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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1999, there were 826 holders of the Registrant's
guaranteed interest account with market value adjustment contracts.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I 1 Business of MONY Life Insurance Company of America.......... 3
1A Directors and Executive Officers............................ 10
2 Properties.................................................. 11
3 Legal Proceedings........................................... 11
4 Submission of Matters to a Vote of Security Holders......... 12
PART II 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
6 Selected Financial Information.............................. 12
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
8 Financial Statements........................................ 29
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 29
PART III 10 Directors and Executive Officers of the Registrant.......... 30
11 Executive Compensation...................................... 30
12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
13 Certain Relationships and Related Transactions.............. 30
PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 30
Index to Financial Statements............................... F-1
Exhibit Index............................................... E-1
Signatures.................................................. S-1
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FORWARD-LOOKING STATEMENTS
The management of MONY Life Insurance Company of America ("the Company")
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 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 contained in the Private Securities Litigation Reform
Act of 1995, and assumes no duty to update any forward-looking statement.
Forward-looking statements are subject to 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 and its parent company's other
public filings, press releases, oral presentations and discussions and the
following; (i) the success of the recently implemented "tiering" of the career
agency sales force of MONY Life Insurance Company ("MONY Life"), and the ability
to attract and retain productive agents; (ii) the success of the restructuring
of agent compensation; (iii) the Company's ability to control operating
expenses; (iv) the outcome of pending litigation; (v) the performance of
financial markets; (vi) the intensity of competition for other financial
institutions; (vii) the Company's mortality, morbidity, persistency and claims
experience; (viii) the Company's ability to develop, distribute and administer
competitive products and services in a timely, cost-effective manner; (ix) the
Company's financial and claims paying ratings; (x) the effect of changes in laws
and regulations affecting the Company's businesses, including changes in tax
laws affecting insurance and annuity products; (xi) market risks related to
interest rates, equity prices, derivatives, foreign currency exchange and
credit; and (xii) the ability of the Company to identify and consummate on
successful terms any future acquisitions, and to successfully integrate acquired
businesses with minimal disruption.
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All financial data of the Company (as defined below) presented herein has
been prepared in accordance with generally accepted accounting principles
("GAAP") unless otherwise indicated.
PART I
ITEM 1. BUSINESS OF MONY LIFE INSURANCE COMPANY OF AMERICA
ORGANIZATION AND BUSINESS
MONY Life Insurance Company of America (the "Company" or "MLOA") is a stock
life insurance company organized in the state of Arizona and is the corporate
successor of VICO Credit Life Insurance Company, incorporated in Arizona on
March 6, 1969. The Company, 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 (the "Demutualization") is domiciled in the state of New York. MONY Life
is a wholly owned subsidiary of The MONY Group, Inc. (the "MONY Group"), a
Delaware Corporation organized to be the parent holding company of MONY Life.
The Company's primary business is to provide term and variable life
insurance and variable annuity products 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. These products are sold in 49 states (not including New
York), the District of Columbia, the U.S. Virgin Islands and Puerto Rico.
The Company had total assets and equity at December 31, 1999 of
approximately $6.2 billion and $303.9 million, respectively. Of the Company's
total assets at such date, $1.8 billion represented assets held in the Company's
general account and $4.4 billion represented assets held in the Company's
separate accounts, for which the Company does not generally bear investment risk
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations").
Total revenues reported in the Company's Financial Statements for the year
ended December 31, 1999, 1998 and 1997 were $254.3 million, $233.0 million and
$208.2 million, respectively. Income before income taxes reported in the
Company's Financial Statements for the year ended December 31, 1999, 1998 and
1997 was $29.9 million, $21.9 million and $12.8 million, respectively.
Information About Life Insurance Products
The Company offers a portfolio of life insurance products consisting of
variable universal life insurance, several term life insurance products and
group universal life insurance products.
Variable universal life insurance is a universal life insurance type of
product that features the ability of the policyholder to allocate premiums among
sub-accounts of the Company's separate accounts, allowing a choice among a wide
variety of investment objectives.
The Company's term insurance products include annual renewable term
insurance, older age term insurance providing coverage for a limited number of
years and term insurance featuring a level premium for selected periods.
The Company's last survivor variable universal life product is designed to
particularly meet the needs of clients for estate planning vehicles.
Survivorship life products insure two lives and provide for the payment of death
benefits upon the death of the last surviving insured.
The Company also offers a corporate sponsored variable universal life
insurance policy designed primarily for corporations to purchase to provide
benefits to employees or as a funding vehicle for benefit programs.
The Company also offers group universal life which is designed for
marketing to employees in their work sites. This program is designed to offer
employers the opportunity to provide employees a means of purchasing life
insurance through payroll deductions.
A variety of policy riders are available for the Company's life insurance
products. These riders are designed to provide additional benefits or
flexibility at the option of the policyholder. They include riders that, subject
to their terms and conditions, waive premium payments upon total disability of
the insured, pay additional benefits in the event of accidental death, allow the
purchase of additional coverage without evidence of insurability and permit the
addition of term insurance to provide additional death benefit protection for
either the insured or the insured's spouse or dependent children.
Annuity Products --
The Company's annuity products focus on the accumulation and retirement
needs of the growing number of individuals who are preparing for retirement or
have already retired. The Company offers flexible payment variable annuities
("FPVA"). This product offers numerous investment alternatives to meet the
customer's individual investment
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objectives. As of December 31, 1999, the Company had $4.6 billion of assets
under management with respect to its annuity products.
Sales of annuities were approximately $378.5 million in 1999. All of such
sales of annuities relate to variable annuities. Variable annuity sales figures
exclude $724.9 million of exchanges relating to surrenders associated with an
exchange program offered by the Company wherein contractholders surrendered old
FPVA contracts and reinvested the proceeds in a new enhanced FPVA product
offered by the Company.
Variable annuity contractholders have a range of investment accounts in
which to place the assets held under their contracts, including accounts with
interest rates guaranteed by the Company. More than 92% of the aggregate amount
held under these contracts and policies is presently in investment accounts not
guaranteed by the Company.
Since early 1992, the Company has emphasized the sale of its separate
account variable annuities over its general account annuities. The Company
believes that it benefits from a shift towards separate account variable annuity
products, as this reduces the Company's investment risks (by shifting such risks
to the separate account contractholder) and capital requirements because the
assets are held in the Company's separate accounts, while enabling the Company
to earn fee income from the management of assets held in the separate accounts.
The selection of sub-accounts of separate accounts also permits contractholders
to choose more aggressive or conservative investment strategies without
affecting the composition and quality of assets in the Company's general
account. The following table illustrates the growth in individual variable
annuity account value from the beginning to the end of each period presented and
the principal factors which caused the increase in account value for such
period.
ANNUITY PRODUCTS -- INDIVIDUAL VARIABLE ANNUITY ACCOUNT VALUE
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
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($ IN MILLIONS)
ACCOUNT VALUE
Beginning total account value................... $4,176.1 $3,771.9 $2,743.3 $1,915.0 $1,169.3
Sales and other deposits(1)..................... 378.5 529.3 624.5 594.7 441.2
Market appreciation............................. 450.4 264.0 647.2 391.9 406.3
Surrenders and withdrawals(1)................... (725.4) (389.1) (243.1) (158.3) (101.8)
-------- -------- -------- -------- --------
Ending total account value...................... $4,279.6 $4,176.1 $3,771.9 $2,743.3 $1,915.0
======== ======== ======== ======== ========
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(1) Excludes approximately $724.9 million in 1999 relating to surrenders
associated with an exchange program offered by the Company wherein
contractholders surrendered old FPVA contracts and reinvested the proceeds
in a new enhanced FPVA product offered by the Company.
MARKETING AND DISTRIBUTION
The Company's marketing strategy focuses on small business owners and
higher income individuals, particularly family builders and pre-retirees. The
Company believes this strategy capitalizes on the Company's key strengths,
namely its annuity and individual life insurance products and MONY Life's career
agency sales force.
The Company believes that MONY Life's managerial agency system and career
agency sales force is a competitive advantage in the marketplace. Distribution
through MONY Life's career agents allows the Company to establish closer
relationships with customers than is typical of insurers using third party
brokers, thereby enhancing the ability of the Company to evaluate customer needs
and underwriting risks.
MONY Life's career agency sales force consisted of approximately 2,100
domestic field agents at December 31, 1999. The sales force is organized as a
managerial agency system under which 55 agency managers as of December 31, 1999
supervise the marketing and sales activities of agents in defined marketing
territories in the United States and Europe. The agency managers are all
employees of MONY Life, while the career agents are all independent contractors
and not employees of MONY Life. The contract with each career agent requires the
agent to submit to the Company applications for policies of insurance issued by
the Company. MONY Life and the Company's compensation arrangements with career
agents contain incentives for the career agents to solicit applications for
products issued by MONY Life and the Company and for products issued by
insurance companies not affiliated with MONY Life or the Company, made available
by MONY Life's insurance brokerage operations, MONY Brokerage, Inc. and its
broker-dealer, MONY Securities Corporation ("MSC"). Those incentives include
counting first year commissions (weighted in the case of products made available
by MONY Brokerage, Inc.) for the purposes of expense reimbursement programs,
sales awards and certain other benefits. In addition, MONY Brokerage, Inc. and
MSC make available products issued by other insurance companies that neither
MONY Life nor the Company issues.
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In 1999, MONY Life had 475 agents who were members of Million Dollar Round
Table ("MDRT"), an industry designation based on sales which result in annual
first-year commissions of $57,000 or more, down from 513 in 1998. MONY Life's
percentage of its career agents who are MDRT members is among the highest in the
industry.
MONY Life and the Company believe that the two most significant challenges
of operating a career agency system are ensuring that the interests of the
agency management organization are aligned with the interests of the Company and
providing a cost-effective and appropriate level of marketing, training and
recruiting support to each of MONY Life's career agents and agency managers. To
address these challenges, over the last several years MONY Life has made several
changes in its compensation structure for the its agency management
organization, which changes culminated in January of 1998 when MONY Life revised
its compensation structure to provide a salary plus incentive compensation
system for all of its agency managers and sales managers designed to more
closely align the interests of the managers with those of MONY Life.
To further address the challenges of operating a career agency sales force,
MONY Life has initiated several programs directed at targeted efforts in
recruiting, marketing and training of career agents. As a result of its
recruiting program, MONY Life hired 862 new agents in 1999. In the area of
training, MONY Life redesigned its training programs directed at new agents in
order to provide them with increased knowledge and skills.
In early 1998, in order to increase the productivity and size of its career
agency sales force, MONY Life adopted a plan to "tier" its agents and agencies
and to provide focused marketing, recruiting and training support tailored to
meet the particular needs of each "tier." The plan was fully implemented in
1999. By restructuring its agencies into tiers, MONY Life is able to segment its
career agency sales force into groups according to experience and productivity
levels and to assign agency managers to tiers based on their skill sets and the
particular needs and goals of such tiers. For example, separate tiers were
established for new agents with little or no experience in the industry,
experienced agents who are producing at superior levels and one or more groups
of agents with experience or production levels falling between those two levels.
MONY Life believes that this tiering system is unique in the life insurance
industry and gives MONY Life a competitive advantage in the marketplace. For
example, by having certain managers responsible solely for recruiting and
providing necessary support systems for new recruits, MONY Life is able to
increase the number and quality of new agents recruited each year. MONY Life
believes that the tiering system allows MONY Life to attract and retain already
established and successful agents by providing an environment in which such
agents can compete favorably with other producer groups, such as third-party
brokers or general agents and to attract and retain other agents by providing
marketing and training support that is responsive to such agents' career
development needs.
The Company also derives part of its sales through MONY Life's
complementary distribution channels. During 1999, these channels included sales
to corporations and direct marketing focusing on contacting middle income and
other customers through direct marketing and the Internet.
PRICING AND UNDERWRITING
Insurance underwriting involves a determination of the type and amount of
risk, which an insurer is willing to accept. The Company underwrites each
application. The Company's underwriters evaluate policy applications on the
basis of information provided by the applicant and others. The Company follows
detailed and uniform underwriting practices and procedures designed to properly
assess and quantify risks before issuing coverage to qualified applications. The
Company's insurance underwriting standards are developed to produce mortality
results consistent with the assumptions used in product pricing while also
allowing competitive risk selection. Factors considered by the Company in
setting premiums and charges for products include assumptions which are
considered prudent by management as to future investment returns, expenses,
persistency, mortality and taxes, where appropriate. The long-term profitability
of the Company's products is affected by the degree to which future experience
deviates from these assumptions.
MONY Life implemented a new contract issuance and administrative system for
the majority of new products introduced effective with MONY Life's
Demutualization. The existing systems continue to be used for older products.
For the new products MONY Life anticipates using a newer version of the field
submit or electronic application supported on the new system, however on an
interim basis MONY Life currently is having the applications centrally submitted
at the Syracuse Operations Center using the new Cyberlife system, which is a
vendor package which supports both issue and administrative functions. In
underwriting business, the Company uses MONY Life's underwriting systems, which
it believes, are technologically superior to the systems of many of its
competitors. MONY Life's Underwriting Complex automatically requests and
processes data necessary to underwrite life insurance applications, including
blood test results and motor vehicle records. The Company's inforce policy
administrative systems, which contain the Company's policyholder databases,
handles policy billing and administrative services. MONY Life's agencies each
have computers connected to this integrated system, enabling agents in the field
to automatically access policyholder data.
MONY Life believes that its underwriting staff is highly experienced and
qualified. Of MONY Life's 31 Home Office Underwriting professionals, 11 have
over 20 years industry experience and 16 others have at least 10 years of
industry experience.
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REINSURANCE
The Company utilizes a variety of indemnity reinsurance agreements with
other insurers to control its loss exposure. Generally, these agreements are
structured either on an automatic basis, where risks meeting prescribed criteria
are automatically covered, or on a facultative basis, where the reinsurer must
agree to accept the specific reinsurance risk before it becomes liable. The
amount of each risk retained by the Company depends on its evaluation of the
specific risk, subject, in certain circumstances, to maximum limits based on
characteristics of coverages. Under the terms of the reinsurance agreements, the
reinsurer will be liable to reimburse the Company for the ceded amount in the
event the claim is paid. However, the Company remains contingently liable for
all benefits payable even if the reinsurer fails to meet its obligations to the
Company.
Life insurance business is ceded under various reinsurance contracts. The
Company's general practice is to retain no more than $4.0 million of risk on any
one person for individual products and $6.0 million for last survivor products.
The total amount of reinsured life insurance in force on this basis was $4.8
billion, $4.5 billion, and $2.7 billion at December 31, 1999, 1998, and 1997,
respectively.
The following table presents the Company's principal reinsurers and the
percentage of total reinsurance recoverable reported in the Company's financial
statements at December 31, 1999 that was due from each reinsurer, including
reinsurance recoverable reported in the financial statements under the caption
"Amounts Due From Reinsurers" (which amounted to $18.6 million).
REINSURERS:
Allianz Life Insurance Company.............................. 23.6%
Lincoln National Life Insurance Company..................... 23.3
Transamerica Occidental LIC................................. 14.2
Swiss Re Life Insurance Company of America.................. 13.3
RGA Reinsurance Co. ........................................ 12.5
MONY Life Insurance Company................................. 2.7
All Other................................................... 10.4
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100.0%
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The Company entered into a modified coinsurance agreement 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. At December 31, 1999,
the Company recorded a payable of $7.8 million to USFL in connection with this
agreement which is included in Accounts Payable and Other Liabilities in the
balance sheet. See Note 3 of the Financial Statements.
COMPETITION
The Company believes that competition in the Company's lines of business is
based on service, product features, price, commission structure, perceived
financial strength, claims-paying ratings and name recognition. The Company
competes with a large number of other insurers as well as non-insurance
financial services companies, such as banks, broker-dealers and asset managers,
many of which have greater financial resources, offer alternative products or
more competitive pricing and, with respect to other insurers, have higher
claims-paying ability ratings than the Company. Competition exists for
individual consumers and agents and other distributors of insurance and
investment products. National banks, with their pre-existing customer bases for
financial services products, increasingly compete with insurers as a result of
court cases that permit national banks to sell annuity products of life
insurance companies in certain circumstances.
In addition, there has been recently enacted legislation removing
restrictions on bank affiliations with insurers. This legislation, the
Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks,
insurers and securities firms under one holding company. Until passage of the
Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933 had limited the ability
of banks to engage in securities-related businesses, and the Bank Holding
Company Act of 1956 had restricted banks from being affiliated with insurance
companies. The ability of banks to affiliate with insurance companies and to
offer annuity products of life insurance companies may materially adversely
affect all of the Company's product lines by substantially increasing the
number, size and financial strength of potential competitors.
The Company must attract and retain productive agents to sell its insurance
and annuity products. Strong competition exists among insurance companies for
agents with demonstrated ability. Management believes that key bases of
competition among insurance companies for agents with demonstrated ability
include a company's financial position and the services provided to, and
relationships developed with, these agents in addition to compensation and
product structure. Changes arising from MONY Life's Demutualization, as well as
the realignment of MONY Life's career agency sales force and the transition to
new products, may affect the Company's ability to retain productive distributors
of
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its individual insurance and annuity products. Sales of individual insurance and
annuity products and the Company's financial position and results of operations
could be materially adversely affected if such changes occur.
REGULATION
The Company, as with other insurance companies, is subject to extensive
regulation and supervision in the jurisdictions in which it does business. Such
regulations impose restrictions on the amount and type of investments insurance
companies may hold. These regulations also affect many other aspects of
insurance companies businesses, including licensing of insurers and their
products and agents, risk-based capital requirements and the type and amount of
required asset valuation reserve accounts. These regulations are primarily
intended to protect policyholders. The Company cannot predict the effect that
any proposed or future legislation may have on the financial condition or
results of operations of the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
In recent years, a number of life and annuity insurers have been the
subject of regulatory proceedings and litigation relating to alleged improper
life insurance pricing and sales practices. Some of these insurers have incurred
or paid substantial amounts in connection with the resolution of such matters.
See "-- Legal Proceedings". In addition, state insurance regulatory authorities
regularly make inquiries, hold investigations and administer market conduct
examinations with respect to insurers' compliance with applicable insurance laws
and regulations.
The Company and MONY Life continuously monitor sales, marketing and
advertising practices, and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance with
applicable insurance laws and regulations. There can be no assurance that any
non-compliance with such applicable laws and regulations would not have a
material adverse effect on the Company.
Statutory Examination
As part of their routine regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books, records and
accounts of insurance companies domiciled in their states. Such examinations are
generally conducted in cooperation with the departments of two or three other
states under guidelines promulgated by National Association of Insurance
Commissioners ("NAIC").
The Arizona State Insurance Department completed an examination of the
Company, for each of the three years in the period ended December 31, 1996. The
report, which became available on March 17, 1998, noted that certain reinsurance
agreements were either not in writing or not submitted to the Arizona Department
for approval, that its federal income tax liability to MONY Life was not settled
in a timely fashion, and it does not maintain current appraisals on its limited
real estate portfolio (with respect to which the Company does not believe there
will be any material consequences), but it did not reveal any material financial
condition or operating items.
NAIC IRIS Ratios
The NAIC has developed a set of financial relationships or "tests" known as
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies which may require special attention or action
by insurance regulatory authorities. Insurance companies submit data annually to
the NAIC, which in turn analyzes the data by utilizing, in the case of life
insurance companies, twelve ratios, each with defined "usual ranges". Generally,
an insurance company will become subject to regulatory scrutiny if it falls
outside the usual ranges of four or more of the ratios, and regulators may then
act, if the company has insufficient capital, to constrain such company's
underwriting capacity. The Company is not currently subject to regulatory
scrutiny based on its IRIS ratios.
Policy and Contract Reserve Sufficiency Analysis
The Company is required to conduct an annual analysis of reserve
sufficiency including all life and health insurance reserves and
interest-sensitive single premium life and annuity reserves. A qualified actuary
must submit an opinion which states that the reserves when considered in light
of the assets held with respect to such reserves make good and sufficient
provision for the associated contractual obligations and related expenses of the
insurance company. In order to provide such an opinion, the insurance company
may set up additional reserves by transferring funds from surplus. The Company
has provided a current opinion, without qualification, to applicable state
regulators with respect to such reserves.
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Statutory Investment Valuation Reserves
Statutory Accounting Practices ("SAP") require a life insurance company to
maintain both an Asset Valuation Reserve ("AVR") and interest maintenance
reserve ("IMR") to absorb both realized and unrealized gains and losses on a
portion of its investments. AVR establishes statutory reserves for fixed
maturity securities, equity securities, mortgage loans, equity real estate, and
other invested assets. AVR is designed to capture all realized and unrealized
gains and losses on such assets, other than those resulting from changes in
interest rates. The level of AVR is based on both the type of investment and its
rating. In addition, the reserves required for similar investments, for example,
fixed maturity securities, differ according to the ratings of the investments,
which are based upon ratings established periodically by the NAIC Securities
Valuation Office. IMR applies to all types of fixed maturity investments,
including bonds, preferred stocks, mortgage backed securities and mortgage
loans. IMR is designed to capture the net gains which are realized upon the sale
of such investments and which result from changes in the overall level of
interest rates. Such captured net realized gains are then amortized into income
over the remaining period to the stated maturity of the investment sold. Any
increase in AVR and IMR causes a reduction in the Company's statutory capital
and surplus.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a model law to implement Risk-Based Capital ("RBC") requirements for
life insurance companies. The requirements are designed to monitor capital
adequacy and to raise the level of protection that statutory surplus provides
for policyholders. The model law measures four major areas of risk facing life
insurers: (i) the risk of loss from asset defaults and asset value fluctuation;
(ii) the risk of loss from adverse mortality and morbidity experience; (iii) the
risk of loss from mismatching of asset and liability cash flow due to changing
interest rates and (iv) business risks. Insurers having less statutory surplus
than required by the RBC model formula will be subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
The RBC formula provides a mechanism for the calculation of an insurance
company's Authorized Control Level RBC and its total adjusted capital. The model
law sets forth the points at which a superintendent of insurance is authorized
and expected to take regulatory action. The first level is known as the Company
Action Level RBC, which is set at twice the Authorized Control Level RBC. The
second level is the Regulatory Action Level RBC, set at 1.5 times the Authorized
Control Level RBC. The third is the Authorized Control Level RBC, and the fourth
is the Mandatory Control Level RBC, set at 70% of the Authorized Control Level
RBC.
If an insurance company's adjusted capital is higher than the Regulatory
Action Level but below the Company Action Level, the insurance company must
submit to its superintendent of insurance a comprehensive financial plan. If an
insurance company's adjusted capital is higher than the Authorized Control level
but lower than the Regulatory Action Level, the superintendent of insurance
shall perform such examination or analysis as he or she deems necessary of the
insurer's business and operations and issue any appropriate corrective orders to
address the insurance company's financial problems. If an insurer's adjusted
capital is higher than the Mandatory Control Level but lower than the Authorized
Control Level, the commissioner may place the insurer under regulatory control.
If the insurance company's adjusted capital falls below the Mandatory Control
Level, the superintendent will be required to place the insurer under regulatory
control. The adjusted RBC capital ratios of the Company at December 31, 1999 and
1998 were in excess of the Company Action Levels.
Regulation of Investments
The Company is subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of
investments in certain investment categories such as below investment grade
fixed income securities, equity real estate and equity investments. Failure to
comply with these laws and regulations would cause investments exceeding
regulatory limitations to be treated as non-admitted assets for purposes of
measuring surplus, and, in some instances, would require divestiture of such
non-qualifying investments. As of December 31, 1999, the Company's investments
complied with all such regulations.
ASSESSMENTS AGAINST INSURERS
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these jurisdictions
can be assessed for policyholder losses incurred by insolvent insurance
companies. These arrangements provide certain levels of protection to
policyholders from losses under insurance policies (and certificates issued
under group insurance policies issued by life insurance companies) issued by
insurance companies that become impaired or insolvent. Typically, assessments
are levied (up to prescribed limits) on member insurers on a basis which is
related to the member insurer's proportionate share of the business written by
all member insurers in the appropriate state.
While the amount and timing of any future assessment on the Company under
these laws cannot be reasonably estimated and are beyond the control of the
Company, the Company has established reserves which they consider adequate for
assessments in respect to insurance companies that are currently subject to
insolvency proceedings. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's solvency
8
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and further provide for annual limits on such assessments. A large part of the
assessments paid by the Company pursuant to these laws may be used as credits
for a portion of the Company's premium taxes. The Company believes the total
assessments will not be material to its operating results or financial position.
For the years ended December 31, 1999, 1998 and 1997, the Company paid
approximately $0.0 million, $0.2 million and $0.6 million, respectively, in
assessments pursuant to state insurance guaranty association laws.
General Regulation at Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the recent removal of barriers restricting banks from
engaging in the insurance and mutual fund business.
Securities Laws
The Company is subject to various levels of regulation under the federal
securities laws administered by the Securities and Exchange Commission (the
"Commission") and under certain state securities laws. Certain separate accounts
and a variety of mutual funds and other pooled investment vehicles are
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Certain annuity contracts and insurance policies issued by the
Company are registered under the Securities Act of 1933, as amended (the
"Securities Act").
The Company is an investment advisor, registered under the Investment
Advisers Act of 1940, as amended (the "Investment Advisers Act"). The investment
company managed by the Company is registered with the Commission under the
Investment Company Act.
The Company may also be subject to similar laws and regulations in the
states in which it provides investment advisory services, offer the products
described above or conduct other securities related activities.
EMPLOYEES
The Company has no employees. The Company has entered into a service
agreement with its parent, MONY Life, pursuant to which MONY Life provides
services necessary to operate the business of the Company.
9
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ITEM 1A. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages and positions are as follows:
NAME AGE POSITION
---- --- --------
Michael I. Roth...................... 54 Director, Chairman and Chief Executive Officer
Samuel J. Foti....................... 48 Director, President and Chief Operating Officer
Richard E. Connors................... 47 Director
Richard Daddario..................... 52 Director, Vice President and Controller
Phillip A. Eisenberg................. 57 Director, Vice President and Actuary
Margaret G. Gale..................... 48 Director and Vice President
Stephen J. Hall...................... 52 Director
Charles P. Leone..................... 60 Director, Vice President and Chief Compliance Officer
Kenneth M. Levine.................... 53 Director and Executive Vice President
David S. Waldman..................... 51 Secretary
David V. Weigel...................... 53 Treasurer
No officer or director listed above receives any compensation from the
Company in addition to compensation paid by MONY Life.
Set forth below is a description of the business positions during at
least the past five years for the directors and the executive officers
of the Company.
Michael I. Roth is Director, Chairman of the Board and Chief Executive
Officer of the Company. He is Chairman of the Board (since July 1993)
and Chief Executive Officer (since January 1993) of MONY Life and has
been a Trustee since May 1991. Mr. Roth is also a director of the
following subsidiaries of MONY Life: 1740 Advisers, Inc. (since December
1992) and MONY CS, Inc. (since December 1989). He has also served as
MONY Life's President and Chief Executive Officer (from January 1993 to
July 1993), President and Chief Operating Officer (from January 1991 to
January 1993) and Executive Vice President and Chief Financial Officer
(from March 1989 to January 1991). Mr. Roth has been with MONY Life for
10 years. Mr. Roth also served on the board of directors of the American
Council of Life Insurance and serves on the boards of directors of the
Life Insurance Council of New York, Insurance Marketplace Standards
Association, Enterprise Foundation (a charitable foundation which
develops housing not affiliated with the Enterprise Group of Funds),
Metropolitan Development Association of Syracuse and Central New York,
Enterprise Group of Funds, Inc., Enterprise Accumulation Trust, Pitney
Bowes, Inc. and Promus Hotel Corporation.
Samuel J. Foti is Director, President and Chief Operating Officer of the
Company. He is President and Chief Operating Officer (since February
1994) of MONY Life and has been a Trustee since January 1993. Mr. Foti
is also a director of the following subsidiaries of MONY Life: MONY
Brokerage, Inc. (since January 1990), MONY International Holdings, Inc.
(since October 1994), MONY Life Insurance Company of the Americas, Ltd.,
(since December 1994) and MONY Bank & Trust Company of the Americas,
Ltd. (since December 1994). He has also served as MONY Life's Executive
Vice President (from January 1991 to February 1994) and Senior Vice
President (from April 1989 to January 1991). Mr. Foti has been with MONY
Life for 11 years. Mr. Foti previously served on the board of directors
of the Life Insurance Marketing and Research Association, where he
served as Chairman from October 1996 through October 1997, and currently
serves on the board of Enterprise Group of Funds, Inc., Enterprise
Accumulation Trust and The American College.
Richard Daddario is Director, Vice President and Controller of the
Company. He is Executive Vice President and Chief Financial Officer
(since April 1994) of MONY Life. Mr. Daddario is also a director of the
following subsidiaries of MONY Life: MONY Brokerage, Inc. (since June
1997) and MONY Life Insurance Company of the Americas, Ltd. (since
December 1997). He has also served as MONY Life's Chief Financial
Officer (from January 1991 to present) and Senior Vice President (from
July 1989 to April 1994). Mr. Daddario has been with MONY Life for 10
years.
Kenneth M. Levine is Director and Executive Vice President of the
Company. He is Executive Vice President (since February 1990) and Chief
Investment Officer (since January 1991) of MONY Life and has been a
Trustee since May 1994. Mr. Levine is also a director of the following
subsidiaries of MONY Life: 1740 Advisers, Inc. (since December 1989),
MONY Funding, Inc. (since October 1991), MONY Realty Partners, Inc.
(since October 1991) and 1740 Ventures, Inc. (since October 1991). He
has also served as MONY Life's Senior Vice President -- Pensions (from
January 1988 to February 1990). Prior to that time, Mr. Levine held
various management positions within MONY Life. Mr. Levine has been with
MONY Life for 27 years.
Richard E. Connors is Director of the Company. He is Senior Vice
President of MONY Life (since February 1994). Mr. Connors is also a
director of the following subsidiary of MONY Life: MONY Brokerage, Inc.
(since May 1994). He has also served as MONY Life's Regional Vice
President -- Western
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Region (from June 1991 to February 1994), Vice President -- Small
Business Marketing (from January 1990 to June 1991) and Vice
President -- Manpower Development (from March 1988 to January 1990). Mr.
Connors has been with MONY Life for 11 years.
Phillip A. Eisenberg is Director, Vice President and Actuary of the
Company. He is Senior Vice President and Chief Actuary of MONY Life
(since April 1993). He has also served as MONY Life's Vice President --
Individual Financial Affairs (from January 1989 to March 1993). Prior to
that time, Mr. Eisenberg held various positions within MONY Life. Mr.
Eisenberg has been with MONY Life for 35 years.
Margaret G. Gale is Director and Vice President of the Company. She is
Vice President of MONY Life (since February 1991). She has also served
as Vice President -- Policyholder Services (from 1988 to 1991). Ms. Gale
has been with MONY Life for 21 years.
Stephen J. Hall is Director of the Company. He is Senior Vice President
of MONY Life (since February 1994). Mr. Hall is also a director of the
following subsidiary of MONY Life: MONY Brokerage, Inc. (since October
1991). He has also served as MONY Life's Vice President & Chief
Marketing Officer (from November 1990 to February 1994) and prior to
that time was manager of MONY Life's Boise, Idaho insurance agency. Mr.
Hall has been with MONY Life for 26 years.
Charles P. Leone is Director, Vice President and Chief Compliance
Officer of the Company. He is Vice President and Chief Corporate
Compliance Officer of MONY Life (since 1996). He has also served as Vice
President of MONY Life (from 1987 to 1996). Mr. Leone has been with MONY
Life for 31 years.
David S. Waldman is Secretary of the Company. He is Assistant Vice
President and Senior Counsel -- Operations (since 1992). He has also
served as Assistant General Counsel of MONY Life (from 1986 to 1992).
Mr. Waldman has been with MONY Life for 17 years.
David V. Weigel is Treasurer of the Company. He is Vice
President -- Treasurer of MONY Life (since 1994). He has also served as
Assistant Treasurer of MONY Life (from 1986 to 1994). Mr. Weigel has
been with MONY Life for 31 years.
ITEM 2. PROPERTIES
The Company's administrative offices are located at MONY Life's office,
1740 Broadway, New York, New York, which consists of approximately 234,903
square feet. MONY Life also has office space facilities in Syracuse, New York,
for use in its insurance operations, which consist of approximately 635,158
square feet in the aggregate. MONY Life leases both of these offices. MONY Life
also leases all 111 of its agency and its subsidiary offices, which consist of
approximately 669,020 square feet in the aggregate. The Company believes that
such properties are suitable and adequate for its current and anticipated
business operations.
ITEM 3. LEGAL PROCEEDINGS
In late 1995 and thereafter a number of purported class actions have been
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies in the 1980s and 1990s. Although the
claims asserted in each case are not identical, they seek substantially the same
relief under essentially the same theories of recovery (i.e., 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
(including the Goshen case discussed below) 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. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance). The Company has denied any wrongdoing and has asserted
numerous affirmative defenses.
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, the Goshen case, being the first of the
aforementioned 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 life or universal life insurance policy issued by
the Company and sold on an alleged "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, or are being
voluntarily 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
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General Business Law), which has been remanded back to the New York State
Supreme Court for further proceedings consistent with the opinion. The Company
intends vigorously to defend that litigation. There can be no assurance that the
present or future litigation relating to sales practices will not have a
material adverse effect on the Company.
In addition to the foregoing, from time to time the Company is party to
litigation and arbitration proceedings in the ordinary course of its business,
none of which is expected to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
None
ITEM 6. SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for the
Company. The selected financial information as of and for each of the years
presented has been derived from the Company's audited financial statements and
in the opinion of management, presents fairly such financial information in
conformity with GAAP except as described in Note 1 to the Selected Financial
Information. The selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's financial statements and the notes thereto and the
other financial information included elsewhere herein.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996(1) 1995(1)
-------- -------- -------- -------- --------
($ IN MILLIONS)
INCOME STATEMENT DATA:(3)
Revenues:
Universal life and investment-type product
policy fees................................ $ 143.1 $ 122.0 $ 100.8 $ 80.8 $ 61.8
Premiums...................................... 9.2 1.7 0.1 0.0 0.0
Net investment income......................... 94.7 94.6 99.1 102.0 104.9
Net realized gains (losses) on
investments(2)............................. (0.3) 7.1 2.7 0.9 0.7
Other income.................................. 7.6 7.6 5.5 4.8 7.6
-------- -------- -------- -------- --------
Total revenues............................. 254.3 233.0 208.2 188.5 175.0
Total benefits and expenses................ 224.4 211.1 195.4 175.4 155.4
-------- -------- -------- -------- --------
Income before income taxes...................... 29.9 21.9 12.8 13.1 19.6
Income tax expense.............................. 10.5 7.7 4.5 4.6 7.2
-------- -------- -------- -------- --------
Net income...................................... $ 19.4 $ 14.2 $ 8.3 $ 8.5 $ 12.4
======== ======== ======== ======== ========
BALANCE SHEET DATA:(3)
Total assets.................................... $6,168.2 $5,889.4 $5,291.5 $4,234.9 $3,405.9
Total liabilities............................... 5,864.3 5,599.6 5,029.5 3,995.3 3,182.4
Shareholders' equity............................ 303.9 289.8 262.0 239.6 223.5
- ---------------
(1) The balance sheet data presented as of December 31, 1996 and 1995 and the
income statement data for December 31, 1995 were derived from unaudited
financial information not included elsewhere herein.
(2) Includes writedowns for impairment and net changes in valuation allowances
on real estate, mortgage loans and investment securities aggregating $0.9
million, $(0.1) million, $(0.3) million, $0.4 million and $1.9 million for
the years ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
(3) Prior to 1996, the Company, as the wholly owned stock insurance company
subsidiary of a mutual life insurance company (MONY Life), prepared its
financial statements in conformity with accounting practices prescribed or
permitted by the Arizona Insurance Department, which accounting practices
were considered to be GAAP for mutual life insurance companies and their
wholly owned stock life insurance company subsidiaries. As of January 1,
1996, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 40, Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises, and Statement of
Financial Accounting Standards ("SFAS") No. 120, Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long Duration Participating Policies. Interpretation No. 40 and SFAS No. 120
require mutual life insurance companies and their wholly owned stock
insurance company subsidiaries to adopt all applicable authoritative GAAP
pronouncements in their general purpose financial statements. Accordingly,
the financial information presented in the Selected Financial Information
for periods prior to 1996 has been derived from financial information of the
Company which has been retroactively restated to reflect the adoption of all
applicable authoritative GAAP pronouncements. All such applicable
pronouncements were adopted as of the effective date originally specified in
each such pronouncement.
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses financial condition and results of
operations of the Company for the periods indicated. The discussion and analysis
of the Company's financial condition and results presented below should be read
in conjunction with the "Selected Financial Information" and the Financial
Statements and related footnotes and other financial information included
elsewhere herein.
The Company is a stock life insurance company organized in the state of
Arizona and is the corporate successor of VICO Credit Life Insurance Company,
incorporated in Arizona on March 6, 1969. The Company is a wholly owned
subsidiary of MONY Life Insurance Company, a stock life insurance company
domiciled in the state of New York. MONY Life, formerly The Mutual Life
Insurance Company of New York, is a wholly-owned subsidiary of The MONY Group, a
Delaware Corporation organized to be the parent holding company of MONY Life.
The Company's primary business is to provide asset accumulation and life
insurance products 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. These
products are sold in 49 states (not including New York), the District of
Columbia, the U.S. Virgin Islands and Puerto Rico.
RESULTS OF OPERATIONS
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
($ IN MILLIONS)
REVENUES:
Universal life and investment-type product policy fees...... $143.1 $122.0 $100.8
Premiums.................................................... 9.2 1.7 0.1
Net investment income....................................... 94.7 94.6 99.1
Net realized gains (losses) on investments.................. (0.3) 7.1 2.7
Other income................................................ 7.6 7.6 5.5
------ ------ ------
Total revenues............................................ 254.3 233.0 208.2
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 43.6 34.9 30.6
Interest credited to policyholders' account balances........ 63.5 65.1 72.5
Amortization of deferred policy acquisition costs........... 43.5 35.5 46.3
Other operating costs and expenses.......................... 73.8 75.6 46.0
------ ------ ------
Total benefits and expenses............................... 224.4 211.1 195.4
Income before income taxes.................................. 29.9 21.9 12.8
Income tax expense.......................................... 10.5 7.7 4.5
------ ------ ------
Net income.................................................. 19.4 14.2 8.3
Other comprehensive income (loss), net...................... (15.3) 1.1 3.3
------ ------ ------
Comprehensive income........................................ $ 4.1 $ 15.3 $ 11.6
====== ====== ======
FACTORS AFFECTING PROFITABILITY
The Company derives its revenues principally from: (i) insurance,
administrative and surrender charges on universal life and annuity products,
(ii) asset management fees from separate account products, (iii) premiums on
non-participating term life insurance, and (iv) net investment income and
realized capital gains on general account assets. The Company's expenses consist
of insurance benefits provided to policyholders, interest credited on
policyholders' account balances, 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, (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) and (v) its ability to manage
the market
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and credit risks associated with its invested assets. External factors, such as
legislation and regulation of the insurance marketplace and products, may also
affect the Company's profitability.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Universal life ("UL") and investment-type product fees were $143.1 million
for 1999, an increase of $21.1 million, or 17.3%, from $122.0 million reported
in the comparable prior year period. The principal reasons for the change from
period to period are as follows:
Flexible premium variable annuity ("FPVA") product fees were $64.4 million
for 1999, an increase of $8.4 million, from $56.0 million reported in the
comparable prior year period. The increase in FPVA fees is primarily due to
surrender charges which were $7.1 million higher than in 1998. FPVA account
value increased $103.5 million during 1999 to $4,279.6 million, as compared
to $4,176.1 million in 1998. The increase in account value in 1999 resulted
from new sales and other deposits of $378.5 million and market appreciation
of $450.4 million, offset by approximately $725.4 million in withdrawals
and surrenders. New sales of variable annuities during 1999 were $379
million, a decrease of $151 million, or 28.5%, from $529 million reported
for 1998. The decline in annuity sales was primarily due to: (i) increased
competition in the marketplace, (ii) the introduction by some companies of
bonus annuities, which the Company elected not to offer, and (iii) delays
in obtaining approval of the Company's new annuity products in certain key
states. During 1999, the Company took actions to reverse this trend,
including changes in agent compensation plans, product improvements
(including the addition of new fund options offered through the Company's
annuities), and increased education and training of the Company's career
agency sales force to emphasize the value of our annuity line compared to
the competition.
Variable universal life ("VUL") and corporate sponsored variable universal
life ("CSVUL") product fees were $36.9 million for 1999, an increase of
$16.2 million, from $20.7 million reported in the comparable prior year
period. The increase in fees is primarily due to higher charges for the
cost of insurance, loading and surrender charges of $8.8 million, $3.5
million and $1.6 million, respectively, and reduced unearned revenue
(amounts assigned to the policyholders for future services) of $2.9
million.
UL product fees were $50.9 million for 1999, a decrease of $2.4 million,
from $53.3 million reported in the comparable prior year period. The
decrease is primarily due to reduced loading and surrender charges of $2.0
million and lower unearned revenue (amount assigned to the policyholders
for future services) of $0.5 million.
Premium revenue was $9.2 million for 1999, an increase of $7.5 million from
$1.7 million reported in the comparable prior year period. Approximately $4.0
million of the increase was a result of a modified co-insurance agreement
between U.S. Financial Life ("USFL") and the Company. The additional increase is
a result of renewal premiums and new premiums relating to level term business,
which has been trending upward since the Company began offering this product
during the fourth quarter of 1997.
Net investment income was $94.7 million for 1999, an increase of $0.1
million, or 0.1%, from $94.6 million reported in the comparable prior year
period. The increase is primarily related to an increase in the average balances
of invested assets of $6.5 million between the periods, which was partially
offset by a 7 basis point decrease in portfolio yields.
Net realized losses on investments were $0.3 million for 1999, a change of
$7.4 million, or 104.2%, from net realized gains of $7.1 million reported in the
comparable prior year period. The decrease is primarily due to lower sales/
prepayment gains on fixed maturities of $3.2 million, lower sales gains on real
estate and real estate partnerships of $2.0 million, higher losses on provisions
for allowances on mortgage loans and real estate of $1.2 million and lower
mortgage sales gains of $1.0 million.
Other income was $7.6 million for 1999 and 1998, which consists mostly of
fees for supplementary contracts.
Benefits to policyholders were $43.6 million for 1999, an increase of $8.7
million, or 24.9%, from $34.9 million reported in the comparable prior year
period. The increase is primarily a result of higher UL death claims of $5.1
million to $30.8 million in 1999 from $25.7 million in 1998. Corporate-owned
life insurance ("COLI"), a new product introduced in 1998, death claims (before
reinsurance) increased to $2.9 million in 1999 from $0.0 million in 1998.
Interest credited to policyholders' account balances was $63.5 million for
1999, a decrease of $1.6 million, or 2.5%, from $65.1 million reported in the
comparable prior year period. The decrease was primarily due to lower single
premium deferred annuity ("SPDA") account balances and modest declines in
crediting rates which reduced interest crediting amounts by approximately $3.4
million. During 1999, SPDA account value decreased $55.3 million to $248.4
million at December 31, 1999 from $303.7 million at December 31, 1998 as a
result of continued withdrawals in 1999. This was offset by a $1.1 million
increase in FPVA interest credited due to increases in general account fund
balances for this product.
Amortization of deferred policy acquisition costs ("DAC") was $43.5 million
for 1999, an increase of $8.0 million, or 22.5%, from $35.5 million reported in
the comparable prior year period. The increase in DAC amortization was the
result of $4.5 million higher amortization related to the Company's VUL business
as a result of better mortality and rapid growth in the product, $1.6 million
related to the modified co-insurance agreement between USFL and the Company for
14
16
traditional life products and an increase of $1.4 million due to higher expected
gross profits in the FPVA business offset by the effect of the FPVA exchange
program.
Other operating costs and expenses were $73.8 million for 1999, a decrease
of $1.8 million, or 2.4%, from $75.6 million reported in the comparable prior
year period. The decrease is due to higher capitalized DAC slightly offset by
higher general expenses and commissions.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
UL and investment-type product fees were $122.0 million for 1998, an
increase of $21.2 million, or 21.0%, from $100.8 million reported for 1997. The
principal reasons for the change from period to period are as follows:
FPVA product fees were $56.0 million for 1998, an increase of $11.9 million
from $44.1 million reported in the comparable prior year period. FPVA
account value increased $404.2 million during 1998 to $4,176.1 million, as
compared to $3,771.9 million in 1997. The increase in account value in 1998
resulted from new sales and other deposits of $529.3 million and market
appreciation of $264.0 million, offset by approximately $389.1 million in
withdrawals and surrenders. New sales of variable annuities during 1998
were $529 million, a decrease of $96 million or 15.3%, from $625 million
reported for 1997. The introduction of new products and delays in
regulatory approvals in key states adversely affected variable annuity
sales.
VUL and CSVUL product fees were $20.7 million for 1998, an increase of $3.5
million, from $17.2 million reported in the comparable prior year period.
The increase relating to the Company's VUL and CSVUL business was $1.8
million and $1.7 million, respectively. The Company began offering CSVUL
during the fourth quarter of 1997. For 1998, the Company reported total
fees from its VUL business of $18.9 million, as compared to $17.1 million
reported from 1997. The increase in VUL fees is primarily due to higher
charges for the cost of insurance, administration, and loading of
approximately $5.0 million, $0.7 million and $1.6 million, respectively.
Premium revenue was $1.7 million for 1998, an increase of $1.6 million from
$0.1 million reported for 1997. The increase was primarily the result of new
premiums relating to private label term business (term insurance sold through
alternate distribution channels), which the Company began offering during the
fourth quarter of 1997.
Net investment income was $94.6 million for 1998, a decrease of $4.5
million, or 4.5%, from $99.1 million reported for 1997. The decrease is
primarily related to a decrease in portfolio yields from 7.3% in 1997 to 7.1% in
1998 due to rollover of the portfolio at lower interest rates.
Net realized gains on investments were $7.1 million for 1998, an increase
of $4.4 million, or 163.0%, from $2.7 million reported for 1997. The increase is
primarily due to $2.7 million in gains on sales and prepayments of fixed
maturity securities, higher gains on sales of real estate of $1.1 million, and
higher gains on sales of farm mortgages of $0.5 million.
Other income was $7.6 million for 1998, an increase of $2.1 million, or
38.2%, as compared to $5.5 million reported for 1997. The increase is primarily
due to higher funds received on supplementary contracts.
Benefits to policyholders were $34.9 million for 1998, an increase of $4.3
million, or 14.1%, from $30.6 million reported for 1997. The increase is
primarily due to higher death claims, net of reinsurance, and higher transfers
to supplementary contracts.
Interest credited to policyholders' account balances was $65.1 million for
1998, a decrease of $7.4 million, or 10.2%, from $72.5 million reported for
1997. The decrease was primarily due to lower interest crediting of
approximately $3.9 million relating to the Company's SPDA business in
conjunction with lower interest crediting on all other products. During 1998,
SPDA account value decreased $62.2 million to $303.7 million at December 31,
1998 from $365.9 million at December 31, 1997. The decrease in account value was
due to continued withdrawals in 1998, as compared to 1997, which management
believes reflected consumer preferences for separate account products. Average
interest crediting rates on the Company SPDA's were approximately 5.5% in both
1998 and 1997, respectively.
Amortization of deferred policy acquisition costs ("DAC") was $35.5 million
for 1998, a decrease of $10.8 million, or 23.3%, from $46.3 million reported for
1997. The decrease primarily consisted of lower amortization on UL products due
to revised estimate of mortality; VUL decreased reflecting higher claims during
1998 as compared to 1997. Amortization of DAC on the SPDA product line decreased
due to lower profit margins as a result of the declining fund balances and
narrowing of interest spreads.
Other operating costs and expenses were $75.6 million for 1998, an increase
of $29.6 million or 64.3% from $46.0 million reported for 1997. The increase is
primarily due to higher intercompany allocation of expenses from MONY Life which
primarily reflects the Company's higher production relative to that of MONY Life
on a consolidated basis. In addition, other expenses increased in 1998 as
compared to the prior year, including costs incurred in connection with
regulatory compliance, guarantee assessments and other miscellaneous items.
15
17
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 term life insurance premiums. Cash outflows primarily relate to the
liabilities associated with its various life insurance and annuity products,
operating expenses and income taxes. The life insurance and annuity liabilities
relate to the Company's obligation to make benefit payments under its insurance
and annuity contracts, as well as the need to make payments in connection with
policy surrenders, withdrawals and loans. The Company develops an annual cash
flow projection which shows expected asset and liability cash flows on a monthly
basis. At the end of each quarter actual cash flows are compared to projections,
projections for the balance of the year are adjusted in light of the actual
results, if appropriate, and investment strategies are also changed, if
appropriate. The quarterly cash flow reports contain relevant information on all
of the following: new product sales and deposits versus projections, existing
liability cash flow versus projections and asset portfolio cash flow versus
projections. An interest rate projection is a part of the initial annual cash
flow projections for both assets and liabilities. Actual changes in interest
rates during the year and, to a lesser extent, changes in rate expectations will
impact the changes in projected asset and liability cash flows during the course
of the year. When the Company is formulating its cash flow projections it
considers, among other things, its expectations about sales of the Company's
products, its expectations concerning customer behavior in light of current and
expected economic conditions, its expectations concerning competitors and the
general outlook for the economy and interest rates.
The events most likely to cause an adjustment in the Company's investment
policies are: (i) a significant change in its product mix, (ii) a significant
change in the outlook for either the economy in general or for interest rates in
particular and (iii) a significant reevaluation of the prospective risks and
returns of various asset classes.
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at December 31, 1999 and 1998.
WITHDRAWAL CHARACTERISTICS OF ANNUITY RESERVES AND DEPOSIT LIABILITIES
AMOUNT AT AMOUNT AT
DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1999 OF TOTAL 1998 OF TOTAL
------------ -------- ------------ --------
($ IN MILLIONS)
Not subject to discretionary withdrawal provisions....... $ 57.8 1.3% $ 67.9 1.5%
Subject to discretionary withdrawal -- with market value
adjustment or at carrying value less surrender
charge................................................. 4,025.5 88.7 3,938.6 87.8
-------- ------ -------- ------
Subtotal................................................. 4,083.3 90.0 4,006.5 89.3
Subject to discretionary withdrawal -- without adjustment
at carrying value...................................... 451.8 10.0 479.9 10.7
-------- ------ -------- ------
Total annuity reserves and deposit liabilities (gross of
reinsurance)........................................... $4,535.1 100.0% $4,486.4 100.0%
======== ====== ======== ======
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
SURRENDERS AND WITHDRAWALS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN MILLIONS)
PRODUCT LINE:
Variable and universal life................................. $ 36.0 $ 28.3 $ 26.0
Annuities(1)................................................ 739.5 406.5 286.7
------ ------ ------
Total..................................................... $775.5 $434.8 $312.7
====== ====== ======
- ---------------
(1) Excludes $724.9 million in 1999 relating to surrenders associated with an
exchange program offered by the Company wherein contract holders surrendered
old FPVA contracts and reinvested the proceeds in a new enhanced FPVA
product offered by the Company.
Annuity surrenders have increased for the year ended December 31, 1999 as
compared to the comparable prior year period primarily due to the aging of the
block of business and consequent decrease in surrender charge rates and due to
an increase in competition. In July 1999, the Company has responded to this
trend by enhancing its variable annuity products by offering new investment fund
choices.
16
18
During 1999, the Company reported cash used in operations of $64.6 million,
as compared to $13.0 million during 1998, an increase of $51.6 million between
the periods. The decrease in net cash flow from operations resulted primarily
from higher operating expense of $29.2 million, higher benefits payment of $15.7
million and lower cash net investment income of $4.8 million. In 1999, net cash
flow provided by financing activities was $70.4 million, an increase of $56.2
million from $14.2 million in the prior year. This increase is primarily due to
the receipt of cash on the issuance of a note payable to MBMC in the amount of
$50.5 million (see Note 3 of the Financial Statements.) The Company's liquid
assets include U.S. Treasury holdings, short-term money market investments and
marketable long-term fixed maturity securities. As of December 31, 1999, the
Company had readily marketable fixed maturity securities with a carrying value
of $1,048.8 million, which were comprised of $539.6 million public and $509.2
million private fixed maturity securities. At that date, approximately 94.8% of
the Company's fixed maturity securities were designated in NAIC rating
categories 1 and 2 (considered investment grade, with a rating of "Baa" or
higher by Moody's or "BBB" or higher by S&P). In addition, at December 31, 1999,
the Company had cash and cash equivalents of $28.9 million. Management believes
that the Company's sources of liquidity are adequate to meet its anticipated
needs.
At December 31, 1999, the Company had commitments to issue $3.7 million of
fixed rate agricultural loans with periodic interest rate reset dates. The
initial interest rates on such loans range from 7.90% to 8.44%. The Company had
no commitments outstanding for private fixed maturity securities as of December
31, 1999. In addition, at that date the Company had no outstanding commitments
to issue any fixed rate commercial mortgage loans.
Of the $52.8 million of currently outstanding commercial mortgage loans in
the Company's investment portfolio at December 31, 1999, $2.2 million, $4.6
million and $8.7 million are scheduled to mature in 2000, 2001 and 2002,
respectively. See "Investments -- Mortgage Loans -- Commercial Mortgage Loans".
At December 31, 1999, aggregate maturities of long-term debt based on
required remaining principal payments for 2000 and the succeeding four years are
$2.1 million, $2.3 million, $2.4 million, $2.6 million and $2.8 million,
respectively, and $36.8 million thereafter.
Aggregate contractual debt service payments on the Company's debt at
December 31, 1999, for 2000 and the succeeding four years are $5.4 million each
year and $49.8 million thereafter.
The National Association of Insurance Commissioners ("NAIC") established
Risk Based Capital ("RBC") requirements to help state regulators monitor and
safeguard life insurers' financial strength by identifying those companies that
may be inadequately capitalized. The RBC guidelines provide a method to measure
the adjusted capital (statutory-basis capital and surplus plus the Asset
Valuation Reserve ("AVR") and other adjustments) that a life insurance company
should have for regulatory purposes, taking into consideration the risk
characteristics of such company's investments and products. A life insurance
company's RBC ratio will vary over time depending upon many factors, including
its earnings, the nature, mix and credit quality of its investment portfolio and
the nature and volume of the products that it sells.
While the RBC guidelines are intended to be a regulatory tool only, and are
not intended as a means to rank insurers generally, comparisons of RBC ratios of
life insurers have become generally available. The Company's adjusted RBC
capital ratio at December 31, 1998 and December 31, 1997 were in excess of the
minimum required RBC.
YEAR 2000
The Company successfully completed its Year 2000 Project (the "Project") to
ensure Year 2000 readiness. The Company developed and implemented an
enterprise-wide plan to prepare for the Year 2000 issue by ensuring compliance
of all applications, operating systems and hardware on mainframe, PC and local
area network ("LAN") platforms; ensuring the compliance of voice and data
network software and hardware; addressing issues related to non-IT systems in
buildings, facilities and equipment which may contain date logic in embedded
chips; and addressing the compliance of key vendors and other third parties.
The total cost of the Project was $2.4 million. The Company does not expect
to incur any material future costs on the Project.
The Company has not experienced any material (or significant) Year 2000
related problems post-December 31, 1999 with its operations or with any external
parties with which business is conducted. Based on this experience and the
amount of work and testing the Company has previously performed, the Company
believes the likelihood of a Year 2000 issue that would have a material effect
on the Company's financial position and results of its operations continues to
be remote as the Company performs month-end, leap year, quarter-end, and
year-end processing. However, there is still the possibility that future Year
2000 related failures in the Company's systems or equipment and/or failure of
external parties to achieve Year 2000 compliance could have a material adverse
effect on the Company's financial position and results of its operations.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations except insofar as inflation affects interest rates.
17
19
INVESTMENTS
GENERAL
The Company's investment operations are managed by MONY Life's investment
area pursuant to an agreement between the Company and MONY Life dated January 1,
1982. The investment area reports directly to the Chief Investment Officer of
MONY Life. The investment area, in consultation with the product actuaries of
MONY Life is responsible for determining, within specified risk tolerances and
investment guidelines, the general asset allocation, duration and other
characteristics of the Company's investment portfolio.
The Company had total assets at December 31, 1999 of approximately $6.2
billion of which $1.8 billion represented assets held in the Company's general
account and $4.4 billion represented assets held in the Company's separate
accounts, for which the Company does not generally bear investment risk.
The primary investment objective of the Company is to maximize after-tax
returns consistent with acceptable risk parameters (including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations). The Company is exposed to two primary sources of investment risk
with respect to its general account assets: credit risk, relating to the
uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash flow variability associated with changes in market
yield curves. The Company manages credit risk through industry and issuer
diversification and asset allocation. The Company manages interest rate risk as
part of its asset/liability management strategies, product design, such as the
use of market value adjustment features and surrender charges and proactive
monitoring and management of certain non-guaranteed elements of the Company's
products (such as the resetting of credited interest rates for policies that
permit such adjustments). A key aspect in managing interest rate exposure are
the analyses performed by the Company to assess the adequacy of its projected
asset cash flows relative to its projected liability cash flows. These analyses,
many of which are required pursuant to the standard valuation laws of virtually
all states, involve evaluating the potential gain or loss for over 95% of the
Company's in force business under various increasing and decreasing interest
rate environments, including inverted yield curves. For purposes of these
analyses the Company has developed models of its in force business which reflect
product characteristics such as cost of insurance rates, surrender charges,
market value adjustments, cash values, etc. The models include assumptions,
based on current and anticipated experience, regarding lapse and mortality rates
and interest crediting strategies. In addition, these models include asset cash
flow projections reflecting coupon payments, sinking fund payments, principal
payments, defaults, bond calls, and mortgage prepayments.
Generally, subject to certain minimum rates, where applicable, these cash
flow analyses are based on projections of cash flows using ten different
interest rate scenarios over ten or more years. First a baseline interest rate
is selected based on current rates. Then from the selected baseline rate the ten
scenarios are: (i) level, (ii) an immediate increase of 3% and then level, (iii)
an immediate decrease of 3% and then level, (iv) a uniform increase over ten
years of one half a percent per year and then level, (v) a uniform decrease over
ten years of one half a percent per year and then level, (vi) a uniform increase
of one percent per year over five years followed by a uniform decrease of one
percent per year over the next five years and then level, (vii) a uniform
decrease of one percent per year over five years followed by a uniform increase
of one percent per year over the next five years and then level and (viii) a
decrease of 2% and then level. In addition, two of the scenarios are run with an
inverted yield curve.
Since most of its in force liabilities result from separate account
products, the Company does not focus on more precise liability duration measures
because management believes that the scenario testing employed is sufficient to
adequately assess interest rate risk. The Company does not use hedging
instruments because management believes that there is limited general account
risk exposure from recurring cash flows and limitations contained in product
designs.
Separate account assets are managed in accordance with the prescribed
investment strategy that applies to the specific separate account. Separate
accounts are established in conformity with insurance laws and are generally not
chargeable with liabilities that arise from any other business of the Company.
Separate account assets are subject to general account claims only to the extent
that the value of such assets exceeds the separate account liabilities.
Investments held in separate accounts and liabilities of the separate accounts
are reported separately as assets and liabilities. Substantially all separate
account assets are reported at estimated fair value. Investment income and gains
or losses on the investments of separate accounts accrue directly to
contractholders and, accordingly, are not reflected in the Company's statements
of income and cash flows. Fees charged to the separate accounts by the Company
(including mortality charges, policy administration fees and surrender charges)
are reflected in the Company's revenues.
General account assets are managed to support all of the Company's life
insurance and annuity lines of business. With respect to the general account,
the Company seeks to protect policyholders' benefits through asset/liability
matching, emphasizing safety of principal, maintaining sufficient liquidity and
avoiding undue asset concentrations through diversification. At the same time,
the Company seeks to produce an investment return that supports competitive
product pricing and which contributes to achieving the required risk adjusted
return on surplus. The Company's general account consists of a diversified
portfolio of investments. Although all the assets of the general account support
all the Company's liabilities, the Company has developed separate investment
portfolios for specific classes of product liabilities within the general
account. The investment area works closely with the business lines to develop
investment guidelines,
18
20
including duration targets, asset allocation, asset/liability mismatch
tolerances and return objectives, for each product line in order to achieve each
such product line's individual risk and return objectives.
The following table summarizes the invested assets held in the general
account of the Company at the dates indicated.
INVESTED ASSETS
AS OF DECEMBER 31,
--------------------------------------
1999 1998
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
($ IN MILLIONS)
Fixed maturities............................................ $1,048.8 80.0% $1,044.2 76.6%
Mortgage loans on real estate............................... 165.0 12.6 120.1 8.8
Policy loans................................................ 58.8 4.5 52.1 3.8
Real estate(1).............................................. 6.9 0.5 8.3 0.6
Other invested assets....................................... 2.3 0.2 4.7 0.4
Cash and cash equivalents................................... 28.9 2.2 133.4 9.8
-------- ----- -------- -----
Total invested assets..................................... $1,310.7 100.0% $1,362.8 100.0%
======== ===== ======== =====
- ---------------
(1) Real estate to be disposed of was $1.6 million and $0.0 million for 1999 and
1998, respectively. Real estate held for investment was $5.3 million and
$8.3 million for 1999 and 1998, respectively.
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, payment-in-kind distributions and undistributed equity earnings.
Investment expenses include mortgage servicing fees and other miscellaneous fee
income.
INVESTMENT RESULTS BY ASSET CATEGORY
1999 1998 1997
---- ---- ----
Fixed maturities............................................ 7.4% 7.4% 7.4%
Mortgage loans on real estate............................... 8.1 8.7 8.4
Policy loans................................................ 6.9 7.4 8.0
Real estate................................................. 6.6 3.3 6.6
Other invested assets....................................... 14.3 6.1 4.9
Cash and cash equivalents................................... 4.3 3.0 7.1
Total invested assets before investment expenses............ 7.3 7.2 7.5
Investment expenses....................................... (0.2) (0.1) (0.2)
---- ---- ----
Total invested assets after investment expenses............. 7.1% 7.1% 7.3%
==== ==== ====
The yield on general account invested assets (including net realized gains
and losses on investments) was 7.1%, 7.6% and 7.5% for the years ended December
31, 1999, 1998 and 1997, respectively.
FIXED MATURITIES
Fixed maturities consist of publicly traded debt securities and privately
placed debt securities and represented 80.0% and 76.6% of total invested assets
at December 31, 1999 and 1998, respectively.
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).
The following tables present the Company's private, public and total fixed
maturities by NAIC designation and the equivalent ratings of the Nationally
Recognized Securities Rating Organizations as of December 31, 1999 and 1998, as
well as the percentage, based on fair value, that each designation comprises.
19
21
PUBLIC FIXED MATURITIES BY CREDIT QUALITY
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ------ ----------------------------- --------- ----- ---------- --------- ----- ----------
($ IN MILLIONS)
1.................. Aaa/Aa/A $346.8 63.1% $340.5 $346.1 60.9% $357.3
2.................. Baa 187.1 34.0 183.5 203.1 35.8 210.0
3.................. Ba 16.1 2.9 15.6 19.2 3.3 19.1
------ ----- ------ ------ ----- ------
Total public fixed maturities $550.0 100.0% $539.6 $568.4 100.0% $586.4
====== ===== ====== ====== ===== ======
PRIVATE FIXED MATURITIES BY CREDIT QUALITY
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
------ ------------------------------ --------- ----- ---------- --------- ----- ----------
($ IN MILLIONS)
1.................. Aaa/Aa/A $156.4 29.8% $151.7 $132.6 30.0% $137.2
2.................. Baa 327.8 62.5 318.1 277.3 62.8 287.4
3.................. Ba 37.3 6.8 34.5 29.3 5.8 26.7
4.................. B 5.0 0.9 4.6 3.0 0.6 2.7
5.................. Caa and lower 0.3 0.0 0.3 3.6 0.8 3.8
------ ----- ------ ------ ----- ------
Total private fixed maturities $526.8 100.0% $509.2 $445.8 100.0% $457.8
====== ===== ====== ====== ===== ======
TOTAL FIXED MATURITIES BY CREDIT QUALITY
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ------ ----------------------------- --------- ----- ---------- --------- ----- ----------
($ IN MILLIONS)
1.................. Aaa/Aa/A $ 503.2 46.9% $ 492.2 $ 478.7 47.3% $ 494.5
2.................. Baa 514.9 47.9 501.6 480.4 47.6 497.4
3.................. Ba 53.4 4.8 50.1 48.5 4.4 45.8
4.................. B 5.0 0.4 4.6 3.0 0.3 2.7
5.................. Caa and lower 0.3 0.0 0.3 3.6 0.4 3.8
-------- ----- -------- -------- ----- --------
Total fixed maturities $1,076.8 100.0% $1,048.8 $1,014.2 100.0% $1,044.2
======== ===== ======== ======== ===== ========
The Company utilizes its investments in privately placed fixed maturities
to increase diversification and obtain higher yields than are possible with
comparable quality public market securities. These privately placed securities
are also used to enhance cash flow as a result of sinking fund payments.
Generally, private placements provide the Company with broader access to
management information, strengthened negotiated protective covenants, call
protection features and, where applicable, a higher level of collateral. They
are, however, generally not freely tradable because of restrictions imposed by
federal and state securities laws and illiquid trading markets.
At December 31, 1999, the percentage, based on estimated fair value, of
total public and private placement fixed maturities that were investment grade
(NAIC Designation 1 or 2) was 94.8% compared to 94.9% for December 31, 1998. The
fixed maturities portfolio was comprised, based on estimated fair value, of
51.4% in public fixed maturities and 48.6% in private fixed maturities at
December 31, 1999 and 56.2% in public fixed maturities and 43.8% in private
fixed maturities at December 31, 1998.
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 which, (i) are in default as to principal or interest payments (ii)
are to be restructured pursuant to commenced negotiations (iii) went into
bankruptcy subsequent to acquisition or (iv) are deemed to have other than
temporary impairments to value. The fair value of problem fixed maturities was
$4.8 million and $4.4 million at December 31, 1999 and 1998, respectively. For
the years ended December 31, 1999, 1998 and 1997 $0.0 million, $0.0 million and
$0.1 million of interest income was not accrued on problem fixed maturities.
20
22
The Company defines potential problem securities in the fixed maturity
category as securities of companies that are deemed to be experiencing
significant operating problems or difficult industry conditions. Typically these
securities are experiencing or anticipating liquidity constraints, having
difficulty meeting projections/budgets and would most likely be considered a
below investment grade risk. The fair value of potential problem fixed
maturities was $6.4 million and $16.4 million at December 31, 1999 and 1998,
respectively.
The Company defines restructured securities in the fixed maturity category
as securities where a concession has been granted to the borrower related to the
borrower's financial difficulties that the Company would not have otherwise
considered. The Company restructures certain securities in instances where a
determination was made that greater economic value will be realized under the
new terms than through liquidation or other disposition. The terms of the
restructure generally involve some or all of the following characteristics: a
reduction in the interest rate, an extension of the maturity date and a partial
forgiveness of principal and/or interest. The fair value of restructured fixed
maturities was $0.0 million and $2.7 million at December 31, 1999 and 1998,
respectively.
The following table sets forth the total carrying values of the Company's
fixed maturity portfolio, as well as its problem, potential problem and
restructured fixed maturities.
PROBLEM, POTENTIAL PROBLEM AND
RESTRUCTURED FIXED MATURITIES AT FAIR VALUE
AS OF DECEMBER 31,
--------------------
1999 1998
-------- --------
($ IN MILLIONS)
Total fixed maturities (public and private)................. $1,048.8 $1,044.2
======== ========
Problem fixed maturities.................................... 4.8 4.4
Potential problem fixed maturities.......................... 6.4 16.4
Restructured fixed maturities............................... 0.0 2.7
-------- --------
Total problem, potential problem & restructured fixed
maturities................................................ $ 11.2 $ 23.5
======== ========
Total problem, potential problem & restructured fixed
maturities as a percent of total fixed maturities......... 1.1% 2.3%
======== ========
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of
December 31, 1999 and 1998 are as follows:
FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
----------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
($ IN MILLIONS)
Due in one year or less................................... $ 75.8 $ 76.2 $ 90.0 $ 90.4
Due after one year through five years..................... 275.8 274.9 306.8 315.5
Due after five years through ten years.................... 383.8 366.5 284.7 299.2
Due after ten years....................................... 119.9 113.7 105.2 106.3
-------- -------- -------- --------
Subtotal................................................ 855.3 831.3 786.7 811.4
Mortgage-backed and other asset-backed securities......... 221.5 217.5 227.5 232.8
-------- -------- -------- --------
Total................................................... $1,076.8 $1,048.8 $1,014.2 $1,044.2
======== ======== ======== ========
The Company held approximately $217.5 million and $232.8 million of
mortgage-backed and asset-backed securities as of December 31, 1999 and 1998,
respectively. Of such amounts, $82.4 million and $108.3 million or 37.9% and
46.5%, respectively, represented agency-issued pass-through and collateralized
mortgage obligations ("CMOs") secured by the Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation and Government National
Mortgage Association. The balance of such amounts was comprised of other types
of mortgage-backed and asset-backed securities. The Company believes that its
active monitoring of its portfolio of mortgage-backed securities and the limited
extent of its holdings of more volatile types of mortgage-backed securities
mitigate the Company's exposure to losses from prepayment risk associated with
interest rate fluctuations for this portfolio. At December 31, 1999 and 1998,
81.9% and 91.2%, respectively, of the Company's mortgage-backed and asset-backed
securities were assigned a NAIC Designation 1. In addition, the Company believes
that it holds a relatively low percentage of CMOs compared to other life
insurance companies.
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23
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated.
MORTGAGE AND ASSET-BACKED SECURITIES
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
($ IN MILLIONS)
CMOs........................................................ $117.0 $147.7
Asset-backed securities..................................... 95.9 79.6
Commercial MBSs............................................. 4.5 5.4
Pass-through securities..................................... 0.1 0.1
------ ------
Total MBS's and asset-backed securities................... $217.5 $232.8
====== ======
CMOs are purchased to diversify the portfolio risk characteristics from
primarily corporate credit risk to a mix of credit and cash flow risk. The
majority of the CMOs in the Company's investment portfolio have relatively low
cash flow variability. In addition, approximately 70.4% of the CMOs in the
portfolio have minimal credit risk because the underlying collateral is backed
by the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association. These CMOs offer
greater liquidity and higher yields than corporate debt securities of similar
credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through
securities) are prepayment and extension risks arising from changes in market
interest rates. In declining interest rate environments, the mortgages
underlying the CMOs are prepaid more rapidly than anticipated, causing early
repayment of the CMOs. In rising interest rate environments, the underlying
mortgages are prepaid at a slower rate than anticipated, causing CMO principal
repayments to be extended. Although early CMO repayments may result in
acceleration of income from recognition of any unamortized discount, the
proceeds typically are reinvested at lower current yields, resulting in a net
reduction of future investment income.
The Company manages this prepayment and extension risk by investing in CMO
tranches that provide for greater stability of cash flows. The mix of CMO
tranches was as follows as of the dates indicated.
COLLATERALIZED MORTGAGE OBLIGATIONS BY TRANCHE
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
($ IN MILLIONS)
Planned Amortization Class.................................. $101.9 $121.8
Sequential.................................................. 15.1 25.9
------ ------
Total CMO's............................................... $117.0 $147.7
====== ======
The Planned Amortization Class ("PAC") tranche is structured to provide
more certain cash flows to the investor and therefore is subject to less
prepayment and extension risk than other CMO tranches. In general, the Company's
PACs are structured to provide average life stability for increases and
decreases in interest rates of 100 to 200 basis points. PACs derive their
stability from two factors: (i) early repayments are applied first to other
tranches to preserve the PACs' originally scheduled cash flows as much as
possible and (ii) cash flows applicable to other tranches are applied first to
the PAC if the PACs' actual cash flows are received later than originally
anticipated.
The prepayment and extension risk associated with a Sequential tranche can
vary as interest rates fluctuate, since this tranche is not supported by other
tranches.
The majority of the securities contained in the Company's CMO portfolio are
traded in the open market. As such, the Company obtains market prices from
outside vendors. Any security price not received from such vendors is obtained
from the originating broker or internally calculated.
Asset-backed securities ("ABS") are purchased both to diversify the overall
credit risks of the fixed maturity portfolio and to provide attractive returns.
The ABS portfolio is diversified both by type of asset and by issuer. The
largest asset class exposure in the ABS portfolio is to credit card receivables.
These are comprised of pools of both general purpose credit card receivables
such as Visa and Mastercard and private label credit card receivable pools.
Excluding the exposures to home equity loans (which represented 6.3% and 10.8%,
of the ABS portfolio as of December 31, 1999 and 1998, respectively), the ABS
portfolio is in general insensitive to changes in interest rates. As of December
31, 1999 and 1998, respectively, the ABS portfolio did not contain any pools of
assets outside of the United States.
22
24
The following table presents the types of ABS held by the Company as of the
dates indicated.
ASSET-BACKED SECURITIES BY TYPE
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
($ IN MILLIONS)
Credit cards................................................ $44.5 $42.1
Public Utilities Rate Reduction receivables................. 13.8 0.0
Automobile receivables...................................... 11.3 12.0
Collateralized bond obligations/Collateralized loan
obligations............................................... 9.8 0.0
Home equity................................................. 6.1 8.6
Lease receivables........................................... 5.0 5.0
Manufactured Housing........................................ 3.0 3.5
Miscellaneous............................................... 2.4 8.4
----- -----
Total ABS................................................. $95.9 $79.6
===== =====
MORTGAGE LOANS
Mortgage loans comprise 12.6% and 8.8% of total invested assets at December
31, 1999 and 1998, respectively. Mortgage loans consist of commercial and
agricultural loans. As of December 31, 1999 and 1998, commercial mortgage loans
comprised $52.8 million and $27.6 million or 32.0% and 23.0% of total mortgage
loan investments, respectively. Agricultural loans comprised $112.2 million and
$92.5 million or 68.0% and 77.0% of total mortgage loan investments,
respectively.
Commercial Mortgage Loans
In 1992, the Company discontinued making new commercial mortgage loans,
except to honor outstanding commitments or safeguard the values of existing
investments. In 1999, due to improved market conditions, the need to maintain a
diversified investment portfolio and advantageous yields, the Company began to
originate new commercial mortgage loans.
Following is a summary of the Company's commercial mortgage loans by
geographic area and property type as of December 31, 1999 and 1998.
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY PROPERTY TYPE
AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------
GEOGRAPHIC AREA
- -----------------------------------------------------------
NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL
- ------ -------- -------- -----
($ IN MILLIONS)
Southeast............ 3 $36.6 69.3%
Northeast............ 5 10.7 20.3
West................. 3 5.5 10.4
Mountain............. 0 0 --
Midwest.............. 0 0 --
-- ----- -----
Total.............. 11 $52.8 100.0%
== ===== =====
PROPERTY TYPE
- -----------------------------------------------------------
NUMBER CARRYING % OF
TYPE OF LOANS VALUE TOTAL
- ---- -------- -------- -----
($ IN MILLIONS)
Office............... 7 $45.3 85.8%
Industrial........... 1 2.3 4.3
Retail............... 1 2.0 3.8
Other................ 1 1.8 3.4
Apartments........... 1 1.4 2.7
-- ----- -----
Total.............. 11 $52.8 100.0%
== ===== =====
23
25
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY PROPERTY TYPE
AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
GEOGRAPHIC AREA
- -----------------------------------------------------------
NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL
- ------ -------- -------- -----
($ IN MILLIONS)
Northeast............ 7 $13.9 50.3%
West................. 4 7.9 28.6
Southeast............ 2 3.0 10.9
Mountain............. 1 1.6 5.8
Midwest.............. 1 1.2 4.4
-- ----- -----
Total.............. 15 $27.6 100.0%
== ===== =====
PROPERTY TYPE
- -----------------------------------------------------------
NUMBER CARRYING % OF
TYPE OF LOANS VALUE TOTAL
- ---- -------- -------- -----
($ IN MILLIONS)
Office............... 7 $13.4 48.5%
Retail............... 3 4.6 16.7
Industrial........... 2 4.6 16.7
Other................ 2 3.6 13.0
Apartments........... 1 1.4 5.1
-- ----- -----
Total.............. 15 $27.6 100.0%
== ===== =====
The Company's commercial mortgage loan portfolio is managed by a group of
experienced real estate professionals. These professionals monitor the
performance of the loan collateral, physically inspect properties, collect
financial information from borrowers and keep in close contact with borrowers
and the local broker communities to assess the market conditions and evaluate
the impact of such conditions on property cash flows. The Company's real estate
professionals identify problem and potential problem mortgage assets and develop
workout strategies to deal with borrowers' financial weakness, whether by
foreclosing on properties to prevent a deterioration in collateral value, or by
restructuring mortgages with temporary cash flow difficulties.
COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
AS OF DECEMBER 31,
---------------------------------------------
1999 1998
------------------ -------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- ------
($ IN MILLIONS)
Due in one year or less............................. $ 2.2 4.2% $ 9.2 33.3%
Due after one year through five years............... 41.6 78.8 9.4 34.1
Due after five years through ten years.............. 7.0 13.2 7.0 25.4
Due after ten years................................. 2.0 3.8 2.0 7.2
----- ----- ----- ------
Total............................................. $52.8 100.0% $27.6 100.0%
===== ===== ===== ======
Problem, Potential Problem and Restructured Commercial Mortgages
Commercial mortgage loans are stated at their unpaid principal balances,
net of valuation allowances and writedowns for impairment. The Company provides
valuation allowances for commercial mortgage loans considered to be impaired.
Mortgage loans are considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When the Company
determines that a loan is impaired, a valuation allowance for loss is
established for the excess of the carrying value of the mortgage loan over its
estimated fair value. Estimated fair value is based on either the present value
of expected future cash flows discounted at the loan's original effective
interest rate, the loan's observable market price or the fair value of the
collateral. The provision for loss is reported as a realized loss on investment.
The Company reviews its mortgage loan portfolio and analyzes the need for a
valuation allowance for any loan which is delinquent for 60 days or more, in
process of foreclosure, restructured, on "watchlist", or which currently has a
valuation allowance. Loans which are delinquent and loans in process of
foreclosure are categorized by the Company as "problem" loans. Loans with
valuation allowances, but which are not currently delinquent, and loans which
are on the 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 December 31, 1999 was
$52.8 million, which amount is net of valuation allowances aggregating $1.1
million which represents management's best estimate of cumulative impairments at
such date. However, there can be no assurance that increases in valuation
allowances will not be necessary. Any such increases may have a material adverse
effect on the Company's financial position and results of operations.
At December 31, 1999, the carrying value of restructured loans was $11.0
million, net of valuation allowances of $0.5 million. There were no problem or
potential problem loans at December 31, 1999.
24
26
Gross interest income on restructured commercial mortgage loan balances
that would have been recorded in accordance with the loans' original terms was
approximately $1.1 million and $1.4 million at December 31, 1999 and 1998. As a
result of the restructurings, the gross interest income recognized in net income
at December 31, 1999 and 1998 was $0.9 million and $1.0 million.
The following table presents the carrying amounts of problem and
restructured commercial mortgages relative to the carrying value of all
commercial mortgages as of the dates indicated. The table also presents the
valuation allowances and writedowns recorded by the Company relative to
commercial mortgages defined as problem and restructured as of each of the
aforementioned dates.
PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING VALUE
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
($ IN MILLIONS)
Total commercial mortgages.................................. $52.8 $27.6
===== =====
Problem commercial mortgages................................ $ -- $ --
Restructured commercial mortgages........................... 11.0 13.5
----- -----
Total problem and restructured commercial mortgages......... $11.0 $13.5
===== =====
Valuation allowances/writedowns:
Problem loans............................................... $ -- $ --
Restructured loans.......................................... 0.5 0.5
----- -----
Total valuation allowances/writedowns....................... $ 0.5 $ 0.5
===== =====
Total valuation allowances/writedowns as a percent of
problem and restructured commercial mortgages at carrying
value before valuation allowances and writedowns.......... 4.3% 3.6%
===== =====
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-asset specific estimate of expected
losses on all other such mortgage loans based on its historical loss experience
for such investments. As of December 31, 1999 and 1998, such reserves were $0.6
million and $0.4 million, respectively.
Agricultural Mortgage Loans
The carrying value of the Company's agricultural mortgage loans was $112.2
million and $92.5 million at December 31, 1999 and 1998, respectively,
representing 68.0% and 77.0% of total mortgage assets. The agricultural mortgage
portfolio is diversified both geographically and by type of product. The
security for these loans includes row crops, permanent plantings, dairies,
ranches and timber tracts. Due to strong agricultural markets and advantageous
yields, the Company expects to continue to invest in agricultural mortgage
investments. Less than 1.0% and 0.0% of total agricultural loans outstanding at
December 31, 1999 and 1998, respectively, were delinquent or in process of
foreclosure.
Problem, Potential Problem and Restructured Agricultural Mortgages
The Company defines problem, potential problem and restructured
agricultural mortgages in the same manner as it does for commercial mortgages.
The following table presents the carrying amounts of problem, potential problem
and restructured agricultural mortgages relative to the carrying value of all
agricultural mortgages as of the dates indicated.
25
27
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES AT CARRYING
VALUE
AS OF DECEMBER 31,
-------------------
1999 1998
-------- -------
($ IN MILLIONS)
Total agricultural mortgages................................ $112.2 $92.5
====== =====
Problem agricultural mortgages(1)........................... $ 1.1 $ 0.0
Potential problem agricultural mortgages.................... 0.4 0.4
Restructured agricultural mortgages......................... 0.9 0.8
------ -----
Total problem, potential problem & restructured agricultural
mortgages(2).............................................. $ 2.4 $ 1.2
====== =====
Total problem, potential problem & restructured agricultural
mortgages as a percent of total agricultural mortgages.... 2.1% 1.3%
====== =====
- ---------------
(1) Problem agricultural mortgages included delinquent mortgage loans of $1.1
million and $0.0 million at December 31, 1999 and 1998, respectively, and
there were no mortgage loans in the process of foreclosure at such dates.
(2) As of December 31, 1999 and 1998, there were $0.1 million and $0.0 million
valuation allowances/writedowns relating to problem, potential problem and
restructured agricultural mortgages.
In addition to valuation allowances and impairment writedowns recorded on
specific agricultural mortgage loans classified as problem, potential problem,
and restructured mortgage loans, the Company records a non-asset specific
estimate of expected losses on all other agricultural mortgage loans based on
its historical loss experience for such investments. As of December 31, 1999 and
1998, such reserves were $1.1 million and $0.9 million, respectively.
EQUITY REAL ESTATE
The Company holds real estate as part of its general account investment
portfolio. The Company has adopted a policy of not investing new funds in equity
real estate except to safeguard values in existing investments or to honor
outstanding commitments. As of December 31, 1999 and 1998, the carrying value of
the Company's real estate investments was $6.9 million and $8.3 million,
respectively, or 0.5% and 0.6%, respectively, of general account invested
assets. The Company owns real estate of $5.3 million and $0.3 million as of
December 31, 1999 and 1998 respectively, and real estate acquired upon
foreclosure of commercial and agricultural mortgage loans of $1.6 million and
$8.0 million as of December 31, 1999 and 1998, respectively.
Equity real estate is categorized as either "Real estate held for
investment" or "Real estate to be disposed of". Real estate to be disposed of
consists of properties for which the Company has commenced marketing efforts.
The carrying value of real estate held for investment totaled $5.3 million and
$8.3 million as of December 31, 1999 and 1998, respectively. The carrying value
of real estate to be disposed of aggregated $1.6 million and $0.0 million as of
December 31, 1999 and 1998, respectively.
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES
The cumulative asset specific impairment adjustments and provisions for
valuation allowances that were recorded as of the end of each period are shown
in the table below and are reflected in the corresponding asset values discussed
above.
CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
AS OF DECEMBER 31,
-------------------
1999 1998
------ ------
($ IN MILLIONS)
Fixed maturities............................................ $0.5 $0.5
Real estate(1).............................................. 1.4 1.9
---- ----
Total..................................................... $1.9 $2.4
==== ====
- ---------------
(1) Includes $1.2 million and $1.6 million at December 31, 1999 and 1998,
respectively, relating to impairments taken upon foreclosure of mortgage
loans.
26
28
CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF DECEMBER 31,
------------------
1999 1998
----- -----
($ IN MILLIONS)
Mortgages................................................... $2.3 $1.9
Real estate................................................. 0.3 0.0
---- ----
Total..................................................... $2.6 $1.9
==== ====
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS
FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF DECEMBER 31,
------------------
1999 1998
----- -----
($ IN MILLIONS)
Fixed maturities............................................ $0.5 $0.5
Mortgages................................................... 2.3 1.9
Real estate................................................. 1.7 1.9
---- ----
Total..................................................... $4.5 $4.3
==== ====
All of the Company's fixed maturity securities are classified as available
for sale and, accordingly, are marked to market, with unrealized gains and
losses excluded from earnings and reported as a separate component of
accumulated other comprehensive income. Securities whose value is deemed other
than temporarily impaired are written down to fair value. The writedowns are
recorded as realized losses and included in earnings. The cost basis of such
securities is adjusted to fair value. The new cost basis is not changed for
subsequent recoveries in value. For the years ended December 31, 1999, 1998 and
1997 such writedowns aggregated $0.0 million, $0.4 million and $0.9 million,
respectively.
At December 31, 1999 and 1998, 4.0% ($52.8 million) and 2.0% ($27.6
million), respectively, of the Company's general account invested assets
consisted of commercial mortgage loans. Commercial mortgage loans are stated at
their unpaid principal balances, net of valuation allowances for impairment. The
Company provides valuation allowances for commercial mortgage loans when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Increases in such valuation
allowances are recorded as realized investment losses and, accordingly, are
reflected in the Company's results of operations. For the years ended December
31, 1999, 1998 and 1997, such increases (decreases) in valuation allowances
aggregated $0.2 million, $(0.4) million and $(0.3) million, respectively. The
carrying value of commercial mortgage loans at December 31, 1999 was $52.8
million, which amount is net of $1.1 million representing management's best
estimate of cumulative impairment losses at such date. However, there can be no
assurance that additional provisions for impairment adjustments with respect to
the real estate held for investment will not need to be made. Any such
adjustments may have a material adverse effect on the Company's financial
position and results of operations.
The carrying value of real estate held for investment is generally adjusted
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and, accordingly, are reflected in
the Company's results of operations. There were no impairment adjustments for
the years ended December 31, 1999, 1998 and 1997. At December 31, 1999 and 1998,
the carrying value of real estate held for investment was $5.3 million and $8.3
million, or 0.4% and 0.6% of invested assets at such dates, respectively. The
aforementioned carrying values are net of cumulative impairments of $1.0 million
and $1.9 million, respectively, and net of accumulated depreciation of $1.9
million and $1.9 million, respectively. However, there can be no assurance that
additional provisions for impairment adjustments with respect to real estate
held for investment will not need to be made. Any such adjustments may have a
material adverse effect on the Company's financial position and results of
operations.
The carrying value of real estate to be disposed of at December 31, 1999
and 1998 was $1.6 million and $0.0 million, net of impairment adjustments of
$0.4 million and $0.0 million, valuation allowances of $0.3 million and $0.0
million, and accumulated depreciation of $0.2 million and $0.0 million,
respectively. Once management identifies a real estate property to be sold and
commences a plan for marketing the property, the property is classified as to be
disposed of and a valuation allowance is established and periodically revised,
if necessary, to adjust the carrying value of the property to reflect the lower
of its current carrying value or the fair value, less associated selling costs
(See Note 2 to the Financial Statements). Increases in such valuation allowances
are recorded as realized investment losses and, accordingly, are reflected in
the Company's results of operations. For the years ended December 31, 1999, 1998
and 1997, such increases (decreases) in valuation allowances aggregated $0.3
million, $(0.1) million and $1.0 million, respectively.
27
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had total assets at December 31, 1999 of approximately $6.2
billion of which $1.8 billion represented assets held in the Company's general
account and $4.4 billion represented assets held in the Company's separate
accounts, for which the Company does generally bear investment risk.
The Company's exposure to market risk in its general account relates to the
market price and/or cash flow variability associated with changes in market
interest rates. Set forth below is an overview of the Company's primary exposure
to market risk, and its objectives and strategies relating to such risk. The
following is a more detailed discussion of: (i) the Company's exposure to
interest rate risk, (ii) liability characteristics of the Company's business,
and (iii) asset/liability management techniques used by the Company to manage
market risks:
OVERVIEW --
The Company's results of operations significantly depend on profit margins
between general account invested assets and interest credited on insurance and
annuity products. Changes in interest rates can potentially impact the Company's
profitability. Management believes the Company's liabilities should be supported
by a portfolio principally composed of fixed rate investments that can generate
predictable, steady rates of return. Although these assets are purchased for
long-term investment, the portfolio management strategy considers them available
for sale in response to changes in market interest rates, changes in prepayment
risk, changes in relative values of asset sectors and individual securities and
loans, changes in credit quality outlook and other relevant factors. The
objective of portfolio management is to maximize returns, taking into
consideration the aforementioned factors. The Company's asset/liability
management discipline includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change. As a result, the
Company's fixed maturity portfolio has modest exposure to call and prepayment
risk and the vast majority of mortgage loan investments are fixed rate mortgages
that carry yield maintenance and prepayment provisions.
INTEREST RATE RISK --
The Company's exposure to interest rate risk primarily relates to its
investments in fixed maturity securities and mortgage loans. The carrying value
of investments in fixed maturity securities and mortgage loans represents 92.6%
at December 31, 1999, of the total carrying value of the Company's invested
assets at such date. Substantially all of the Company's fixed maturity
securities are U.S. dollar denominated securities. As part of its
asset/liability management discipline, quantitative analyses are conducted that
model the assets with interest rate risk assuming various changes in interest
rates (see "Investments -- General" for a more detailed discussion of these
analyses). The table below shows the Company's potential exposure, measured in
terms of fair value, to an immediate 100 basis point decrease in interest rates
from levels prevailing at December 31, 1999. A 100 basis point fluctuation in
interest rates is a hypothetical interest rate scenario used to calibrate
potential risk and does not represent management's view of future market
changes. While these fair value measurements provide a representation of
interest rate sensitivity of fixed maturities and mortgage loans, they are based
on the Company's portfolio exposures at a particular point in time and may not
be representative of future market results. These exposures will change as a
result of ongoing portfolio activities in response to management's assessment of
changing market conditions and available investment opportunities.
ASSETS WITH INTEREST RATE RISK -- FAIR VALUE AT DECEMBER 31, 1999
BASE -100 BASIS
FAIR VALUE POINT CHANGE
---------- ------------
($ IN MILLIONS)
ASSETS
Fixed maturities............................................ $1,048.8 $39.9
Mortgage loans.............................................. 162.5 5.1
-------- -----
Total..................................................... $1,211.3 $45.0
======== =====
In addition to its interest rate risk relating to fixed maturity securities
and mortgage loans, the Company has interest rate exposure relating to the note
payable to an affiliate which has a fixed interest rate (see Note 3 of the
Financial Statements). At December 31, 1999, the fair value of the note payable
was $49.0 million. The table below shows the potential fair value exposure to an
immediate 100 basis point decrease in interest rates at December 31, 1999.
28
30
NOTE PAYABLE -- FAIR VALUE
BASE -100 BASIS
FAIR VALUE POINT CHANGE
---------- ------------
($ IN MILLIONS)
ASSETS
Fixed rate debt............................................. $49.0 $2.8
POLICYHOLDERS' LIABILITY CHARACTERISTICS --
Policyholders' liabilities at December 31, 1999 consisted of future policy
benefits, policyholders' account balances, and other policyholders' liabilities
of $123.4 million, $1,154.1 million, $54.0 million, respectively. These
liabilities were backed, at such date, by approximately $1.8 billion of assets
(total assets excluding "Separate account assets"), including invested assets of
approximately $1.3 billion. Ensuring that the expected cash flows generated by
the assets are sufficient, given the policyholder obligations, is an explicit
objective of the Company's asset/liability management strategy. Following is a
discussion of the Company's policyholders' policy and annuity liabilities at
December 31, 1999.
Future Policy Benefits
Products in this category contain significant actuarial (including
mortality and morbidity) pricing and cash flow risks. The cash flows associated
with these policy liabilities are not interest rate sensitive but do vary based
on the timing and amount of benefit payments. The primary risks associated with
these products are that the benefits will exceed expected actuarial pricing
and/or that the actual timing of the cash flows will differ from those
anticipated resulting in an investment return lower than that assumed in
pricing. Products comprising this category include single premium whole life,
yearly renewable term, level term policies, and supplementary contracts with
life contingencies. Future policy benefit liabilities on such business
aggregated approximate $121.2 million at December 31, 1999. The guaranteed rate
on single premium whole life business, which represents policyholder liabilities
of approximately $82.1 million at December 31, 1999, is 6.0%.
Policyholders' Account Balances and Other Policyholders' Liabilities
Products in this category credit interest to policyholders, subject to
market conditions and minimum guarantees. Interest crediting on the products in
this category may be reset periodically. Policyholders may surrender at book
value, but under the terms of certain of the products in this category may be
subject to surrender charges for an initial period. Product examples include,
single premium deferred annuities, universal life contracts, and the general
account portion of the Company's variable annuity products. In general, the
Company's investment strategy is designed to manage a portfolio of assets with
appropriate duration and convexity consistent with the characteristics and risk
elements of the products comprising the policyholders' account balance
liabilities. Liability durations are short to intermediate term for annuities
and intermediate term for life insurance products.
ASSET/LIABILITY MANAGEMENT TECHNIQUES --
Asset/liability management is integrated into many aspects of the Company's
operations, including investment decisions, product development and
determination of interest crediting rates. As part of the risk management
process, numerous scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. See
"Investments" -- "General". Key variables include policy terms and policyholder
behavior, such as persistency, under differing crediting rate strategies. See
"Life Insurance Liability Characteristics". On the basis of these analyses,
management believes there is no material risk to the Company with respect to
interest rate movements up or down 100 basis points from rate levels at December
31, 1999.
ITEM 8. FINANCIAL STATEMENTS
See the Financial Statements beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
29
31
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is set forth in Item 1A hereof
under the caption "Directors and Executive Officers" and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
None of the directors or officers receives any compensation from the
Company. All compensation is being paid by MONY Life, with an allocation
of their compensation to be made for services rendered to the Company
pursuant to a cost allocation agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 3 to the Financial Statements beginning at page F-1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
See Index to Financial Statements included at page F-1 hereto.
(2) Financial Statement Schedule.
None.
(3) Exhibits.
See Exhibit Index at page E-1.
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the period covered by this report.
30
32
ITEM 8. FINANCIAL STATEMENTS
MONY LIFE INSURANCE COMPANY OF AMERICA
INDEX TO FINANCIAL STATEMENTS
Report of independent accountants........................... F-2
Balance sheets as of December 31, 1999 and 1998............. F-3
Statements of income and comprehensive income for the years
ended December 31, 1999, 1998 and 1997.................... F-4
Statements of changes in shareholder's equity for the years
ended December 31, 1999, 1998 and 1997.................... F-5
Statements of cash flows for the years ended December 31,
1999, 1998 and 1997....................................... F-6
Notes to financial statements............................... F-8
F-1
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
MONY Life Insurance Company of America
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income, changes in shareholder's equity and cash
flows present fairly, in all material respects, the financial position of MONY
Life Insurance Company of America (the "Company") at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 10, 2000
F-2
34
MONY LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
-------- --------
($ IN MILLIONS)
ASSETS
INVESTMENTS:
Fixed maturity securities available-for-sale, at fair
value..................................................... $1,048.8 $1,044.2
Mortgage loans on real estate (Note 8)...................... 165.0 120.1
Policy loans................................................ 58.8 52.1
Real estate (Note 8)........................................ 6.9 8.3
Other invested assets....................................... 2.3 4.7
-------- --------
1,281.8 1,229.4
Cash and cash equivalents................................... 28.9 133.4
Accrued investment income................................... 20.4 19.5
Amounts due from reinsurers................................. 18.6 24.4
Deferred policy acquisition costs........................... 406.4 318.6
Other assets................................................ 24.9 15.3
Separate account assets..................................... 4,387.2 4,148.8
-------- --------
Total assets.............................................. $6,168.2 $5,889.4
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits...................................... $ 123.4 $ 112.0
Policyholders' account balances............................. 1,154.1 1,187.1
Other policyholders' liabilities............................ 54.0 56.9
Accounts payable and other liabilities...................... 79.5 67.9
Note payable to affiliate................................... 49.0 0.0
Current federal income taxes payable........................ (2.3) 13.2
Deferred federal income taxes (Note 5)...................... 19.4 13.7
Separate account liabilities................................ 4,387.2 4,148.8
-------- --------
Total liabilities......................................... 5,864.3 5,599.6
Commitments and contingencies (Notes 12)
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.................................... 199.7 189.7
Retained earnings........................................... 109.0 89.6
Accumulated other comprehensive income/(loss)............... (7.3) 8.0
-------- --------
Total shareholder's equity................................ 303.9 289.8
-------- --------
Total liabilities and shareholder's equity................ $6,168.2 $5,889.4
======== ========
See accompanying notes to financial statements.
F-3
35
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
REVENUES:
Universal life and investment-type product policy fees...... $143.1 $122.0 $100.8
Premiums.................................................... 9.2 1.7 0.1
Net investment income (Note 6).............................. 94.7 94.6 99.1
Net realized gains (losses) on investments (Note 6)......... (0.3) 7.1 2.7
Other income................................................ 7.6 7.6 5.5
------ ------ ------
254.3 233.0 208.2
------ ------ ------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 43.6 34.9 30.6
Interest credited to policyholders' account balances........ 63.5 65.1 72.5
Amortization of deferred policy acquisition costs........... 43.5 35.5 46.3
Other operating costs and expenses.......................... 73.8 75.6 46.0
------ ------ ------
224.4 211.1 195.4
------ ------ ------
Income before income taxes.................................. 29.9 21.9 12.8
Income tax expense.......................................... 10.5 7.7 4.5
------ ------ ------
Net income.................................................. 19.4 14.2 8.3
Other comprehensive income/(loss), net (Note 6)............. (15.3) 1.1 3.3
------ ------ ------
Comprehensive income........................................ $ 4.1 $ 15.3 $ 11.6
====== ====== ======
See accompanying notes to financial statements.
F-4
36
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
ACCUMULATED TOTAL
CAPITAL OTHER SHARE-
COMMON IN EXCESS RETAINED COMPREHENSIVE HOLDER'S
STOCK OF PAR EARNINGS INCOME/(LOSS) EQUITY
------ --------- -------- ------------- --------
Balance, December 31, 1996....................... $2.5 $166.4 $ 67.1 $ 3.6 $239.6
Capital contribution............................. 10.8 10.8
Comprehensive income:
Net income..................................... 8.3 8.3
Other comprehensive income:
Unrealized gains on investments, net of
unrealized losses, reclassification
adjustments, and taxes (Note 6)........... 3.3 3.3
---- ------ ------ ------ ------
Comprehensive income............................. 11.6
------
Balance, December 31, 1997....................... 2.5 177.2 75.4 6.9 262.0
Capital contribution............................. 12.5 12.5
Comprehensive income:
Net income..................................... 14.2 14.2
Other comprehensive income:
Unrealized gains on investments, net of
unrealized losses, reclassification
adjustments, and taxes (Note 6)........... 1.1 1.1
---- ------ ------ ------ ------
Comprehensive income............................. 15.3
------
Balance, December 31, 1998....................... 2.5 189.7 89.6 8.0 289.8
Capital contribution............................. 10.0 10.0
Comprehensive income:
Net income..................................... 19.4 19.4
Other comprehensive income:
Unrealized losses on investments, net of
unrealized gains, reclassification
adjustments, and taxes (Note 6)........... (15.3) (15.3)
---- ------ ------ ------ ------
Comprehensive income/(loss)...................... (15.3)
------
Balance, December 31, 1999....................... $2.5 $199.7 $109.0 $ (7.3) $303.9
==== ====== ====== ====== ======
See accompanying notes to financial statements.
F-5
37
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
------- ------- -------
($ IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES (SEE NOTE 2):
Net income.................................................. $ 19.4 $ 14.2 $ 8.3
Adjustments to reconcile net income to net cash (used in)
operating activities:
Interest credited to policyholders' account balances...... 65.5 64.1 71.5
Universal life and investment-type product policy fee
income................................................. (102.9) (107.0) (98.1)
Capitalization of deferred policy acquisition costs....... (96.8) (74.9) (73.8)
Amortization of deferred policy acquisition costs......... 43.5 35.5 46.3
Provision for depreciation and amortization............... 0.2 1.0 0.4
Provision for deferred federal income taxes............... 13.9 (1.1) (13.4)
Net realized gains on investments......................... 0.3 (7.1) (2.7)
Change in other assets and accounts payable and other
liabilities............................................ 6.3 45.3 29.6
Change in future policy benefits.......................... 4.4 5.9 0.2
Change in other policyholders' liabilities................ (2.8) 15.7 5.0
Change in current federal income taxes payable............ (15.6) (4.6) (11.2)
------- ------- -------
Net cash (used in) operating activities..................... (64.6) (13.0) (37.9)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayments of:
Fixed maturities.......................................... 289.6 171.4 130.6
Equity securities......................................... 0.0 0.8 1.0
Mortgage loans on real estate............................. 24.5 37.6 37.7
Real estate............................................... 1.2 17.0 18.6
Other invested assets..................................... 3.9 0.6 1.5
Acquisitions of investments:
Fixed maturities.......................................... (352.3) (109.2) (157.6)
Equity securities......................................... (0.2) (0.1) (0.1)
Mortgage loans on real estate............................. (69.7) (24.3) (13.6)
Real estate............................................... (0.7) (0.6) (1.5)
Other invested assets..................................... (0.5) (0.3) (0.1)
Policy loans, net......................................... (6.6) (6.2) (4.4)
Other, net................................................ 0.5 (0.5) 0.3
------- ------- -------
Net cash (used in)/provided by investing activities......... $(110.3) $ 86.2 $ 12.4
------- ------- -------
See accompanying notes to financial statements.
F-6
38
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
--------- ------- -------
($ IN MILLIONS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to affiliate.............................. $ 50.5 $ 0.0 $ 0.0
Repayments of note to affiliate........................ (1.5) 0.0 0.0
Receipts from annuity and universal life policies
credited to policyholders' account balances........... 1,395.4 811.8 810.4
Return of policyholders' account balances on annuity
policies and universal life policies.................. (1,384.0) (797.6) (829.1)
Capital contribution................................... 10.0 0.0 0.0
--------- ------- -------
Net cash provided by/(used in) financing activities......... 70.4 14.2 (18.7)
--------- ------- -------
Net increase/(decrease) in cash and cash equivalents........ (104.5) 87.4 (44.2)
Cash and cash equivalents, beginning of year................ 133.4 46.0 90.2
--------- ------- -------
Cash and cash equivalents, end of year...................... $ 28.9 $ 133.4 $ 46.0
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes................................................ $ 12.1 $ 13.4 $ 29.1
Interest.................................................... $ 2.5 $ -- $ --
See accompanying notes to financial statements.
F-7
39
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
MONY Life Insurance Company of America (the "Company"), an Arizona stock
life insurance company, is a wholly-owned subsidiary of MONY Life Insurance
Company of New York ("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 (the "Demutualization"). MONY Life is a wholly-owned
subsidiary of The MONY Group, Inc. (the "MONY Group").
The Company's primary business is to provide asset accumulation and life
insurance products 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. These
products are sold throughout the United States (except New York) and Puerto
Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("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, and (iii) valuation allowances for mortgage loans and real
estate to be disposed of, and impairment writedowns for real estate held for
investment.
During 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, which was issued by
the Financial Accounting Standards Board ("FASB") in June of 1997. SFAS No. 130
established standards for reporting and display of comprehensive income and its
components in general purpose financial statements. All periods presented herein
reflect the provisions of SFAS No. 130.
Valuation of Investments and Realized Gains and Losses
All of the Company's fixed maturity securities are classified as
available-for-sale and are reported at estimated fair value. Unrealized gains
and losses on fixed maturity securities are reported as a separate component of
other comprehensive income, net of deferred income taxes and an adjustment for
the effect on deferred policy acquisition costs that would have occurred if such
gains and losses had been realized. The cost of fixed maturity securities is
adjusted for impairments in value deemed to be other than temporary. These
adjustments are reflected as realized losses on investments. Realized gains and
losses on sales of investments are determined on the basis of specific
identification.
Mortgage loans on real estate are stated at their unpaid principal
balances, net of valuation allowances. Valuation allowances are established for
the excess of the carrying value of a mortgage loan over its estimated fair
value when the loan is considered to be impaired. Mortgage loans are considered
to be 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. Estimated fair value is based on either
the present value of expected future cash flows discounted at the loan's
original effective interest rate, or the loan's observable market price (if
considered to be a practical expedient), or the fair value of the collateral if
the loan is collateral dependent and if foreclosure of the loan is considered
probable. The provision for loss is reported as a realized loss on investment.
Loans in foreclosure and loans considered to be impaired, other than
restructured loans, are placed on non-accrual status. Interest received on
non-accrual status mortgage loans is included in investment income in the period
received. Interest income on restructured mortgage loans is accrued at the
restructured loans' interest rate.
Real estate held for investment, as well as related improvements, is
generally stated at cost less depreciation. Depreciation is determined using the
straight-line method over the estimated useful life of the asset (which may
range from 5 to 40 years). Cost is adjusted for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. In performing the review for recoverability, management
estimates the future cash flows expected from real estate investments, including
the proceeds on disposition. If the sum of the expected undiscounted future cash
flows is less than the carrying amount of the real estate, an impairment loss is
recognized. Impairment losses are based on the estimated fair value of the real
estate, which is generally computed using the present value of expected future
cash flows from the real estate discounted at a rate commensurate with the
underlying risks. Real estate acquired in satisfaction of debt is recorded at
estimated fair value at the date of foreclosure. Real estate that management
intends to sell is classified as "to be disposed of". Real estate to be disposed
of is reported at the lower of its current carrying value or estimated fair
value less estimated sales costs. Changes in reported values
F-8
40
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
relating to real estate to be disposed of and impairments of real estate held
for investment are reported as realized gains or losses on investments.
Policy loans are carried at their unpaid principal balances.
Cash and cash equivalents include cash on hand, amounts due from banks and
highly liquid debt instruments with an original maturity of three months or
less.
Recognition of Insurance Revenue and Related Benefits
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenue from these types of
products consists of amounts assessed during the period against policyholders'
account balances for policy administration charges, cost of insurance and
surrender charges. Policy benefits charged to expense include benefit claims
incurred in the period in excess of the related policyholders' account balance.
Premiums from non-participating term life and annuity policies with life
contingencies are recognized as premium income when due. Benefits and expenses
are matched with such income so as to result in the recognition of profits over
the life of the contracts. This match is accomplished by means of the provision
for liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
Deferred Policy Acquisition Costs ("DAC")
The costs of acquiring new business, principally commissions, underwriting,
agency, and policy issue expenses, all of which vary with and are primarily
related to the production of new business, are deferred.
For universal life products and investment-type products, DAC is amortized
over the expected life of the contracts (ranging from 15 to 30 years) as a
constant percentage based on the present value of estimated gross profits
expected to be realized over the life of the contracts using the initial
locked-in discount rate. The discount rate for all products is 8%. Estimated
gross profits arise principally from investment results, mortality and expense
margins and surrender charges.
For non-participating term policies, DAC is amortized over the expected
life of the contracts (ranging from 5 to 20 years) in proportion to premium
revenue recognized.
DAC is subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each accounting period. The effect on the
amortization of DAC of revisions in estimated experience is reflected in
earnings in the period such estimates are revised. In addition, the effect on
the DAC asset that would result from the realization of unrealized gains
(losses) is recognized through an offset to Other Comprehensive Income as of the
balance sheet date.
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals. The weighted
average interest crediting rate for universal life products was approximately
5.8%, 5.7%, and 5.8% for the years ended December 31, 1999, 1998, and 1997,
respectively. The weighted average interest crediting rate for investment-type
products was approximately 5.4%, 5.5% and 5.7% for each of the years ended
December 31, 1999, 1998, and 1997, respectively.
GAAP reserves for non-participating term life policies are calculated using
a net level premium method on the basis of actuarial assumptions equal to
expected investment yields, mortality, terminations, and expenses applicable at
the time the insurance contracts are made, including a provision for the risk of
adverse deviation.
Federal Income Taxes
The Company files a consolidated federal income tax return with its parent,
MONY Life, along with MONY Life's other life and non-life subsidiaries. Deferred
income tax assets and liabilities are recognized based on the difference between
financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
The method of allocation between the companies is subject to written
agreement, approved by the Board of Directors. The allocation of federal income
taxes will be based upon separate return calculations with current credit for
losses and other federal income tax credits provided to the life insurance
members of the affiliated group. Intercompany balances are settled annually in
the fourth quarter of the year in which the return is filed.
F-9
41
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Reinsurance
The Company has reinsured certain of its life insurance and annuity
business with life contingencies with MONY Life and other insurance companies
under various agreements. Amounts due from reinsurers are estimated based on
assumptions consistent with those used in establishing the liabilities related
to the underlying reinsured contracts. Policy and contract liabilities are
reported gross of reserve credits. Gains on reinsurance are deferred and
amortized into income over the remaining life of the underlying reinsured
contracts.
In determining whether a reinsurance contract qualifies for reinsurance
accounting, SFAS No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" requires that there be a "reasonable
possibility" that the reinsurer may realize a "significant loss" from assuming
insurance risk under the contract. In making this assessment, the Company
projects the results of the policies reinsured under the contract under various
scenarios and assesses the probability of such results actually occurring. The
projected results represent the present value of all the cash flows under the
reinsurance contract. The Company generally defines a "reasonable possibility"
as having a probability of at least 10%. In assessing whether the projected
results of the reinsured business constitute a "significant loss", the Company
considers: (i) the ratio of the aggregate projected loss, discounted at an
appropriate rate of interest (the "aggregate projected loss"), to an estimate of
the reinsurer's investment in the contract, as hereafter defined, and (ii) the
ratio of the aggregate projected loss to an estimate of the total premiums to be
received by the reinsurer under the contract discounted at an appropriate rate
of interest.
The reinsurer's investment in a reinsurance contract consists of amounts
paid to the ceding company at the inception of the contract (e.g. expense
allowances and the excess of liabilities assumed by the reinsurer over the
assets transferred to the reinsurer under the contract) plus the amount of
capital required to support such business consistent with prudent business
practices, regulatory requirements, and the reinsurer's credit rating. The
Company estimates the capital required to support such business based on what it
considers to be an appropriate level of risk-based capital in light of
regulatory requirements and prudent business practices.
Separate Accounts
Separate accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate account assets are subject to general account claims only
to the extent that the value of such assets exceeds the separate account
liabilities. Investments held in separate accounts and liabilities of the
separate accounts are reported separately as assets and liabilities.
Substantially all separate account assets are reported at estimated fair value.
Investment income and gains or losses on the investments of separate accounts
accrue directly to contractholders and, accordingly, are not reflected in the
Company's statements of income and cash flows. Fees charged to the separate
accounts by the Company (including mortality charges, policy administration fees
and surrender charges) are reflected in the Company's revenues.
Statements of Cash Flows -- Non-cash Transactions
For the years ended December 31, 1999, 1998, and 1997, respectively, real
estate of $0.0 million, $0.5 million, and $0.0 million was acquired in
satisfaction of debt. At December 31, 1999 and 1998, the Company owned real
estate acquired in satisfaction of debt of $6.9 million and $8.0 million,
respectively.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on the hedge relationship that exists, if there
is one. Changes in the fair value of derivatives that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133, are
required to be reported in earnings. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of the fiscal years beginning after June 15,
2000. SFAS 137 delayed the effective date of SFAS 133 by one year. Adoption of
SFAS 133 is not expected to have a material effect on the Company's financial
condition or results of operations.
3. RELATED PARTY TRANSACTIONS:
MONY Life has a guarantee outstanding to one state that the statutory
surplus of the Company will be maintained at amounts at least equal to the
minimum surplus for admission to that states.
At December 31, 1999 and 1998, approximately 11% and 23% of the Company's
investments in mortgages were held through joint participation with MONY Life,
respectively. In addition, 100% of the Company's real estate and joint venture
investments were held through joint participation with MONY Life at December 31,
1999 and 1998.
F-10
42
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Company and MONY Life are parties to an agreement whereby MONY Life
agrees to reimburse the Company to the extent that the Company's recognized loss
as a result of mortgage loan default or foreclosure or subsequent sale of the
underlying collateral exceeds 75% of the appraised value of the loan at
origination for each such mortgage loan. Pursuant to the agreement, the Company
received payments from MONY Life of $0.0 million, $0.1 million and $0.1 million
for the years ending December 31, 1999, 1998 and 1997.
The Company has a service agreement with MONY Life whereby MONY Life
provides personnel services, facilities, supplies and equipment to the Company
to conduct its business. The associated costs related to the service agreement
are allocated to the Company based on methods that management believes are
reasonable, including a review of the nature of such costs and time studies
analyzing the amount of employee compensation costs incurred by the Company. For
the years ended December 31, 1999, 1998, and 1997, the Company incurred expenses
of $51.0 million, $59.8 million and $30.5 million as a result of such
allocations. Accordingly, the Company recorded capital contributions from MONY
Life of $10.0 million, $12.5 million, and $10.8 million during 1999, 1998 and
1997 respectively. At December 31, 1999 and 1998 the Company had a payable to
MONY Life in connection with this service agreement of $10.3 million and $9.0
million, respectively, which is reflected in Accounts Payable and Other
Liabilities.
The Company has an investment advisory agreement with MONY Life whereby
MONY Life provides investment advisory services with respect to the investment
and management of the Company's investment portfolio. The amount of expenses
incurred by the Company related to this agreement was $0.8 million, $0.9 million
and $1.0 million for 1999, 1998 and 1997, respectively. In addition, the Company
recorded an intercompany payable of $66,816 and $88,401 at December 31, 1999 and
1998, respectively, related to this agreement which is included in Accounts
Payable and Other Liabilities in the balance sheet.
In addition to the agreements discussed above, the Company has various
other service and investment advisory agreements with MONY Life and affiliates
of the Company. The amount of expenses incurred by the Company related to these
agreements was $4.0 million, $2.0 million and $2.6 million for 1999, 1998 and
1997, respectively. In addition, the Company recorded an intercompany
(receivable)/payable of $0.2 million and $(0.2) million at December 31, 1999 and
1998, respectively, related to these agreements.
The Company has purchased bonds issued by the New York City Industrial
Development Agency for the benefit of MONY Life for its consolidation of site
locations to New York City in 1997, and subsequent spending on tenant
improvements, and furniture, fixtures, and equipment related to the New York
City site. Debt service under the bonds is funded by lease payments by MONY Life
to the bond trustee for the benefit of the fond holder (the Company). The bonds
are held by the Company and are listed as affiliated bonds. The carrying value
of these bonds is $10.9 million and $14.7 million as of December 31, 1999, and
December 31, 1998, respectively. The bonds outstanding as of December 31, 1999
mature on December 31, 2013, and have interest rates from 6.40% to 7.25%.
The Company entered into a modified coinsurance agreement 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. At December 31, 1999, the Company recorded a payable of $7.8 million
to USFL in connection with this agreement which is included in Accounts Payable
and Other Liabilities in the balance sheet.
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 6.75% per annum and matures on March 5,
2014. Principal and interest are payable quarterly to MBMC. The carrying value
of the note as of December 31, 1999 is $49.0 million.
F-11
43
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs deferred and amortized in 1999, 1998 and 1997 are
as follows:
1999 1998 1997
------ ------ ------
($ IN MILLIONS)
Balance, beginning of year.................................. $318.6 $281.6 $262.3
Cost deferred during the year............................... 96.8 75.0 73.8
Amortized to expense during the year........................ (43.5) (35.5) (46.3)
Effect on DAC from unrealized gains (losses) (see Note 2)... 34.5 (2.5) (8.2)
------ ------ ------
Balance, end of year........................................ $406.4 $318.6 $281.6
====== ====== ======
5. FEDERAL INCOME TAXES:
The Company files a consolidated federal income tax return with MONY Life
and MONY Life's other subsidiaries. Federal income taxes have been calculated in
accordance with the provisions of the Internal Revenue Code of 1986, as amended.
A summary of the Federal income tax expense (benefit) is presented below:
1999 1998 1997
----- ----- ------
($ IN MILLIONS)
Federal income tax expense (benefit):
Current................................................... $(3.4) $ 8.8 $ 17.9
Deferred.................................................. 13.9 (1.1) (13.4)
----- ----- ------
Total.................................................. $10.5 $ 7.7 $ 4.5
===== ===== ======
Federal income taxes reported in the statements of income may be different
from the amounts determined by multiplying the earnings before federal income
taxes by the statutory federal income tax rate of 35%. The sources of the
difference and the tax effects of each are as follows:
1999 1998 1997
----- ----- -----
($ IN MILLIONS)
Tax at statutory rate....................................... $10.5 $ 7.7 $ 4.5
Dividends received deduction................................ (1.1) (1.1) (1.2)
Other....................................................... 1.1 1.1 1.2
----- ----- -----
Provision for income taxes.................................. $10.5 $ 7.7 $ 4.5
===== ===== =====
The Company's federal income tax returns for years through 1993 have been
examined by the Internal Revenue Service ("IRS"). No material adjustments were
proposed by the IRS as a result of these examinations. In the opinion of
management, adequate provision has been made for any additional taxes which may
become due with respect to open years.
The components of deferred tax liabilities and assets at December 31, 1999
and 1998 are as follows:
1999 1998
------ ------
($ IN MILLIONS)
Deferred policy acquisition costs........................... $117.0 $ 91.8
Fixed maturities............................................ 0.0 12.0
Other, net.................................................. 7.8 4.4
------ ------
Total deferred tax liabilities.............................. 124.8 108.2
------ ------
Policyholder and separate account liabilities............... 96.5 93.7
Real estate and mortgages................................... 0.7 0.8
Fixed maturities............................................ 8.2 0.0
------ ------
Total deferred tax assets................................... 105.4 94.5
------ ------
Net deferred tax asset/(liability).......................... $(19.4) $(13.7)
====== ======
F-12
44
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that it will realize the
benefit of the deferred tax assets and, therefore, no such valuation allowance
has been established.
6. INVESTMENT INCOME, REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES), AND
OTHER COMPREHENSIVE INCOME:
Net investment income for the years ended December 31, 1999, 1998 and 1997
was derived from the following sources:
1999 1998 1997
----- ----- ------
($ IN MILLIONS)
NET INVESTMENT INCOME
Fixed maturities............................................ $77.0 $77.2 $ 78.4
Mortgage loans.............................................. 11.6 11.0 12.1
Real estate................................................. 0.5 0.5 2.0
Policy loans................................................ 3.8 3.6 3.5
Other investments (including cash & cash equivalents)....... 6.6 5.3 6.4
----- ----- ------
Total investment income..................................... 99.5 97.6 102.4
Investment expenses......................................... 4.8 3.0 3.3
----- ----- ------
Net investment income....................................... $94.7 $94.6 $ 99.1
===== ===== ======
Net realized gains (losses) on investments for the years ended December 31,
1999, 1998 and 1997 are summarized as follows:
1999 1998 1997
----- ---- -----
($ IN MILLIONS)
NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Fixed maturities............................................ $(0.2) $2.6 $(0.7)
Mortgage loans.............................................. (0.3) 1.4 2.4
Real estate................................................. (0.5) 2.5 0.5
Other invested assets....................................... 0.7 0.6 0.5
----- ---- -----
Net realized gains/(losses) on investments.................. $(0.3) $7.1 $ 2.7
===== ==== =====
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1999,
1998, and 1997. Following is a summary of the change in unrealized investment
gains (losses) net of related deferred income taxes and adjustment for deferred
policy acquisition costs (see Note 2), which are reflected in Accumulated Other
Comprehensive Income for the periods presented:
1999 1998 1997
------ ----- -----
($ IN MILLIONS)
CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS, NET
Fixed maturities............................................ $(58.0) $ 4.8 $13.2
Other....................................................... 0.0 (0.6) 0.1
------ ----- -----
Subtotal.................................................... (58.0) 4.2 13.3
Effect on unrealized gains (losses) on investments
attributable to:
DAC....................................................... 34.5 (2.5) (8.2)
Deferred federal income taxes............................. 8.2 (0.6) (1.8)
------ ----- -----
Change in unrealized gains (losses) on investments, net..... $(15.3) $ 1.1 $ 3.3
====== ===== =====
F-13
45
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the reclassification adjustments required
for the years ended December 31, 1999, 1998, and 1997 to avoid double-counting
in comprehensive income items that are included as part of net income for a
period that also had been part of other comprehensive income in earlier periods:
1999 1998 1997
------ ----- ----
($ IN MILLIONS)
RECLASSIFICATION ADJUSTMENTS
Unrealized gains (losses) on investments arising during
period.................................................... $(15.4) $ 1.9 $3.3
Reclassification adjustment for gains included in net
income.................................................... 0.1 (0.8) 0.0
------ ----- ----
Unrealized gains (losses) on investments, net of
reclassification adjustments.............................. $(15.3) $ 1.1 $3.3
====== ===== ====
Unrealized gains (losses) on investments arising during the period reported
in the above table for the years ended December 31, 1999, 1998 and 1997 are net
of income tax expense (benefit) of $(8.2) million, $0.1 million, and $1.8
million, respectively, and $34.3 million, $(0.5) million, and $(8.2) million,
respectively, relating to the effect of such unrealized gains (losses) on DAC.
Reclassification adjustments reported in the above table for the years
ended December 31, 1999, 1998 and 1997 are net of income tax expense (benefit)
of $0.0 million, $0.5 million and $0.0 million, respectively, and $0.2 million,
$(2.0) million and $0.0 million, respectively, relating to the effect of such
amounts on DAC.
7. INVESTMENTS:
Fixed Maturity Securities Available-for-Sale:
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity securities available-for-sale as of December 31, 1999
and December 31, 1998 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------------- ------------- ------------- ----------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- ---- ----- ----- ---- -------- ----------
($ IN MILLIONS)
US Treasury securities and
obligations of US government
agencies........................... $ 26.6 $ 5.3 $0.0 $ 0.0 $ 1.1 $0.0 $ 25.5 $ 5.3
Collateralized mortgage obligations:
Government agency-backed........... 82.4 106.3 0.3 1.9 0.4 0.0 82.3 108.2
Non-agency backed.................. 34.4 37.7 0.6 1.8 0.3 0.0 34.7 39.5
Other asset-backed securities:
Government agency-backed........... 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.1
Non-agency backed.................. 104.6 83.4 0.2 1.9 4.4 0.3 100.4 85.0
Utilities............................ 113.2 101.9 0.2 3.4 3.4 2.7 110.0 102.6
Corporate bonds...................... 704.2 664.8 2.7 24.8 22.0 0.8 684.9 688.8
Affiliates........................... 11.3 14.7 0.0 0.0 0.4 0.0 10.9 14.7
-------- -------- ---- ----- ----- ---- -------- --------
Total....................... $1,076.8 $1,014.2 $4.0 $33.8 $32.0 $3.8 $1,048.8 $1,044.2
======== ======== ==== ===== ===== ==== ======== ========
The carrying value of the Company's fixed maturity securities at December
31, 1999 and 1998 is net of adjustments for impairments in value deemed to be
other than temporary of $0.5 million and $0.5 million, respectively.
At December 31, 1999 and 1998, there were no fixed maturity securities
which were non-income producing for the twelve months preceding such dates.
The Company classifies fixed maturity securities which, (i) are in default
as to principal or interest payments, (ii) are to be restructured pursuant to
commenced negotiations, (iii) went into bankruptcy subsequent to acquisition or
(iv) are deemed to have other than temporary impairments to value, as "problem
fixed maturity securities." At December 31, 1999 and 1998, the carrying value of
problem fixed maturities held by the Company was $4.8 million and $4.4 million,
respectively. In addition, at December 31, 1999 and 1998, the Company held $0.0
million and $2.7 million of fixed maturity securities which had been
restructured. Gross interest income that would have been recorded in accordance
with the original terms of restructured fixed maturity securities amounted to
$0.0 million and $0.3 million for the year ended December 31, 1999 and 1998.
Gross interest income on these fixed maturity securities included in net
investment income aggregated $0.0 million and $0.5 million for the year ended
December 31, 1999 and 1998.
F-14
46
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of
December 31, 1999 are as follows:
1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
($ IN MILLIONS)
Due in one year or less..................................... $ 75.8 $ 76.2
Due after one year through five years....................... 275.8 274.9
Due after five years through ten years...................... 383.8 366.5
Due after ten years......................................... 119.9 113.7
-------- --------
Subtotal.......................................... 855.3 831.3
Mortgage-backed and other asset-backed securities........... 221.5 217.5
-------- --------
Total............................................. $1,076.8 $1,048.8
======== ========
Fixed maturity securities that are not due at a single maturity date have
been included in the preceding table in the year of final maturity. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Proceeds from sales of fixed maturity securities during 1999, 1998 and 1997
were $80.1 million, $45.1 million and $31.3 million, respectively. Gross gains
of $0.2 million, $0.7 million, and $0.5 million and gross losses of $2.0
million, $0.1 million, and $1.1 million were realized on these sales,
respectively.
8. MORTGAGE LOANS ON REAL ESTATE AND REAL ESTATE
Mortgage loans on real estate at December 31, 1999 and 1998 consist of the
following:
1999 1998
------ ------
($ IN MILLIONS)
Commercial mortgage loans................................... $ 53.9 $ 28.5
Agricultural and other loans................................ 113.4 93.5
------ ------
Total loans................................................. 167.3 122.0
Less: valuation allowances.................................. (2.3) (1.9)
------ ------
Mortgage loans, net of valuation allowances................. $165.0 $120.1
====== ======
An analysis of the valuation allowances for 1999, 1998 and 1997 is as
follows:
1999 1998 1997
---- ----- -----
($ IN MILLIONS)
Balance, beginning of year.................................. $1.9 $ 2.5 $ 4.6
Increase (decrease) in allowance............................ 0.4 (0.4) (0.3)
Reduction due to pay downs and pay offs..................... 0.0 0.0 (1.8)
Transfers to real estate.................................... 0.0 (0.2) 0.0
---- ----- -----
Balance, end of year........................................ $2.3 $ 1.9 $ 2.5
==== ===== =====
Impaired mortgage loans along with related valuation allowances were as
follows:
1999 1998
------ ------
($ IN MILLIONS)
Investment in impaired mortgage loans (before valuation
allowances):
Loans that have valuation allowances...................... $ 9.6 $ 9.4
Loans that do not have valuation allowances............... 4.3 5.8
----- -----
Subtotal............................................... 13.9 15.2
Valuation allowances........................................ (0.5) (0.5)
----- -----
Impaired mortgage loans, net of valuation allowances... $13.4 $14.7
===== =====
F-15
47
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Impaired mortgage loans that do not have valuation allowances are loans
where the net present value of the expected future cash flows related to the
loan or the fair value of the collateral equals or exceeds the recorded
investment in the loan. Such loans primarily consist of restructured loans or
loans on which impairment writedowns were taken prior to the adoption of SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan".
During 1999 and 1998, the average recorded investment in impaired mortgage
loans was approximately $14.1 million and $15.1 million, respectively. During
1999, 1998, and 1997, the Company recognized $1.0 million, $1.1 million, and
$1.1 million, respectively, of interest income on impaired loans.
At December 31, 1999 and 1998, there were no mortgage loans which were
non-income producing for the twelve months preceding such dates.
At December 31, 1999 and 1998, the Company had restructured mortgage loans
of $11.9 million and $14.3 million, respectively. Interest income of $1.0
million, $1.0 million, and $1.0 million was recognized on restructured mortgage
loans in 1999, 1998, and 1997, respectively. Gross interest income on these
loans that would have been recorded in accordance with the original terms of
such loans amounted to approximately $1.2 million in 1999, 1998 and 1997.
The carrying value of real estate is $6.9 million and $8.3 million as of
December 31, 1999 and 1998, respectively. Real estate is categorized are either
real estate to be disposed of or real estate held for investment.
The carrying value of real estate to be disposed of as of December 31, 1999
was $1.6 million, net of $0.5 million relating to impairments taken upon
foreclosure of mortgage loans and $0.2 million of accumulated depreciation.
There was no real estate to be disposed of as of December 31, 1998.
The carrying value of real estate held for investment as of December 31,
1999 was $5.3 million, net of $0.7 million relating to impairments taken upon
foreclosure of mortgage loans and $1.9 million of accumulated depreciation. The
carrying value of real estate held for investment as of December 31, 1998 was
$8.3 million, net of $1.6 million relating to impairments taken upon foreclosure
of mortgage loans and $1.9 million of accumulated depreciation.
At December 31, 1999 and 1998, there was no real estate which was
non-income producing for the twelve months preceding such dates.
The carrying value of impaired real estate as of December 31, 1999 and 1998
was $4.4 million and $8.3 million, respectively. The depreciated cost of such
real estate as of December 31, 1999 and 1998 was $5.8 million and $10.2 million
before impairment writedowns of $1.4 million and $1.9 million, respectively. The
aforementioned impairments occurred primarily as a result of low occupancy
levels and other market related factors. There were no losses recorded during
1999, 1998, and 1997 related to impaired real estate.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments
approximate their carrying amounts. The methods and assumptions utilized in
estimating the fair values of the Company's financial instruments are summarized
as follows:
Fixed Maturities
The estimated fair values of fixed maturity securities are based upon
quoted market prices, where available. The fair values of fixed maturity
securities not actively traded and other non-publicly traded securities are
estimated using values obtained from independent pricing services or, in the
case of private placements, by discounting expected future cash flows using a
current market interest rate commensurate with the credit quality and term of
the investments.
Mortgage Loans
The fair values of mortgage loans are estimated by discounting expected
future cash flows, using current interest rates for similar loans to borrowers
with similar credit risk. Loans with similar characteristics are aggregated for
purposes of the calculations. The fair value of mortgages in process of
foreclosure is the estimated fair value of the underlying collateral.
Policy Loans
Policy loans are an integral component of insurance contracts and have no
maturity dates. Management has determined that it is not practicable to estimate
the fair value of policy loans.
Separate Account Assets and Liabilities
The estimated fair value of assets held in Separate Accounts is based on
quoted market prices. The fair value of liabilities related to Separate Accounts
is the amount payable on demand, which includes surrender charges.
F-16
48
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Investment-Type Contracts
The fair values of annuities are based on estimates of the value of
payments available upon full surrender. The fair values of the Company's
liabilities under guaranteed investment contracts are estimated by discounting
expected cash outflows using interest rates currently offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
10. REINSURANCE:
Life insurance business is ceded on a yearly renewable term basis under
various reinsurance contracts. The Company's general practice is to retain no
more than $0.5 million of risk on any one person for individual products and
$0.5 million for last survivor products.
The following table summarizes the effect of reinsurance for the years
indicated:
1999 1998 1997
----- ----- -----
($ IN MILLIONS)
Direct premiums............................................. $ 7.1 $ 2.5 $ 0.1
Reinsurance assumed......................................... 4.0 0.0 0.0
Reinsurance ceded........................................... (1.9) (0.8) 0.0
----- ----- -----
Net premiums.............................................. $ 9.2 $ 1.7 $ 0.1
===== ===== =====
Universal life and investment type product policy fee income
ceded..................................................... $19.7 $17.4 $16.1
===== ===== =====
Policyholders' benefits ceded............................... $27.8 $21.8 $12.1
===== ===== =====
Policyholders' benefits assumed............................. $ 0.1 $ 0.0 $ 0.0
===== ===== =====
The Company is contingently liable with respect to ceded insurance should
any reinsurer be unable to meet its obligations under these agreements. To limit
the possibility of such losses, the Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk.
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.
11. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK:
Financial Instruments with Off-Balance Sheet Risk:
Pursuant to a securities lending agreement with a major financial
institution, the Company from time to time lends securities to approved
borrowers. At December 31, 1999 and 1998, securities loaned by the Company under
this agreement had a carrying value of approximately $18.0 million and $4.1
million, respectively. The minimum collateral on securities loaned is 102% of
the market value of the loaned securities. Such securities are marked to market
on a daily basis and the collateral is correspondingly increased or decreased.
Concentration of Credit Risk:
At December 31, 1999 and 1998, the Company had no single investment or
series of investments with a single issuer, (excluding US Treasury securities
and obligations of US government agencies) exceeding 1.7% of total cash and
invested assets.
The Company's fixed maturity securities are diversified by industry type.
The industries that comprise 10% or more of the carrying value of the fixed
maturity securities at December 31, 1999 are Consumer Goods and Services of
$173.0 million (16.5%), Energy of $137.9 million (13.2%), Non-Government
Asset/Mortgage-Backed of $135.1 million (12.9%), Public Utilities of $110.0
million (10.5%) and Government and Agencies of $107.9 million (10.3%).
At December 31, 1998 the industries that comprise 10% or more of the
carrying value Company's fixed maturity securities were Consumer Goods and
Services of $138.5 million (13.3%), Non-Government Asset/Mortgage Backed of
$124.5 million (11.9%), Financial Services of $119.8 million (11.5%), Other
Manufacturing $116.4 million (11.1%), Government and Agencies $113.6 million
(10.9%) and Energy $112.1 (10.7%).
F-17
49
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Company holds below investment grade fixed maturity securities with a
carrying value of $55.0 million at December 31, 1999. These investments consist
mostly of privately issued bonds which are monitored by the Company through
extensive internal analysis of the financial condition of the issuers and which
generally include protective debt covenants. At December 31, 1998, the carrying
value of the Company's investments in below investment grade fixed maturity
securities amounted to $52.3 million.
The Company has investments in commercial and agricultural mortgage loans
and real estate. The locations of property collateralizing mortgage loans and
real estate investment carrying values at December 31, 1999 and 1998 are as
follows ($ in millions):
1999 1998
---------------- ---------------
GEOGRAPHIC REGION
West........................................................ $ 58.9 34.3% $ 54.9 42.7%
Southeast................................................... 45.4 26.4 5.9 4.6
Mountain.................................................... 28.4 16.5 25.9 20.2
Southwest................................................... 14.3 8.3 14.6 11.4
Midwest..................................................... 14.2 8.3 13.2 10.3
Northeast................................................... 10.7 6.2 13.9 10.8
------ ------ ------ -----
Total..................................................... $171.9 100.0% $128.4 100.0%
====== ====== ====== =====
The states with the largest concentrations of mortgage loans and real
estate investments at December 31, 1999 are: California, $32.8 million (19.1%);
District of Columbia, $28.4 million (16.5%); Washington, $16.0 million (9.3%);
Texas, $11.5 million (6.7%); New York, $10.7 million (6.2%); Oregon, $10.1
million (5.9%); Arizona, $9.1 million (5.3%); Idaho, $8.9 million (5.2%); and
Missouri, $8.5 million (4.9%).
As of December 31, 1999 and 1998, the real estate and mortgage loan
portfolio by property type were as follows ($ in millions):
1999 1998
---------------- ----------------
PROPERTY TYPE
Agricultural................................................ $112.2 65.3% $ 92.5 72.0%
Office buildings............................................ 46.9 27.3 14.9 11.6
Hotel....................................................... 5.3 3.1 5.1 4.0
Industrial.................................................. 2.3 1.3 4.6 3.6
Retail...................................................... 2.0 1.2 6.0 4.7
Other....................................................... 1.8 1.0 3.9 3.0
Apartment buildings......................................... 1.4 0.8 1.4 1.1
------ ------ ------ ------
Total..................................................... $171.9 100.0% $128.4 100.0%
====== ====== ====== ======
12. COMMITMENTS AND CONTINGENCIES:
In late 1995 and thereafter a number of purported class actions have been
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies in the 1980s and 1990s. Although the
claims asserted in each case are not identical, they seek substantially the same
relief under essentially the same theories of recovery (i.e., 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
(including the Goshen case discussed below) 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. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance). The Company has denied any wrongdoing and has asserted
numerous affirmative defenses.
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, the Goshen case, being the first of the
aforementioned 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 life or universal life insurance policy issued by
the Company
F-18
50
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
and sold on an alleged "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, or are being voluntarily 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 Company intends vigorously to defend that litigation. There can be no
assurance that the present or future 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 in connection with its business. The
claimants in certain of these actions and proceedings seek damages of
unspecified amounts.
While the outcome of such matters cannot be predicted with certainty, in
the opinion of management, any additional liability beyond that recorded in the
financial statements at December 31, 1999, resulting from the resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.
Insurance companies are subject to assessments up to statutory limits, by
state guaranty funds for losses of policyholders of insolvent insurance
companies. In the opinion of management, such assessments will not have a
material adverse effect on the financial position and the results of operations
of the Company.
At December 31, 1999, the Company had commitments outstanding of $3.7
million for fixed rate agricultural loans with periodic interest rate reset
dates. The initial interest rates on such agricultural loans range from 7.90% to
8.44%. There were no outstanding commitments for private fixed maturity
securities or commercial mortgages as of December 31, 1999.
13. STATUTORY FINANCIAL INFORMATION AND REGULATORY RISK-BASED CAPITAL:
Statutory net income reported by the Company for the years ended December
31, 1999, 1998, and 1997 was $(18.2) million, $11.1 million, and $9.7 million,
respectively. The combined statutory surplus of the Company as of December 31,
1999 and 1998 was $140.2 million and $146.8 million, respectively.
In March 1998, the National Association of Insurance Commissioners ("NAIC")
voted to adopt its Codification of Statutory Accounting Principles project
(referred to hereafter as "codification"). Codification is a modified form of
statutory accounting principles that will result in changes to the current NAIC
Accounting Practices and Procedures Manual applicable to insurance enterprises.
Although adoption of codification by all states is not a certainty, the NAIC has
recommended that all states enact codification as soon as practicable with an
effective date of January 1, 2001. It is currently anticipated that codification
will become a NAIC state accreditation requirement starting in 2002. In
addition, the American Institute of Certified Public Accountants and the NAIC
have agreed to continue to allow the use of certain permitted accounting
practices when codification becomes effective in 2001. Any accounting
differences from codification principles, however, must be disclosed and
quantified in the footnotes to the audited financial statements. Therefore,
codification will likely result in changes to what are currently considered
prescribed statutory insurance accounting practices.
Each insurance company's state of domicile imposes minimum risk-based
capital requirements. The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of the Company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level risk-based
capital, as defined by the NAIC. Companies below specific trigger points or
ratios are classified within certain levels, each of which requires specified
corrective action. The Company exceeded the minimum risk-based capital
requirements.
As part of their routine regulatory oversight, the Arizona State Insurance
Department completed an examination of the Company for each of the three years
in the period ended December 31, 1996. The report, which became available March
17, 1998, did not cite any matters which will result in a material effect on the
Company's financial condition or results of operations.
F-19
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of New
York, New York on March 30, 2000.
MONY LIFE INSURANCE COMPANY OF AMERICA
By: /s/ MICHAEL ISOR ROTH
----------------------------------------
Name: Michael Isor Roth
Title: Director, Chairman of the Board
and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 30, 2000, by the following persons on behalf of
the Registrant and in the capacities indicated.
SIGNATURES TITLE
---------- -----
/s/ MICHAEL ISOR ROTH Director, Chairman of the Board and Chief
- ------------------------------------------------- Executive Officer
Michael Isor Roth
/s/ SAMUEL JOSEPH FOTI Director, President and Chief Operating Officer
- -------------------------------------------------
Samuel Joseph Foti
/s/ RICHARD DADDARIO Director, Vice President and Controller
- ------------------------------------------------- (Principal Financial and Accounting Officer)
Richard Daddario
/s/ KENNETH MARC LEVINE Director and Executive Vice President
- -------------------------------------------------
Kenneth Marc Levine
/s/ PHILLIP A. EISENBERG Director, Vice President and Actuary
- -------------------------------------------------
Phillip A. Eisenberg
/s/ MARGARET G. GALE Director and Vice President
- -------------------------------------------------
Margaret G. Gale
/s/ CHARLES P. LEONE Director, Vice President and Chief Compliance
- ------------------------------------------------- Officer
Charles P. Leone
/s/ RICHARD E. CONNORS Director
- -------------------------------------------------
Richard E. Connors
/s/ STEPHEN J. HALL Director
- -------------------------------------------------
Stephen J. Hall
S-1
52
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27. Financial Data Schedule
E-1