(1) The conversion of the predecessor to MONY Life to a stock life insurance company and the establishment of the Closed Block have significantly affected the presentation of our consolidated financial statements. The most significant effects are as follows:
- The results of the policies included in the Closed Block are reflected as a single line item in our statements of income, entitled "Contribution from the Closed Block," whereas, prior to the establishment of the closed block, the results of such business were reported in various line items in our income statement, including premiums, net investment income, net realized gains, benefits, amortization of deferred policy acquisition costs, etc.
To assist interested parties in analyzing our consolidated financial results, the consolidated income statement information for the year ended December 31, 1999 and the year ended December 31, 1998 present the individual components of the Closed Block activity for such periods, combined on a line by line basis, with such activity outside the Closed Block. This consolidated combined basis income statement is provided to facilitate comparisons of current period results with that of the other periods presented.
(3) For a description of the Group Pension Transaction, the Group Pension Profits and certain summary financial information relating thereto, refer to Note 10 of the Consolidated Financial Statements included herein. Management believes that Group Pension Profits will decline in future periods consistent with the continuing run-off of the underlying business until they terminate as of December 31, 2002.
(4) Prior to November 16, 1998, MONY Life, as a mutual life insurance company, was subject to the surplus tax imposed on mutual life insurance companies under Section 809 of the Code. Section 809 requires (and the surplus tax results from) the disallowance of a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. The income tax expense amounts include $0.0 million, $0.0 million, $5.8 million, $12.8 million and $0.0 million of surplus tax for the years ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
(5) Prior to its reorganization on November 16, 1998, the Company had no common stock outstanding and, accordingly, did not report per share earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In accordance with GAAP, per share amounts presented for 1998 include only the results of operations for the period from November 16, 1998 (the effective date of our reorganization) through December 31, 1998. On a pro forma basis, assuming the reorganization occurred January 1, 1998, basic and diluted earnings per share would have been $4.05 and $3.99 respectively. See Note 4 to the Consolidated Financial Statements.
(10) Shareholders' equity at December 31, 1998 includes approximately $248.7 million which represents the remaining net proceeds from MONY Group's initial public offering after deducting cash used to pay cash to certain eligible policyholders and cash used to fund policy credits given to certain eligible policyholders in connection with the Demutualization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 to the Consolidated Financial Statements.
(11) Prior to 1996, MONY, as a mutual life insurance company, prepared its financial statements in conformity with accounting practices prescribed or permitted by the New York Insurance Department, which accounting practices were considered to be GAAP for mutual life insurance companies. As of January 1, 1996, MONY adopted Financial Accounting Standards Board (FASB) Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises, and SFAS No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long Duration Participating Policies. Interpretation No. 40 and SFAS No. 120 require mutual life insurance companies to adopt all applicable authoritative GAAP pronouncements in their general purpose financial statements. Accordingly, the financial information presented in the Selected Consolidated Financial Information for periods prior to 1996 has been derived from financial information of MONY which has been retroactively restated to reflect the adoption of all applicable authoritative GAAP pronouncements. All such applicable pronouncements were adopted as of the effective date originally specified in each such pronouncement.
MONY's conversion to a stock life insurance company and the establishment of the Closed Block have significantly affected the presentation of the consolidated financial statements of the Company. The most significant effects are as follows:
(i) the actual results of the Closed Block's operations are reflected as a single line item in the Company's statements of income, entitled "Contribution from the Closed Block", whereas, prior to the establishment of the Closed Block the results of its operations were reported in various line items in the Company's income statement, including premiums, net investment income, net realized gains, benefits, amortization of deferred policy acquisition costs, etc.
(ii) all assets and liabilities allocated to the Closed Block are reported separately in the Company's balance sheet under the captions "Closed Block assets" and "Closed Block liabilities", respectively, whereas prior to the establishment of the Closed Block such assets and liabilities were reported in various line items in the Company's balance sheet, including fixed maturity securities, mortgage loans on real estate, policy loans, deferred policy acquisition costs, etc.
The following tables present the Company's consolidated and segment results of operations for the years ended December 31, 1999, 1998, and 1997. For comparability with prior periods, the results of operations of the Closed Block for the year ended December 31, 1999 and the period from November 16, 1998 (the date of the formation of the Closed Block) to December 31, 1998 have been combined on a line by line basis with the results of operations outside the Closed Block. In all other respects the financial information herein is presented in accordance with GAAP unless otherwise noted. Management's Discussion and Analysis, which follows this table, discusses the Company's consolidated and segment results of operations on the aforementioned combined basis unless otherwise noted.
- --------------- (1) Amounts reported as "reconciling" 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) a one-time restructuring charge in 1999 of $59.7 million pretax relating to the Company's early retirement program. (2) See Note 10 to the Consolidated Financial Statements contained herein.
Premium revenue was $717.1 million for 1999, a decrease of $4.7 million, or 0.7%, from $721.8 million reported for 1998. The decrease resulted primarily from $1.7 million of lower sales of immediate annuities in the Accumulation Products segment and $3.5 million of lower premiums relating primarily to group pension business recorded in the Other Products segment. The increase in premiums of $0.5 million in the Protection Products segment was primarily due to $20.6 million of premiums from Sagamore which was acquired at December 31, 1998, offset by (i) lower renewal premiums of approximately $18.8 million, and (ii) lower single premiums of approximately $1.8 million.
Net investment income was $902.3 million for 1999, an increase of $166.6 million, or 22.6%, from $735.7 million reported for 1998. The increase in net investment income is primarily due to the combination of higher yields on invested assets (mostly due to higher equity partnerships income), higher average balances, and changes in the mix of invested assets during 1999, as compared to 1998. Higher yields on invested assets in 1999, resulted in higher investment income of approximately $108.3 million. In addition, an increase in the Company's average total invested assets between the periods of approximately $379.8 million, as well as changes in the mix of invested assets from real estate to relatively higher yielding fixed maturity securities, mortgages and equity securities resulted in additional increases in investment income of approximately $58.3 million. The increase in average invested assets was primarily a result of IPO proceeds received, gains on sales of real estate, and positive cash flow from operations and investing activities between the periods. For 1999, the Company's average investment in fixed maturity securities (before cumulative unrealized gains or losses), mortgages, equity securities and cash and short term securities increased by approximately $494.1 million, $141.7 million, $91.0 million and $31.9 million, respectively, while real estate and other invested assets (mostly real estate partnerships) decreased by approximately $374.0 million, and $15.3 million, respectively. As of December 31, 1999, invested assets were $10,831.8 million (including cumulative unrealized losses of $206.4 million for fixed maturity securities) compared to $10,991.2 million (including cumulative unrealized gains of $252.5 million for fixed maturity securities) for the prior period. At December 31, 1999, fixed maturity securities, mortgage loans and real estate represented approximately 60.4%, 15.8% and 3.4%, respectively, of total invested assets, as compared to 61.0%, 12.9% and 5.7%, respectively, at December 31, 1998. The annualized yield on the Company's invested assets before and after realized gains/(losses) on investments was 8.3% and 9.4%, respectively, for the year ended December 31, 1999, as compared to 7.0% and 8.6%, respectively, for the year ended December 31, 1998.
Other operating costs and expenses were $547.3 million for 1999, an increase of $94.0 million, or 20.7%, from $453.3 million reported for 1998. The increase of $94.0 million consisted primarily of approximately $27.1 million, $19.1 million, and $19.7 million of costs directly attributable to the Protection Products, Accumulation Products and Other Products segment, respectively, as well as higher allocable and other miscellaneous direct costs of approximately $28.1 million. To the extent that costs are not directly identifiable with an operating segment, such costs are allocated to the Company's operating segments based on cost allocations utilizing time studies, and cost estimates included in the Company's product pricing (see "Segments"). As further discussed below, the increase in operating costs and expenses in 1999 as compared to 1998 was primarily attributable to: (i) higher commissions and other selling costs associated with the increase in revenues reported by the Company's mutual fund and broker-dealer operations, (ii) the consolidation of Sagamore, (iii) the Company's continuing investment in its international operations and (iv) certain strategic initiatives, offset by (v) certain operating efficiencies and other cost reductions. Following sets forth additional information with respect to the increase in operating costs in 1999, as compared to 1998:
Universal life and investment-type product policy fees were $151.6 million for 1998, an increase of $24.3 million, or 19.1%, from $127.3 million reported for 1997. The increase in fees during 1998, as compared to 1997, consisted of higher Protection Products segment fees of $11.3 million and higher Accumulation Product segment fees of $13.2 million. The increase in fees in the Protection Products segment was primarily due to higher fees from the Company's VUL and corporate sponsored variable universal life ("CSVUL") business of approximately $9.8 million and $3.2 million, respectively. The Company first began offering CSVUL business during the 4th quarter of 1998. For 1998, the Company reported total fees from its VUL business of $27.5 million, as compared to $17.7 million reported for 1997. The increase in VUL fees is primarily due to higher charges for the cost of insurance, administration, and loading. The increase in fees in the Accumulation Products segment was primarily due to an increase of $13.4 million in fees from the Company's FPVA
Group Pension Profits (see Note 10 to the Consolidated Financial Statements) were $56.8 million for 1998, a decrease of $3.2 million, or 5.3%, from $60.0 million reported for 1997. Group Pension Profits in 1998 consisted of $49.8 million of Group Pension Payments and $7.0 million relating to adjustments required to reflect the earnings from such payments in accordance with GAAP. Such adjustments primarily relate to changes in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction. In 1997, Group Pension Profits consisted of $55.7 million of Group Pension Payments and a $4.3 million reduction in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction. Group Pension Payments in 1998 decreased from that recorded in 1997 primarily because of the continuing run-off of the Existing Deposits. The decrease in valuation allowances in 1998 resulted primarily from the decrease in mortgage loan assets supporting the transferred business due to prepayments of such loans.
Other income (which consists primarily of fees earned by the Company's mutual fund management, broker-dealer, and insurance brokerage operations, as well as revenues from interest on deposits held under financial reinsurance arrangements, certain other asset management fees, and other miscellaneous revenues) was $163.2 million for 1998, an
increase of $17.8 million, or 12.2%, from $145.4 million reported for 1997. The increase was primarily due to higher income of $20.7 million and $8.0 million in the Accumulation Products and Other Products segments, respectively, offset in part by lower income of $11.3 million in the Protection Products segment. Substantially all of the increase in income recorded in the Accumulation Products segment was attributable to higher fees earned by the Company's mutual fund management operations. The Company's mutual fund management operations reported $61.8 million in fees from advisory, underwriting and distribution services in 1998, as compared to $42.3 million reported in 1997, as assets under management increased to approximately $6.9 billion at December 31, 1998 from $5.4 billion at December 31, 1997. The increase in income recorded in the Other Products segment in 1998 as compared to 1997 was primarily due to higher commissions earned by the Company's broker-dealer operations of approximately $11.1 million, offset by approximately $3.1 million of lower revenues from an aviation reinsurance pool in which the Company participates. During 1998, the Company's broker-dealer operations reported commission earnings of $43.5 million, as compared to $32.4 million reported in 1997. The decrease in other income recorded in the Protection Products segment of $11.3 million was primarily due to: (i) a non-recurring gain of $19.4 million recognized in 1997 relating to certain assets which had appreciated in value and were transferred to partially fund the cost of the indemnity reinsurance purchased in connection with the DI Transaction, as hereafter defined (see "DI Transaction"), partially offset by, (ii) an increase in reinsurance allowances and officer life insurance premiums of $5.9 million and $2.2 million, respectively.
Benefits to policyholders were $789.8 million for 1998, a decrease of $50.3 million, or 6.0%, from $840.1 million reported for 1997. The decrease, substantially all of which (approximately $44.9 million) occurred in the Company's Protection Products segment, was primarily due to the transfer of the Company's disability income insurance business pursuant to the DI Transaction in 1997, as hereafter defined (See "DI Transaction"). Benefits to policyholders recorded in 1998 relating to the business transferred pursuant to the DI Transaction decreased by $47.3 million to $0.9 million, as compared to $48.2 million recorded in 1997. In addition, the change in reserves on traditional business in 1998 decreased $21.2 million to $168.1 million, as compared to $189.3 million reported in 1997. Surrenders on traditional business in 1998 decreased $5.0 million to $322.4 million, as compared to $327.4 million in 1997. These increases were partially offset by an increase in traditional death benefits of $30.0 million.
Amortization of deferred policy acquisition costs ("DAC") was $131.0 million for 1998, a decrease of $50.2 million, or 27.7%, from $181.2 million reported for 1997. The decrease primarily resulted from lower amortization in both the Protection Products and Accumulation Products segments of approximately $45.4 million and $4.8 million, respectively. The decrease in DAC amortization in the Protection Products segment primarily resulted from: (i) a non-recurring charge of $33.6 million recorded in 1997 relating to the transfer of the Company's disability income insurance business pursuant to the DI Transaction, as hereafter defined (See "DI Transaction"), (ii) lower amortization of approximately $5.1 million resulting from a revision during 1997 of mortality assumptions on the Company universal life business, and (iii) lower amortization of approximately $6.7 million resulting from higher death claims in 1998 as compared to 1997. The decrease in DAC amortization of $4.8 million in the Accumulation Products segment was primarily due to approximately $2.9 million relating to the Company's single premium deferred annuity business as a result of lower profit margins caused by declining fund balances and a narrowing of interest spreads.
Dividends to policyholders were $218.2 million for 1998, a decrease of $6.1 million, or 2.7%, from $224.3 million reported for 1997. The decrease primarily resulted from a decrease in the Protection Products segment of $5.8 million due to a reduction in the interest component of the dividend during 1997 by amounts ranging from 15 to 50 basis points, which was partially offset by an increase in life insurance reserves.
The increase of $15.7 million in costs directly attributable to the Accumulation Products segment primarily consisted of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The increase of $13.9 million in costs directly attributable to the Other Products segment primarily consisted of higher commissions and other expenses incurred by the Company's broker-dealer operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The net increase in other allocable operating costs and expenses primarily consisted of (i) $7.4 million of higher costs associated with addressing the Year 2000 issue, (ii) $17.0 million of higher cost associated with restructuring the Company's career agency sales force and other strategic initiatives, and (iii) $9.5 million of higher interest expense primarily relating to the MONY Notes issued on December 30, 1997, offset by (iv) approximately $6.4 million relating to a reduction in the fair value of the Company's liability under its non-qualified pension plan, (v) $3.7 million, $4.0 million and $2.7 million of non-recurring costs incurred in 1997 relating to the issuance of the MONY Notes, the cancellation of an information technology service agreement, and severance charges relating to the DI Transaction, respectively, and (vi) other miscellaneous items.
The Company's provision for federal income taxes in 1998, including the tax effect of demutualization expenses, of $103.0 million included no surplus tax, compared to a surplus tax benefit of $5.8 million in 1997. The Company's effective tax rate before the surplus tax and extraordinary item was 35.0% in 1998, as compared to approximately 33.6% in 1997. Prior to its reorganization pursuant to the Plan, MONY Life was subject to the surplus tax imposed on mutual life insurance companies under Section 809 of the Code. Section 809 requires (and the surplus tax results from) the disallowance of a portion of a mutual life insurance company's policyholder dividends as a deduction from taxable income. As a stock company, the MONY Life is no longer subject to the surplus tax.
The Company distributes its products primarily through its career agency sales force and various complementary distribution channels which include: (i) sales of proprietary retail mutual funds through third party broker-dealers, (ii) sales of Protection Products by the Company's U.S. Financial subsidiary through brokerage general agencies, (iii) sales of COLI products by the Company's corporate marketing team, and (iv) sales of a variety of financial products and services through the Company's Trusted Advisors subsidiary. The table below and discussion which follows present certain information with respect to the Company's sales of protection and accumulation products during the years ended December 31, 1999, 1998 and 1997 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. 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 funds sales represent deposits made by customers during the periods presented.
- --------------- (1) Annualized premiums 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 COLI business or single premium paying business. All premiums received on COLI business and single premium paying policies during the periods presented are included. (2) Includes premiums or deposits that have been annualized. (3) Excludes annualized premiums in 1999 associated with an exchange program offered by the Company wherein contractholders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company.
Total new annualized and single life insurance premiums for the year ended December 31, 1999 increased $23.5 million, or 13.8 %, to $194.3 million from $170.8 million in 1998. This increase was primarily due to new life insurance premiums produced by the Company's career agency system and international sales force. Such new life insurance premiums increased $14.8 million, or 17.1%, to $101.2 million in 1999 from $86.4 million in 1998. The number of agents comprising the Company's career agency system and international field force totaled 2,417 at December 31, 1999, compared to 2,447 at December 31, 1998. The decrease in the number of agents from period to period was primarily due to actions taken by the Company to terminate unproductive agents in response to new agent productivity. The number agents based in the U.S. decreased in 1999, as compared to 1998, while the Company's international sales force increased. U.S. Financial, which was acquired on December 31, 1998 and which markets its protection products primarily through brokerage general agents, contributed $26.5 million of annualized premium in 1999. Offsetting the aforementioned increases was a decrease in sales of COLI.
The following tables set forth assets under management at December 31, 1999, 1998, and 1997, as well as the changes in the primary components of assets under management during the years then ended:
- --------------- (1) Amount presented for 1999 is net of approximately $727 million of transfers to new product series.
Sales of proprietary retail mutual funds offered by the Company's Enterprise Group of Funds subsidiary increased by $537 million, or 41%, to $1.8 billion at December 31, 1999, as compared to $1.3 billion at December 31, 1998. Proprietary mutual fund sales through the Company's career agency system increased approximately $87 million, or 16% to $634 million for 1999, as compared to $546 million for 1998. Proprietary mutual fund sales through third-party broker-dealers increased approximately $450 million, or 60%, to $1,198 million for 1999, as compared to approximately $749 million for 1998. The increase in sales primarily resulted from the expansion of third-party distribution arrangements and the introduction of a new internet fund and a multi cap fund which the Company began offering on July 1, 1999. Management expects to increase sales through third-party distribution in 2000 as a result of a distribution agreement entered into during the 4th quarter of 1999 with a major broker-dealer.
New Business Information for the year ended December 31, 1998 compared to the year ended December 31, 1997
Effective December 31, 1997, the Company ceased writing new disability insurance business and transferred all of its existing in force disability income insurance business to a third party reinsurer, Centre Life Reinsurance, Ltd. ("Centre Re"), under an indemnity reinsurance contract (the "DI Transaction"). MONY Life Insurance Company remains contingently liable for all benefits payable with respect to such business if Centre Re fails to meet its obligations under the reinsurance agreement. As a result of this transaction, the Company recorded a pre-tax loss for the year ended December 31, 1997 of approximately $9.1 million which represented the excess of the amount paid for the indemnity reinsurance and deferred acquisition costs relating to such business (which were reflected on the Company's books at the date of the transaction) over the carrying value of the liabilities transferred. In addition, the indemnity reinsurance purchased pursuant to the DI Transaction replaced a previously existing reinsurance contract, which had been accounted for as a financing rather than reinsurance. The assets held on deposit under the replaced contract, which had a fair value in excess of the carrying value of the deposit on MONY's books at the date of the transaction, were used to partially fund the cost of the aforementioned indemnity agreement. As a result thereof, the Company recorded a gain of $19.4 million in 1997, which is separate from the DI Transaction and reported in "Other Income". The impact on the Company's historical consolidated operating results for the year ended December 31, 1997 from the Company's disability income insurance business was not material.
On March 8, 2000, MONY Life repurchased the surplus note indebtedness it had outstanding at December 31, 1999. As a result of the repurchase, the Company will record an after-tax loss of approximately $36.1 million during the first quarter of 2000. The loss resulted from the premium paid by MONY Life to the holders of the aforementioned surplus notes, reflecting the excess of their fair value over their carrying value on the Company's books at the date of the transaction, which aggregated approximately $55.5 million. This loss will be reported, net of tax, as an extraordinary item on the Company's income statement in 2000. See Liquidity and Capital Resources -- Issuance of Senior Notes and Repurchase of Surplus Notes.
MONY Group's cash flow consists of investment income from its invested assets (including interest from the Inter-company Surplus Notes, as hereafter defined) and dividends from MONY Life, if declared and paid, offset by expenses incurred in connection with the administration of MONY Group's affairs and interest expense on the Senior Notes, as hereafter defined (see Issuance of Senior Notes and Repurchase of Surplus Notes below). As a holding company, MONY Group's ability to meet its cash requirements, pay interest expense on the Senior Notes, and pay dividends on its Common Stock substantially depend upon payments from MONY Life, including the receipt of; (i) dividends, (ii) interest income on the Inter-company Surplus Notes, and (iii) other payments. The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life will be permitted to pay shareholder dividends to the MONY Group only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent and the New York Superintendent does not disapprove the distribution. Under the New York Insurance Law, the New York Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. The New York Insurance Department has established informal guidelines for the New York Superintendent's determinations that focus on, among other things, overall financial condition and profitability under statutory accounting practices. In addition, payments of principal and interest on the Inter-company Surplus Notes can only be made with the prior approval of the New York Superintendent "whenever, in his judgment, the financial condition of such insurer warrants". Such payments further may be made only out of surplus funds, which are available for such payments under the New York Insurance Law. There can be no assurance that MONY Life will have statutory earnings to support the payment of dividends to the MONY Group or that the New York Superintendent will approve interest payments to MONY Group on the Inter-company Surplus Notes. Accordingly, there can be no assurance that MONY Group will have sufficient funds to meet its cash requirements and pay cash dividends to shareholders. In addition, state insurance laws contain similar restrictions on the ability of the life insurance subsidiaries to pay dividends to MONY Life. There can be no assurance that state insurance laws will in the future permit the payment of dividends by the life insurance subsidiaries to MONY Life in an amount sufficient to support the ability of MONY Life to pay dividends to the MONY Group.
The MONY Group expects to continue to pay a dividend on its common stock of at least $0.40 per share in 2000. However, because the Company has changed the frequency of dividend payments from quarterly to annual, it expects to increase the $0.40 per share dividend to compensate shareholders for the time value of money.
On January 12, 2000, the Holding Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (the "SEC") to register certain securities. This registration, known as a "Shelf Registration", provides the Company with the ability to offer various securities to the public, when it deems appropriate, to raise proceeds up to an amount not to exceed $1.0 billion in the aggregate for all issuance's of securities thereunder. It is the intention of the Company to use this facility to raise proceeds for mergers and acquisitions and for other general corporate matters, as it considers necessary.
On March 8, 2000, the Holding Company issued $300.0 million principal amount of senior notes (the "Senior Notes") pursuant to the aforementioned Shelf Registration. The senior notes mature on March 15, 2010, bear interest at 8.35% per annum and were priced at a discount to yield 8.38%. The principal amount of the senior notes is payable at maturity and interest is payable semi-annually. The net proceeds to the Company from the issuance of the senior notes, after deducting underwriting commissions and other expenses (primarily legal and accounting fees), were approximately $297.0 million. Approximately $267.6 million of the net proceeds from the issuance of the senior notes was used by the Holding Company as discussed below to finance the repurchase, on March 3, 2000, by MONY Life of all of its outstanding $115.0 million face amount 9.5% coupon surplus notes, and a $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 "11.25% Notes", respectively), which were outstanding at December 31, 1999. See Note 16 to the Consolidated Financial Statements. The balance of the net proceeds from the issuance of the senior notes (approximately $29.4 million) will be used by the Holding Company for general corporate purposes.
To finance MONY Life's repurchase of the 9.5% Notes and the 11.25% Notes, the Holding Company, on March 8, 2000:
(i) purchased two surplus notes from MONY Life (hereafter referred to as the "Inter-company Surplus Notes") to replace the 9.5% Notes and the 11.25% Notes. The terms of the Inter-company Surplus Notes are identical to the 9.5% Notes and the 11.25% notes, except that the Inter-company Surplus Notes were priced to yield a current market rate of interest and the inter-company surplus note issued to replace the $116.5 million face amount of the 11.25% Notes was issued at a face amount of $100.0 million, and
(ii) contributed capital to MONY Life in the amount of $52.6 million, which was equal to the after-tax cost to MONY Life of the premium it paid to repurchase the 9.5% Notes and the 11.25% Notes, plus an additional $16.5 million representing the difference between the face amounts of the inter-company surplus note which replaced the 11.25% Notes and the $116.5 million face amount of the 11.25% Notes.
MONY Life's cash inflows are provided mainly from life insurance premiums, annuity considerations and deposit funds, investment income and maturities and sales of invested assets. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, dividends to policyholders, operating expenses, income taxes and principal and interest on its outstanding debt obligations. The life insurance and annuity liabilities relate to the Company's obligation to make benefit payments under its insurance and annuity contracts, as well as the need to make payments in connection with policy surrenders, withdrawals and loans. The Company develops an annual cash flow projection which shows expected asset and liability cash flows on a monthly basis. At the end of each quarter actual cash flows are compared to projections, projections for the balance of the year are adjusted in light of the actual results, if appropriate, and investment strategies are also changed, if appropriate. The quarterly cash flow reports contain relevant information on all of the following: new product sales and deposits versus projections, existing liability cash flow versus projections and asset portfolio cash flow versus projections. An interest rate projection is a part of the initial annual cash flow projections for both assets and liabilities. Actual changes in interest rates during the year and, to a lesser extent, changes in rate expectations will impact the changes in projected asset and liability cash flows during the course of the year. When the Company is formulating its cash flow projections it considers, among other things, its expectations about sales of the Company's products, its expectations concerning customer behavior in light of current and expected economic conditions, its expectations concerning competitors and the general outlook for the economy and interest rates. See "Investments -- General."
Annuity surrenders have increased for the year ended December 31, 1999 as compared to the comparable prior year periods primarily due to the aging of the block of business and consequent decrease in surrender charge rates and due to an increase in competition. In July, 1999, the Company has responded to this trend by enhancing its variable annuity products by offering new investment fund choices.
The Company's principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 1999, the Company reported net cash outflows from operations of $30.0 million, as compared to cash inflow of $76.7 million in 1998. In 1999 and 1998 cash flow from operations excluded $175.7 million and $87.3 million, respectively of cash flow relating to the Closed Block. Total combined cash flow from operations for 1999 and 1998, including the Closed Block was $145.7 million and $164.0 million, respectively, a decrease of $18.3 million. The decrease from prior year is primarily due to higher operating expenses, higher benefit payments, and lower payments from the Group Pension Transaction (see Note 10 to the Consolidated Financial Statements), offset by lower federal income tax payments. The combined cash flow from operations for 1998 including the Closed Block was $164.0 million as compared to $69.1 million for 1997, an increase of $94.9 million. The increase was due to a non-recurring payment of $149.5 million made in 1997 in connection with the DI transaction, offset by other miscellaneous items in 1998 principally, extraordinary expenses, Year 2000 costs and costs incurred in connection with strategic initiatives. The Company's liquid assets include substantial U.S. treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. Management believes that the Company's sources of liquidity are adequate to meet its anticipated needs. As of December 31, 1999, the Company had readily marketable fixed maturity securities with a carrying value of $6,546.2 million (including fixed maturities in the Closed Block), which were comprised of $3,577.6 million public and $2,968.6 million private fixed maturity securities. At that date, approximately 92.8% of the Company's fixed maturity securities were designated in NAIC rating categories 1 and 2 (considered investment grade, with a rating of "Baa" or higher by Moody's or "BBB" or higher by S&P). In addition, at December 31, 1999 the Company had cash and cash equivalents of $377.2 million.
In addition, the Company has two bank line of credit facilities with domestic banks aggregating $150.0 million, with scheduled renewal dates in September 2000 and September 2003. Under these lines of credit, the Company is required to maintain a certain statutory tangible net worth and debt to capitalization ratio. The purpose of these facilities is to provide additional liquidity for any unanticipated short-term cash needs the Company might experience. The Company has not borrowed against these lines of credit since their inception.
At December 31, 1999, the Company had commitments to contribute capital to its equity partnership investments of $118.2 million, and commitments of $15.0 million to purchase private fixed maturity securities with an interest rate of 9%.
At December 31, 1999, MONY Life had commitments to issue $8.7 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 7.25% to 8.75%. MONY Life also had commitments outstanding to underwrite $70.2 million of commercial mortgage loans as of December 31, 1999 with interest rates ranging from 7.00% to 8.92%.
Of the $1,141.4 million of currently outstanding commercial mortgage loans in the Company's investment portfolio at December 31, 1999, $26.6 million, $89.3 million and $161.7 million are scheduled to mature in 2000, 2001 and 2002, respectively. See "Investments -- Mortgage Loans -- Commercial Mortgage Loans".
The Company has mortgage loans on certain of its real estate properties. The interest rates on these loans range from 6.3% to 7.7%. Maturities range from June 2000 to February 2002. For the years ended December 31, 1999, 1998 and 1997, interest expense on such mortgage loans aggregated $5.0 million, $9.0 million, and $12.3 million, respectively.
In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement. The facility was sold for $66.0 million, $56.0 million of which was in the form of an interest bearing note receivable and $10.0 million in cash. The note was due January 1, 2009. The remaining balance of the interest bearing note was paid in full on December 1, 1999, as part of the sale of the property to a third party. This transaction continues to be accounted for as a sale/leaseback arrangement, with the proceeds received 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 $7.3 million in 2000, $7.4 million in 2001, $7.6 million in 2002, $7.7 million in 2003, $7.9 million in 2004 and $33.1 million thereafter. The Company has the option to renew the lease at the end of the lease term.
At December 31, 1999, aggregate maturities of long-term debt based on required principal payments for 2000 and the succeeding four years are $0.0 million, $0.0 million, $5.4 million, $0.0 million and $0.0 million, respectively, and $240.0 million thereafter.
Aggregate contractual debt service payments on the Company's debt at December 31, 1999, for 2000 and the succeeding four years are $25.4 million, $25.4 million, $30.4 million, $25.0 million and $25.0 million, respectively, and $608.7 million thereafter.
Among the assets allocated to the Closed Block are the Series A Notes. MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments on the Series A Notes pursuant to the terms thereof, as described in Note 10 to the Consolidated Financial Statements.
While the RBC guidelines are intended to be a regulatory tool only, and are not intended as a means to rank insurers generally, comparisons of RBC ratios of life insurers have become generally available. The adjusted RBC capital ratios of all the Company's insurance subsidiaries at December 31, 1999 and December 31, 1998 were in excess of the minimum required RBC.
In accordance with its ongoing strategy to strengthen the Company's financial position, management expects to continue to selectively sell equity real estate. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or its fair value, less associated selling costs (see Note 4 to the Consolidated Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. Real estate classified as to be disposed of may also be net of impairment adjustments recorded prior to the time such real estate was designated for sale or at the time of foreclosure, if acquired in satisfaction of debt. At December 31, 1999, 1998 and 1997, the carrying value of real estate to be disposed of was $322.9 million, $312.9 million and $621.2 million, respectively, or 3.0%, 2.8% and 5.9% of invested assets at such dates, respectively. The aforementioned carrying values are net of valuation allowances of $22.0 million, $30.6 million and $82.7 million, respectively. In addition, the carrying value of real estate to be disposed of at such dates is net of $62.3 million, $79.1 million and $182.3 million of impairment adjustments, respectively. For the years ended December 31, 1999, 1998, and 1997, such increases in valuation allowances aggregated $12.1 million, $6.7 million and $63.8 million, respectively. Because the carrying value of real estate to be disposed of is adjusted to reflect the aforementioned valuation allowances, management expects that the net proceeds from sales of real estate will not be materially different from the carrying value of such real estate on a GAAP basis. However, there can be no assurance that increases in valuation allowances will not be required in the future or that future sales of real estate will not be made at amounts below recorded GAAP carrying value which may have a material effect on the Company's financial position and results of operations.
In addition, as a result of differences between SAP and GAAP, the carrying value of real estate on a SAP basis exceeds the carrying value of such investments on a GAAP basis. Accordingly, management expects to incur losses on a SAP basis as a result of anticipated real estate sales, which losses could materially affect the Company's statutory-basis surplus and net income. Although there can be no assurance, the Company believes that any such impact on statutory surplus will be substantially offset by the release of the statutory investment reserves established by the Company. The Company will monitor the results of its real estate sales strategy and its ongoing effect on statutory surplus. The GAAP carrying value of real estate to be disposed of was $322.9 million at December 31, 1999 (or 3.0% of invested assets), which amount is net of impairment adjustments and valuation allowances aggregating approximately $62.3 million and $22.0 million, respectively. There can be no assurance as to whether, when or for what amounts any real estate that is classified to be disposed of will actually be disposed of. For the years ended December 31, 1999, 1998 and 1997 the GAAP carrying value of real estate sold was approximately $281.4 million, $424.7 million and $346.3 million, respectively. For the years ended December 31, 1999, 1998 and 1997, the SAP carrying value of real estate sold was approximately $496.7 million, $593.8 million and $395.0 million, respectively (see "Investments -- Equity Real Estate", "-- Investment Impairments and Valuation Allowances" and Note 19 to the Consolidated Financial Statements.)
The Company successfully completed its Year 2000 Project (the "Project") to ensure Year 2000 readiness. The Company developed and implemented an enterprise-wide plan to prepare for the Year 2000 issue by ensuring compliance of all applications, operating systems and hardware on mainframe, PC and local area network ("LAN") platforms; ensuring the compliance of voice and data network software and hardware; addressing issues related to non-IT systems in buildings, facilities and equipment which may contain date logic in embedded chips; and addressing the compliance of key vendors and other third parties.
The total cost of the Project was $25.4 million. The Company does not expect to incur any material future costs on the Project.
The Company does not believe that inflation has had a material effect on its consolidated results of operations except insofar as inflation affects interest rates.
The Company's investment operations are managed by its investment area, which reports directly to the Chief Investment Officer of the Company. The investment area, in consultation with the product actuaries, is responsible for determining, within specified risk tolerances and investment guidelines, the general asset allocation, duration and other characteristics of the Company's investment portfolio.
The Company had total consolidated assets at December 31, 1999 of approximately $24.8 billion. Of the Company's total consolidated assets at such date, approximately $13.3 billion represented assets held in the Company's general account (which includes $6.2 billion of assets in the Closed Block), approximately $5.1 billion represented assets transferred pursuant to the Group Pension Transaction (see Note 10 to the Consolidated Financial Statements), and approximately $6.4 billion were held in the Company's separate accounts, for which the Company does not generally bear investment risk.
Separate account assets are managed in accordance with the prescribed investment strategy that applies to the specific separate account. Separate accounts are established in conformity with insurance laws and are generally not chargeable with liabilities that arise from any other business of the Company. Separate account assets are subject to general account claims only to the extent that the value of such assets exceeds the separate account liabilities. Investments held in separate accounts and liabilities of the separate accounts are reported separately as assets and liabilities. Substantially all separate account assets are reported at estimated fair value. Investment income and gains or
The following table illustrates the net investment income yields based on average annual asset carrying values, excluding unrealized gains (losses) in the fixed maturity asset category. Equity real estate income is shown net of operating expenses, depreciation and minority interest. Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings. Investment expenses include mortgage servicing fees and other miscellaneous fee income.
At December 31, 1999, the percentage, based on estimated fair value, of total public and private placement fixed maturities that were investment grade (NAIC Designation 1 or 2) was 92.8% compared to 94.1% for December 31, 1998. The fixed maturities portfolio was comprised, based on estimated fair value, of 54.7% in public fixed maturities and 45.3% in private fixed maturities at December 31, 1999 and 55.0% in public fixed maturities and 45.0% in private fixed maturities at December 31, 1998.
The Company defines problem securities in the fixed maturity category as securities (i) as to which principal and/or interest payments are in default or are to be restructured pursuant to commenced negotiations or (ii) issued by a company that went into bankruptcy subsequent to the acquisition of such securities or (iii) are deemed to have other than temporary impairments to value. The fair value of problem fixed maturities was $45.9 million and $33.9 million at December 31, 1999 and 1998, respectively. For the years ended December 31, 1999, 1998 and 1997, $1.5 million, $0.9 million and $1.1 million of interest income was not accrued on problem fixed maturities.
The Company defines restructured securities in the fixed maturity category as securities where a concession has been granted to the borrower related to the borrower's financial difficulties that the Company would not have otherwise considered. The Company restructures certain securities in instances where a determination was made that greater economic value will be realized under the new terms than through liquidation or other disposition. The terms of the restructure generally involve some or all of the following characteristics: a reduction in the interest rate, an extension of the maturity date and a partial forgiveness of principal and/or interest. The fair value of restructured fixed maturities was $0.0 million and $8.6 million at December 31, 1999 and 1998, respectively.
The Company believes that its long-term fixed maturities portfolio is well diversified among industry types. The following tables set forth the fair value of the Company's fixed maturities by industry category, as well as the percentage of the total portfolio that each industry category comprises as of December 31, 1999 and 1998, respectively. The tables also show by industry category the relative amounts of publicly traded and privately placed securities.
of total invested assets at December 31, 1999. (See Note 10 to the Consolidated Financial Statements.) No other individual non-government issuer represents more than 0.4% of invested assets.
The following table presents the types of mortgage-backed securities ("MBSs"), as well as other asset-backed securities, held by the Company as of the dates indicated.
In 1992, the Company discontinued making new commercial mortgage loans, except to honor outstanding commitments or safeguard the values of existing investments. In 1996, due to improving market conditions, the need to maintain a diversified investment portfolio and advantageous yields, the Company started to originate new commercial mortgage loans. New commercial mortgage loan originations and purchases aggregated $396.1 million, $279.3 million, and $79.9 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The total number of commercial mortgage loans outstanding at December 31, 1999 and 1998 was 146 and 125, respectively, with an average loan size of $7.8 million and $7.1 million, respectively. The largest amount loaned on any single property at such dates aggregated $45.5 million and $46.7 million, respectively, and represented less than 0.5% and 0.5% of general account invested assets, respectively. At such dates, amounts loaned on fifteen and seven properties were $20 million or greater, representing in the aggregate 38.0% and 24.9% respectively, of the total carrying value of the commercial mortgage loan portfolio at such dates. Total mortgage loans to the five largest borrowers accounted in the aggregate for approximately 21.6% and 26.7% of the total carrying value of the commercial mortgage loan portfolio at December 31, 1999 and 1998, respectively, and less than 1.8% and 2.2%, respectively, of total invested assets at such dates. All such loans were performing.
The following table presents the disposition of maturities for the years ended December 31, 1999, 1998 and 1997.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances and writedowns for impairment. The Company provides valuation allowances for commercial mortgage loans considered to be impaired. Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance for loss is established for the excess of the carrying value of the mortgage loan over its estimated fair value. Estimated fair value is based on either the present value of expected future cash flows discounted at the loan's original effective interest rate, the loan's observable market price or the fair value of the collateral. The provision for loss is reported as a realized loss on investment.
The Company reviews its mortgage loan portfolio and analyzes the need for a valuation allowance for any loan which is delinquent for 60 days or more, in process of foreclosure, restructured, on "watchlist", or which currently has a valuation allowance. Loans which are delinquent and loans in process of foreclosure are categorized by the Company as "problem"
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other such mortgage loans based on its historical loss experience for such investments. As of December 31, 1999 and 1998, such reserves were $15.9 million and $13.2 million, respectively.
The following tables present the distribution of potential problem and restructured commercial mortgages by property type and by state as of December 31, 1999 and 1998.
- --------------- (1) Problem agricultural mortgages included delinquent mortgage loans of $3.1 million and $2.1 million at December 31, 1999 and 1998, respectively, and mortgage loans in the process of foreclosure of $4.3 million and $0.0 million, at such dates, respectively.
In addition to valuation allowances and impairment writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other agricultural mortgage loans based on its historical loss experience for such investments. As of December 31, 1999 and 1998, such reserves were $5.6 million and $5.2 million, respectively.
As illustrated in the table above, at December 31, 1999 and 1998 problem agricultural mortgage loans totaled $7.4 million and $2.1 million, or 1.3% and 0.4% of the total carrying value of agricultural mortgages at such dates. Potential problems (not currently in a delinquent status, but with collateral impairment) totaled $1.4 million and $1.7 million or 0.2% and 0.3% of the total carrying value of agricultural mortgages at such dates, respectively, and restructured mortgages totaled $9.3 million and $11.7 million or 1.6% and 2.2% of the total carrying value of agricultural mortgages at such dates, respectively. Total problem, potential problem and restructured mortgages were $18.1 million and $15.5 million at December 31, 1999 and 1998, respectively, or 3.2% and 2.9% of the total carrying value of agricultural mortgages at such dates, respectively. Total specific asset valuation allowances of $0.8 million and $0.4 million for agricultural mortgages were 4.2% and 2.5% of the carrying value before valuation allowances and writedowns of these total problem agricultural mortgages of $18.9 million and $15.9 million for December 31, 1999 and 1998, respectively.
Equity real estate is categorized as either "Real estate held for investment" or "Real Estate to be disposed of". Real estate to be disposed of consists of properties for which the Company has commenced marketing efforts. The carrying value of real estate held for investment totaled $46.2 million and $321.3 million as of December 31, 1999 and 1998, respectively. The carrying value of real estate to be disposed of aggregated $322.9 million and $312.9 million as of December 31, 1999 and 1998, respectively.
The Company's equity securities are comprised of investments in common stocks and limited partnership interests of investment partnerships. The following table presents the carrying values of the Company's equity securities at the dates indicated.
The Company's investments in common stocks are classified as available-for-sale and are reported at estimated fair value. Unrealized gains and losses on the Company's common stocks are reported as a separate component of other comprehensive income, net of deferred income taxes and an adjustment for the effect on deferred policy acquisition costs that would have occurred if such gains and losses had been realized. Substantially all the common stocks owned by the Company are publicly traded on national securities exchanges. The Company's investments in commons stocks represented 2.6% and 2.7% of invested assets at December 31, 1999 and 1998, respectively. The Company achieved a total return on its investments in common stocks of 27.7%, 16.7% and 20.5% for the years ended December 31, 1999, 1998 and 1997, respectively. The Company defines total return as the percentage obtained by dividing the summation of realized and unrealized gains and losses and dividends by the average market value of the portfolio during the period. Proceeds on the sale of common stocks totaled $302.7 million, $165.0 million and $234.1 million which resulted in net realized gains of $77.6 million, $7.2 million, and $39.7 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The limited partnerships in which the Company has invested are investment partnerships which invest in the equity of private companies (generally in the form of common stock). These partnerships will generally hold such equity until the underlying company issues its securities to the public through an initial public offering. At that time or thereafter, at the general partners' discretion, the partnership will generally distribute the underlying common stock to its partners. Upon distribution, the Company will record the common stock received at fair value, reverse the carrying value of the corresponding limited partnership investment, and record as investment income any excess of the fair value of the common stock distributed over the carrying value of the limited partnership investment. Accordingly, certain of the common stocks owned by the Company at December 31, 1999 and 1998 were acquired through distributions from the Company's investments in limited partnership interests. However, it has been the Company's practice to sell such positions shortly after such distributions.
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, as well as the amount of such investments attributable to the partnerships' ownership of public and private common stock at December 31, 1999 and 1998:
At December 31, 1999 and 1998, the Company had investments in approximately 50 and 43 different limited partnerships which represented 2.2% and 1.5%, respectively, of the Company's general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock. For the years ended December 31, 1999, 1998, and 1997, investment income from investments in limited partnership interests (which is comprised primarily of the Company's pro rata share of income reported by partnerships accounted for under the equity method and income recognized upon distribution for partnership investments accounted for under the cost method) was approximately $188.9 million, $49.5 million and $49.0 million, respectively, representing 20.9%, 6.7% and 6.7%, respectively, of the net investment income for such periods. For the same periods, the Company achieved total returns on its investments in limited partnership interests of 81.9%, 28.4% and 37.5%, respectively. There can be no assurance that the recent level of investment returns achieved on limited partnership investments can be sustained in the future, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations.
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of December 31, 1999 and 1998 are shown in the table below.
All of the Company's fixed maturity and equity securities are classified as available for sale and, accordingly, are marked to market, with unrealized gains and losses excluded from earnings and reported as a separate component of accumulated other comprehensive income. Securities whose value is deemed other than temporarily impaired are written down to fair value. The writedowns are recorded as realized losses and included in earnings. The cost basis of such securities is adjusted to fair value. The new cost basis is not changed for subsequent recoveries in value. For the years ended December 31, 1999, 1998 and 1997, such writedowns aggregated $8.3 million, $15.7 million and $10.2 million, respectively.
The carrying value of real estate to be disposed of at December 31, 1999 and 1998 was $322.9 million and $312.9 million, net of impairment adjustments of $62.3 million and $79.1 million, valuation allowances of $22.0 million and $30.6 million and accumulated depreciation of $116.1 million and $136.2 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs (See Note 4 to the Consolidated Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1999, 1998 and 1997, such increases in valuation allowances aggregated $12.1 million, $6.8 million and $63.8 million, respectively. See "-- Equity Real Estate -- Real Estate Sales".