The decrease in the Other Products segment was primarily due to a $1.0 million negative market value adjustment on the retained portion of the Company’s group pension business, and a $0.7 million decrease in fees earned on administrative charges.
The Group Pension Transaction and the related Group Pension Profits ceased as of December 31, 2002. Refer to Note 13 of the Mony Holdings and Subsidiary Consolidated Financial Statements included herein for information regarding the Group Pension Transaction, the Group Pension Profits and the Final Value Payment, along with certain summary financial information relating thereto.
allocated to the Accumulation Products segment was $2.5 million in 2003 compared to $(2.0) million in 2002. For reporting purposes, the results of the COLI contract are allocated among the segments.
In addition to the increase in the cash surrender value of the COLI contract, the Accumulation Products segment also reported increases in fee income and supplementary contract sales of $3.8 million and $3.5 million, respectively. These increases were partially offset by a $2.1 million decrease in advisory fees from the Company’s mutual fund management operations. The increase in the Other Products segment was primarily due to increased revenues from the Company’s securities broker-dealer and insurance brokerage subsidiaries, while the decrease in reconciling amounts was primarily due to lower revenue attributable to the Company’s employee benefit plans.
Interest credited to policyholders’ account balances was $139.4 million for 2003, an increase of $20.1 million, or 16.8%, from $119.3 million reported for 2002. The increase was primarily attributable to higher interest crediting of $10.6 million and $10.3 million in the Protection Products and Accumulation Products segments, respectively, offset by lower interest crediting of $0.8 million in the Other Products segment. The increase in the Protection Products segment was primarily due to higher interest crediting on CSVUL and UL products of $6.7 million and $3.1 million, respectively, due to a larger in-force block on those products. Higher interest crediting on VUL, individual life and Guaranteed Universal Life (“GUL”) products aggregating $0.8 million made up the remainder of the increase in the Protection Products segment. The increase in the Accumulation Products segment was primarily attributable to higher interest crediting on the Flexible Premium Deferred Annuity (“FPDA”) and FPVA products of $10.2 million and $2.1 million, respectively, partially offset by decreased interest crediting on Single Premium Deferred Annuity (“SPDA”) business and other annuity contract business of $1.4 million and $0.6 million, respectively. The increase in interest crediting on FPDA and FPVA business was related to higher general account fund balances resulting from new sales of these products. The decrease in interest crediting on SPDA and other annuity contract business is primarily attributable to the continued run-off of these lines of business.
The increase in the Protection Products segment was primarily attributable to higher costs related to the Company’s employee benefit plans of $43.4 million, offset by a decrease in other general operating expenses of $1.4 million. The $43.4 million increase in the costs related to the Company’s employee benefit plans consisted of a $21.1 million increase in the non-qualified deferred compensation liabilities and a $22.3 million increase in pension expense. The Company purchased a COLI contract to provide a funding mechanism for the 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 cash surrender value of the COLI contract is reflected in the statement of income and comprehensive income caption entitled “other income”. The increase in the Accumulation Products segment was primarily attributable to higher costs related to the Company’s employee benefit plans of $7.6 million, and a charge of $2.0 million relating to reserves established for the support of certain market fund net asset values, partially offset by a $2.0 million reduction in compensation and other miscellaneous expenses at Enterprise, and a decrease in other general expenses of $1.9 million. The increased expenses in the Other Products segment were primarily attributable to higher employee compensation and expense reimbursement allowances attributable to the increased commission revenues earned by the Company’s securities broker-dealer and insurance brokerage subsidiaries. The increase in reconciling amounts related primarily to an increase in interest expense of $5.2 million relating primarily to the issuance of the Insured Notes on April 30, 2002 (see Notes 21 and 22 to the MONY Holdings and Subsidiary Consolidated Financial Statements).
The Company recorded a federal income tax expense in 2003 of $15.4 million, compared to a federal income tax benefit of $9.2 million in 2002. The Company’s effective tax rates were approximately 25.9% and 35.0% in 2003 and 2002, respectively. See Note 12 to the MONY Holdings and Subsidiary Consolidated Financial Statements for details of the sources of the differences between the statutory federal income tax rate of 35.0% and the Company’s effective tax rate.
The results of operations of the Closed Block are combined with the results of operations outside the Closed Block in the Protection Products segment in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Year Ended December 31, 2003 Compared to Year Ended December 31, 2002” included elsewhere herein. Set forth below is a discussion and analysis of the results of operations of the Closed Block for the periods indicated.
Closed Block-Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net realized gains were $12.2 million for the year ended December 31, 2003, an increase of $63.6 million from losses of $51.4 million reported in the prior year. The increase in realized gains/(losses) was attributable primarily to an increase in prepayment gains and a decrease in other than temporary impairments on bonds. The following table sets forth the components of net realized gains/(losses) by investment category for the years ended December 31, 2003 and 2002.
Other income was $1.9 million for the year ended December 31, 2003, a decrease of $0.3 million, or 13.6%, from $2.2 million reported in the prior year due to lower mortgage loan modification fees.
Interest credited to policyholders’ account balances was $8.8 million for the year ended December 31, 2003 a decrease of $0.2 million from $8.6 million reported in the prior year. The decrease in interest crediting was primarily due to a decrease in interest crediting on overdue policy claims.
Amortization of DPAC was $45.2 million for the year ended December 31, 2003, a decrease of $3.9 million, or 7.9%, compared to $49.1 million reported in the prior year. The decrease in amortization was due principally
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. The deferred dividend liability was $65.7 million at December 31, 2003, an increase of $32.5 from $33.2 million at December 31, 2002.
The table below and the discussion that follows present certain information with respect to the Company’s sales of protection and accumulation products during the years ended December 31, 2003 and 2002 by source of distribution. Management uses this information to measure the Company’s sales production from period to period by source of distribution. The amounts presented with respect to life insurance sales represent annualized statutory-basis premiums. Annualized premiums in the Protection Products segment represent the total premium scheduled to be collected on a policy or contract over a twelve-month period. Pursuant to the terms of certain of the policies and contracts issued by the Company, premiums and deposits may be paid or deposited on a monthly, quarterly, or semi-annual basis. Annualized premium does not apply to single premium paying business. All premiums received during the periods presented on COLI and BOLI business and single premium paying policies are included. Statutory basis premiums are used in lieu of GAAP basis premiums because, in accordance with statutory accounting practices, revenues from all classes of long-duration contracts are measured on the same basis, whereas GAAP provides different revenue recognition rules for different classes of long-duration contracts as defined by the requirements of SFAS No. 60, Accounting and Reporting by Insurance Enterprises, SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments, and SOP 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises. The amounts presented with respect to annuity and mutual fund sales represent deposits made by customers during the periods presented.
Total new annualized recurring and single life insurance premiums were $336.0 million for the year ended December 31, 2003, compared with $279.0 million for the year ended December 31, 2002. The increase was primarily due to increased sales of COLI and BOLI, which were $171.8 million for the year ended December 31, 2003, compared to $147.6 million in the prior year, and an increase in new life insurance premiums sold through the Wholesale distribution channel. The improvement in COLI and BOLI sales was attributable primarily to MONY Group’s pending merger with AXA Financial, whose strong financial ratings are important in the COLI and BOLI markets. There were 66 new cases and 1,690 new policies issued in 2003, approximately 40% of which were in the fourth quarter. In 2002, there were 43 new cases and 2,061 new policies issued, approximately 20% of which were in the 2002 fourth quarter. Prior to the announcement of the proposed merger with AXA Financial in September 2003, the Company’s COLI and BOLI sales for the first nine months of 2003 were down
Accumulation sales were $1,876.0 million for the year ended December 31, 2003 compared to $1,781.0 million for the year ended December 31, 2002. Enterprise had sales of $1,266.0 million, $1,077.0 million of which were sold through third-party broker-dealers and $189.0 million of which were sold through the Company’s career network. For the year ended December 31, 2002, Enterprise sales were $1,238.0 million, $1,007.0 million of which were sold through third-party broker-dealers and $231.0 million of which were sold through the Company’s career network. Accumulation assets under management increased 24.7% to $9.6 billion as of December 31, 2003 from $7.7 billion as of December 31, 2002, attributable primarily to an improvement in the equity markets during 2003, and net cash inflows of $275.0 million for the year. The improvement in the equity markets during 2003 was also reflected in higher sales of the Company’s variable annuities, the sales of which were $412.0 million for the year ended December 31, 2003 compared to $405.0 million in the prior year.
Presented below is a discussion and analysis of the Company’s general account consolidated invested assets on a GAAP basis. This discussion and analysis excludes Separate Account assets for the reasons discussed below.
Separate account assets for which the Company does not bear investment risk are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with applicable insurance laws and are generally not chargeable with liabilities that arise from any other business of MONY Life. Separate account assets are subject to general account claims only to the extent that the value of those assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. The Company reports substantially all separate account assets at estimated fair value. Investment income and gains or losses on the investments of separate accounts accrue directly to contract holders and, accordingly, are not reflected in the Company’s consolidated statements of income and cash flows. Fees that the Company charges to the separate accounts (including mortality charges, policy administration fees and surrender charges) are reflected in the Company’s revenues.
The following table presents a summary of the Company’s consolidated general account invested assets at December 31, 2003 and 2002:
The Company utilizes its investments in privately placed fixed maturity securities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. The Company also uses these privately placed investments 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.
Within its fixed maturity securities portfolio, the Company identifies “problem fixed maturity securities”, “potential problem fixed maturity securities” and “restructured fixed maturity securities”. See Note 4 to the MONY Holdings and Subsidiary Consolidated Financial Statements for a discussion of the criteria used in these identifications.
As of December 31, 2003, the fair value of the Company’s problem, potential problem and restructured fixed maturity securities was $240.4 million, $4.9 million and $0.0 million, respectively, which, in the aggregate, represented approximately 2.9% of total fixed maturity securities. As of December 31, 2002 the fair value of the Company’s problem, potential problem and restructured fixed maturity securities was $274.7 million, $8.5 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.3% of total fixed maturity securities.
The following table presents the types of mortgage-backed securities (“MBS”), as well as other asset-backed securities, held by the Company as of the dates indicated.
The Company purchased collateralized mortgage obligations (“CMOs”) to diversify the risk characteristics of its portfolio of invested assets primarily from credit risk to cash flow risk. The majority of the CMOs in the Company’s investment portfolio have relatively low cash flow variability. In addition, 77.1% of the CMOs in the portfolio have minimal credit risk because the underlying collateral is backed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
The Company manages this prepayment and extension risk by investing in CMO tranches that provide for greater stability of cash flows. The following table presents the mix of CMO tranches as of the dates indicated.
The Planned Amortization Class (“PAC”) tranche is structured to provide more certain cash flows to the investor and therefore is subject to less prepayment and extension risk than other CMO tranches. PACs derive their stability from two factors: (i) early repayments are applied first to other tranches to preserve the PACs’ originally scheduled cash flows as much as possible and (ii) cash flows applicable to other tranches are applied first to the PAC if the PAC’s actual cash flows are received later than originally anticipated.
The prepayment and extension risk associated with a Sequential tranche can vary as interest rates fluctuate, since this tranche is not supported by other tranches. The Target Amortization Class tranche has protection similar to PAC in decreasing interest rate environments, but has minimal protection in increasing rate environments.
The majority of the securities contained in the Company’s CMO portfolio are traded in the open market. The Company obtains market prices for these securities from outside vendors. Any security price that the Company does not receive from such vendors, the Company obtains from the originating broker or internally calculate.
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. The Company categorizes loans that are delinquent and loans in process of foreclosure as “problem” loans. The Company categorizes loans with valuation allowances, but which are not currently delinquent, and loans that are on watchlist as “potential problem” loans. The Company categorizes loans for which the original terms of the mortgages have been modified or for which interest or principal payments have been deferred as “restructured” loans.
The carrying value of the Company’s commercial mortgage loans at December 31, 2003 was $1,434.7 million, which is net of valuation allowances aggregating $19.9 million. The valuation allowance represents the Company’s best estimate of impairments at that date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any increases may have a material adverse effect on the Company’s financial position and results of operations.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other mortgage loans based on the Company’s historical loss experience for those investments. As of December 31, 2003 and 2002, these reserves were $17.2 million and $17.6 million, respectively.
The carrying value of the Company’s agricultural mortgage loans was $347.4 million and $306.2 million at December 31, 2003 and 2002, respectively, representing 19.5% and 17.6% of the Company’s total mortgage assets and 2.8% and 2.6% of the Company’s general account invested assets at these dates, respectively. The agricultural mortgage portfolio is diversified both geographically and by type of product. The security for these loans includes row crops, permanent plantings, dairies, ranches and timber tracts. Due to what the Company believes are strong agricultural markets and advantageous yields, the Company expects to continue to invest in agricultural mortgage investments. Less than 2.7% and 4.2% of the Company’s total agricultural loans outstanding at December 31, 2003 and 2002, respectively, were delinquent or in process of foreclosure. The states with the highest concentration of agricultural mortgages at December 31, 2003 were California (15.8%), Washington (11.9%) and Idaho (9.1%). No other state had a concentration of more than 9.0%. The states with the highest concentration of agricultural mortgages at December 31, 2002 were California (15.6%), Washington (13.5%) and Idaho (11.4%). No other state had a concentration of more than 10.0%.
The following table sets forth the components of other invested assets, including real estate to be disposed of and real estate held for investment, as at December 31, 2003 and 2002.
The Company’s investments in common stocks are classified as available-for-sale and are reported at estimated fair value. Unrealized gains and losses on the Company’s 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. Substantially all the common stocks owned by the Company are publicly traded on national securities exchanges. The Company’s investments in common stocks represented $74.1 million, or 0.6%, and $61.5 million, or 0.5%, of invested assets at December 31, 2003 and 2002, respectively. Proceeds on the sale of equity securities totaled $16.9 million, $16.5 million and $31.0 million, which resulted in net realized gains/(losses) of $4.5 million, $(0.1) million and $(6.4) million for the years ended December 31, 2003, 2002 and 2001, respectively.
investments at fair value and changes in the fair value of such investments are reflected in the income of such partnerships. Accordingly, a significant portion of the income reported by the Company from partnerships accounted for under the equity method results from unrealized appreciation or depreciation in the fair value of the investments of the partnerships. See “Quantitative and Qualitative Disclosures about Market Risk - Equity Price Risk.”
At December 31, 2003 and 2002, the Company had investments in 53 and 54 different limited partnerships which represented 1.4% and 1.6%, respectively, of the Company’s general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock. For the years ended December 31, 2003, 2002, and 2001, investment income from investments in limited partnership interests (which is comprised primarily of the Company’s pro rata share of income reported by partnerships accounted for under the equity method and income recognized upon distribution for partnership investments accounted for under the fair value method (see Note 4 to the MONY Holdings and Subsidiary Consolidated Financial Statements) was approximately $12.3 million, $6.5 million and $(35.4) million, respectively, representing 1.7%, 0.9% and (5.2)%, respectively, of the net investment income for such periods. For the same periods, the Company achieved total returns on its investments in limited partnership interests of 6.7%, (15.1)% and (16.2)%, respectively. There can be no assurance that the recent level of investment returns achieved on limited partnership investments can be sustained in the future, and the failure to do so could have a material adverse effect on the Company’s financial position and results of operations.
Once management determines that a security is “other than temporarily impaired” the impairment charge is measured based on the difference between the carrying value of the security and its fair value at the date the determination of impairment is made.
reflects their fair value at the balance sheet date. Fair value for public securities is based on sales prices or bid-and-asked quotations currently available on a securities exchange registered with the SEC or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations system (“NASDAQ”). Fair value for private securities is generally determined by discounting their prospective cash flows at a discount rate. The discount rate for each issue is the sum of two rates. The first component is the yield to maturity of a U.S.T security with a maturity comparable to the average life of the issue being priced. The second component is a credit spread assigned from a matrix based on credit rating and average life. This matrix is created monthly based on data from two major broker dealers. The quality ratings on the issues being priced are reviewed and updated quarterly.
At December 31, 2003, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $43.9 million, of which $31.4 million and $12.5 million related to public and private fixed maturity securities, respectively, and gross unrealized losses on the Company’s portfolio of common stocks were $0.9 million. At December 31, 2002, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $43.2 million, of which $22.4 million and $20.8 million related to public and private fixed maturity securities, respectively, and gross unrealized losses on the Company’s portfolio of common stocks were $2.3 million.
The following tables present certain information by type of investment with respect to the Company’s gross unrealized losses on fixed maturity securities outside of the Closed Block, in the Closed Block, and in total, at December 31, 2003 and 2002, including the number of individual security positions comprising such unrealized losses, the aggregate carrying value and market value of such positions, the amount of such unrealized losses, information as to the amount of time securities have been in an unrealized loss position, and the respective credit quality of such securities. Management segregated the information in the following tables between that applicable to the Closed Block and that applicable to outside the Closed Block because, other than a difference in classification within the Company’s income statement, management believes it is unlikely that there could be any impact to the net income reported by the Company for any period presented due to the sufficiency of the deferred
dividend liability in the Closed Block as of the end of all periods presented. See Note 3 to the MONY Holdings and Subsidiary Consolidated Financial Statements. 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.
Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2002
With respect to fixed maturity securities sold which resulted in a loss for the year ended December 31, 2003 and the year ended December 31, 2002, the following table presents certain information as to the amount of time such securities have been in an unrealized loss position. The information in this table is sorted by % of sales price to carrying value.
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 reflected in the Company’s results of operations. For the years ended December 31, 2003, 2002 and 2001, increases (decreases) in valuation allowances related to mortgage loans aggregated $11.7 million, $1.4 million and $(3.8) million, respectively. The carrying value of commercial mortgage loans at December 31, 2003 was $1,782.4 million, which amount is net of $20.0 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 commercial mortgage loans 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 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. These properties have cumulative impairments of $27.4 million.
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.
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 “Notes”). The Series A Notes pay interest at 6.44% per annum and the Series B Notes pay interest at 6.24% per annum. The Series B Notes matured on December 31, 2002 and the Series A Notes matured on April 7, 2003. The Company’s investment in the Series A Notes was intended to provide AEGON with the funding necessary to capitalize AUSA.
Earnings which emerged from the Existing Deposits pursuant to the application of the Earnings Formula were 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 entirely in accordance with GAAP (such earnings hereafter referred to as the “Group Pension Profits”). Losses which arose from the application of the Earnings Formula for any annual period were 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 was at risk (as described below), which at any time was equal to the then outstanding principal amount of the Series A Notes.
The Insured Notes mature on January 21, 2017. The Insured Notes pay interest only through January 21, 2008 at which time principal payments will begin to be made pursuant to an amortization schedule. Interest on the Insured Notes is payable quarterly at an annual rate equal to three month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract, which effectively locked in a fixed rate of interest on the Insured Notes at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum) (the “Insurance Policy”), which guarantees the payment of scheduled principal and interest on the Insured Notes, the annual cost of the Insured Notes is 7.36%. Pursuant to the terms of this structured financing, MONY Holdings can, subject to certain conditions, issue an additional $150.0 million of this floating rate insured debt through December 31, 2004. MONY Holdings does not currently expect to issue any such additional notes. During 2002 MONY Holdings commenced activities to register the Insured Notes with the SEC as provided for under the note indenture. On February 14, 2003, the SEC declared such registration effective.
Looking Risks Affecting Profitability - If the Merger with AXA Financial Does Not Close for Any Reason, the Company’s Profits and Financial Condition Could Deteriorate Drastically.
MONY Life’s cash inflows are provided mainly from life insurance premiums, annuity considerations and deposit funds, investment income, and maturities and dispositions of invested assets. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, dividends to policyholders, dividends to MONY Holdings (if declared and paid), operating expenses, income taxes, and principal and interest payments on its inter-company surplus notes and demand notes outstanding. The life insurance and annuity liabilities relate to the Company’s obligation to make benefit payments under its insurance and annuity contracts, as well as the need to make payments in connection with policy surrenders, withdrawals and loans. The Company develops an annual cash flow projection which shows expected asset and liability cash flows on a monthly basis. At the end of each quarter actual cash flows are compared to projections, projections for the balance of the year are adjusted in light of the actual results, if appropriate, and investment strategies are also changed, if appropriate. The quarterly cash flow reports contain relevant information on all the following: new product sales and deposits versus projections, existing liability cash flow versus projections and asset portfolio cash flow versus projections. An interest rate projection is a part of the internal cash flow projections for both assets and liabilities. Actual changes in interest rates during the year and, to a lesser extent, changes in rate expectations will impact the changes in projected asset and liability cash flows during the course of the year. When the Company is formulating its cash flow projections, it considers, among other things, its expectations about sales of the Company’s products, its expectations concerning customer behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates.
The payment of dividends by MONY Life to MONY Holdings is regulated under state insurance law. In 2003, MONY Life paid a dividend to MONY Holdings in the amount of $25.0 million, of which $13.8 million was retained by MONY Holdings in its DSCA Sub-account CBB (see Note 22 to the MONY Holdings and Subsidiary Consolidated Financial Statements) and $11.2 million was paid by MONY Holdings in the form of a dividend to MONY Group. Under the New York State Insurance Law, the maximum allowable dividend from MONY Life to MONY Holdings in 2004 without regulatory approval is $87.4 million.
In 2003, MONY Group contributed $40.0 million to MONY Holdings, which in turn contributed such amount to MONY Life to support its capital and surplus. At December 31, 2003 total statutory capital and surplus, including Asset Valuation Reserves, was approximately $1.1 billion. Total statutory capital and surplus represents that of MONY Life, the principal insurance company subsidiary of the MONY Holdings and the direct or indirect parent of all of MONY Holdings’ insurance subsidiaries. The sufficiency of MONY Life’s statutory capital and surplus is a significant factor in determining its and its subsidiaries’ claims paying ability ratings. Statutory basis surplus is computed on the basis of Statutory Accounting Practices, which are those accounting principles or practices prescribed or permitted by an insurer’s domiciliary state. Statutory Accounting Practices are set forth in the insurance laws, regulations and administrative rulings of each state, publications of the National Association of Insurance Commissioners and other documents and accordingly, a reconciliation of Statutory Capital Surplus to shareholders’ equity determined in accordance with GAAP would not be meaningful.
The Company’s principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 2003, the Company reported net cash inflows from operations of $90.8 million, a
$17.0 million increase from net cash inflows of $73.8 million in 2002. The Company’s liquid assets include substantial U.S. treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. Management believes that the Company’s sources of liquidity are adequate to meet its anticipated needs.
(2) The Company anticipates that these amounts could be invested in these partnerships at any time, but are presented in the current period, as the timing of the fulfillment of the obligation cannot be predicted.
(3) See Note 18 to the MONY Holdings and Subsidiary Consolidated Financial Statements for further details on the Company’s operating leases.
(4) Primarily commitments to fund private fixed maturity securities, agricultural loans and floating rate commercial mortgages (see Note 18 to the MONY Holdings and Subsidiary Consolidated Financial Statements). The unfunded commitments for the commercial mortgage loans are presented in the current period, as the timing of the fulfillment of the obligation cannot be predicted.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MONY LIFE (STATUTORY ACCOUNTING PRACTICES)
The following discussion and analysis addresses the financial condition and results of operations of MONY Life as reported in accordance with Statutory Accounting Practices for the year ended December 31, 2003 as compared to the year ended December 31, 2002. You should read this discussion in conjunction with MONY Life’s Statutory Accounting Practices Financial Statements in this Annual Report on Form 10K
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”) 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.
Proceeds to MONY Holdings from the issuance of the aforementioned debt securities, after all offering and other related expenses, were approximately $292.6 million. Of this amount, $60 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 remaining balance of the proceeds from the debt issuance of approximately $232.6 million, were distributed to MONY Group in the form of a dividend.
In connection with this financing, MONY Holdings purchased insurance from Ambac Assurance Corporation which guarantees the timely payment of interest and principal to investors in the event of a default on the Insured Notes. As a result of this insurance, the Insured Notes were rated triple-A by all the major rating organizations, allowing MONY Holdings to minimize the cost of such debt. Interest on the Insured Notes accrue at an annual rate equal to three-month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract, which locked in a fixed rate of interest on the debt of 6.44%. Including all costs associated with the offering, the effective yield on the debt is 7.36%.
Pursuant to the terms of the structured financing, MONY Holdings can, subject to certain conditions, issue an additional $150 million of this floating rate insured debt in the future. 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 debt 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 aforementioned interest rate swap, and (iv) amounts on deposit in (and the earnings thereon) the DSCA. In addition to the aforementioned 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.
From the proceeds of the dividend MONY Holdings made to MONY Group, MONY Group loaned MONY Life $67.7 million. This loan was in the form of a demand loan, which allows MONY Group the ability to require repayment at its discretion. The loan was made to effectively enable MONY Group to invest the funds from the issuance of the Insured Notes in higher yielding longer duration investments until such time the funds could be permanently invested by MONY Group. The ability of MONY Life to invest the funds in longer duration securities is possible because MONY Life has other sources of cash flow that enables the company to fund the aforementioned demand when it occurs. The interest rate on the loan was at a floating rate equal to the Federal Funds Rate plus 0.15% per annum. MONY Life paid off $55.0 million of the loan on September 24, 2002 and $12.7 million of the loan on November 26, 2002. MONY Life paid $ 0.3 million in interest on these loans to MONY Group during 2002.
On September 17, 2003, MONY Group entered into an Agreement and Plan of Merger with AXA Financial, Inc. and AIMA Acquisition Co. (the AXA Agreement), pursuant to which MONY Group will become a wholly owned subsidiary of AXA Financial, Inc. (AXA) in a cash transaction valued at approximately $1.5 billion. Under the terms of the AXA Agreement, which has been approved by the boards of directors of AXA and the Company, the Company’s shareholders will receive $31.00 for each share of the MONY Group’s common stock.
The AXA Agreement is subject to various regulatory approvals and other customary conditions, as well as the approval of the Company’s shareholders. The transaction is expected to close in the second quarter of 2004.
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.
• goodwill arising from the purchase of a subsidiary or controlled or affiliated entity is written off by New York domiciled companies directly to surplus in the year it originates, whereas, under Codified SAP, goodwill in amounts not exceeding 10% of an insurer’s capital and surplus may be recognized as an admitted asset, and
• deferred tax assets and deferred tax liabilities representing the expected future tax consequences of temporary differences generated by differences between statutory and tax accounting are not recorded by New York domiciled companies, whereas, under Codified SAP, those deferred tax assets and liabilities are recognized as admitted assets or liabilities, respectively.
Premium and annuity considerations, surrenders benefits and withdrawals, and net transfers to or (from) separate accounts on these contracts were $54.7 million, $111.4 million, and $(56.7) million for the twelve months ended December 31, 2003, respectively, and $78.0 million, $230.6 million and $(152.6) million for the twelve months ended December 31, 2002, respectively.
Results of Operations For the Years Ended December 31, 2003 and 2002
The following table presents a summary of MONY Life’s statutory basis results of operations for the years ended December 31, 2003 and 2002:
The limited partnerships in which MONY Life 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 the 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. Upon this distribution, MONY Life, in accordance with statutory accounting practices applied in 2003 and prior years, will:
• record, as investment income, any excess of the fair value of the common stock distributed over the original cost of the limited partnership investment.
At December 31, 2003 and 2002, MONY Life had investments in approximately 47 and 49 different limited partnerships, respectively, which represented 1.6% and 1.9%, respectively, of MONY Life’s general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock.
Reserve adjustments on reinsurance ceded were $(4.4) million in 2003 compared to $(6.6) million during 2002. The increase in reserve adjustments was primarily due to higher interest rates on modified coinsurance reserves during 2003.
The decrease in individual annuity contract surrenders and withdrawals is due to lower surrenders and withdrawals on flexible premium variable annuity contracts of $6.6 million from the previous year. This decrease
in primarily from the impact of an exchange program initiated by MONY Life in 2000. The exchange program represented an offer to contractholders whereby they were given the ability, free of charge, to exchange their old flexible premium variable annuity contracts for a new enhanced flexible premium variable annuity contract offered by MONY Life. This exchange program accounted for surrenders of $3.8 million during the year ended December 31, 2003, as compared to $8.7 million for the comparative prior year period, a decrease of $4.9 million.
The decrease in general insurance expenses of $20.6 million from $180.8 million for year ended December 31, 2002 to $160.2 million for the comparable period in 2003, was primarily due to expense savings from restructuring and other cost reductions taken by management.
For the year ended December 31, 2003, dividends to policyholders were $199.5 million, a decrease of $2.7 million from $202.2 million for the year ended December 31, 2002. Dividend scales were not changed during this period and the decrease reflects the normal year-to-year progression of dividends as well as true-up of liability estimates to actual payments made in the following year.
MONY Life recorded federal income taxes of $(2.1) million and $18.8 million for the years ended December 31, 2003 and 2002, respectively. Federal income tax incurred recorded in the Summary of Operations excludes the tax based on Capital Gains net of interest maintenance reserve tax (which is referred to as Gains Tax). The excluded Gains Tax for the year ended December 31, 2003 and 2002 was $13.8 million and $(3.0) million, respectively. The decrease in the federal income tax incurred of $20.9 was due to a decrease in net gains from operations and a net increase in tax deductible statutory to tax adjustments relating to litigation and miscellaneous reserves, cash surrender value of corporate owned life insurance, interest expense on tax assessments and the accrual of policyholders dividends offset by a benefit for a capital loss carryback reflected in the Gains Tax computation. The excluded Gains Tax increased by $16.8 million which was due to an increase in the statutory realized loss, which is not fully recognized for tax purposes, offset by an increase in the deductible statutory to tax adjustment for realized tax losses on various equity investments.
On a pre-tax, pre-IMR basis, realized capital gains/(losses) were ($7.9) million in 2003 compared to ($133.0) million in 2002, a decrease in losses of $125.1 million. The decrease in losses was primarily due to a decrease in impairment write-downs of $67.4 million on bonds and preferred stocks, $18.9 million on mortgage loans and $29.1 on real estate and real estate joint ventures. On an after-tax, after transfers to IMR basis, realized capital losses were $41.4 million in 2003 versus $141.5 million in 2002, a decrease in losses of $100.1 million. Higher capital gains tax of $16.7 million is due to an increase in realized gains on various equity investments.
Statutory Capital For the Years Ended December 31, 2003 and 2002
The principal components of the changes in total statutory capital and surplus for the periods indicated are as follows:
MONY Life recorded net unrealized capital losses of $75.2 million for the year ended December 31, 2003, a decrease of $60.1 million from $135.3 million recorded for the year ended December 31, 2002. The decrease was primarily due to an increase in the fair value of MONY Life’s investment in venture capital partnerships of approximately $33.1 million during 2003, compared with a $51.5 million decrease in 2002, a change of $84.6 million. This decrease in losses was partially offset by unrealized losses on investments in subsidiaries of approximately $114.7 million in 2003 compared to $92.8 million in 2002, an increase in unrealized losses of $21.9 million.
MONY Holdings, the parent holding company, contributed $40.0 million and $125.0 million in 2003 and 2002, respectively in additional paid in surplus to MONY Life to support MONY Life’s surplus and RBC. In addition, during 2003 MONY Life received $3.7 million in MONY Group stock related to employee stock options.
During 2003 and 2002, MONY Life paid dividends of $25.0 million and $90.0 million, respectively, to its parent, MONY Holdings.
The major components of other changes to surplus for the periods indicated are presented in the table below:
The changes in non-admitted assets in 2003 are primarily related to decreases in prepaid pension assets of $6.6 million and furniture and equipment of $3.8 million. These decreases were partially offset by increases in non-admitted assets of $5.8 million for capitalized software, $1.5 million in amounts due from agents, and $1.1 million in leasehold improvements.
Effective with the agreement, AUSA Life reinsured, on an indemnity reinsurance basis, the contract liabilities funded by such general account assets. AUSA Life agreed to reinsure such general account and separate account liabilities on an assumption reinsurance basis upon the consent of general account contractholders to assumption of their contracts and AUSA Life receiving the appropriate state license to conduct separate accounts business. Substantially all of the contractholders elected assumption reinsurance.
Following is a discussion and analysis of the Company’s invested assets of the Closed Block Business (“CBB”).
Assets included in the Closed Block consist of fixed maturity securities, mortgage loans, policy loans, accrued investment income and premiums due on Closed Block policies.
At December 31, 2003, the carrying value of the Closed Block’s problem and potential problem fixed maturity securities was $108.1 million and $0.0 million respectively, which, in the aggregate, represented approximately 2.6% of the total fixed maturity portfolio. At December 31, 2002, the carrying value of the Closed Block’s problem and potential problem fixed maturity securities was $136.9 million and $3.6 million respectively, which, in the aggregate, represented approximately 3.5% of the total fixed maturity securities portfolio. At December 31, 2003 and 2002, the Company had no fixed maturity securities which had been restructured.
The Company has a well-diversified portfolio of fixed maturity securities in the Closed Block. The portfolio at December 31, 2003 included 21.7% in consumer goods and services, 18.7% in government and agency and the remaining 59.6% in other sectors, none of which exceeded 10.0% of total fixed maturity securities. The portfolio at December 31, 2002 included 18.8% in consumer goods and services, 10.0% in financial services and the remaining 71.2% in other sectors, none of which exceeded 10.0% of total fixed maturity securities.
The carrying value and estimated fair value of fixed maturity securities held in the Closed Block, by contractual maturity dates (excluding scheduled sinking funds), as of December 31, 2003 and 2002 are as follows:
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other mortgage loans so classified based on the Company’s historical loss experience for those investments. As of December 31, 2003, 2002 and 2001, these reserves were $6.4 million, $5.9 million and $6.7 million, respectively.
The Company pledged the DSCA as collateral for the Company’s obligations under the Insured Notes and to Ambac. For as long as the Company remains obligated under the Insured Notes or have any outstanding obligations to Ambac, the Company will maintain the DSCA. One or more of the Company’s affiliates manages the investment of assets in the DSCA, in accordance with the investment policy set forth in the Indenture.
The following table sets forth the withdrawal characteristics of MONY’s total annuity reserves and deposit liabilities at December 31, 2003 and 2002:
At December 31, 2003 the Company had commitments to issue the following: $0.7 million of a fixed rate agricultural loan with periodic interest rate resets with an initial interest rate of 6.35%. In addition the Company had commitments to issue $94.3 million of fixed and floating rate commercial and mezzanine mortgage loans with interest rates ranging from 3.67% to 8.00% and $5.0 million of a private fixed maturity security with an interest rate of 5.71%.
Generally Accepted Accounting Principles Consolidated Financial Statements of MONY Holdings, LLC and Subsidiary:
Statements of admitted assets, and liabilities, capital and surplus - statutory basis as of December 31, 2003 and 2002
Statements of operations - statutory basis for the years ended December 31, 2003 and 2002
Statements of capital and surplus - statutory basis for the years ended December 31, 2003 and 2002
Statements of cash flows - statutory basis for the years ended December 31, 2003 and 2002
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, statements of changes in member’s equity and statements of cash flows present fairly, in all material respects, the financial position of MONY Holdings, LLC and Subsidiary (the “Company”), a wholly owned entity of The MONY Group Inc., at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
February 4, 2004, except for matters described as subsequent events in Note 18, to which the date is March 9, 2004.
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 Debt Service Coverage Account (the “DSCA”), pursuant to the terms of the note indenture, to provide collateral for the payment of interest and principal on the Insured Notes and the balance of approximately $232.6 million was distributed to MONY Group in the form of a dividend. The Insured Notes mature on January 21, 2017. The Insured Notes pay interest only through January 21, 2008 at which time principal payments will begin to be made pursuant to an amortization schedule. Interest on the Insured Notes is payable quarterly at an annual rate equal to three month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract (the “Swap”), which locked in a fixed rate of interest on the Insured Notes at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum) (the “Insurance Policy”), which guarantees the scheduled principal and interest payments on the Insured Notes, the all-in cost of the indebtedness is 7.36%. See Note 22 for further information regarding the Insured Notes.
(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.
Expenses incurred by MONY Holdings and its subsidiary, as reflected in the consolidated statements of income and comprehensive income, reflect all costs associated with conducting the business of MONY Holdings and its subsidiary. MONY Life incurs all costs associated with its operations, except asset management services. Asset management fees are charged directly to MONY Life by an affiliate of MONY Group for negotiated market based fees based on asset type, and are periodically accrued based on average invested assets. MONY Life directly incurs interest expense on intercompany debt with its ultimate parent company, MONY Group, based on contractual terms, which management believes reflect terms materially similar to an arm’s-length transaction. Income taxes are determined based on MONY Holdings operating as a separate entity. Costs incurred by MONY Holdings’ parent, MONY Group, represent incremental expenses (primarily transfer agent fees, stock option expenses, and printing costs) incurred by MONY Group that MONY Holdings would not incur as a stand-alone entity.
dividend scales in effect at the date of MONY Life’s demutualization (assuming the experience underlying such dividend scales continues), and for appropriate adjustments in such scales if the experience changes. To determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for the aforementioned payments, MONY Life forecasted the expected cash flows from the Closed Block in force business and mathematically determined the cash flows that would need to be provided from assets allocated to the Closed Block to fully fund the aforementioned payments. Assets were then allocated to the Closed Block accordingly. The aforementioned forecast consists of a cash flow projection for each year over the estimated life of the policies in the Closed Block. The earnings from such expected cash flows from the Closed Block in force business and the assets allocated to the Closed Block are referred to as the “glide path earnings”.
charged against the balance of any existing deferred dividend liability. If the deferred dividend liability is not sufficient to absorb the difference, any such remaining amount, not absorbed, will remain in earnings for the period and an adjustment will be made to get back on the glide path when earnings emerge in future periods that are sufficient to offset such remaining accumulated difference or through a subsequent reduction in dividend scales. As of December 31, 2003 and 2002, the deferred dividend liability was $65.7 million and $33.2 million, respectively.
The Company’s fixed maturity securities are classified as available-for-sale and trading and are reported at estimated fair value. The Company’s equity securities are comprised of investments in common stocks and venture capital limited partnerships. The Company’s investments in common stocks are classified as available-for-sale and are reported at estimated fair value. The Company’s investments in venture capital limited partnerships are accounted for in accordance with the equity method of accounting or at estimated fair value (with changes in fair value recorded in other comprehensive income) depending upon the Company’s percentage ownership of the partnership and the date it was acquired. In general, partnership interests acquired after May 18, 1995 are accounted for in accordance with the equity method of accounting if the Company’s ownership interest in the partnership exceeds three percent, whereas, if the partnership was acquired prior to May 18, 1995, the equity method would be applied only if the Company’s ownership interest is 20 percent or greater. In the unlikely event that the Company’s ownership interest in a partnership exceeded 50 percent the partnership would be
Mortgage loans on real estate are stated at their unpaid principal balances, net of valuation allowances. Valuation allowances are established for the excess of the carrying value of a mortgage loan over its estimated fair value when the loan is considered to be impaired. Mortgage loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Estimated fair value is based on either the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the loan’s observable market price (if considered to be a practical expedient), or the fair value of the collateral if the loan is collateral dependent and if foreclosure of the loan is considered probable. The provision for loss is reported as a realized loss on investment. Loans in foreclosure and loans considered to be impaired, other than restructured loans, are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in investment income in the period received. Interest income on restructured mortgage loans is accrued at the restructured loans’ respective interest rates.
• Management, having the authority to approve the action, commits the organization to a plan to sell the property;
• The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year;
Securities loaned and borrowed are accounted for as collateralized financing transactions and are recorded at the amount of cash collateral received or advanced. The fee received or paid by the Company is recorded as interest revenue or expense and is reflected in other income and other operating costs and expenses, respectively, in the consolidated statement of income and comprehensive income. The initial collateral advanced or received has a higher market value than the underlying securities. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.
For participating traditional life policies, DPAC is amortized over the expected life of the contracts (30 years) as a constant percentage based on the present value of estimated gross margins expected to be realized over the life of the contracts using discount rates that grade down from 7.22% in 2004 to 6.97% in the year 2026. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends.
DPAC is subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each accounting period. The effect on the amortization of DPAC of revisions in estimated experience is reflected in earnings in the period such estimates are revised. In addition, the effect on the DPAC asset that would result from the realization of unrealized gains (losses) is recognized through an offset to other comprehensive income as of the balance sheet date.
Dividends to policyholders reflected on the consolidated statement of income and comprehensive income is comprised of policyholder dividends payable in the current year and the change in the deferred dividend liability. Dividends payable to policyholders are determined annually by the board of directors of MONY Life. All but a de minimus amount of dividends paid to policyholders are on policies in the Closed Block. Refer to Note 3 for a more detailed explanation of policyholder dividends, as well as the deferred dividend liability. The change in the deferred dividend liability recognized in the consolidated statement of income and comprehensive income was $23.7 million, $(14.6) million and $21.2 million for the years ended December 31, 2003, 2002, and 2001, respectively.
At December 31, 2003 and 2002, participating business, substantially all of which is in the Closed Block, represented approximately 28.7% and 34.0% of the Company’s life insurance in force, and 70.2% and 73.7% of the number of life insurance policies in force, respectively. For each of the years ended December 31, 2003, 2002, and 2001, participating business represented approximately 79.0%, 82.5%, and 83.5%, respectively, of life insurance premiums.
The following table reflects the effect on the Company’s net income as if the accounting prescribed by SFAS 123 had been applied to the options granted to employees and outstanding as at December 31, 2003, 2002 and 2001:
The fair value of each option outstanding is estimated using the Black-Scholes option pricing model with the following assumptions: exercise prices ranging from $20.90 to $44.25, dividend yields ranging from 1.02% to 2.37%, expected volatility ranging from 23.5% to 44.4%, and a range of interest rates from 3.3% to 6.7%. The fair value of options determined using the Black-Scholes pricing model ranged from $6.30 to $18.92 per share at December 31, 2003.
results represent the present value of all the cash flows under the reinsurance contract. The Company generally defines a “reasonable possibility” as having a probability of at least 10%. In assessing whether the projected results of the reinsured business constitute a “significant loss”, the Company considers: (i) the ratio of the aggregate projected loss, discounted at an appropriate rate of interest (the “aggregate projected loss”), to an estimate of the reinsurer’s investment in the contract, as hereafter defined, and (ii) the ratio of the aggregate projected loss to an estimate of the total premiums to be received by the reinsurer under the contract discounted at an appropriate rate of interest.
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 contract holders and, accordingly, are not reflected in the Company’s consolidated statements of income and comprehensive 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.
For the years ended December 31, 2003, 2002, and 2001, respectively, real estate of $0.0 million, $12.0 million, and $18.0 million was acquired in satisfaction of debt. At December 31, 2003 and 2002, the Company owned real estate acquired in satisfaction of debt of $28.2 million and $33.1 million, respectively. Other non-cash transactions, which are reflected in the statement of cash flows as a reconciling item from net income to net cash provided by operating activities, consisted primarily of stock distributions from the Company’s partnership investments and payment-in-kind for interest due on certain fixed maturity securities.
assets and collateral, recognition and measurement of servicing assets and liabilities, and the extinguishment of liabilities. Adoption of the new requirements did not have a material effect on the Company’s results of operations or financial position.
Only Partially Related to the Creditworthiness of the Obligor under Those Instruments (“DIG B36”). DIG B36 addresses the need to separately account for an embedded derivative within a reinsurer’s receivable and ceding company’s payable arising from modified coinsurance or similar arrangements. Paragraph 12(a) of SFAS 133 indicates that an embedded derivative must be separated from the host contract (“bifurcated”) if the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract. DIG B36 concludes that bifurcation is necessary in a modified coinsurance arrangement because the yield on the receivable and payable is based on a specified proportion of the ceding company’s return on either its general account assets or a specified block of those assets, rather than the overall creditworthiness of the ceding company. The effective date of implementation was the first day of the first fiscal quarter beginning after September 15, 2003, with earlier application as of the beginning of a fiscal quarter permitted. The adoption of DIG B36 did not have a material impact on the Company’s results of operations and financial position.
Other Postretirement Benefits (“SFAS 132”), which it replaces, and requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. SFAS 132-2003 does not change the measurement or recognition of pension plans and other postretirement benefit plans required by SFAS 87 Employers’ Accounting for Pensions, SFAS 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS 106 Employers’ Accounting for Postretirement Benefits Other Than Pensions. The disclosure provisions for SFAS 132-2003 are effective for financial statements with fiscal years ending after December 15, 2003.
In July 2003 the American Institute of Certified Public Accountants issued Statement of Position 03-1 Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”). SOP 03-1 provides guidance relating to (i) separate account presentation, (ii) accounting for an insurance enterprise’s interest in separate accounts, (iii) gains and losses on the transfer of assets from the general account, (iv) liability valuation, (v) return based on a contractually referenced pool of assets or index, (vi) determining the significance of mortality and morbidity risk and classification of contracts that contain death or other insurance benefit features, (vii) accounting for contracts that contain death or other insurance benefit features, (viii) accounting for reinsurance and other similar contracts, (ix) accounting for annuitization benefits, (x) sales inducements to contract holders, and (xi) disclosures in the financial statements of an insurance enterprise regarding (a) separate account assets and liabilities, (b) the insurance enterprise’s accounting policy for sales inducements, and (c) the nature of the liabilities and methods and assumptions used in estimating any contract benefits recognized in excess of the account balance. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. The adoption of SOP 03-1 will result in an additional liability for Guaranteed Minimum Death Benefits of approximately $0.8 million at January 1, 2004. This increase in reserves will be partially offset by a decrease in DPAC amortization due to lower profit margins as a result of the increased reserves. The adoption of SOP 03-1 is not expected to have any other material impact on the Company’s results of operations and financial position.
Net realized gains (losses) on investments for the years ended December 31, 2003, 2002 and 2001 are summarized as follows:
Following is a summary of the change in unrealized investment gains (losses), net of related deferred income taxes and the adjustment for deferred policy acquisition costs (see Note 8), which are reflected in Accumulated Other Comprehensive Income for the periods presented. The net change in unrealized investment gains/(losses) and the change in the Company’s minimum pension liability represent the only components of other comprehensive income for the years ended December 31, 2003, 2002 and 2001 as presented below:
Unrealized gains/(losses) on investments, (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 $(18.4) million, $101.9 million and $43.2 million, respectively, and $(9.1) million, $(71.4) million and $(32.1) million, respectively, relating to the effect of such unrealized gains (losses) on DPAC.
The Company classifies fixed maturity 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 as “problem fixed maturity securities.” At December 31, 2003 and 2002, the carrying value of problem fixed maturity securities held by the Company was $240.4 million and $274.7 million, respectively. 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. At December 31, 2003 and 2002, the carrying value of potential problem fixed maturity securities held by the Company was $4.9 million and $8.5 million, respectively. In addition, at December 31, 2003 and 2002, the Company had no fixed maturity securities which had been restructured.
Proceeds from sales of fixed maturity securities during 2003, 2002 and 2001 were $1,844.2 million, $468.1 million and $484.3 million, respectively. Gross gains of $70.3 million, $35.1 million and $21.4 million and gross losses of $0.4 million, $6.6 million and $8.3 million were realized on these sales in 2003, 2002 and 2001, respectively.
Proceeds from sales of equity securities during 2003, 2002 and 2001 were $16.9 million, $16.5 million and $31.0 million, respectively. Gross gains of $5.4 million, $2.7 million and $3.1 million and gross losses of $0.9 million, $2.8 million and $9.5 million were realized on these sales during 2003, 2002, and 2001, respectively.
There are no common stock positions that have been in an unrealized loss position for more than 12 months as at December 31,2003.
An analysis of the valuation allowances for 2003, 2002 and 2001 is as follows:
The Company’s business activities consist of the following: protection product operations, accumulation product operations, mutual fund operations, securities broker-dealer operations, insurance brokerage operations, and certain insurance lines of business no longer written by the Company (the “run-off businesses”). These business activities represent the Company’s operating segments. Except as discussed below, these segments are managed separately because they either provide different products or services, are subject to different regulation, require different strategies, or have different technology requirements.
Of the aforementioned segments, only the Protection Products segment and the Accumulation Products segment qualify as reportable segments in accordance with SFAS Statement No. 131. All of the Company’s other segments are combined and reported in the Other Products segment.
Products comprising the Protection Products segment primarily include a wide range of individual life insurance products, including: whole life, term life, universal life, variable universal life, corporate-owned life, last survivor universal life, last survivor variable universal life, group universal life and special-risk products. In addition, included in the Protection Products segment are: (i) the assets and liabilities transferred pursuant to the Group Pension Transaction (which ceased as of December 31, 2002 - see Note 13), as well as the Group Pension Profits derived therefrom, (ii) the Closed Block assets and liabilities, as well as the revenues and expenses relating thereto (See Notes 3 and 20), and (iii) the Company’s disability income insurance products (which are 100% reinsured and no longer offered by the Company).
The Company’s Other Products segment primarily consists of a securities broker-dealer operation, an insurance brokerage operation, and the run-off businesses. The securities broker-dealer operation markets the Company’s proprietary investment products and, in addition, provides customers of the Company’s protection and accumulation products access to other non-proprietary investment products (including stocks, bonds, limited partnership interests, tax-exempt unit investment trusts and other investment securities). The insurance brokerage operation provides the Company’s career agency force with access to variable life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The run-off businesses primarily consist of group life and health business, as well as group pension business that was not included in the Group Pension Transaction (See Note 13).
Set forth in the table below is certain financial information with respect to the Company’s reportable segments as of and for each of the years ended December 31, 2003, 2002, and 2001, as well as amounts not allocated to the segments. Except for various allocations discussed below, the accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 4). The Company evaluates the performance of each operating segment based on profit or loss from operations before income taxes and nonrecurring items (e.g., items of an unusual or infrequent nature). The Company does not allocate certain nonrecurring items to the segments. In addition, unless otherwise noted, all segment revenues are from external customers.
(2) Each segment includes separate account assets in an amount not less than the corresponding liability reported.
(4) Amounts reported as “reconciling” in 2003 primarily related 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 $5.8 million pre-tax relating to the Company’s reorganization activities (see Note 26) and (v) merger related expenses totaling $0.8 million incurred in connection with MONY Group’s pending merger with AXA Financial (see Note 2).
(6) Amounts reported as “reconciling” in 2001 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) interest expense associated with the surplus and intercompany surplus notes (see Note 16) and (iii) charges totaling $56.8 million pre-tax relating to the Company’s reorganization activities (see Note 26).
(7) Amounts reported in 2002 include a loss of $3.9 million pre-tax from discontinued operations, of which $3.3 million, $0.4 million, and $0.2 million, has been allocated to the Protection Products, Accumulation Products and Other Products segments, respectively.
Following is a summary of revenues by product for the years ended December 31, 2003, 2002 and 2001:
MONY Life also sponsors a non-qualified employee excess pension plan, which provides both defined benefits and defined contribution accruals in excess of Internal Revenue Service (“IRS”) limits to certain employees. The benefits are based on years of service and the employee’s final average annual compensation. Pension benefits are paid from the Company’s general account.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare Part D as well as a Federal subsidy to employers who provide an “actuarial equivalent” prescription drug benefit to employees. The requirements under the Act are not expected to have a material impact on the Company’s results of operations and financial position.
The projected benefit obligation and accumulated benefit obligation for the non-qualified defined benefit pension plan, which is unfunded, were $65.9 million and $61.1 million at December 31, 2003 and $68.2 million and $66.6 million at December 31, 2002, respectively.
(1) For MONY Life, no benefits bearing incentive compensation is assumed for 2003. Otherwise, benefits bearing compensation is assumed to increase by 4% for all participants eligible for incentive compensation and by 5% for all others. Benefits bearing incentive compensation for the top four officers is assumed to be 50% of base salary after 2003.
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease gradually to 6% for 2010 and remain at that level thereafter.
The Company’s assumption with respect to the future return on pension plan assets, which at January 1, 2003 was determined to be 8%, is made by management after taking into consideration historic returns on such assets (generally the geometric annual rate of return over at least a ten year period), the actual mix of the pension plan’s invested assets at the valuation date (which is assumed to be consistent in future periods), management’s outlook for future returns on such asset types, and the long-term outlook for such returns in the marketplace. At December 31, 2003 and 2002, the fair value of the pension plan invested assets were comprised of the following:
The Company files a consolidated federal income tax return with its parent, MONY Group and its other subsidiaries, as well as the Company’s life and non-life affiliates except Sagamore Financial Corporation and its subsidiaries (see Note 3).
Federal income taxes reported in the consolidated statements of income for the years ended December 31, 2003, 2002 and 2001 are different from the amounts determined by multiplying the earnings before federal income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects for each of the years ended December 31, 2003, 2002 and 2001 are as follows:
Operating losses reported in any annual period pursuant to the Earnings Formula were carried forward to reduce any earnings in subsequent years reported pursuant to the Earnings Formula. Any resultant deficit
remaining at December 31, 2002 would be deducted from the Final Value Payment and New Business Growth Payment, if any, due to the Company. If a deficit still remained, it would be applied (as provided for in the Agreement) as an offset against the principal payment due to the Company upon maturity of the Series A Notes. As of December 31, 2002, there were no operating losses reported in any annual period during the term of the agreement, nor was the Company eligible for any New Business Growth payment.
(2) Includes $2.5 million of pretax realized losses ($1.6 million after-tax) relating to the impairment of certain investments, which were included in the 4th quarter 2002 Other Charges (see Note 26).
The estimated fair values of fixed maturity securities are based upon quoted market prices, where available. The fair values of fixed maturity securities not actively traded and other non-publicly traded securities are estimated using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market interest rate commensurate with the credit quality and term of the investments. Equity securities primarily consist of investments in common stocks and limited partnership interests. The fair value of the Company’s investments in common stocks are determined based on quoted market prices, where available. The fair value of the Company’s investments in limited partnership interests are based on amounts reported by such partnerships to the Company.
The fair value of long-term debt is determined based on contractual cash flows discounted at market rates. The carrying value and fair value of long-term debt at December 31, 2003 were $516.9 million and $544.3 million, respectively. The carrying value and fair value of long-term debt at December 31, 2002 were $516.9 million and $534.1 million, respectively.
On March 8, 2000, the MONY Group issued $300.0 million principal amount of senior notes (the “$300 million Senior Notes”) pursuant to the aforementioned Shelf Registration. The $300 million Senior Notes mature on March 15, 2010 and bear interest at 8.35% per annum. The principal amount of the $300 million Senior Notes is payable at maturity and interest is payable semi-annually. The net proceeds to the MONY Group from the issuance of the $300 million Senior Notes, after deducting underwriting commissions and other expenses (primarily legal and accounting fees), were approximately $296.6 million. Approximately $280.0 million of the net proceeds from the issuance of the Senior Notes was used by the MONY Group to finance MONY Life’s repurchase, on March 8, 2000, of all of its outstanding $115.0 million face amount 9.5% coupon surplus notes, and $116.5 million face amount of its $125.0 million face amount 11.25% coupon surplus notes (hereafter referred to as the “9.5% Notes” and the “11.25% Notes”, respectively), which were previously outstanding. The balance of the net proceeds from the issuance of the Senior Notes was retained by the MONY Group for general corporate purposes. In the third quarter of 2000 and first quarter of 2001, the Company repurchased another $6.5 million and $0.1 million face amount of the 11.25% notes, respectively, resulting in a remaining balance of $1.9 million at December 31, 2003. MONY Group’s financing of MONY Life’s repurchase of its 9.5% Notes and 11.25% Notes consisted of a capital contribution by MONY Group to MONY Life of $65.0 million and the purchase by MONY Group from MONY Life of two separate newly issued “inter-company” surplus notes. The inter-company surplus note issued to replace the 9.5% Notes has a par value of $115.0 million, a coupon rate of interest of 8.65%, and matures on December 31, 2012. The inter-company surplus note issued to replace the 11.25% Notes has a par value of $100 million, a coupon rate of interest of 8.65%, and matures on August 15, 2024. Principal on the inter-company surplus notes is payable at maturity and interest is payable semi-annually.
Aggregate contractual long term debt service payments on the Company’s debt at December 31, 2003 for the succeeding five years are approximately $38.1 million for 2004, $38.1 million for 2005, $38.1 million for 2006 , $38.1 million for 2007, $63.2 million for 2008, and $588.8 million for the years thereafter.
Pursuant to a securities lending agreement with a major financial institution, the Company from time to time lends securities to approved borrowers. At December 31, 2003 and 2002, securities loaned by the Company under this agreement had a fair value of approximately $405.3 million and $351.8 million, respectively. The minimum collateral on securities loaned is 102 percent of the market value of the loaned securities. Such securities are marked to market on a daily basis; the collateral is increased or decreased in accordance with the Company’s agent agreement.
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
The Company held below investment grade fixed maturity securities with a carrying value of $824.9 million at December 31, 2003. These investments consist mostly of privately issued bonds which are monitored by the Company through extensive internal analysis of the financial condition of the issuers and which generally include protective debt covenants. At December 31, 2002, the carrying value of the Company’s investments in below investment grade fixed maturity securities amounted to $892.7 million.
claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (i.e., breach of contract, fraud, negligent misrepresentation, negligent supervision and training, breach of fiduciary duty, unjust enrichment and violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases seek primarily equitable relief (e.g., reformation, specific performance, mandatory injunctive relief prohibiting MONY Life and MLOA from canceling policies for failure to make required premium payments, imposition of a constructive trust and creation of a claims resolution facility to adjudicate any individual issues remaining after resolution of all class-wide issues) as opposed to compensatory damages, although they also seek compensatory damages in unspecified amounts. MONY Life and MLOA have answered the complaints in each action (except for one being voluntarily held in abeyance). MONY Life and MLOA have denied any wrongdoing and have asserted numerous affirmative defenses.
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 relating to the accuracy and/or completeness of information provided by the MONY Group in such proxy statement. Thereafter, plaintiffs requested a hearing on their motion for a preliminary injunction to enjoin the stockholder vote which had been scheduled to occur at the special meeting on February 24, 2004. A hearing on plaintiffs’ motion for a preliminary injunction was held on February 13, 2004. By order dated March 1, 2004, and an opinion released on February 17, 2004, Vice Chancellor Lamb granted plaintiffs’ motion to the limited extent of enjoining MONY Group from proceeding with the special meeting until MONY Group provides supplemental
disclosure to its stockholders relating to the amount of the benefits that the MONY Group executives would receive under the change-in-control agreements relative to the amounts received by executives in the other transactions the independent directors and their advisors had considered at least ten days before the special meeting. Vice Chancellor Lamb otherwise rejected plaintiffs’ arguments in support of an injunction based on the directors’ purported breach of fiduciary duty, the associated aiding and abetting claims and plaintiffs’ other disclosure claims.
On March 9, 2004, plaintiffs filed a second amended complaint which included, among other things, allegations that (i) the MONY Group’s 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’s 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.
(iv) In July 2002, pursuant to a jury verdict, the Company was found liable and ordered to pay a former joint venture partner some of the proceeds distributed to the Company from the disposition of a real estate asset in 1999, which was formerly owned by the joint venture. As a result of the verdict, which the Company appealed, the Company recorded a charge aggregating $13.7 million pre-tax in its results of operations for the quarter ended June 30, 2002. Approximately, $6.8 million of this charge was reflected in the income statement caption entitled “net realized gains/(losses) on investments” because it represented the return of proceeds originally included in the determination of the realized gain recognized by the Company in 1999 upon receipt of the aforementioned distribution. The balance of the charge, which was reflected in the income statement caption entitled “other operating costs and expenses” represented management’s best estimate of the interest that the court would have required the Company to pay its former joint venture partner, as well as legal costs. In the first quarter of 2003, the Company settled the litigation for approximately $4.3 million less than the provision previously recorded. Accordingly, during the first quarter of 2003, the Company reversed such over-accrual to income, approximately $3.0 million of which was recorded as realized gains and $1.0 million as a reduction to other expenses. The Company’s appeal was subsequently withdrawn.
(viii) At December 31, 2003, the Company had commitments to fund the following: $96.4 million of equity partnership investments, $5.0 million private fixed maturity security with an interest rate of 5.7%, $3.2 million of fixed rate agricultural loans with periodic interest rate reset dates with initial rates ranging from 5.25% to 6.35%, $132.7 million fixed and floating rate commercial mortgages with interest rates ranging from 3.67% to 8.0%.
The Company has entered into various operating lease agreements for office space, furniture and equipment. These leases have remaining non-cancelable lease terms in excess of one year. Total rental expense for these operating leases, which includes lease abandonment charges taken in connection with the Company’s reorganization activities (see Note 26), amounted to $25.6 million in 2003, $32.6 million in 2002, and
In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement with the proceeds received from the sale, amortized into income over the life of the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.9 million in 2004, $8.0 million in 2005, $8.2 million in 2006, $8.4 million for 2007 and $8.5 million for 2008. The Company has the option to renew the lease at the end of the lease term.
The combined statutory net loss reported by the Company for the years ended December 31, 2003, 2002, and 2001 was $38.5 million, $83.5 million, and $30.2 million, respectively. The combined statutory surplus of the Company as of December 31, 2003 and 2002 was $926.8 million and $906.4 million respectively. Each of the Company’s insurance subsidiaries exceeds the minimum risk based capital requirements imposed by such subsidiaries’ state of domicile.
Summarized financial information of the Closed Block as of and for the years ended December 31, 2003 and 2002 is presented below.
At December 31, 2003 and 2002, there were $15.1 million and $0.6 million of fixed maturity securities in the Closed Block which have been non-income producing for the twelve months proceeding such dates.
Impaired mortgage loans along with related valuation allowances as of December 31, 2003 and 2002 were as follows:
(1) Includes the assets and liabilities of MONY Holdings as of December 31, 2003.
(1) Includes the assets and liabilities of MONY Holdings as of December 31, 2002.
(1) Includes: (i) revenues and expenses associated with the DSCA, the Insured Notes and the Swap for the period from April 30, 2002 (the date of MONY Holdings’ commencement of operations) through December 31, 2002, (ii) the net contribution to income from the SRA from April 30, 2002 (the date of MONY Holdings’ commencement of operations) through December 31, 2002, and (iii) the results of operations from the Closed Block from January 1, 2002 through December 31, 2002.
Dividends from MONY Life are the principal source of cash inflow, which will enable MONY Holdings to meet its obligations under the Insured Notes. The ability of MONY Life to declare and pay MONY Holdings a dividend is governed by the Insurance Law of the State of New York. The Insurance Law of the State of New York permits a stock life insurance company to pay dividends each calendar year, without the prior approval of the superintendent of the insurance department, in an amount equal to the lesser of (a) ten percent of its “policyholders’ surplus” as of the end of the preceding calendar year or (b) the company’s “net gain from operations” for the preceding calendar year (not including realized capital gains), as determined in accordance with Statutory Accounting Practices prescribed or permitted by the Insurance Department of the State of New York (hereafter referred to as the “NY Dividend Statute”).
In November 1998, upon approval of the New York Insurance Department, MONY Group adopted the 1998 Stock Incentive Plan (the “1998 SIP”) for employees of the Company and certain of its career financial professionals, as well as certain employees of other subsidiaries of the MONY Group. As a condition for its approval of the 1998 SIP, the New York Insurance Department restricted options under the plan to no more than
five percent of the shares of MONY Group’s common stock outstanding as of the date of its initial public offering (2,361,908 shares). Options granted under the 1998 SIP may be Incentive Stock Options (“ISOs”) qualifying under Section 422(a) of the Internal Revenue Code or Non-Qualified Stock Options (“NQSOs”).
Pursuant to the 1998 SIP, 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. In addition, one-third of each option granted pursuant to the 1998 SIP shall become exercisable on each of the first three anniversaries following the date such option is granted and will remain exercisable for a period not to exceed 10 years from the date of grant. As of December 31, 2003, options to acquire 2,404,138 common shares of the MONY Group had been issued to employees and certain career financial professionals of the Company under the 1998 SIP. Options to acquire 1,627,782 of these common shares remained outstanding as of December 31, 2003.
A summary of the Company’s activity under these stock incentive plans for the years ended December 31, 2003, 2002 and 2001 is presented below:
As of December 31, 2003 there were 1,729,280 options exercisable, with exercise prices ranging from $27.06 to $44.25, and a weighted average remaining contractual life of 6.7 years.
At December 31, 2003 there were 3,509,207 options outstanding with exercise prices ranging from $20.90 to $44.25, and a weighted average remaining contractual life of approximately 7.7 years. Approximately 28.4% or 996,940 of the options outstanding at December 31, 2003 had an exercise price of $30.50. These options had a remaining contractual life of approximately 5.9 years.
In May 2001, MONY Group shareholders approved The MONY Group Inc. Restricted Stock Ownership Plan (the “Plan”). Pursuant to the terms of the Plan, management has the authority to grant up to 1,000,000 restricted shares of MONY Group common stock to eligible employees, as defined in the Plan, and to establish vesting and forfeiture conditions relating thereto. During 2002 and 2001, MONY Group granted 97,143 and 352,050 restricted shares, respectively, to certain members of management pursuant to the Plan. The 2002 and 2001 awards made under the Plan are conditioned on: (i) the expiration of a vesting period and (ii) an increase in the average per share price of MONY Group common stock above specified targets. In accordance with APB No. 25, compensation expense is recognized on the awards proportionally over the vesting period of the award provided that the condition with respect to the average price of MONY Group common stock is satisfied at the end of any period. In March 2003, MONY Group granted 334,050 restricted shares to certain members of management under the Plan. The 2003 awards made under the Plan are conditioned only on the expiration of a vesting period.
The following table presents the condensed balance sheets of MONY Holdings as of December 31, 2003 and 2002:
The following table presents the condensed statements of income for the years indicated:
In accordance with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) goodwill is periodically tested for impairment and is no longer amortized. The following tables set forth the impact of the adoption of SFAS 142 on the Company’s net income for the years ended December 31, 2003, 2002 and 2001. In addition, as required by SFAS 142, management tested the carrying value of the Company’s goodwill at December 31, 2003 and determined that no impairment exists.
During 2003, the Company recorded charges aggregating $5.8 million as part of the Company’s continuing initiative to enhance operating efficiency and effectively allocate resources. These charges consisted of: (i) severance and related benefits of $1.1 million incurred in connection with the merger of MONY Asset Management, Inc.’s (“MAM”) operations into Boston Advisors, a subsidiary of The Advest Group, Inc., and the resulting termination of certain employees of MONY Life that provided professional services to MAM pursuant to a service agreement between MAM and MONY Life; (ii) losses from the abandonment of leased offices of $1.3 million; (iii) losses from the abandonment of leased space in the Company’s home office of $2.0 million;
During the fourth quarter of 2002 and 2001, the Company recorded reorganization and other charges aggregating approximately $7.2 million and $144.4 million, respectively, as part of the Company’s initiative to enhance operating efficiency, more effectively allocate resources and capital, and discontinue certain non-core operations. Of these charges, $7.2 million and $19.0 million, respectively, met the definition of “restructure charges” as defined by Emerging Issues Task Force Consensus 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The 2002 restructure charge consisted of severance and related benefits resulting from headcount reductions of 161 and 26, respectively, in the Company’s home office and career agency system, as well as losses from the abandonment of certain leased offices and equipment. The 2001 restructure charge consisted of severance and related benefits of $10.3 million resulting from headcount reductions of 117 and 240, in the Company’s home office and career agency system, respectively, and $8.7 million of other miscellaneous items. These actions were substantially completed in 2002. The remaining restructuring reserves primarily relate to lease abandonment costs and are expected to run-off through 2007. The balance of the charge in 2001, $125.4 million, was unrelated to the Company’s restructure activities and consisted of: (i) impairments of certain invested assets and valuation related write-downs of private equity securities held in the Company’s equity method venture capital portfolio, (ii) the write-off of deferred sales charges in the Company’s mutual fund business to reflect revised estimates of recoverability which are principally due to the decline in the value of the Company’s internet funds, (iii) write-downs of certain information technology assets, and (iv) other miscellaneous items.
(1) All of the reorganization charges recorded in 2003 are “costs associated with exit or disposal activities” as described in SFAS 146.
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 2001 consolidated statement of income and comprehensive income.
We have audited the accompanying statutory statements of admitted assets and liabilities, capital and surplus of MONY Life Insurance Company (the “Company”) as of December 31, 2003 and 2002, and the related statutory statements of operations, capital and surplus, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2003 and 2002, or the results of its operations or its cash flows for the years then ended.
In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets and liabilities and capital and surplus of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Notes 2 and 3.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for deferred income taxes as required by the Insurance Department of the State of New York. The effect of adoption is recorded as an adjustment to capital and surplus as of December 31, 2002.
STATEMENTS of ADMITTED ASSETS, and LIABILITIES, CAPITAL and SURPLUS - STATUTORY BASIS
On September 17, 2003, MONY Group entered into an Agreement and Plan of Merger with AXA Financial, Inc. and AIMA Acquisition Co. (the “AXA Agreement”), pursuant to which MONY Group will become a wholly owned subsidiary of AXA Financial, Inc. (“AXA”) in a cash transaction valued at approximately $1.5 billion. Under the terms of the AXA Agreement, which has been approved by the boards of directors of AXA and the Company, the Company’s shareholders will receive $31.00 for each share of the MONY Group’s common stock.
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 more fully 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 and 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. (“MLICA”), which provides life insurance, annuity and investment products to nationals of certain Latin American countries.
For reporting periods prior to December 31, 2002, New York State had certain prescribed accounting practices that differed from those found in NAIC SAP related to the admissibility of deferred tax assets (DTA’s) and deferred tax liabilities (DTL’s). DTA’s and DTL’s representing the expected future tax consequences of
temporary differences generated by statutory accounting are were not recorded by New York domiciled companies prior to December 31, 2002. In NAIC SAP, DTA’s and DTL’s are included in a reporting entity’s Statement of Assets, Liabilities, Surplus and Other Funds.
A reconciliation of the Company’s capital and surplus between NAIC SAP and practices prescribed and permitted by the State of New York at December 31, 2003 and 2002 is shown below (in millions):
GAAP net income (loss) reported by the Company for the years ending December 31, 2003 and 2002 was $56.2 million and $(5.6) million, respectively. GAAP shareholder’s equity of the Company as of December 31, 2003 and 2002 was $2,039.0 million and $1,973.9 million, respectively.
• Policy acquisition costs, such as commissions and other costs incurred in connection with acquiring new and renewal business, are expensed when incurred under SAP; whereas under GAAP, such costs are deferred and amortized over the expected life of the business.
• Postretirement benefits are accrued at the time employees are vested or retire under SAP; whereas under GAAP, an obligation for such benefits is accrued over the service period for all eligible employees.
The preparation of financial statements in conformity with SAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.
The following is a description of the Company’s principal statutory accounting policies:
Life premiums are generally recognized as income over the premium-paying period of the related policies. On universal life-type insurance policies and annuities with life contingencies, premiums and considerations are recognized as revenue when received. Payments on deposit type contracts are recorded to the policy reserve. Expenses incurred in connection with the acquiring of new insurance business, including acquisition costs such as sales commission, are charged to operations as incurred. Health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies.
Mortgage loans other than those in process of foreclosure are carried at their unpaid principal balances adjusted for unamortized premium or discount and valuation allowance. Mortgage loans in process of foreclosure are carried at the lower of the carrying value at the time of foreclosure or estimated fair value. Fair value is determined by using the estimated discounted cash flows expected from the underlying real estate properties. These projected cash flows are based on estimates regarding future operating expenses, lease rates, occupancy levels and investors’ targeted yields.
Policy reserves for life insurance, annuities, and supplemental benefits are computed by using prescribed statutory interest rates and mortality factors. Reserves computed by a modified commissioners’ reserve method represent approximately 82% of gross life insurance reserves at December 31, 2003 and 2002.
Reserves for life insurance were principally determined by using the 1941, 1958 and 1980 Commissioners’ Standard Ordinary Mortality and the American Experience Tables and assumed interest rates ranging from 2 percent to 7 percent. Reserves for individual and group annuity mortality tables have assumed interest rates ranging from 2.5 percent to 9.5 percent.
Policy claims in process of settlement include provisions for payments to be made on reported claims and on claims incurred but not reported.
The aggregate amount of divisible surplus to be distributed as dividends to policyholders during the year is determined by Company’s Board of Directors with due recognition to factors including solvency of the Company, its ability to meet all contractual obligations, and the existence of the Closed Block which was established as part of MONY’s Plan of Reorganization effective November 16, 1998. The aggregate divisible surplus is then divided among policyholders in the proportion that their policies are considered to have contributed to divisible surplus. In addition, as specified in MONY’s Plan of Reorganization, dividend scales for
Prior to January 1, 2001, the Company used the constant-yield method of depreciation for substantially all investments in real estate and real estate joint ventures acquired prior to January 1, 1991. As of January 1, 2001, the Company converted to straight-line depreciation for all investments in real estate and real estate joint ventures acquired prior to January 1, 1991 that are being held for income production. Real estate classified as held for sale is not being depreciated. Real estate assets and improvements are generally depreciated over ten to forty year periods and leasehold improvements are depreciated over the lives of the leases. Deprecation expense related to wholly owned investments in real estate was $2.1 million and $1.9 million in 2003 and 2002, respectively; accumulated depreciation was $15.9 million and $26.8 million at December 31, 2003 and 2002, respectively.
The Company amortizes leasehold improvements on a straight-line basis over the shorter of their estimated useful life or the remaining life of the original lease. The Company recorded depreciation expense on leasehold improvements of $2.0 million and $1.9 million for the years ended December 31, 2003 and 2002, respectively.
For the years ended December 31, 2003 and 2002, respectively, real estate of $0.0 million and $12.0 million was acquired in satisfaction of debt. In 2003, the Company recorded a capital contribution of $3.7 million related to employee stock option plan expenses.
The amortized cost and estimated fair value (see Note 10) of fixed maturity securities which include short-term investments, bonds and redeemable preferred stocks as of December 31, 2003 and 2002 are as follows:
As of December 31, 2003 and 2002 the carrying value of non-income producing bonds and redeemable preferred stock was $23.6 and $6.9 million, respectively.
Common stocks include marketable equity securities carried at market values of $43.6 million and $34.8 million at December 31, 2003 and 2002, respectively, and non-marketable equity investments carried at estimated fair value of $0.7 million and $0.6 million at December 31, 2003 and 2002, respectively. The cost of the marketable equity securities was $39.4 million and $32.9 million at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, gross unrealized gains were $5.7 million and $3.9 million, respectively, and gross unrealized losses were $0.9 million and $1.6 million, respectively, for equity securities.
Proceeds from sales of investments in common stocks during 2003 and 2002 were $24.0 million and $14.0 million, respectively. Gross gains of $4.7 million in 2003 and $2.3 million in 2002 and gross losses of $0.4 million in 2003 and $2.6 million in 2002 were realized on these sales.
There were 13 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 $2.4 million ($1.5 million after-tax) as of such date. Of these positions: (i) eight comprising approximately $1.8 million ($1.1 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) five comprising approximately $0.6 million ($0.4 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”.
The Company made aggregate capital contributions of $100.0 million and $150.0 million to MLOA during the years ended December 31, 2003 and 2002, respectively.
In 1997 the New York City Industrial Development Agency (“the NY IDA”) issued bonds for the benefit of the Company in the total amount of $16.0 million related to the Company’s consolidation of site locations to New York City. Debt service under the bonds is funded by lease payments by the Company to the NY IDA bond trustee for the benefit of the bondholder, MLOA (See Note 22). The carrying value of these bonds was $1.2 million and $1.3 million at December 31, 2003 and 2002 respectively.
The Company also has investment advisory agreements with four subsidiaries of MONY Group with respect to the investment and management of its invested assets. These agreements, effective in 2003, provide for scheduled fees or actual cost reimbursements. Expenses related to these agreements were $13.8 million in 2003. In addition, the Company carried an intercompany payable of $3.4 million at December 31, 2003 related to these agreements.
At December 31, 2003 and 2002, the carrying value of real estate which was non-income producing for the twelve months preceding such dates was $6.9 million and $7.5 million, respectively.
The minimum and maximum lending rates for mortgage loans during 2003 were 4.09% and 11.02% for urban commercial loans, 5.10% and 7.37% for agricultural mortgage loans, and 8.0% and 10.5% for mezzanine loans.
During 2003, the Company reduced interest rates on outstanding agricultural mortgage loans as follows; over 3%, 1 loan, $0.4 million; 2% to 3%, 2 loans, $0.2 million; less than 2%, 5 loans, $3.0 million.
The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 75.6%.
The average investment in impaired mortgage loans was $1.0 million and $3.0 million at December 31, 2003 and 2002, respectively, and interest income recognized on impaired mortgage loans was $3.8 million and $11.0 million for the years ended December 31, 2003 and 2002, respectively. On a cash basis method of accounting, $2.8 million and $10.3 million in investment income was recognized on impaired mortgage loans during the years ended December 31, 2003 and 2002, respectively.
At December 31, 2003 and 2002 the Company held investments in restructured mortgage loans of $12.3 million and $29.4 million, respectively. The Company recorded realized losses of $0.0 and $6.0 million related to these loans during 2003 and 2002 respectively. The Company accrues interest income on impaired loans to the extent they are deemed collectible (delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis.
Net investment income for the years ended December 31, 2003 and 2002 was derived from the following sources:
The Company had net unrealized losses of $75.2 million and $135.3 million for the years 2003 and 2002, respectively. The change in gains and losses for the years ended December 31 are detailed by asset type in the table below (in millions):
Policy loans are an integral component of insurance contracts and have no maturity dates. The fair value of policy loans approximates carrying value.
The Company has an agreement with a bank to lend securities to approved borrowers. At December 31, 2003 and 2002, securities loaned by the Company under this agreement had a fair value of $297.6 million and
$164.9 million, respectively. The minimum collateral at the time securities are loaned is 102 percent of the market value of loaned securities. Such securities are marked to market on a daily basis. In the event that the value of collateral ever drops to 100% of the market value of the security on loan, such collateral is adjusted back to 102% of the market value of the security on loan.
At December 31, 2002, the industries comprising 10 percent or more of the bond portfolio carrying value were: Consumer Goods and Services of $1,035.6 million (16.2%), Public Utilities of $605.6 million (10.8%), and Other Manufacturing of $572.0 million (10.2%).
Below investment grade bonds are defined as those securities rated in categories 3 through 6 by the NAIC, which are approximately equivalent to bonds rated below BBB by rating agencies. These bonds consist mostly of privately issued bonds, which are monitored by the Company through extensive internal analysis of the financial condition of the borrowers, and which generally include protective debt covenants. The Company held below investment grade bonds of $589.2 million and $658.9 million at December 31, 2003 and 2002, respectively. Of these bonds, $425.7 million and $434.1 million, respectively, were in category 3, which is considered to be medium quality by the NAIC.
Approximately 42.7% of the Company’s real estate and mortgage portfolios are invested in office building properties. As of December 31, 2003 and 2002, the real estate and mortgage loan portfolio was diversified as follows:
Interest rates swaps may be used by the Company from time to time to create synthetic fixed rate assets with a more appropriately desired duration for matching the Company’s liabilities. Interest rate swaps may also be used from time to time to hedge away interest rate risk on certain assets held for sale. In addition, as discussed above, interest rate swaps permit the Company to participate in the floating rate debt market and therefore expand its universe of investment alternatives, whereas it would otherwise only participate in such markets on a more limited basis.
Put options may be used from time to time by the Company to mitigate its downside risk from holding equity securities.
(4) Tabular Interest, Tabular less actual reserve released, and Tabular Cost have been determined by formulas as described in the Annual Statement instructions.
The total amount of reinsured life insurance in force on this basis was $5.2 billion and $5.0 billion at December 31, 2003 and 2002, respectively. Premiums ceded under these contracts were $30.6 million and $30.2 million; benefit payments recovered were approximately $19.5 million and $21.4 million; policy reserve credits recorded were $31.0 million and $27.7 million; and recoverable amounts on paid and unpaid losses were $7.5 million and $5.4 million at December 31, 2003 and 2002, respectively.
The Company has 2,500,000 shares of common stock authorized, 2,500,000 shares issued, and 2,500,000 outstanding. All outstanding shares are held by MONY Holdings.
The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life may distribute a dividend to its shareholder where the aggregate amount of such dividend in any calendar year does not exceed the lesser of: (a) ten percent of its surplus to policyholders as of the immediately preceding calendar year, or (b) its net gain from operations for the immediately preceding calendar year, not including realized capital gains. Based on these criteria the maximum allowable distribution for calendar year 2004 is $87.4 million. The law also states that if MONY Life does not satisfy the criteria mentioned above, it can only distribute dividends to its shareholders upon giving notice of its intentions to the superintendent no less than thirty days in advance of such declaration. The superintendent may disapprove such distribution by giving written notice to MONY Life within thirty days after such filing that the superintendent finds that the financial condition of MONY Life does not warrant such distribution. In addition, Arizona and Ohio insurance laws contain restrictions on the abilities of MLOA and USFL respectively to pay dividends to MONY Life. MONY Life paid dividends of $25.0 million and $90.0 million in 2003 and 2002, respectively, to MONY Holdings.
The portion of unassigned funds (surplus) represented or reduced for certain items at December 31, 2003 is as follows (in millions):
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 have entered into certain service agreements. These agreements, among other things, provide the Company will 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.
In connection with the Group Pension Transaction, on December 31, 1993, the Company made a $200 million capital investment in AEGON USA by purchasing $150 million of Series A and $50 million of Series B notes. The Series A notes pay interest at 6.44% and the Series B notes pay interest at 6.24% per annum. The Series A notes matured on April 7, 2003 and the Series B notes matured on December 31, 2002.
On March 8, 2000, MONY Life repurchased all of its outstanding $115.0 million face amount 9.5% coupon surplus notes, which were issued in 1997, and approximately $116.5 million face amount of its $125.0 million face amount 11.25% coupon surplus notes, which were issued in 1994 (the “9.5% Notes” and the “11.25% Notes”, respectively). In the third quarter of 2000, MONY Life repurchased another $6.5 million face amount of the 11.25% Notes and, in 2001, MONY Life repurchased another $0.1 million face amount of the 11.25% Notes, leaving $1.9 million face amount ($1.1 million carrying value) of the 11.25% Notes outstanding at December 31, 2003.
The components of the net deferred tax asset/(liability) at December 31, 2003 and 2002 are as follows (in millions). The Company did not record deferred income taxes prior to December 31, 2002 (see Note 2 above).
(1) Includes $(13.7) million and $(3.0) million in 2003 and 2002, respectively for federal income tax on capital gains.
Pre-tax operating gains and pre-tax operating losses, as reported in the accompanying statements of operations, differ from the taxable income reported for tax purposes. Among the more significant book to tax adjustments at December 31, 2003 were corporate owned life insurance, interest expense, amortization of IMR, and prior year adjustments.
The assets of the qualified pension plan are primarily invested in MONY Pooled Accounts which include common stock, real estate, private placement debt securities and bonds. 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 and $30.1 million were paid by this plan for the years ended December 31, 2003 and 2002, respectively.
* Pension benefits assume no benefits bearing incentive compensation in 2002 and a 4% rate of compensation increase for those eligible for Incentive Compensation and 5% for all others.
The Company’s qualified plan had assets of $387.6 million and $345.8 million at December 31, 2003 and 2002, respectively. The projected benefits 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.
The projected benefit obligation and accumulated benefit obligation for the non-qualified Employee Excess Plan, which is unfunded, were $127.0 million and $122.2 million at December 31, 2003 and $121.1 and $119.5 million at December 31, 2002, respectively.
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 and 2002, the Company contributed $2.2 million and $2.8 million to the plan, respectively.
The Company has an incentive savings plan in which substantially all employees and career field underwriters are eligible to participate. The Company matches employee contributions up to 3% and field underwriter contributions up to 2% of eligible compensation, as defined, and may also make an additional profit sharing contribution for non-officer employees. The Company made employer contributions on these plans of $4.6 million and $4.9 million in 2003 and 2002, respectively. At December 31, 2003 and 2002, the fair value of plan assets was $390.2 million and $331.8 million, respectively.
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 the 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.
At December 31, 2003 the Company had a commitment to issue $0.7 million on a fixed rate agricultural mortgage loan with periodic interest rate resets. The initial interest rate on the mortgage loan was 6.35%. The Company had commitments to issue $94.3 million of fixed and floating rate commercial mortgage loans with pay rates ranging from 3.67% to 8.00% at December 31, 2003. In addition, the Company had commitments to contribute capital to its equity partnership investments on $58.6 million and for one private placement security for $5.0 million with an interest rate of 5.71% at December 31, 2003.
(ii) Since late 1995 a number of purported class actions have been commenced in various state and federal courts against MONY Life and MLOA alleging that they engaged in deceptive sales practices in connection with the sale of whole and universal life insurance policies from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (i.e., breach of contract, fraud, negligent misrepresentation, negligent supervision and training, breach of fiduciary duty, unjust enrichment and violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases seek primarily equitable relief (e.g., reformation, specific performance, mandatory injunctive relief prohibiting MONY Life and MLOA from canceling policies for failure to make required premium payments, imposition of a constructive trust and creation of a claims resolution facility to adjudicate any individual issues remaining after resolution of all class-wide issues), as opposed to compensatory damages, although they also seek compensatory damages in unspecified amounts. MONY Life and MLOA have answered the complaints in each action (except for one being voluntarily held in abeyance). MONY Life and MLOA have denied any wrongdoing and have asserted numerous affirmative defenses.
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 McClean) those predicated on alleged violations of the Massachusetts and Illinois consumer protection statutes. On November 19, 2003, the Court in McClean entered an order granting defendants’ dispositive motion seeking dismissal of the individual claims of the proposed class representatives of the putative state-wide 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.
$2.9 million of which was reflected in the statement of operations caption entitled “net realized capital losses” and $1.2 million which was reflected in the statement of operations under the caption entitled “other income (net)”. The Company’s appeal was subsequently withdrawn.
(iv) 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).
In addition, MONY Group, its directors and AXA Financial have been named in two putative class action lawsuits filed in New York State Supreme Court in Manhattan, entitled Laufer v. The MONY Group, et al., Civ. No. 602957-2003 (Sept. 19, 2003) and North Border Investments v. Barrett, et al., Civ. No. 602984-2003 (Sept. 22, 2003). The complaints in these actions contain allegations substantially similar to those in the original consolidated complaint in the Delaware cases, and likewise purport to assert claims against MONY Group and its directors for breach of fiduciary duty and against AXA Financial for aiding and abetting a breach of fiduciary duty. The Laufer and North Border complaints also seek various forms of relief, including damages and injunctive relief that would, if granted, prevent the completion of the merger. On December 29 and 30, 2003, respectively, defendants served their answers to the Laufer and North Border complaints. MONY Group has denied the material allegations of the complaints and intends to vigorously defend the actions.
(v) On February 3, 2004, MONY Group commenced an action in the United States District Court for the Southern District of New York, entitled The MONY Group Inc. v. Highfields Capital Management LP, Longleaf Partners Small-Cap Fund and Southeastern Asset Management, No. 04 Civ. 00916. MONY Group’s complaint alleges, among other things, that: (i) the furnishing by defendants, in solicitation materials sent to MONY Group’s stockholders, of a duplicate copy of MONY Group’s proxy voting card, without first filing a proxy statement and making the requisite disclosures in connection therewith, violates the federal proxy rules; (ii) certain of defendants’ solicitation materials contained false and misleading statements; and (iii) the defendants are acting as members of a “group” under Section 13(d) of the Securities Exchange Act and the rules promulgated thereunder in opposing the proposed merger, requiring the defendants to make certain securities filings and disclosures regarding their holdings, plans and intentions before engaging in a solicitation of MONY Group’s stockholders.
Information regarding the separate accounts of the Company is as follows (in millions):
Deferred and uncollected life insurance premiums and annuity considerations as of December 31, 2003 and 2002 were as follows (in millions):
The terrorist events of September 11, 2001 had no material effect on the Company’s financial position as December 31, 2001 or it results of operations for the year then ended. The net effect of life insurance claims relating to the incident (after reinsurance and the release of related reserves) aggregated approximately $3.0 million pre tax. In addition, the Company and its subsidiaries incurred damages from property losses and business interruption. These damages principally consist of: (i) lost revenues at MSC and Enterprise resulting from the close of the New York securities markets, (ii) the closing of the Company’s New York corporate
offices, and (iii) lost revenues resulting from the volatility of the securities markets and consumer uncertainty with respect to equity based products in the aftermath of September 11, 2001. To date, the Company has recovered $0.3 million relating to the aforementioned damages under its insurance coverage.
In addition, MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments due on the Series A Notes (which have been allocated to the Closed Block) pursuant to the terms thereof, as described in Note 17. Since the Closed Block will be 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 Closed Block Business experience very substantial ongoing adverse experience in investment, mortality, persistency or other experience factors. The Company 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.
Balance sheet information for the Closed Block as of December 31, 2003 and 2002 is summarized as follows (in millions):
The Company has sold variable annuity contracts containing guaranteed minimum death benefits (“GMDB’s”) that reduce on a dollar-for-dollar basis when a partial withdrawal occurs. There has been ambiguity as to the correct interpretation and application of Actuarial Guideline XXXIII, “Determining CARVM Reserves for Annuity Contracts with Elective Benefits” (AG XXXIII) and Actuarial Guidelines XXXIV, “Variable Annuity Minimum Guaranteed Death Benefit Reserves” (AG XXXIV) in determining statutory reserves for these products. In the fourth quarter of 2003 an interim measure in the form of an amendment to AG XXXIV was adopted to clarify reserve methodology. Except as noted below, in calculating the GMDB reserves for these variable annuity contracts under AG XXXIV, the Company does not consider the potential benefit stream where all policyholders immediately elect to maximize partial withdrawals under these policies. This is consistent with the method applied in the prior year.
At the time of the issuance of these financial statements, neither the NAIC nor the New York State Insurance Department, which is ultimately responsible for determining the appropriate reserving methods for statutory financial statements of New York domiciled insurance companies, has provided specific guidance as to the correct interpretation of AG XXXIII and AG XXXIV with respect to GMDB reserves required for variable annuity contacts containing dollar-for-dollar withdrawal provisions. However, the New York State Insurance