The Company leases its headquarters building which is located at 1740 Broadway, New York, New York and consists of approximately 265,613 square feet. The Company also occupies facilities in Syracuse and New York for use in its insurance operations, which consist of approximately 577,646 square feet in the aggregate. The Company also leases all 105 of its agency and its subsidiary offices, which consist of approximately 539,706 square feet in the aggregate. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
1,333,745 incremental shares from assumed conversion of dilutive securities were not included in the computation of per share amounts for the year ended December 31, 2001 because to do so would be antidilutive.
See Part I Item 1, “Business” and Notes 1 and 7 to the Consolidated Financial Statements for further information regarding the Company’s organization and business.
The Company derives its revenues principally from: (i) premiums on individual life insurance, (ii) insurance, administrative and surrender charges on universal life and annuity products, (iii) asset management fees from separate account and mutual fund products, (iv) net investment income on general account assets, (v) the Group Pension Profits, (See Note 11 to the Consolidated Financial Statements) and (vi) commissions from securities and insurance brokerage operations. The Company’s expenses consist of insurance benefits provided to policyholders, interest credited on policyholders’ account balances, dividends to policyholders, the cost of selling and servicing the various products sold by the Company, including commissions to sales representatives (net of any deferrals) and general business expenses.
The Company’s profitability depends in large part upon (i) the amount of its assets and its third-party assets under management, (ii) the adequacy of its product pricing (which is primarily a function of competitive conditions, management’s ability to assess and manage trends in mortality and morbidity experience as compared to the level of benefit payments, and its ability to maintain expenses within pricing assumptions), (iii) the maintenance of the Company’s target spreads between credited rates on policyholders’ account balances and the rate of earnings on its investments, (iv) the persistency of its policies (which affects the ability of the Company to recover the costs incurred to sell a policy), (v) its ability to manage the market and credit risks associated with its invested assets, (vi) returns on venture capital investments, (vii) the investment performance of its mutual fund and variable product offerings, and (viii) commission and fee revenue from securities brokerage and investment banking operations. External factors, such as legislation and regulation of the insurance marketplace and products, may also affect the Company’s profitability.
For management and reporting purposes, the Company’s business is organized in three principal operating segments: the “Protection Products” segment, the “Accumulation Products” segment, and the “Retail Brokerage and Investment Banking” segment. Substantially all of the Company’s other business activities are combined in the “Other Products” segment. See Note 7 to the Consolidated Financial Statements. The Company formed the Retail Brokerage and Investment Banking segment in 2001 in connection with its acquisitions of Advest, Lebenthal and Matrix. See Note 1 to the Consolidated Financial Statements. In addition to these companies, this segment includes the revenues, expenses, assets and liabilities of MSC. In prior years MSC was 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.
The Company records investments in fixed maturities available for sale, equity securities, trading account securities and investments in limited partnership interests accounted for using the equity method at fair value in the consolidated balance sheet. In most cases, the Company determines fair values using quoted market prices. However, valuation of certain investments, such as private placement fixed maturities, requires use of assumptions and estimates related to interest rates, default rates, collection of principal, and the timing of cash flows because quoted market prices are not available.
The Company records changes in the fair values of investments in fixed maturities available for sale and equity securities that are not considered to be other than temporarily impaired in other comprehensive income. The Company reports changes in value of limited partnership interests 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. Determining if a security is other than temporarily impaired and the valuation of impaired securities requires use of estimates and significant judgment. The Company’s financial position and operating results 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 DAC and insurance reserves in accordance with the relevant GAAP pronouncements: generally Financial Accounting Standards Board (“FASB”) 60 for term and whole life insurance products, FASB 97 for universal life and investment-type contracts, and FASB 120 for traditional participating life insurance contracts. The valuation of DAC and insurance reserves requires management to make assumptions about future investment yields, mortality rates, lapse rates, expense levels, policyholder dividends and policy duration. For many of the Company’s products, amortization of DAC varies with profit margins of the policies and contracts supporting the DAC balances. The Company must periodically evaluate the recoverability of DAC 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 operating results.
As discussed in Note 22 to the Consolidated Financial Statements, in 2001 the Company established reserves related to the reorganization of its businesses. These reserves are based on the estimated costs of employee terminations and benefits, lease abandonments and other costs directly related to the Company’s reorganization plan and incremental to the Company’s normal
In addition to the items discussed above, the application of GAAP requires management to make other estimates and assumptions. For example, accounting for pension and other post-retirement and post-employment benefits requires estimates of future returns on plan assets, expected increases in compensation levels and trends in health care costs. See Note 9 to the Consolidated Financial Statements. Another example is the recognition of deferred tax assets, which depends upon management’s assumption that future earnings will be sufficient to realize the deferred tax benefit. See Note 10 to the Consolidated Financial Statements.
During the fourth quarter of 2001, the Company recorded charges aggregating approximately $146.1 million on a pre-tax basis. Of this amount approximately $56.8 million represented “Reorganization Charges” taken in connection with the Company’s previously announced reorganization of certain of its businesses and $89.3 million represented “Other Charges” unrelated to the Company’s reorganization activities. The Reorganization Charges consisted of: (i) severance and related benefits resulting from headcount reductions in the Company’s home office and career agency system, (ii) losses from abandonment of certain leased offices and equipment, (iii) the write-off of deferred acquisition costs as a result of the decision to exit certain international markets and lines of business, and (iv) certain other charges. The Other Charges 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 following table summarizes the components of the aforementioned Reorganization Charges and Other Charges, respectively:
All of the components of the Reorganization Charges reflected above, except $17.0 million related to deferred policy acquisition costs and $5.3 million related to investment expenses, are included in “Other Operating Costs and Expenses” in the Company’s consolidated income statement for the year ended December 31, 2001. None of the Reorganization Charges reflected in the table above have been allocated to the Company’s segments. All such charges are included as reconciling items of the segments to the Company’s consolidated income statement for the year ended December 31, 2001.
Amounts reported as “reconciling” in 1999 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of the MONY Group (iii) charges of $59.7 million pre-tax relating to a voluntary early retirement program, and (iv) certain expenses related to the Company’s demutualization.
Premium revenue was $695.3 million for 2001, a decrease of $5.2 million, or 0.7%, from $700.5 million reported for 2000. The decrease was primarily the result of lower premiums in the Protection Products segment of $10.3 million partially offset by an increase in the Accumulation Products segment of $4.0 million. The decrease of premiums in the Protection Products segment was primarily a result of lower renewal premiums of $32.5 million due to the reduction of the in-force block, offset by an increase of $18.2 million in premiums from special risk insurance products offered by USFL. The increase in USFL’s premiums is primarily attributable to the expansion of its distribution and the improvement in its financial strength ratings being acquired by the Company. Management believes that the decrease in traditional life insurance premiums is consistent with industry trends, particularly the continuing shift by consumers from traditional protection products to asset accumulation products. The increase in the Accumulation Products segment of $4.0 million was primarily due to an increase in immediate annuity sales. See “- New Business Information” for a discussion regarding year to year sales and related trends.
As of December 31, 2001, the Company had approximately $16.8 million of additional pre-tax gains related to its venture capital limited partnership investments that may be recognized in earnings in the future subject to market fluctuations.
Net realized losses on investments were $12.3 million for 2001, a decrease of $49.8 million from gains of $37.5 million for 2000. The 2001 losses include $20.1 million in “Other Charges” taken during the fourth quarter. See Note 22 to the Consolidated Financial Statements.
Other income (which consists primarily of fees earned by the Company’s mutual fund management and insurance brokerage operations, as well as revenues from interest on deposits held under financial reinsurance arrangements, certain other asset management fees, and other miscellaneous revenues) was $147.1 million for 2001, a decrease of $16.5 million, or 10.1%, from $163.6 million reported for 2000. The decrease was primarily due to lower income of $4.5 million in the Company’s Protection Products segment and $12.8 million in the Company’s Accumulation Products segment, partially offset by higher income relating to the Company’s employee benefit plans which are reported as a reconciling item. During 2001, the cash surrender value of the company’s COLI contract decreased by approximately $4.3 million as a result of unfavorable market conditions. Approximately $3.7 million of this loss was reflected in the Protection Products segment and the balance, or $0.6 million, is reflected in the Accumulation Products segment. The remaining decrease in the Accumulation Products segment was primarily caused by lower fees of approximately $16.0 million from ECM, partially offset by an increase of $3.9 million in fees from supplemental contracts. ECM reported $90.0 million in fees from advisory, underwriting and distribution services in 2001, as compared to $106.9 million in 2000.
Benefits to policyholders were $814.7 million for 2001, an increase of $26.9 million, or 3.4%, from $787.8 million reported for 2000. The increase consisted primarily of higher death benefits of approximately $16.6 million in the Company’s Protection Products segment, and $12.8 million in the Accumulation Products segment. The increase of $16.6 million in the Protection Products segment was due to higher benefits of $8.9 million, and $5.1 million on individual life and universal life business, respectively. The increase of $12.8 million in the Accumulation Products segment was primarily the result of higher immediate annuity benefit payments, FPVA death benefits, and supplementary contract benefits of $3.8 million, $6.1 million, and $2.6 million, respectively.
The Company recorded a federal income benefit in 2001 of $(32.6) million, compared to a $133.8 million federal income tax expense recorded in 2000. The Company’s effective tax rate was approximately 34.9% in 2001, as compared to approximately 33.8% in 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31,
Premium revenue was $700.5 million for 2000, a decrease of $16.6 million, or 2.3%, from $717.1 million reported for 1999. Substantially all of the decrease related to traditional life insurance products offered through the Company’s Protection Products segment. The decrease was comprised of (i) lower new premiums of $10.6 million, and (ii) lower renewal premiums of $30.5 million due to the reduction of the in-force block of business, offset by (i) higher single premiums of $2.8 million, and (ii) an increase in USFL premiums of $21.3 million of which $17.6 million represented new premiums on special risk term insurance products. The increase in new premiums written by USFL is primarily attributable to the expansion of its distribution, the improvement of its financial strength ratings since being acquired by the Company and a product shift towards its term insurance product. Management believes that the decrease in traditional life insurance premiums is consistent with industry trends, particularly the continuing shift by consumers from traditional protection products to asset accumulation products. See “ - New Business Information” for a discussion regarding period to period sales and related trends.
Universal life and investment-type product policy fees were $205.8 million for 2000, an increase of $9.5 million, or 4.8%, from $196.3 million reported for 1999. The increase consisted primarily of higher Protection Products segment fees of $12.5
million primarily due to higher fees from the Company’s VUL business of approximately $14.9 million, and an increase of $2.2 million related to increased sales of corporate owned life insurance, offset by higher ceded reinsurance of $4.0 million across the Protection Products segment. For the year ended December 31, 2000, the Company reported total fees from its VUL business of $48.6 million, as compared to $33.7 million reported for 1999. The increase in fees resulted primarily from new sales of such business and the growing in-force block. This was offset by a decrease in the Accumulation Product segment of $3.3 million primarily due to lower fees from the Company’s FPVA products as a result of lower policy counts and lower fund balances.
Net investment income was $978.1 million for 2000, an increase of $75.8 million, or 8.4%, from $902.3 million reported in 1999. The increase in net investment income is primarily related to an increase in income recorded by the Company from its investments in limited partnership interests. Such partnerships provide venture capital funding to companies through the purchase of, or investment in, equity securities issued by such companies. For 2000, the Company earned $236.3 million relating to such partnership investments, an increase of $47.4 million from $188.9 million recorded for 1999. The balance of the increase in investment income resulted from other invested asset categories collectively and is primarily attributable to higher yields and an increase in average invested assets. As of December 31, 2000, invested assets were $11,222.5 million (including cumulative unrealized losses of $9.8 million on fixed maturity securities) compared to $10,831.8 million (including cumulative unrealized losses of $206.4 million on fixed maturity securities) at December 31, 1999. At December 31, 2000, fixed maturity securities and mortgage loans represented approximately 59.6% and 15.6%, respectively, of total invested assets, as compared to 60.4% and 15.8%, respectively, at December 31, 1999. The annualized yield on the Company’s invested assets, including limited partnership interests, before and after realized gains/(losses) on investments was 8.8% and 9.1%, respectively, for 2000, as compared to 8.3% and 9.4%, respectively, for 1999. See “ - Investments - Results by Asset Category.”
Net investment income and net realized gains on investments are allocated to the Company’s segments based on the assets allocated to such segments to support the associated liabilities of each segment and to maintain a targeted regulatory risk-based capital level for each segment. See Note 4 to the Consolidated Financial Statements.
For a description of the Group Pension Transaction, the Group Pension Profits and certain summary financial information relating thereto, refer to Note 11 of the Consolidated Financial Statements included herein. Management believes that Group Pension Profits will decline in future periods consistent with the continuing run-off of the underlying business until they terminate as of December 31, 2002.
Retail Brokerage and Investment Banking revenues were $59.7 million for 2000, a decrease of $3.7 million, or 5.8%, compared to $63.4 million for 1999. The decrease was primarily due to lower commissions earned by the Company’s broker-dealer operations of $3.6 million due to unfavorable market conditions.
Products segment was primarily attributable to higher fees earned by the Company’s mutual fund management operations. The Company’s mutual fund management operations reported $106.9 million in fees from advisory, underwriting and distribution services in 2000 compared to $84.9 million in 1999.
Benefits to policyholders were $787.8 million for 2000, an increase of $0.7 million, from $787.1 million reported for 1999. The increase consisted primarily of higher benefits of approximately $2.8 million and $3.1 million in the Accumulation Products segment and the Company’s benefit plans, respectively, partially offset by lower benefits of approximately $5.2 million in the Protection Products segment. The increase of $2.8 million in the Accumulation Products segment was primarily due to an increase in the issuance of supplementary contracts during 1999. The decrease in the Protection Products segment of $5.2 million was primarily due to a decrease in policy benefits related to the Company’s non-USFL business of $17.6 million, offset by $12.4 million of benefits related to USFL.
Other operating costs and expenses were $513.2 million for 2000, a decrease of $34.1 million, or 6.2%, from $547.3 million reported for 1999. The decrease consisted of $35.4 million attributable to reconciling items not allocated to the Company’s operating segments, and $25.2 million attributable to the Protection Products segment. The decrease in reconciling items was primarily attributable to a charge of $59.7 million in connection with an early retirement program during the third quarter of 1999, offset by a $21.8 million increase in interest expense on Senior Notes issued by the MONY Group in 2000. The decrease in the Protection Products segment was primarily due to a decrease in interest expense resulting from the repurchase of high coupon debt. This was offset by higher expenses of $14.4 million and $12.3 million of costs directly attributable to the Accumulation Product and Other Product Segments, respectively. To the extent that costs are not directly identifiable with an operating segment, such costs are allocated to the Company’s operating segments based on cost allocations utilizing time studies, and cost estimates included in the Company’s product pricing. See “- Segments.”
The increase of $14.4 million in costs directly attributable to the Accumulation Products segment primarily consisted of higher sub-advisory fees and other expenses incurred by the Company’s mutual fund management operations, which directly corresponded to an increase in revenues from such operations (see discussion and analysis of other income above). The increase of $12.3 million in costs directly attributable to the Other Products segment was primarily due to $6.7 million in higher costs in connection with the Company’s investment in its international brokerage operations.
The Company’s provision for federal income taxes in 2000 was $133.8 million, compared to $132.0 million in 1999. The Company’s effective tax rate before extraordinary items was approximately 33.8% in 2000, as compared to approximately 34.5% in 1999.
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, 2001, 2000 and 1999 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 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.
Excludes annualized premiums in 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 and single life insurance premiums for the year ended December 31, 2001 decreased $51.3 million or 19.3% to $214.7 million from $266.0 million in 2000. New life insurance premiums from the Company’s complementary network decreased 24.2% to $128.0 million for the year, which accounted for 60% of total protection sales. The decrease in premiums for the year was due to lower sales of the Company’s COLI product.
For the year ended December 31, 2001, COLI sales decreased 38% to $79.0 million from $126.8 million in 2000. Recurring premiums were $24.0 million for the year, compared with $31.8 million for 2000. Corporate sales are large-premium cases that typically generate revenues that can fluctuate considerably from quarter-to-quarter.
USFL’s products, sold through its brokerage general agency distribution channel, increased 17% for the year to $49.0 million from $42.0 million in 2000.
New life insurance premiums (first-year and single premiums) from the career agency system were $86.7 million for the current year compared with $97.2 million in 2000.
Total new annualized and single life insurance premiums for the year ended December 31, 2000 increased $71.7 million, or 36.9%, to $266.0 million from $194.3 million in 1999. New life insurance premiums from the Company’s complementary network increased 81% to $168.8 million for the year, which accounted for 63% of total protection sales. The increase in premiums for the year was driven by strong sales of the Company’s COLI product as well as sales from USFL.
The following tables set forth assets under management at December 31, 2001, 2000, and 1999 as well as the changes in the primary components of assets under management during the years then ended:
New sales of variable annuities during 2001 were $393 million, a decrease in 2001 of $28 million, or 6.7%, from $421 million reported for 2000. The Company’s exchange program continues to be well received. The exchange program is a commission-free program that enables customers to exchange their old variable policy for a new policy series. Customers exchanged approximately $208 million of assets from their old variable policies to the new product series during 2001.
Sales of proprietary retail mutual funds offered by the Enterprise Group of Funds and Advest decreased by $732 million, or 36%, to $1,321 million at December 31, 2001, as compared to $2,053 million at December 31, 2000. Proprietary mutual fund sales through the Company’s career agency system decreased approximately $256 million, or 42% to $359 million for 2001, as compared to $615 million for 2000. Proprietary mutual fund sales through third-party broker-dealers decreased $476 million, or 33%, to $962 million for 2001, as compared to approximately $1,438 million for 2000. The decrease was due primarily to adverse market conditions in 2001.
New Business Information for the year ended December 31, 2000 compared to the year ended December 31, 1999
The Retail Brokerage and Investment Banking segment, formed during the first quarter of 2001, had revenues of $343.5 million for the year ended December 31, 2001. Overall market conditions, coupled with the four-day market close following the terrorist events of September 11, 2001, affected trading volume at Advest and MSC. Advest revenues were $296.9 million for the period February 1, 2001 to December 31, 2001, compared to $371.1 million for the comparable prior year period on a pro forma basis. Revenues from Advest’s private client group were $164.1 million for the period compared to $207.4 million for the comparable prior year period on a pro forma basis. Advest’s private client group includes the retail sale of equities, asset management products, fixed income products and annuities to individual investors through Advest financial advisors.
MONY Group’s cash flow consists of investment income from invested assets (including interest income from surplus notes issued by MONY Life to MONY Group in connection with MONY Life’s repurchase of higher coupon surplus notes, as discussed in Note 14 to the Consolidated Financial Statements), and dividends from MONY Life and Advest, if declared and paid, offset by expenses incurred in connection with the administration of MONY Group’s affairs and interest expense on its outstanding indebtedness. As a holding company, MONY Group’s ability to meet its cash requirements, pay interest expense on its outstanding indebtedness, and pay dividends on its Common Stock substantially depend upon payments from MONY Life and Advest including the receipt of: (i) dividends, (ii) interest income on the Inter-company Surplus Notes, and (iii) other payments. The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. See “Item 1 - Business - Regulation - Shareholder Dividend Restrictions.” In addition, payments of principal and interest on the Inter-company Surplus Notes can only be made with the prior approval of the New York Superintendent “whenever, in his judgment, the financial condition of such insurer warrants.” Such payments further may be made only out of surplus funds, which are available for such payments under the New York Insurance Law. There can be no assurance that MONY Life will have statutory earnings to support the payment of dividends to the MONY Group or that the New York Superintendent will approve interest payments to the MONY Group on the Inter-company Surplus Notes. Accordingly, there can be no assurance that MONY Group will have sufficient funds to meet its cash requirements and pay cash dividends to shareholders. There can be no assurance that state insurance laws will in the future permit the payment of dividends by the life insurance subsidiaries to MONY Life in an amount sufficient to support the ability of MONY Life to pay dividends to the MONY Group.
On January 12, 2000, MONY Group filed a registration statement on Form S-3 with the Commission to register certain securities. This registration, known as a “Shelf Registration”, provides the Company with the ability to offer various securities to the public, when it deems appropriate, to raise proceeds up to an amount not to exceed $1.0 billion in the aggregate for all issuances of securities thereunder. In 2000, the Company issued $300 million face amount of 8.35% Senior Notes and $275 million face amount of 7.45% Senior Notes. See Note 14 to the Consolidated Financial Statements herein for further discussion of the Senior Notes and the use of proceeds from such issuances.
The Company’s total capitalization, excluding accumulated comprehensive income and short-term debt, decreased $4.1 million, or 0.2%, to $2,592.9 million at December 31, 2001, as compared to $2,597.0 million at December 31, 2000. The Company’s debt to equity (excluding accumulated comprehensive income) and debt to total capitalization ratios increased to 28.7% and 22.3%, respectively, at December 31, 2001, from 28.2% and 22.0%, respectively, at December 31, 2000. Included in total debt used in the above calculations are $0.0 million and $52.3 million of non-recourse indebtedness as of December 31, 2001 and 2000, respectively.
Since January 2000, the MONY Group has had a common share repurchase program in place. During the second quarter of 2001, the MONY Group announced a plan to repurchase an additional 2.5 million common shares, bringing the total authorized share repurchase to approximately 4.9 million shares. Under the plan, the MONY Group may repurchase such shares from time to time, as market conditions and other factors warrant. The plan may be discontinued at anytime. As of December 31, 2001, 3,088,775 million shares had been repurchased at an aggregate cost of approximately $104.7 million, of which 2,527,389 shares were repurchased in 2001 for aggregate consideration of $71.7 million. Also, during 2001, the MONY Group issued 4,485,798 shares primarily in connection with its acquisitions of Advest and Lebenthal. See Note 1 to the Consolidated Financial Statements.
The following table sets forth the withdrawal characteristics and the surrender and withdrawal experience of the Company’s total annuity reserves and deposit liabilities at December 31, 2001 and 2000.
Annuity surrenders have decreased for the year ended December 31, 2001 as compared to December 31, 2000 and 1999. In past years the Company began to experience a trend of increasing surrenders, and, in July 1999, the Company responded to this trend by enhancing its variable annuity products by offering new investment fund choices. In addition, the Company established a special conservation unit and offers policyholders the opportunity to exchange their contracts for a new product series. The positive effects of these conservation efforts are reflected in the decrease in surrender activity in 2001 and 2000, as compared with 1999. The exchange program, which allows policyholders to exchange to a more competitive product, has resulted in a decrease of $790 million as of 2001. Since 1999, almost 50% of the annuity block opted for the exchange program.
The Company’s principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 2001, the Company reported net cash inflows from operations of $14.3 million, as compared to cash inflow of $12.2 million in 2000. The increase from the prior year is primarily due to lower federal income tax payments, partially offset by decreased revenues, lower payments from the Group Pension Transaction, and certain of the reorganization and other charges. See Notes 11 and 22 to the Consolidated Financial Statements.
Among the assets allocated to the Closed Block are the Series A Notes received as part of the Group Pension Transaction. MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments on the Series A Notes pursuant to the terms thereof, as described in Note 18 to the Consolidated Financial Statements.
The following discussion and analysis excludes invested assets transferred in the Group Pension Transaction. This discussion should be read in conjunction with the summary financial information regarding assets transferred in the Group Pension Transaction presented in Note 11 to the Consolidated Financial Statements, as well as summary financial information regarding Closed Block assets in Note 18 to the Consolidated Financial Statements.
The Company had total consolidated assets at December 31, 2001 of approximately $25.6 billion. Of the Company’s total consolidated assets at such date, approximately $15.8 billion represented assets held in the Company’s general account (which includes $6.4 billion of assets in the Closed Block), approximately $4.6 billion represented assets transferred in the Group Pension Transaction (See Note 11 to the Consolidated Financial Statements), and approximately $5.2 billion were held in the Company’s separate accounts.
The following discussion and tables analyze the major categories of general account invested assets. This discussion excludes trading account securities and securities pledged as collateral.
The Securities Valuation Office of the NAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories, (“NAIC Designations”). The NAIC Designations closely mirror the Nationally Recognized Securities Rating Organizations’ credit ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered investment grade (“Baa” or higher by Moody’s, or “BBB” or higher by S&P) by such rating organizations. NAIC Designations 3 through 6 are referred to as below investment grade (“Ba” or lower by Moody’s, or “BB” or lower by S&P).
Within its fixed maturities portfolio, the Company identifies “problem fixed maturity securities”, “potential problem fixed maturity securities” and “restructured fixed maturity securities”. See Note 5 to the Consolidated Financial Statements for a discussion of the criteria used in these identifications.
At December 31, 2001, the Company’s largest unaffiliated single concentration of fixed maturities consists of $300.3 million of carrying value of Federal National Mortgage Association (“FNMA”) fixed maturities which represent approximately 2.7% of total invested assets at December 31, 2001. The largest non-government issuer consists of $205.7 of AEGON notes purchased in connection with the Group Pension Transaction. These notes represent approximately 1.9% of total invested assets at December 31, 2001. See Note 11 to the Consolidated Financial Statements. No other individual non-government issuer represents more than 0.5% of invested assets.
The following table presents the types of mortgage-backed securities (“MBSs”), as well as other asset-backed securities, held by the Company as of the dates indicated.
Of the $118.0 million, $26.3 million and $124.0 million, in maturing loans during the years ended December 31, 2001, 2000 and 1999, 0.0%, 0.0% and 33.9%, respectively, were refinanced, 65.3%, 44.5%, and 38.9%, respectively, were paid off, 6.0%, 0.0% and 0.0%, respectively, were foreclosed, and 0.0%, 0.0% and 15.3%, respectively, were restructured. Of the $1,507.8 million of outstanding commercial mortgage loans in the Company’s investment portfolio at December 31, 2001, $102.9 million, $128.2 million and $158.0 million are scheduled to mature in 2002, 2003, and 2004, respectively.
Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances and writedowns for impairment. The Company provides valuation allowances for commercial mortgage loans considered to be impaired. Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance for loss is established for the excess of the carrying value of the mortgage loan over its estimated fair value. Estimated fair value is based on the fair value of the collateral. The provision for loss is reported as a realized loss on investment.
As of December 31, 2001, the Company had two problem commercial mortgages aggregating $16.3 million: an $11.0 million hotel in Virginia and a $5.3 million office building in New Jersey. As of December 31, 2000, the Company had two problem commercial mortgages aggregating $14.8 million: $8.0 million in Arizona and $6.8 million in California, which are office buildings.
The carrying value of the Company’s agricultural mortgage loans was $301.1 million and $310.3 million at December 31, 2001 and 2000, respectively, representing 16.6% and 17.7% of total mortgage assets and 2.7% and 2.8% of general account invested assets at such dates, respectively. The agricultural mortgage portfolio is diversified both geographically and by type of product. The security for these loans includes row crops, permanent plantings, dairies, ranches and timber tracts. Due to strong agricultural markets and advantageous yields, the Company expects to continue to invest in agricultural mortgage investments. Less than 4.4% and 3.3% of total agricultural loans outstanding at December 31, 2001 and 2000, respectively, were delinquent or in process of foreclosure. Agricultural mortgage loans at December 31, 2001 and 2000, respectively, comprised 14.7% and 15.7% in Washington, 16.6% and 13.5% in California, 12.3% and 13.2% in Idaho and 10.5% and 11.7% in Oregon. No other states had a concentration of more than 10.0%.
The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. Total problem, potential problem and restructured agricultural mortgages as of December 31, 2001 and 2000 were $21.6 million and $20.3 million, respectively.
The Company has, from time to time, pooled certain of its agricultural mortgage loans and sold beneficial interests in each of the individual agricultural mortgage loans in such pools (referred to as “participation interests”) to third parties. Under such arrangements, the Company retains a specified equity interest in the loans in such pools and sells the remaining participation interest. The Company is responsible for servicing the individual agricultural mortgage loans in each pool, for which it receives a servicing fee from the third party participants. As of December 31, 2001, the aggregate amount of agricultural mortgage loans in such pools being serviced by the Company was approximately $409.6 million.
The Company’s investments in limited partnership interests were $229.7 million and $277.9 million at December 31, 2001 and 2000 respectively. In accordance with GAAP, investment partnerships report their investments at fair value and changes in the fair value of such investments are reflected in the income of such partnerships. Accordingly, a significant portion of the income reported by the Company from partnerships accounted for under the equity method results from unrealized appreciation in the investments of the partnerships. See “Quantitative and Qualitative Disclosures about Market Risk - Equity Price Risk.”
At December 31, 2001 and 2000, the industry sectors underlying the investments in equity limited partnerships comprised 46.8% and 51.8% in information technology, 28.0% and 24.9% in domestic and international LBO, and 25.2% and 23.3% in other industry sectors none of which exceeded 10.0% of total equity limited partnerships, respectively.
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of December 31, 2001 and 2000 are shown in the table below.
All of the Company’s fixed maturity securities are classified as available for sale, and equity securities are classified as available for sale. Accordingly fixed maturity and equity securities are marked to market, with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. Securities whose value is deemed other than temporarily impaired are written down to fair value. The writedowns are recorded as realized losses and included in earnings. The cost basis of such securities is adjusted to fair value. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 2001, 2000 and 1999, such writedowns aggregated $31.2 million, $16.0 million and $8.3 million, respectively.
Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for commercial mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and reflected in the Company’s results of operations. For the years ended December 31, 2001, 2000 and 1999, increases (decreases) in valuation allowances related to mortgage loans aggregated $(3.8) million, $(20.3) million and $9.5 million, respectively. The carrying value of commercial mortgage loans at December 31, 2001 was $1,507.8 million, which amount is net of $36.0 million representing management’s best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company’s financial position and results of operations.
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. There have been no such impairments the past three years. At December 31, 2001 and 2000, the carrying value of real estate held for investment was $58.5 million and $40.7 million, or 0.5% and 0.4% of invested assets at such dates, respectively. The aforementioned carrying values are net of cumulative impairments of $10.8 million and $10.8 million, respectively, and net of accumulated depreciation of $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 real estate to be disposed of at December 31, 2001 and 2000 was $172.3 million and $171.3 million, net of impairment adjustments of $3.6 million and $20.2 million, valuation allowances of $0.8 million and $4.5 million and accumulated depreciation of $62.0 million and $63.8 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs. See Note 4 to the Consolidated Financial Statements. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company’s results of operations. For the years ended December 31, 2001, 2000 and 1999, such increases in valuation allowances aggregated $0.8 million, $0.7 million and $12.1 million, respectively. See “- Equity Real Estate - Real Estate Sales.”