The information required by this Item is presented in a reduced disclosure format pursuant to General Instruction I to Form 10-K.
Our principal offices are located in the headquarter’s leased by MONY Group at 1740 Broadway, New York, New York. MONY Group’s headquarters building consists of approximately 265,613 square feet. We do not directly own any real property. We believe that the property is suitable and adequate for our current and anticipated operations.
The information required by this Item is omitted pursuant to General Instruction I(2)(a).
The information required by this Item is presented in a condensed disclosure format pursuant to General Instructions I(2)(a) to Form 10K
· insurance, administrative and surrender charges on universal life and annuity products,
· the maintenance of our target spreads between credited rates on policyholders’ account balances and the rate of earnings on its investments,
· our ability to manage the market and credit risks associated with our invested assets,
· the investment performance of our mutual fund and variable product offerings, and
· The Company Might Have to Amortize or Write-Off Deferred Policy Acquisition Costs Sooner Than Planned. In accordance with GAAP, deferred policy acquisition costs (“DPAC”) (policy acquisition costs represent costs that vary with and primarily relate to the
· 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:
· management’s analysis of the issuer’s financial condition and trends therein,
· the consideration of other factors, including: any actions by rating agencies affecting the issuer, the period of time the fair value of a security has been at less than its cost, the Company’s expectations regarding the period of time required for a recovery of any current unrealized loss, and other relevant facts regarding the issuer.
· 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, 2002, the Company’s net amount at risk (or the aggregate amount by which the guaranteed values exceeded the cash values of the Company’s in force annuity contracts) totaled approximately $776.0 million. At December 31, 2002, the Company carried a reserve of approximately $6.5 million with respect to such claims. However, additional reserves for such claims may need to be established, particularly if there is a sustained or continuing deterioration in the securities markets. In addition, the American Institute of Certified Public Accountants (“AICPA”) is deliberating the issuance of guidance concerning the establishment of such reserves. This guidance may require the Company to change its methodology for determining the amount of reserves that should be
· As required under GAAP, both the rate of return assumption for 2002 on assets funding the Company’s pension liabilities and the discount rate used to determine those liabilities were established at the end of December 31, 2001. The Company made these assumptions on the basis of historic returns on such assets, its outlook for future returns, the long-term outlook for such returns in the marketplace, and yields available on high-quality corporate bonds. However, due to deteriorating economic conditions, the decline in securities market valuations and interest rates, the Company lowered both its assumed rate of return assumption from 10.0% to 8.0% and the discount rate assumption from 7.3% to 6.6% which will cause an increase in the Company’s net periodic pension expense in 2003 and thereafter. In addition, the deterioration of the securities markets during 2002 has resulted in a decline in the fair value of the assets funding the Company’s pension obligations. As a result, the Company’s net periodic pension expense will increase in 2003 and thereafter due to the requirement under GAAP to amortize unrealized gains and losses through net periodic pension costs over a period of time. The Company expects that the effect of changing the assumed rate of return on assets funding the Company’s pension liabilities and the decline in the fair value of such assets, as well as changing the discount rate, will result in lower earnings in 2003 of approximately $23.0 million before tax, as compared to those reported in 2002. In addition, a continuing deterioration in the securities markets may require further changes in the assumed rate of return on assets funding the Company’s pension liabilities and the discount rate, which may have a material adverse affect on the Company’s results of operations and financial position.
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 Consolidated Financial Statements, and (iii) certain charges associated with the Company’s reorganization activities in 2002 and 2001 - see “Reorganization and Other Charges” for further details. MONY Securities Corp. (“MSC”) is reported in the Company’s Other Products segment. Accordingly, segment disclosures for years prior to 2001 have been restated to conform to the current period presentation. See Note 7 to the Consolidated Financial Statements for further information regarding the Company’s reportable segments.
The following is a discussion of the critical accounting policies that, in the Company’s view, require significant use of judgment. See Note 3 of the 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 account securities and certain investments in venture capital partnerships at fair value in its consolidated balance sheet. In most cases, the Company determines fair values using quoted market prices. However, the valuation of certain investments, such as private placement fixed maturity securities, requires the use of assumptions and estimates related to interest rates, default rates, and the timing of cash flows because quoted market prices are not available. At December 31, 2002, the carrying value of private placement fixed maturity securities was $3,173.0 million.
The Company records changes in the fair values of investments in fixed maturity and equity securities available for sale that are not considered to be “other than temporarily impaired” in other comprehensive income. The Company reports changes in the value of venture capital investments accounted for using the equity method and trading securities in the consolidated statement of operations. For investments the Company considers to be other than temporarily impaired, the Company records an impairment loss, which is reflected in realized gains (losses) on investments - see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Investments - Other Than Temporary Impairment Charges On Investments in Fixed Maturity Securities and Common Stocks. Determining whether a security is other than temporarily impaired requires the use of estimates and significant judgment. The Company’s financial position and results of operations are therefore affected by changes in circumstances that affect the value of these investments and the Company’s determination as to whether the investments are other than temporarily impaired.
The Company values DPAC and insurance reserves in accordance with the relevant GAAP pronouncements: generally Financial Accounting Standards Board (“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 policy duration. 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations - Potential Forward Looking Risks Affecting Profitability.
As discussed in Note 24 to the Consolidated Financial Statements, in both 2002 and 2001 the Company established reserves related to the reorganization of certain of its businesses. These reserves are primarily related to the estimated costs of employee terminations and benefits, lease abandonments and other costs directly related to the Company’s reorganization plans and incremental to the Company’s normal operating costs. Although management does not expect significant changes to its reorganization plans, the actual costs related to these plans may differ from management’s estimates.
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. Of these charges, $7.2 million and $19.1 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: (i) severance and related benefits resulting from headcount reductions of 161 and 26, respectively, in the Company’s home office and career agency system, respectively, as well as losses from 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. 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.
Amounts reported as “reconciling” in 2002 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of MONY Holdings, (iii) charges totalling $7.2 million pre-tax relating to the Company’s reorganization and (iv) a $1.5 million reversal of certain reserves associated with the reorganization charge recorded in 2001. See “Reorganization and Other Charges”.
Amounts reported as “reconciling” in 2001 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) charges totaling $56.8 million pre-tax relating to the Company’s reorganization. See “Reorganization and Other Charges”.
Amounts reported as “reconciling” in 2000 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans.
Premium revenue was $690.4 million for 2002, a decrease of $4.9 million, or 0.7%, from $695.3 million reported for 2001. The decrease was primarily the result of lower premiums in the Protection Products segment of $12.6 million partially offset by increases in the Accumulation Products and Other Products segments of $6.3 million and $1.4 million, respectively. The following table summarizes the components of premiums recorded in the Protection Products segment for the years ended December 31, 2002 and 2001, respectively, which represents 96% and 97%, respectively, of the Company’s total premiums on a consolidated basis.
Refer to Note 11 of the 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.
The Company purchased a COLI contract to provide a funding mechanism for its non-qualified deferred compensation liabilities. The investments in the COLI contract are structured to substantially hedge the changes in the Company’s non-qualified deferred compensation liabilities. The change in such liabilities is reflected in the statement of income and comprehensive income caption entitled “other operating costs and expenses.” In 2002, the change in the cash surrender value of the COLI contract allocated to the Protection Products segment was $(11.5) million compared to $(3.7) million in 2001. In addition, there was a decrease in investment management fees.
due to unfavorable market conditions and the decline in assets under management. The increase in reconciling amounts is due to higher costs attributable to the Company’s employee benefit plans.
Interest credited to policyholders’ account balances was $119.3 million for 2002, an increase of $8.8 million, or 8.0%, from $110.5 million reported for the comparable prior year. The increase is primarily attributable to higher interest crediting of $3.9 million in the Protection Products segment, $4.7 million in the Accumulation Products segment and $0.2 million in the Other Products segment. The increase in the Protection Products segment is primarily related to higher interest crediting on CSVUL of $3.0 million primarily due to higher general account fund values. The increase in the Accumulation Products segment is primarily attributable to higher interest crediting of $7.3 million on FPVA business and $2.0 million on the new Flexible Premium Deferred Annuity (“FPDA”) product, partially offset by decreased interest crediting on supplemental contracts, Single Premium Deferred Annuity (“SPDA”) business, and other annuity contract business of $2.0 million, $1.9 million and $0.5 million, respectively. The increase in interest crediting on FPVA is related to higher general account fund balances. The decrease in interest crediting on supplemental contracts is attributable to lower interest rates. The decrease on SPDA and other annuity contract business is due to the continued run-off of these products.
Due to a reduction in the dividend scale effective January 1, 2002, policyholder dividends payable during the year ended December 31, 2002 were $202.6 million, a decrease of $12.8 million, or 5.9%, from $215.4 million reported in the comparable prior year period. The dividend scale reduction reflects lower forecasted ultimate profitability of the Closed Block due primarily to declines in the interest rate environment for fixed income assets. Determination of dividends paid to policyholders in the Closed Block is based on a forecast of the ultimate profitability of the Closed Block over its remaining expected life. The purpose of reducing or increasing dividends to policyholders in the Closed Block is to attempt to align the payment of such dividends to the emergence of expected profits from the Closed Block. (See Note 2 to the Consolidated Financial Statements).
No new policies have been added to the Closed Block subsequent to MONY Life’s demutualization. Therefore, we expect the revenues and benefits related to the Closed Block to decrease over time as the in-force business declines. This is consistent with the “glide path” established in connection with MONY Life’s plan of demutualization.
Net realized losses were $51.4 million for the year ended December 31, 2002, a decrease of $57.4 million, from gains of $6.0 million reported for the corresponding prior year. The following table sets forth the components of net realized gains (losses) by investment category for the years ended December 31, 2002 and 2001.
Amortization of DPAC was $49.1 million for the year ended December 31, 2002, a decrease of $10.3 million, compared to $59.4 million reported in the prior year. The $10.3 million decrease in amortization is due principally to the run-off of this block of business and the implementation of SOP 00-3 in 2001 - see “Dividends to policyholders” below for an explanation of the deferred dividend liability.
Due to a reduction in the dividend scale effective January 1, 2002, policyholder dividends payable during 2002 were $199.7 million, a decrease of $11.8 million from $211.5 million reported in the prior year. The dividend scale reduction reflects lower forecasted ultimate profitability of the Closed Block due primarily to declines in the interest rate environment for fixed income assets. Determination of dividends paid to policyholders in the Closed Block is based on a forecast of ultimate profitability of the Closed Block over its remaining expected life. The purpose of reducing or increasing dividends to policyholders in the Closed Block is to attempt to align the payment of such dividends to the emergence of expected profits from the Closed Block. (See Note 2 to the Consolidated Financial Statements)
The table below and the discussion that follows present certain information with respect to the Company’s sales of protection, accumulation, and retail brokerage and investment banking products and services during the years ended December 31, 2002, 2001 and 2000 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 on COLI and BOLI business and single premium paying policies during the periods presented 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 The amounts presented with respect to the Retail Brokerage and Investment Banking segment represent fees earned by Advest, Matrix and MSC primarily from securities brokerage, investment banking and asset management services.
Excludes deposits in 2002, 2001 and 2000 associated with an exchange program offered by the Company wherein contractholders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company.
Total new annualized recurring and single life insurance premiums were $279.0 million for the year ended December 31, 2002, compared with $214.7 million during the comparable prior year. The increase was primarily due to increased sales of COLI/BOLI from the Company’s Wholesale distribution channel, which were $147.6 million for the year ended December 31, 2002, compared to $74.3 million for the comparable prior year. The increase is primarily due to an overall increase in new cases and policies issued in 2002 compared to 2001. There were 43 new cases and 2,061 new policies issued for the year ended December 31, 2002 compared to 29 new cases and 1,074 new policies for the year ended December 31, 2001. Corporate sales, approximately 99% of which are from the Company’s Wholesale distribution channel, are large premium cases, which typically generate revenues that can fluctuate considerably from quarter to quarter.
We present below a discussion and analysis of our General Account consolidated invested assets on a Generally Accepted Accounting Principles basis. This discussion and analysis excludes Separate Account assets for the reasons discussed below, as well as invested assets transferred in the Group Pension Transaction. Following the discussion and analysis of our consolidated invested assets is a discussion and analysis of the invested assets of the Closed Block Business on a statutory basis.
The following table illustrates the net investment yields based on amortized cost. Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings. Investment expenses are net of mortgage servicing fees and other miscellaneous fees.
The Securities Valuation Office of the National Association of Insurance Commissioners evaluates the fixed maturity investments of insurers for regulatory reporting purposes and assigns investments to one of six investment categories called National Association of Insurance Commissioners Designations. The National Association of Insurance Commissioners Designations closely mirror the Nationally Recognized Statistical Rating Organizations’ credit ratings for marketable bonds. National Association of Insurance Commissioners Designations 1 and 2 include fixed maturity investments considered investment grade (“Baa” or higher by Moody’s, or “BBB” or higher by Standard & Poor’s) by the rating organizations. National Association of Insurance Commissioners Designations 3 through 6 are referred to as below investment grade (“Ba” or lower by Moody’s, or “BB” or lower by Standard & Poor’s).
Amounts in 2002 include fixed maturities of $58.3 million at amortized cost and $61.8 million at estimated fair value included in the DSCA sub-account OB.
We utilize our investments in privately placed fixed maturities to enhance the overall value of the portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. We also use these privately placed investments to enhance cash flow as a result of sinking fund payments. Generally, private placements provide us with:
They are, however, generally not freely tradable because of restrictions imposed by federal and state securities laws and illiquid trading markets.
We review all fixed maturity investments at least once each quarter and identify investments that we conclude require additional monitoring. Among the items reviewed are:
· public securities trading at a substantial discount as a result of specific credit concerns, and
We define problem investments in the fixed maturity category as investments that are
· in default as to principal and/or interest payments or are to be restructured pursuant to commenced negotiations,
We define potential problem investments in the fixed maturity category as investments that are deemed to be experiencing significant operating problems or difficult industry conditions. Typically these investments are experiencing or anticipating liquidity constraints, having difficulty meeting projections/budgets and would most likely be considered a below investment grade risk.
We define restructured investments in the fixed maturity category as investments where a concession has been granted to the borrower related to the borrower’s financial difficulties that we would not have otherwise considered. We restructure certain investments in instances where we determine that greater economic value will be realized under the new terms than through liquidation or other disposition. The terms of the restructure generally involve some or all of the following characteristics:
As of December 31, 2002, the fair value of our problem, potential problem and restructured fixed maturities was $274.7 million, $8.5 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.3% of total fixed maturities. As of
December 31, 2001 the fair value of our problem, potential problem and restructured fixed maturities was $66.7 million, $16.1 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.2% of total fixed maturities.
At December 31, 2002, our largest unaffiliated single concentration of fixed maturities consisted of $325.6 million of carrying value of Federal National Mortgage Association fixed maturities which represented approximately 2.8% of our total invested assets on that date. The largest non-government issuer consisted of $200.0 million of AEGON notes that we purchased in connection with the Group Pension Transaction. These notes, of which $50 million matured on December 31, 2002 and $150 million of which mature on April 7, 2003, represented approximately 1.7% of our total invested assets at December 31, 2002. No other individual non-government issuer represented more than 0.4% of our invested assets.
We held approximately $1,013.9 million, $1,085.5 million and $1,103.9 million of mortgage-backed and asset-backed securities as of December 31, 2002, December 31, 2001 and 2000, respectively. Of these amounts, $305.5 million, $292.4 million and $338.9 million, or 30.4%, 26.9% and 30.7%, respectively, represented agency-issued pass-through and collateralized mortgage obligations secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. We believe that our active monitoring of our portfolio of mortgage-backed securities and the limited extent of our holdings of more volatile types of mortgage-backed securities mitigate our exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 2002, December 31, 2001 and 2000, 87.1%, 86.8% and 84.5%, respectively, of our mortgage-backed and asset-backed securities were assigned a National Association of Insurance Commissioners Designation 1.
The principal risks inherent in holding collateralized mortgage obligations, as well as pass-through securities (securities generally representing pooled debt obligations repackaged as shares, that pass income from debtors through intermediaries such as investment banks, to investors), are prepayment and extension risks arising from changes in market interest rates. In declining interest rate environments, the mortgages underlying the collateralized mortgage obligations are prepaid more rapidly than anticipated, causing early repayment of the collateralized mortgage obligations. In rising interest rate environments, the underlying mortgages are prepaid at a slower rate than anticipated, causing collateralized mortgage obligations principal repayments to be extended. Although early collateralized mortgage obligations repayments may result in acceleration of income from recognition of any unamortized discount, the proceeds typically are reinvested at lower current yields, resulting in a net reduction of future investment income.
The Planned Amortization Class tranche is structured to provide more certain cash flows to the investor and therefore is subject to less prepayment and extension risk than other collateralized mortgage obligations tranches. Planned Amortization Classes derive their stability from two factors: (i) early repayments are applied first to other tranches to preserve the Planned Amortization Class’s originally scheduled cash flows as much as possible and (ii) cash flows applicable to other tranches are applied first to the Planned Amortization Class if the Planned Amortization Class’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 Planned Amortization Class in decreasing interest rate environments, but has minimal protection in increasing rate environments.
The majority of the securities contained in our collateralized mortgage obligations portfolio are traded in the open market. We obtain market prices for these securities from outside vendors. Any security price that we do not receive from such vendors we obtain from the originating broker or internally calculate.
We purchase asset-backed securities both to diversify the overall credit risks of the fixed maturity portfolio and to provide attractive returns. The asset-backed securities portfolio is diversified both by type of asset and by issuer. No one issuer represents more than 3.6% of the asset-backed securities portfolio. The largest exposure in the asset-backed securities portfolio is to credit card receivables. These securities are comprised of pools of both general purpose credit card receivables, such as Visa and Mastercard, and private label credit card receivable pools. Excluding the exposures to home equity loans (which represented 9.4% of our asset-backed securities portfolio as of December 31, 2002 and 8.2% and 1.7% as of December 31, 2001 and 2000, respectively), we believe the asset-backed securities portfolio is in general insensitive to changes in interest rates.
The following table presents the types of asset-backed securities held by us as of the dates indicated.
Below is a summary of the changes in our commercial mortgage portfolio for the nine months ended December 31, 2002 and for the years ended December 31, 2001, 2000, and 1999, respectively.
We review our mortgage loan portfolio and analyze 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. We categorize loans that are delinquent and loans in process of foreclosure as “problem” loans. We categorize loans with valuation allowances, but which are not currently delinquent, and loans that are on watchlist as “potential problem” loans. We categorize 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.
At December 31, 2002, the carrying value of our problem, potential problem and restructured loans was $0.0 million, $104.7 million and $20.3 million, respectively, net of valuation allowances of $0.0 million, $6.5 million and $8.0 million, respectively. Problem commercial mortgages included loans in foreclosure of $0.0 million and $11.0 million at December 31, 2002 and December 31, 2001,
respectively. Valuation allowances includes impairment writedowns recorded prior to the adoption of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, of $11.1 million at December 31, 2002 and December 31, 2001.
Gross interest income on our restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $3.1 million at December 31, 2002 and $6.4 million, $9.1 million and $16.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Actual gross interest income recorded on these loans for the year ended December 31, 2002 was $0.5 million. For the years ended December 31, 2001, 2000 and 1999 actual gross income was $0.6 million, $3.6 million and $6.3 million, respectively.
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%.
We hold real estate as part of our General Account investment portfolio. We have adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 2002, 2001 and 2000 the carrying value of our equity real estate investments was $206.9 million, $230.8 and $212.0 million, respectively, or 1.8%, 2.1% and 2.0%, respectively, of our General Account invested assets. We own real estate, interests in real estate joint ventures (both majority owned and minority owned), and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of our equity real estate investments by these classifications as of the dates indicated.
The following table sets forth certain data concerning our real estate sales during the periods indicated.
Excludes sales of unconsolidated real estate joint venture interests. Our real estate joint venture interests are reported in Other invested assets. Gains from the sales of these interests in 2002, 2001, 2000 and 1999 were $1.1 million, $1.0 million, $0.0 million and $0.0 million, respectively.
Most of the proceeds from real estate sales have been invested in fixed maturities and loans, making our overall asset portfolio somewhat more sensitive to changes in interest rates and reducing our exposure to an illiquid asset class, real estate.
Our equity securities are comprised of investments in common stocks and limited partnership interests of investment partnerships. The following table presents the carrying values of our equity securities at the dates indicated.
We make investments in partnerships specializing in venture capital investing. Our investments are in the form of limited partnership interests. As a percentage of our total invested assets, we generally limit these investments to no more than 2% to 3%. In accordance with Generally Accepted Accounting Principles, certain of our investments in these partnerships are accounted for under the equity method of accounting, while the balance of the portfolio is accounted for at estimated fair value with changes in fair value recorded in other comprehensive income. Generally, substantially all our partnership investments acquired before May, 1995 are accounted for at fair value, while those acquired subsequent thereto are accounted for under the equity method of accounting. Because the underlying partnerships are required under Generally Accepted Accounting Principles to mark their investment portfolios to market and report changes in such market value through their earnings, our earnings will reflect our pro rata share of such mark to market adjustment if we account for the partnership investment under the equity method. With respect to partnerships accounted for at fair value, there will be no impact on our earnings until: (i) the underlying investments held by the partnership are distributed to us, or (ii) the underlying investments held by the partnership are sold by the partnership and the proceeds are distributed to us, or (iii) an impairment of our investment in the partnership is determined to exist. Historically, venture capital investments owned by us have significantly impacted our earnings. Our future earnings from our venture capital investments could be adversely affected when market valuations deteriorate, which could materially affect our results of operations and financial position. For the year ended December 31, 2002, and the years ended December 31, 2001, 2000, and 1999 income/(loss) from investments in venture capital partnerships were $(6.7) million, $(35.4) million, $236.3 million, and $188.9 million, respectively, representing 1.2%, 5.5%, 2.4%, and 20.9%, respectively, of our net investment income for such periods.
At December 31, 20022001 and 2000 we had investments in approximately 54 and 53 different limited partnerships, respectively, which represented 1.6%, 2.1% and 2.6%, respectively, of our General Account invested assets at those dates. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock.
Management’s assessment of whether an investment by the Company in a debt or equity security is other than temporarily impaired is primarily based on the following factors:
· management’s analysis of the issuer’s financial condition and trends therein;
· the consideration of other factors, including: any actions by rating agencies affecting the issuer, the period of time the fair value of a security has been at less than its cost, management’s expectations regarding the period of time required for a recovery of any current unrealized loss, and other relevant facts regarding the issuer.
The following table presents certain information by type of investments with respect to our gross unrealized losses on common stock investments at December 31, 2001 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 and information as to the amount of time securities have been in an unrealized loss position.
With respect to common stock sold which resulted in a loss for the years ended December 31, 2002 and 2001, the following table presents certain information as to the amount of time such securities have been in an unrealized loss position. Excludes amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
ended December 31, 2002 and 2001. Based on management’s analysis of the factors discussed herein management concluded that all other common stock positions during the aforementioned periods were not “other than temporarily impaired”.
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. These impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in our results of operations. We had no impairment adjustments for the years ended December 31, 2002, 2001, 2000 and 1999. At December 31, 2002, 2001 and 2000, the carrying value of real estate held for investment was $180.2 million, $58.5 million and $40.7 million, or 1.5%, 0.5% and 0.4% of our invested assets at such dates, respectively. Those carrying values are net of cumulative impairments of $3.5 million, $10.8 million and $10.8 million, respectively, and net of accumulated depreciation of $24.3 million, $24.3 million and $22.2 million, respectively. However, there can be no assurance that additional provisions for impairment adjustments with respect to real estate held for investment will not need to be made.
The carrying value of our real estate to be disposed of at December 31, 2002, 2001 and 2000 was $26.8 million, $172.3 million and $171.3 million, net of impairment adjustments of $29.8 million and $20.2 million, valuation allowances of $4.0 million, $0.8 million and $4.5 million and accumulated depreciation of $64.2 million, $62.0 million and $63.8 million, respectively. Once we identify a real estate property to be sold and commence a plan for marketing the property, the property is classified as to be disposed of and we establish a valuation allowance, which we periodically revise, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs. Increases in these valuation allowances are recorded as realized investment losses and, accordingly, are reflected in our results of operations. For the years ended December 31, 2002, 2001, 2000 and 1999, these increases in valuation allowances aggregated $5.2 million, $0.8 million, $0.7 million and $12.1 million, respectively.
The Closed Block invested assets are managed in the aggregate to seek a high level of return consistent with the preservation of principal and equity and to reflect the Closed Block’s duration and its ability to take risks consistent with the nature of the Closed Block and the investment objectives established for it.
Assets included in the Closed Block consist of fixed maturities, mortgage loans, policy loans, accrued investment income and premiums due on Closed Block policies.
The amount of invested assets used initially to fund the Closed Block was $5.7 billion on a statutory basis. Set forth below are the invested assets included in the Closed Block as of December 31, 2002, 2001 and 2000 on a statutory basis.
The following table summarizes Closed Block public and private fixed maturities by National Association of Insurance Commissioners Designation and the equivalent ratings of the Nationally Recognized Statistical Rating Organizations as of December 31, 2002, 2001 and 2000, as well as the percentage, based on carrying value, that each designation comprises.
2000. At December 31, 2002, the percentage, based on carrying value, of total private placement fixed maturities that were investment grade (National Association of Insurance Commissioners Designation 1 or 2) was 83.3%, as compared to 93.6% and 95.0% at December 31, 2001 and 2000.
At December 31, 2002, the largest non-government issuer of bonds held in the Closed Block was $150.0 million of AEGON notes that we purchased in connection with the Group Pension Transaction and which mature in April 2003 and December 2002. These notes represent approximately 3.6% of total Closed Block invested assets at December 31, 2002. No other individual non-government issuer represents more than 1.1% of invested assets.
The carrying value and estimated fair value of fixed maturities held in the Closed Block, by contractual maturity dates (excluding scheduled sinking funds), as of December 31, 2002, 2001 and 2000 are as follows:
Following is a summary of Closed Block commercial mortgage loans by geographic area and property type as of December 31, 2002, 2001, and 2000, respectively.
We pledged the Debt Service Coverage Account as collateral for our obligations under the Notes and to Ambac. For as long as we remain obligated under the Notes or have any outstanding obligations to Ambac, we will maintain the Debt Service Coverage Account. One or more of our affiliates manages the investment of assets in the Debt Service Coverage Account, in accordance with the investment policy set forth in the Indenture.
With respect to the Group Pension Payments, the annual results from the Existing Deposits are measured on a basis in accordance with the Agreement (such basis hereafter referred to as the “Earnings Formula”) which is substantially the same as GAAP, except that: (i) asset impairments on fixed maturity securities are only recognized when such securities are designated with an NAIC rating of “6”, and (ii) no impairment losses are recognized on mortgage loans until such loans are disposed of, or at the time and in the calculation, of the Final Value Payment. All mortgage loans had been disposed of prior to the calculation of the Final Payment.
The old notes mature on January 21, 2017. The old notes pay interest only through January 21, 2008 at which time principal payments begin to be made pursuant to an amortization schedule. Interest on the old notes is payable quarterly at an annual rate equal to the three month London Interbank Offered Rate plus 0.55%. Concurrent with the issuance of the old notes, we entered into an interest rate swap contract, which locked in a fixed rate of interest on this indebtedness at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum), which guarantees the scheduled principal and interest payments on the old notes, the total effective cost of the indebtedness is 7.36%.
Company is formulating its cash flow projections, it considers, among other things, its expectations about sales of the Company’s products, its expectations concerning customer behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates. See “- Investments - General In 2002, MONY Life paid a dividend to MONY Holdings in the amount of $90.0 million, of which $15.6 million was retained by MONY Holdings in its DSCA Sub-account CCB (see Note 20 to the Consolidated Financial Statement) and $74.4 million as paid by MONY Holdings in the form of a dividend to MONY Group. Also in 2002, MONY Group contributed $125.0 million to MONY Holdings, which in turn contributed such amount to MONY Life to support its capital and surplus.
The Company’s principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 2002, the Company reported net cash inflows from operations of $68.6 million, a $54.3 million increase from net cash inflows of $14.3 million 2001. The increase from the prior year is primarily due to a decrease in operating expenses, lower federal income tax payments and lower death benefit payouts, offset by an increase in the amounts due from reinsurers and the timing of payment of liabilities.
Also, See “ - Investments” for information on the Company’s investment portfolio.
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) Trusted Securities Advisors Corporation (“Trusted Advisors”), which distributes investment products and services through a network of independent certified public accountants, (vi) 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, and (vii) MONY Life Insurance Company of the Americas, Ltd. (“MLICA”), which provides life insurance, annuity and investment products to nationals of certain Latin American countries.
Effective December 31, 2002 New York adopted certain additional provisions of NAIC SAP which require New York domiciled companies to record deferred tax assets and deferred tax liabilities. As a result of the change, the Company reported a change in accounting principle, as an adjustment that increased unassigned funds (surplus) by $90.2 million in 2002
Premiums, Annuity Considerations and Fund Deposits consist of premiums and deposits from MONY Life’s Individual Operations (life, health and annuities) and Group Operation of approximately $695.8 million and $117.0 million for the year ended December 31, 2002, respectively, as compared to approximately $720.2 million and $140.8 million for the year ended December 31, 2001, respectively.
For the year ended December 31, 2002, MONY Life reported net investment income of $594.7 million, a decrease of $29.6 million from $624.3 million reported for the year ended December 31, 2001. The decrease in net investment income is primarily due to a decrease of $26.2 million in income reported from the MONY Life’s investments in short-term commercial paper, fixed maturities, and mortgages. The decrease was principally caused by lower interest rates in 2002. In addition, MONY Life reported a decrease in income of $8.1 million reported from venture capital investment partnerships. The annualized yield on MONY Life’s average invested assets, including its investments in venture capital partnerships, before and after realized gains on investments was 6.4% and 4.9%, respectively, for 2002, as compared to 6.5% and 5.9%, respectively, for 2001. The following discusses the nature of MONY Life’s venture capital investments, as well as the statutory accounting practices applied to them.
· reverse the carrying value of the corresponding limited partnership investment, and
At December 31, 2002 and 2001, MONY Life had investments in approximately 49 and 51 different limited partnerships, respectively, which represented 1.9% and 2.6%, 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 $(6.6) million in 2002 compared to $(13.3) million during 2001. The increase in reserve adjustments was due to higher surrenders reported on reinsurance in 2001 and lower interest rates on modified coinsurance reserves during 2002.
For the year ended December 31, 2002 MONY Life reported $(0.6) million from the change in reserves relating to employee benefit plans, a decrease of $1.1 million, as compared to $0.5 million reported for the year ended December 31, 2001. The decrease is primarily due to higher reserve benefits for life, disability, and medical coverage to company employees.
For the year ended December 31, 2002 MONY Life reported $(11.8) million in miscellaneous income, an increase of $15.5 million, as compared to $(27.3) million for the year ended December 31, 2001. This increase in miscellaneous income is primarily attributable to a decrease in fixed asset write-offs of $8.9 million related to corporate restructuring in 2001, a decrease in reserves and expenses for various legal matters of $5.2 million, and decreases of $3.1 million and $1.7 million for prior year investment and expense items, respectively. Partially offsetting these decreases was an increase in expenses of $5.2 million related to interest on MONY Life’s tax valuation allowance.
The decrease in death benefits of $25.6 million from $227.5 million for the year ended December 31, 2002 to $201.9 million for the comparable period in 2002, was primarily due to more favorable mortality experience of $14.7 million and $10.9 million in closed block business and ongoing business, respectively from 2001.
· the change in reserves on individual annuity contracts for the year ended December 31, 2002 of $50.5 million compared with $(12.6) for the same period in 2001, a change of $63.1 million. This change was due to lower surrenders of fixed annuities and higher reserve increases on variable annuity general account fund balances in 2002.
MONY Life recorded federal income taxes of $18.8 million and $(0.7) million for the years ended December 31, 2002 and 2001, 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 we refer to as Gains Tax). The excluded Gains Tax for the year ended December 31, 2002 and 2001 was $(3.0) million and $13.5 million, respectively. The increase in the federal income tax incurred of $19.5 was due to an increase in net gains from operations and a net increase in tax deductible statutory to tax adjustment relating to litigation and miscellaneous reserves, cash surrender value of corporate owned life insurance 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 decreased by $16.6 million which was due to an increase in the statutory realized loss offset by an increase in the deductible statutory to tax adjustment for realized tax losses on various equity investments.
Statutory Capital For the Years Ended December 31, 2002 and 2001
The principal components of the changes in total statutory capital and surplus from year to year are as follows:
· a decrease in the fair value of MONY Life’s investment in venture capital partnerships of approximately $51.5 million during 2002, compared with a $107.4 million decrease in 2001, a change of $55.9 million,
During 2001, MONY Life recorded a charge to surplus of $36.9 million as a result of the adoption of Codified SAP. Included in this charge are reductions in unassigned funds of approximately $11.6 million related to the valuation of invested assets, $12.1 million related to contingent liabilities, $9.5 million related to fixed assets, and $3.7 million related to compensated absences.
The following table sets forth by product line the actual amounts paid in connection with surrenders and withdrawals for the years ended December 31, 2002 and 2001 (in millions):
At December 31, 2002 the Company had commitments to issue the following: $3.5 million of fixed rate agricultural loans with periodic interest rate resets. The initial interest rates on such loans range from approximately 6.25% to 7.37%, $146.2 million of fixed and floating rate commercial and mezzanine mortgage loans with interest rates ranging from 4.19% to 10.00% and $7.5 million of a private fixed maturity security with an interest rate of 6.83%
quarter of 2000. In accordance with specified covenants of the facility, MONY Life is 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 debt to capitalization ratio not to exceed 40%, and cash and cash equivalents on a separate company basis equal to or greater of $75.0 million or one and one half years debt service. As of December 31, 2002, MONY Group was in compliance with each of the covenants as follows: (i) MONY Life’s tangible net worth determined in accordance with Statutory Accounting Practices (including capital and surplus plus asset valuation reserves) totaled $1,109.3 million, (ii) MONY Group’s debt to total capitalization ratio was 30.8%, and (iii) MONY Group had cash and cash equivalents of $168.4 million. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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.
On November 16, 1998, MONY Life, pursuant to the New York Insurance Law, established a closed block (the “Closed Block”) of certain participating insurance policies (the “Closed Block in force business”) as defined in its plan of demutualization (the “Plan”). In conjunction therewith, MONY Life allocated assets to the Closed Block that are expected
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. The most significant estimates made in conjunction with the preparation of the Company’s financial statements include those used in determining (i) deferred policy acquisition costs, (ii) the liability for future policy benefits, (iii) valuation allowances for mortgage loans and charges for the impairment of invested assets, (iv) pension costs, (v) costs associated with contingencies, (vi) litigation and restructuring charges and (vii) income taxes. Certain reclassifications have been made in the amounts presented for prior years to conform those years to the current year’s presentation.
The Company’s fixed maturity securities are classified as available-for-sale 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 3 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 consolidated. In all other circumstances, the Company accounts for its investments in venture capital limited partnerships at estimated fair value. Because the underlying partnerships are required under GAAP to mark their investment portfolios to market and report changes in such market value through their earnings, the Company’s earnings will reflect its pro rata share of such mark to market adjustment if it accounts for the partnership investment under the equity method. With respect to partnerships accounted for at fair value, there will be no impact on the Company’s earnings until: (i) the underlying investments held by the partnership are distributed to the Company, or (ii) the underlying investments held by the partnership are sold by the partnership and the proceeds distributed to the Company, or (iii) an impairment of the Company’s investment in the partnership is determined to exist. Unrealized gains and losses on fixed maturity securities and common stocks are reported as a separate component of other comprehensive income, net of deferred income taxes and an adjustment for the effect on deferred policy acquisition costs that would have occurred if such gains and losses had been realized. The cost of all fixed maturity securities and common stock is adjusted for impairments in value deemed to be other than temporary. Fixed maturity securities deemed to be other than temporarily impaired are analyzed to assess whether such investments should be placed on non-accrual status. A fixed maturity security would be placed on non-accrual status when management believes it will not receive all principal and interest payments according to the original terms. Any cash received on non-accrual status securities is applied against the outstanding principal. These adjustments are reflected as realized losses on investments. Realized gains and losses on sales of investments are determined on the basis of specific identification.
Real estate investments meeting the following criteria are classified as “real estate to be disposed of” in the Company’s consolidated statement of financial position and the results therefrom are reported as “discontinued operations” in the Company’s consolidated statement of income and comprehensive income as a result of the Company’s adoption in 2002 of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”):
· The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
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 retail brokerage and investment banking revenues and other operating costs and expenses, respectively, in the consolidated statement of 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 obtained or refunded, as necessary.
For universal life products and investment-type products, DPAC is amortized over the expected life of the contracts (ranging from 15 to 30 years) as a constant percentage based on the present value of estimated gross profits expected to be realized over the life of the contracts using the initial locked in discount rate. For non-participating term policies, DPAC is amortized over the expected life of the contracts (ranging from 10 to 20 years) in proportion to premium revenue recognized. The discount rate for all products is 8.0%. Estimated gross profits arise principally from investment results, mortality and expense margins and surrender charges.
Policyholders’ account balances for universal life and investment-type contracts represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals. The weighted average interest crediting rate for universal life products was approximately 5.6%, 5.9% and 5.9% for the years ended December 31, 2002, 2001, and 2000, respectively. The weighted average interest crediting rate for investment-type products was approximately 4.3%, 4.5% and 4.9% for the years ended December 31, 2002, 2001, and 2000, respectively.
At December 31, 2002 and 2001, participating business, substantially all of which is in the Closed Block, represented approximately 34.0% and 39.4% of the Company’s life insurance in force, and 73.7% and 76.8% of the number of life insurance policies in force, respectively. For each of the years ended December 31, 2002, 2001 and 2000, participating business represented approximately 82.5%, 83.5% and 91.6%, respectively, of life insurance premiums.
The Company files a consolidated federal income tax return with its ultimate parent, The MONY Group Inc. and its other subsidiaries, as well as the Company’s life and non-life affiliates except Sagamore Financial Corporation, the parent holding company of USFL. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws.
The Company has reinsured certain of its life insurance and investment contracts with other insurance companies under various agreements. Amounts due from reinsurers are estimated based on assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Policy and contract liabilities are reported gross of reinsurance reserve credits. Gains on reinsurance are deferred and amortized into income over the remaining life of the underlying reinsured contracts.
instruments is not significant and accordingly, adoption of the standard did not have a material effect on the Company’s earnings or financial position.
On January 1, 2001 the Company adopted SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, a replacement of SFAS No. 125” (“SFAS 140”). SFAS No. 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial 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 earnings or financial position.
In July 2001, the FASB issued SFAS No. 141, Business Combinations (“SFAS 141”). SFAS 141 addresses the financial accounting and reporting for all business combinations. This statement requires that all business combinations be accounted for under the purchase method of accounting, abolishes the use of the pooling-of-interest method, requires separate recognition of intangible assets that can be identified and named, and expands required disclosures. All of the Company’s past business combinations have been accounted for under the purchase accounting method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. The adoption of SFAS 141 had no material effect on the Company’s earnings or financial position.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This statement establishes a single accounting model for the impairment or disposal of long-lived assets, including assets to be held and used, assets to be disposed of by other than sale, and assets to be disposed of by sale. The provisions of SFAS 144 are effective for the financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within such year, except that assets held for sale as a result of disposal activities initiated prior to the effective date of SFAS 144 may be accounted for in accordance with prior guidance until the end of the fiscal year in which SFAS 144 is effective. SFAS 144 retains many of the same provisions as SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS 121”). In addition to retaining the SFAS 121 requirements, SFAS 144 requires companies to present the results of operations of components of the entity that are held for sale as discontinued operations in the consolidated statement of income and comprehensive income. The Company had real estate that meets the definition of a component of the entity. Substantially all of the Company’s real estate to be disposed of resulted from disposal activities initiated prior to the effective date of SFAS 144. The carrying value of real estate to be disposed of at December 31, 2002 was $26.8 million. The Company’s pretax loss from real estate to be disposed of for the year ended December 31, 2002, which is reported in the Company’s consolidated statement of income and comprehensive income as a discontinued operation, was $3.9 million.
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, 2002, 2001 and 2000 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, 2002, 2001 and 2000 are net of income tax expense (benefit) of $101.9 million, $43.2 million and $17.2 million, respectively, and $(71.4) million, $(32.1) million and $(95.5) million, respectively, relating to the effect of such unrealized gains (losses) on DPAC.
Reclassification adjustments, (excluding net unrealized gains (losses) on assets allocated to the Closed Block), reported in the above table for the years ended December 31, 2002, 2001 and 2000 are net of income tax expense (benefit) of $(22.5) million, $5.1 million and $3.3 million, respectively, and $4.1 million, $1.8 million and $2.5 million, respectively, relating to the effect of such amounts on DPAC.
The carrying value of the Company’s fixed maturity securities available-for-sale at December 31, 2002 and 2001 is net of adjustments for impairments in value deemed to be other than temporary of $124.4 million and $48.2 million, respectively.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale, by contractual maturity dates (excluding scheduled sinking funds) as of December 31, 2002, are as follows:
Fixed maturity securities available-for-sale that are not due at a single maturity date have been included in the preceding table in the year of final maturity. Actual maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of fixed maturity securities available-for-sale during 2002, 2001 and 2000 were $468.1 million, $484.3 million and $441.3 million, respectively. Gross gains of $35.1 million, $21.4 million and $7.2 million and gross losses of $6.6 million, $8.3 million and $16.3 million were realized on these sales in 2002, 2001 and 2000, respectively.
The cost, gross unrealized gains and losses, and estimated fair value of marketable and non-marketable equity securities at December 31, 2002 and 2001 are as follows:
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 whole life, last survivor variable universal life, last survivor 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, as well as the Group Pension Profits derived therefrom (see Note 11), (ii) the Closed Block assets and
liabilities, as well as the revenues and expenses relating thereto (See Notes 2 and 18), and (iii) the Company’s disability income insurance products (which are 100% reinsured and no longer offered by the Company).
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, 2002, 2001, and 2000, 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 3). 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 non-recurring items to the segments. In addition, unless otherwise noted, all segment revenues are from external customers.
See Note 23 for details regarding the allocation of Reorganization and Other Charges to segments.
Amounts reported as “reconciling” in 2002 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, (iii) charges totaling $7.2 million pre-tax relating to the Company’s 2002 reorganization charge (See Note 23), and (iv) a $1.5 million decrease in certain reserves associated with the Company’s 2001 reorganization charge (See Note 23).
Includes policyholder liabilities transferred in the Group Pension Transaction of $0.0 million, $1,398.4 million and $1,468.1 million as of December 31, 2002, 2001 and 2000, respectively (see Note 11).
Assumed health care cost trend rates typically have a significant effect on the amounts reported for health care plans, however, under the Company’s postretirement healthcare plan, there is a per capita limit on the Company’s healthcare costs. As a result, a one-percentage point change in the assumed healthcare cost trend rates would have an immaterial affect on amounts reported.
The following presents the change in the benefit obligation, change in plan assets and other information with respect to the Company’s qualified and non-qualified defined benefit pension plans and other benefits which represents the Company’s postretirement benefit obligation:
The projected benefit obligation and accumulated benefit obligation for the non-qualified defined benefit pension plan, which is unfunded, were $68.2 million and $66.6 million at December 31, 2002 and $68.0 million and $65.6 million at December 31, 2001, respectively.
For measurement purposes, a 10% percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 6% percent for 2010 and remain at that level thereafter.
Components of net periodic benefit cost for the pension and other post-retirement plans are as follows:
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, 2002 and 2001, the fair value of plan assets was $165.1 million and $198.9 million, respectively. For the years ended December 31, 2002, 2001, and 2000, the Company contributed $2.8 million, $3.2 million and $3.2 million to the plan, respectively, which amounts are reflected in other operating costs and expenses in the Company’s consolidated statement of income.
The Company has a non-qualified defined contribution plan, which is unfunded. The non-qualified defined contribution plan projected benefit obligation, which equaled the accumulated benefit obligation, was $52.9 million and $59.5 million as of December 31, 2002 and 2001, respectively. The non-qualified defined contribution plan’s net periodic expense was $(2.7) million, $(0.2) million and $7.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company also has incentive savings plans in which substantially all employees and career field underwriters are eligible to participate. The Company matches field underwriter contributions up to 2% of eligible compensation and may also make an additional profit sharing contribution for non-officer employees. As with the employee excess plan, the Company also sponsors non-qualified excess defined contribution plans for both the field underwriter retirement plan and the incentive savings plan for field underwriters. The Company also sponsors several other 401(k) plans for its smaller subsidiaries which the Company considers immaterial.
Income taxes reported in the consolidated statements of income are different from the amounts determined by multiplying the earnings before income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each are as follows:
The components of deferred tax liabilities and assets at December 31, 2002 and 2001 are reported in accounts payable and other liabilities in the balance sheet and are as follows:
Includes $0.0 million and $10.9 million at December 31, 2002 and 2001 of deferred taxes relating to net unrealized gains on fixed maturity securities in the AEGON Portfolio (see Note 11).
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 mature 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.
Pursuant to the Agreement, the Company received from AUSA: (i) payments on an annual basis through December 31, 2002 (the “Group Pension Payments”) equal to all of the earnings from the Existing Deposits, (ii) a final payment (the “Final Value Payment”) at December 31, 2002 based on the remaining fair value of the Existing Deposits, and (iii) a contingent payment (the “New Business Growth Payment”) at December 31, 2002 based on new business growth subsequent to the Transaction Date.
With respect to the Group Pension Payments, the annual results from the Existing Deposits are measured on a basis in accordance with the Agreement (such basis hereafter referred to as the “Earnings Formula”) which is substantially the same as GAAP, except that: (i) asset impairments on fixed maturity securities are only recognized when such securities are designated with an NAIC rating of “6”, and (ii) no impairment losses are recognized on mortgage loans until such loans are disposed of, or at the time and in the calculation, of the Final Value Payment. All mortgage loans had been disposed of prior to the calculation of the Final Value Payment.
For the years ended December 31, 2002, 2001 and 2000, AUSA reported earnings to the Company pursuant to the application of the Earnings Formula of $19.1 million, $27.4 million, and $26.9 million, respectively, and the Company recorded Group Pension Profits of $28.2 million, $30.7 million and $37.1 million, respectively. In addition, the Company earned $ 12.8 million of interest income on the Notes in each of the aforementioned years. In addition, the Company recorded earnings from the Final Value Payment of $54.1 million (before expenses of approximately $6.0 million relating thereto, which are recorded in “Other operating costs and expenses” in the consolidated statement of income and comprehensive income), on December 31, 2002.
The following sets forth certain summarized financial information relating to the Group Pension Transaction as of and for the periods indicated, including information regarding: (i) the general account assets transferred to support the Existing Deposits in the Group Pension Transaction (such assets hereafter referred to as the “AEGON Portfolio”), (ii) the transferred separate account assets and liabilities, and (iii) the components of revenue and expenses comprising the Group Pension Profits:
The fair value of long-term debt is determined based on contractual cash flows discounted at market rates.
Life insurance business is primarily ceded on a yearly renewable term basis under various reinsurance contracts except for the level term product which utilizes a coinsurance agreement. The Company’s general practice is to retain no more than $4.0 million of risk on any one person for individual products and $6.0 million for last survivor products.
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, 2002. 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 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.
At December 31, 2002 and 2001, the Company had no single investment or series of investments with a single issuer (excluding U.S. Treasury securities and obligations of U.S. government agencies) exceeding 1.3% and 1.9%, respectively, of total cash and invested assets.
The Company’s fixed maturity securities are diversified by industry type. The industries (excluding U.S. Treasury securities and obligations of U.S. government agencies) that comprise 10.0% or more of the carrying value of the fixed maturity securities at December 31, 2002 are Consumer Goods of $1,444.8 million (18.3%) and Other Manufacturing of $848.0 million (10.8%).
The Company held below investment grade fixed maturity securities with a carrying value of $892.7 million at December 31, 2002. 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, 2001, the carrying value of the Company’s investments in below investment grade fixed maturity securities amounted to $603.1 million.
The Company has significant investments in commercial and agricultural mortgage loans and real estate (including joint ventures and partnerships). The locations of property collateralizing mortgage loans and real estate investment carrying values at December 31, 2002 and 2001 are as follows:
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 and/or are being held in abeyance pending the outcome of the Goshen case.
On November 16, 1999, the MONY Group and MONY Life were served with a complaint in an action entitled Calvin Chatlos, M.D., and Alvin H. Clement, On Behalf of Themselves And All Others Similarly Situated v. The MONY Life Insurance Company, The MONY Group Inc., and Neil D. Levin, Superintendent, New York Department of Insurance, filed in the United States District Court for the Southern District of New York. The action purports to be brought as a class action on behalf of all individuals who had an ownership interest in one or more in force life insurance policies issued by MONY Life as of November 16, 1998. The complaint alleges that (i) the New York Superintendent of Insurance, Neil D. Levin, violated Section 7312 of the New York Insurance Law by approving the Plan of Demutualization, which plaintiffs claim was not fair and adequate, primarily because it allegedly failed to provide for sufficient assets for the mechanism established under the plan to preserve reasonable dividend expectations of the Closed Block, and (ii) MONY Life violated Section 7312 by failing to develop and submit to the New York Superintendent a plan of demutualization that was fair and adequate. The plaintiffs seek equitable relief in the form of an order vacating and/or modifying the New York Superintendent’s order approving the Plan of Demutualization and/or directing the New York Superintendent to order MONY Life to increase the assets in the Closed Block, as well as unspecified monetary damages, attorneys’ fees and other relief.
(iv) It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of the settlement, or re-evaluation of, the matters discussed above. Management believes, however, that the ultimate payments in connection with such matters should not have a material adverse affect on the Company’s financial statements. In addition to the matters discussed above, the Company is involved in various other legal actions and proceedings (some of which involve demands for unspecified damages) in connection with its business. In the opinion of management of the Company, resolution of contingent liabilities, income taxes and other matters will not have a material adverse effect on the Company’s financial position or results of operations.
(v) At December 31, 2002, the Company had commitments to fund the following: $111.0 million of equity partnership investments, $7.5 million private fixed maturity security with an interest rate of 6.83%, $8.8 million of fixed rate agricultural loans with periodic interest rate reset dates with initial rates ranging from 6.25% to 7.37%, $139.6 million fixed and floating rate commercial mortgages with interest rates ranging from 3.93% to 8.36% and $7.4 million of mezzanine financing with pay rates ranging from 8.0% to 10.0%.
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 amounted to $46.1 million in 2002, $46.5 million in 2001, and $29.7 million in 2000. The future minimum rental obligations for the next five years and thereafter under these leases are: $33.3 million for 2003, $29.0 million for 2004, $25.7 million for 2005, $23.1 million for 2006, $22.0 million for 2007, and $106.9 million for the years thereafter.
The combined statutory net income (loss) reported by the Company for the years ended December 31, 2002, 2001, and 2000 was $(83.5) million, $(30.2) million, and $199.3 million, respectively. The combined statutory surplus of the Company as of December 31, 2002 and 2001 was $906.4 million and $917.4 million respectively. Each of MONY Life and MLOA exceeds the minimum risk based capital requirements imposed by their respective state of domicile.
At December 31, 2002 and 2001, there were problem fixed maturity securities of $123.3 million and $6.5 million, respectively. At December 31, 2002 and 2001, there were potential problem fixed maturity securities of $0.0 million and $3.2 million, respectively. There were no fixed maturity securities which were restructured at December 31, 2002 and 2001.
The amortized cost and estimated fair value of fixed maturity securities in the Closed Block, by contractual maturity dates, excluding scheduled sinking funds, as of December 31, 2002 are as follows:
Mortgage loans on real estate in the Closed Block at December 31, 2002 and 2001 consist of the following:
The following tables set forth certain summarized financial information attributable to the Ongoing Business and the Closed Block Business of MONY Holdings and subsidiary as of and for the year ended 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”).
Set forth below are unconsolidated condensed financial statements of MONY Holdings. The significant accounting policies used in preparing these financial statements are substantially the same as those used in the preparation of the consolidated financial statements of the Company, except that MONY Holdings subsidiaries are carried under the equity method.
The goodwill amortization recorded for the years ended December 31, 2001 and 2000 was included in the Protection Products and Other Products segments as follows:
The following table summarizes the significant components of goodwill, and the related amortization by segment for the periods presented.
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. Of these charges, $7.2 million and $19.1 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, respectively, in the Company’s home office and career agency system, and $8.7 million of other miscellaneous items. 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.
The terrorist events of September 11th had no material effect on the Company’s financial position at December 31, 2001 or its 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 policy reserves) aggregated approximately $3.9 million pre-tax. In addition, the Company incurred damages from the interruption of certain of its business operations. These damages principally consist of: (i) lost revenues at MSC and Enterprise resulting from the close of the New York securities markets, (ii) the temporary 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, no determination has been made with respect to the Company’s ability to recover the aforementioned damages under its insurance coverage. To date, the Company has recovered $0.3 million relating to the aforementioned damages under its insurance coverage.
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, 2002 and 2001, or the results of its operations or its cash flows for the years then ended.
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. In addition, as discussed in Note 2 to the financial statements, in 2001 the Company adopted the accounting policies in the revised National Association of Insurance Commissioners “Accounting Practices and Procedures Manual”-Effective January 1, 2001, 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 January 1, 2001.
The New York State Insurance Department recognizes only statutory accounting practices prescribed or permitted by the State of New York for determining and reporting the financial condition and results of operations of an insurance company, for determining its solvency under New York Insurance Law. The National Association of Insurance Commissioners’ (“NAIC”) Accounting Practices and Procedures manual [effective January 1, 2001] as of March 2002, (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by the State of New York. The NAIC Accounting Practices and Procedures manual is composed of the Preamble, the Statements of Statutory Accounting Principles (SSAPs), and Appendices. New York State has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Specifically, goodwill arising from the purchase of a subsidiary, controlled or affiliated entity is written off directly to surplus in the year it originates by New York domiciled companies. In NAIC SAP, goodwill in amounts not exceeding 10% of an insurer’s capital and surplus may be capitalized and all amounts of goodwill are amortized to unrealized gains and losses on investments over periods not to exceed 10 years.
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, 2002 and 2001 is shown below (in millions):
· Policy reserves are based on statutory mortality and interest requirements, without consideration of withdrawals, and are reported net of reinsurance reserve credits under SAP; whereas under GAAP, the reserves for interest sensitive life and annuity products are equal to the fund value, and the reserve for long duration participating contracts is the net level premium reserve calculated using the dividend fund interest rate and the mortality rates guaranteed in calculating cash surrender values. GAAP reserves are gross of reinsurance reserve credits.
· Certain assets designated as “non-admitted” are excluded from assets by a direct charge to surplus; whereas under GAAP, such assets are carried on the balance sheet, net of appropriate valuation allowances.
· Certain reinsurance agreements recognized as reinsurance for statutory purposes are accounted for as financing transactions under GAAP.
Short-term investments are carried at amortized cost and consist of securities with original maturities of between four and twelve months.
Other invested assets are primarily compromised of real estate joint venture partnerships and common stock equity partnerships. The carrying value of these assets is based on the underlying GAAP equity of the investee. Changes in value are recorded as a component of unrealized gains or losses.
The AVR is based upon a formula prescribed by the NAIC and functions as a reserve for potential non-interest related investment losses. In addition, realized investment gains and losses (not subject to the IMR) and unrealized gains and losses result in changes in the AVR, which are recorded directly to surplus.
Policy reserves for life insurance, annuities, and supplemental benefits are computed by using prescribed statutory interest rates and mortality factors.
Certain assets designated as “non-admitted” assets (principally capitalized software, goodwill, and miscellaneous receivables) are excluded from the statements of admitted assets, liabilities, capital and surplus.
The Company amortizes non-operating system software on a straight-line basis over the lesser of its expected useful life or five years. The Company recorded non-operating system software depreciation expense of $14.2 million and $14.3 million for the years ended December 31, 2002 and 2001, respectively. Non-operating system software totaled $106.6 million, accumulated depreciation was $42.0 million, and the net non-admitted asset was $64.6 million at December 31, 2001.
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 $1.9 million and $1.5 million for the years ended December 31, 2002 and 2001.
For the years ended December 31, 2002 and 2001, respectively, real estate of $12.0 million and $17.5 million was acquired in satisfaction of debt. In 2001, the Company transferred securities as capital contributions to MLOA (see Note 6).
Fixed maturity securities that have periodic payments before final maturity have been included in the preceding table in the year of final maturity date. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investments in bonds and redeemable preferred stocks during 2002 and 2001 were $377.9 million and $483.5 million, respectively. Gross gains of $28.7 million in 2002 and $16.6 million in 2001 and gross losses of $5.5 million in 2002 and $9.7 million in 2001 were realized on these sales.
Proceeds from sales of investments in common stocks during 2002 and 2001 were $14.0 million and $33.7 million, respectively. Gross gains of $2.3 million in 2002 and $1.5 million in 2001 and gross losses of $2.6 million in 2002 and $3.0 million in 2001 were realized on these sales.
The Company paid dividends of $90.0 million in 2002 and $115.0 million in 2001 to MONY Holdings and MONY Group, respectively.
The Company received a capital contribution from MONY Holdings of $125.0 million in 2002.
The Company issued two surplus notes to MONY Group on March 8, 2000 for $115.0 million and $100.0 million and received a capital contribution from MONY Group of $65.0 million (see Note 17).
In 2002, the Company made aggregate capital contributions of $17.5 million to MONY International Holdings, the parent holding company of MLICA, $5.0 million to Sagamore Financial Corporation, the parent holding company of USFL, $4.1 million to MONY Venture Partners, and $1.0 million to MSC. In 2001, the Company made aggregate capital contributions of $11.8 million to MONY Realty Partners Inc., $7.3 million to Sagamore Financial Corporation, $4.8 million to MSC, $4.0 million to MONY International Holdings, and $3.8 million to MONY Venture Partners. The Company also received aggregate capital distributions from MONY Assets Corporation of $9.0 million in 2001.
The Company has an investment advisory agreement with MONY America with respect to the investment and management of MONY America’s assets. The agreement provides that services are provided on a cost reimbursement basis and may be terminated by either party upon written notice. Income related to this agreement was $0.7 million and $0.8 in 2002 and 2001, respectively. In addition, the Company carried an intercompany receivable related to this agreement of $0.1 million and $0.3 million at December 31, 2002 and 2001, respectively.
At December 31, 2002 and 2001, the carrying values of mortgage loans which were non-income producing for the twelve months preceding such dates were $13.8 million and $21.1 million, respectively.
At December 31, 2002 and 2001 the Company held mortgages with interest more than 180 days past due, excluding accrued interest of $5.8 million and $7.5 million, respectively. Total interest due on mortgages with interest more than 180 past due was $0.4 million and $0.6 million at December 31, 2002 and 2001, respectively.
The Company held $0.7 million in impaired mortgage loans that carried a related allowance for credit losses of $0.0 million at December 31, 2002. The Company held $138.6 million in impaired mortgage loans which did not carry an allowance for credit losses at December 31, 2002.
Net investment income for the years ended December 31, 2002 and 2001 was derived from the following sources:
Net realized capital gains (losses) on investments for the years ended December 31, 2002 and 2001 are summarized as follows (in millions):
The methods and assumptions utilized in estimating these fair values of financial instruments are summarized as follows:
The estimated fair values of bonds and redeemable preferred stocks are based upon quoted market prices, where available. The fair values of bonds and redeemable preferred stocks not actively traded
The fair values of investment type contracts are based on estimates of the value of payments available upon full surrender. Investment type contracts include certain general account annuity contracts reported as liabilities as life insurance and annuity reserves on the Statement of Liabilities, and deposits left with the company also reported on the Statement of Liabilities. The carrying value and fair value fair value of investment-type contract annuities at December 31, 2002 and 2001 was $199.8 million and $145.8 million, and $194.4 million and $143.1 million, respectively. The carrying value and fair value fair value of deposits left with the company at December 31, 2002 and 2001 was $491.0 million and $488.3 million, and $496.8 million and $494.8 million, respectively.
The bond portfolio is diversified by industry type. The industries that comprise 10 percent or more of the carrying value of the bond portfolio at December 31, 2002 are: 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%).
At December 31, 2001, the industries comprising 10 percent or more of the bond portfolio carrying value were: Consumer Goods and Services of $875.1 million (16.2%), Public Utilities of $608.9 million (11.2%), Non-Government Assets/Mortgage backed of $603.2 million (11.1%), and Other Manufacturing of $546.9 million (10.1%).
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 $658.9 million and $436.1 million at December 31, 2002 and 2001, respectively. Of these bonds, $434.1 million and $328.8 million, respectively, were in category 3, which is considered to be medium quality by the NAIC.
Put options may be used from time to time by the Company to mitigate its downside risk from holdings of equity securities.
Interest rate floors are used from time to time to mitigate risk associated with provisions in the Company’s annuity and life products guaranteeing minimum interest crediting rates.
The Company waives deduction of deferred fractional premiums upon death of insured and returns any portion of the final premium beyond the date of death. Surrender values promised in excess of the legally computed reserves totaled $43.9 million at December 31, 2002.
As of December 31, 2002, the Company had $2,374.5 million of insurance in force for which the gross premiums are less than the net premiums according to the standard valuation of the State of New York. Reserves to cover the above insurance totaled $16.6 million at December 31, 2002.
The tabular interest on funds not involving life contingencies is generally the interest credited or paid on such funds.
The details for “Other Increases” (net) under Analysis of Increases in Reserve during the year, include the following (in millions):
The withdrawal characteristics of the Company’s annuity actuarial reserves and deposit-type contract funds and other liabilities without life or disability contingencies as of December 31, 2002 were as follows:
The amounts shown above are included in the Company’s statement of admitted assets, liabilities, capital and surplus as life insurance and annuity reserves ($1.1 billion) and separate account liabilities ($1.2 billion).
Life insurance business is mainly ceded on a yearly renewable term basis under various reinsurance contracts, except for the level term product which utilizes a coinsurance agreement. The Company’s general practice is to retain no more than $4.0 million of risk on any one person for individual products and $6.0 million for last survivor products.
The total amount of reinsured life insurance in force on this basis was $5.0 billion and $4.7 billion at December 31, 2002 and 2001, respectively. Premiums ceded under these contracts were $30.2 million and $28.6 million; benefit payments recovered were approximately $21.4 million and $20.6 million; policy reserve credits recorded were $27.7 million and $23.8 million; and recoverable amounts on paid and unpaid losses were $5.4 million and $6.9 million at December 31, 2002 and 2001, respectively.
The Company has coinsured a portion of its extended term insurance, guaranteed interest contract and long-term disability claim liabilities. The total ceded reserves and claims liabilities under these agreements were $25.0 million and $26.5 million at December 31, 2002 and 2001, respectively.
The $115.0 million face amount and $100.0 million face amount Inter-company Surplus Notes mature on December 31, 2012 and August 15, 2024, respectively, and both pay interest to MONY Group at 8.65% semiannually on March 8 and September 8. Each accrual and payment of interest on the Inter-company Surplus Notes may be made only with the prior approval of the New York State Superintendent of Insurance. Interest expense incurred on surplus notes was $18.8 million in both 2002 and 2001.
Allocation of federal income taxes is based upon separate return calculations with current credit for losses and other federal income tax credits provided to the life insurance members of the affiliated group. Intercompany tax balances are settled annually in the fourth quarter of the year in which the return is filed.
Includes $(3.0) million and $13.5 million in 2002 and 2001, respectively for federal income tax on capital gains.
The Company did not have any operating loss carry forwards at December 31, 2002.
Income taxes incurred in the current and prior years that will be available for recoupment in the event of future net losses are $27.3 million, $3.1 million, and $75.6 million for each of the years ended December 31, 2002, 2001, and 2000, respectively.
The Company also sponsors a non-qualified employee excess pension plan, which provides both defined benefits and defined contribution accruals in excess of Internal Revenue Services 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.
Pension benefits assume no benefits bearing incentive compensation in 2002. 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 2002.
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 6% for 2010 and remain level thereafter.
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, 2002 and 2001 the fair value of plan assets was $165.1 million and $198.9 million, respectively. For the years ended December 31, 2002 and 2001, the Company contributed $2.8 million and $3.2 million to the plan, respectively.
In addition, the Company has two compensation plans for key employees that allow deferral of current compensation, as allowed by New York Insurance Law.
On June 7, 1996, the New York State Supreme Court certified one of those cases, Goshen v. The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America (now known as DeFilippo, et al v. The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America), the first of the class actions filed, as a nationwide class consisting of all persons or entities who have, or at the time of the policy’s termination had, an ownership interest in a whole or universal life insurance policy issued by MONY and sold on an alleged “vanishing premium” basis during the period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY 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 and/or are being held in abeyance pending the outcome of the Goshen case.
of Insurance, filed in the United States District Court for the Southern District of New York. The action purported to be brought as a class action on behalf of all individuals who had an ownership interest in one or more in-force life insurance policies issued by MONY Life Insurance Company as of November 16, 1998. The complaint alleged that (i) the New York Superintendent of Insurance, Neil D. Levin, violated Section 7312 of the New York Insurance Law by approving the plan of demutualization, which plaintiffs claim was not fair and adequate, primarily because it allegedly failed to provide for sufficient assets for the mechanism established under the plan to preserve reasonable dividend expectations of the closed block, and (ii) MONY violated Section 7312 by failing to develop and submit to the Superintendent a plan of demutualization that was fair and adequate. The plaintiffs sought equitable relief in the form of an order vacating and/or modifying the Superintendent’s order approving the plan of demutualization and/or directing the Superintendent to order MONY to increase the assets in the closed block, as well as unspecified monetary damages, attorneys’ fees and other relief.
MONY and the Superintendent moved to dismiss the state court complaint in its entirety on a variety of grounds. On April 20, 2001, the New York Supreme Court granted both motions and dismissed all claims against MONY and the Superintendent. Plaintiffs appealed the dismissal of the claims against the MONY Group, MONY Life and the New York Superintendent to the Appellate Division, First Department. On October 29, 2002 the Appellate Division affirmed the trial court’s decision granting MONY’s motion to dismiss the complaint in its entirety. On November 8, 2002 plaintiffs filed a Motion with the New York Court of Appeals seeking permission to file an appeal from the Appellate Division’s decision. On January 9, 2003, the Court of Appeals denied plaintiffs’ motion, thereby concluding the litigation.
In addition to the matters discussed above, the Company is involved in various other legal actions and proceedings (some of which involve demands for unspecified damages) in connection with its business. In the opinion of management of the Company, resolution of contingent liabilities, income taxes and other matters will not have a material adverse effect on the Company’s statutory surplus or results of operations.
The Company leases office space, furniture and equipment, and electronic data processing equipment under various noncancelable operating lease agreements that expire through December 31, 2016. Rental expense for 2002 and 2001 was approximately $31.0 million, and $28.4 million, respectively.
The future minimum rental obligations under these leases at December 31, 2002 are as follows:
Certain other separate accounts relate to experience-rated group annuity contracts, which fund defined contributions pension plans. These contracts provide guaranteed interest returns for one-year only, where the guaranteed interest rate is re-established each year based on the investment experience of the separate account. The assets and liabilities of these separate accounts are carried at book value.
In determining the amount of assets to be allocated to the Closed Block, management made certain estimates and assumptions regarding the expected cash flows from the Closed Block assets and the Closed Block Business, including estimates and assumptions regarding investment cash flows, mortality, persistency, and expenses which are to be funded in the Closed Block. The estimated net cash flows assumed in determining the Closed Block funding consisted of premiums from policies included in the Closed Block, investment income from Closed Block assets, proceeds from maturities and dispositions of Closed Block assets, less benefits paid on Closed Block policies, certain expenses (including taxes) funded in the Closed Block, and dividends on Closed Block policies based on current payable dividend scales. To the extent that the actual cash flows, subsequent to the Plan Effective Date, from the assets allocated to the Closed Block and the Closed Block Business are, in the aggregate, more favorable than assumed in establishing the Closed Block, total dividends paid to the Closed Block policyholders in future years will be greater than the total dividends that would have been paid to such policyholders if the current payable dividend scales had been continued. Conversely, to the extent that the actual cash flows, subsequent to the Plan Effective Date, from the assets allocated to the Closed Block and the Closed Block Business are, in the aggregate, less favorable than assumed in establishing the Closed Block, total dividends paid to the Closed Block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the current payable dividend scales had been continued. Accordingly, the recognition of the aforementioned estimated future post-tax contribution expected to emerge from the operation of the Closed Block is not affected by the aggregate actual experience of the Closed Block assets and the Closed Block Business subsequent to the Plan Effective Date, except in the unlikely event that the Closed Block assets and the actual experience of the Closed Block Business subsequent to the Plan Effective Date are not sufficient to pay the guaranteed benefits on the Closed Block policies, in which case the Company will be required to fund any such deficiency from its general account assets outside of the Closed Block.