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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 September 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 of (I.R.S. Employer
incorporation or organization) Identification 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 September 30, 2002, there were 6,480 holders of the Registrant's
guaranteed interest account with market value adjustment contracts.
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MONY LIFE INSURANCE COMPANY OF AMERICA
FORM 10-Q
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1: Financial Statements
Unaudited interim condensed balance sheets as of September 30, 2002 and
December 31, 2001....................................................... 3
Unaudited interim condensed statements of income and comprehensive
income for the three-month periods ended September 30, 2002 and 2001.... 4
Unaudited interim condensed statements of income and comprehensive
income for the nine-month periods ended September 30, 2002 and 2001..... 5
Unaudited interim condensed statement of changes in shareholder's equity
for the nine-month period ended September 30, 2002...................... 6
Unaudited interim condensed statements of cash flows for the nine-month
periods ended September 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........................................................... 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk.............. 26
Item 4: Controls and Procedures................................................. 26
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................... 27
Item 6: Exhibits and Reports on Form 8-K........................................ 27
SIGNATURES...................................................................... 28
CERTIFICATIONS.................................................................. 29
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. 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 the following: we could have further venture
capital losses; we could have to accelerate amortization of deferred policy
acquisition costs if market conditions continue to deteriorate; we could have
to write off investments in certain securities if the issuers' financial
condition deteriorates; actual death-claim experience could differ from our
mortality assumptions; the Company may not achieve anticipated levels of
operational efficiency and cost-savings initiatives; the Company could have
liability from as-yet-unknown litigation and claims; larger settlements or
judgments than we anticipate could result in pending cases due to unforeseen
developments; and changes in laws, including tax laws, could affect the demand
for the Company's products. The Company does not undertake to update or revise
any forward-looking statement, whether as a result of new information, future
events, or otherwise.
2
ITEM 1: FINANCIAL STATEMENTS
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED BALANCE SHEETS
As of September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
------------- ------------
($ in millions)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value. $1,493.3 $1,220.9
Equity securities available-for-sale, at fair value......... 5.2 4.6
Mortgage loans on real estate............................... 290.9 132.8
Policy loans................................................ 78.6 71.6
Other invested assets....................................... 18.2 17.8
-------- --------
1,886.2 1,447.7
-------- --------
Cash and cash equivalents...................................... 50.6 102.6
Accrued investment income...................................... 32.0 22.3
Amounts due from reinsurers.................................... 34.6 34.8
Deferred policy acquisition costs.............................. 582.6 564.6
Current federal income taxes receivable........................ 65.7 24.9
Other assets................................................... 1.2 18.1
Separate account assets........................................ 2,812.4 3,589.0
-------- --------
Total assets............................................ $5,465.3 $5,804.0
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits......................................... $ 174.9 $ 156.8
Policyholders' account balances................................ 1,486.3 1,269.5
Other policyholders' liabilities............................... 74.8 77.2
Accounts payable and other liabilities......................... 53.6 94.9
Demand note payable to affiliate (Note 5)...................... 121.0 --
Note payable to affiliate (Note 6)............................. 42.7 44.6
Deferred federal income taxes.................................. 127.6 85.0
Separate account liabilities................................... 2,812.4 3,589.0
-------- --------
Total liabilities....................................... $4,893.3 $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....................................... 424.7 349.7
Retained earnings.............................................. 127.7 130.1
Accumulated other comprehensive income......................... 17.1 4.7
-------- --------
Total shareholder's equity.............................. 572.0 487.0
-------- --------
Total liabilities and shareholder's equity.............. $5,465.3 $5,804.0
======== ========
See accompanying notes to unaudited interim condensed financial statements.
3
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three-month Periods Ended September 30, 2002 and 2001
2002 2001
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($ in millions)
Revenues:
Universal life and investment-type product policy fees $ 42.0 $39.0
Premiums.............................................. 22.0 14.9
Net investment income................................. 27.7 25.8
Net realized (losses)/gains on investments............ (0.9) 2.2
Other income.......................................... 3.6 2.5
------ -----
Total revenues........................................ 94.4 84.4
------ -----
Benefits and Expenses:
Benefits to policyholders............................. 30.7 22.0
Interest credited to policyholders' account balances.. 18.7 17.5
Amortization of deferred policy acquisition costs..... 29.4 10.2
Other operating costs and expenses.................... 22.2 27.0
------ -----
Total benefits and expenses........................... 101.0 76.7
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(Loss)/income before income taxes..................... (6.6) 7.7
Income tax (benefit)/expense.......................... (2.3) 3.2
------ -----
Net (loss)/income..................................... (4.3) 4.5
Other comprehensive income, net....................... 7.4 7.0
------ -----
Comprehensive income.................................. $ 3.1 $11.5
====== =====
See accompanying notes to unaudited interim condensed financial statements.
4
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Nine-month Periods Ended September 30, 2002 and 2001
2002 2001
------ ------
($ in millions)
Revenues:
Universal life and investment-type product policy fees $119.2 $115.4
Premiums.............................................. 63.0 41.2
Net investment income................................. 79.3 71.9
Net realized (losses)/gains on investments............ (3.1) 7.9
Other income.......................................... 11.1 7.6
------ ------
Total revenues........................................ 269.5 244.0
------ ------
Benefits and Expenses:
Benefits to policyholders............................. 91.0 67.6
Interest credited to policyholders' account balances.. 53.7 49.6
Amortization of deferred policy acquisition costs..... 62.9 34.8
Other operating costs and expenses.................... 65.6 73.6
------ ------
Total benefits and expenses........................... 273.2 225.6
------ ------
(Loss)/income before income taxes..................... (3.7) 18.4
Income tax (benefit)/expense.......................... (1.3) 6.1
------ ------
Net (loss)/income..................................... (2.4) 12.3
Other comprehensive income, net....................... 12.4 8.9
------ ------
Comprehensive income.................................. $ 10.0 $ 21.2
====== ======
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
For the Nine-month Period Ended September 30, 2002
Capital Accumulated
In Other Total
Common Excess Retained Comprehensive Shareholder's
Stock of Par Earnings Income Equity
------ ------- -------- ------------- -------------
Balance, December 31, 2001........ $2.5 $349.7 $130.1 $ 4.7 $487.0
Capital contribution.............. 75.0 75.0
Comprehensive income:
Net loss....................... (2.4) (2.4)
Other comprehensive income (1). 12.4 12.4
------
Comprehensive income....... 10.0
------
Balance, September 30, 2002....... $2.5 $424.7 $127.7 $17.1 $572.0
==== ====== ====== ===== ======
- ----------
(1)Represents unrealized gains on investments, net of unrealized losses,
reclassification adjustments and taxes.
See accompanying notes to unaudited interim condensed financial statements.
6
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF CASH FLOWS
For the Nine-month Periods Ended September 30, 2002 and 2001
2002 2001
------- -------
($ in millions)
Net cash used in operating activities............................................... $ (87.6) $ (49.9)
Cash flows from investing activities:
Sales, maturities or repayments of:
Fixed maturity securities........................................................ 205.1 255.5
Equity securities................................................................ -- 0.1
Mortgage loans on real estate.................................................... 20.4 41.2
Other invested assets............................................................ 0.4 --
Acquisitions of investments:
Fixed maturity securities........................................................ (410.8) (291.8)
Equity securities................................................................ (1.1) (3.4)
Mortgage loans on real estate.................................................... (180.0) (57.2)
Other invested assets............................................................ (0.3) (3.0)
Policy loans, net................................................................ (7.0) (0.7)
------- -------
Net cash used in investing activities............................................... (373.3) (59.3)
------- -------
Cash flows from financing activities:
Demand note payable to affiliate.................................................... 121.0 --
Repayment of note to affiliate...................................................... (1.8) (1.7)
Receipts from annuity and universal life policies credited to policyholders' account
balances (1)...................................................................... 632.7 624.5
Return of policyholders' account balances on annuity and universal life policies (1) (418.0) (547.4)
Capital contribution................................................................ 75.0 50.0
------- -------
Net cash provided by financing activities........................................... 408.9 125.4
------- -------
Net (decrease)/increase in cash and cash equivalents................................ (52.0) 16.2
Cash and cash equivalents, beginning of period...................................... 102.6 104.8
------- -------
Cash and cash equivalents, end of period............................................ $ 50.6 $ 121.0
======= =======
- ----------
(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. 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 whole life insurance, 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 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 estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Actual results could differ significantly from those estimates. The most
significant estimates made in conjunction with the preparation of the Company's
financial statements include those used in determining: (i) deferred policy
acquisition costs, (ii) the liability for future policy benefits, (iii)
valuation allowances for mortgage loans and impairment writedowns for other
invested assets, and (iv) litigation contingencies and restructuring charges.
Certain reclassifications have been made in the amounts presented for 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 MONY Life and MLOA alleging that they
engaged in deceptive sales practices in connection with the sale of whole and
universal life insurance policies from the early 1980s through the mid 1990s.
Although the claims asserted in each case are not identical, they seek
substantially the same relief under essentially the same theories of recovery
(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 MONY Life and
MLOA from canceling policies for failure to make required premium payments,
imposition of a constructive trust and creation of a claims resolution facility
to adjudicate any individual issues remaining after resolution of all
class-wide issues) as opposed to compensatory damages, although they also seek
compensatory damages in unspecified amounts and, if they were to succeed at
trial, the equitable remedies they seek could result in significant expense to
MONY Life and MLOA. MONY Life and MLOA have 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 of America), 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
MONY Life and MLOA and sold on an alleged "vanishing premium" basis during the
period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY Life and
MLOA filed a motion to dismiss or, alternatively, for summary judgment 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 MONY Life's
and MLOA's motion for summary judgment and dismissed all claims filed in the
Goshen case against MONY Life and MLOA. 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. On July 2, 2002, the New York
Court of Appeals unanimously affirmed the Appellate Division decision limiting
the class action claims under section 349 of the New York General Business Law
to the purchase of insurance products in New York. MONY Life and MLOA intend to
defend themselves vigorously against the plaintiffs' sole remaining claim.
There can be no assurance, however, that the present litigation relating to
sales practices will not have a material adverse effect on them.
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 September 30, 2002, the Company had commitments to issue $68.0 million
fixed and floating rate commercial mortgages ranging from 4.3% to 7.7%, and
$6.1 million of fixed rate agricultural loans with periodic interest rate reset
dates. The initial interest rates on such loans range from approximately 6.4%
to 7.4%.
5. Demand Note Payable to Affiliate
On May 29, 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 matures on May
28, 2003. Interest is payable at maturity to the MONY Group. The carrying value
of the note as of September 30, 2002 is $121.0 million and is payable on demand.
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 September 30, 2002 is $42.7 million.
9
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (Continued)
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 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 September 30, 2002, the Company recorded a payable of $10.2 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. Related Party Transaction
On August 30, 2002, the Company purchased eleven commercial mortgage loans
from MONY Life. The purchase price for the mortgages was determined based on
their fair market value aggregating $147.6 million, which consisted of $146.8
million in principal and $0.8 million in premium. These mortgage loans are
reflected in the balance sheet caption entitled "Mortgage Loans on Real Estate".
9. New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 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 and interim periods within such year, except
that assets held for sale as a result of disposal activities initiated prior to
the effective date of SFAS 144 may be accounted for in accordance with prior
guidance until the end of the fiscal year in which SFAS 144 is effective. SFAS
144 retains many of the same provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). In addition to retaining the SFAS 121 requirements, SFAS 144
requires companies to present the results of operations of components of the
entity that are held for sale as discontinued operations in the 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 financial position or earnings.
10
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (Continued)
10. 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 September 30,
2002 and December 31, 2001 was $1.1 million and $1.4 million, respectively.
11
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.
General Discussion of Factors Affecting Profitability
The Company derives its revenues principally from: (i) premiums on
individual life insurance, (ii) insurance, administrative, and surrender
charges on universal life and annuity products, (iii) asset management fees
from separate account and mutual fund products and (iv) net investment income
on general account assets. The Company's expenses consist of insurance benefits
provided to policyholders, interest credited on policyholders' account
balances, dividends to policyholders, the cost of selling and servicing the
various products sold by the Company, including commissions to sales
representatives (net of any deferrals) and general business expenses.
The Company's profitability depends in large part upon: (i) the amount of
its assets and its third-party assets under management, (ii) the adequacy of
its product pricing (which is primarily a function of competitive conditions,
management's ability to assess and manage trends in mortality and morbidity
experience as compared to the level of benefit payments, and its ability to
maintain expenses within pricing assumptions), (iii) the maintenance of the
Company's target spreads between credited rates on policyholders' account
balances and the rate of earnings on its investments, (iv) the persistency of
its policies (which affects the ability of the Company to recover the costs
incurred to sell a policy), (v) its ability to manage the market and credit
risks associated with its invested assets and (vi) the investment performance
of its mutual fund and variable product offerings. External factors, such as
economic conditions, as well as legislation and regulation of the insurance
marketplace and products, may also affect the Company's profitability.
Potential Forward Looking Risks Affecting Profitability
The results of operations of the Company's businesses are highly sensitive
to general economic and securities market conditions. Such conditions include
the level of valuations in the securities markets, the level of interest rates,
consumer sentiment, the levels of retail securities trading volume, and the
consensus economic and securities market outlook. Set forth below is a
discussion of certain matters that may adversely impact the Company's results
of operations in the event of a continuation or worsening of current economic
and securities market conditions, as well as other matters that could adversely
affect its future earnings:
. In accordance with GAAP, deferred policy acquisition costs ("DPAC")
(policy acquisition costs represent costs that vary with and primarily
relate to the production of business, such as commissions paid to agents
and brokers) are amortized on a consistent basis with how earnings
emerge from the underlying products that gave rise to such DPAC. Such
amortization is calculated based on the actual amount of earnings that
has emerged to date relative to management's best estimate of the total
amount of such earnings expected to emerge over the life of such
business. This calculation requires management to make assumptions about
future investment yields, contract charges, interest crediting rates,
mortality rates, lapse rates, expense levels, policyholder dividends and
policy duration. In addition, to the extent that the present value of
estimated future earnings expected to emerge over the remaining life of
the business is not sufficient to recover the remaining DPAC balance,
GAAP requires that such excess DPAC amount be immediately charged to
earnings. Accordingly, changes in management's assumptions underlying
DPAC or actual results that differ significantly from management's
estimates may materially affect the Company's financial position and
operating results. Also, to the extent that circumstances lead
management to conclude that the business, after writing off
12
all DPAC will not ultimately be profitable, the Company would be
required to record its best estimate of the loss in the period such
determination was made. While management believes such a scenario is
unlikely, a sustained deterioration in the securities markets will
significantly impact such determination and, as a result, there can be
no assurance that the Company's business will be profitable and such a
determination may materially affect the Company's financial position and
operating results.
. At September 30, 2002 the carrying value of the Company's DPAC was
$582.6 million. Approximately $110.1 million of this amount pertains to
the Company's annuity in force business. The profit margins from this
business, over which the related DPAC is amortized, are particularly
sensitive to changes in assumed investment returns and asset valuations.
With respect to the investment return assumptions which underlie the
amortization of its annuity DPAC, the accounting policy followed by the
Company, which is referred to as the "reversion to the mean" method,
assumes a rate of return over the life of the business of 8.0%. In
applying this method, the future assumed rate of return assumption is
adjusted based on actual returns to date so that the ultimate rate of
return over the expected life of the business is always 8.0%. However,
the Company's policy is to never exceed a future rate of return
assumption in excess of 10%. Accordingly, the ultimate rate of return
over the life of such business may be less than 8.0%. In addition, in
applying the "reversion to the mean" method the Company's policy does
not provide for a floor on the assumed future rate of return.
Accordingly, actual returns to date sufficiently in excess of the
ultimate assumed rate of return of 8.0% may result in a future rate of
return assumption that could actually be negative. Management believes
that its policies for applying the "reversion to the mean" method are
conservative.
While management's current best estimate for the ultimate return
underlying this business is 8.0%, there can be no assurance that a
continuing deterioration in the securities markets (whether with regard
to investment returns or asset valuations) will not require management
to revise its estimate of the ultimate profitability of this business.
This could result in accelerated amortization and, or, a charge to
earnings to reflect the amount of DPAC which may not be recoverable from
the estimated present value of future profits expected to emerge from
this business. Such an event, should it occur, may materially affect the
Company's financial position and operating results.
During the third quarter of 2002, management 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 through September 30, 2002 due primarily to the
deterioration of the equity securities markets. As a result of this
revised estimate, the Company recorded a charge of $7.9 million during
the third quarter of 2002 to reflect the amount of DPAC amortization
that should have been recorded through September 30, 2002 based on
management's best estimate, as of such date, of the ultimate gross
profits from the annuity in force business. In addition, the Company
recorded a charge of $1.6 million representing management's 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.
. Certain of the Company's annuity products contain contractual provisions
that guarantee minimum death benefits. These provisions require the
Company to pay the estate of a contract holder any excess of the
guaranteed minimum benefit over the cash value of the annuity contract.
It is the Company's practice to establish reserves for the payment of
any guaranteed minimum death benefit claims based on management's
mortality expectations and the expected cash values of annuity
contracts. At September 30, 2002, the Company carried a reserve of
approximately $6.2 million with respect to such claims reflecting a
provision of $1.7 million during the third quarter of 2002. While
management believes that this reserve is sufficient, there can be no
assurance that additional reserves for such claims may not need to be
established, particularly if there is a sustained or continuing
deterioration in the securities markets. In addition, the American
Institute of Certified Public Accountants is deliberating the issuance
of guidance concerning the establishment of such reserves. This guidance
may require the
13
Company to change the methodology it applies in determining the amount
of reserves that should be established for such claims. There can be no
assurance that the Company will not have to establish additional
reserves upon the adoption of any new guidance issued by the FASB.
. As discussed above under the caption General Discussion of Factors
Affecting Profitability, revenues from the Company's separate account
and mutual fund products depend, in large part, upon the amount of the
Company's assets under management. Accordingly, a continuing or
sustained deterioration in the securities markets can adversely affect
the Company's revenues and there can be no assurance that such effect
will not be material to the Company's results of operations and
financial condition.
Summary of Financial Results
The following table presents the Company's results of operations for the
three and nine-month periods ended September 30, 2002 and 2001.
For the For the
Three-Month Nine-Month
Periods Ended Periods Ended
September 30, September 30,
------------- --------------
2002 2001 2002 2001
------ ----- ------ ------
($ in millions)
Revenues:
Universal life and investment-type product policy fees $ 42.0 $39.0 $119.2 $115.4
Premiums.............................................. 22.0 14.9 63.0 41.2
Net investment income................................. 27.7 25.8 79.3 71.9
Net realized (losses)/gains on investments............ (0.9) 2.2 (3.1) 7.9
Other income.......................................... 3.6 2.5 11.1 7.6
------ ----- ------ ------
Total revenues..................................... 94.4 84.4 269.5 244.0
------ ----- ------ ------
Benefits and expenses:
Benefits to policyholders............................. 30.7 22.0 91.0 67.6
Interest credited to policyholders' account balances.. 18.7 17.5 53.7 49.6
Amortization of deferred policy acquisition costs..... 29.4 10.2 62.9 34.8
Other operating costs and expenses.................... 22.2 27.0 65.6 73.6
------ ----- ------ ------
Total benefits and expenses........................ 101.0 76.7 273.2 225.6
------ ----- ------ ------
(Loss)/income before income taxes..................... $ (6.6) $ 7.7 $ (3.7) $ 18.4
====== ===== ====== ======
Three-month Period Ended September 30, 2002 Compared to the Three-month Period
Ended September 30, 2001
Universal life and investment-type policy fees -
Universal life and investment-type product fees were $42.0 million for the
three-month period ended September 30, 2002, an increase of $3.0 million, or
7.7%, from $39.0 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 $18.4 million for the
three-month period ended September 30, 2002, an increase of $5.9 million, or
47.2%, from $12.5 million reported in the comparable prior year 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 $2.5 million on Universal Life ("UL") and Corporate Sponsored
Variable Universal Life ("CSVUL") products attributable to the decrease in the
in-force blocks of such business.
14
The Company, under its amended modified coinsurance agreement ("MODCO")
treaty with the United States Financial Life Company ("USFL"), assumed $1.5
million of UL business for the three-month period ended September 30, 2002, an
increase of $0.5 million from $1.0 million of UL business and term life
insurance assumed for the three-month period ended September 30, 2001.
Flexible premium variable annuity ("FPVA") product fees were $10.1 million
for the three-month period ended September 30, 2002, a decrease of $1.0 million
or 9.0%, from $11.1 million reported in the comparable prior year period. The
decrease was primarily attributable to lower mortality and expense charges of
$1.6 million. The decrease in mortality and expense charges is due to lower
fund separate account balances.
Premiums -
Premium revenue was $22.0 million for the three-month period ended September
30, 2002, an increase of $7.1 million, or 47.7%, from $14.9 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 $16.0 million in
assumed premiums, a $5.4 million increase from the $10.6 million in assumed
premiums for the comparable prior year period (See Note 7 in the Unaudited
Interim Condensed Financial Statements) due to an increase in sales for USFL,
(ii) individual annuity premiums of $2.0 million, a $1.2 million increase from
the $0.8 million reported in the comparable prior year period due to increased
sales of immediate annuities and (iii) new and renewal direct premiums on
Individual Life ("IL") products of approximately $4.2 million, net of
reinsurance, a $0.9 million increase from $3.3 million reported for the
comparable prior year period primarily due to increased sales of Level Term
products.
Net Investment Income and Realized Gains on Investments -
Net investment income was $27.7 million for the three-month period ended
September 30, 2002, an increase of $1.9 million, or 7.4%, from $25.8 million
reported in the comparable prior year period. The increase was primarily
related to an increase in the average balance of invested assets, partially
offset by a decline in interest rates resulting in lower investment yields.
Net realized losses on investments were $0.9 million for the three-month
period ended September 30, 2002, a decrease of $3.1 million from net realized
gains of $2.2 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 September 30, 2002
compared to the three-month period ended September 30, 2001.
For the
Three-month
Periods Ended
September 30,
------------
2002 2001
----- -----
Fixed maturity securities $ 0.9 $ 2.3
Mortgage loans........... (1.4) (0.2)
Other invested assets.... (0.4) 0.1
----- -----
$(0.9) $ 2.2
===== =====
Other Income -
Other income was $3.6 million for the three-month period ended September 30,
2002, an increase of $1.1 million, or 44.0%, from $2.5 million reported in the
comparable prior year period. The increase was primarily due to increased sales
of supplementary contracts of $0.8 million.
15
Benefits to Policyholders -
Benefits to policyholders were $30.7 million for the three-month period
ended September 30, 2002, an increase of $8.7 million, or 39.6%, from $22.0
million reported in the comparable prior year period. The increase was
primarily the result of (i) $11.1 million in assumed benefit under the MODCO
treaty between USFL and the Company, a $7.7 million increase from the $3.4
million in assumed benefits for the comparable prior year period, (ii)
increased benefits in the IL product of $2.2 million, (iii) higher supplemental
contract and Individual Annuity ("IA") reserves of $2.5 million, as well as
higher benefit reserves on the Company's FPVA business of $1.8 million as
compared to the prior year period, offset by (iv) lower benefits in UL and VUL
products of $2.7 million and $2.5 million. The increased reserves on
supplemental contracts and IA were attributable to higher sales of accumulation
products and higher provisions for guaranteed minimum death benefits on the
Company's FPVA products, due to unfavorable market conditions and the decline
in assets under management.
Interest Credited to Policyholders' Account Balances -
Interest credited to policyholders' account balances was $18.7 million for
the three-month period ended September 30, 2002, an increase of $1.2 million,
or 6.9%, from $17.5 million reported in the comparable prior year period. This
was primarily due 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 annuities ("COA"), due to the
continued runoff of these products.
Amortization of Deferred Policy Acquisition Costs -
DPAC was $29.4 million for the three-month period ended September 30, 2002,
an increase of $19.2 million, or 188.2%, from $10.2 million reported in the
comparable prior year period. The increase was primarily due to (i) higher
amortization on VUL and IL of $7.1 million and $1.6 million, respectively, (ii)
higher amortization of $8.6 million on FPVA products, and (iii) lower
amortization on CSVUL and GUL of $1.4 million and $0.2 million, respectively.
The increases related to the VUL and IL products are attributable to the growth
in those blocks of business, while the decreases on CSVUL and GUL are
attributable to a decrease in new business on these lines of business. The
increase on the FPVA products is due to an acceleration of amortization
subsequent to a decline in variable annuity assets under management. See
Potential Forward Looking Risks Affecting Profitability for further information
regarding DPAC amortization.
Other operating costs and expenses -
Other operating costs and expenses were $22.2 million for the three-month
period ended September 30, 2002, a decrease of $4.8 million, or 17.8%, from
$27.0 million reported in the comparable prior year period. The decrease was
due to higher dacable expenses of $7.9 million as a result of an increase in
new business, offset by an increase of reinsurance allowances of $0.9 and an
increase in general overhead expenses of approximately $2.2 million.
Nine-month Period Ended September 30, 2002 Compared to the Nine-month Period
Ended September 30, 2001
Universal life and investment-type policy fees -
Universal life and investment-type product fees were $119.2 million for the
nine-month period ended September 30, 2002, an increase of $3.8 million, or
3.3%, from $115.4 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 $48.0 million for the nine-month period ended
September 30, 2002, an increase of $12.4 million or 34.8%, from $35.6 million
reported in the comparable prior year period. The increase in fees
16
was primarily due to higher charges for cost of insurance, surrender charges,
and unearned revenue (amounts assigned to the policyholders for future
services) of $3.5 million, $2.7 million and $5.8 million respectively. The
higher charges are the result of an increase in the VUL in-force block of
business. The increase in VUL fees was partially offset by a $5.7 million
decrease in UL, GUL and CSVUL fees as these businesses continue to run-off.
The Company, under its amended MODCO treaty with USFL, assumed $5.3 million
of UL business for the nine-month period ended September 30, 2002, an increase
of $2.6 million from $2.7 million of UL business and term life insurance
assumed for the nine-month period ended September 30, 2001 as a result of
growth in USFL's business.
FPVA product fees were $31.7 million for the nine-month period ended
September 30, 2002, a decrease of $5.2 million or 14.1%, from $36.9 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 $4.6
million as a result of lower fund balances in the separate accounts due to
stock market declines.
Premiums -
Premium revenue was $63.0 million for the nine-month period ended September
30, 2002, an increase of $21.8 million, or 52.9%, from $41.2 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 $45.4 million
in assumed premiums, a $15.9 million increase from $29.5 million in assumed
premiums for the comparable prior year period, (ii) individual annuity premiums
of $5.3 million, a $2.6 million increase from $2.7 million reported in the
comparable prior year period due to increased sales of immediate annuities and
(iii) new and renewal direct premiums on IL of approximately $12.5 million, net
of reinsurance, a $3.4 million increase from $9.1 million reported for the
comparable prior year period due to increased sales of Level Term products.
Net Investment Income and Realized Gains on Investment -
Net investment income was $79.3 million for the nine-month period ended
September 30, 2002, an increase of $7.4 million, or 10.3%, from $71.9 million
reported in the comparable prior year period. The increase was primarily
related to an increase in the average balance of invested assets, partially
offset by a decline in interest rates resulting in lower investment yields.
Net realized losses on investments were $3.1 million for the nine-month
period ended September 30, 2002, a decrease of $11.0 million, from net realized
gains of $7.9 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 nine-month periods ended September 30, 2002 and
2001, respectively.
For the
Nine-month
Periods Ended
September 30,
-------------
2002 2001
----- ----
Fixed maturity securities $(0.1) $7.1
Mortgage loans........... (1.5) 0.8
Other invested assets.... (1.5) 0.0
----- ----
$(3.1) $7.9
===== ====
Other Income -
Other income was $11.1 million for the nine-month period ended September 30,
2002, an increase of $3.5 million, or 46.1%, as compared to $7.6 million in the
comparable prior year period. The increase was primarily due to increased sales
of supplementary contracts and FPVA products of $2.2 million and $1.2 million,
respectively.
17
Benefits to Policyholders -
Benefits to policyholders were $91.0 million for the nine-month period ended
September 30, 2002, an increase of $23.4 million, or 34.6%, from $67.6 million
reported in the comparable prior year period. The increase was primarily the
result of (i) $30.3 million in assumed benefit, under the MODCO treaty between
USFL and the Company, a $10.4 million increase from the $19.9 million in
assumed benefits for the comparable prior year period, (ii) increased benefits
in IL, GUL and UL products of $3.5 million, $0.4 million and $5.5 million,
respectively, (iii) higher supplemental contracts and IA reserves of $6.2
million, as well as higher benefit reserves on the Company's FPVA business of
$3.6 million as compared to the prior period, and (iv) lower benefits in VUL
and CSVUL products of $5.6 million and $0.7 million, respectively. The
increased reserves on supplemental contracts and IA were attributable to higher
sales of accumulation products and higher provisions for guaranteed minimum
death benefits on the Company's FPVA products, due to unfavorable market
conditions and the decline in assets under management.
Interest Credited to Policyholders' Account Balances -
Interest credited to policyholders' account balances was $53.7 million for
the nine-month period ended September 30, 2002, an increase of $4.1 million, or
8.3%, from $49.6 million reported in the comparable prior year period. The
increase was primarily the result of (i) higher interest crediting of $5.3
million on FPVA due to higher general account fund values and (ii) an increase
in benefits ceded under MODCO of $0.9 million, offset by (iii) decreases in
SPDA and COA of $1.1 million due to the continued run off of these products and
(iv) a decrease on UL of $0.6 million.
Amortization of Deferred Policy Acquisition Costs -
DPAC was $62.9 million for the nine-month period ended September 30, 2002,
an increase of $28.1 million, or 80.7%, from $34.8 million reported in the
comparable prior year period. The increase was primarily the result of (i)
higher amortization on VUL, IL and CSVUL of $12.2 million, $1.6 million and
$0.3 million, respectively, (ii) higher amortization of $11.9 million on FPVA
products, and (iii) lower amortization on GUL and UL of $0.6 million and $1.3
million, respectively. The increases related to the VUL, IL and CSVUL products
are attributable to the growth in those blocks of business, while the decreases
on GUL and UL are attributable to a decrease in new business on these lines of
business. The increase on the FPVA products is due to an acceleration of
amortization subsequent to a decline in variable annuity assets under
management. See "Potential Forward Looking Risks Affecting Profitability" for
further information regarding DPAC amortization.
Other Operating Costs and Expenses -
Other operating costs and expenses were $65.6 million for the nine-month
period ended September 30, 2002, a decrease of $8.0 million, or 10.9%, from
$73.6 million reported in the comparable prior year period. The decrease was
due to higher dacable expenses of $17.0 million as a result of an increase in
new business, which was partially offset by an increase of reinsurance
allowances of $6.0 and an increase in general overhead expenses of
approximately $3.0 million.
Liquidity and Capital Resources
The Company's cash inflows are provided mainly from annuity considerations
and deposit funds, investment income and maturities, and sales of invested
assets and life insurance premiums. Cash outflows primarily relate to the
liabilities associated with its various annuity and life insurance products,
operating expenses, income taxes, acquisitions of invested assets, and
principal and interest on its outstanding debt obligations. The annuity and
life insurance liabilities relate to the Company's obligation to make benefit
payments under its annuity and insurance contracts, as well as the need to make
payments in connection with policy surrenders, withdrawals and loans.
18
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at September 30, 2002 and December 31, 2001.
Withdrawal Characteristics of
Annuity Reserves and Deposit Liabilities
As of As of
September 30, Percent December 31, Percent
2002 of Total 2001 of Total
------------- -------- ------------ --------
($ in millions)
Not subject to discretionary withdrawal provisions........ $ 68.9 2.3% $ 62.5 1.7%
Subject to discretionary withdrawal--with market value
adjustment or at carrying value less surrender charge... 2,527.9 84.7 3,142.5 88.0
-------- ----- -------- -----
Subtotal.................................................. 2,596.8 87.0 3,205.0 89.7
Subject to discretionary withdrawal--without adjustment at
carrying value.......................................... 387.1 13.0 367.5 10.3
-------- ----- -------- -----
Total annuity reserves and deposit liabilities (gross of
reinsurance)............................................ $2,983.9 100.0% $3,572.5 100.0%
======== ===== ======== =====
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
Surrenders and Withdrawals
For the For the
Three-Month Nine-Month
Periods Ended Periods Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
------ ------ ------ ------
($ in millions)
Product Line:
Variable and universal life $ 12.1 $ 17.7 $ 38.4 $ 57.6
Annuities(1)............... 110.3 88.4 294.3 296.6
------ ------ ------ ------
Total................... $122.4 $106.1 $332.7 $354.2
====== ====== ====== ======
- ----------
(1)Excludes approximately $17.0 million and $32.9 million for the three-month
periods ended September 30, 2002 and 2001, respectively, and $46.4 million
and $153.5 million for the nine-month periods ended September 30, 2002 and
2001 respectively, relating to surrenders associated with an exchange
program offered by the Company wherein contract holders surrendered old FPVA
products and reinvested the proceeds in a new enhanced FPVA product offered
by the Company.
During the nine-month period ended September 30, 2002, the net cash outflow
from operations was $87.6 million, a decrease of $37.7 million from September
30, 2001, which was $49.9 million. The decrease was primarily due to the timing
of payments of liabilities. For the nine-month period ended September 30, 2002
net cash inflow from financing activities was $408.9 million, an increase of
$283.5 million from September 30, 2001, which was $125.4 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 September 30, 2002, the Company had fixed-maturity securities with a
carrying value of $1,493.3 million, which were comprised of
19
$798.2 million of public and $695.1 million of private fixed maturity
securities. At that date, approximately 86.0% of the Company's fixed maturity
securities were designated in The Securities Office of the National Association
of Insurance Commission ("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 September 30, 2002, the Company had cash and
cash equivalents of $50.6 million.
At September 30, 2002, the Company had the following commitments
outstanding: (i) $6.1 million for fixed rate agricultural loans with periodic
interest rate reset dates with initial interest rates between 6.4% and 7.4%,
and (ii) commercial mortgage commitments of $68.0 million with interest rates
ranging from 4.3% to 7.7%. The Company had $10.0 million in commitments
outstanding for private fixed maturity securities with an initial interest rate
of 8.2%.
Of the $213.5 million commercial mortgage loans in the Company's investment
portfolio at September 30, 2002, $0.0 million, $8.2 million, $43.1 million and
$162.2 million are scheduled to mature in 2002, 2003, 2004 and thereafter,
respectively.
At September 30, 2002, aggregate maturities of long-term debt based on
required remaining principal payments for 2002 and the succeeding four years
are $0.6 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
September 30, 2002, for the remainder of 2002 and the succeeding four years are
$1.3 million, $5.4 million, $5.4 million, $5.4 million and $5.4 million
respectively, and $39.0 million thereafter.
At September 30, 2002, the adjusted Risk Based Capital ("RBC") capital
ratios of the Company were in excess of the minimum capital requirements of the
RBC guidelines.
20
INVESTMENTS
The following table illustrates the net investment income yields based on
average annual asset carrying values, excluding unrealized (losses) gains 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 September 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.............................................. 6.7% $1,343.9 7.8% $1,054.4
Mortgage loans on real estate........................ 6.9 219.3 7.7 122.3
Policy loans......................................... 6.5 78.5 6.6 71.4
Real estate (1) ..................................... 9.4 4.7 5.2 5.5
Other invested assets................................ 4.8 20.1 1.8 25.1
Cash and cash equivalents............................ 2.8 75.1 4.0 176.1
-------- --------
Total invested assets before investment expenses..... 6.5 $1,741.6 7.2 $1,454.8
======== ========
Investment expenses/other fee income................. (0.1) (0.1)
---- ----
Total invested assets after investment expenses...... 6.4% 7.1%
==== ====
As of the Nine-month Periods
Ended September 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.............................................. 6.6% $1,305.0 7.4% $1,039.6
Mortgage loans on real estate........................ 5.7 211.8 6.8 124.5
Policy loans......................................... 8.6 75.1 5.9 69.7
Real estate (1) ..................................... 3.4 5.2 7.5 5.4
Other invested assets................................ 4.2 17.7 5.7 8.7
Cash and cash equivalents............................ 2.4 79.3 4.8 146.2
-------- --------
Total invested assets before investment expenses..... 6.4 $1,694.1 7.0 $1,394.1
======== ========
Investment expenses/other fee income................. (0.2) (0.1)
---- ----
Total invested assets after investment expenses...... 6.2% 6.9%
==== ====
- ----------
(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 6.2% and 7.7% for the three-month periods ended
September 30, 2002 and 2001, respectively and 6.0% and 7.6% for the nine-month
periods ended September 30, 2002 and 2001, respectively.
21
Fixed Maturity Securities
Fixed maturity securities consisted of publicly traded and privately placed
debt securities and small amounts of preferred stock, and represented 77.1% and
78.7% of total invested assets at September 30, 2002 and December 31, 2001,
respectively.
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). The
following table presents our fixed maturity securities by NAIC designation and
the equivalent rating of Nationally Recognized Statistical Rating Organizations
(NRSRO), as well as the percentage, based on fair values, that each designation
comprises.
Total Fixed Maturity Securities by Credit Quality
As of As of
September 30, 2002 December 31, 2001
--------------------------- ---------------------------
NAIC Amortized % of Estimated Amortized % of Estimated
Rating Rating Agency Equivalent Designation Cost Total Fair Value Cost Total Fair Value
- ------ ------------------------------------ --------- ----- ---------- --------- ----- ----------
($ in millions)
1 Aaa/Aa/A.......................... $ 660.2 47.5% $ 709.3 $ 508.2 42.1% $ 521.8
2 Baa............................... 537.3 38.5 575.4 535.6 44.5 543.2
3 Ba................................ 165.0 10.9 162.3 105.7 8.5 104.1
4 B................................. 5.4 0.3 4.5 19.9 1.6 19.2
5 Caa and lower..................... 15.1 1.0 14.6 7.6 0.6 7.6
-------- ----- -------- -------- ----- --------
Subtotal....................... 1,383.0 98.2 1,466.1 1,177.0 97.9 1,195.9
Preferred stock................ 25.0 1.8 27.2 25.0 2.1 25.0
-------- ----- -------- -------- ----- --------
Total fixed maturity securities... $1,408.0 100.0% $1,493.3 $1,202.0 100.0% $1,220.9
======== ===== ======== ======== ===== ========
Of the Company's total portfolio of fixed maturity securities at September
30, 2002, 86.0% were investment grade and 14.0% 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
22
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 September 30, 2002 the fair values of the Company's problem and
potential problem fixed maturity securities were $18.7 million and $1.0
million, respectively, which, in the aggregate, represented approximately 1.3%
of total fixed maturity securities. As of December 31, 2001, the fair values of
the Company's problem and potential problem fixed maturity securities 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
September 30, 2002 and December 31, 2001 the Company had no fixed maturity
securities which have been restructured.
At September 30, 2002, the Company's largest unaffiliated single
concentration of fixed maturity securities was $93.8 million of which Federal
Home Loan Mortgage Corporation ("FHLMC") issued securities represented 4.8% of
total invested assets. The largest non-government issuer consists of $22.0
million, which represented approximately 1.1% of total invested assets at
September 30, 2002. No other individual non-government issuer represented more
than 0.9% of total invested assets.
The Company held approximately $186.6 million and $212.9 million of
mortgage-backed and asset-backed securities as of September 30, 2002 and
December 31, 2001, respectively. Of such amounts, $22.8 million and $39.9
million, or 12.2% and 18.8%, respectively, represented agency-issued
pass-through and collateralized mortgage obligations ("CMOs") secured by
Federal National Mortgage Association ("FNMA"), the FHLMC, and the Government
National Mortgage Association ("GNMA"). The balance of such amounts was
comprised of other types of mortgage-backed and asset-backed securities. The
Company believes that its active monitoring of its portfolio of mortgage-backed
securities ("MBSs") and the limited extent of its holdings of more volatile
types of MBSs mitigate the Company's exposure to losses from prepayment risk
associated with interest rate fluctuations for this portfolio. At September 30,
2002 and December 31, 2001, 70.9% and 76.5%, respectively, of the Company's
mortgage-backed and asset-backed securities were assigned an NAIC Designation
1. In addition, the Company believes that it holds a relatively low percentage
of CMOs compared to other life insurance companies.
The following table presents the types of MBSs, as well as other
asset-backed securities, held by the Company as of the dates indicated.
Mortgage and Asset-Backed Securities
As of As of
September 30, December 31,
2002 2001
------------- ------------
($ in millions)
CMOs...................................... $ 44.5 $ 77.9
Asset-backed securities................... 133.2 126.1
Commercial MBSs........................... 8.9 8.7
Pass-through securities................... 0.0 0.2
------ ------
Total MBSs and asset-backed securities. $186.6 $212.9
====== ======
23
The amortized cost and estimated fair value of fixed maturity securities, by
contractual maturity dates, (excluding scheduled sinking funds) as of September
30, 2002 and December 31, 2001 were as follows:
Fixed Maturity Securities by Contractual Maturity Dates
As of September 30, 2002 As of December 31, 2001
------------------------ -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
($ in millions)
Due in one year or less.......................... $ 26.5 $ 27.3 $ 37.1 $ 37.7
Due after one year through five years............ 517.4 548.4 358.7 369.4
Due after five years through ten years........... 592.5 635.4 512.2 514.1
Due after ten years.............................. 92.4 95.6 86.0 86.8
-------- -------- -------- --------
Subtotal...................................... 1,228.8 1,306.7 994.0 1,008.0
Mortgage-backed and other asset-backed securities 179.2 186.6 208.0 212.9
-------- -------- -------- --------
Total......................................... $1,408.0 $1,493.3 $1,202.0 $1,220.9
======== ======== ======== ========
Mortgage Loans
Mortgage loans comprised 15.0% and 8.6% of total invested assets as of
September 30, 2002 and December 31, 2001, respectively. Mortgage loans consist
of commercial and agricultural loans. As of September 30, 2002 and December 31,
2001, commercial mortgage loans comprised $213.5 million and $60.6 million or
73.4% and 45.6% of total mortgage loan investments, respectively. Agricultural
loans comprised $77.4 million and $72.2 million, or 26.6% and 54.4% of total
mortgage loan investments at September 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 $28.4 million and represented 1.5% of
general account invested assets as of September 30, 2002. No other mortgage
loan represents more than 1.4% of invested assets. Total mortgage loans to the
five largest borrowers accounted in the aggregate for 50.8% of the total
carrying value of the commercial loan portfolio and less than 5.6% of total
invested assets at September 30, 2002.
On August 30, 2002, the Company purchased eleven commercial mortgage loans
from MONY Life. The purchase price for the mortgages was determined based on
their fair market value aggregating $147.6 million, which consisted of $146.8
million in principal and $0.8 million in premium. These mortgage loans are
reflected in the balance sheet caption entitled "Mortgage Loans on Real Estate".
Problem, Potential Problem and Restructured Commercial Mortgages -
Commercial mortgage loans are stated at their unpaid principal balances, net
of valuation allowances and writedowns for impairment. The Company provides
valuation allowances for commercial mortgage loans considered to be impaired.
Mortgage loans are considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When the Company
determines that a loan is impaired, a valuation allowance for loss is
established for the excess of the carrying value of the mortgage loan over its
estimated fair value. Estimated fair value is based on the fair value of the
collateral. The provision for loss is reported as a realized loss on investment.
The Company reviews its commercial mortgage loan portfolio and analyzes the
need for a valuation allowance for any loan which is delinquent for 60 days or
more, in process of foreclosure, restructured, on
24
"watchlist", or which currently has a valuation allowance. Loans which are
delinquent and loans in process of foreclosure are categorized by the Company
as "problem" loans. Loans with valuation allowances, but which 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 September 30, 2002 was
$213.5 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.
There were no problem, potential problem or restructured commercial mortgage
loans at September 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 September 30, 2002 and December 31, 2001 such reserves
were $2.6 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 September
30, 2002 and December 31, 2001 were $1.9 million and $2.2 million,
respectively. Problem agricultural mortgages included delinquent mortgage loans
of $0.0 million and $0.9 million at September 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 September 30, 2002 and
December 31, 2001, such reserves were $0.4 million and $0.7 million,
respectively.
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 September 30, 2002 As of December 31, 2001
---------------------------- ----------------------------
Impairment Valuation Impairment Valuation
Adjustments Allowances Total Adjustments Allowances Total
----------- ---------- ----- ----------- ---------- -----
Fixed maturities $5.7 $ -- $ 5.7 $3.5 $ -- $3.5
Mortgages....... -- 3.0 3.0 -- 1.4 1.4
Real estate..... 1.0 1.1 2.1 1.0 0.4 1.4
---- ---- ----- ---- ---- ----
Total........ $6.7 $4.1 $10.8 $4.5 $1.8 $6.3
==== ==== ===== ==== ==== ====
25
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure regarding the Company's exposure to
market risk, as well as the Company's objectives, policies and strategies
relating to the management of such risks, is set forth in the Company's 2001
Annual Report on Form 10-K. The relative sensitivity to changes in fair value
from interest rates and equity prices at September 30, 2002 is not materially
different from that presented in the Company's 2001 Annual Report on Form 10-K.
Item 4: Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
26
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Unaudited Interim Condensed Financial Statements. Except
as disclosed in Note 4, there have been no new material legal proceedings and
no new material developments in matters previously reported in the Company's
2001 Annual Report on Form 10-K. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Michael I. Roth pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Richard Daddario pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
27
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
Vice President and Controller
(Authorized Signatory and
Principal Financial Officer)
Date: November 14, 2002
28
CERTIFICATIONS
I, Michael I. Roth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MONY Life Insurance
Company of America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ MICHAEL I. ROTH
- ---------------------------
Michael I. Roth
Chairman and Chief Executive
Officer
29
I, Richard Daddario, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MONY Life Insurance
Company of America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ RICHARD DADDARIO
- ---------------------------
Richard Daddario
Vice President and Controller
30