See Note 11 to the Consolidated Financial Statements regarding the Group Pension Transaction.
The Company’s results of operations for the years ended December 31, 2002 and 2001 include reorganization charges aggregating $7.7 million and reorganization and other charges aggregating $146.1 million, respectively, before taxes. For details of such charges and the line items in which they are reflected, see Note 24 to the Consolidated Financial Statements.
1,227,397 and 1,333,745 incremental shares from assumed conversion of dilutive securities were not included in the computation of per share amounts for the years ended December 31, 2002 and 2001, respectively, because to do so would be antidilutive.
The following discussion and analysis addresses the financial condition and results of operations of the Company for the periods indicated. The discussion and analysis of the Company’s financial condition and results of operations presented below should be read in conjunction with the “Selected Financial Data” and the Consolidated Financial Statements and related footnotes and other financial information included elsewhere herein.
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 (which ceased as of December 31, 2002 - 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.
credited rates on policyholders’ account balances and the rate of earnings on its investments, (vi) the amount of time purchasers of our insurance and annuity products hold and renew their contracts with us (referred to as “persistency”), which affects our ability to recover the costs incurred to sell such policies and contracts, (vii) the ability to manage the market and credit risks associated with its invested assets, (viii) returns on venture capital investments, (ix) the investment performance of its mutual fund and variable product offerings, and (x) commission and fee revenue from securities brokerage and investment banking operations which fluctuate with trading volume. External factors, such as general economic conditions and the securities markets, as well as legislation and regulation of the insurance marketplace and products, may also affect the Company’s profitability. In addition, downgrades of the claims paying ability ratings of our insurance subsidiaries by Nationally Recognized Statistical Rating Organizations may affect our ability to compete in the marketplace for our products and services. Similarly, downgrades of MONY Group’s credit ratings may affect our ability to access the debt markets to raise additional capital, which could affect the Company’s liquidity and ability to support the capital of our insurance subsidiaries.
The results of operations of the Company’s businesses, particularly the businesses comprising its Accumulation Products segment and the businesses comprising its Retail Brokerage and Investment Banking segment, are highly sensitive to general economic and securities market conditions. Such conditions include the level of valuations in the securities markets, the level of interest rates, consumer sentiment, the level of retail securities trading volume, and the consensus economic and securities market outlook. Set forth below is a discussion of certain matters that may adversely impact the Company’s results of operations in the event of a continuation or worsening of current economic and securities market conditions, as well as other matters that could adversely affect its future earnings:
$16.3 million during 2002 to reflect the amount of DPAC amortization that should have been recorded through December 31, 2002 based on the Company’s best estimate of the ultimate gross profits from the annuity in force business. In addition, the Company recorded a charge of $1.6 million representing its best estimate of the amount of annuity in force DPAC that is not recoverable based on the estimated present value of future gross profits expected to emerge from this business.
The Company’s calculation of annuity product DPAC asset balances as of December 31, 2002 incorporates an assumption of 10% returns in 2003 and later for all funds underlying variable annuity products. This assumption is consistent with the “reversion to the mean” method described above. The assumption of future returns impacts the Company’s expectation of both future fee income and future expenses, including the cost of the death benefit guarantees. The Company’s anticipated earnings for 2003, which were disclosed at its Investment Community meeting on January 16, 2003 were predicated on a 7% return, which built in $3.0 million of variable annuity DPAC unlocking. Within a narrow range, any deviation from 7% will change earnings by approximately $1.0 million per 1% change in return. For example, a return of 8% would lead to a $1 million gain relative to plan, and a return of 6% would lead to a $1 million loss. However, if returns fall substantially below 3 or 4%, the Company may need to take additional “loss recognition” writeoffs. These writeoffs have a larger immediate impact than DPAC unlocking, in that the entire amount of DPAC deemed non-recoverable must be written off at once, rather than over the life of the product. Every additional drop of 1% in this range would decrease earnings by approximately $2 million. For example, 2003 returns of 0% would decrease pre-tax earnings by approximately $11.0 million.
As discussed above under the caption General Discussion of Factors Affecting Profitability, revenues from the Company’s separate account and mutual fund products depend, in large part, upon the amount of assets it has under management. Accordingly, a continuing or sustained deterioration in the securities markets can adversely affect the Company’s revenues which could be material to its results of operations and financial position.
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 historical 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.
Presently there is a significant debate within industry, the accounting profession and among securities analysts and regulators as to the propriety of the current generally accepted accounting practice provided in Accounting Principles Board Opinion
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 $3,173.1 million.
The Company’s assets include goodwill and intangible assets, which are primarily related to its 2001 acquisition of Advest. In accordance with SFAS 142, the Company must reevaluate the valuation of the goodwill and intangible assets at least annually by comparing the fair value and carrying value of the reporting unit to which the goodwill and intangible assets relate. If the carrying value of the reporting unit exceeds its fair value, the Company must recognize an impairment loss for the excess of carrying value over fair value. The estimate of a reporting unit’s fair value considers various valuation methodologies and in certain cases, requires the use of assumptions and estimates regarding the reporting unit’s future cash flows and discount rates. Changes in the business supporting the goodwill and intangible assets may affect management’s assessment of the recoverability of goodwill and intangible assets - see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Potential Forward Looking Risks Affecting Profitability.
Accounting for litigation, contingencies and restructuring charges requires the Company to estimate the expected costs of events which have already occurred but which the Company has not completely resolved. As discussed in Note 16 to the Consolidated Financial Statements, the Company is party to various legal actions and proceedings in connection with its businesses. To the extent the losses are probable and reasonably estimable, the Company records liabilities related to these matters in accordance with the provisions of SFAS 5 and Financial Accounting Standards Board (“FASB”) Interpretation 14. Judgments or settlements exceeding established loss reserves or changes in the circumstances requiring management to update its loss estimate may materially affect the Company’s financial position and results of operations.
All charges referred to as Reorganization Charges included in the table above, except $17.0 million related to deferred policy acquisition costs in 2001 and $5.3 million related to investment expenses in 2001, are included in “Other Operating Costs and Expenses” in the Company’s 2001 consolidated statement of income and comprehensive income.
The Company had a liability at December 31, 2001 relating to such charges of approximately $12.6 million, which is included in “Accounts payable and other liabilities” in the Company’s consolidated balance sheet.
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 the MONY Group, (iii) revenues and expenses of MONY Holdings, (iv) charges totalling $7.7 million pre-tax relating to the Company’s reorganization and (v) a $1.5 million reversal of certain reserves associated with the reorganization charge recorded in 2001. See “Reorganization and Other Charges”.
USFL’s premiums were $83.3 million and $60.0 million for the years ended December 31, 2002 and 2001, respectively. The increase in USFL’s premiums is primarily due to higher new premiums on special risk insurance products attributable to the increased penetration of the broker market into more states and an increase in renewal premiums.
Net investment income was $737.3 million for the year ended December 31, 2002, an increase of $52.5 million, or 7.7%, from $684.8 million reported in the prior year. The increase in net investment income primarily consisted of: (i) a $41.9 million increase in income from investments in venture capital partnerships to $6.5 million for the year ended December 31, 2002, from a loss of $35.4 million reported for the year ended December 31, 2001 (See “Investments - Limited Partnership Interests”) (ii) a $6.5 million increase in income from real estate investments, and (iii) additional earnings from the increase in invested assets which was substantially offset by a decline in interest rates. The annualized yield on the Company’s invested assets, including limited partnership interests, before and after realized gains/(losses) on investments was 6.6% and 5.2%, respectively, for the year ended December 31, 2002, as compared to 6.2% and 6.1%, respectively, for the year ended December 31, 2001. See “- Investments - Investment Yields by Asset Category.”
As of December 31, 2002, the Company had approximately $3.3 million of additional unrealized pre-tax gains related to venture capital limited partnership investments accounted for at fair value that may be recognized in future earnings subject to market fluctuation. The amount is reflected in other comprehensive income.
Net realized losses were $153.0 million for the year ended December 31, 2002, an increase of $140.7 million, from losses of $12.3 million reported in the prior year. The increase in realized losses primarily consists of other than temporary impairment charges on fixed maturity and equity securities of $115.5 million and $38.5 million, respectively, valuation allowances taken on real estate properties of $26.7 million and a $6.8 million litigation loss related to a specific joint venture real estate partnership, offset by gains from sales of investments and prepayments on fixed maturity securities of $38.2 million. See “- Investments - Other Than Temporary Impairment Charges on Investments in Fixed Maturity Securities and Common Stocks” and see Note 16 to the Consolidated Financial Statements.
Group Pension Profits (which ceased as of December 31, 2002 - see Note 11 to the Consolidated Financial Statements), of $82.3 million for the year ended December 31, 2002 include earnings of $54.1 million from the final payment due from Aegon USA, Inc. (“AEGON”) (“Final Value Payment”) in connection with the expiration of the Group Pension Transaction at December 31, 2002. Excluding the Final Value Payment, Group Pension Profits for the year ended December 31, 2002 were $28.2 million, a decrease of $2.5 million, as compared to $30.7 million recorded in the prior year. The decrease primarily resulted from the continuing runoff of the group pension in force business transferred by the Company pursuant to the Group Pension Transaction.
The following table presents the components of retail brokerage and investment banking revenues for the periods presented.
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. This decrease was partially offset by an increase in investment management fees.
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 business is related to higher general account fund balances. The decrease in interest crediting on supplementary 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.
Amortization of deferred policy acquisition costs was $156.1 million for 2002, a decrease of $2.7 million, or 1.7%, from $158.8 million reported for 2001. The decrease was primarily due to lower amortization of $5.4 million in the Protection Products segment and $17.0 million in reconciling amounts, partially offset by an increase of $19.7 million in the Accumulation products segment. The decrease in the Protection Products segment was primarily due to lower amortization in the Closed Block of $10.4 million due to the run-off of this block of business and the implementation of SOP 00-3 in 2001. In addition, the UL product line had lower amortization line of $3.5 million due to unfavorable mortality. The Group Universal Life (“GUL”) product line had lower amortization of $1.5 million. This was partially offset by increased amortization in the VUL and term product lines of $4.4 million and $2.0 million, respectively as these blocks of business continue to grow. The decrease of $17.0 million in reconciling amounts relates to reorganization and other charges recorded during the fourth quarter of 2001. See Note 24 to the Consolidated Financial Statements. Of the $17.0 million, approximately $13.0 million represented a write-off of DPAC in the Company’s international insurance subsidiary to reflect reduced expectations of future profitability due primarily to revised business strategies, and approximately $4.0 million represented the write-off of DPAC on the Company’s GUL business. The increase in the Accumulation Products segment is due to higher amortization in the FPVA product caused by an acceleration of amortization. Amortization in the FPVA product line was lower primarily due to a decline in variable annuity assets under management and lower expected future profit margins.
Other Products segment and reconciling amounts of $11.8 million, $7.8 million, $2.6 million and $18.6 million, respectively, partially offset by increased expenses in the Retail Brokerage and Investment Banking segment of $24.4 million. The decreases in the Protection Products and Accumulation Products segments are primarily attributable to lower compensation and other miscellaneous expenses of $18.6 million and $9.7 million, respectively, partially offset by higher costs related to the Company’s employee benefit plans of $6.6 million and $2.0 million, respectively. The increase in the Retail Brokerage and Investment Banking segment is primarily attributable to the inclusion of an additional month of Advest’s expenses in 2002 (because Advest was acquired by the Company on January 31, 2001) of approximately $33.0 million and higher compensation expense of approximately $15.4 million, partially offset by lower interest expense of $17.1 million and the elimination of goodwill expense of $6.7 million. The decrease in reconciling amounts relates primarily to a decrease in reorganization charges of $26.5 million (see Note 24 to the Consolidated Financial Statements) and general miscellaneous expenses of $5.5 million, partially offset by an increase in interest expense of $13.2 million. The increased interest expense relates primarily to the issuance of the Insured Notes on April 30, 2002. See Notes 19 and 20 to the Consolidated Financial Statements.
The Company recorded a federal income tax benefit in 2002 of $11.2 million, compared to a federal income tax benefit of $32.6 million recorded in 2001. The Company’s effective tax rate was approximately 35.0% in 2002 and 2001.
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 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 approximately 97% and 98%, respectively, of the Company’s total premiums on a consolidated basis.
The decrease in premiums in the Protection Products segment, excluding USFL, was primarily a result of lower renewal premiums of $32.5 million due to the reduction of the in-force block. Management believes that the decrease in traditional life insurance premiums is consistent with industry trends. See “- New Business Information” for a discussion regarding year to year sales and related trends.
The increase in the Accumulation Products segment of $4.0 million was primarily due to an increase in immediate annuity sales.
Universal life and investment-type product policy fees were $207.2 million for 2001, an increase of $1.4 million, or 0.7%, from $205.8 million reported for 2000. The increase was primarily a result of higher fees in the Protection Products segment of $16.8 million, partially offset by lower fees in the Accumulation Products segment of $15.3 million. The increase in the Protection Products segment was primarily attributable to higher fees earned on CSVUL and VUL business of $5.5 million and $11.3 million, respectively, consistent with the growth in the in-force blocks of such business. The decrease in the Accumulation Products segment was primarily due to lower mortality and expense charges of $7.5 million and a $6.9 million decrease in surrender charges on the Company’s FPVA product. The decrease in FPVA mortality and expense charges is due primarily to lower fund balances resulting from stock market declines. The decrease in surrender charges reflects the positive effects of the efforts of the Company’s conservation unit and other measures designed to improve persistency.
Group Pension Profits were $30.7 million for the year ended December 31, 2001, a decrease of $6.4 million, or 17.3%, from $37.1 million for the year ended December 31, 2000. Group Pension Profits for the years ended December 31, 2001 and 2000, consisted of $27.4 million and $26.9 million, respectively, of Group Pension Payments and $3.3 million and $10.2 million, respectively, relating to adjustments required to reflect the earnings from such payments in accordance with GAAP. Such adjustments primarily relate to changes in the valuation allowances established to recognize the impairment of assets supporting the business transferred in the Group Pension Transaction as well as certain adjustments relating to policyholder liabilities. The decrease of $6.4 million in the Group Pension Profits is primarily due to lower operating income due to the run-off of the Group Pension business of $9.1 million, offset by higher realized gains on investments in 2001 of $2.7 million.
Retail brokerage and investment banking revenues were $350.8 million for 2001, an increase of $291.1 million, compared to $59.7 million reported for 2000. The increase is primarily attributable to the Company’s acquisitions of Advest and Matrix in 2001. See Note 1 to the Consolidated Financial Statements. Revenues recorded in 2001 for Advest, Matrix, and MSC, which together comprise the Retail Brokerage and Investment Banking segment, were $304.1 million, $3.1 million, and $43.6 million, respectively. Retail brokerage and investment banking revenues in 2000 consisted solely of $59.7 million of revenues derived from the operations of MSC. The $16.1 million decrease in MSC’s revenues is due to lower commission revenue. All expenses related to the operations of Advest, Matrix and MSC are recorded in “Other operating costs and expenses” in the Company’s consolidated statement of income and comprehensive income.
The decrease in the Accumulation Products segment was primarily caused by lower fees of approximately $16.0 million from Enterprise and a $0.6 million decrease in the cash surrender value of this segment’s allocated portion of the Company’s COLI contract, partially offset by an increase of $3.9 million in fees from supplemental contracts. Enterprise reported $90.0 million in fees from advisory services in 2001, as compared to $106.9 million in 2000.
DPAC amortization was $158.8 million for 2001, an increase of $19.7 million, or 14.2%, from $139.1 million reported for 2000. The increase was primarily due to higher amortization of $4.9 million in the Company’s Protection Products segment and $17.0 million in reconciling amounts in connection with reorganization and other charges recorded during the fourth quarter of 2001. See Note 24 to the Consolidated Financial Statements. Of the $17.0 million in reconciling amounts $13.0 million represented a write-off of DPAC in the Company’s international insurance subsidiary to reflect reduced expectations of future profitability due primarily to revised business strategies, which included the decision to exit certain markets, and approximately $4.0 million represented a write-off of DPAC on the Company’s GUL business to reflect a de-emphasis on this line of business and resultant reduced future profitability expectations. The increase in the Protection Products segment is primarily attributable higher amortization on the VUL, CSVUL, and GUL lines of business of $9.2 million, $3.5 million and $4.4 million, respectively, partially offset by decreases in yearly renewable term business, individual life and UL of $8.3 million due to the declining in force block of such businesses. The increased amortization on VUL and CSVUL business is primarily attributable to the increasing size of the in force block of such business. The increases in the Protection Products segment and reconciling amounts were partially offset by a $2.2 million decrease in the Accumulation Products segment as a result of poor equity performance.
The results of operations of the Closed Block are combined with the results of operations outside the Closed Block in the Protection Products segment in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. Set forth below is a discussion and analysis of the results of operation of the Closed Block for the periods indicated.
Premiums were $509.1 million for the year ended December 31, 2002, a decrease of $42.3 million from $551.4 million reported in the prior year. Excluding reinvested dividends, premiums decreased by approximately $28.1 million, or 6.8%, which is in line with the expected runoff of the in force business in the Closed Block. Premiums from reinvested dividends decreased by $14.1 million primarily due to a reduction in the dividend scale effective January 1, 2002.
Benefits to policyholders were $566.8 million for the year ended December 31, 2002, a decrease of $40.1 million, from $606.9 million reported in the comparable prior year. The decrease principally resulted from: (i) lower death benefits of $14.7 million, as compared to the prior year as a result of improvements in mortality experience (death benefits were $173.1 million and $187.8 million for the years ended December 31, 2002 and 2001, respectively); (ii) a decrease in surrender benefits of $10.6 million, as compared to the prior year as a result of an improvement in persistency experience (surrender benefits were $345.2 million and $355.8 million for the years ended December 31, 2002 and 2001, respectively); and (iii) a $14.6 million decrease in the change in reserves, compared to the comparable prior year results (changes in reserves were $39.1 million and $53.7 million for the years ended December 31, 2002 and 2001, respectively).
Net investment income was $397.6 million for the year ended December 31, 2001, an increase of $1.9 million, from $395.7 million reported for the prior year. The increase in net investment income reflects investment earnings on a higher asset base offset by declines in the interest rate environment for fixed income assets.
Due to a reduction in the dividend scale effective January 1, 2001, policyholder dividends payable during 2001 were $211.9 million, a decrease of $18.5 million from the $230.4 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.
Other expenses were $7.0 million for year ended December 31, 2001, a decrease of $0.5 million from $7.5 million reported in the prior year. The decrease is primarily attributable to a decrease in premium taxes of $0.2 million and a decrease in guaranteed assessments of $0.3 million.
New life insurance premiums (annualized recurring and single premiums) through the career agency network decreased to $63.6 million for the year ended December 31, 2002 compared to $86.7 million for the comparable prior year period. The decrease is primarily due to weaker markets throughout 2002 and a reduction in the career network’s sales force.
ended December 31, 2001 compared to $121.0 million for the comparable prior year. The decrease in COLI/BOLI sales is primarily due to a sharp decline in rates on bank-owned life insurance products and a decline in new cases and policies issued in 2001 compared to 2000. There were 29 new cases and 1,074 new policies issued in 2001 compared to 31 new cases and 1,467 new policies issued in 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, were $49.0 million for the year ended December 31, 2002, an increase of 16.7% from sales of $42.0 million in the comparable prior year.
Amount presented for 2002 includes fixed annuity sales of approximately $0.2 billion.
New Business Information for the year ended December 31, 2001 compared to the year ended December 31, 2000
Accumulation sales were $1,714.0 million for the year ended December 31, 2001 compared to $2,474.0 million in the comparable prior year. New sales of variable annuities during 2001 were $393.0 million, a decrease of $28.0 million, or 6.7%, from $421.0 million reported for 2000. The Company’s exchange program continued to be well received in 2001. 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 $208.0 million of assets from their old variable policies to the new product series during 2001.
For the year ended December 31, 2002, MSC, a registered securities broker-dealer for MONY’s career network, had revenues of $44.8 million, compared with $43.6 million in the comparable prior year.
Proceeds to MONY Holdings from the issuance of the Insured Notes, after all offering and other related expenses, were approximately $292.6 million. Of this amount, $60.0 million was deposited in a debt service coverage account, pursuant to the terms of the note indenture, to provide liquidity and collateral for the payment of interest and principal on the Insured Notes. These funds will ultimately revert back to the Company, provided that the cash flows from the Closed Block Business are sufficient to satisfy MONY Holdings’ obligations under the Insured Notes. The balance of the proceeds aggregating $232.6 million was paid in the form of a dividend by MONY Holdings to MONY Group.
This transaction effectively securitized a portion of the future profits from MONY Life’s Closed Block Business. The source of cash flows and the collateral for the payment of principal and interest on the Insured Notes is limited to: (i) the amount of dividends that can be paid by MONY Life which are attributable to the Closed Block Business, (ii) net tax payments paid to MONY Holdings pursuant to certain tax sharing agreements, (iii) net payments made to MONY Holdings under the interest rate swap, and (iv) amounts on deposit in the debt service coverage account (and the earnings thereon). In addition to the cash flows and collateral, investors in the Insured Notes have limited recourse to MONY Holdings in the event of any default under the Insured Notes. The amount of dividends attributable to the Closed Block Business is determined by applying the New York dividend regulation to the surplus and net gain from operations of MONY Life which is attributable to the Closed Block business, subject to certain adjustments described in the indenture (see Note 20 to the Consolidated Financial Statements).
If an event of default occurs (and is not waived) with regard to compliance with the terms of the Indenture under which the Insured Notes were issued or if MONY Group’s senior debt rating is downgraded to BB+ or below by Standard & Poor’s Rating Services or to Ba2 or below by Moody’s Investors Service, Inc., the insurer of the Insured Notes, at its option, may (a) declare all future premiums payable pursuant to the Insurance Agreement among it, MONY Holdings, MONY Group and MONY Life to be immediately due and payable, (b) cause all assets held in the debt service coverage account in excess of an amount equal to the debt service payable on the next scheduled payment date on the Insured Notes to be applied to prepay all or a portion of the principal or accrued interest on the Insured Notes, or (c) do both (a) and (b).
MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million, with a scheduled renewal date in July 2003. The purpose of this facility is to provide additional liquidity for any unanticipated short-term cash needs that MONY Group might experience and also to serve as support for MONY Group’s $150.0 million commercial paper program which was activated in the third 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 at least $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 the greater of $75.0 million or one and one half years of 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 totaled $1,118.1 million, (ii) MONY Group’s debt to total capitalization ratio (including accumulated comprehensive income and short-term debt) for purposes of the credit facility was 30.7%, and (iii) MONY Group had cash and cash equivalents of $168.3 million. For purposes of the facility, cash and cash equivalents are defined to include only commercial paper rated at least A1/P1 and U.S. Treasury investments. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 2002 and 2001. The facility was amended at the consummation of the offering of the Insured Notes to permit the offering of the Insured Notes.
On January 12, 2000, the MONY Group filed a registration statement with the Securities and Exchange Commission to register certain securities. This registration, known as a “Shelf Registration, provides the MONY Group with a vehicle 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. Through December 31, 2002 the MONY Group issued $575.0 million of par value securities in the form of senior indebtedness pursuant to the Shelf Registration which remain outstanding as of December 31, 2002.
The Company’s total capitalization, excluding accumulated comprehensive income, increased to $2,814.9 million at December 31, 2002, as compared to $2,597.2 million at December 31, 2001. The increase was primarily due to the issuance of $300.0 million of debt on April 30, 2002, as discussed above. The Company’s debt to equity ratio (excluding accumulated comprehensive income and short term debt) was 45.2% at December 31, 2002 as compared to 29.0% at December 31, 2001. The Company’s debt to total capitalization ratio (excluding accumulated comprehensive income and short term debt) increased to 31.1% at December 31, 2002 from 22.5% at December 31, 2001.
Excludes approximately $71.0 million, $208.0 million and $998.0 million in 2002, 2001 and 2000, respectively, relating to surrenders associated with an exchange program offered by MONY Life wherein contractholders surrendered old FPVA contracts and reinvested the proceeds in a new enhanced FPVA product offered by MONY Life.
In July 1999, the Company responded to an increasing trend in surrenders by enhancing its variable annuity products by offering new investment fund choices. In addition to the product enhancements, the Company established a special conservation unit and began to offer policyholders the opportunity to exchange their contracts for a newly created more competitive series of products. The positive effects of the conservation efforts are reflected in the decreased surrender activity for the years ended December 31, 2002 and 2001 compared to the year ended December 31, 2000.
The Company’s liquid assets include substantial U.S. treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. Management believes that the Company’s sources of liquidity are adequate to meet its anticipated needs.
Advest’s assets are highly liquid in nature. At December 31, 2002, liquid assets which include cash and cash equivalents, receivables from broker, dealers and clearing firms, available for sale and trading securities, comprised 71% of Advest’s total assets. At December 31, 2001, liquid assets which include cash and cash equivalents, receivables from brokerage customers, securities borrowed, receivables from brokers and dealers, available for sale and trading securities, comprised 85% of Advest’s total assets. The year to year decline in liquid assets is primarily the greater impact of goodwill on a smaller asset base in 2002.
On December 31, 2002, Advest paid off $7.0 million in short-term borrowings which was the fourth installment of annual payments to satisfy a $35 million note payable. The final $7.0 million payment is due December 31, 2003 and is classified in short-term borrowings.
The Securities and Exchange Commission (“SEC”) requires Advest to maintain liquid net capital to meet its obligations to customers. As a result of the outsourcing of clearing operations to Wexford, Advest’s capital requirement changed from $10.7 million at December 31, 2001 to $1.0 million at December 31, 2002. At December 31, 2002, Advest’s regulatory net capital of $41.8 million exceeded required net capital by $40.8 million. Pursuant to the outsourcing agreement with Wexford, Advest is required to maintain net capital of $25 million. At December 31, 2002, Advest’s net capital exceeded this requirement by $16.8 million.
Management believes that operating cash flow together with capital available from MONY in the form of subordinated borrowings will provide sufficient resources for Advest to meet all present and reasonably foreseeable capital needs.
The following discussion and analysis excludes invested assets transferred in the Group Pension Transaction and includes the Debt Service Coverage Account sub-account OB and sub-account CBB (See Note 19 to the Consolidated Financial Statements). 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 following table presents the Company’s fixed maturity securities by NAIC Designation and the equivalent ratings of the Nationally Recognized Statistical Rating Organizations as of December 31, 2002 and 2001, as well as the percentage, based on fair value, that each designation comprises.
At December 31, 2002, the percentage, based on estimated fair value, of total public fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 94.0% compared to 94.4% for December 31, 2001. At December 31, 2002, the percentage, based on estimated fair value, of total private placement fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 80.9% compared to 87.7% for December 31, 2001.
The Company has a well-diversified portfolio of fixed maturity securities. The portfolio at December 31, 2002 included 18.3% in consumer goods and services, 12.9% in government and government agency, 12.7% in asset and mortgage backed securities, 10.6% in other manufacturing, and the remaining 45.5% in other sectors none of which exceeded 10.0% of the total fixed maturity securities portfolio. At December 31, 2001, the portfolio included 17.6% in consumer goods and services, 15.6% in asset and mortgage backed securities, 10.6% in public utilities, and the remaining 56.2% in other sectors none of which exceeded 10.0% of the total fixed maturity securities portfolio.
At December 31, 2002, the Company’s largest unaffiliated single concentration of fixed maturity securities consists of $567.5 million of carrying value of United States Treasury fixed maturity securities which represent approximately 4.7% of total invested assets at December 31, 2002. The largest non-government issuer consists of $150.0 million of AEGON notes purchased in connection with the Group Pension Transaction. These notes represent approximately 1.2% of total invested assets at December 31, 2002. See Note 11 to the Consolidated Financial Statements. No other individual non-government issuer represents more than 0.4% of invested assets.
The Company held approximately $1,016.1 million and $1,088.0 million of mortgage-backed and asset-backed securities as of December 31, 2002 and 2001, respectively. Of such amounts, $307.8 million and $294.9 million or 30.3% and 27.1%, respectively, represented agency-issued pass-through and collateralized mortgage obligations (“CMOs”) secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts was comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company’s exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At December 31, 2002 and 2001, 87.1%, and 87.0%, respectively, of the Company’s mortgage-backed and asset-backed securities were assigned an NAIC Designation 1.
The principal risks inherent in holding CMOs (as well as pass-through securities) are prepayment and extension risks arising from changes in market interest rates. In declining interest rate environments, the mortgages underlying the CMOs are prepaid more rapidly than anticipated, causing early repayment of the CMOs. In rising interest rate environments, the underlying mortgages are prepaid at a slower rate than anticipated, causing CMO principal repayments to be extended. Although early CMO 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.
(11.0% and 10.9%, respectively). No other asset class exposures exceeded 9.4% of total ABS portfolio as at December 31, 2002 and 2001. Excluding the exposure to home equity loans (which represented 9.4% and 8.2% of the ABS portfolio as of December 31, 2002 and 2001, respectively), the ABS portfolio is generally insensitive to changes in interest rates.
Mortgage loans, consisting of commercial, agricultural and residential loans, comprised 15.6% and 16.3% of total invested assets at December 31, 2002 and 2001, respectively. As of December 31, 2002 and 2001, commercial mortgage loans comprised $1,570.5 million and $1,507.8 million or 83.7% and 83.3% of total mortgage loan investments, respectively. Agricultural loans comprised $306.2 million and $301.1 million or 16.3% and 16.6% of total mortgage loans, and residential mortgages comprised $0.7 million and $0.8 million or 0.0% and 0.1% of total mortgage loan investments at the dates indicated.
Below is a summary of the changes in the commercial mortgage portfolio for the years ended December 31, 2002, 2001, and 2000, respectively.
Of the $102.9 million, $118.0 million and $26.3 million, in maturing loans during the years ended December 31, 2002, 2001 and 2000, no loans were refinanced or restructured, 71.5%, 65.3%, and 44.5%, respectively, were paid off, and 10.7%, 6.0% and 0.0%, respectively, were foreclosed. Of the $1,570.5 million of outstanding commercial mortgage loans in the Company’s investment portfolio at December 31, 2002, $142.3 million, $218.5 million and $76.0 million are scheduled to mature in 2003, 2004, and 2005, respectively.
At December 31, 2002 and 2001, respectively, the underlying properties supporting potential problem commercial mortgages consisted of 73.5% and 85.4% in office properties and 26.5% and 14.6% in an apartment, a hotel, an industrial property and a retail property. At December 31, 2002 and 2001 the underlying properties supporting restructured commercial mortgage loans consisted entirely of office properties. The potential problem and restructured commercial mortgages at December 31, 2002 and 2001 were primarily concentrated in the District of Columbia and New York.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $3.1 million, $6.4 million and $9.1 million at December 31, 2002, 2001 and 2000, respectively. As a result of the restructuring, the gross interest income recognized in net income at December 31, 2002, 2001 and 2000, respectively, was $0.6 million, $3.6 million and $6.3 million.
The carrying value of the Company’s agricultural mortgage loans was $306.2 million and $301.1 million at December 31, 2002 and 2001, respectively, representing 16.3% and 16.6% of total mortgage loan assets and 2.5% and 2.7% 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 2.7% and 4.4% of total agricultural loans outstanding at December 31, 2002 and 2001, respectively, were delinquent or in process of foreclosure. The geographical diversification of agricultural mortgage loans at December 31, 2002 and 2001, respectively, comprised 13.3% and 14.7% in Washington, 16.2% and 16.6% in California, 10.6% and 12.3% in Idaho and 9.0% and 10.5% in Oregon. No other state had a concentration of more than 9.0%.
The Company’s investments in common stocks are classified as available-for-sale and are reported at estimated fair value. Unrealized gains and losses on the Company’s common stocks are reported as a separate component of other comprehensive income, net of deferred income taxes and an adjustment for the effect on deferred policy acquisition costs that would have occurred if such gains and losses had been realized. Substantially all the common stocks owned by the Company are publicly traded on national securities exchanges. The Company’s investments in common stocks represented $62.8 million or 0.5% and $69.5 million or 0.6% of invested assets at December 31, 2002 and 2001, respectively. Proceeds on the sale of equity securities totaled $16.5 million, $31.0 million and $499.2 million which resulted in net realized gains/(losses) of $(0.1) million, $(6.4) million, and $23.4 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The limited partnerships in which the Company has invested are investment partnerships which invest in the equity of private companies (generally in the form of common stock). These partnerships will generally hold such equity until the underlying company issues its securities to the public through an initial public offering. At that time or thereafter, at the general partners’ discretion, the partnership will generally distribute the underlying common stock to its partners. Accordingly, certain of the common stocks owned by the Company at December 31, 2002 and 2001 were acquired through distributions from the Company’s investments in limited partnership interests. However, it has been the Company’s practice to sell such positions shortly after such distributions.
At December 31, 2002 and 2001, the industry sectors underlying the investments in equity limited partnerships comprised 52.5% and 46.8% in information technology, 26.9% and 28.0% in domestic and international leveraged buyouts (“LBO”), and 20.6% and 25.2% in other industry sectors none of which exceeded 10.0% of total equity limited partnerships, respectively.
At December 31, 2002 and 2001, the Company had investments in 54 different limited partnerships which represented 1.6% and 2.1%, respectively, of the Company’s general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock. For the years ended December 31, 2002, 2001, and 2000, investment income from investments in limited partnership interests (which is comprised primarily of the Company’s pro rata share of income reported by partnerships accounted for under the equity method and income recognized upon distribution for partnership investments accounted for under the fair value method (see Note 3 to the Consolidated Financial Statements) was approximately $6.5 million, $(35.4) million and $236.3 million, respectively, representing 0.9%, (5.2)%, and 24.9%, respectively, of the net investment income for such periods. For the same periods, the Company achieved total returns on its investments in limited partnership interests of (15.1)%, (16.2)%, and 82.8%, respectively. There can be no assurance that the recent level of investment returns achieved on limited partnership investments can be sustained in the future, and the failure to do so could have a material adverse effect on the Company’s financial position and results of operations.
The following table presents certain information with respect to realized investment losses from “other than temporary impairment” charges for the years ended December 31, 2002 and 2001. These impairment charges were determined based on the Company’s assessment of the factors referred to above, as they pertain to the individual securities determined to be other than temporarily impaired. 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.
The Company’s portfolio of fixed maturity securities is comprised of public and private securities. The Company’s portfolio of common stocks is comprised of all public securities. Public securities are those that are registered with the Securities and Exchange Commission (“SEC”). Private securities are issued under an exemption from registration under the Securities Act of 1933. It is generally recognized that publicly traded securities are more liquid than privately traded securities. The Company classifies all of its investments in fixed maturity securities and common stocks as “available for sale”. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value for public securities is based on sales prices or bid-and-asked quotations currently available on a securities exchange registered with the Commission or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations system “NASDAQ”. Fair value for private securities is generally determined by discounting their prospective cash flows at a discount rate. The discount rate for each issue is the sum of two rates. The first component is the yield to maturity of a U.S. Treasury security with a maturity comparable to the average life of the issue being priced. The second component is a credit spread assigned from a matrix based on credit rating and average life. This matrix is created monthly based on data from two major broker dealers. The quality ratings on the issues being priced are reviewed and updated quarterly.
At December 31, 2002, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $43.2 million, of which $22.4 million and $20.8 million related to public and private fixed maturity securities, respectively, and gross unrealized losses on the Company’s portfolio of common stocks were $2.3 million. At December 31, 2001, gross unrealized losses on the Company’s fixed maturity security portfolio aggregated $72.5 million, of which $33.8 million and $38.7 million related to public and private fixed maturity securities, respectively, and gross unrealized losses on the Company’s portfolio of common stocks were $7.3 million.
The following tables present certain information by type of investment with respect to the Company’s gross unrealized losses on fixed maturity securities outside of the Closed Block, in the Closed Block, and in total, at December 31, 2002 and 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, information as to the amount of time securities have been in an unrealized loss position, and the respective credit quality of such securities. Management segregated the information in the following tables between that applicable to the Closed Block and that applicable to outside the Closed Block because, other than a difference in classification within the Company’s income statement, management believes it is unlikely that there could be any impact to the net income reported by the Company for any period presented due to the sufficiency of the deferred dividend liability in the Closed Block as of the end of all periods presented. See Note 2 to the Consolidated Financial Statements. 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.
Total Gross Unrealized Losses on Fixed Maturity Securities As of December 31, 2001
Based on management’s analysis of the underlying issuers’ fundamentals, management concluded that, with few exceptions, losses incurred on sales of fixed maturity securities at or above prices of 90% of carrying value are not attributable to the creditworthiness of the issuer. In certain instances losses incurred on sales of fixed maturity securities at or above prices of 90% of carrying value were at least in part due to the creditworthiness of the issuer. Management made sales of securities at or above prices of 90% of carrying value in response to portfolio management decisions made in the period of sale, and such sales were not previously contemplated in prior periods. For the year ended December 31, 2002 and the year ended December 31, 2001 the Company incurred losses on sales of fixed maturity securities at prices below 90% of carrying value aggregating $4.7 million and $5.8 million, respectively. For all sales of securities at prices less than 90% of carrying value management’s evaluation of the underlying issuers’ fundamentals up to the period of sale concluded that both the principal and interest would be collected as scheduled. In the period in which management changed its view as to the likelihood that the Company would collect the scheduled principal and interest the Company either recognized an other than temporary impairment or sold the securities.
All sales of common stocks at losses during 2002 and 2001 were made to offset gains from sales of common stock in order to minimize the Company’s tax liability and were in keeping with management’s decision to reduce the Company’s exposure to common stock investments. Specific common stocks sold at losses were not identified as of periods prior to their sale. Decisions on specific securities to be sold at losses were made during the periods in which they were sold after consideration of the amount of common stock gains realized during the period. The table above presents the amount of other than temporary impairment charges taken during the years 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 cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of December 31, 2002 and 2001 are shown in the table below.
All of the Company’s fixed maturity securities and equity securities are classified as available for sale and reported at fair value with corresponding changes in unrealized gains and losses thereon reported in 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, 2002, 2001 and 2000, such writedowns aggregated $115.5 million, $31.2 million and $16.0 million, respectively.
The MONY Group Inc. (the “MONY Group”), through its subsidiaries (MONY Group and its subsidiaries are collectively referred to herein as the “Company”), provides life insurance, annuities, corporate-owned and bank-owned life insurance (COLI and BOLI), mutual funds, securities brokerage, securities trading, asset management, business and estate planning, trust, and investment banking products and services. The Company distributes its products and services through Retail and Wholesale distribution channels. The Company’s Retail distribution channels are comprised of (i) the career agency sales force operated by its principal life insurance operating subsidiary, and (ii) financial advisors and account executives of its securities broker dealer subsidiaries. The Company’s Wholesale channel is comprised of (i) MONY Partners, a division of MONY Life, (ii) independent third party insurance brokerage general agencies and securities broker dealers and (iii) its corporate marketing team which markets COLI and BOLI products. For the year ended December 31, 2002, Retail distribution accounted for approximately 22.8%, and 43.5% of sales of protection and accumulation products, respectively, and 100.0% of retail brokerage and investment banking revenues, while Wholesale distribution accounted for 77.2% and 56.5% of sales of protection and accumulation products, respectively. The Company principally sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico, and currently insures or provides other financial services to more than one million individuals.
On January 1, 2001, the Company acquired Matrix Capital Markets Group Inc. and Matrix Private Equities, Inc. (together, “Matrix”), for $12.1 million in cash, plus the obligation to make certain contingent payments in the event that Matrix achieves certain profit goals. Matrix primarily provides investment banking services to middle market companies. Goodwill recorded in connection with the transaction was approximately $11.1 million.
On February 27, 2002, MONY Group formed MONY Holdings, LLC (“MONY Holdings”) as a downstream, wholly owned, holding company of the MONY Group. MONY Group formed MONY Holdings for the purpose of issuing debt tied to the performance of the Closed Block Business within MONY Life (see Note 19). On April 30, 2002, the date MONY Holdings commenced its operations, MONY Holdings, through a structured financing tied to the performance of the Closed Block Business within MONY Life, issued $300.0 million of floating rate insured debt securities (the “Insured Notes”) in a private placement and MONY Group, pursuant to the terms of the structured financing, transferred all of its ownership interest in MONY Life to MONY Holdings. Other than activities related to servicing the Insured Notes in accordance with the Insured Notes indenture and its ownership interest in MONY Life, MONY Holdings has no operations and engages in no other activities.
Proceeds to MONY Holdings from the issuance of the Insured Notes, after all offering and other related expenses, were approximately $292.6 million. Of this amount, $60.0 million was deposited in a debt service coverage account (the “DSCA”), pursuant to the terms of the note indenture, to provide collateral for the payment of interest and principal on the Insured Notes and the balance of approximately $232.6 million was distributed to MONY Group in the form of a dividend. The Insured Notes mature on January 21, 2017. The Insured Notes pay interest only through January 21, 2008 at which time principal payments will begin to be made pursuant to an amortization schedule. Interest on the Insured Notes is payable quarterly at an annual rate equal to three month LIBOR plus 0.55%. Concurrent with the issuance of the Insured Notes, MONY Holdings entered into an interest rate swap contract (the “Swap”), which locked in a fixed rate of interest on Insured Notes at 6.44%. Including debt issuance costs of $7.4 million and the cost of the insurance policy (75 basis points per annum) (the “Insurance Policy”), which guarantees the scheduled principal and interest payments on the Insured Notes, the all-in cost of the indebtedness is 7.36%. See Note 20 for further information regarding the Insured Notes.
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 to produce cash flows which, together with anticipated revenues from the Closed Block in force business, are expected to be sufficient to support the Closed Block in force business, including but not limited to the payment of claims and surrender benefits, certain expenses and taxes, and for the continuation of dividend scales in effect at the date of MONY Life’s demutualization (assuming the experience underlying such dividend scales continues), and for appropriate adjustments in such scales if the experience changes. To determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for the aforementioned payments, MONY Life forecasted the expected cash flows from the Closed Block in force business and mathematically determined the cash flows that would need to be provided from assets allocated to the Closed Block to fully fund the aforementioned payments. Assets were then allocated to the Closed Block accordingly. The aforementioned forecast consists of a cash flow projection for each year over the estimated life of the policies in the Closed Block. The earnings from such expected cash flows from the Closed Block in force business and the assets allocated to the Closed Block are referred to as the “glide path earnings”.
To the extent that the actual cash flows, subsequent to the effective date of MONY Life’s demutualization, from the assets allocated to the Closed Block and the Closed Block in force 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 dividend scales used to determine Closed Block cash flows had been continued. Conversely, to the extent that the actual cash flows, subsequent to the effective date of MONY Life’s demutualization, from the assets allocated to the Closed Block and the Closed Block in force 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 dividend scales used to determine Closed Block cash flows had been continued. Accordingly, the recognition of the estimated ultimate aggregate future post-tax contribution expected to emerge from the operation of the Closed Block is not affected by the ultimate aggregate actual experience of the Closed Block
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
Real estate held for investment, as well as related improvements, is generally stated at cost less depreciation. Depreciation is determined using the straight-line method over the estimated useful life of the asset, which may range from 5 to 40 years. Cost is adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment losses are based on the estimated fair value of the real estate, which is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Impairment losses on real estate held for investment are reported as realized gains or losses on investments.
Management, having the authority to approve the action, commits the organization to a plan to sell the property
An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated and are continuing
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company currently introduces all of its customer transactions, which are now not reflected in these financial statements, to the clearing broker, which executes, clears, and carries such transactions on a “fully disclosed” basis. Advest’s proprietary transactions are also executed and cleared through the clearing broker.
Receivable from clearing broker primarily represents net cash balances on deposit, commissions, interest and trading profits receivable, clearing fees and borrowings to finance securities inventories. At times during the year, the balance with the clearing broker can be net payable. The Company is subject to credit risk should the clearing broker be unable to repay the balance reflected on the Statement of Financial Position. However, the Company does not anticipate non-performance. The carrying value approximates the fair value as the balance is short-term and interest-bearing.
Investment banking revenues are recorded, net of expenses, on the settlement date for management fees and sales concessions, and on the dates the underwriting syndications are closed for underwriting fees. Investment banking revenues are included in “Retail brokerage and investment banking revenues” in the consolidated statement of income and comprehensive income.
Asset management fees are computed based on the market value of assets in the Company’s managed accounts program, and are generally recognized over the period the related service is provided based on contractual terms.
Future policy benefit liabilities for participating traditional life policies are calculated using a net level premium method on the basis of actuarial assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Dividend fund interest assumptions range from 2.0% to 5.5%.
Dividends to policyholders reflected on the consolidated statement of income and comprehensive income is comprised of policyholder dividends payable in the current year and the change in the deferred dividend liability. Dividends payable to policyholders are determined annually by the board of directors of MONY Life. All but a deminimus amount of dividends paid to policyholders are on policies in the Closed Block. Refer to Note 2 for a more detailed explanation of policyholder dividends, as well as the deferred dividend liability. The change in the deferred dividend liability recognized in the statement of income and comprehensive income was $(14.6) million, $21.2 million, and $2.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.
For the years ended December 31, 2002, 2001, and 2000, respectively, real estate of $12.0 million, $18.0 million, and $0.5 million was acquired in satisfaction of debt. At December 31, 2002 and 2001, the Company owned real estate acquired in
Incremental shares totaling 1,227,397 and 1,333,745 from the assumed conversion of dilutive securities were not included in the computation of per share amounts for the year ended December 31, 2002 and 2001, respectively, because to do so would be antidilutive.
In July 2001, the SFAS 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.
4. Investment Income, Trading Gains (Losses), Realized and Unrealized Investment Gains (Losses), and Comprehensive Income:
liability represent the only components of other comprehensive income for the years ended December 31, 2002, 2001 and 2000 as presented below:
Amounts in 2002 include $3.5 million of changes in unrealized gains related to fixed maturity securities, which are on deposit in the Debt Service Coverage Account sub-account CB - see Note 20.
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 $(25.0) million, $5.1 million and $3.3 million, respectively, and $4.3 million, $1.8 million and $2.5 million, respectively, relating to the effect of such amounts on DPAC.
The amortized cost, gross unrealized gains and estimated fair value of fixed maturity securities in the Debt Service Coverage Account Sub-account OB at December 31, 2002 are $58.3 million, $3.5 million, and $61.8 million, respectively - see Note 20.
Proceeds from sales of equity securities during 2002, 2001 and 2000 were $16.5 million, $31.0 million and $449.2 million, respectively. Gross gains of $2.7 million, $3.1 million and $81.2 million and gross losses of $2.8 million, $9.5 million and $57.8 million were realized on these sales during 2002, 2001, and 2000, respectively.
The Company’s average fair value of futures contracts during the years ended December 31, 2002 and 2001 was $14.4 million and $1.5 million, respectively. At December 31, 2002 the market value of open positions was $15.8 million. At December 31, 2001, the Company had only nominal open positions.
The Company is exposed to off balance sheet risk related to securities sold, not yet purchased and financial futures sold. These transactions obligate the Company to repurchase such securities and futures at prevailing market prices in the future. These obligations are recorded in the Company’s balance sheet at the market values at December 31, 2002, and the Company will incur a loss if the market value of the securities or futures increases.
During 2002, 2001, and 2000, the Company recognized $11.3 million, $12.8 million, and $19.5 million, respectively, of interest income on impaired loans.
At December 31, 2002 and 2001, the Company had restructured mortgage loans of $29.8 million and $66.3 million, respectively. Interest income of $1.5 million, $4.3 million and $6.8 million was recognized on restructured mortgage loans in 2002, 2001, and 2000, respectively. Gross interest income on these loans that would have been recorded in accordance with the original terms of such loans amounted to approximately $4.0 million, $7.2 million, and $9.5 million in 2002, 2001 and 2000, respectively.
The Company’s Other Products segment primarily consists of an insurance brokerage operation and certain lines of insurance business no longer written by the Company (the “run-off businesses”). The insurance brokerage operation provides the Company’s career agency sales force with access to variable life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The run-off businesses primarily consist of group life and health business as well as group pension business that was not included in the Group Pension Transaction (see Note 11).
Assets have been allocated to the segments in amounts sufficient to support the associated liabilities of each segment and maintain a separately calculated regulatory risk-based capital (“RBC”) level for each segment. Allocations of the net investment income and net realized gains on investments were based on the amount of assets allocated to each segment. Other costs and operating expenses were allocated to each of the segments based on: (i) a review of the nature of such costs, (ii) time studies analyzing the amount of employee compensation costs incurred by each segment, and (iii) cost estimates included in the Company’s product pricing. Substantially all non-cash transactions and impaired real estate (including real estate acquired in satisfaction of debt) have been allocated to the Protection Products segment.
Amounts reported as “reconciling amounts” in the table below primarily relate to: (i) contracts issued by MONY relating to its employee benefit plans, (ii) revenues and expenses of the MONY Group, (iii) revenues and expenses of MONY Holdings in 2002, (iv) charges totaling $7.7 million and $56.8 million in 2002 and 2001, respectively, associated with the Company’s reorganization (see Note 24), and (v) a $1.5 million decrease in 2002 in certain reserves established in connection with the reorganization charge recorded in 2001 (see Note 24).
Includes interest income related to intercompany surplus notes. Interest expense is included as a reconciling item.
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 the MONY Group, (iii) revenues and expenses of MONY Holdings and (iv) charges totaling $7.7 million pre-tax relating to the Company’s 2002 restructure charge (see Note 24), and (v) a $1.5 million reversal of certain reserves associated with the Company’s 2001 restructure charge (see Note 24).
For MONY Life, no benefits bearing incentive compensation is assumed for 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 Advest, the rates of future compensation increases for the AE Defined Benefit Plan and the Executive Defined Benefit Plan are 3.00% and 4.43%, respectively, as of December 31, 2002.
The Company files a consolidated income tax return with its life and non-life affiliates, except Sagamore Financial Corporation and its subsidiaries (see Note 3).
Federal income taxes reported in the consolidated statements of income and comprehensive income are different from the amounts determined by multiplying the earnings before federal income taxes by the statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each are as follows:
In accordance with GAAP, the transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the existing deposits on the transferred business (the “Existing Deposits”). Accordingly, the Company reflects the transferred assets and liabilities on its balance sheet under separate captions entitled “Assets transferred in Group Pension Transaction” and “Liabilities transferred in Group Pension Transaction” until the expiration of the agreement, December 31, 2002. In addition, the Company reports in its GAAP earnings the profits from the Existing Deposits as discussed below.
Earnings which emerge from the Existing Deposits pursuant to the application of the Earnings Formula are recorded in the Company’s financial statements only after adjustments (primarily to recognize asset impairments in accordance with SFAS Nos. 114 and 115) to reflect such earnings on a basis entirely in accordance with GAAP (such earnings hereafter referred to as the “Group Pension Profits”). Losses which arise from the application of the Earnings Formula for any annual period will be reflected in the Company’s results of operations (after adjustments to reflect such losses in accordance with GAAP) only up to the amount for which the Company is at risk (as described below), which at any time is equal to the then outstanding principal amount of the Series A Notes.
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 expense comprising the Group Pension Profits:
Includes general account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $71.2 million as of December 31, 2001.
Includes separate account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $11.8 million as of December 31, 2001.
The estimated fair values of fixed maturity and trading securities are based upon quoted market prices, where available. The fair values of fixed maturity securities not actively traded and other non-publicly traded securities are estimated using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market interest rate commensurate with the credit quality and term of the investments. Equity securities primarily consist of investments in common stocks and limited partnership interests. The fair value of the Company’s investments in common stocks are determined based on quoted market prices, where available. The fair value of the Company’s investments in limited partnership interests are based on amounts reported by such partnerships to the Company.
Policy loans are an integral component of insurance contracts and have no maturity dates. Management has determined that it is not practicable to estimate the fair value of policy loans.
Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Under SFAS 140, securities which can be sold or rehypothecated by the holder are classified as pledged securities owned. As all of the Company’s securities are deposited with a clearing broker, they have been classified accordingly.
The Company has entered into coinsurance agreements with other insurers related to a portion of its extended term insurance, guaranteed interest contract and long-term disability claim liabilities, and reinsures approximately 50% of its block of paid-up life insurance policies.
The following table summarizes the effect of reinsurance for the years indicated ($ in millions):
On January 12, 2000, the MONY Group filed a registration statement on Form S-3 with the Securities and Exchange Commission (the “SEC”) 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. It is the intention of the Company to use this facility to raise proceeds for mergers and acquisitions and for other general corporate matters, as it considers necessary.
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 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, MONY Life repurchased another $6.5 million and $0.1 million face amount of the 11.25% notes, respectively, resulting in a remaining balance outstanding 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
As a result of the repurchase of the 9.5% Notes and substantially all of the 11.25% Notes, the Company recorded a pre-tax tax loss of $58.1 million ($37.7 million after tax) during 2000. The loss resulted from the premium paid by MONY Life to the holders of the 9.5% Notes and the 11.25% Notes reflecting the excess of their fair value over their carrying value on the Company’s books at the date of the transaction of approximately $7.0 million and $51.1 million, respectively. This loss is reported, net of tax, as an extraordinary item on the Company’s income statement for the year ended December 31, 2000
At December 31, 2001, the Company’s Advest subsidiary had $313.0 million outstanding in bank loans, $281.0 million of which was collateralized by firm and customer securities. The entire principal and interest outstanding on the loans was paid off in January, 2002. The weighted average interest rate on Advest bank loans outstanding at December 31, 2001 was 2.1%.
At December 31, 2002, the Company’s Advest subsidiary had $7.0 million outstanding on a private placement note with three institutional investors. Under the terms of the note, equal principal payments are due on the last day of December through and including December 31, 2003. The note is investment-grade rated and bears interest at the rate of 7.95% per annum payable semiannually on the last day of June and December.
Pursuant to a securities lending agreement with a major financial institution, the Company from time to time lends securities to approved borrowers. At December 31, 2002 and 2001, securities loaned by the Company under this agreement had a fair value of approximately $351.8 million and $161.5 million, respectively. The minimum collateral when securities are loaned is 102 percent of the market value of the loaned securities. Such securities are marked to market on a daily basis; the collateral is increased or decreased in accordance with our agent agreement.
The states or jurisdictions with the largest concentrations of mortgage loans and real estate investments at December 31, 2002 are: California, $236.8 million (11.5%); Arizona $212.2 million (10.3%); Texas, $186.2 million (9.1%); Washington D.C., $149.0 million (7.2%); New York, $145.7 million (7.1%); Georgia, $137.5 million (6.7%); and Washington, $96.5 million (4.7%).
(i) Since late 1995 a number of purported class actions have been commenced in various state and federal courts against MONY Life and MLOA alleging that it engaged in deceptive sales practices in connection with the sale of whole and universal life insurance policies from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (i.e., breach of contract, fraud, negligent misrepresentation, negligent supervision and training, breach of fiduciary duty, unjust enrichment and violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases seek primarily equitable relief (e.g., reformation, specific performance, mandatory injunctive relief prohibiting MONY Life and MLOA from canceling policies for failure to make required premium payments, imposition of a constructive trust and creation of a claims resolution facility to adjudicate any individual issues remaining after resolution of all class-wide issues) as opposed to compensatory damages, although they also seek compensatory damages in unspecified amounts. MONY Life and MLOA have answered the complaints in each action (except for one being voluntarily held in abeyance). MONY Life and MLOA have denied any wrongdoing and have asserted numerous affirmative defenses.
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 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 October 21, 1997, the New York State Supreme Court granted MONY Life’s and MLOA’s motion for summary judgment and dismissed all claims filed in the Goshen case against MONY Life and MLOA. On December 20, 1999, the New York State Court of Appeals affirmed the dismissal of all but one of the claims in the Goshen case (a claim under New York’s General Business Law), which has been remanded back to the New York State Supreme Court for further proceedings consistent with the opinion. The New York State Supreme Court subsequently reaffirmed that, for purposes of the remaining New York General Business Law claim, the class is now limited to New York purchasers only. On July 2, 2002, the New York Court of Appeals affirmed the New York State Supreme Court’s decision limiting the class to New York purchasers. In addition, the New York State Supreme Court has further held that the New York General Business Law claims of all class members whose claims accrued prior to November 29, 1992 are barred by the applicable statute of limitations. MONY Life and MLOA intend to defend themselves vigorously against the sole remaining claim. There can be no assurance, however, that the present litigation relating to sales practices will not have a material adverse effect on them.
On March 27, 2000, plaintiffs filed a new action in New York State Supreme Court bearing the same caption and naming the same defendants as the previously filed federal action. The state court complaint differed from the complaint previously filed in federal court in two primary respects. First, it no longer asserted a claim for damages against the New York Superintendent, nor did its prayer for relief seek entry of an order vacating or modifying the New York Superintendent’s decision or requiring the New York Superintendent to direct MONY Life to place additional assets into the Closed Block. Rather, it sought an accounting and an order from the Court directing MONY Life to transfer additional assets to the Closed Block.
(vi) In addition, MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million, with a scheduled renewal date in July 2003. The purpose of this facility is to provide additional liquidity for any unanticipated short-term cash needs that MONY Group might experience and also to serve as support for MONY Group’s $150.0 million commercial paper program which was activated in the third 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 at least $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 the greater of $75 million or one and one half years of 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 totaled $1,118.1 million, (ii) MONY Group’s debt to total capitalization ratio (including comprehensive income and short-term debt) for purposes of the credit facility was 30.7%, and (iii) MONY Group had cash and cash equivalents of $168.4 million. For purposes of the facility, cash and cash equivalents is defined to include only commercial paper rated at least A1/P1 and US Treasuries. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 2002 and 2001. The facility was amended at the consummation of the offering of the Notes to permit the offering of the Notes.
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: $45.3 million for 2003, $39.7 million for 2004, $35.4 million for 2005, $31.4 million for 2006, $28.0 million for 2007, and $119.1 million for the years thereafter.
The combined statutory net (loss) income 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 the Company’s insurance subsidiaries exceeds the minimum risk based capital requirements imposed by such subsidiaries’ state of domicile.
The carrying value of the Closed Block fixed maturity securities at December 31, 2002 and 2001 is net of “other than temporary impairment” adjustments of $60.5 million and $10.9 million, respectively.
Impaired mortgage loans along with related valuation allowances as of December 31, 2002 and 2001 were as follows:
For the year ended December 31, 2002, the Closed Block recognized $9.9 million of interest income on impaired loans. For the year ended December 31, 2001 the Closed Block recognized $8.4 million of interest income on impaired loans.
At December 31, 2002 and 2001, there was $0.1 million and no mortgage loans in the Closed Block which were non-income producing for the twelve months preceding such dates.
The following tables set forth certain summarized financial information attributable to the Ongoing Business and the Closed Block Business of MONY Holdings and its subsidiary, MonyLife, as of and for the year ended December 31, 2002:
The statutory surplus of MONY Life as of December 31, 2002 was $906.4 million, of which $555.6 million was attributable to the Ongoing Business and $350.8 million was attributable to the Closed Block Business. The statutory net gain from operations of MONY Life for the year ended December 31, 2002 was $154.6 million, of which $59.3 million was attributable to the Ongoing Business and $95.3 million was attributable to the Closed Block Business. The net gain from operations attributable to the Closed Block Business includes: (i) the net contribution to income from the Surplus and Related Assets from April 30, 2002 (the date of commencement of operations of the Closed Block Business) through December 31, 2002, and (ii) the results of operations from the Closed Block from January 1, 2002 through December 31, 2002.
In November 1998, upon approval of the New York Insurance Department, MONY Group adopted the 1998 Stock Incentive Plan (the “1998 SIP”) for employees of the Company and certain of its career financial professionals. As a condition for its approval of the 1998 SIP, the New York Insurance Department restricted options under the plan to no more than 5 percent of the shares of MONY Group’s common stock outstanding as of the date of its initial public offering (2,361,908 shares). Options granted under the 1998 SIP may be Incentive Stock Options (ISOs) qualifying under Section 422(a) of the Internal Revenue Code or Non-Qualified Stock Options (NQSOs).
Pursuant to the 1998 SIP, options may be granted at a price not less than 100% of the fair value of the Company’s common stock as determined on the date of grant. In addition, one-third of each option granted pursuant to the 1998 SIP shall become exercisable on each of the first three anniversaries following the date such option is granted and will remain exercisable for a period not to exceed 10 years from the date of grant. As of December 31, 2002, options to acquire 2,266,293 million common shares of the MONY Group had been issued under the 1998 SIP. Options to acquire 1,893,033 common shares remained outstanding as of December 31, 2002.
In May 2002, MONY Group’s shareholders approved the 2002 Stock Option Plan (the “2002 SOP”), and the allocation of 5,000,000 shares of MONY Group common stock for grants under that Plan. Options granted under the plan may not be exercised, transferred or otherwise disposed of by the grantee prior to December 24, 2003, even if vested. Options may be Incentive Stock Options (ISOs) qualifying under Section 422(a) of the Internal Revenue Code or Non-Qualified Stock Options (NQSOs). Options may be granted at a price not less than 100% of the fair value of the Company’s common stock as determined on the date of grant, and vesting provisions are determined at the discretion of the board of directors. As of December 31, 2002, options to acquire 1,512,050 common shares of the MONY Group had been issued and 1,492,350 options were outstanding under the 2002 SOP. All options granted through December 31, 2002 under the 2002 SOP are NQSOs that shall vest one-third ratably on the December 31st after each of the first three anniversaries following the date such option was granted, and will remain exercisable for a period not to exceed 10 years from the date of grant.
As of December 31, 2002 there were 1,451,856 options exercisable, with exercise prices ranging from $30.50 to $43.44 and a weighted average remaining contractual life of 7.0 years.
At December 31, 2002 there were 3,402,988 options outstanding with exercise prices ranging from $24.27 to $43.44, and a weighted average remaining contractual life of approximately 8.2 years. Approximately 39.0% or 1,316,654 of the options outstanding at December 31, 2002 had an exercise price of $30.50. These options had a remaining contractual life of approximately 6.9 years.
companies, at their election, to continue to apply the accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which was issued and effective since 1972. SFAS 123 provides no similar election with respect to transactions in which an entity issues equity instruments to acquire goods or services from non-employees. For companies electing to apply the accounting prescribed by APB 25 to their employee stock-based compensation plans, however, SFAS 123 requires that pro forma disclosure be made of net income and earnings per share as if the accounting prescribed by SFAS 123 had been adopted. Based on the definition of an “employee” prescribed in the Internal Revenue Code, the Company’s career financial professionals do not qualify as employees.
At the effective date of the initial grants of options pursuant to the SIP, the Company elected to apply the accounting prescribed by APB 25 to option grants to employees and, accordingly, make the aforementioned pro forma disclosures. Pursuant to the requirements of APB 25, the options granted by the Company under the SIP to employees qualify as non-compensatory. Accordingly, the Company is not required to recognize any compensation expense with respect to such option grants. With respect to grants of options under the SIP to career financial professionals, the Company adopted the accounting provisions of SFAS 123. Pursuant to the guidance in SFAS 123 and related interpretations, vesting provisions attached to stock based compensation issued to non-employees constitute a performance based condition which requires variable plan accounting. Under variable plan accounting, the fair value of the option grant must be re-measured at the end of each accounting period, until the options are 100 percent vested. Accordingly, the compensation cost charged to expense during any particular accounting period represents the difference between the vested percentage of the fair value of the options at the end of the accounting period and the cumulative compensation cost charged to expense in prior periods. Compensation cost is determined based on the fair value of such options using a Black-Scholes option pricing model (see below for further discussion regarding how fair value is determined). Such compensation cost is required to be recognized over the vesting period. Compensation expense recognized in the statement of income and comprehensive income related to options granted to career financial professionals which were outstanding at December 31, 2002 and 2001 was $0.3 million and $0.7 million respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee and career financial professionals options have characteristics different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
In addition to the aforementioned restricted stock plan, the Company issued approximately 111,987 shares of restricted stock in connection with the acquisition of Advest, of which approximately 86,764 shares remained restricted at December 31, 2002.
MONY Group’s cash inflows principally consist of investment income from its invested assets (including principal and interest payments on inter-company surplus notes of MONY Life (see Note 14), principal and interest payments on inter-company demand notes due from certain of its subsidiaries, and dividends from MONY Holdings and MONY Group’s other principal subsidiary, Advest, if declared and paid). MONY Group’s cash outflows principally consist of expenses incurred in connection with the administration of MONY Group’s affairs and interest expense on its outstanding indebtedness. The amount of dividends from MONY Holdings available to MONY Group is largely dependent upon the amount of dividends available to MONY Holdings from MONY Life in excess of that attributable to the Closed Block Business, as discussed above. 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 depends upon payments from its subsidiaries, including the receipt of: (i) dividends, (ii) principal and interest income on the inter-company surplus and demand notes, and (iii) other payments. The payment of dividends by MONY Life to MONY Holdings is regulated under state insurance law. 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 may be made only out of surplus funds which are available for such payments under the New York Insurance Law.
23. Goodwill and Other Intangible Assets - Adoption of Statement 142
In accordance with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) goodwill is periodically tested for impairment and is no longer amortized. The following tables set forth the impact of the adoption of SFAS 142 on the Company’s net income and earnings per share amounts for the years ended December 31, 2002, 2001 and 2000. In addition, as required by SFAS 142, management tested the carrying value of the Company’s goodwill at December 31, 2002 and determined that no impairment exists.
The goodwill amortization recorded for the years ended December 31, 2001 and 2000 was included in the Protection Products, Retail Brokerage and Investment Banking, and Other Products segments as follows:
All charges referred to as Reorganization Charges included in the table above, except $17.0 million related to deferred policy acquisition costs in 2001 and $5.3 million related to investment expenses in 2001, are included in “Other Operating Costs and Expenses” in the Company’s 2001 consolidated income statement.
The terrorist events of September 11, 2001 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 property losses and business interruption. These damages principally consisted of: (i) lost revenues at Advest, MSC, and Enterprise resulting from the close of the New York securities markets, (ii) physical damage to Advest’s Rector Street offices in lower Manhattan and associated recovery and relocation costs, (iii) the temporary closing of the Company’s New York corporate offices, (iv) delays associated with outsourcing Advest’s clearing operation, and (v) lost revenues resulting from the volatility of the securities markets and consumer uncertainty with respect to equity based products in the aftermath of September 11, 2001. To date, the Company has recovered $1.1 million relating to the aforementioned damages under its insurance coverage.
During 2002, MONY Holdings commenced activities to register the Insured Notes with the Securities and Exchange Commission as provided for under the note indenture. On February 14, 2003, the SEC declared such registration effective.
In March 2003, litigation relating to the disposition of a real estate asset discussed in Note 16(ii) was settled for approximately $4.0 million less than the provision recorded in 2002. Accordingly, during the first quarter of 2003 the Company will reverse such over-accrual to income.