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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 333-65423
MONY LIFE INSURANCE COMPANY OF AMERICA
(Exact name of Registrant as specified in its charter)
Arizona 86-0222062
(State or other
jurisdiction (I.R.S.
of incorporation or Employer Identification
organization) No.)
1740 Broadway
New York,
New York 10019 (212) 708-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of June 30, 2002, there were 6,021 holders of the Registrant's guaranteed
interest account with market value adjustment contracts.
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MONY LIFE INSURANCE COMPANY OF AMERICA
INDEX TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1: Unaudited interim condensed balance sheets as of June 30, 2002 and
December 31, 2001....................................................... 3
Unaudited interim condensed statements of income and comprehensive
income for the three-month periods ended June 30, 2002 and 2001......... 4
Unaudited interim condensed statements of income and comprehensive
income for the six-month periods ended June 30, 2002 and 2001........... 5
Unaudited interim condensed statement of changes in shareholder's equity
for the six-month period ended June 30, 2002............................ 6
Unaudited interim condensed statements of cash flows for the six-month
periods ended June 30, 2002 and 2001.................................... 7
Notes to unaudited interim condensed financial statements............... 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............. 22
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................... 23
SIGNATURES...................................................................... S-1
1
Forward-Looking Statements
The Company's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning the Company's
operations, economic performance, prospects and financial condition.
Forward-looking statements include, among other things, discussions concerning
the Company's potential exposure to market risks, as well as statements
expressing management's expectations, beliefs, estimates, forecasts,
projections and assumptions, as indicated by words such as "believes,"
"estimates," "intends," "anticipates," "expects," "projects," "should,"
"probably," "risk," "target," "goals," "objectives," or similar expressions.
The Company claims the protection afforded by the safe harbor for
forward-looking statements as set forth in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are subject to many risks and
uncertainties. Actual results could differ materially from those anticipated by
forward-looking statements due to a number of important factors including those
discussed elsewhere in this report and in the Company's other public filings,
press releases, oral presentations and discussions, and the following: venture
capital gains or losses could differ significantly from our assumptions because
of further significant changes in equity values; fees from assets under
management could be significantly higher or lower than the Company has assumed
and there could be significant write-offs of intangible assets if there are
further major movements in the equity markets; the value of our overall
investment portfolio could fluctuate significantly as a result of additional
major changes in the equity and debt markets generally; actual death claims
experience could differ significantly from our mortality assumptions; we may
have as-yet unascertained tax liabilities; sales of variable products, mutual
funds and equity securities could differ materially from our assumptions
because of further unexpected developments in the equity markets and changes in
demand for such products; major changes in interest rates could affect our
earnings; we could have liability from as-yet unknown or unquantified
litigation and claims; pending or known litigation or claims could result in
larger settlements or judgments than we anticipate; the Company may have higher
operating expenses than anticipated; changes in law or regulation, including
tax laws, could materially affect the demand for the Company's products and the
Company's net income after tax; the Company may not achieve the assumed
economic benefits of consolidating acquired enterprises. The Company undertakes
no obligation to update or revise any forward-looking statement, whether as a
result of new information, future events, or otherwise.
2
ITEM 1:
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED BALANCE SHEETS
June 30, 2002 and December 31, 2001
June 30, December 31,
2002 2001
-------- ------------
($ in millions)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value. $1,321.2 $1,220.9
Mortgage loans on real estate............................... 147.8 132.8
Policy loans................................................ 78.4 71.6
Other invested assets....................................... 26.1 22.4
-------- --------
1,573.5 1,447.7
-------- --------
Cash and cash equivalents...................................... 113.1 102.6
Accrued investment income...................................... 24.3 22.3
Amounts due from reinsurers.................................... 34.8 34.8
Deferred policy acquisition costs.............................. 596.7 564.6
Current federal income taxes receivable........................ 49.2 24.9
Other assets................................................... 6.9 18.1
Separate account assets........................................ 3,237.6 3,589.0
-------- --------
Total assets............................................ $5,636.1 $5,804.0
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits......................................... $ 170.4 $ 156.8
Policyholders' account balances................................ 1,336.6 1,269.5
Other policyholders' liabilities............................... 75.3 77.2
Accounts payable and other liabilities......................... 48.6 94.9
Demand note payable to affiliate (Note 5)...................... 121.0 --
Note payable to affiliate (Note 6)............................. 43.4 44.6
Deferred federal income taxes.................................. 109.4 85.0
Separate account liabilities................................... 3,237.6 3,589.0
-------- --------
Total liabilities....................................... $5,142.3 $5,317.0
======== ========
Commitments and contingencies (Note 4)
Common stock $1.00 par-value; 5,000,000 shares authorized,
2,500,000 issued and outstanding............................. $ 2.5 $ 2.5
Capital in excess of par....................................... 349.6 349.7
Retained earnings.............................................. 131.9 130.1
Accumulated other comprehensive income......................... 9.8 4.7
-------- --------
Total shareholder's equity.............................. 493.8 487.0
-------- --------
Total liabilities and shareholder's equity.............. $5,636.1 $5,804.0
======== ========
See accompanying notes to unaudited interim condensed financial statements.
3
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three-month Periods Ended June 30, 2002 and 2001
2002 2001
----- -----
($ in millions)
Revenues:
Universal life and investment-type product policy fees $41.0 $36.3
Premiums.............................................. 22.1 13.8
Net investment income................................. 25.3 22.2
Net realized (losses)/gains on investments............ (2.5) 4.0
Other income.......................................... 3.4 2.2
----- -----
Total revenues........................................ 89.3 78.5
----- -----
Benefits and Expenses:
Benefits to policyholders............................. 34.5 20.6
Interest credited to policyholders' account balances.. 17.6 15.6
Amortization of deferred policy acquisition costs..... 19.3 14.1
Other operating costs and expenses.................... 27.2 18.4
----- -----
Total benefits and expenses........................... 98.6 68.7
----- -----
(Loss)/income before income taxes..................... (9.3) 9.8
Income tax (benefit) expense.......................... (3.0) 2.7
----- -----
Net (loss)/income..................................... (6.3) 7.1
Other comprehensive income/(loss), net................ 8.5 (3.6)
----- -----
Comprehensive income.................................. $ 2.2 $ 3.5
===== =====
See accompanying notes to unaudited interim condensed financial statements.
4
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six-month Periods Ended June 30, 2002 and 2001
2002 2001
------ ------
($ in millions)
Revenues:
Universal life and investment-type product policy fees $ 77.3 $ 76.4
Premiums.............................................. 41.0 26.3
Net investment income................................. 51.6 46.1
Net realized (losses)/gains on investments............ (2.2) 5.7
Other income.......................................... 7.5 5.1
------ ------
Total revenues........................................ 175.2 159.6
------ ------
Benefits and Expenses:
Benefits to policyholders............................. 60.3 45.6
Interest credited to policyholders' account balances.. 35.1 32.1
Amortization of deferred policy acquisition costs..... 33.5 24.7
Other operating costs and expenses.................... 43.5 46.6
------ ------
Total benefits and expenses........................... 172.4 149.0
------ ------
Income before income taxes............................ 2.8 10.6
Income tax expense.................................... 1.0 2.9
------ ------
Net income............................................ 1.8 7.7
Other comprehensive income, net....................... 5.1 1.9
------ ------
Comprehensive income.................................. $ 6.9 $ 9.6
====== ======
See accompanying notes to unaudited interim condensed financial statements.
5
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENT
OF CHANGES IN SHAREHOLDER'S EQUITY
Six-month Period Ended June 30, 2002
Accumulated
Capital Other Total
Common In Excess Retained Comprehensive Shareholder's
Stock of Par Earnings Income/(Loss) Equity
------ --------- -------- ------------- -------------
Balance, December 31, 2001......... $2.5 $349.7 $130.1 $4.7 $487.0
Dividend........................... (0.1) (0.1)
Comprehensive income:
Net income...................... 1.8 1.8
Other comprehensive income(1)... 5.1 5.1
------
Comprehensive income.......... 6.9
---- ------ ------ ---- ------
Balance, June 30, 2002............. $2.5 $349.6 $131.9 $9.8 $493.8
==== ====== ====== ==== ======
- ----------
(1)Represents unrealized gains on investments, net of unrealized losses,
reclassification adjustments, and taxes.
See accompanying notes to unaudited interim condensed financial statements.
6
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF CASH FLOWS
Six-month Periods Ended June 30, 2002 and 2001
2002 2001
------- -------
($ in millions)
Net cash (used in)/provided by operating activities................................. $ (72.4) $ 36.0
Cash flows from investing activities:
Sales, maturities or repayments of:
Fixed maturities................................................................. 121.4 126.6
Mortgage loans on real estate.................................................... 8.6 36.5
Other invested assets............................................................ 0.4 0.0
Acquisitions of investments:
Fixed maturities................................................................. (202.4) (180.5)
Equity securities................................................................ (1.1) (0.2)
Mortgage loans on real estate.................................................... (23.8) (31.1)
Other invested assets............................................................ 0.0 (2.8)
Policy loans, net................................................................ (6.8) (3.4)
------- -------
Net cash used in investing activities............................................... $(103.7) $ (54.9)
------- -------
Cash flows from financing activities:
Demand note payable to affiliate.................................................... 121.0 0.0
Repayment of note payable to affiliate.............................................. (1.2) (1.1)
Receipts from annuity and universal life policies credited to policyholders' account
balances.......................................................................... 382.7 427.4
Return of policyholders' account balances on annuity and universal life policies(1). (315.9) (388.7)
Capital contribution................................................................ 0.0 50.0
------- -------
Net cash provided by financing activities........................................... 186.6 87.6
------- -------
Net increase in cash and cash equivalents........................................... 10.5 68.7
Cash and cash equivalents, beginning of period...................................... 102.6 104.8
------- -------
Cash and cash equivalents, end of period............................................ $ 113.1 $ 173.5
======= =======
- ----------
(1)Includes exchanges to a new FPVA product series.
See accompanying notes to unaudited interim condensed financial statements.
7
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
1. Organization and Description of Business
MONY Life Insurance Company of America (the "Company" or "MLOA"), an Arizona
stock life insurance company, is a wholly-owned subsidiary of MONY Life
Insurance Company ("MONY Life"), formerly The Mutual Life Insurance Company of
New York, which converted from a mutual life insurance company to a stock life
insurance company on November 16, 1998 (the "Demutualization"). MONY Life is a
wholly-owned subsidiary of MONY Holdings, LLC ("MONY Holdings"), a downstream
holding company formed by The MONY Group, Inc. (the "MONY Group") on February
27, 2002. On April 30, 2002, MONY Group transferred all of its ownership
interests in MONY Life to MONY Holdings.
The Company's primary business is to provide term life insurance, variable
life insurance, variable and fixed annuities, universal life insurance, group
universal life insurance and corporate-owned and bank-owned life insurance
("COLI/BOLI") to business owners, growing families, and pre-retirees. The
Company's insurance and financial products are marketed and distributed
directly to individuals primarily through MONY Life's career agency sales force
and complementary distribution channels. These products are sold in 49 states
(not including New York), the District of Columbia and Puerto Rico.
2. Basis of Presentation
The accompanying unaudited interim condensed financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. In the opinion of management, these statements include all
normal recurring adjustments necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
presented. These statements should be read in conjunction with the financial
statements of the Company for the year ended December 31, 2001 which are
presented in the Company's 2001 Annual Report on Form 10-K. The results of
operations for the three-month period ending June 30, 2002 are not necessarily
indicative of the results to be expected for the full year. Certain
reclassifications have been made in the amounts presented for the comparative
prior periods to conform those periods to the current presentation.
3. Federal Income Taxes
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate.
4. Commitments and Contingencies
Since late 1995 a number of purported class actions have been commenced in
various state and federal courts against the Company alleging that it engaged
in deceptive sales practices in connection with the sale of whole and universal
life insurance policies from the early 1980s through the mid 1990s. Although
the claims asserted in each case are not identical, they seek substantially the
same relief under essentially the same theories of recovery (e.g., breach of
contract, fraud, negligent misrepresentation, negligent supervision and
training, breach of fiduciary duty, unjust enrichment and violation of state
insurance and/or deceptive business practice laws). Plaintiffs in these cases
seek primarily equitable relief (e.g., reformation, specific performance,
mandatory injunctive relief prohibiting the Company from canceling policies for
failure to make required premium payments, imposition of a constructive trust
and creation of a claims resolution facility to adjudicate any individual
issues remaining after resolution of all class-wide issues) as opposed to
compensatory damages, although they also seek compensatory damages in
unspecified amounts and, if they were to succeed at trial, the equitable
remedies they seek could result in significant expense to the Company. The
Company has denied any wrongdoing and has asserted numerous affirmative
defenses.
8
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (Continued)
On June 7, 1996, the New York State Supreme Court certified one of those
cases, Goshen v. The Mutual Life Insurance Company of New York and MONY Life
Insurance Company of America (now known as DeFilippo, et al v. The Mutual Life
Insurance Company of New York and MONY Life Insurance Company), the first of
the class actions filed, as a nationwide class consisting of all persons or
entities who have, or at the time of the policy's termination had, an ownership
interest in a whole or universal life insurance policy issued by the Company
that was allegedly sold on a "vanishing premium" basis during the period
January 1, 1982 to December 31, 1995. On March 27, 1997, the Company filed a
motion to dismiss or, alternatively, for summary judgement on all counts of the
complaint. All of the other putative class actions have been consolidated and
transferred by the Judicial Panel on Multidistrict Litigation to the United
States District Court for the District of Massachusetts and/or are being held
in abeyance pending the outcome of the Goshen case.
On October 21, 1997, the New York State Supreme Court granted the Company's
motion for summary judgement and dismissed all claims filed in the Goshen case
against the Company. On December 20, 1999, the New York State Court of Appeals
affirmed the dismissal of all but one of the claims in the Goshen case (a claim
under New York's General Business Law), which has been remanded back to the New
York State Supreme Court for further proceedings consistent with the opinion.
The New York State Supreme Court has subsequently reaffirmed that, for purposes
of the remaining New York General Business Law claim, the class is now limited
to New York purchasers only, and has further held that the New York General
Business Law claims of all class members whose claims accrued prior to November
29, 1992 are barred by the applicable statute of limitations. On August 9,
2001, the New York State Appellate Division, First Department, affirmed the
ruling limiting the class to New York purchasers. On January 15, 2002, the New
York State Court of Appeals granted the plaintiffs' motion for leave to appeal
from that decision. The Company intends vigorously to defend that litigation.
There can be no assurance, however, that the present litigation relating to
sales practices will not have a material adverse effect on the Company.
In addition to the matters discussed above, the Company is involved in
various other legal actions and proceedings (some of which involved demands for
unspecified damages) in connection with its business. In the opinion of
management of the Company, resolution of contingent liabilities, income taxes
and other matters will not have a material adverse effect on the Company's
results of operations.
At June 30, 2002, the Company had commitments to issue $0.8 million fixed
and floating rate commercial mortgages ranging from 4.5% to 7.7%, and $2.7
million of fixed rate agricultural loans with periodic interest rate reset
dates. The initial interest rates on such loans ranging from approximately
6.75% to 7.42%.
5. Demand Note Payable to Affiliate
On June 26, 2002, the company borrowed $121.0 million from the MONY Group in
exchange for a note payable in the same amount. The note bears interest at a
floating rate equal to Federal Funds Rate +0.15% per annum and is payable on
demand. Interest is payable quarterly to the MONY Group. The carrying value of
the note as of June 30, 2002 is $121.0 million.
6. Note Payable to Affiliate
On March 5, 1999, the Company borrowed $50.5 million from MONY Benefits
Management Corp. ("MBMC"), an affiliate, in exchange for a note payable in the
same amount. The note bears interest at 6.8% per annum and matures on March 5,
2014. Principal and interest are payable quarterly to MBMC. The carrying value
of the note as of June 30, 2002 is $43.4 million.
7. Intercompany Reinsurance Agreements
The Company entered into a modified coinsurance agreement ("MODCO") with
U.S. Financial Life Insurance Company ("USFL"), an affiliate, effective January
1, 1999, whereby the Company agrees to reinsure
9
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (Continued)
90% of all level term life insurance policies written by USFL after January 1,
1999. Under the agreement, the Company will share in all premiums and benefits
for such policies based on the 90% quota share percentage, after consideration
of existing reinsurance agreements previously in force on this business. In
addition, the Company will reimburse USFL for its quota share of expense
allowances, as defined in the agreement. The Company amended that agreement
effective January 1, 2000 to add all other term life policies and all universal
life policies written by USFL on or after January 1, 2000. Effective April 1,
2001, the Company amended that agreement to add a new series of term life
insurance policies issued by USFL. At June 30, 2002 the Company recorded a
payable of $8.3 million to USFL in connection with this agreement, which is
included in Accounts Payable and Other Liabilities in the balance sheet.
Effective September 1, 1999, the Company recaptured its reinsurance
agreements with MONY Life for all in-force and new business. The Company
simultaneously entered into new reinsurance agreements with third party
reinsurers, which reinsured the same block of business as that previously
reinsured by MONY Life. Under the new reinsurance agreements, the Company
increased its retention limits on new business for any one person for
individual products from $0.5 million to $4.0 million and on last survivor
products from $0.5 million to $6.0 million.
8. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
provides that goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least annually for
impairment. This statement provides specific guidance for testing the
impairment of goodwill and intangible assets. This statement is effective for
fiscal years beginning after December 15, 2001. This statement should not have
any material effect on the financial position or earnings of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). SFAS 144 establishes
a single accounting model for the impairment or disposal of long-lived assets,
including assets to be held and used, assets to be disposed of by other than
sale, and assets to be disposed of by sale. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS 144 retains many of the same provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of " ("SFAS 121"). In addition to retaining the SFAS 121
requirements, SFAS 144 requires companies to present the results of operations
of components of the entity that are held for sale as discontinued operations
in the consolidated statements of income and comprehensive income and to
restate prior years accordingly. Adoption of this statement is not expected to
have a significant impact on the Company's consolidated financial position or
earnings.
9. Reorganization and Other Charges
During 2001, the Company recorded charges aggregating approximately $20.7
million on a pre-tax basis, approximately $14.8 million of which represented
"Reorganization Charges" taken in connection with the Company's reorganization
of certain of its lines of business. These charges consisted of severance for
terminated employees, losses relating to the abandonment of leased office space
and certain information technology related assets. Of these reorganization
charges, approximately $1.4 million met the definition of "restructuring
charges" as defined by Emerging Issues Task Force Consensus 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". The
liability relating to the aforementioned restructuring charges at June 30, 2002
and December 31, 2001 was $1.1 million and $1.4 million, respectively.
10
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition and results of
operations of the Company for the periods indicated. This discussion and
analysis of the Company's financial condition and results of operations should
be read in conjunction with the Company's unaudited interim condensed financial
statements and the related notes to the unaudited interim condensed financial
statements included elsewhere herein, and with the Management's Discussion and
Analysis of Financial Condition and Results of Operations section included in
the Company's 2001 Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
Summary of Financial Results
The following table presents the Company's results of operations for the
three and six-month periods ended June 30, 2002 and 2001.
For the For the
Three-month Six-month
Periods Ended Periods Ended
June 30, June 30,
------------ --------------
2002 2001 2002 2001
----- ----- ------ ------
($ in millions)
Revenues:
Universal life and investment-type product policy
fees............................................ $41.0 $36.3 $ 77.3 $ 76.4
Premiums.......................................... 22.1 13.8 41.0 26.3
Net investment income............................. 25.3 22.2 51.6 46.1
Net realized (losses)/gains on investments........ (2.5) 4.0 (2.2) 5.7
Other income...................................... 3.4 2.2 7.5 5.1
----- ----- ------ ------
Total revenues................................. $89.3 $78.5 $175.2 $159.6
----- ----- ------ ------
Benefits and expenses:
Benefits to policyholders......................... 34.5 20.6 60.3 45.6
Interest credited to policyholders' account
balances........................................ 17.6 15.6 35.1 32.1
Amortization of deferred policy acquisition costs. 19.3 14.1 33.5 24.7
Other operating costs and expenses................ 27.2 18.4 43.5 46.6
----- ----- ------ ------
Total benefits and expenses.................... 98.6 68.7 172.4 149.0
----- ----- ------ ------
(Loss)/income before income taxes................. $(9.3) $ 9.8 $ 2.8 $ 10.6
===== ===== ====== ======
For the Three-Month Period Ended June 30, 2002 Compared to the Three-Month
Period Ended June 30, 2001
Policy Fees -
Universal life ("UL") and investment-type product fees were $41.0 million
for the three-month period ended June 30, 2002, an increase of $4.7 million, or
11.4%, from $36.3 million reported in the comparable prior year period. The
principal reasons for the change from period to period are as follows:
Variable Universal Life ("VUL") product fees were $16.8 million for the
three-month period ended June 30, 2002, an increase of $4.4 million from $12.4
million in the comparable prior period. The increase in VUL fees was due
primarily to the increase in new sales of such business. The increase in VUL
fees was partially offset by decreased fees of approximately $0.9 million on UL
and Guaranteed Universal Life ("GUL") products.
11
The Company, under its amended modified coinsurance agreement ("MODCO")
treaty with USFL, assumed $1.7 million of UL business for the three-month
period ended June 30, 2002, an increase of $3.0 million from $1.3 million of UL
business and term life insurance ceded for the three-month period ended
June 30, 2001.
Flexible premium variable annuity ("FPVA") product fees were $11.1 million
for the three-month period ended June 30, 2002, a decrease of $1.8 million from
$12.9 million reported in the comparable prior period. The decrease was
primarily attributable to lower mortality and expense charges of $1.1 million
and a $0.2 million decrease in surrender charges on the FPVA product. The
decrease in mortality and expense charges was due to lower fund balances in the
separate accounts. The decrease in FPVA surrender charges was due to the
positive efforts of the Company's conservation program coupled with other
measures designed to improve persistency.
Premiums -
Premium revenue was $22.1 million for the three-month period ended June 30,
2002, an increase of $8.3 million, or 60.1%, from $13.8 million reported in the
comparable prior year period. The increase was primarily the result of: (i) the
MODCO treaty between USFL and the Company, contributing $15.3 million in
assumed premiums, a $5.9 million increase from $9.4 million in assumed premiums
for the comparable prior year period (See Note 7 in the Unaudited Interim
Condensed Financial Statements), (ii) individual annuity premiums of $2.1
million, a $1.5 million increase from $0.7 million reported in the prior
comparable period, and (iii) new and renewal direct premiums on Individual Life
of approximately $4.6 million, net of reinsurance, a $0.6 million increase from
$4.5 million reported for the comparable prior year period.
Net Investment Income and Realized Gains on Investments -
Net investment income was $25.3 million for the three-month period ended
June 30, 2002, an increase of $3.1 million, or 14.0%, from $22.2 million
reported in the comparable prior year period. The increase was primarily
related to an increase in the average balance of invested assets.
Net realized losses on investments were $2.5 million for the three-month
period ended June 30, 2002, a decrease of $6.5 million or 162.5%, from a net
realized gain of $4.0 million reported in the comparable prior year period. The
following table sets forth the components of net realized (losses)/gains by
investment category for the three-month period ended June 30, 2002 compared to
the three-month period ended June 30, 2001.
For the
Three-month
Period Ended
June 30,
------------
2002 2001
----- -----
Fixed maturities................................................. $(1.8) $ 4.2
Mortgage loans................................................... (0.2) (0.2)
Other invested assets............................................ (0.5) (0.0)
----- -----
$(2.5) $ 4.0
===== =====
Other Income -
Other income was $3.4 million for the three-month period ended June 30,
2002, an increase of $1.2 million, or 54.5%, from $2.2 million reported in the
comparable prior year period. The increase related primarily to an increase in
supplementary contract sales.
Benefits to Policyholders -
Benefits to policyholders were $34.5 million for the three-month period
ended June 30, 2002, an increase of $13.9 million, or 67.5%, from $20.6 million
reported in the comparable prior year period. The increase is
12
primarily due to: (i) an increase in benefits on UL products an $8.4 million
increase from the comparable prior period as a result of poor mortality, (ii)
higher supplemental contract and individual annuity reserves of $5.8 million, a
$3.7 million increase from the comparable prior year period, and (iii) higher
FPVA benefits of $1.6 million. The increased reserves were attributable to
higher sales of accumulation products, while the higher death benefits are due
to a decline in average assets under management.
Interest Credited to Policyholders' Account Balances -
Interest credited to policyholders' account balances was $17.6 million for
the three-month period ended June 30, 2002, an increase of $2.0 million, or
12.8%, from $15.6 million reported in the comparable prior year period. This
was due primarily to higher interest crediting of $1.8 million on FPVA due to
an increase in general account funds, offset by decreases in single premium
deferred annuities ("SPDA") and certificates of annuity ("COA"). SPDA and COA
interest crediting declined due to the continued runoff of these products.
Amortization of Deferred Policy Acquisition Costs -
Amortization of deferred policy acquisition costs ("DPAC") was $19.3 million
for the three-month period ended June 30, 2002, an increase of $5.2 million, or
36.9%, from $14.1 million reported in the comparable prior year period. The
increase was primarily due to: (i) higher amortization of $3.8 million on FPVA
resulting from an adjustment to the future expected profitability assumptions
on the product, and (ii) higher amortization on VUL and corporate sponsored
variable universal life ("CSVUL") of $2.6 million and $1.1 million,
respectively, due to the growth in these businesses offset primarily by, (iii)
lower amortization on UL and individual life ("IL") of $1.4 million and $0.8
million, respectively, due to the continued run-off of these businesses.
Other Operating Costs and Expenses -
Other operating costs and expenses were $27.2 million for the three-month
period ended June 30, 2002, an increase of $8.8 million, or 47.8%, from $18.4
million reported in the comparable prior year period. The increase was
primarily due to an increase in non-dacable expenses for the USFL MODCO treaty
coupled with higher reinsurance allowances and overhead expenses.
For the Six-Month Period Ended June 30, 2002 Compared to the Six-Month Period
Ended June 30, 2001
Policy Fees -
UL and investment-type product fees were $77.3 million for the six-month
period ended June 30, 2002, an increase of $0.9 million, or 1.2%, from $76.4
million reported in the comparable prior year period. The principal reasons for
the change from period to period are as follows:
VUL product fees were $29.6 million for the six-month period ended June 30,
2002, an increase of $6.5 million from $23.1 million reported in the comparable
prior year period. The increase in fees was primarily due to higher charges for
cost of insurance, administrative charges, and unearned revenue (amounts
assigned to the policyholders for future services) of $2.3 million, $1.2
million and $3.3 million, respectively. The higher charges are the result of an
increase in the VUL block of business. The increase in VUL fees was partially
offset by a $2.2 million decrease in UL and GUL fees as these businesses
continue to run-off.
FPVA product fees were $21.6 million for the six-month period ended June 30,
2002, a decrease of $4.3 million from $25.9 million reported in the comparable
prior year period. The decrease in FPVA, net of reinsurance, was primarily due
to lower mortality and expense charges of $3.0 million and a $1.1 million
decrease in surrender charges. The decline in FPVA mortality and expense
charges is due to lower fund balances in the separate accounts, while the
decrease in surrender charges reflects the positive efforts of the Company's
conservation program and other matters designed to improve persistency.
13
Premiums -
Premium revenue was $41.0 million for the six-month period ended June 30,
2002, an increase of $14.7 million, from $26.3 million reported in the
comparable prior year period. The increase was primarily the result of: (i) a
$10.5 million increase in premiums assumed under MODCO between USFL, which has
been in effect since the third quarter of 1999 (see Note 7 in Unaudited Interim
Condensed Financial Statements), (ii) a $2.6 million increase in individual
life premiums, and (iii) a $1.5 million increase in sales of individual
annuities.
Net Investment Income and Realized Gains on Investment -
Net investment income was $51.6 million for the six-month period ended June
30, 2002, an increase of $5.5 million, or 11.9%, from $46.1 million reported in
the comparable prior year period. The increase was primarily related to an
increase in the average balance of invested assets.
Net realized losses on investments were $2.2 million for the six-month
period ended June 30, 2002, a decrease of $7.9 million, from net realized gains
of $5.7 million reported in the comparable prior year period. The following
table sets forth the components of net realized (losses)/gains by investment
category for the six-month period ended June 30, 2002 compared to the six-month
period ended June 30, 2001.
For the
Six-month
Period Ended
June 30,
------------
2002 2001
----- -----
Fixed maturities..... $(1.0) $ 4.8
Mortgage loans....... (0.1) 1.0
Other invested assets (1.1) (0.1)
----- -----
$(2.2) $ 5.7
===== =====
Other Income -
Other income was $7.5 million for the six-month period ended June 30, 2002,
an increase of $2.4 million, or 47.1%, as compared to $5.1 million in the
comparable prior year period. The increase was due to increased sales of
supplementary contracts.
Benefits to Policyholders -
Benefits to policyholders were $60.3 million for the six-month period ended
June 30, 2002, an increase of $14.6 million, or 32.2%, from $45.6 million
reported in the comparable prior year period. The increase was primarily the
result of: (i) higher assumed benefits of $2.9 million from the MODCO
reinsurance treaty with USFL due to the increased inforce business, (ii) higher
death benefits of $8.1 million on UL as a result of poor mortality, partially
offset by lower benefits of $3.1 million on VUL, (iii) a $3.0 million increase
in reserves on individual life, (iv) increased supplemental contract and
individual annuity reserves of $3.8 million, and (v) higher FPVA benefits of
$1.8 million.
Interest Credited to Policyholders' Account Balances -
Interest credited to policyholders' account balances was $35.1 million for
the six-month period ended June 30, 2002, an increase of $3.0 million, or 9.3%,
from $32.1 million reported in the comparable prior year period. The increase
was primarily the result of: (i) higher interest crediting of $3.4 million on
FPVA due to higher general account fund values, and (ii) an increase in
benefits ceded under MODCO of $1.3 million offset by, (iii) decreases in SPDA
and COA of $1.0 million due to the continued run off of these products, and
(iv) a decrease on UL of $0.5 million.
14
Amortization of Deferred Policy Acquisition Costs -
Amortization of DPAC was $33.5 million for the six-month period ended June
30, 2002, an increase of $8.8 million, or 35.6%, from $24.7 million reported in
the comparable prior year period. The increase was primarily a result of: (i)
higher amortization on VUL and CSVUL of $5.1 million and $1.7 million,
respectively, due to the growing blocks of business pertaining to these
products, and (ii) an increase in amortization on FPVA of $3.2 million due to
lower current fund balances and the resulting loss in expected future
profitability.
Other Operating Costs and Expenses -
Other operating costs and expenses were $43.5 million for the six-month
period ended June 30, 2002, a decrease of $3.1 million, or 6.7%, from $46.6
million reported in the comparable year. The decrease was due to higher dacable
expenses, partially offset by increased commission expenses and higher
reinsurance allowances.
Liquidity and Capital Resources
The Company's cash inflows are provided mainly from annuity considerations
and deposit funds, investment income and maturities, and sales of invested
assets and life insurance premiums. Cash outflows primarily relate to the
liabilities associated with its various annuity and life insurance products,
operating expenses, income taxes, acquisitions of invested assets, and
principal and interest on its outstanding debt obligations. The annuity and
life insurance liabilities relate to the Company's obligation to make benefit
payments under its annuity and insurance contracts, as well as the need to make
payments in connection with policy surrenders, withdrawals and loans.
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at June 30, 2002 and December 31, 2001.
Withdrawal Characteristics of
Annuity Reserves and Deposit Liabilities
Amount at Amount at
June 30, Percent December 31, Percent
2002 of Total 2001 of Total
--------- -------- ------------ --------
($ in millions)
Not subject to discretionary withdrawal provisions................... $ 65.3 2.0% $ 62.5 1.7%
Subject to discretionary withdrawal--with market value adjustment
or at carrying value less surrender charge......................... 2,846.2 86.9% 3,142.5 88.0%
-------- ----- -------- -----
Subtotal............................................................. 2,911.5 88.9% 3,205.0 89.7%
Subject to discretionary withdrawal--without adjustment at carrying
value.............................................................. 364.6 11.1% 367.5 10.3%
-------- ----- -------- -----
Total annuity reserves and deposit liabilities (gross of reinsurance) $3,276.1 100.0% $3,572.5 100.0%
======== ===== ======== =====
15
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
Surrenders and Withdrawals
For the For the
Three-month Six-month
Period Ended Period Ended
June 30, June 30,
------------- -------------
2002 2001 2002 2001
------ ------ ------ ------
($ in millions)
Product Line:
Variable and universal life $ 10.2 $ 12.6 $ 26.4 $ 37.9
Annuities(1)............... 99.3 97.0 183.9 208.3
------ ------ ------ ------
Total................... $109.5 $109.6 $210.3 $246.2
====== ====== ====== ======
- ----------
(1)Excludes approximately $14.7 million and $63.2 million for the three-months
ended June 30, 2002 and 2001, respectively, and $29.4 million and $121.0
million for the six-months ended June 30, 2002 and 2001, respectively,
relating to surrenders associated with an exchange program offered by the
Company wherein contract holders surrendered old FPVA and reinvested the
proceeds in a new enhanced FPVA product offered by the Company.
During the six-month period ended June 30, 2002 the net cash outflow from
operations was $72.4 million, a decrease of $108.4 million from June 30, 2001,
which had a cash inflow of $36.0 million. The decrease was primarily due to the
timing of payments of liabilities. For the six-month period ended June 30, 2002
net cash inflow from financing activities was $186.6 million, an increase of
$99.0 million from June 30, 2001, which had a cash outflow of $87.6 million.
This increase was primarily due to lower surrenders (as noted in the table
above) and funds received pursuant to a demand note payable from affiliate (see
Note 5 to the unaudited interim condensed financial statements). 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 June 30, 2002, the Company had readily marketable
fixed maturity securities with a carrying value of $1,321.2 million, which were
comprised of $647.6 million of public and $673.6 million of private fixed
maturity securities. At that date, approximately 87.2% 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 June 30, 2002, the Company had cash
and cash equivalents of $113.1 million.
At June 30, 2002, the Company had commitments outstanding of $2.7 million
for fixed rate agricultural loans with periodic interest rate reset dates. The
initial interest rates on the agricultural loans ranging between 6.75% and
7.42%. The Company had commercial mortgage commitments of $0.8 million with
interest rates ranging from 4.5% to 7.7%.
Of the $72.8 million commercial mortgage loans in the Company's investment
portfolio at June 30, 2002, $6.1 million, $8.2 million, and $2.4 million are
scheduled to mature in 2002, 2003, and 2004, respectively.
At June 30, 2002, aggregate maturities of long-term debt based on required
remaining principal payments for 2002 and the succeeding four years are $1.2
million, $2.6 million, $2.8 million, $3.0 million and $3.2 million,
respectively, and $30.6 million thereafter.
Aggregate contractual debt service payments on the Company's debt at June
30, 2002, for the remainder of 2002 and the succeeding four years are $2.7
million, $5.4 million, $5.4 million, $5.4 million and $5.4 million
respectively, and $39.0 million thereafter.
At June 30, 2002, the adjusted RBC capital ratios of all the Company's
insurance subsidiaries were in excess of the minimum capital requirements of
the RBC guidelines.
16
INVESTMENTS
The following table illustrates the net investment income yields based on
average annual asset carrying values, excluding unrealized gains (losses) in
the fixed maturity category. Equity real estate income is shown net of
operating expenses and depreciation. Total investment income includes non-cash
income from amortization, and payment-in-kind distributions. Investment
expenses include mortgage servicing fees and other miscellaneous fee income.
Investment Results by Asset Category
As of the Three-month Periods Ended June 30,
---------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Net Investment Average Asset Net Investment Average Asset
Income Yield Balances Income Yield Balances
-------------- ------------- -------------- -------------
Fixed maturity securities available-for-sale, at fair
value.............................................. 6.8% $1,244.3 7.1% $1,035.8
Mortgage loans on real estate........................ 7.7 141.3 7.1 104.4
Policy loans......................................... 9.9 76.9 1.7 72.5
Real estate(1) ...................................... (1.1) 5.1 8.6 5.5
Other invested assets................................ (11.1) 17.3 2.8 22.0
Cash and cash equivalents............................ 2.2 81.8 4.8 143.7
-------- --------
Total invested assets before investment expenses..... 6.6% $1,566.7 6.5% $1,383.9
======== ========
Investment expenses/other fee income................. (0.1) (0.1)
----- ----
Total invested assets after investment expenses...... 6.5% 6.4%
===== ====
As of the Six-month Periods Ended June 30,
---------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Net Investment Average Asset Net Investment Average Asset
Income Yield Balances Income Yield Balances
-------------- ------------- -------------- -------------
Fixed maturity securities available-for-sale, at fair
value.............................................. 6.8% $1,240.9 7.2% $1,034.1
Mortgage loans on real estate........................ 7.5 140.3 7.1 113.9
Policy loans......................................... 9.5 75.0 5.4 71.1
Real estate(1) ...................................... 0.8 5.5 8.5 5.5
Other invested assets................................ 3.3 18.8 2.6 19.7
Cash and cash equivalents............................ 2.1 86.5 5.3 133.1
-------- --------
Total invested assets before investment expenses..... 6.7% $1,567.0 6.9% $1,377.4
======== ========
Investment expenses/other fee income................. (0.1) (0.2)
----- ----
Total invested assets after investment expenses...... 6.6% 6.7%
===== ====
- ----------
(1)Real estate investments are reported as "Other invested assets" on the
Company's Unaudited Interim Condensed Balance Sheet.
The yield on general account invested assets (including net realized gains
and losses on investments) was 5.8% and 7.3% for the three-month periods ended
June 30, 2002 and 2001, respectively and 6.3% and 7.4% for the six-month
periods ended June 30, 2002 and 2001, respectively.
Fixed Maturity Securities
Fixed maturity securities consist of publicly traded and privately placed
debt securities and small amounts of preferred stock, and represent 78.3% and
78.7% of total invested assets at June 30, 2002 and December 31, 2001,
respectively.
17
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC Designations". The NAIC Designations
closely mirror the Nationally Recognized Securities Rating Organizations'
credit ratings for marketable bonds. NAIC Designations 1 and 2 include bonds
considered investment grade ("Baa" or higher by Moody's, or "BBB" or higher by
S&P) by such rating organizations. NAIC Designations 3 through 6 are referred
to as below investment grade ("Ba" or lower by Moody's, or "BB" or lower by
S&P).
Total Fixed Maturity Securities by Credit Quality
Quarter Ended June 30, 2002 Year Ended December 31, 2001
--------------------------- ---------------------------
NAIC Amortized % of Estimated Amortized % of Estimated
Rating Rating Agency Equivalent Cost Total Fair Value Cost Total Fair Value
- ------ ------------------------ --------- ----- ---------- --------- ----- ----------
Designation
------------------------
($ in millions)
1 Aaa/Aa/A................. $ 575.7 45.0% $ 597.0 $ 508.2 42.3% $ 521.8
2 Baa...................... 542.0 42.4 560.0 535.6 44.5 543.2
3 Ba....................... 116.8 9.1 117.8 105.7 8.8 104.1
4 B........................ 6.5 0.5 5.6 19.9 1.7 19.2
5 Caa and lower............ 13.9 1.1 15.6 7.6 0.6 7.6
-------- ----- -------- -------- ----- --------
Subtotal.............. $1,254.9 98.1% $1,296.0 $1,177.0 97.9% $1,195.9
Preferred stock....... 25.0 1.9 25.2 25.0 2.1 25.0
-------- ----- -------- -------- ----- --------
Total fixed maturity
securities............. $1,279.9 100.0% $1,321.2 $1,202.0 100.0% $1,220.9
======== ===== ======== ======== ===== ========
Of the Company's total portfolio of fixed maturity securities at June 30,
2002, 87.6% were investment grade and 12.4% were below investment grade.
The Company reviews all fixed maturity securities at least once each quarter
and identifies investments that management concludes require additional
monitoring. Among the criteria are: (i) violation of financial covenants, (ii)
public securities trading at a substantial discount as a result of specific
credit concerns and (iii) other subjective factors relating to the issuer.
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) are 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 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 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.
As of June 30, 2002 the fair values of the Company's problem and potential
problem fixed maturity securities were $20.0 million and $1.1 million,
respectively, which, in the aggregate, represented approximately
18
1.6% of total fixed maturity securities. As of December 31, 2001, the fair
values of the Company's problem and potential problem fixed maturities were
$8.7 million and $1.1 million, respectively, which, in the aggregate,
represented approximately 0.8% of total fixed maturity securities. In addition,
at June 30, 2002 and December 31, 2001 the Company had no fixed maturity
securities which have been restructured.
At June 30, 2002, the Company's largest unaffiliated single concentration of
fixed maturity securities was $42.6 million of Federal Home Loan Mortgage Corp.
("FHLMC") fixed maturity securities which represents 2.5% of total invested
assets. The largest non-government issuer consists of $20.7 million, which
represents approximately 1.2% of total invested assets at June 30, 2002. No
other individual non-government issuer represents more than 1.0% of total
invested assets.
The Company held approximately $192.5 million and $212.9 million of
mortgage-backed and asset-backed securities as of June 30, 2002 and December
31, 2001, respectively. Of such amounts, $26.5 million and $39.9 million, or
13.8% and 18.8%, respectively, represented agency-issued pass-through and
collateralized mortgage obligations ("CMOs") secured by the Federal National
Mortgage Association ("FNMA"), the FHLMC, and the Government National Mortgage
Association ("GNMA"). The balance of such amounts was comprised of other types
of mortgage-backed and asset-backed securities. The Company believes that its
active monitoring of its portfolio of mortgage-backed securities and the
limited extent of its holdings of more volatile types of mortgage-backed
securities mitigate the Company's exposure to losses from prepayment risk
associated with interest rate fluctuations for this portfolio. At June 30, 2002
and December 31, 2001, 74.9% and 76.5%, respectively, of the Company's
mortgage-backed and asset-backed securities were assigned an NAIC Designation
1. In addition, the Company believes that it holds a relatively low percentage
of CMOs compared to other life insurance companies.
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated.
Mortgage and Asset-Backed Securities
As of As of
June 30, December 31,
2002 2001
-------- ------------
($ in millions)
CMOs...................................................... $ 57.8 $ 77.9
Asset-backed securities................................... 125.9 126.1
Commercial MBSs........................................... 8.8 8.7
Pass-through securities................................... 0.0 0.2
------ ------
Total MBSs and asset-backed securities.................... $192.5 $212.9
====== ======
19
The amortized cost and estimated fair value of fixed maturity securities, by
contractual maturity dates, (excluding scheduled sinking funds) as of June 30,
2002 and December 31, 2001 are as follows:
Fixed Maturity Securities by Contractual Maturity Dates
As of June 30, 2002 As of December 31, 2001
-------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
($ in millions)
Due in one year or less............ $ 24.5 $ 24.8 $ 37.1 $ 37.7
Due after one year through five
years............................ 428.8 445.6 358.7 369.4
Due after five years through ten
years............................ 557.0 573.8 512.2 514.1
Due after ten years................ 82.1 84.5 86.0 86.8
-------- -------- -------- --------
Subtotal........................ $1,092.4 $1,128.7 $ 994.0 $1,008.0
Mortgage-backed and other
asset-backed securities.......... 187.5 192.5 208.0 212.9
-------- -------- -------- --------
Total........................... $1,279.9 $1,321.2 $1,202.0 $1,220.9
======== ======== ======== ========
Mortgage Loans
Mortgage loans comprised 8.8% and 8.6% of total invested assets as of June
30, 2002 and December 31, 2001, respectively. Mortgage loans consist of
commercial and agricultural loans. As of June 30, 2002 and December 31, 2001,
commercial mortgage loans comprised $72.8 million and $60.6 million or 49.3%
and 45.6% of total mortgage loan investments, respectively. Agricultural loans
comprised $75.0 million and $72.2 million, or 50.7% and 54.4% of total mortgage
loan investments at June 30, 2002 and December 31, 2001, respectively.
Commercial Mortgage Loans
For commercial mortgages, the carrying value of the largest amount loaned on
any one single property aggregated $17.8 million and represented 1.1% of
general account invested assets as of June 30, 2002. No other mortgage loan
represents more than 0.9% of invested assets. Total mortgage loans to the five
largest borrowers accounted in the aggregate for 78.9% of the total carrying
value of the commercial loan portfolio and less than 3.5% of total invested
assets at June 30, 2002.
The following table presents the Company's commercial mortgage loan maturity
profile for the periods indicated.
Commercial Mortgage Loan Portfolio Maturity Profile
As of As of
June 30, December 31,
2002 2001
-------------- --------------
Carrying % of Carrying % of
Value Total Value Total
-------- ----- -------- -----
($ in millions)
Due in one year or less............... $ 6.1 8.4% $ 6.2 10.2%
Due after one year through five years. 13.7 18.9 8.0 13.2
Due after five years through ten years 40.4 55.5 33.8 55.8
Due after ten years................... 12.6 17.2 12.6 20.8
----- ----- ----- -----
Total.............................. $72.8 100.0% $60.6 100.0%
===== ===== ===== =====
20
Problem, Potential Problem and Restructured Commercial Mortgages
Loans that are delinquent and loans in process of foreclosure are
categorized by the Company as "problem" loans. Loans with valuation allowances,
but that are not currently delinquent, and loans, which are on watchlist, are
categorized by the Company as "potential problem" loans. Loans for which the
original terms of the mortgages have been modified or for which interest or
principal payments have been deferred are categorized by the Company as
"restructured" loans.
The carrying value of commercial mortgage loans at June 30, 2002 was $72.8
million. There are currently no valuation allowances netted against the
carrying value, however, there can be no assurance that future valuation
allowances will not be necessary. Any such valuation allowances may have a
material adverse effect on the Company's financial position and results of
operations.
At June 30, 2002, the carrying value of restructured loans was $3.1 million.
There were no problem or potential problem loans at June 30, 2002.
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 June 30, 2002 and December 31, 2001 such reserves were
$0.9 million and $0.7 million, respectively.
Agricultural Mortgage Loans
Problem, Potential Problem and Restructured Agricultural Mortgages
The Company defines problem, potential problem and restructured agricultural
mortgages in the same manner as it does for commercial mortgages. Total
problem, potential problem and restructured agricultural mortgages at June 30,
2002 and December 31, 2001 were $2.6 million and $2.2 million, respectively.
Problem agricultural mortgages included delinquent mortgage loans of $0.4
million and $0.9 million at June 30, 2002 and December 31, 2001, respectively,
and there were mortgage loans in the process of foreclosure of $0.0 million and
$0.5 million at such dates.
In addition to valuation allowances and impairment writedowns recorded on
specific agricultural mortgage loans classified as problem, potential problem,
and restructured mortgages, 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 June 30, 2002 and
December 31, 2001, such reserves were $0.7 million and $0.7 million,
respectively.
21
Investment Impairments and Valuation Allowances
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.
Cumulative Impairment Adjustments and Provisions For Valuation Allowances on
Investments
As of June 30, 2002 As of December 31, 2001
---------------------------- ----------------------------
Impairment Valuation Impairment Valuation
Adjustments Allowances Total Adjustments Allowances Total
----------- ---------- ----- ----------- ---------- -----
Fixed maturities $5.7 $0.0 $5.7 $3.5 $0.0 $3.5
Mortgages....... 0.0 1.6 1.6 0.0 1.4 1.4
Real estate..... 1.0 1.1 2.1 1.0 0.4 1.4
---- ---- ---- ---- ---- ----
Total........ $6.7 $2.7 $9.4 $4.5 $1.8 $6.3
==== ==== ==== ==== ==== ====
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Refer to the Company's 2001 Annual Report on Form 10-K for a description of
the Company's exposures to market risk, as well as the Company's objectives,
policies and strategies relating to the management of such risks. The relative
sensitivity to changes in fair value from interest rates and equity prices at
June 30, 2002 is not materially different from that presented in the Company's
2001 Annual Report on Form 10-K at December 31, 2001.
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Unaudited Interim Condensed Financial Statements. In
addition to the matters discussed therein, in the ordinary course of its
business the Company is involved in various other legal actions and proceedings
(some of which involve demands for unspecified damages), none of which is
expected to have a material adverse effect on the Company.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONY LIFE INSURANCE COMPANY OF
AMERICA
By: /s/ RICHARD DADDARIO
-----------------------------
Richard Daddario
Director, Vice President and
Controller
(Principal Financial and
Accounting Officer)
Signatory and Principal
Date: August 14, 2002
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