The Company leases its headquarters building which is located at 1740 Broadway, New York, New York and consists of approximately 267,000 square feet. The Company also occupies facilities in Syracuse, New York for use in its insurance operations, which consist of approximately 578,000 square feet in the aggregate. The Company also leases all 217 of its agency and its subsidiary offices, which consist of approximately 1,388,000 square feet in the aggregate. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
(4) 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.
On September 17, 2003, MONY Group entered into an Agreement and Plan of Merger with AXA Financial, Inc. (“AXA Financial”) and AIMA Acquisition Co., which was subsequently amended on February 22, 2004
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 and (v) 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.
If the Merger with AXA Financial Does Not Close for Any Reason, the Company’s Profits and Financial Condition Could Deteriorate Drastically
The Company’s calculation of variable annuity product DPAC asset balances as of December 31, 2003 incorporated an asset growth assumption of 9.6% in 2004, gradually decreasing to 8.0% in 2013 and thereafter, for all funds underlying variable annuity products. This assumption is consistent with the “reversion to the mean” method described above. The assumption of future returns impacts the Company’s expectation of both future fee income and future expenses, including the cost of guaranteed minimum death benefits.
The Company makes investments in partnerships specializing in venture capital investing. The Company’s investments are in the form of limited partnership interests. The Company generally limits these investments to no more than 2.0% to 3.0% of its total invested assets. In accordance with GAAP, certain of the Company’s investments in these partnerships are accounted for under the equity method of accounting, while the balance of the portfolio is accounted for at estimated fair value with changes in fair value recorded in other comprehensive income. Generally, substantially all the Company’s partnership investments acquired before May 1995 are accounted for at fair value, while those acquired on or after May 1995 are accounted for under the equity method of accounting. Because the underlying partnerships are required under GAAP to mark their investment portfolios to market and report changes in such market value through their earnings, the Company’s earnings will reflect the pro rata share of such mark to market adjustment if the Company accounts for the partnership investment under the equity method. With respect to partnerships accounted for at fair value, there will be no impact on the Company’s earnings until: (i) the underlying investments held by the partnership are distributed to the Company by the partnership, or (ii) the underlying investments held by the partnership are sold by the partnership and the proceeds distributed to the Company, or (iii) an impairment of the Company’s investment in the partnership is determined to exist. Historically, venture capital investments have had a significant impact on the Company’s earnings. The Company’s future earnings from venture capital investments could be adversely affected when market valuations deteriorate, which could materially affect the Company’s results of operations and financial position. At December 31, 2003, the carrying value of the Company’s venture capital investments was $177.6 million, of which $80.6 million was accounted for under the equity method and $97.0 million was accounted for at fair value.
• Certain of the Company’s annuity products have contractual provisions which guarantee minimum death benefits. These provisions require the Company to pay the beneficiary any excess of the guaranteed minimum benefit over the fund value of the annuity contract in addition to the payment of the fund value. It is the Company’s practice to establish reserves for the payment of any guaranteed minimum death benefit claims on the basis of its outlook for mortality experience and the amount at risk on the annuity contracts. At December 31, 2003, the Company’s net amount at risk (or the aggregate amount by which the guaranteed values exceeded the fund values of the Company’s in force annuity contracts) totaled approximately $418.0 million. At December 31, 2003, the Company carried a reserve of approximately $4.0 million with respect to such claims. However, additional reserves for such claims may need to be established, particularly if there is a sustained deterioration in the securities markets. In addition, the American Institute of Certified Public Accountants (“AICPA”) has issued guidance concerning the establishment of such reserves. This guidance requires the Company to change its methodology for determining the amount of reserves that should be established for such claims.
Accordingly, upon the adoption of the new guidance issued by the AICPA, effective for financial statements for fiscal years beginning after December 15, 2003, the Company will have to establish additional reserves. The Company estimates that under the new AICPA guidance it would have had to establish additional reserves of approximately $0.8 million at December 31, 2003.
• 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 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.
• 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 No. 25 Accounting for Stock Issued to Employees (“Opinion No. 25”), which provides for the application of the intrinsic value based method of accounting. For certain stock based compensation plans (including certain stock option plans), the guidance provided in Opinion No. 25 does not require companies to recognize compensation expense. Recently, certain companies, in response to this debate, have announced their intention to adopt the generally accepted accounting guidance prescribed under SFAS 123, which provides for the application of the fair value based method of accounting. In accordance with this method, all forms of employee stock-based compensation are measured at fair value at the date of grant and expensed over the requisite service or vesting period. If the Company chooses to adopt these provisions of SFAS No. 123 or if it becomes required to adopt such provisions as a result of action by the Financial Accounting Standards Board (“FASB”), the adoption will result in additional expense recognition in an amount that may be material to the Company’s results of operations.
The Company records changes in the fair values of investments in fixed maturity and equity securities available for sale that are not considered to be “other than temporarily impaired” in other comprehensive income. The Company reports changes in the value of trading securities and venture capital investments accounted for using the equity method, in the consolidated statement of income and comprehensive income. For investments the Company considers to be “other than temporarily impaired”, the Company records an impairment loss, which is reflected in realized gains and (losses) on investments. See-Investments-Other Than Temporary Impairment Charges On Investments in Fixed Maturity Securities and Common Stocks. Determining whether a security is “other than temporarily impaired” requires the use of estimates and significant judgment. The Company’s financial position and results of operations are therefore affected by changes in circumstances that affect the value of these investments and the Company’s determination as to whether the investments are “other than temporarily impaired”.
The Company values DPAC and insurance reserves in accordance with the relevant GAAP pronouncements: generally SFAS 60 for term and whole life insurance products, SFAS 97 for universal life and investment-type contracts, and SFAS 120 for traditional participating life insurance contracts. The valuation of DPAC and insurance reserves requires management to assume future investment yields, mortality rates, lapse rates, expense levels, policyholder dividends and where flexibility is allowed, policyholder premium payment behavior. For many of the Company’s products, amortization of DPAC varies with profit margins of the policies and contracts supporting the DPAC balances. The Company must periodically evaluate the recoverability of DPAC and the adequacy of its reserves based on historical and projected future results. Changes in management’s assumptions or actual results that differ significantly from management’s estimates may materially affect the Company’s financial position and results of operations. See-Potential Forward Looking Risks Affecting Profitability.
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-Potential Forward Looking Risks Affecting Profitability.
Accounting for litigation, contingencies and restructuring charges requires the Company to estimate the expected costs of events which have already occurred but which the Company has not completely resolved. As discussed in Note 18 to the 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 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.
The accounting for pension liabilities and the corresponding periodic expense requires assumptions with respect to the future return on the Company’s pension plan (the “Plan”) assets, the discount rate used to determine the present value of pension liabilities, the rate of compensation increases, and the determination of the fair value of Plan assets and the resultant unrealized gain or loss.
• Public common stock-The fair values of public common stock investments are determined based on quoted market prices.
• Real estate-The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks.
During 2003, the Company recorded charges aggregating $5.8 million as part of the Company’s continuing initiative to enhance operating efficiency and effectively allocate resources. These charges consisted of: (i) severance and related benefits of $1.1 million incurred in connection with the merger of MONY Asset Management, Inc.’s operations into Boston Advisors and the resulting termination of certain employees; (ii) losses from the abandonment of leased offices of $1.3 million; (iii) losses from the abandonment of leased space in the Company’s home office of $2.0 million; (iv) write-offs of unused furniture and equipment in certain abandoned agency offices of $1.3 million; and (iv) moving and alteration costs incurred in connection with the consolidation of leased space in the Company’s home office of $0.2 million. The severance actions were substantially completed during the fourth quarter of 2003. The reserves established for the abandonment of leased agency offices and leased space in the Company’s home office are expected to run-off through 2008 and 2016, respectively. All of the charges recorded in 2003 represent “costs associated with exit or disposal activities” as described in SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”).
During the fourth quarter of 2002 and 2001, the Company recorded reorganization and other charges aggregating approximately $7.7 million and $146.1 million, respectively, as part of the Company’s initiative to enhance operating efficiency, more effectively allocate resources and capital, and discontinue certain non-core operations. Of these charges, $7.7 million and $19.0 million, respectively, met the definition of “restructure charges” as defined by Emerging Issues Task Force Consensus 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The 2002 restructure charge consisted of severance and related benefits resulting
from headcount reductions of 161 and 26 in the Company’s home office and career agency system, respectively, as well as losses from the abandonment of certain leased offices and equipment. The 2001 restructure charge consisted of severance and related benefits of $10.3 million resulting from headcount reductions of 117 and 240 in the Company’s home office and career agency system, respectively, and $8.7 million of other miscellaneous items. These actions were substantially completed in 2002. The remaining restructuring reserves primarily relate to lease abandonment costs and are expected to run-off through 2007. The balance of the charge in 2001, $127.0 million, was unrelated to the Company’s restructure activities and consisted of: (i) impairments of certain invested assets and valuation related write-downs of private equity securities held in the Company’s equity method venture capital portfolio; (ii) the write-off of deferred sales charges in the Company’s mutual fund business to reflect revised estimates of recoverability which are principally due to the decline in the value of the Company’s internet funds; (iii) write-downs of certain information technology assets; and (iv) other miscellaneous items.
Set forth below is certain information regarding the liability recorded in connection with the Company’s restructuring actions, as well as the changes therein during the year ended December 31, 2003. Such liability is reflected in Accounts Payable and Other Liabilities on the Company’s consolidated balance sheet.
(1) Amounts reported as “reconciling” in 2003 primarily relate to (i) contracts issued by MONY Life relating to its employee benefits plans, (ii) revenues and expenses of the MONY Group, (iii) revenues and expenses of MONY Holdings, (iv) charges totaling $5.8 million pre-tax relating to the Company’s reorganization activities (see “Reorganization and Other Charges”) and (v) merger related expenses totaling $9.6 million incurred in connection with MONY Group’s pending merger transaction with AXA Financial - see Note 2 to the Consolidated Financial Statements.
Premium revenue was $705.2 million for 2003, an increase of $14.8 million, or 2.1%, from $690.4 million reported for 2002. The increase was primarily the result of higher premiums in the Protection Products and Accumulation Products segments of $5.0 million and $9.6 million, respectively. The following table summarizes the components of premiums recorded in each of the Company’s segments for the years ended December 31, 2003 and 2002, respectively.
USFL’s premiums were $108.8 million and $83.3 million for the years ended December 31, 2003 and 2002, respectively. The increase in USFL’s premiums was primarily due to an increase in renewal premiums attributable to the growth of its in-force block of business and improved retention. Higher new premiums on special risk insurance products attributable to the increased penetration of the broker market into more states also contributed to the increase in USFL’s premiums.
Universal life and investment-type product policy fees were $210.9 million for 2003, an increase of $10.4 million, or 5.2%, from $200.5 million reported for 2002. The increase was primarily the result of higher fees in the Protection Products segment of $18.3 million, partially offset by lower fees in the Accumulation Products and Other
Net investment income was $739.5 million for 2003, an increase of $2.2 million, or 0.3%, from $737.3 million reported for 2002. The increase in net investment income related primarily to a higher average invested asset balance offset by a decline in interest rates. The annualized yield on the Company’s invested assets, including limited partnership interests, before and after net realized gains and (losses) on investments was 6.3% and 6.7%, respectively, for the year ended December 31, 2003, as compared to 6.6% and 5.2%, respectively, for the year ended December 31, 2002. See “- Investments - Investment Yields by Asset Category.”
The Group Pension Transaction and the related Group Pension Profits ceased as of December 31, 2002. Refer to Note 13 of the Consolidated Financial Statements included herein for information regarding the Group Pension Transaction, the Group Pension Profits and the Final Value Payment, along with certain summary financial information relating thereto.
(1) Includes commissions and trading profits from trading securities where Advest acts as principal.
Other income (which consists primarily of fees earned by the Company’s mutual fund management and insurance brokerage operations, as well as certain asset management fees, and other miscellaneous revenues) was $186.7 million for 2003, an increase of $46.8 million, or 33.5%, from $139.9 million reported for 2002. The increase was due primarily to higher income in the Protection Products, Accumulation Products, Other Products and Retail Brokerage and Investment Banking segments of $27.1 million, $9.7 million, $10.1 million and $3.3 million, respectively, partially offset by a decrease in reconciling amounts of $3.4 million. The following table summarizes the components of other income recorded in each of the Company’s segments for the years ended December 31, 2003 and 2002, respectively.
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 offset 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 2003, the change in the cash surrender value of the COLI contract allocated to the Protection Products segment was $14.0 million compared to $(11.5) million in 2002. The change in the cash surrender value of the COLI contract allocated to the Accumulation Products segment was $2.5 million in 2003 compared to $(2.0) million in 2002. For reporting purposes, the results of the COLI contract are allocated among the segments.
Benefits to policyholders were $841.5 million for 2003, an increase of $38.4 million, or 4.8%, from $803.1 million reported for 2002. The increase consisted primarily of higher benefits of $32.8 million, $7.8 million, and $2.2 million in the Protection Products, Accumulation Products, and Other Products segments, respectively, partially offset by a decrease in reconciling amounts of $4.4 million. The increase in the Protection Products segment of $32.8 million was primarily attributable to (i) a $24.5 million increase in death claims in USFL, attributable to an unusually high level of claims in the first half of 2003 compared to an unusually low level of claims in 2002 and an increase in USFL’s in-force block of business, (ii) an increase in death benefits on
CSVUL and individual life outside the Closed Block of $3.3 million and $5.0 million, respectively, attributable primarily to increased sales of these products over the past few years, (iii) a $17.8 million increase in death benefits in the Closed Block, net of reinsurance, attributable to an unusually low level of claims in 2002 , and (iv) a $6.8 million increase in reserves primarily due to the growth of the in-force block of business for USFL’s products and for individual life products outside the Closed Block. These increases were partially offset by a $21.7 million decrease in surrender benefits, primarily in the Closed Block, attributable to conservation efforts, and a $3.6 million decrease in death benefits on UL business. The decrease in death benefits on UL business is attributable to poor mortality experience in 2002 compared to 2003. The increase in the Accumulation Products segment was primarily due to higher reserves on individual annuity products and supplementary contracts of $9.0 million and $2.1 million, respectively, partially offset by lower benefit reserves of $3.4 million on the Company’s FPVA product as compared to the prior year. The increased reserves on individual annuities and supplementary contracts were attributable to higher sales of these accumulation products, while the lower reserves for guaranteed minimum death benefits (“GMDB”) on the Company’s FPVA products were due to improving market conditions. The reduction in GMDB reserves was partially offset by an increase in death benefit payouts. The increased benefits in the Other Products segment were primarily attributable to higher reserves for group health and an increase in claims experience.
Other operating costs and expenses were $954.5 million for 2003, an increase of $94.5 million, or 11.0 %, from $860.0 million for 2002. The following table summarizes the change in other operating costs and expenses reported in each of the Company’s segments for the years ended December 31, 2003 and 2002, respectively.
The increase in the Protection Products segment was primarily attributable to higher costs related to the Company’s employee benefit plans of $43.4 million, offset by a decrease in other general operating expenses of $2.6 million. The $43.4 million increase in the costs related to the Company’s employee benefit plans consisted of a $21.1 million increase in the non-qualified deferred compensation liabilities and a $22.3 million increase in pension expense. The Company purchased a COLI contract to provide a funding mechanism for the non-qualified deferred compensation liabilities. The investments in the COLI contract are structured to substantially offset the changes in the Company’s non-qualified deferred compensation liabilities. The cash surrender value of the COLI contract is reflected in the statement of income and comprehensive income caption entitled “other income”. The increase in the Accumulation Products segment was primarily attributable to higher costs related to the Company’s employee benefit plans of $7.6 million, and a charge of $2.0 million relating to reserves established for the support of certain market fund net asset values, partially offset by a $2.0 million reduction in compensation and other miscellaneous expenses at Enterprise and a decrease in other general expenses of $1.9 million. The increased expenses in the Retail Brokerage and Investment Banking segment were primarily
attributable to higher employee compensation and other benefit expenses of $20.3 million, attributable primarily to an increase in commission expense directly related to increased commission revenues, a $7.0 million increase in expense reimbursement allowances attributable to the increased commission revenues, a charge of $4.0 million related to the impairment of goodwill at Matrix, and an increase in other general expenses of $5.8 million. These increases in the Retail Brokerage and Investment Banking segment were offset by a decrease in interest expense of $8.8 million. The increase in reconciling amounts related primarily to merger related expenses of $9.6 million, consisting primarily of legal and consulting costs relating to MONY Group’s pending merger with AXA Financial (see Note 2 to the Consolidated Financial Statements), an increase in interest expense of $6.7 million relating to the issuance of the Insured Notes on April 30, 2002 (see Notes 21 and 22 to the Consolidated Financial Statements), and an increase in other general expenses (primarily stock option expense, transfer agent fees and postage) of $2.2 million. These increases in reconciling amounts were partially offset by a decrease in reorganization charges of $1.9 million (see Note 26 to the Consolidated Financial Statements).
The Company recorded a federal income tax expense in 2003 of $13.0 million, compared to a federal income tax benefit of $12.6 million in 2002. The Company’s effective tax rates were approximately 26.2% and 35.0% in 2003 and 2002, respectively. See Note 12 to the Consolidated Financial Statements for details of the sources of the differences between the statutory federal income tax rate of 35.0% and the Company’s effective tax rate.
Universal life and investment-type product policy fees were $200.5 million for 2002, a decrease of $6.7 million, or 3.2%, from $207.2 million reported for 2001. The decrease was primarily a result of lower fees in the Accumulation Products segment of $7.9 million, partially offset by higher fees in the Protection Products and Other Products segments of $0.5 million and $0.7 million, respectively. The decrease in the Accumulation Products segment was primarily due to lower FPVA mortality and expense charges of $7.5 million, attributable to lower separate account fund balances. Annuity assets under management were $4.0 billion at December 31, 2002 compared to $4.6 billion at December 31, 2001. The increase in the Protection Products segment was primarily due to an increase of $9.8 million in VUL relating to an increase in that block of business and a decrease of $1.5 million relating to certain reinsurance attributable to protection products. This was partially offset by decreases in UL and CSVUL fees of $5.2 million and $5.1 million, respectively. The decrease in UL fees was due to lower COI charges attributable to the overall decline in UL business, and the decrease in CSVUL fees was primarily due to lower renewal premiums.
Net realized losses were $153.0 million for 2002, an increase of $140.7 million from losses of $12.3 million reported for 2001. The increase in realized losses primarily consisted 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 Note 18 to the Consolidated Financial Statements.
Group Pension Profits (which ceased as of December 31, 2002 - see Note 13 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 run-off of the group pension in force business transferred by the Company pursuant to the Group Pension Transaction.
Retail brokerage and investment banking revenues were $397.1 million for the year ended December 31, 2002, an increase of $46.3 million, or 13.2%, compared to $350.8 million reported for 2001 to increased revenues from Advest, MSC, and Matrix. Advest had revenues of $348.3 million for 2002 compared to $304.1 million reported for 2001, an increase of $44.2 million, or 14.6%. The increase was primarily due to an additional month of revenue in 2002 (Advest was acquired by the Company on January 31, 2001), partially offset by a decrease in interest revenue due to the outsourcing of Advest’s clearing operations. Advest’s results for the year ended December 31, 2002 also include $21.6 million in revenue from Lebenthal, which was acquired by Advest in November, 2001 and merged into Advest, Inc. in early 2002, and Babson-United which was acquired by Advest on May 31, 2002. Revenues from MSC, a registered securities broker-dealer for the MONY Group’s career network, increased to $44.8 million from $43.6 million in the comparable prior year due to higher commission fee income. Matrix revenues increased to $4.0 million from $3.1 million in the prior year due to higher mergers and acquisition related fees.
The decrease in the Accumulation Products segment was due primarily to an $11.1 million decrease in commission revenue earned by Enterprise and a $1.4 million decrease in the change in the cash surrender value
Benefits to policyholders were $803.1 million for 2002, a decrease of $11.6 million, or 1.4%, from $814.7 million reported for 2001. The decrease consisted primarily of lower benefits of $24.8 million in the Protection Products segment offset by higher benefits in the Accumulation Products segment, Other Products segment and reconciling amounts of $7.8 million, $1.0 million and $4.4 million, respectively. The decrease of $24.8 million in the Protection Products segment was due primarily to lower benefits of $35.3 million and $2.7 million on individual life and VUL business, respectively, partially offset by an increase in benefits related to UL business of $13.3 million. The decrease in individual life was due to lower death benefits, surrenders, and reserves, primarily in the Closed Block, as a result of better mortality and improved persistency, while the decrease in VUL was primarily attributable to lower death benefits, net of reinsurance. The increase in UL business was primarily attributable to poor mortality. The increase in the Accumulation Products segment was primarily due to higher supplementary contract and individual annuity reserves of $1.2 million and $5.1 million, respectively, coupled with higher benefit reserves of $0.8 million on the Company’s FPVA products line as compared to the prior year. The increased reserves are attributable to higher sales of accumulation products and higher provisions for guaranteed minimum death benefits on the Company’s FPVA products line due to unfavorable market conditions and the decline in assets under management. The increase in reconciling amounts is due to higher costs attributable to the Company’s employee benefit plans.
Amortization of DPAC 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 of $3.5 million due to unfavorable mortality and the 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 related to reorganization and other charges recorded during the fourth quarter of 2001 (see Note 26 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 was due to higher amortization in the FPVA product caused by an acceleration of amortization, which was attributable to a decline in variable annuity assets under management and lower expected future profit margins.
Due to a reduction in the dividend scale effective January 1, 2002, policyholder dividends payable during the year ended December 31, 2002 were $202.6 million, a decrease of $12.8 million, or 5.9%, from $215.4 million reported in the comparable prior year period. The dividend scale reduction reflects lower forecasted ultimate profitability of the Closed Block due primarily to declines in the interest rate environment for fixed income assets. Determination of dividends paid to policyholders in the Closed Block is based on a forecast of the ultimate profitability of the Closed Block over its remaining expected life. The purpose of reducing or increasing dividends to policyholders in the Closed Block is to attempt to align the payment of such dividends to the emergence of expected profits from the Closed Block (see Note 3 to the Consolidated Financial Statements).
Other operating costs and expenses were $860.0 million for 2002, a decrease of $16.4 million, or 1.9%, from $876.4 million for 2001. The decrease was primarily attributable to decreases in the Protection Products segment, Accumulation Products segment, 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 were 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 was 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 (see Note 25 to the Consolidated Financial Statements). The decrease in reconciling amounts related primarily to a decrease in reorganization charges of $26.5 million (see Note 26 to the Consolidated Financial Statements) and miscellaneous expenses of $5.5 million, partially offset by an increase in interest expense of $13.2 million. The increased interest expense related primarily to the issuance of the Insured Notes on April 30, 2002 (see Notes 21 and 22 to the Consolidated Financial Statements).
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 operations of the Closed Block for the periods indicated.
No new policies have been added to the Closed Block subsequent to MONY Life’s demutualization. Therefore, the Company expects the revenues and benefits related to the Closed Block to decrease over time as the in-force business declines. This is consistent with the “glide path earnings” established in connection with MONY Life’s plan of demutualization.
Benefits to policyholders were $562.6 million for the year ended December 31, 2003, a decrease of $4.2 million, or 0.7%, from $566.8 million reported in the comparable prior year. The decrease resulted primarily from: (i) a $21.8 million decrease in surrenders (surrenders were $323.4 million and $345.2 million for the years ended December 31, 2003 and 2002, respectively), and (ii) a $0.6 million decrease in annuity benefits, disability benefits and mature endowments, offset by (iii) higher death benefits of $17.8 million (death benefits were $190.9 million and $173.1 million for the years ended December 31, 2003 and 2002, respectively), and (iv) an increase in change in reserves of $0.4 million (the change in reserves was $38.5 million and $38.1 million for the years ended December 31, 2003 and 2002, respectively)
As required under GAAP, actual Closed Block earnings in excess of expected Closed Block earnings inure solely to the benefit of policyholders in the Closed Block and, accordingly, are recorded as an additional liability to Closed Block policyholders, referred to as the deferred dividend liability. Expected Closed Block earnings were forecasted for each year over the estimated life of the policies in the Closed Block in order to determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for payment of policyholder liabilities and dividends in the Closed Block in connection with the demutualization of MONY Life as more fully discussed in Note 3 to the Consolidated Financial Statements. Due to the recognition of realized losses from “other than temporary impairment” charges on invested assets during the fourth quarter of 2002, the actual experience of the Closed Block earnings was less than expected in the prior year. See “Closed Block - Year ended December 31, 2002 compared to Year Ended December 31, 2001-Net Investment Income and Net Realized Gains/(Losses)”. The deferred dividend liability was $65.7 million at December 31, 2003 an increase of $32.5 million from $33.2 million at December 31, 2002.
Closed Block - Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net realized losses were $51.4 million for the year ended December 31, 2002, a decrease of $57.4 million, from gains of $6.0 million reported for the corresponding prior year. The following table sets forth the components of net realized gains/(losses) by investment category for the years ended December 31, 2002 and 2001.
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 resulted primarily from: (i) lower death benefits of $14.7 million compared to the prior year as a result of improved 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 compared to the prior year as a result of
Other income was $2.2 million for the year ended December 31, 2002, a decrease of $0.2 million from $2.4 million reported in the prior year due to lower loan modification fees.
Interest credited to policyholders’ account balances was $8.6 million for the year ended December 31, 2002 a decrease of $0.3 million from $8.9 million reported in the prior year. The decrease in interest crediting was primarily due to a decrease in interest crediting on overdue policy claims.
Amortization of DPAC was $49.1 million for the year ended December 31, 2002, a decrease of $10.3 million, compared to $59.4 million reported in the prior year. The $10.3 million decrease in amortization was due principally to the run-off of this block of business and the implementation of SOP 00-3 in 2001 See “Dividends to policyholders” below for an explanation of the deferred dividend liability.
Dividends to policyholders were $185.5 million for the year ended December 31, 2002, a decrease of $47.6 million compared to $233.1 million reported in the prior year. Dividends to policyholders can be broken down into two components, namely policyholder dividends payable in the current year and the change in the deferred dividend liability. The decrease in dividends to policyholders was due to a year over year decrease of $35.8 million in the deferred dividend liability and a year over year decrease of $11.8 million in dividends paid to policyholders.
As required under GAAP, actual Closed Block earnings in excess of expected Closed Block earnings inure solely to the benefit of policyholders in the Closed Block and, accordingly, are recorded as an additional liability to Closed Block policyholders. Expected Closed Block earnings were forecasted for each year over the estimated life of the policies in the Closed Block in order to determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for payment of policyholder liabilities and dividends in the Closed Block, as well as certain expenses, as more fully discussed in Note 3 to the Consolidated Financial Statements. The expected emergence of earnings from such cash flows is referred to as the “glide path earnings.” The aforementioned additional liability (which represents the actual Closed Block earnings in excess of expected Closed Block glide path earnings) is referred to as the deferred dividend liability. Due to the recognition of realized losses from “other than temporary impairment” charges on invested assets during the fourth quarter of 2002, the actual experience of the Closed Block earnings was less than expected. See “- Net Investment Income and Net Realized Gains/(Losses)” above. The deferred dividend liability was $33.2 million at December 31, 2002.
The table below and the discussion that follows present certain information with respect to the Company’s sales of protection, accumulation, and retail brokerage and investment banking products and services during the years ended December 31, 2003, 2002 and 2001 by source of distribution. Management uses this information to measure the Company’s sales production from period to period by source of distribution. The amounts presented with respect to life insurance sales represent annualized statutory-basis premiums. Annualized premiums in the Protection Products segment represent the total premium scheduled to be collected on a policy or contract over a twelve-month period. Pursuant to the terms of certain of the policies and contracts issued by the Company, premiums and deposits may be paid or deposited on a monthly, quarterly, or semi-annual basis. Annualized premium does not apply to single premium paying business. All premiums received during the periods presented on COLI and BOLI business and single premium paying policies are included. Statutory basis premiums are used in lieu of GAAP basis premiums because, in accordance with statutory accounting practices, revenues from all classes of long-duration contracts are measured on the same basis, whereas GAAP provides different revenue recognition rules for different classes of long-duration contracts as defined by the requirements of SFAS No. 60, Accounting and Reporting by Insurance Enterprises, SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments, and SOP 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises. The amounts presented with respect to annuity and mutual fund sales represent deposits made by customers during the periods presented. The amounts presented with respect to the Retail Brokerage and Investment Banking segment represent fees earned by Advest, Matrix Private Equity, Inc. and Matrix Capital Markets, Inc. (together “Matrix”) and MSC primarily from securities brokerage, investment banking and asset management services.
The information presented should not be viewed as a substitute for revenues determined in accordance with GAAP. Revenues in accordance with GAAP related to product sales are generated from both current and prior period sales that are in-force during the reporting period. For protection products, GAAP recognizes premium revenue when due from a policyholder. For accumulation products, GAAP revenues are a function of fee based charges applied to a contract holder’s account balance. Because of how revenues are recognized in accordance with GAAP, management does not believe GAAP revenues are meaningful in assessing the periodic sales production of a life insurance company and, accordingly, a reconciliation to GAAP revenues would not be meaningful.
USFL sales were $55.8 million for the year ended December 31, 2002, compared to $49.0 million during the comparable 2001 period due to increased penetration of the brokerage market into more states.
Accumulation sales were $1,781.0 million for the year ended December 31, 2002 compared to $1,714.0 million in the comparable prior year. Enterprise had sales of $1,238.0 million, $1,007.0 million of which were sold through third-party broker-dealers and $231.0 million of which were sold through the Company’s career network. For the year ended December 31, 2001, Enterprise sales were $1,321.0 million, $962.0 million of which were from third-party broker dealers and $359.0 million of which were sold through the Company’s career network. Due to a decline in the equity markets and a 15.0% decline in the Dow Jones Industrial average during 2002, accumulation assets under management decreased 14.4% to $7.7 billion as of December 31, 2002 from $9.0 billion as of December 31, 2001.
MONY Group’s cash inflows principally consist of investment income from its invested assets (including principal and interest payments on the inter-company surplus notes of MONY Life (see Note 16 to the Consolidated Financial Statements), principal and interest payments on the 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. As of December 31, 2003, MONY Group and MONY Holdings had cash and cash equivalents (including all commercial paper and U.S. Treasury investments) aggregating approximately $235.0 million. The cash and cash equivalents balance at December 31, 2003 includes proceeds received by MONY Group of approximately $52.4 million from the purchase of MONY Group common stock by AXA Financial pursuant to the exercise of warrants (see Note 2 to the Consolidated Financial Statements) and proceeds of approximately $9.8 million from the exercise of options by employees and career financial professionals (see Note 23 to the Consolidated Financial Statements).
billion in the aggregate for all issuances of securities thereunder. Through December 31, 2003 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, 2003.
Company’s products, its expectations concerning customer behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates. See “- Investments - General.”
The events most likely to cause an adjustment in the Company’s investment policies are: (i) a significant change in its product mix, (ii) a significant change in the outlook for either the economy in general or for interest rates in particular and (iii) a significant reevaluation of the prospective risks and returns of various asset classes. See “- Investments - General.”
(1) Excludes approximately $33.2 million, $71.0 million and $208.0 million in 2003, 2002 and 2001, respectively, relating to surrenders associated with an exchange program offered by MONY Life wherein contract holders surrendered old FPVA contracts and reinvested the proceeds in a new enhanced FPVA product offered by MONY Life.
The following table provides a summary of the Company’s material contractual obligations as of December 31, 2003, other than those arising from its ordinary product activities and from its pension obligations. See Note 11 to the Consolidated Financial Statements for details of the Company’s pension plans and other postretirement benefits.
(1) Included in long-term debt are amounts owed at December 31, 2003 on the Company’s Senior Notes, Surplus Notes and Insured Notes, as well as its credit facility. These borrowings are further explained in Notes 16 and 18 to the Consolidated Financial Statements. The table assumes that the long-term debt is held to maturity.
(3) See Note 18 to the Consolidated Financial Statements for further details on the Company’s operating leases.
The following discussion and analysis includes the Debt Service Coverage Account sub-account OB and sub-account CBB (See Note 21 to the Consolidated Financial Statements). This discussion should be read in conjunction with the summary financial information regarding Closed Block assets in Note 20 to the Consolidated Financial Statements.
Separate account assets, for which the Company does not generally bear investment risk, are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with 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. Separate account assets are reported at estimated fair value. Investment income and gains or losses on the investments of separate accounts accrue directly to contract holders and, accordingly, are not reflected in the Company’s consolidated statements of income and comprehensive income and cash flows. Fees charged to the separate accounts by the Company (including mortality charges, policy administration fees and surrender charges) are reflected in the Company’s revenues.
The following discussion and tables analyze the major categories of general account invested assets. This discussion excludes trading account securities of Advest and securities pledged as collateral.
The following table illustrates the net investment income yields based on average annual asset carrying values, excluding unrealized gains and losses in the fixed maturity asset category. 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 fees.
(1) For the years ended December 31, 2003 and 2002, income from real estate to be disposed of is classified as part of Discontinued Operations on the Company’s consolidated statement of income and comprehensive income.
Fixed maturity securities consist of publicly traded and privately placed debt securities, and redeemable preferred stock which represented 68.0% and 66.3% of total invested assets excluding trading securities in Advest at December 31, 2003 and 2002, respectively.
The following table presents the Company’s fixed maturity securities by NAIC Designation and the equivalent ratings of the NRSRO as of December 31, 2003 and 2002, as well as the percentage, based on fair value, that each designation comprises.
At December 31, 2003, the percentage, based on estimated fair value, of total public fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 95.1% compared to 94.0% at December 31, 2002. At December 31, 2003, the percentage, based on estimated fair value, of total private placement fixed maturity securities that were investment grade (NAIC Designation 1 or 2) was 81.9% compared to 80.9% at December 31, 2002.
The Company has a well-diversified portfolio of fixed maturity securities. The portfolio at December 31, 2003 included 19.9% in consumer goods and services, 16.5% in government and government agency, 12.0% in asset and mortgage backed securities, 8.7% in other manufacturing, and the remaining 42.9% in other sectors none of which exceeded 10.0% of the total fixed maturity securities portfolio. At December 31, 2002, the portfolio 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.
(1) Amounts in 2003 and 2002 include fixed maturity securities of $58.3 million and $58.3 million, respectively, at amortized cost and $61.1 million and $61.8 million, respectively, at estimated fair value included in the DSCA sub-account OB.
CMOs are purchased to diversify the portfolio risk characteristics from primarily corporate credit risk to a mix of credit and cash flow risk. The majority of the CMOs in the Company’s investment portfolio have relatively low cash flow variability. In addition, approximately 42.3% of the CMOs in the portfolio have low credit risk because the underlying collateral is backed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. These CMOs offer greater liquidity and higher yields than corporate debt securities of similar credit quality and expected average lives.
Asset-backed securities (“ABS”) are purchased both to diversify the overall credit risks of the fixed maturity security portfolio and to provide attractive returns. The ABS portfolio is diversified both by type of asset and by issuer. The largest asset class exposure in the ABS portfolio is to credit card receivables, representing 28.2% and 26.3% of the total at December 31, 2003 and 2002, respectively. These are comprised of pools of both general purpose credit card receivables such as Visa and MasterCard and private label credit card receivable pools. Other
significant asset class exposures in the ABS portfolio as of December 31, 2003 and 2002 included public utilities’ rate reduction receivables (11.6% and 11.1%, respectively) and manufactured housing receivables (11.3% and 11.0%, respectively). No other asset class exposures exceeded 9.9% of the total ABS portfolio as at December 31, 2003 and 2002. Excluding the exposure to home equity loans (which represented 8.8% and 9.4% of the ABS portfolio as of December 31, 2003 and 2002, respectively), the ABS portfolio is generally insensitive to changes in interest rates.
Mortgage loans, consisting of commercial, agricultural and residential loans, comprised 14.1% and 15.6% of total invested assets at December 31, 2003 and 2002, respectively. As of December 31, 2003 and 2002, commercial mortgage loans comprised $1,434.7 million and $1,570.5 million, or 80.5% and 83.7%, of total mortgage loan investments, respectively. Agricultural loans comprised $347.4 million and $306.2 million, or 19.5% and 16.3%, of total mortgage loans, and residential mortgages comprised $0.3 million and $0.7 million of total mortgage loan investments at the dates indicated.
The underlying properties supporting the commercial mortgage loans at December 31, 2003 and 2002, respectively, consisted of 57.2% and 56.0% in office buildings, 8.9% and 8.6% in hotels, 11.4% and 12.0% in industrial buildings, and 22.5% and 23.4% in other categories, none of which exceeded 10.0% of total commercial mortgage loans.
The Company’s commercial mortgage loan portfolio is geographically diversified throughout the United States. At December 31, 2003 and 2002, the highest concentration was in the southeast region, comprising 27.4% and 25.8% respectively, of the total.
Of the $142.3 million, $102.9 million and $118.0 million in maturing loans during the years ended December 31, 2003, 2002 and 2001, no loans were refinanced or restructured, 79.7%, 71.5% and 65.3%, respectively, were paid off, and 0.0%, 10.7% and 6.0%, respectively, were foreclosed. Of the $1,434.7 million of outstanding commercial mortgage loans in the Company’s investment portfolio at December 31, 2003, $187.4 million, $74.1 million and $202.3 million are scheduled to mature in 2004, 2005, and 2006, respectively.
The carrying value of commercial mortgage loans at December 31, 2003 was $1,434.7 million, which is net of valuation allowances aggregating $19.9 million, representing management’s best estimate of cumulative impairments at such date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any such increases may have a material adverse effect on the Company’s financial position and results of operations.
The Company had no problem commercial mortgages as of December 31, 2003 and 2002.
As of December 31, 2003 the carrying value of potential problem commercial mortgages aggregated $18.1 million, net of $0.7 million in valuation allowances, and restructured loans aggregated $5.7 million, net of $2.1 million in valuation allowances.
At December 31, 2003 and 2002, respectively, the underlying properties supporting potential problem commercial mortgages consisted of 51.2% and 73.5% in office properties and 48.8% and 26.5% in an industrial property and an office warehouse property. At December 31, 2003 and 2002, the underlying properties supporting restructured commercial mortgage loans consisted entirely of office properties. The potential problem and restructured commercial mortgages at December 31, 2003 and 2002 were primarily concentrated in New York, Ohio and Texas.
Gross interest income on restructured commercial mortgage loan balances that would have been recorded in accordance with the loans’ original terms was approximately $0.7 million, $3.1 million and $6.4 million at December 31, 2003, 2002 and 2001, respectively. As a result of the restructuring, the gross interest income recognized in net income at December 31, 2003, 2002 and 2001, respectively, was $0.5 million, $0.6 million and $3.6 million.
The carrying value of the Company’s agricultural mortgage loans was $347.4 million and $306.2 million at December 31, 2003 and 2002, respectively, representing 19.5% and 16.3% of total mortgage loan assets and 2.7% and 2.5% 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 2.7% of total agricultural loans outstanding at December 31, 2003 and 2002, respectively, were delinquent or in process of foreclosure. The geographical diversification of agricultural mortgage loans at December 31, 2003 and 2002, respectively, comprised 11.9% and 13.3% in Washington, 15.8% and 16.2% in California, 9.1% and 10.6% in Idaho, 8.1% and 9.0% in Oregon and 8.5% and 8.9% in Texas. No other state had a concentration of more than 7.0%.
The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. Total problem, potential problem and restructured agricultural mortgages as of December 31, 2003 and 2002 were $17.4 million and $17.3 million, respectively.
At December 31, 2003 and 2002, the industry sectors underlying the investments in equity limited partnerships comprised 49.7% and 52.5% in information technology, 22.0% and 26.9% in domestic and international leveraged buyouts (“LBO”), and 28.3% and 20.6% in other industry sectors, none of which exceeded 9.3% of total equity limited partnerships, respectively.
The following table sets forth the carrying value of the Company’s investments in limited partnership interests sorted by the basis upon which the Company accounts for such investments (see Note 4 to the Consolidated Financial Statements), as well as the amount of such investments attributable to the partnerships’ ownership of public and private common stock at December 31, 2003 and 2002:
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 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” or “trading”. 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 SEC or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations system (“NASDAQ”). Fair value for private securities is generally determined by discounting their prospective cash flows at a discount rate. The discount rate for each issue is the sum of two rates. The first component is the yield to maturity of a U.S. 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, 2003, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $5,542.4 million and $3,061.2 million, respectively, and the carrying value of the Company’s common stock portfolio was $79.7 million. At December 31, 2002, the carrying values of the public and private fixed maturity securities comprising the Company’s fixed maturity security portfolio were $4,798.1 million and $3,173.1 million, respectively, and the carrying value of the Company’s common stock portfolio was $62.8 million.
In determining that the securities giving rise to the aforementioned unrealized losses were not “other than temporarily impaired,” the Company evaluated the factors cited above, which it considers when assessing whether a security is “other than temporarily impaired.” In making these evaluations, the Company must exercise considerable judgment. Accordingly, there can be no assurance that actual results will not differ from the Company’s judgments and that such differences may require the future recognition of “other than temporary impairment charges” that could have a material affect on its financial position and results of operations. In addition, the value of, and the realization of any loss on, a fixed maturity security or common stock is subject to numerous risks, including interest rate risk, market risk, credit risk and liquidity risk. The magnitude of any loss incurred by the Company may be affected by the relative concentration of its investments in any one issuer or industry. The Company has established specific policies limiting the concentration of its investments in any single issuer and industry and believes its investment portfolio is prudently diversified. At December 31, 2003
and 2002, no single issuer constituted more than $1.8 million and $5.0 million of the Company’s gross unrealized losses, respectively. See “- Investments - Fixed Maturity Securities - Total Fixed Maturities by Credit Quality” for information regarding the ratings by NRSROs of securities comprising the Company’s fixed maturity security portfolio. Also, see “- Investments - Fixed Maturity Securities - Total Fixed Maturities by Credit Quality” for information concerning the industry concentration of the Company’s fixed maturity securities.
As indicated in the above tables, there were 19 investment grade fixed maturity security positions that have been in an unrealized loss position for more than 12 months as of December 31, 2003. The aggregate gross pre-tax unrealized loss relating to these positions was $2.6 million ($1.7 million after-tax) as of such date. Of these positions: (i) eight comprising approximately $1.8 million ($1.2 million after-tax) of the aforementioned aggregate unrealized loss, were not considered “other than temporarily impaired” principally
unrealized loss, were not considered “other than temporarily impaired” principally because of the issuer’s financial strength as indicated by the fact that all such securities were rated “A” or better, (ii) eight comprising approximately $2.4 million ($1.6 million after-tax) of the aforementioned unrealized loss were not considered “other than temporarily impaired” because management is of the opinion that the unrealized loss position was primarily attributable to temporary market conditions affecting the related industry sectors, as well as the fact that management’s analysis of the issuer’s financial strength supported the conclusion that the security was not “other than temporarily impaired,” and (iii) three positions with negligible unrealized losses were U.S. Government securities.
The following table presents certain information by type of investments with respect to the Company’s gross unrealized losses on common stock investments at December 31, 2002 including the number of individual security positions comprising such unrealized losses, the aggregate carrying value and market value of such positions, the amount of such unrealized losses and information as to the amount of time securities have been in an unrealized loss position.
The following tables present certain information by type of investment with respect to securities sold which resulted in a loss for the years ended December 31, 2003 and 2002, including: (i) the number of positions sold that comprise the aggregate gross realized loss for the period; (ii) the aggregate fair value of such securities at the date of their sale; (iii) the aggregate carrying value of such securities at the date of sale; (iv) the aggregate gross amount of the realized loss recorded from the sale of such securities during the period; and (v) the gross realized losses reported for each period sorted in descending order by percentage of sales price to carrying value at date of sale. The following tables exclude amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer.
With respect to fixed maturity securities sold which resulted in a loss for the years ended December 31, 2003 and 2002, the following table presents certain information as to the amount of time such securities have been in an unrealized loss position. The information in this table is sorted by % of sales price to carrying value.
All sales of common stocks at losses during 2003 and 2002 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, 2003 and 2002. Based on management’s analysis of the factors discussed herein management concluded that all other common stock positions during the aforementioned periods were not “other than temporarily impaired.”
The carrying value of real estate held for investment is generally adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such impairment adjustments are recorded in realized losses and, accordingly, are reflected in the Company’s results of operations. These properties have cumulative impairments of $27.4 million.
Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2003, 2002 and 2001
Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001
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 Insurance Company, (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, 2003, Retail distribution accounted for approximately 17.6% and 42.6% of sales of protection and accumulation products, respectively, and 100.0% of retail brokerage and investment banking revenues, while Wholesale distribution accounted for 82.4% and 57.4% 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 products and services to more than one million individuals.
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 21). On April 30, 2002, MONY Holdings commenced its operations and, 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. In addition, 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.
MONY Group is a holding company and is a legal entity separate and distinct from its subsidiaries. The rights of MONY Group to participate in any distribution of assets of any subsidiary, including upon its liquidation or reorganization, are subject to the prior claims of creditors of that subsidiary, except to the extent that MONY Group may itself be a creditor of that subsidiary and its claims are recognized. MONY Holdings and its subsidiary have entered into covenants and arrangements with third parties in connection with the issuance of the Insured Notes which are intended to conform their separate, “bankruptcy-remote” status, by assuring that the assets of MONY Holdings and its subsidiary are not available to creditors of MONY Group or its other subsidiaries, except and to the extent that MONY Group and its other subsidiaries are, as shareholders or creditors of MONY Holdings and its subsidiary, or would be, entitled to those assets.
The MONY Group incurred merger related expenses totaling $9.6 million for the year ended December 31, 2003 in connection with its pending merger with AXA Financial. These expenses are reflected under the caption “other operating costs and expenses” in the Company’s statement of income and comprehensive income.
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 assets and the Closed Block in force business subsequent to the effective date of MONY Life’s demutualization, except in the event that the actual experience of the Closed Block assets and the Closed Block in force business subsequent to the effective date of the demutualization is not sufficient to pay the guaranteed benefits on the policies in the Closed Block, in which case MONY Life will be required to fund any such deficiency from its general account assets outside of the Closed Block.
Real estate investments meeting the following criteria are classified as “real estate to be disposed of” in the Company’s consolidated statement of financial position and the results therefrom are reported as “discontinued operations” in the Company’s consolidated statement of income and comprehensive income as a result of the Company’s adoption in 2002 of the Financial Accounting Standard Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”):
• 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
• The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year
Real estate to be disposed of is carried at the lower of its carrying value at the time of classification as “to be disposed of” or fair value less estimated selling costs.
Receivables from and payables to brokerage customers arise from cash and margin transactions executed by the Company on customers’ behalf. In virtually all instances, receivables are collateralized by securities with market values in excess of the amounts due. The collateral is not reflected in the accompanying financial
Pursuant to the terms of the agreement between Advest and the clearing broker, the clearing broker has the right to charge Advest for losses that result from a counterparty’s failure to fulfill its contractual obligations. As the right to charge Advest has no maximum amount and applies to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2003, Advest has recorded no liabilities with regard to the right. In addition, Advest has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. Advest monitors the credit standing of the clearing broker and all counterparties with which it conducts business.
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.
The Company conducts programs from time-to-time that allow annuity contract holders to exchange older annuity contracts for new annuity products sold at no cost. The Company has determined that the old and new products are substantially similar and, as such, the Company retains previously recorded DPAC related to the exchanged contract.
At December 31, 2003 and 2002, participating business, substantially all of which is in the Closed Block, represented approximately 28.7% and 34.0% of the Company’s life insurance in force, and 70.2% and 73.7% of the number of life insurance policies in force, respectively. For each of the years ended December 31, 2003, 2002, and 2001 participating business represented approximately 79.0%, 82.5%, and 83.5%, respectively, of life insurance premiums.
In determining whether a reinsurance contract qualifies for reinsurance accounting, SFAS No. 113 “Accounting and reporting for reinsurance of short-duration and long-duration contracts” requires that there be a “reasonable possibility” that the reinsurer may realize a “significant loss” from assuming insurance risk under the contract. In making this assessment, the Company projects the results of the policies reinsured under the contract under various scenarios and assesses the probability of such results actually occurring. The projected results represent the present value of all the cash flows under the reinsurance contract. The Company generally defines a “reasonable possibility” as having a probability of at least 10%. In assessing whether the projected results of the reinsured business constitute a “significant loss”, the Company considers: (i) the ratio of the aggregate projected loss, discounted at an appropriate rate of interest (the “aggregate projected loss”), to an estimate of the reinsurer’s investment in the contract, as hereafter defined, and (ii) the ratio of the aggregate projected loss to an estimate of the total premiums to be received by the reinsurer under the contract discounted at an appropriate rate of interest.
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 years ended December 31, 2002 and 2001, respectively, because to do so would be antidilutive.
On January 1, 2001 the Company adopted SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125 (“SFAS 140”). SFAS 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial assets and collateral, recognition and measurement of servicing assets and liabilities, and the extinguishment of liabilities. Adoption of the new requirements did not have a material effect on the Company’s results of operations or financial position.
On January 1, 2002 the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 provides that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. This Statement provides specific guidance for testing the impairment of goodwill and intangible assets. As a result of adopting this standard, the Company no longer recognizes goodwill amortization of approximately $12 million on an annualized basis. In addition, based on the Company’s estimate of its reporting unit, the Company determined in 2003 that a $4.0 million
On January 1, 2002 the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). This statement establishes a single accounting model for the impairment or disposal of long-lived assets, including assets to be held and used, assets to be disposed of by other than sale, and assets to be disposed of by sale. SFAS 144 retains many of the same provisions as SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS 121”). In addition to retaining the SFAS 121 requirements, SFAS 144 requires companies to present the results of operations of components of the entity that are held for sale as discontinued operations in the consolidated statement of income and comprehensive income. The Company had real estate that meets the definition of a component of the entity. Substantially all of the Company’s real estate to be disposed of resulted from disposal activities initiated prior to the effective date of SFAS 144. The carrying value of real estate to be disposed of at December 31, 2003 and 2002 was $0.0 million and $26.8 million, respectively. The Company’s pretax income (loss) from real estate to be disposed of for the years ended December 31, 2003 and 2002, which is reported in the Company’s consolidated statement of income and comprehensive income as a discontinued operation, was $9.0 million and $(3.9) million, respectively.
financial position. Further, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS 150 affects an entity’s classification of the following free-standing instruments: (i) mandatory redeemable instruments, (ii) financial instruments to repurchase an entity’s own equity instruments, and (iii) financial instruments embodying obligations that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on (a) a fixed monetary amount known at inception or (b) something other than changes in its own equity instruments. SFAS 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The guidance in SFAS 150 was generally effective for all financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s results of operations and financial position.
New Accounting Pronouncements Not Yet Adopted as of December 31, 2003
assets from the general account, (iv) liability valuation, (v) return based on a contractually referenced pool of assets or index, (vi) determining the significance of mortality and morbidity risk and classification of contracts that contain death or other insurance benefit features, (vii) accounting for contracts that contain death or other insurance benefit features, (viii) accounting for reinsurance and other similar contracts, (ix) accounting for annuitization benefits, (x) sales inducements to contract holders, and (xi) disclosures in the financial statements of an insurance enterprise regarding (a) separate account assets and liabilities, (b) the insurance enterprise’s accounting policy for sales inducements, and (c) the nature of the liabilities and methods and assumptions used in estimating any contract benefits recognized in excess of the account balance. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. The adoption of SOP 03-1 would have resulted in an additional liability for Guaranteed Minimum Death Benefits of approximately $0.8 million at December 31, 2003. This increase in reserves would have been partially offset by a decrease in DPAC amortization due to lower profit margins as a result of the increased reserves. The adoption of SOP 03-1 is not expected to have any other material impact on the Company’s results of operations and financial position.
(1) Amounts in 2003 and 2002 include $(0.7) million and $3.5 million, respectively, of changes in unrealized gains/(losses) related to fixed maturity securities which are on deposit in the DSCA sub-account CBB-see Note 21.
The following table sets forth the reclassification adjustments required for the years ended December 31, 2003, 2002, and 2001 to avoid double-counting in comprehensive income items that are included as part of net income for a period that also had been part of other comprehensive income in earlier periods:
Unrealized gains/(losses) on investments, excluding net unrealized gains/(losses) on assets allocated to the Closed Block, reported in the above table for the years ended December 31, 2003, 2002 and 2001 are net of income tax expense (benefit) of $(22.1) million, $106.6 million and $43.2 million, respectively, and $(8.8) million, $(71.7) million, and $(32.1) million, respectively, relating to the effect of such unrealized gains (losses) on DPAC.
The following table presents the amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturity securities, including the DSCA sub-account OB (see Note 21) and amounts relating to certain invested assets held pursuant to a reinsurance arrangement whereby all the experience from such assets is passed to the reinsurer, as of December 31, 2003 and 2002.
The Company classifies fixed maturity securities available-for-sale which: (i) are in default as to principal or interest payments, (ii) are to be restructured pursuant to commenced negotiations, (iii) went into bankruptcy subsequent to acquisition, or (iv) are deemed to have “other than temporary impairments” to value as “problem fixed maturity securities.” At December 31, 2003 and 2002, the carrying value of problem fixed maturity securities held by the Company was $240.4 million and $274.7 million, respectively. The Company defines potential problem securities in the fixed maturity category as securities that are deemed to be experiencing significant operating problems or difficult industry conditions. At December 31, 2003 and 2002, the carrying value of potential problem fixed maturity securities held by the Company was $4.9 million and $8.5 million, respectively. In addition, at December 31, 2003 and 2002, the Company had no fixed maturity securities which had been restructured.
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates (excluding scheduled sinking funds) as of December 31, 2003, are as follows:
(1) Amounts in 2003 and 2002 include fixed maturity securities of $58.3 million and $58.3 million, respectively, at amortized cost and $61.1 million and $61.8 million, respectively, at estimated fair value included in the DSCA sub-account OB (see Note 21).
The cost, gross unrealized gains and losses, and estimated fair value of marketable and non-marketable equity securities at December 31, 2003 and 2002 are as follows:
Proceeds from sales of equity securities during 2003, 2002 and 2001 were $16.9 million, $16.5 million and $31.0 million, respectively. Gross gains of $5.4 million, $2.7 million and $3.1 million and gross losses of $0.5 million, $2.8 million and $9.5 million were realized on these sales during 2003, 2002, and 2001, respectively.
The Company’s average fair value of futures contracts during the years ended December 31, 2003 and 2002 was $15.0 million and $14.4 million, respectively. At December 31, 2003 and 2002 the market value of open positions was $3.9 million and $15.8 million, respectively.
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, 2003, and the Company will incur a loss if the market value of the securities or futures increases.
At December 31, 2003 and 2002, the carrying value of mortgage loans which were non-income producing for the twelve months preceding such dates was $0.0 million and $13.8 million, respectively. Interest income that would have been recognized on these mortgage loans was $2.2 million for the year ended December 31, 2002.
At December 31, 2003 and 2002, the Company had restructured mortgage loans of $15.3 million and $29.8 million, respectively. Interest income of $1.3 million, $1.5 million and $4.3 million was recognized on restructured mortgage loans in 2003, 2002, and 2001, respectively. Gross interest income on these loans that would have been recorded in accordance with the original terms of such loans amounted to approximately $1.6 million, $4.0 million and $7.2 million in 2003, 2002 and 2001, 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 13).
Set forth in the table below is certain financial information with respect to the Company’s reportable segments as of and for each of the years ended December 31, 2003, 2002, and 2001, as well as amounts not allocated to the segments. Except for various allocations discussed below, the accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 4). The Company evaluates the performance of each operating segment based on profit or loss from operations before income taxes and nonrecurring items (e.g. items of an unusual or infrequent nature). The Company does not allocate nonrecurring items to the segments. In addition, unless otherwise noted, all segment revenues are from external customers.
(5) Amounts reported as “reconciling” in 2003 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 totaling $5.8 million pre-tax relating to the Company’s reorganization activities (see Note 26) and (v) merger related expenses totaling $9.6 million incurred in connection with MONY Group’s pending merger transaction with AXA Financial (see Note 2).
(7) Amounts reported as “reconciling” in 2001 primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, (ii) revenues and expenses of the MONY Group and (iii) charges totaling $56.8 million pre-tax relating to the Company’s 2001 reorganization activities (see Note 26).
(8) Amounts reported in 2002 include a loss of $3.9 million pre-tax from discontinued operations, of which $3.3 million, $0.4 million, and $0.2 million, has been allocated to the Protection Products, Accumulation Products and Other Products segments, respectively.
(12) Includes retail brokerage and investment banking revenues and other income.
Following is a summary of revenues by product for the years ended December 31, 2003, 2002, and 2001:
On December 8, 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare Part D as well as a Federal subsidy to employers who provide an “actuarial equivalent” prescription drug benefit to employees. The requirements under the Act are not expected to have a material impact on the Company’s results of operations and financial position.
The projected benefit obligation and accumulated benefit obligation for the non-qualified defined benefit pension plan, which is unfunded, were $96.4 million and $89.3 million at December 31, 2003 and $93.3 million and $91.2 million at December 31, 2002, respectively.
(2) For MONY Life, no benefits bearing incentive compensation is assumed for 2003. Otherwise benefits bearing compensation is assumed to increase by 4% for all participants eligible for incentive compensation and by 5% for all others. Benefits bearing incentive compensation for the top four officers is assumed to be 50% of base salary after 2003. For Advest, the rates of future compensation increases for the AE Defined Benefit Plan and the Executive Defined Benefit Plan are 3.0% and 5.0%, respectively, as of September 30, 2003.
MONY Life uses a December 31 measurement date for its pension plans and other postretirement benefits. Advest uses a September 30 measurement date for its pension plans.
• Real estate-The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate, discounted at a rate commensurate with the underlying risks.
The Company also has incentive savings plans in which substantially all employees and career field underwriters of MONY Life are eligible to participate. The Company matches field underwriter contributions up to 2% of eligible compensation and may also make an additional profit sharing contribution for non-officer
employees. As with the employee excess plan, the Company also sponsors non-qualified excess defined contribution plans for both the field underwriter retirement plan and the incentive savings plan for field underwriters of MONY Life. Advest also maintains The Advest Thrift Plan (the “Thrift Plan”) which is a qualified 401(k) plan. All employees who are scheduled to work at least 20 hours per week and are not classified as temporary employees are eligible to participate beginning on the first day of a month following their commencement of employment. However, an employee will be eligible to receive Advest contributions only after having completed one year of service. For the calendar 2003 plan year Advest made a contribution of 100% of participants’ contributions to their Thrift Plan accounts up to 2% of compensation and a direct contribution to participants’ Thrift Plan accounts equal to 1.5% of compensation. Advest’s contribution expense for the years ended December 31, 2003 and 2002 was $4.4 million and $4.0 million, respectively. The Company also sponsors several other 401(k) plans for its smaller subsidiaries which the Company considers immaterial.
Federal income taxes have been calculated in accordance with the provisions of the Internal Revenue Code of 1986, as amended. A summary of the income tax expense/(benefit) for the years ended December 31, 2003, 2002 and 2001 is presented below:
The Company’s federal income tax returns for years through 1993 have been examined by the Internal Revenue Service (“IRS”). No material adjustments were proposed by the IRS as a result of these examinations. In the opinion of management, adequate provision has been made for any additional taxes that may become due pending the outcome of IRS examinations.
On December 31, 1993 (the “Group Pension Transaction Date”), the Company entered into an agreement (the “Agreement”) with AEGON USA, Inc. (“AEGON”) under which the Company transferred a substantial portion of its group pension business (hereafter referred to as the “Group Pension Transaction”), including its full service group pension contracts, consisting primarily of tax-deferred annuity, 401(k) and managed funds lines of business, to AEGON’s wholly-owned subsidiary, AUSA Life Insurance Company, Inc. (“AUSA”). The Company also transferred to AUSA the corporate infrastructure supporting the group pension business, including data processing systems, facilities and regional offices. AUSA was newly formed by AEGON solely for the purpose of facilitating this transaction. In connection with the transaction, the Company and AEGON have entered into certain service agreements. These agreements, among other things, provide that the Company will continue to manage the transferred assets, and that AUSA will continue to provide certain administrative services to the Company’s remaining group pension contracts not included in the transfer.
Operating losses reported in any annual period pursuant to the Earnings Formula were carried forward to reduce any earnings in subsequent years reported pursuant to the Earnings Formula. Any resultant deficit remaining at December 31, 2002 would be deducted from the Final Value Payment and New Business Growth Payment, if any, due to the Company. If a deficit still remained, it would be applied (as provided for in the Agreement) as an offset against the principal payment due to the Company upon maturity of the Series A Notes. As of December 31, 2002, there were no operating losses reported in any annual period during the term of the agreement, nor was the Company eligible for any New Business Growth payment.
For the years ended December 31, 2002 and 2001, AUSA reported earnings to the Company pursuant to the application of the Earnings Formula of $19.1 million and $27.4 million, respectively, and the Company recorded Group Pension Profits of $28.2 million and $30.7 million, respectively. In addition, the Company earned $12.8 million of interest income on the Notes in each of the aforementioned years. In addition, the Company recorded earnings from the Final Value Payment of $54.1 million (before expenses of approximately $6.0 million relating thereto, which are recorded in “other operating costs and expenses” in the consolidated statement of income and comprehensive income), on December 31, 2002.
The following sets forth certain summarized financial information relating to the Group Pension Transaction for the periods indicated, including information regarding the components of revenue and expense comprising the Group Pension Profits. In accordance with GAAP, the Group Pension Transaction did not constitute a sale because the Company retained substantially all the risks and rewards associated with the business transferred to
(2) Includes in 2001 $2.5 million of pretax realized losses ($1.6 million after-tax) relating to the impairment of certain investments which was included in the fourth quarter 2001 Other Charges (see Note 26).
The fair value of mortgage loans is estimated by discounting expected future cash flows, using current interest rates for similar loans to borrowers with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations. The fair value of mortgages in process of foreclosure is the estimated fair value of the underlying collateral. At December 31, 2003 and 2002 the fair value of mortgage loans was $1,926.9 million and $2,065.5 million, respectively.
Life insurance business is primarily reinsured on a yearly renewable term basis under various reinsurance contracts except for the level term product, which is reinsured under a coinsurance agreement. The Company’s general practice is to retain no more than $4.0 million of risk on any one person for individual products and $6.0 million for last survivor products.
The Company’s debt at December 31, 2003 and 2002 consists of the following:
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, 2003. MONY Group’s financing of MONY Life’s repurchase of its 9.5% Notes and 11.25% Notes consisted of a capital contribution by MONY Group to MONY Life of $65.0 million and the purchase by MONY Group from MONY Life of two separate newly issued “inter-company” surplus notes. The inter-company surplus note issued to replace the 9.5% Notes has a par value of $115 million, a coupon rate of interest of 8.65%, and matures on December 31, 2012. The inter-company surplus note issued to replace the 11.25% Notes has a par value of $100 million, a coupon rate of interest of 8.65%, and matures on August 15, 2024. Principal on the inter-company surplus notes is payable at maturity and interest is payable semi-annually.
In December 2003, the Company’s Advest subsidiary made the last outstanding principal payment on a private placement note with three institutional investors. Under the terms of the note, equal principal payments were due on the last day of December through and including December 31, 2003. The note was investment-grade rated and bore interest at the rate of 7.95% per annum payable semiannually on the last day of June and December.
At December 31, 2003 and 2002, the Company had no single investment or series of investments with a single issuer (excluding U.S. Treasury securities and obligations of U.S. government agencies) exceeding 1.0% and 1.2%, respectively, of total cash and invested assets.
The Company’s fixed maturity securities are diversified by industry type. The industries (excluding U.S. Treasury securities and obligations of U.S. government agencies) that comprise 10.0% or more of the carrying value of the fixed maturity securities at December 31, 2003 are Consumer Goods of $1,710.8 million (19.9%) and Government and Agency of $1,424.7 million (16.5%).
The industries (excluding U.S. Treasury securities and obligations of U.S. government agencies) that comprise 10.0% or more of the carrying value of the fixed maturity securities at December 31, 2002 are Consumer Goods of $1,457.6 million (18.3%), Non-Government Asset/Mortgage Backed securities of $1,016.1 million (12.8%), and Other Manufacturing of $848.0 million (10.6%).
The Company has significant investments in commercial and agricultural mortgage loans and real estate (including joint ventures and partnerships). The locations of property collateralizing mortgage loans and real estate investment carrying values at December 31, 2003 and 2002 are as follows:
(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 they engaged in deceptive sales practices in connection with the sale of whole and universal life insurance policies from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (i.e., breach of contract, fraud, negligent misrepresentation, negligent supervision and training, breach of fiduciary duty, unjust enrichment and violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases seek primarily equitable relief (e.g., reformation, specific performance, mandatory injunctive relief prohibiting MONY Life and MLOA from canceling policies for failure to make required premium payments, imposition of a constructive trust and creation of a claims resolution facility to adjudicate any individual issues remaining after resolution of all class-wide issues) as opposed to compensatory damages, although they also seek compensatory damages in unspecified amounts. MONY Life and MLOA have answered the complaints in each action (except for one being voluntarily held in abeyance). MONY Life and MLOA have denied any wrongdoing and have asserted numerous affirmative defenses.
(iii) On February 3, 2004, MONY Group commenced an action in the United States District Court for the Southern District of New York, entitled The MONY Group Inc. v. Highfields Capital Management LP, Longleaf Partners Small-Cap Fund and Southeastern Asset Management, No. 04 Civ. 00916. MONY Group’s complaint alleges, among other things, that: (i) the furnishing by defendants, in solicitation materials sent to MONY Group’s stockholders, of a duplicate copy of MONY Group’s proxy voting card, without first filing a proxy statement and making the requisite disclosures in connection therewith, violates the federal proxy rules; (ii) certain of defendants’ solicitation materials contained false and misleading statements; and (iii) the defendants are acting as members of a “group” under Section 13(d) of the Securities Exchange Act and the rules promulgated thereunder in opposing the proposed merger, requiring the defendants to make certain securities
filings and disclosures regarding their holdings, plans and intentions before engaging in a solicitation of MONY Group’s stockholders.
(iv) MONY Group maintains a syndicated credit facility with banks aggregating $150.0 million. This facility was renewed in July 2003 with a renewal date in July 2004, subject to bank approval. 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. 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, 2003, MONY Group was in compliance with each of the covenants. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 2003 and 2002. The facility was amended at the consummation of the offering of the Insured Notes to permit the offering of the Insured Notes.
In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement with the proceeds received from the sale amortized into income over the life of the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.9 million in 2004, $8.0 million in 2005, $8.2 million in 2006, $8.4 million for 2007 and $8.5 million for 2008. The Company has the option to renew the lease at the end of the lease term.
The carrying value of fixed maturity securities in the Closed Block at December 31, 2003 and 2002 is net of “other than temporary impairment” adjustments of $56.4 million and $60.5 million, respectively.
The amortized cost and estimated fair value of fixed maturity securities in the Closed Block, by contractual maturity dates, excluding scheduled sinking funds, as of December 31, 2003 are as follows:
Mortgage loans on real estate in the Closed Block at December 31, 2003 and 2002 consist of the following:
An analysis of the valuation allowances for the years ended December 31, 2003 and 2002 is as follows:
The Closed Block Business (“CBB”) is comprised of certain amounts within MONY Holdings and MONY Life. Within MONY Holdings, the Closed Block Business includes: (i) the Insured Notes, (ii) the capitalized costs of issuing the Insured Notes, (iii) the DSCA Sub-account CBB (see Note 22), (iv) the Swap, and (v) the Insurance Policy (see Note 1). Within MONY Life, the Closed Block Business includes: (i) the Closed Block discussed in Notes 3 and 20 and (ii) an amount of capital (hereafter referred to as “Surplus and Related Assets”) outside the Closed Block, but within MONY Life, that when aggregated with the assets and liabilities in the Closed Block results in an aggregate carrying value of assets in the Closed Block Business within MONY Life in excess of the carrying value of the liabilities in the CBB within MONY Life. The amount by which the assets in the CBB within MONY Life exceed the liabilities in the CBB within MONY Life represents a sufficient amount of capital based on regulatory standards to support the CBB within MONY Life. All business of MONY
The following tables set forth certain summarized financial information attributable to the OB and the CBB of MONY Holdings and its subsidiary, MONY Life, as of and for the years ended December 31, 2003 and 2002:
(1) Includes: (i) revenues and expenses associated with the DSCA, the Insured Notes, and the Swap (ii) the net contribution to income from the Surplus and Related Assets, and (iii) the results of operations from the Closed Block.
In addition, pursuant to the Note indenture, dividends to MONY Holdings from MONY Life are required to be allocated between the OB and the CBB. This allocation, while principally based on separately applying the NY Dividend Statute to the “policyholders’ surplus” and “net gain from operations” attributable to the OB and the CBB, is subject to certain adjustments described in the Note indenture. The amount of the dividend attributable to the CBB is required to be deposited in the DSCA - Sub-account CBB. As described in the Note indenture, the amount of the dividend deposited in the DSCA - Sub-account CBB will not generally be available for dividend to the MONY Group until all the obligations to pay principal, interest and other amounts on the Insured Notes are fully extinguished. Under limited circumstances, if the fair value of the DSCA exceeds amounts set forth in the Note indenture, such excess can become available earlier for dividend to the MONY Group. The amount of such dividend attributable to the OB will generally be available to MONY Holdings to pay dividends to the MONY Group. See Note 1 for additional information regarding the Insured Notes.
In 2003, MONY Life paid a dividend to MONY Holdings in the amount of $25.0 million, of which $13.8 million was retained by MONY Holdings in its DSCA Sub-account CBB and $11.2 million was paid by MONY Holdings in the form of a dividend to MONY Group.
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, 2003, options to acquire 2,414,138 common shares of the MONY Group had been issued under the 1998 SIP. Options to acquire 1,637,782 common shares remained outstanding as of December 31, 2003.
A summary of the activity under these stock incentive plans for the years ended December 31, 2003, 2002 and 2001 is presented below:
During 2003 there were 1,089,675 options granted with a weighted average exercise price of $21.76 and a weighted average fair value of $7.14.
As of December 31, 2003 there were 1,818,280 options exercisable, with exercise prices ranging from $24.27 to $44.25, and a weighted average remaining contractual life of 6.8 years.
At the effective date of the initial grants of options pursuant to the 1998 SIP, the Company elected to apply the accounting prescribed by APB 25 to option grants to employees and, accordingly, make the required pro forma disclosures of net income and earnings per share as if the fair value accounting prescribed by SFAS 123 had been adopted (see Note 4). Pursuant to the requirements of APB 25, the options granted by the Company under the 1998 SIP and the 2002 SOP to employees qualify as non-compensatory. Accordingly, the Company is not required to recognize any compensation expense with respect to such option grants. Based on the definition of an “employee” prescribed in the Internal Revenue Code, the Company’s career financial professionals do not qualify as employees. Accordingly, with respect to grants of options under both the SIP and the SOP 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. The compensation expense related to options granted to career financial professionals varies with and primarily relates to the production of business and as such is recognized DPAC and is amortized on a basis consistent with how earnings emerge from the underlying products that gave rise to such DPAC. The deferred expense amount relating to options granted to career financial professionals which were outstanding was $0.5 million and $0.0 million for the years ended December 31, 2003 and 2002, respectively.
Furthermore, MONY Group has issued 20,913 shares of restricted stock to members of its board of directors. These restricted shares are conditioned only on the expiration of a vesting period. At December 31, 2003, 9,674 shares of such restricted stock remained restricted.
(1) Includes in 2003 merger related expenses totaling $8.8 million incurred in connection with MONY Group’s pending merger transaction with AXA Financial (see Note 2).
The goodwill amortization recorded for the year ended December 31, 2001 was included in the Protection Products, Retail Brokerage and Investment Banking, and Other Products segments as follows:
headcount reductions of 161 and 26, respectively, in the Company’s home office and career agency system, as well as losses from the abandonment of certain leased offices and equipment. The 2001 restructure charge consisted of severance and related benefits of $10.3 million resulting from headcount reductions of 117 and 240, in the Company’s home office and career agency system, respectively, and $8.7 million of other miscellaneous items. These actions were substantially completed in 2002. The remaining restructuring reserves primarily relate to lease abandonment costs and are expected to run-off through 2007. The balance of the charge in 2001, $127.0 million, was unrelated to the Company’s restructure activities and consisted of: (i) impairments of certain invested assets and valuation related write-downs of private equity securities held in the Company’s equity method venture capital portfolio, (ii) the write-off of deferred sales charges in the Company’s mutual fund business to reflect revised estimates of recoverability which are principally due to the decline in the value of the Company’s internet funds, (iii) write-downs of certain information technology assets, and (iv) other miscellaneous items.
(1) Cash payments include in 2003 the non-cash write-off of $1.3 million in unused equipment in certain abandoned leased offices.
aftermath of September 11, 2001. To date, the Company has recovered $5.1 million relating to the aforementioned damages under its insurance coverage.