The Company's administrative offices are located at MONY Life's office, 1740 Broadway, New York, New York, which consists of approximately 234,903 square feet. MONY Life also has office space facilities in Syracuse, New York, for use in its insurance operations, which consist of approximately 635,158 square feet in the aggregate. MONY Life leases both of these offices. MONY Life also leases all 111 of its agency and its subsidiary offices, which consist of approximately 669,020 square feet in the aggregate. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
The following table sets forth selected financial information for the Company. The selected financial information as of and for each of the years presented has been derived from the Company's audited financial statements and in the opinion of management, presents fairly such financial information in conformity with GAAP except as described in Note 1 to the Selected Financial Information. The selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's financial statements and the notes thereto and the other financial information included elsewhere herein.
(2) Includes writedowns for impairment and net changes in valuation allowances on real estate, mortgage loans and investment securities aggregating $0.9 million, $(0.1) million, $(0.3) million, $0.4 million and $1.9 million for the years ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
The Company is a stock life insurance company organized in the state of Arizona and is the corporate successor of VICO Credit Life Insurance Company, incorporated in Arizona on March 6, 1969. The Company is a wholly owned subsidiary of MONY Life Insurance Company, a stock life insurance company domiciled in the state of New York. MONY Life, formerly The Mutual Life Insurance Company of New York, is a wholly-owned subsidiary of The MONY Group, a Delaware Corporation organized to be the parent holding company of MONY Life.
Universal life ("UL") and investment-type product fees were $143.1 million for 1999, an increase of $21.1 million, or 17.3%, from $122.0 million reported in the comparable prior year period. The principal reasons for the change from period to period are as follows:
Flexible premium variable annuity ("FPVA") product fees were $64.4 million for 1999, an increase of $8.4 million, from $56.0 million reported in the comparable prior year period. The increase in FPVA fees is primarily due to surrender charges which were $7.1 million higher than in 1998. FPVA account value increased $103.5 million during 1999 to $4,279.6 million, as compared to $4,176.1 million in 1998. The increase in account value in 1999 resulted from new sales and other deposits of $378.5 million and market appreciation of $450.4 million, offset by approximately $725.4 million in withdrawals and surrenders. New sales of variable annuities during 1999 were $379 million, a decrease of $151 million, or 28.5%, from $529 million reported for 1998. The decline in annuity sales was primarily due to: (i) increased competition in the marketplace, (ii) the introduction by some companies of bonus annuities, which the Company elected not to offer, and (iii) delays in obtaining approval of the Company's new annuity products in certain key states. During 1999, the Company took actions to reverse this trend, including changes in agent compensation plans, product improvements (including the addition of new fund options offered through the Company's annuities), and increased education and training of the Company's career agency sales force to emphasize the value of our annuity line compared to the competition.
Variable universal life ("VUL") and corporate sponsored variable universal life ("CSVUL") product fees were $36.9 million for 1999, an increase of $16.2 million, from $20.7 million reported in the comparable prior year period. The increase in fees is primarily due to higher charges for the cost of insurance, loading and surrender charges of $8.8 million, $3.5 million and $1.6 million, respectively, and reduced unearned revenue (amounts assigned to the policyholders for future services) of $2.9 million.
Premium revenue was $9.2 million for 1999, an increase of $7.5 million from $1.7 million reported in the comparable prior year period. Approximately $4.0 million of the increase was a result of a modified co-insurance agreement between U.S. Financial Life ("USFL") and the Company. The additional increase is a result of renewal premiums and new premiums relating to level term business, which has been trending upward since the Company began offering this product during the fourth quarter of 1997.
Amortization of deferred policy acquisition costs ("DAC") was $43.5 million for 1999, an increase of $8.0 million, or 22.5%, from $35.5 million reported in the comparable prior year period. The increase in DAC amortization was the result of $4.5 million higher amortization related to the Company's VUL business as a result of better mortality and rapid growth in the product, $1.6 million related to the modified co-insurance agreement between USFL and the Company for
FPVA product fees were $56.0 million for 1998, an increase of $11.9 million from $44.1 million reported in the comparable prior year period. FPVA account value increased $404.2 million during 1998 to $4,176.1 million, as compared to $3,771.9 million in 1997. The increase in account value in 1998 resulted from new sales and other deposits of $529.3 million and market appreciation of $264.0 million, offset by approximately $389.1 million in withdrawals and surrenders. New sales of variable annuities during 1998 were $529 million, a decrease of $96 million or 15.3%, from $625 million reported for 1997. The introduction of new products and delays in regulatory approvals in key states adversely affected variable annuity sales.
Net investment income was $94.6 million for 1998, a decrease of $4.5 million, or 4.5%, from $99.1 million reported for 1997. The decrease is primarily related to a decrease in portfolio yields from 7.3% in 1997 to 7.1% in 1998 due to rollover of the portfolio at lower interest rates.
Other income was $7.6 million for 1998, an increase of $2.1 million, or 38.2%, as compared to $5.5 million reported for 1997. The increase is primarily due to higher funds received on supplementary contracts.
Other operating costs and expenses were $75.6 million for 1998, an increase of $29.6 million or 64.3% from $46.0 million reported for 1997. The increase is primarily due to higher intercompany allocation of expenses from MONY Life which primarily reflects the Company's higher production relative to that of MONY Life on a consolidated basis. In addition, other expenses increased in 1998 as compared to the prior year, including costs incurred in connection with regulatory compliance, guarantee assessments and other miscellaneous items.
- --------------- (1) Excludes $724.9 million in 1999 relating to surrenders associated with an exchange program offered by the Company wherein contract holders surrendered old FPVA contracts and reinvested the proceeds in a new enhanced FPVA product offered by the Company.
At December 31, 1999, aggregate maturities of long-term debt based on required remaining principal payments for 2000 and the succeeding four years are $2.1 million, $2.3 million, $2.4 million, $2.6 million and $2.8 million, respectively, and $36.8 million thereafter.
The National Association of Insurance Commissioners ("NAIC") established Risk Based Capital ("RBC") requirements to help state regulators monitor and safeguard life insurers' financial strength by identifying those companies that may be inadequately capitalized. The RBC guidelines provide a method to measure the adjusted capital (statutory-basis capital and surplus plus the Asset Valuation Reserve ("AVR") and other adjustments) that a life insurance company should have for regulatory purposes, taking into consideration the risk characteristics of such company's investments and products. A life insurance company's RBC ratio will vary over time depending upon many factors, including its earnings, the nature, mix and credit quality of its investment portfolio and the nature and volume of the products that it sells.
While the RBC guidelines are intended to be a regulatory tool only, and are not intended as a means to rank insurers generally, comparisons of RBC ratios of life insurers have become generally available. The Company's adjusted RBC capital ratio at December 31, 1998 and December 31, 1997 were in excess of the minimum required RBC.
The primary investment objective of the Company is to maximize after-tax returns consistent with acceptable risk parameters (including the management of the interest rate sensitivity of invested assets to that of policyholder obligations). The Company is exposed to two primary sources of investment risk with respect to its general account assets: credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, and interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves. The Company manages credit risk through industry and issuer diversification and asset allocation. The Company manages interest rate risk as part of its asset/liability management strategies, product design, such as the use of market value adjustment features and surrender charges and proactive monitoring and management of certain non-guaranteed elements of the Company's products (such as the resetting of credited interest rates for policies that permit such adjustments). A key aspect in managing interest rate exposure are the analyses performed by the Company to assess the adequacy of its projected asset cash flows relative to its projected liability cash flows. These analyses, many of which are required pursuant to the standard valuation laws of virtually all states, involve evaluating the potential gain or loss for over 95% of the Company's in force business under various increasing and decreasing interest rate environments, including inverted yield curves. For purposes of these analyses the Company has developed models of its in force business which reflect product characteristics such as cost of insurance rates, surrender charges, market value adjustments, cash values, etc. The models include assumptions, based on current and anticipated experience, regarding lapse and mortality rates and interest crediting strategies. In addition, these models include asset cash flow projections reflecting coupon payments, sinking fund payments, principal payments, defaults, bond calls, and mortgage prepayments.
Separate account assets are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent that the value of such assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. Substantially all separate account assets are reported at estimated fair value. Investment income and gains or losses on the investments of separate accounts accrue directly to contractholders and, accordingly, are not reflected in the Company's statements of income and cash flows. Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company's revenues.
including duration targets, asset allocation, asset/liability mismatch tolerances and return objectives, for each product line in order to achieve each such product line's individual risk and return objectives.
The following table illustrates the net investment income yields based on average annual asset carrying values, excluding unrealized gains (losses) in the fixed maturity category. Equity real estate income is shown net of operating expenses and depreciation. Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings. Investment expenses include mortgage servicing fees and other miscellaneous fee income.
The yield on general account invested assets (including net realized gains and losses on investments) was 7.1%, 7.6% and 7.5% for the years ended December 31, 1999, 1998 and 1997, respectively.
Fixed maturities consist of publicly traded debt securities and privately placed debt securities and represented 80.0% and 76.6% of total invested assets at December 31, 1999 and 1998, respectively.
The Securities Valuation Office of the NAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC Designations". The NAIC Designations closely mirror the Nationally Recognized Securities Rating Organizations' credit ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered investment grade ("Baa" or higher by Moody's, or "BBB" or higher by S&P) by such rating organizations. NAIC Designations 3 through 6 are referred to as below investment grade ("Ba" or lower by Moody's, or "BB" or lower by S&P).
At December 31, 1999, the percentage, based on estimated fair value, of total public and private placement fixed maturities that were investment grade (NAIC Designation 1 or 2) was 94.8% compared to 94.9% for December 31, 1998. The fixed maturities portfolio was comprised, based on estimated fair value, of 51.4% in public fixed maturities and 48.6% in private fixed maturities at December 31, 1999 and 56.2% in public fixed maturities and 43.8% in private fixed maturities at December 31, 1998.
The Company defines restructured securities in the fixed maturity category as securities where a concession has been granted to the borrower related to the borrower's financial difficulties that the Company would not have otherwise considered. The Company restructures certain securities in instances where a determination was made that greater economic value will be realized under the new terms than through liquidation or other disposition. The terms of the restructure generally involve some or all of the following characteristics: a reduction in the interest rate, an extension of the maturity date and a partial forgiveness of principal and/or interest. The fair value of restructured fixed maturities was $0.0 million and $2.7 million at December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, (excluding scheduled sinking funds) as of December 31, 1999 and 1998 are as follows:
The Company held approximately $217.5 million and $232.8 million of mortgage-backed and asset-backed securities as of December 31, 1999 and 1998, respectively. Of such amounts, $82.4 million and $108.3 million or 37.9% and 46.5%, respectively, represented agency-issued pass-through and collateralized mortgage obligations ("CMOs") secured by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association. 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, 1999 and 1998, 81.9% and 91.2%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned a NAIC Designation 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies.
The Company manages this prepayment and extension risk by investing in CMO tranches that provide for greater stability of cash flows. The mix of CMO tranches was as follows as of the dates indicated.
The prepayment and extension risk associated with a Sequential tranche can vary as interest rates fluctuate, since this tranche is not supported by other tranches.
Mortgage loans comprise 12.6% and 8.8% of total invested assets at December 31, 1999 and 1998, respectively. Mortgage loans consist of commercial and agricultural loans. As of December 31, 1999 and 1998, commercial mortgage loans comprised $52.8 million and $27.6 million or 32.0% and 23.0% of total mortgage loan investments, respectively. Agricultural loans comprised $112.2 million and $92.5 million or 68.0% and 77.0% of total mortgage loan investments, respectively.
- --------------- (1) Problem agricultural mortgages included delinquent mortgage loans of $1.1 million and $0.0 million at December 31, 1999 and 1998, respectively, and there were no mortgage loans in the process of foreclosure at such dates.
In addition to valuation allowances and impairment writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-asset specific estimate of expected losses on all other agricultural mortgage loans based on its historical loss experience for such investments. As of December 31, 1999 and 1998, such reserves were $1.1 million and $0.9 million, respectively.
The Company holds real estate as part of its general account investment portfolio. The Company has adopted a policy of not investing new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. As of December 31, 1999 and 1998, the carrying value of the Company's real estate investments was $6.9 million and $8.3 million, respectively, or 0.5% and 0.6%, respectively, of general account invested assets. The Company owns real estate of $5.3 million and $0.3 million as of December 31, 1999 and 1998 respectively, and real estate acquired upon foreclosure of commercial and agricultural mortgage loans of $1.6 million and $8.0 million as of December 31, 1999 and 1998, respectively.
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of the end of each period are shown in the table below and are reflected in the corresponding asset values discussed above.
- --------------- (1) Includes $1.2 million and $1.6 million at December 31, 1999 and 1998, respectively, relating to impairments taken upon foreclosure of mortgage loans.
At December 31, 1999 and 1998, 4.0% ($52.8 million) and 2.0% ($27.6 million), respectively, of the Company's general account invested assets consisted of commercial mortgage loans. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. The Company provides valuation allowances for commercial mortgage loans when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1999, 1998 and 1997, such increases (decreases) in valuation allowances aggregated $0.2 million, $(0.4) million and $(0.3) million, respectively. The carrying value of commercial mortgage loans at December 31, 1999 was $52.8 million, which amount is net of $1.1 million representing management's best estimate of cumulative impairment losses at such date. However, there can be no assurance that additional provisions for impairment adjustments with respect to the real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. There were no impairment adjustments for the years ended December 31, 1999, 1998 and 1997. At December 31, 1999 and 1998, the carrying value of real estate held for investment was $5.3 million and $8.3 million, or 0.4% and 0.6% of invested assets at such dates, respectively. The aforementioned carrying values are net of cumulative impairments of $1.0 million and $1.9 million, respectively, and net of accumulated depreciation of $1.9 million and $1.9 million, respectively. However, there can be no assurance that additional provisions for impairment adjustments with respect to real estate held for investment will not need to be made. Any such adjustments may have a material adverse effect on the Company's financial position and results of operations.
The carrying value of real estate to be disposed of at December 31, 1999 and 1998 was $1.6 million and $0.0 million, net of impairment adjustments of $0.4 million and $0.0 million, valuation allowances of $0.3 million and $0.0 million, and accumulated depreciation of $0.2 million and $0.0 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs (See Note 2 to the Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1999, 1998 and 1997, such increases (decreases) in valuation allowances aggregated $0.3 million, $(0.1) million and $1.0 million, respectively.