External factors, such as legislation and regulation of the insurance marketplace and products, may also affect our profitability.
During 2002, the Company revised its estimate of the ultimate amount of gross profits to be earned from its annuity in force block of business. This revision reflects the decline in annuity in force account values during the year due primarily to the deterioration of the equity securities markets. As a result of this revised estimate, the Company recorded a charge of $16.3 million during 2002 to reflect the amount of DPAC amortization that should have been recorded through December 31, 2002 based on the Company’s best estimate of the ultimate gross profits from the annuity in force business. In addition, the Company recorded a charge of $1.6 million representing its best estimate of the amount of annuity in force DPAC that is not recoverable based on the estimated present value of future gross profits expected to emerge from this business.
The Company May Be Required to Recognize in its Earnings “Other Than Temporary Impairment” Charges on its Investments in Fixed Maturity and Equity Securities, as Well as Mark to Market Losses on Certain of its Venture Capital Investments
Other operating costs and expenses were $474.7 million for 2002, a decrease of $44.7 million, or 8.6%, from $519.4 million for 2001. The decrease is primarily attributable to decreases in the Protection Products segment, Accumulation Products segment, Other Products segment and reconciling amounts of $18.9 million, $7.8 million, $4.0 million and $14.0 million, respectively. The decreases in the Protection Products and Accumulation Products segments are primarily attributable to lower compensation and other miscellaneous expenses of $18.6 million and $9.7 million, respectively, partially offset by higher costs related to the Company’s employee benefit plans of $6.6 million and $2.0 million, respectively. The decrease in reconciling amounts relates primarily to a decrease in reorganization charges of $27.0 million (see Note 24 to the Consolidated Financial Statements), partially offset by an increase in interest expense of $13.1 million. The increased interest expense relates primarily to the issuance of the Insured Notes on April 30, 2002. See Notes 19 and 20 to the Consolidated Financial Statements.
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 is primarily due to a decrease in interest crediting on overdue policy claims.
· issued by a company that went into bankruptcy subsequent to our acquisition of the investments, or
The largest amount loaned on any single property at December 31, 2002, December 31, 2001 and 2000 was $49.5 million, $52.2 million and $46.0 million, respectively, and represented less than 0.5%, 0.5% and 0.4% of our General Account invested assets, respectively. At these dates, amounts loaned on twenty properties were $22.5 million or greater, representing in the aggregate 36.8%, 37.6% and 38.4%, respectively, of the total carrying value of our commercial mortgage loan portfolio. Total mortgage loans to the five largest borrowers accounted in the aggregate for approximately 18.3%, 17.8% and 21.8% of the total carrying value of our commercial mortgage loan portfolio at December 31, 2002, 2001 and 2000, respectively, and less than 2.5%, 2.5% and 2.8%, respectively, of our total invested assets at these dates. All of these loans are performing. Our commercial mortgage loan portfolio is managed by a group of experienced real estate professionals. These professionals monitor the performance of the loan collateral, physically inspect properties, collect financial information from borrowers and keep in close contact with borrowers and the local broker communities to assess the market conditions and evaluate the impact of those conditions on property cash flows. Our real estate professionals identify problem and potential problem mortgage assets and develop workout strategies to deal with borrowers’ financial weakness, whether by foreclosing on properties to prevent a deterioration in collateral value, or by restructuring mortgages with temporary cash flow difficulties.
The carrying value of our commercial mortgage loans at December 31, 2002 was $1,570.5 million, which is net of valuation allowances aggregating $32.1 million. The valuation allowance represents our best estimate of impairments at that date. However, there can be no assurance that increases in valuation allowances will not be necessary. Any increases may have a material adverse effect on our financial position and results of operations.
At December 31, 2002, 2001 and 2000, 13.3% ($1,570.5 million), 13.8% ($1,507.8 million) and 13.3% ($1,443.3 million), respectively, of our General Account invested assets consisted of commercial mortgage loans. Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances for impairment. We provide valuation allowances for commercial mortgage loans when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Increases in the valuation allowances are recorded as realized investment losses and reflected in our results of operations. For the years ended December 31, 2002, 2001, 2000 and 1999, increases (decreases) in valuation allowances aggregated $1.4 million, $(3.8) million, $(20.3) million, and $9.5 million, respectively. The carrying value of our commercial mortgage loans at December 31, 2002 was $1,570.5 million. That amount is net of $32.1 million representing our best estimate of cumulative impairment losses at that date.
Fixed maturities consist of publicly traded debt securities and privately placed debt representing 68.1%, 67.4% and 64.6% of total Closed Block invested assets at December 31 2002, 2001 and 2000, respectively.
During the second quarter of 2002, out of the proceeds from the dividend we made to MONY Group, MONY Group loaned MONY Life and MONY Life Insurance Company of America $48.1 million and $121.0 million, respectively. During the third quarter of 2002, MONY Group loaned MONY Life an additional $24.6 million out of the proceeds from the aforementioned dividend. The loans are in the form of demand loans, which allow MONY Group the ability to require repayment at its discretion. The loans were made to effectively enable MONY Group to invest the funds from the issuance of the old notes in higher yielding, longer duration investments until such time as the funds could be permanently invested by MONY Group. The ability of MONY Life and MONY Life Insurance Company of America to invest the funds in longer duration securities is possible because both MONY Life and MONY Life Insurance Company of America have other sources of cash flow that enable them to fund the aforementioned demand when it occurs. The loans bear interest at a floating rate equal to the Federal Funds Rate plus 0.15% per annum. On September 24, 2002, MONY Life Insurance Company repaid to MONY Group the entire amount of the principal outstanding on its loan of $67.7 million plus interest accrued through that date of $0.3 million.
The following discussion and analysis addresses the financial condition and results of operations of MONY Life as reported in accordance with Statutory Accounting Practices for the year ended December 31, 2002 as compared to the year ended December 31, 2001. You should read this discussion in conjunction with MONY Life’s Statutory Accounting Practices Financial Statements in this Annual Report on Form 10K.
A reconciliation of MONY Life’s capital and surplus between practices prescribed or permitted by the State of New York and Codified SAP is shown below:
The increase in annuity deposits of $16.7 million was primarily due to an increase of $35.0 million from a new flexible premium deferred annuity product offered in 2002 which featured very competitive rates, offset by a decrease in flexible premium variable annuity deposits of $18.4 million. The decrease in flexible premium variable annuity deposits was primarily due to the impact of an exchange program initiated by MONY Life in 2000 offset by an increase in new deposits of $2.1 million. The exchange program represented an offer to contractholders whereby they were given the ability, free of charge, to exchange their old flexible premium variable annuity contracts for a new enhanced flexible premium variable annuity contract offered by MONY Life. This exchange program accounted for annuity deposits of $8.7 million during the year ended December 31, 2002, as compared to $29.2 million for the comparative prior year period, a decrease of $20.5 million
The limited partnerships in which MONY Life 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 the 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 this distribution, MONY Life, in accordance with statutory accounting practices applied in 2002 and prior years, will:
The following table summarizes the components of other operating expenses for the years ended December 31, 2002 and 2001, respectively.
MONY’s principal sources of liquidity to meet unexpected cash outflows are its portfolio of liquid assets and its net operating cash flow. MONY reported net cash flow from operations of $381.1 million in 2002 and $155.3 million in 2001. MONY’s liquid assets include substantial Treasury holdings, short-term money market investments and marketable long-term fixed income securities. Management believes that the Company’s sources of liquidity are more than adequate to meet its anticipated needs. As of December 31, 2002, MONY had total liquidity of approximately $5.0 billion comprised of $3.2 billion public and $1.8 billion private bonds in categories 1 and 2 and cash and short-term investments of $104 million.
to produce cash flows which, together with anticipated revenues from the Closed Block in force business, are expected to be sufficient to support the Closed Block in force business, including but not limited to the payment of claims and surrender benefits, certain expenses and taxes, and for the continuation of dividend scales in effect at the date of MONY Life’s demutualization (assuming the experience underlying such dividend scales continues), and for appropriate adjustments in such scales if the experience changes. To determine the amount of assets to allocate to the Closed Block in order to provide sufficient funding for the aforementioned payments, MONY Life forecasted the expected cash flows from the Closed Block in force business and mathematically determined the cash flows that would need to be provided from assets allocated to the Closed Block to fully fund the aforementioned payments. Assets were then allocated to the Closed Block accordingly. The aforementioned forecast consists of a cash flow projection for each year over the estimated life of the policies in the Closed Block. The earnings from such expected cash flows from the Closed Block in force business and the assets allocated to the Closed Block are referred to as the “glide path earnings”.
4. Investment Income, Realized and Unrealized Investment Gains (Losses), and Comprehensive Income:
Amounts reported as “reconciling amounts” in the table below primarily relate to: (i) contracts issued by the Company relating to its employee benefit plans, (ii) interest expense associated with the surplus and intercompany surplus notes, (iii) charges totaling $7.2 million and $56.8 million in 2002 and 2001, respectively, associated with the Company’s reorganization (see Note 23), and (iv) a $1.5 million decrease in 2002 in certain reserves established in connection with the reorganization charge recorded in 2001 (see Note 23).
The Company has a qualified pension plan covering substantially all of its salaried employees. The provisions of the plan provide both (a) defined benefit accruals based on: (i) years of service, (ii) the employee’s final average annual compensation and (iii) wage bases or benefits under Social Security and (b) defined contribution accruals based on a Company matching contribution equal to 100% of the employee’s elective deferrals under the incentive savings plan for employees up to 3% of the employee’s eligible compensation and an additional 2% of eligible compensation for each active participant. Effective June 15, 1999, prospective defined contribution accruals in the defined benefit plan ceased and were redirected to the Investment Plan Supplement for Employees of MONY Life. The Company did not make any contribution in the current year or prior year under Section 404 of the Internal Revenue Code (“IRC”) because the plan was fully funded under Section 412 of the IRC.
The Company files a consolidated federal income tax return with its parent, The MONY Group Inc. and its other subsidiaries, as well as the Company’s life and non-life affiliates except Sagamore Financial Corporation and its subsidiaries (see Note 3).
Expenses of approximately $6.0 million relating to the Final Value Payment are recorded in “Other operating costs and expenses” on the Company’s consolidated statement of income and comprehensive income.
The states with the largest concentrations of mortgage loans and real estate investments at December 31, 2002 are: California, $236.8 million (11.5%); Arizona $212.2 million (10.3%); Texas, $186.2 million (9.1%); Washington D.C., $149.0 million (7.2%); New York, $145.7 million (7.1%); Georgia, $137.5 million (6.7%); and Minnesota, $97.2 million (4.7%).
Includes the assets and liabilities of MONY Holdings as of December 31, 2002.
The statutory surplus of MONY Life as of December 31, 2002 was $906.4 million, of which $555.6 million was attributable to the Ongoing Business and $350.8 million was attributable to the Closed Block Business. Statutory net gain from operations of MONY Life for the year ended December 31, 2002 was $154.6 million, of which 59.3 million was attributable to the Ongoing Business and $95.3 million was attributable to the Closed Block Business. The net gain from operations attributable to the Closed Block Business includes: (i) the net contribution to income from the Surplus and Related Assets from April 30, 2002 (the date of commencement of operations of the Closed Block Business) through December 31, 2002, and (ii) the results of operations from the Closed Block from January 1, 2002 through December 31, 2002.
During 2002, MONY Holdings commenced activities to register the Insured Notes with the SEC as provided for under the note indenture. On February 14, 2003, the SEC declared such registration effective.
In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and capital and surplus of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Notes 2 and 3.
· Postretirement benefits are accrued at the time employees are vested or retire under SAP; whereas under GAAP, an obligation for such benefits is accrued over the service period for all eligible employees.
Bonds are stated at amortized cost, except those bonds not in good standing, which are carried at approximate fair value. Loan-backed bonds and structured securities are valued at amortized cost using the effective interest method considering anticipated prepayments at the date of purchase; significant changes in the estimated cash flows from the original purchase assumptions are accounted for using the retrospective method. Redeemable preferred stocks are carried principally at cost except for those securities in or near default, which are carried at fair value. The carrying values of these investments are adjusted for impairment deemed to be other than temporary through write-downs recorded as realized losses. Investments where impairment is deemed other than temporary are reviewed to assess whether such investments should be placed on non-accrual status.
Reserves computed by a modified commissioners’ reserve method represent approximately 82% and 81% of gross life insurance reserves at December 31, 2002 and 2001, respectively. Reserves for life insurance were principally determined by using the 1941, 1958 and 1980 Commissioners’ Standard Ordinary Mortality and the American Experience Tables and assumed interest rates ranging from 2 percent to 7 percent. Reserves for individual and group annuity mortality tables have assumed interest rates ranging from 2.5 percent to 9.5 percent.
For the year ended 2002, premiums under individual and group insurance participating policies were $586.0 million, or 79.9% of individual and group premiums earned. The aggregate amount of divisible surplus to be distributed during the year is determined by company management with due recognition to factors including solvency of the Company, its ability to meet all contractual obligations, and the existence of the Closed Block which was established as part of MONY’s Plan of Reorganization effective November 16, 1998. The aggregate divisible surplus is then divided among policyholders in the proportion that their policies are considered to have contributed to divisible surplus. In addition, as specified in MONY’s Plan of Reorganization, dividend scales for Closed Block policies are based on changes in the specific experience for this business relative to the experience underlying the 1998 dividend scale. The change in the liability for dividends payable in the following year is charged or credited to current year operations. The Company paid dividends in the amount of $204.2 million to policyholders in 2002 and did not allocate any additional income to such policyholders.
The Company amortizes electronic data processing equipment (EDP) on a straight-line basis over a three year period. The Company recorded EDP depreciation expense of $3.3 million and $4.6 million for the years ended December 31, 2002 and 2001, respectively. EDP equipment totaled $20.0 million, accumulated depreciation was $15.5 million, and the net admitted asset was $4.5 million at December 31, 2002.
At December 31, 2002, 64.4% of the Company’s Collateralized Mortgage Obligation (CMO) portfolio was held in U.S. government and government agency-backed securities. The remainder of the CMO portfolio consisted of NAIC category 1-investment grade securities.
The Company has service agreements with certain subsidiaries to provide personnel services, facilities, supplies and equipment as shall reasonably be necessary to conduct business. These agreements provide for reimbursement of actual costs and are subject to cancellation upon written notice by either party. Income related to these agreements were $194.3 million and $165.3 million in 2002 and 2001 respectively. In addition, the Company recorded an intercompany receivable of $23.5 million and $62.2 million at December 31, 2002 and 2001, respectively, related to these agreements.
The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 80.19%.
At December 31, 2002 and 2001 the Company held investments in restructured mortgage loans of $29.4 million and $59.8 million, respectively. The Company recorded realized losses of $6.0 million related to these loans during 2002. The Company accrues interest income on impaired loans to the extent it is deemed collectible (delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis.
During 2002 and 2001, realized capital gains/(losses) resulting from changes in interest rates on bonds, redeemable preferred stocks, and mortgage loans of $11.5 million (net of $6.2 million tax) and $4.5 million (net of $2.4 million tax), respectively, were transferred to the Company’s IMR for future amortization into net income. Included in realized capital gains/(losses) with other invested assets are other than temporary charges related to the Company’s venture capital interests of $26.4 million.
The Company’s use of derivatives is regulated by New York Insurance Regulation. Pursuant to such regulation the Company may only utilize derivatives for certain applications as specified in its Derivatives Use Plan filed with the New York Insurance Department. In accordance with this plan the Company may utilize the following derivatives from time to time for the purposes discussed below:
As of December 31, 1997, the Company reinsured 100 percent of its net retained individual disability (“DI”) business. Total ceded reserves, claim and dividend liabilities under these agreements were $384.8 million and $389.5 at December 31, 2002 and 2001 respectively.
Pre-tax operating gains and pre-tax operating losses, as reported in the accompanying statements of operations, differ from the taxable income reported for tax purposes. Among the more significant book to tax adjustments at December 31, 2002 and 2001 were the following (in millions):
The Company has an incentive savings plan in which substantially all employees and career field underwriters are eligible to participate. The Company matches employee contributions up to 3% and field underwriter contributions up to 2% of eligible compensation, as defined, and may also make an additional profit sharing contribution for non-officer employees. The Company made employer contributions on these plans of $4.9 million and $5.7 million in 2002 and 2001, respectively. At December 31, 2002 and 2001, the fair value of plan assets was $331.8 million and $383.5 million, respectively.
capitalization ratio not to exceed 40%, and cash and cash equivalents on a separate company basis equal to or greater of $75.0 million or one and one half years debt service. As of December 31, 2002, MONY Group was in compliance with each of the covenants as follows: (i) MONY Life’s tangible net worth determined in accordance with Statutory Accounting Practices (including capital and surplus plus asset valuation reserves) totaled $1,118.1 million, (ii) MONY Group’s debt to total capitalization ratio was 30.7%, and (iii) MONY Group had cash and cash equivalents of $168.4 million. For purposes of the facility, cash and cash equivalents is defined to include only commercial paper rated at least A1/P1 and US Treasuries. MONY Group has not borrowed against the facility since its inception, and did not have any commercial paper outstanding as of December 31, 2002.
The Company recorded pre-tax charges of $7.1 million and $18.0 million during 2002 and 2001, respectively, as a result of the reorganization of certain of its businesses. This charge primarily consists of severance for terminated employees, write-off of certain furniture and equipment, and other charges. These costs were charged against operations on the Company’s Summary of Operations.