The Company's administrative offices are located at MONY Life's office, 1740 Broadway, New York, New York, which consists of approximately 225,000 square feet. MONY Life also has office space facilities in Syracuse, New York, for use in its insurance operations, which consist of approximately 600,000 square feet in the aggregate. MONY Life leases both of these offices. The Company believes that such properties are suitable and adequate for its current and anticipated business operations.
- - --------------- (1) Includes writedowns for impairment and net changes in valuation allowances on real estate, mortgage loans and investment securities aggregating $(0.1) million, $(0.3) million, $0.4 million, $1.9 million and $5.5 million for the years ended December 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(2) Prior to 1996, the Company, as the wholly owned stock insurance company subsidiary of a mutual life insurance company (MONY Life), prepared its financial statements in conformity with accounting practices prescribed or permitted by the Arizona Insurance Department, which accounting practices were considered to be GAAP for mutual life insurance companies and their wholly owned stock life insurance company subsidiaries. As of January 1, 1996, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises, and Statement of Financial Accounting Standards ("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 and their wholly owned stock insurance company subsidiaries to adopt all applicable authoritative GAAP pronouncements in their general purpose financial statements. See Note 2 to the Financial Statements. Accordingly, the financial information presented in the Selected Financial Information for periods prior to 1996 has been derived from financial information of the Company 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. However, if the effective date of a pronouncement was subsequent to the earliest financial information presented herein, the Company
- SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, was adopted on a retroactive basis as of December 31, 1993 and subsequent years.
Premium revenue was $1.7 million for 1998, an increase of $1.6 million from $0.1 million reported for 1997. The increase was primarily the result of new premiums relating to private label term business (term insurance sold through alternate distribution channels), which the Company began offering during the fourth quarter of 1997.
Interest credited to policyholders' account balances was $65.1 million for 1998, a decrease of $7.4 million, or 10.2%, from $72.5 million reported for 1997. The decrease was primarily due to lower interest crediting of approximately $3.9 million relating to the Company's single premium deferred annuity ("SPDA") business in conjunction with lower interest crediting on all other products. During 1998, SPDA account value decreased $62.2 million to $303.7 million at December 31, 1998 from $365.9 million at December 31, 1997. The decrease in account value was due to continued withdrawals in 1998, as compared to 1997, which management believes reflected consumer preferences for separate account products. Average interest crediting rates on the Company SPDA's were approximately 5.5% in both 1998 and 1997, respectively.
Other operating costs and expenses were $75.6 million for 1998 an increase of $29.6 million or 64.3% from $46.0 million reported for 1997. The increase is primarily due to higher intercompany allocation of expenses from MONY Life which primarily reflects the Company's higher production relative to that of MONY Life on a consolidated basis. In addition, other expenses increased in 1998 as compared to the prior year, including costs incurred in connection with regulatory compliance, guarantee assessments and other miscellaneous items.
Premium revenue was $0.1 million for 1997, an increase of $0.1 million, from $0.0 million reported for 1996. The increase was the result of new premiums relating to private label term business (term insurance sold through alternate distribution channels), which the Company began offering during the fourth quarter of 1997.
Net realized gains on investments were $2.7 million for 1997, an increase of $1.8 million, or 200.0%, from $0.9 million reported for 1996. The increase is primarily due to recoveries on mortgage allowances occurring in 1997.
Benefits to policyholders were $30.6 million for 1997, an increase of $4.2 million, or 15.9%, from $26.4 million reported for 1996. The increase is primarily due to lower death claims, net of reinsurance, and higher transfers to supplementary contracts.
Amortization of DAC was $46.3 million for 1997, an increase of $9.7 million, or 26.5%, from $36.6 million reported for 1996. This increase primarily consisted of higher amortization of $10.8 million, as compared to the prior year, relating to the Company's FPVA product line which resulted from higher profits due to an increase account value of approximately $1,028.6 million during 1997 to $3,771.9 million, as compared to $2,743.3 million in 1996. The increase in account value in 1997 resulted from new sales and other deposits of $624.5 million and market appreciation of $647.2 million, offset by approximately $243.1 million in withdrawals and surrenders.
The Company's cash inflows are provided mainly from annuity considerations and deposit funds, investment income and maturities and sales of invested assets and term life insurance premiums. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, operating expenses and income taxes. 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.
The following table sets forth the withdrawal characteristics and the surrender and withdrawal experience of the Company's total annuity reserves and deposit liabilities at December 31, 1998 and 1997 ($ in millions).
The following table sets forth by product line the actual amounts paid in connection with surrenders and withdrawals for the periods indicated ($ in millions).
The Company's principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During 1998, the Company reported net cash flow from operations of ($13.0) million, as compared to ($37.9) million in 1997. The increase in net cash flow from operations resulted primarily from lower taxes paid of $15.7 million and other miscellaneous items. The decrease in net cash flow from operations of $38.0 million, as compared to that reported for 1996, resulted primarily from an increase of taxes paid of $29.1 million and other miscellaneous items. The Company's liquid assets include 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, 1998, the Company had readily marketable fixed maturity securities with a carrying value of $1,044.2 million, which were comprised of $586.4 million public and $457.8 million private fixed maturity securities. At that date, approximately 94.9% 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, 1998 the Company had cash and cash equivalents of $133.4 million.
At December 31, 1998, the Company had commitments to issue $9.7 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 6.75% to 7.50%. The Company had no commitments outstanding for private fixed maturity securities as of December 31, 1998. In addition, at that date the Company had no outstanding commitments to issue any fixed rate commercial mortgage loans.
The National Association of Insurance Commissioners ("NAIC") established Risk Based Capital ("RBC") requirements to help state regulators monitor and safeguard life insurers' financial strength by
Approximately 87% of the operating systems, systems software, and hardware for mainframe, PC and LAN platforms were deemed compliant based on information supplied by vendors verbally, in writing, or on the vendor's Internet site. Essentially all critical hardware and software was compliant and tested by December 31, 1998. The remaining items will be resolved and tested in the first quarter of 1999. Ongoing testing for Year 2000 compliance will take place in 1999 as applications, systems software and hardware is
The Company believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that MONY Life and its subsidiaries' internal systems or equipment or those external parties on which the Company relies will be Year 2000 compliant in a timely manner or that the Company's or external parties' contingency plans will mitigate the effects of any noncompliance. Based upon currently available information and considering the Company's Year 2000 Project status, management believes that the most reasonably likely worst case scenario could result in short-term business interruptions. However, failure by the Company and/or external parties to complete Year 2000 readiness work in a timely manner could have a material adverse effect on the Company's financial position and results of its operations.
The Company has retained outside consultants to assist in the development of Business Continuity Plans, which includes identification of third party service providers, information systems, equipment, facilities, and other items which are mission-critical to the operation of the business. In conjunction with this effort, the Company is developing a Year 2000 Contingency Plan (the "Contingency Plan") to address failures due to the Year 2000 problem of third parties and other items, which are critical to the ongoing operation of the business. The Contingency Plan includes the performance of alternate processing as well as consideration for changing third party service providers, vendors, and suppliers if necessary. The scheduled date for completion of the Contingency Plan is mid-1999. The Company believes that due to the pervasive nature of potential Year 2000 issues, the contingency planning process is an ongoing one that will require further modifications as the Company obtains additional information regarding the status of third party Year 2000 readiness.
The Company had total assets at December 31, 1998 of approximately $5.9 billion of which $1.8 billion represented assets held in the Company's general account and $4.1 billion represented assets held in the Company's separate accounts, for which the Company does not generally bear investment risk.
Generally, subject to certain minimum rates, where applicable, these cash flow analyses are based on projections of cash flows using ten different interest rate scenarios over ten or more years. First a baseline interest rate is selected based on current rates. Then from the selected baseline rate the ten scenarios are: (i) level, (ii) an immediate increase of 3% and then level, (iii) an immediate decrease of 3% and then level, (iv) a uniform increase over ten years of one half a percent per year and then level, (v) a uniform decrease over ten years of one half a percent per year and then level, (vi) a uniform increase of one percent per year over five years followed by a uniform decrease of one percent per year over the next five years and then level, (vii) a uniform decrease of one percent per year over five years followed by a uniform increase of one percent per year over the next five years and then level and (viii) a decrease of 2% and then level. In addition, two of the scenarios are run with an inverted yield curve.
General account assets are managed to support all of the Company's life insurance and annuity lines of business. With respect to the general account, the Company seeks to protect policyholders' benefits through asset/liability matching, emphasizing safety of principal, maintaining sufficient liquidity and avoiding undue asset concentrations through diversification. At the same time, the Company seeks to produce an investment return that supports competitive product pricing and which contributes to achieving the required risk adjusted return on surplus. The Company's general account consists of a diversified portfolio of investments. Although all the assets of the general account support all the Company's liabilities, the Company has developed separate investment portfolios for specific classes of product liabilities within the general account. The investment area works closely with the business lines to develop investment guidelines, including duration targets, asset allocation, asset/liability mismatch tolerances and return objectives, for each product line in order to achieve each such product line's individual risk and return objectives.
The following table summarizes the invested assets held in the general account of the Company at the dates indicated ($ in millions).
The yield on general account invested assets (including net realized gains and losses on investments) was 7.6% and 7.5% for the years ended December 31, 1998 and 1997, respectively.
The following table illustrates the yields on average assets for each of the components of the Company's investment portfolio for and the years ended December 31, 1998, 1997 and 1996 ($ in millions).
- - --------------- (1) Yields are based on annual average asset carrying values, excluding unrealized gains (losses) in the fixed maturity asset category.
(4) Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings of $1.6 million, $4.6 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, real estate investment income is shown net of depreciation of $0.6 million, $0.4 million and $0.8 million for the aforementioned periods, respectively.
Fixed maturities consist of publicly traded debt securities and privately placed debt securities and represented 76.6% and 81.4% of total invested assets at December 31, 1998 and 1997, 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. Typically these credits are experiencing or anticipating liquidity constraints, having difficulty meeting projections/budgets and would most likely be considered a below investment grade risk. The fair value of potential problem fixed maturities was $16.4 million and $28.3 million at December 31, 1998 and 1997, respectively.
The following table sets forth the total carrying values of the Company's fixed maturity portfolio, as well as its problem, potential problem and restructured fixed maturities ($ in millions).
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 73.2% of the CMOs in the portfolio have minimal 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.
The Company manages this prepayment and extension risk by investing in CMO tranches that provide for greater stability of cash flows. The mix of CMO tranches was as follows as of the dates indicated ($ in millions).
Mortgage loans comprise 8.8% and 9.8% of total invested assets at December 31, 1998 and 1997, respectively. Mortgage loans consist of commercial and agricultural loans. As of December 31, 1998 and 1997, commercial mortgage loans comprised $27.6 million and $34.0 million or 23.0% and 25.7% of total mortgage loan investments, respectively. Agricultural loans comprised $92.5 million and $98.5 million or 77.0% and 74.3% of total mortgage loan investments, respectively.
In 1992, the Company discontinued making new commercial mortgage loans, except to honor outstanding commitments or safeguard the values of existing investments. In 1999, due to improving market conditions, the need to maintain a diversified investment portfolio and advantageous yields, the Company will begin to originate new commercial mortgage loans.
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 carrying value of commercial mortgage loans at December 31, 1998 was $27.6 million, which amount is net of valuation allowances aggregating $0.9 million which represents 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.
In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as 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, 1998 and 1997, such reserves were $0.4 million and $0.6 million, respectively.
The carrying value of the Company's agricultural mortgage loans was $92.5 million and $98.5 million at December 31, 1998 and 1997, respectively, representing 77.0% and 74.3% of total mortgage assets. 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 0.0% and 0.8% of total agricultural loans outstanding at December 31, 1998 and 1997, respectively, were delinquent or in process of foreclosure.
- - --------------- (1) Problem agricultural mortgages included delinquent mortgage loans of $0.0 million and $0.7 million at December 31, 1998 and 1997, respectively, and there were no mortgage loans in the process of foreclosure at such dates.
In addition to valuation allowances and impairment writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other agricultural mortgage loans based on its historical loss experience for such investments. As of December 31, 1998 and 1997, such reserves were $0.9 million and $1.0 million, respectively.
As illustrated in the table above, at December 31, 1998 and 1997 problem agricultural mortgage loans totaled $0.0 million and $0.7 million or 0.0% and 0.7% of the total carrying value of agricultural mortgages at such dates, respectively. Potential problem agricultural mortgages (not currently in a delinquent status, but with collateral impairment) totaled $0.4 million and $0.5 million or 0.4% and 0.5% of the total carrying value of agricultural mortgages at such dates, respectively, and restructured mortgages totaled $0.8 million and $0.0 million or 0.9% and 0.0% of the total carrying value of agricultural mortgages at such dates, respectively. Total problem, potential problem and restructured mortgages was $1.2 million at December 31, 1998 and 1997 or 1.3% and 1.2% of the total carrying value of agricultural mortgages at such dates, 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 $8.3 million and $2.8 million as
The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of the end of each period are shown in the table below and are reflected in the corresponding asset values discussed above ($ in millions).
All of the Company's fixed maturity 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, 1998, 1997 and 1996 such writedowns aggregated $0.4 million, $0.9 million and $0.8 million, respectively.
The carrying value of real estate to be disposed of at December 31, 1998 and 1997 was $0.0 million and $19.2 million, net of impairment adjustments of $0.0 million and $8.9 million, valuation allowances of $0.0 million and $2.2 million, and accumulated depreciation of $0.0 million and $2.6 million, respectively. Once management identifies a real estate property to be sold and commences a plan for marketing the property, the property is classified as to be disposed of and a valuation allowance is established and periodically revised, if necessary, to adjust the carrying value of the property to reflect the lower of its current carrying value or the fair value, less associated selling costs (See Note 2 to the Financial Statements). Increases in such valuation allowances are recorded as realized investment losses and, accordingly, are reflected in the Company's results of operations. For the years ended December 31, 1998, 1997 and 1996, such increases (decreases) in valuation allowances aggregated ($0.1) million, $1.0 million and ($0.1) million, respectively.