-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SmdokleqRPsvGzbHvBZ1NKNCCJcm2l/LJjStlkPtBie83iZFo1Ic5KC+zC+KXpP/ jf+9CZCubrpzQSseh/mvqQ== 0000950123-00-005043.txt : 20000516 0000950123-00-005043.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950123-00-005043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONY GROUP INC CENTRAL INDEX KEY: 0001069822 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 133976138 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 812-11294-01 FILM NUMBER: 631861 BUSINESS ADDRESS: STREET 1: 1740 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 MONY GROUP INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 [ ] 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: 1-14603 THE MONY GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3976138 (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) NONE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 8, 2000 there were 46,444,257 shares of the Registrant's common stock, par value $0.01, outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE MONY GROUP INC. AND SUBSIDIARIES INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1: Unaudited interim condensed consolidated balance sheets as of March 31, 2000 and December 31, 1999................... 3 Unaudited interim condensed consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2000 and 1999..................... 4 Unaudited interim condensed consolidated statement of changes in shareholders' equity for the three-month period ended March 31, 2000...................................... 5 Unaudited interim condensed consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999...................................................... 6 Notes to unaudited interim condensed consolidated financial statements................................................ 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Investments................................................. 37 Item 3: Quantitative and Qualitative Disclosures About Market Risk...................................................... 46 PART II OTHER INFORMATION Item 1: Legal Proceedings........................................... 47 Item 2: Changes in Securities....................................... 48 Item 3: Defaults upon Senior Securities............................. 48 Item 4: Submission of Matters to a Vote of Security Holders......... 48 Item 5: Other Information........................................... 48 Item 6: Exhibits and Reports on Form 8-K............................ 48 SIGNATURES........................................................... S-1
1 3 FORWARD-LOOKING STATEMENTS The Company's management has made in this report, and from time to time may make in its public filings and press releases as well as in oral presentations and discussions, forward-looking statements concerning the Company's operations, economic performance 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," "anticipates," "expects," "projects," "forecasts," "plans," "intends," "may," "could," "possible," "will," "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 other public filings, press releases, oral presentations and discussions and the following: (i) losses with respect to the Company's equity real estate, and the success of the Company's continuing process of selectively selling its equity real estate; (ii) the success of the restructuring of the Company's career agency sales force, and the ability to attract and retain productive agents; (iii) the success of the restructuring of agent compensation; (iv) the Company's ability to control operating expenses; (v) the outcome of pending litigation; (vi) deterioration in the experience of the "closed block" established in connection with the Demutualization; (vii) the performance of the financial markets; (viii) the intensity of competition from other financial institutions; (ix) the Company's mortality, morbidity, persistency and claims experience; (x) the Company's ability to develop, distribute and administer competitive products and services in a timely, cost-effective manner; (xi) the Company's financial and claims paying ratings; (xii) the effect of changes in laws and regulations affecting the Company's businesses, including changes in tax laws affecting insurance and annuity products; (xiii) market risks related to interest rates, equity prices, derivatives, foreign currency exchange and credit and; (xiv) the ability of the Company to identify and consummate on successful terms any future acquisitions, and to successfully integrate acquired businesses with minimal disruption. 2 4 ITEM 1: THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) ASSETS Investments: Fixed maturity securities available-for-sale, at fair value.................................................. $ 3,089.8 $ 3,066.7 Equity securities available-for-sale, at fair value....... 517.5 519.8 Mortgage loans on real estate............................. 1,335.2 1,270.4 Policy loans.............................................. 73.0 69.1 Real estate to be disposed of............................. 304.5 300.9 Real estate held for investment........................... 46.6 46.2 Other invested assets..................................... 61.0 37.9 --------- --------- $ 5,427.6 $ 5,311.0 ========= ========= Cash and cash equivalents................................... 295.0 265.9 Accrued investment income................................... 75.5 74.6 Amounts due from reinsurers................................. 491.0 488.0 Deferred policy acquisition costs........................... 593.0 558.3 Other assets................................................ 356.2 365.4 Assets transferred in Group Pension Transaction (Note 4).... 5,100.1 5,109.8 Separate account assets..................................... 6,373.9 6,398.3 Closed Block assets (Note 6)................................ 6,160.1 6,182.1 --------- --------- Total assets........................................... $24,872.4 $24,753.4 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Future policy benefits...................................... $ 966.4 $ 954.3 Policyholders' account balances............................. 1,899.1 1,942.9 Other policyholders' liabilities............................ 117.1 120.4 Amounts due to reinsurers................................... 86.7 83.8 Accounts payable and other liabilities...................... 602.5 581.1 Short-term debt............................................. 53.1 53.4 Long-term debt.............................................. 310.8 245.4 Current federal income taxes payable........................ 170.3 148.0 Liabilities transferred in Group Pension Transaction (Note 4)........................................................ 5,122.8 5,099.1 Separate account liabilities................................ 6,371.5 6,396.2 Closed Block liabilities (Note 6)........................... 7,274.4 7,303.3 --------- --------- Total liabilities...................................... $22,974.7 $22,927.9 ========= ========= Commitments and contingencies (Note 5) Common stock, $0.01 par value; 400 million shares authorized; 47.2 million shares issued.................... $ 0.5 $ 0.5 Capital in excess of par.................................... 1616.1 1,615.9 Treasury stock at cost: 494,100 shares...................... (14.2) -- Retained earnings........................................... 339.7 238.5 Accumulated other comprehensive income...................... (44.3) (29.4) Unamortized restricted stock compensation................... (0.1) -- --------- --------- Total shareholders' equity............................. 1,897.7 1,825.5 --------- --------- Total liabilities and shareholders' equity............. $24,872.4 $24,753.4 ========= =========
See accompanying notes to unaudited interim condensed consolidated financial statements 3 5 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999 -------------- --------------- ($ IN MILLIONS, EXCEPT SHARE DATA AND PER SHARE AMOUNTS) REVENUES: Premiums.................................................... $ 29.3 $ 23.3 Universal life and investment-type product policy fees...... 49.9 45.4 Net investment income....................................... 255.4 94.8 Net realized gains on investment............................ 21.1 28.9 Group Pension Profits (Note 4).............................. 10.1 14.3 Other income................................................ 58.8 42.0 Contribution from the Closed Block (Note 6)................. 10.6 10.5 ----------- ----------- 435.2 259.2 ----------- ----------- BENEFITS AND EXPENSES: Benefits to policyholders................................... 39.1 39.9 Interest credited to policyholders' account balances........ 26.2 27.9 Amortization of deferred policy acquisition costs........... 19.9 16.8 Dividends to policyholders.................................. 0.6 0.0 Other operating costs and expenses.......................... 137.2 103.8 ----------- ----------- 223.0 188.4 ----------- ----------- Income before income taxes and extraordinary item........... 212.2 70.8 Income tax expense.......................................... 74.3 24.8 ----------- ----------- Income before extraordinary item............................ 137.9 46.0 ----------- ----------- Extraordinary items, net of tax............................. 36.7 0.0 ----------- ----------- Net income.................................................. 101.2 46.0 ----------- ----------- Other comprehensive loss, net............................... (14.9) (55.1) ----------- ----------- Comprehensive income/(loss)................................. $ 86.3 $ (9.1) =========== =========== PER SHARE DATA: Income before extraordinary items........................... $ 137.9 $ 46.0 =========== =========== Basic earnings per share.................................... 2.93 0.97 =========== =========== Diluted earnings per share.................................. 2.89 0.97 =========== =========== Net income.................................................. $ 101.2 $ 46.0 =========== =========== Basic earnings per share.................................... $ 2.15 $ 0.97 =========== =========== Diluted earnings per share.................................. $ 2.12 $ 0.97 =========== =========== SHARE DATA: Weighted-average shares used in basic per share calculation............................................... 47,104,995 47,238,156 Plus: incremental shares from assumed conversion of dilutive securities................................................ 598,886 196,538 ----------- ----------- Weighted-average shares used in diluted per share calculations.............................................. 47,703,881 47,434,694 =========== ===========
See accompanying notes to unaudited interim condensed consolidated financial statements. 4 6 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY THREE-MONTH PERIOD ENDED MARCH 31, 2000
ACCUMULATED UNAMORTIZED CAPITAL OTHER RESTRICTED TOTAL COMMON IN EXCESS TREASURY RETAINED COMPREHENSIVE STOCK SHAREHOLDERS' STOCK OF PAR STOCK EARNINGS INCOME COMPENSATION EQUITY ------ --------- -------- -------- ------------- ------------ ------------- ($ IN MILLIONS) BALANCE, DECEMBER 31, 1999.................. $0.5 $1,615.9 $238.5 $(29.4) $1,825.5 Issuance of Shares...... 0.2 0.2 Treasury Stock at cost.................. (14.2) (14.2) Unamortized restricted stock compensation.... (0.1) (0.1) Comprehensive income/ (loss)................ Net income.............. 101.2 101.2 Other comprehensive loss: Unrealized losses on investments, net of unrealized gains, reclassification adjustments, and taxes............. (14.9) (14.9) -------- Comprehensive income.... 72.2 ---- -------- ------ ------ ------ ----- -------- BALANCE, MARCH 31, 2000.................. 0.5 1,616.1 (14.2) 339.7 (44.3) (0.1) 1,897.7 ==== ======== ====== ====== ====== ===== ========
See accompanying notes to unaudited interim condensed consolidated financial statements. 5 7 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
2000 1999 -------- -------- ($ IN MILLIONS) NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 22.1 $ 64.3 CASH FLOWS FROM INVESTING ACTIVITIES: Sales, maturities or repayment of: Fixed maturities.......................................... 109.1 110.2 Equity securities......................................... 194.3 93.4 Mortgage loans on real estate............................. 27.4 38.7 Real estate............................................... 0.3 12.4 Other invested assets..................................... 1.6 0.6 Acquisitions of investments: Fixed maturities.......................................... (155.6) (124.2) Equity securities......................................... (29.1) (30.5) Mortgage loans on real estate............................. (90.1) (111.9) Real estate............................................... (3.2) (6.8) Other invested assets..................................... (2.8) (0.7) Policy loans, net......................................... (3.8) (4.6) Other, net................................................ 0.0 (0.5) Property and equipment, net................................. (6.8) (9.3) ------- ------- Net cash provided by/(used in) investing activities......... $ 41.3 $ (33.2) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt............................................ 297.0 -- Repayments of debt.......................................... (286.6) (0.7) Receipts from annuity and universal life policies credited to policyholder account balances.......................... 640.9 393.4 Return of policyholder's account balances on annuity and universal life policies................................... (673.2) (365.1) Treasury stock.............................................. (12.4) -- Dividends paid to shareholders.............................. -- (4.7) Payments to eligible policyholders.......................... -- (8.0) ------- ------- Net cash (used in)/provided by financing activities......... (34.3) 14.9 ------- ------- Net increase/decrease in cash and cash equivalents.......... 29.1 46.0 Cash and cash equivalents, beginning of period.............. 265.9 329.1 ------- ------- Cash and cash equivalents, end of period.................... $ 295.0 $ 375.1 ======= =======
See accompanying notes to unaudited interim condensed consolidated financial statements 6 8 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS: On November 16, 1998, pursuant to its Plan of Reorganization (the "Plan") which was approved by the New York Superintendent of Insurance on the same day (the "Plan Effective Date"), The Mutual Life Insurance Company of New York ("MONY") converted from a mutual life insurance company to a stock life insurance company (the "Demutualization") and became a wholly owned subsidiary of The MONY Group Inc., (the "MONY Group" or the "Holding Company"), a Delaware corporation organized on June 24, 1997 for the purpose of becoming the parent holding company of MONY. The MONY Group has no other operations or subsidiaries. In connection with the Plan, MONY established a closed block to fund the guaranteed benefits and dividends of certain participating insurance policies, and eligible policyholders received cash, policy credits, or shares of common stock of the MONY Group in exchange for their membership interests in MONY. Also, on November 16, 1998, the MONY Group consummated an initial public offering (the "Offerings") of approximately 12.9 million shares of its common stock and MONY changed its name to MONY Life Insurance Company (MONY Life Insurance Company and its subsidiaries are hereafter referred to as "MONY Life"). The shares of common stock issued in the Offerings are in addition to approximately 34.3 million shares of common stock of the MONY Group distributed to the aforementioned policyholders. The Plan and the Offerings are hereafter collectively referred to as the "Transaction". The MONY Group, through MONY Life and its subsidiaries (hereafter collectively referred to as the "Company"), is primarily engaged in the business of providing a wide range of life insurance, annuity, and investment products to higher income individuals, particularly family builders, pre-retirees, and small business owners (see Note 5). The Company distributes its products primarily through its career agency sales force and various complementary distribution channels. These include sales of mutual funds sold by Enterprise Capital Management through third-party broker dealers, sales of protection products sold by U.S. Financial Life Insurance Company ("USFL") through brokerage general agencies, sales of corporate-owned life insurance ("COLI") products by the Company's corporate marketing team and sales of a variety of financial products and services through the Company's Trusted Securities Advisors Corp. subsidiary. The Company primarily sells its products in all 50 of the United States, the District of Columbia, the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico. 2. BASIS OF PRESENTATION: The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States ("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. In the opinion of management these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. These statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 1999, which are presented in the Company's 1999 Annual Report on Form 10-K. The results of operations for the three-month period ended March 31, 2000 is not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made in the amounts presented for prior periods to conform those periods to the current presentation. 3. SEGMENT INFORMATION: The Company's business activities consist of the following: protection product operations, accumulation product operations, mutual fund operations, securities broker-dealer operations, insurance brokerage operations, and certain insurance lines of business no longer written by the Company (the "run-off businesses"). These business activities represent the Company's operating segments. Except as discussed below, these segments are managed separately because they either provide different products or services, are subject to different regulation, require different strategies, or have different technology requirements. 7 9 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Management considers the Company's mutual fund operations to be an integral part of the products offered by the Company's accumulation products segment. The Company's mutual fund operation, which is conducted through its Enterprise Capital Management subsidiary, offers proprietary mutual funds directly to retail customers as well as proprietary and non-proprietary mutual funds offered through the products marketed by the accumulation products segment. Accordingly, for management purposes (including, performance assessment and making decisions regarding the allocation of resources), the Company aggregates its mutual fund operations with its accumulation products segment. Of the aforementioned segments, only the protection products segment and the accumulation products segment qualify as reportable segments in accordance with FASB Statement No. 131. All of the Company's other segments are combined and reported in an other products segment. Products comprising the protection products segment primarily include a wide range of insurance products, including; whole life, term life, universal life, variable universal life, corporate-owned life insurance, last survivor variable universal life, last survivor universal life, group universal life and special-risk products. In addition, included in the protection products segment are: (i) the assets and liabilities transferred pursuant to the Group Pension Transaction, as well as the Group Pension Profits (see Note 4) and (ii) the Closed Block assets and liabilities, as well as the Contribution from the Closed Block (see Note 6). Products comprising the accumulation products segment primarily include flexible premium variable annuities, single premium deferred annuities, immediate annuities, proprietary mutual funds, investment management services, and certain other financial services products. The Company's other products segment primarily consists of the securities broker-dealer operation, the insurance brokerage operation, and the run-off businesses. The securities broker-dealer operation markets the Company's proprietary investment products and, in addition, provides customers of the Company's protection and accumulation products access to other non-proprietary investment products (including stocks, bonds, limited partnership interests, tax-exempt unit investment trusts and other investment securities). The insurance brokerage operation provides the Company's field agency force with access to life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The run-off businesses primarily consist of group life and health business, as well as group pension business that was not included in the Group Pension Transaction (see Note 4). Set forth in the table below is certain financial information with respect to the Company's operating segments as of March 31, 2000 and December 31, 1999 and for the three-month periods ended March 31, 2000 and 1999, as well as amounts not allocated to the segments. The Company evaluates the performance of each operating segment based on profit or loss from operations before income taxes and certain nonrecurring items (e.g. items of an unusual or infrequent nature). In addition, all segment revenues are from external customers. Assets have been allocated to the segments in amounts sufficient to support the associated liabilities of each segment. In addition, capital is allocated to each segment in amounts sufficient to maintain a targeted regulatory risk -based capital ("RBC") level for each segment. Allocations of net investment income and net realized gains on investments were based on the amount of assets allocated to each segment. Other costs and operating expenses were allocated to each of the segments based on: (i) a review of the nature of such costs, (ii) time studies analyzing the amount of employee compensation costs incurred by each segment, and (iii) cost estimates included in the Company's product pricing. Substantially all non-cash transactions and impaired real estate (including real estate acquired in satisfaction of debt) are included in the protection products segment. Amounts reported as "reconciling amounts" in the table below represent amounts not allocated to segments and primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, and (ii) assets, liabilities, revenues and expenses of the MONY Group. 8 10 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEGMENT SUMMARY FINANCIAL INFORMATION
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, ----------------------- 2000 1999 ------ ------ ($ IN MILLIONS) PREMIUMS: Protection Products(1)...................................... $ 26.8 $ 20.5 Accumulation Products....................................... 0.1 0.4 Other Products.............................................. 2.4 2.4 ------ ------ $ 29.3 $ 23.3 ====== ====== UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES: Protection Products......................................... $ 30.3 $ 27.8 Accumulation Products....................................... 18.9 17.2 Other Products.............................................. 0.7 0.4 ------ ------ $ 49.9 $ 45.4 ====== ====== NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS: Protection Products(2)...................................... $189.7 $ 82.0 Accumulation Products....................................... 50.6 28.9 Other Products.............................................. 33.7 10.9 Reconciling amounts......................................... 2.5 1.9 ------ ------ $276.5 $123.7 ====== ====== OTHER INCOME: Protection Products(3)(9)................................... $ 24.0 $ 28.1 Accumulation Products....................................... 31.3 20.9 Other Products.............................................. 22.9 16.8 Reconciling amounts......................................... 1.3 1.0 ------ ------ $ 79.5 $ 66.8 ====== ====== AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS: Protection Products(13)..................................... $ 12.4 $ 9.1 Accumulation Products....................................... 7.5 7.7 ------ ------ $ 19.9 $ 16.8 ====== ====== BENEFITS TO POLICYHOLDERS:(4) Protection Products......................................... $ 40.0 $ 40.1 Accumulation Products....................................... 17.8 18.3 Other Products.............................................. 6.4 7.1 Reconciling amounts......................................... 1.1 2.3 ------ ------ $ 65.3 $ 67.8 ====== ======
9 11 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, ----------------------- 2000 1999 ------ ------ ($ IN MILLIONS) OTHER OPERATING COSTS AND EXPENSES: Protection Products......................................... $ 77.3 $ 60.1 Accumulation Products....................................... 29.9 23.4 Other Products.............................................. 27.6 20.3 Reconciling amounts......................................... 2.4 -- ------ ------ $137.2 $103.8 ====== ====== INCOME BEFORE INCOME TAXES: Protection Products......................................... $141.1 $ 49.8 Accumulation Products....................................... 45.3 17.6 Other Products.............................................. 25.5 2.8 Reconciling amounts......................................... 0.3 0.6 ------ ------ $212.2 $ 70.8 ====== ======
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ASSETS:(7) Protection Products(5)(10).................................. $16,393.0 $16,181.4 Accumulation Products....................................... 6,111.3 6,175.0 Other Products.............................................. 1,176.5 1,187.6 Reconciling amounts......................................... 1,191.6 1,209.4 --------- --------- $24,872.4 $24,753.4 ========= ========= DEFERRED POLICY ACQUISITION COSTS: Protection Products(11)..................................... $ 1,112.9 $ 1,094.9 Accumulation Products....................................... 152.9 153.3 --------- --------- $ 1,265.8 $ 1,248.2 ========= ========= POLICYHOLDERS' LIABILITIES: Protection Products(6)(12).................................. $10,185.4 $10,231.7 Accumulation Products....................................... 1,188.8 1,236.3 Other Products.............................................. 404.5 418.9 Reconciling amounts......................................... 16.9 17.4 --------- --------- $11,795.6 $11,904.3 ========= ========= SEPARATE ACCOUNT LIABILITIES:(7) Protection Products(8)...................................... $ 3,976.5 $ 3,843.5 Accumulation Products....................................... 4,508.9 4,548.9 Other Products.............................................. 589.4 604.2 Reconciling amounts......................................... 821.4 832.3 --------- --------- $ 9,896.2 $ 9,828.9 ========= =========
- --------------- (1) Excludes $135.7 million and $146.4 million of revenues in individual life related to the Closed Block for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 6). 10 12 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Excludes net investment income and net realized capital gains on investments in individual life related to the Closed Block of $93.9 million and $97.6 for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 6). (3) Includes Group Pension Profits of $10.1 million and $14.3 million for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 4). (4) Includes interest credited to policyholders' account balances. Excludes $143.8 and $149.2 million of benefits and interest credited to policyholders' account balances related to individual life business in the Closed Block for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 6). (5) Includes assets transferred in the Group Pension Transaction of $5,100.1 million and $5,109.8 million as of March 31, 2000 and December 31, 1999, respectively (see Note 4). (6) Includes policyholder liabilities transferred in the Group Pension Transaction of $1,586.1 million and $1,645.7 million as of March 31, 2000 and December 31, 1999, respectively (see Note 4). (7) Each segment includes separate account assets in an amount equal to the corresponding liability reported. (8) Includes separate account liabilities transferred in the Group Pension Transaction of $3,524.7 million and $3,432.7 million as of March 31, 2000 and December 31, 1999 respectively (see Note 4). (9) Includes $10.6 million and $10.5 million relating to the Contribution from the Closed Block for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 6). (10) Includes Closed Block assets of $6,160.1 million and $6,182.1 million as of March 31, 2000 and December 31, 1999, respectively (see Note 6). (11) Includes deferred policy acquisition costs allocated to the Closed Block of $672.8 million and $689.9 million as of March 31, 2000 and December 31, 1999, respectively (see Note 6). (12) Includes Closed Block policyholders' liabilities of $7,226.9 million and $7,241.0 million as of March 31, 2000 and December 31, 1999, respectively (see Note 6). (13) Excludes $17.6 million and $17.9 million of amortization of deferred policy acquisition costs related to the Closed Block for the three-month periods ended March 31, 2000 and 1999, respectively (see Note 6). The following is a summary of premiums and universal life and investment-type product policy fees by product for the three-month period ended March 31, 2000 and 1999, respectively.
THREE-MONTH PERIOD ENDED MARCH 31, ---------------- 2000 1999 ------ ------ ($ IN MILLIONS) PREMIUMS: Individual life(1).......................................... $26.7 $20.4 Group insurance............................................. 2.4 2.4 Disability income insurance................................. 0.1 0.1 Other....................................................... 0.1 0.4 ----- ----- Total.................................................. $29.3 $23.3 ===== =====
11 13 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE-MONTH PERIOD ENDED MARCH 31, ---------------- 2000 1999 ------ ------ ($ IN MILLIONS) UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES: Universal life.............................................. $15.8 $17.6 Variable universal life(2).................................. 11.6 7.7 Group universal life........................................ 2.9 2.5 Individual variable annuities............................... 18.7 17.0 Individual fixed annuities.................................. 0.9 0.6 ----- ----- Total.................................................. $49.9 $45.4 ===== =====
- --------------- (1) Excludes revenues from individual life in the Closed Block of $135.7 million and $146.4 million for the three-month periods ending March 31, 2000 and 1999, respectively. (2) Includes Corporate Sponsored variable universal life products. 4. THE GROUP PENSION TRANSACTION: On December 31, 1993 (the "Group Pension Transaction Date"), MONY entered into an agreement (the "Agreement") with AEGON USA, Inc. ("AEGON") under which the Company transferred a substantial portion of its group pension business (hereafter referred to as the "Group Pension Transaction"), to AEGON's wholly-owned subsidiary, AUSA Life Insurance Company, Inc. ("AUSA"). The Company also transferred to AUSA the corporate infrastructure supporting the group pension business, including data processing systems, facilities and regional offices. AUSA was newly formed by AEGON solely for the purpose of facilitating this transaction. In connection with the transaction, the Company and AEGON have entered into certain service agreements. These agreements, among other things, provide that the Company will continue to manage the transferred assets, and that AUSA will continue to provide certain administrative services to the Company's remaining group pension contracts not included in the transfer. Pursuant to the Agreement, MONY agreed to make a $200 million capital investment in AEGON by purchasing $150 million face amount of Series A Notes and $50 million face amount of Series B Notes (hereinafter referred to as the "Notes"). The Series A Notes pay interest at 6.44 percent per annum and the Series B Notes pay interest at 6.24 percent per annum. Both the Series A Notes and the Series B Notes mature on December 31, 2002. MONY's investment in the Series A Notes was intended to provide AEGON with the funding necessary to capitalize AUSA. In accordance with GAAP, the transaction did not constitute a sale because MONY retained substantially all the risks and rewards associated with the deposits on contracts in force and transferred to AEGON on the Group Pension Transaction Date (the "Existing Deposits"). Accordingly, the Company continues to reflect the transferred assets and liabilities on its balance sheet under separate captions entitled "Assets transferred in Group Pension Transaction" and "Liabilities transferred in Group Pension Transaction". In addition, MONY reports in its GAAP earnings the profits from the Existing Deposits as discussed below. Pursuant to the Agreement, MONY receives from AUSA (i) payments on an annual basis through December 31, 2002 (the "Group Pension Payments") equal to all of the earnings from the Existing Deposits, (ii) a final payment (the "Final Value Payment") at December 31, 2002 based on the remaining fair value of the Existing Deposits, and (iii) a contingent payment (the "New Business Growth Payment") at December 31, 2002 based on new business growth subsequent to the Group Pension Transaction Date. However, the 12 14 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) level of new business growth necessary for MONY to receive the New Business Growth Payment make it unlikely that MONY will ever receive any such payment. With respect to the Group Pension Payments, the annual results from the Existing Deposits are measured on a basis in accordance with the Agreement (such basis hereafter referred to as the "Earnings Formula") which is substantially the same as GAAP, except that: (i) asset impairments on fixed maturity securities are only recognized when such securities are designated with a National Association of Insurance Commissioners ("NAIC") rating of "6", and (ii) no impairment losses are recognized on mortgage loans until such loans are disposed of or at the time, and in the calculation, of the Final Value Payment. Earnings which emerge from the Existing Deposits pursuant to the application of the Earnings Formula are recorded in MONY's financial statements only after adjustments (primarily to recognize asset impairments in accordance with SFAS Nos. 114 and 115) to reflect such earnings on a basis entirely in accordance with GAAP (such earnings hereafter referred to as the "Group Pension Profits"). Losses which arise from the application of the Earnings Formula for any annual period will be reflected in MONY's results of operations (after adjustments to reflect such losses in accordance with GAAP) only up to the amount for which MONY is at risk (as described below), which at any time is equal to the then outstanding principal amount of the Series A Notes. Operating losses reported in any annual period pursuant to the Earnings Formula are carried forward to reduce any earnings in subsequent years reported pursuant to the Earnings Formula. Any resultant deficit remaining at December 31, 2002 will be deducted from the Final Value Payment and New Business Growth Payment, if any, due to MONY. If a deficit still remains, it will be applied (as provided for in the Agreement) as an offset against the principal payment due to MONY upon maturity of the Series A Notes. Management expects that Group Pension Profits will continue to decrease in the future consistent with the runoff of the Existing Deposits. 13 15 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables set forth certain summarized financial information relating to the Group Pension Transaction as of and for the periods indicated, including information regarding: (i) the general account assets transferred to support the Existing Deposits in the Group Pension Transaction (hereafter referred to as the "AEGON Portfolio"), (ii) the transferred separate account assets and liabilities and (iii) the components of revenue and expense comprising the Group Pension Profits:
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) ASSETS: General Account Fixed maturities: available for sale, at estimated fair value (amortized cost; $1,489.9 million and $1,532.4 million, respectively)................................. $1,462.0 $1,510.0 Mortgage loans on real estate............................. 83.4 98.5 Real estate to be disposed of............................. 5.2 16.8 Cash and cash equivalents................................. 1.4 25.3 Accrued investment income................................. 23.4 26.5 -------- -------- Total general account assets........................... 1,575.4 1,677.1 Separate account assets..................................... 3,524.7 3,432.7 -------- -------- Total assets........................................... $5,100.1 $5,109.8 ======== ======== LIABILITIES: General Account(1) Policyholders' account balances........................... $1,586.1 $1,645.7 Other liabilities......................................... 12.0 20.7 -------- -------- Total general account liabilities...................... 1,598.1 1,666.4 Separate account liabilities(2)............................. 3,524.7 3,432.7 -------- -------- Total liabilities...................................... $5,122.8 $5,099.1 ======== ========
- --------------- (1) Includes general account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $83.4 million and $88.9 million as of March 31, 2000 and December 31, 1999, respectively. (2) Includes separate account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $16.9 million and $20.3 million as of March 31, 2000 and December 31, 1999, respectively.
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, ---------------- 2000 1999 ------ ------ ($ IN MILLIONS) REVENUES: Product policy fees......................................... $ 6.1 $ 6.1 Net investment income....................................... 30.1 34.1 Net realized gains on investments........................... 0.6 3.3 ----- ----- Total revenues......................................... 36.8 43.5 ----- -----
14 16 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, ---------------- 2000 1999 ------ ------ ($ IN MILLIONS) BENEFITS AND EXPENSES: Interest credited to policyholders' account balances........ 20.9 22.5 Other operating costs and expenses.......................... 5.8 6.7 ----- ----- Total benefits and expenses............................ 26.7 29.2 ----- ----- Group Pension Profits.................................. $10.1 $14.3 ===== =====
5. COMMITMENTS AND CONTINGENCIES: Since late 1995 a number of purported class actions were 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 from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (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), 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 the 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 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 judgment on all counts of the complaint. All of the other putative class actions have been consolidated and transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of Massachusetts, 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 judgment and dismissed all claims filed in the Goshen case against the Company on the merits. 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 to defend itself vigorously against the sole remaining claim. There can be no assurance that the present litigation relating to sales practices will not have a material adverse effect on the Company. On March 27, 2000, the MONY Group and MONY Life Insurance Company were served with a complaint in an action entitled Calvin Chatlos, M.D. and Alvin H. Clement, On Behalf of Themselves And All Others Similarly Situated v. The MONY Life Insurance Company, The MONY Group Inc., and Neil Levin, Superintendent, New York Insurance Department, filed in the Supreme Court of the State of 15 17 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New York, County of New York. The action purports to be a class action on behalf of all persons or entities who had an ownership interest in one or more in-force life insurance policies issued by MONY Life Insurance Company as of November 16, 1998. Plaintiffs seek a declaratory judgment that the New York Superintendent of Insurance and the Company violated Section 7312 of the New York Insurance Law in connection with its demutualization. Plaintiffs also allege that the Company breached its contractual obligations and alleged fiduciary duties to its policyholders in connection with the demutualization. Plaintiffs seek damages against the Company for wrongfully denying them a fair and equitable amount for their membership interests. The Company believes that the claims are without merit and intends to defend itself vigorously. In addition to the matters discussed above, the Company is involved in various other legal actions and proceedings in connection with its businesses. 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 consolidated financial statements at March 31, 2000, resulting from the resolution of these matters will not have a material adverse effect on the Company's consolidated 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 consolidated financial position and the results of operations of the Company. The Company maintains two lines of credit with domestic banks totaling $150.0 million with scheduled renewal dates in September 2000 and September 2003. Under these lines of credit, the Company is required to maintain a certain statutory tangible net worth and debt to capitalization ratio. The Company has complied with all covenants relating thereto. The Company has not borrowed against these lines of credit since their inception. At March 31, 2000, the Company had commitments to issue $9.2 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from approximately 8.4% to 9.2%. In addition, the Company had commitments to issue $92.4 million of fixed rate and floating rate commercial mortgage loans with interest rates ranging from 7.0% to 9.14%. The Company had commitments outstanding to purchase private fixed maturity securities as of March 31, 2000 of $131.6 million with interest rates from 6.2% to 11.0%. At March 31, 2000, the Company had commitments to contribute capital to its equity partnership investments of $118.5 million. 6. CLOSED BLOCK: In accordance with New York State Insurance Law, on November 16, 1998, the Company established a closed block (the "Closed Block") of certain participating insurance policies as defined in the Plan (the "Closed Block Business"). In conjunction therewith, the Company allocated assets to the Closed Block expected to produce cash flows which, together with anticipated revenues from the Closed Block Business, are reasonably expected to be sufficient to support the Closed Block Business, including but not limited to, provision for payment of claims and surrender benefits, certain expenses and taxes, and for continuation of current payable dividend scales in effect at the date of Demutualization, assuming the experience underlying such dividend scales continues, and for appropriate adjustments in such scales if the experience changes. The assets allocated to the Closed Block and the aforementioned revenues inure solely to the benefit of the owners of policies included in the Closed Block. 16 18 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assets and liabilities allocated to the Closed Block were recorded in the Company's financial statements at their historical carrying values. The carrying values of the assets allocated to the Closed Block are less than the carrying value of the Closed Block liabilities at the Plan Effective Date. The excess of the Closed Block liabilities over the Closed Block assets at the Plan Effective Date represents the total estimated future post-tax contribution expected to emerge from the operation of the Closed Block, which will be recognized in the Company's income over the period the policies and the contracts in the Closed Block remain in force. To the extent that the actual cash flows, subsequent to the Plan Effective Date, from the assets allocated to the Closed Block and the Closed Block Business are, in the aggregate, more favorable than assumed in establishing the Closed Block, total dividends paid to the Closed Block policyholders in future years will be greater than the total dividends that would have been paid to such policyholders if the current payable dividend scales had been continued. Conversely, to the extent that the actual cash flows, subsequent to the Plan Effective Date, from the assets allocated to the Closed Block and the Closed Block Business are, in the aggregate, less favorable than assumed in establishing the Closed Block, total dividends paid to the Closed Block policyholders in future years will be less than the total dividends that would have been paid to such policyholders if the current payable dividend scales had been continued. Accordingly, the recognition of the aforementioned estimated future post-tax contribution expected to emerge from the operation of the Closed Block is not affected by the aggregate actual experience of the Closed Block assets and the Closed Block Business subsequent to the Plan Effective Date, except in the unlikely event that the Closed Block assets and the actual experience of the Closed Block Business subsequent to the Plan Effective Date are not sufficient to pay the guaranteed benefits on the Closed Block Policies, in which case the Company will be required to fund any such deficiency from its general account assets outside of the Closed Block. In addition, MONY has undertaken to reimburse the Closed Block from it's general account assets outside the Closed Block for any reduction in principal payments due on the Series A Notes (which have been allocated to the Closed Block) pursuant to the terms thereof, as described in Note 4. Since the Closed Block has been funded to provide for payment guaranteed benefits and the continuation of current payable dividends on the policies included therein, it will not be necessary to use general funds to pay guaranteed benefits unless the Closed Block Business experiences very substantial ongoing adverse experience in investment, mortality, persistency or other experience factors. The Company regularly (at least quarterly) monitors the experience from the Closed Block and may make changes to the dividend scale, when appropriate, to ensure the profits are distributed to Closed Block policyholders in a fair and equitable manner. In addition, periodically the New York Insurance Department requires the filing of an independent auditor's report on the operations of the Closed Block. The results of the Closed Block are presented as a single line item in the Company's statements of income entitled, "Contribution from the Closed Block". Prior to the establishment of the Closed Block the results of the assets and policies comprising the Closed Block were reported in various line items in the Company's income statements, including: premiums, investment income, net realized gains and losses on investments, benefits, amortization of deferred policy acquisition costs, etc. In addition, all assets and liabilities allocated to the Closed Block are reported in the Company's balance sheet separately under the captions "Closed Block assets" and "Closed Block liabilities", respectively. Accordingly, certain line items in the Company's financial statements subsequent to the establishment of the Closed Block reflect material reductions in reported amounts, as compared to years prior to the establishment of the Closed Block, while having no effect on net income. The pre-tax Contribution from the Closed Block includes only those revenues, benefit payments, dividends, premium taxes, state guaranty fund assessments, and investment expenses considered in funding the Closed Block. However, many expenses associated with operating the Closed Block and administering the policies included therein were excluded from and, accordingly, not funded in the Closed Block. These 17 19 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expenses are reported in the Company's statement of operations, outside of the Contribution from the Closed Block, consistent with how they are funded. Such expenses are reported in the separate line items to which they apply based on the nature of such expenses. Federal income taxes applicable to the Closed Block, which are funded in the Closed Block, are reflected as a component of federal income tax expense in the Company's statement of operations. Since many expenses related to the Closed Block are funded outside the Closed Block, operating costs and expenses outside the Closed Block are disproportionate to the level of business outside the Closed Block. The following tables set forth certain summarized financial information relating to the Closed Block, as of and for the periods indicated:
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) ASSETS: Fixed Maturities: Available for sale, at estimated fair value (amortized cost; $3,604.0 and $3,554.7, respectively)............. $3,490.4 $3,479.5 Mortgage loans on real estate............................. 490.0 443.0 Policy loans.............................................. 1,190.3 1,199.1 Real estate............................................... 22.4 22.1 Cash and cash equivalents................................. 46.5 111.3 Premiums receivable....................................... 6.9 14.2 Deferred policy acquisition costs......................... 672.8 689.9 Other assets.............................................. 240.8 223.0 -------- -------- Total Closed Block assets.............................. $6,160.1 $6,182.1 ======== ======== LIABILITIES: Future policy benefits.................................... $6,766.2 $6,781.5 Policyholders' account balances........................... 293.6 294.6 Other Policyholders' liabilities.......................... 167.1 164.9 Other liabilities......................................... 47.5 62.3 -------- -------- Total Closed Block liabilities......................... $7,274.4 $7,303.3 ======== ========
FOR THE THREE-MONTH FOR THE THREE-MONTH PERIOD ENDED PERIOD ENDED MARCH 31, 2000 MARCH 31, 1999 ------------------- ------------------- ($ IN MILLIONS) REVENUES: Premiums.......................................... $135.7 $146.4 Net investment income............................. 96.4 93.3 Net realized gains(losses) on investments......... (2.5) 4.3 Other income...................................... 0.8 0.4 ------ ------ Total revenues............................... 230.4 244.4 ------ ------
18 20 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE-MONTH FOR THE THREE-MONTH PERIOD ENDED PERIOD ENDED MARCH 31, 2000 MARCH 31, 1999 ------------------- ------------------- ($ IN MILLIONS) BENEFITS AND EXPENSES: Benefits to policyholders......................... 141.6 147.0 Interest credited to policyholders' account balances........................................ 2.2 2.2 Amortization of deferred policy acquisition costs........................................... 17.6 17.9 Dividends to policyholders........................ 56.6 63.7 Other operating costs and expenses................ 1.8 3.1 ------ ------ Total benefits and expenses.................. 219.8 233.9 ------ ------ Contribution from Closed Block.................... $ 10.6 $ 10.5 ====== ======
For the three-month periods ended March 31, 2000 and March 31, 1999, there were $3.0 million and $0.0 million, respectively, in adjustments in the value of fixed maturity securities in the Closed Block deemed to be other than temporarily impaired or fixed maturity securities which have been non-income producing for the twelve months preceding such dates. At March 31, 2000 and December 31, 1999, the carrying value of mortgage loans in the Closed Block that were non-income producing for the twelve months preceding such date, were $0.3 million and $0.0 million, respectively. 7. EXTRAORDINARY AND OTHER ITEMS a) On January 12, 2000, the Company announced a plan to repurchase up to 5% of the outstanding common shares of the Company or approximately 2.4 million shares. Under the plan, the Company may repurchase such shares from time to time, as market conditions and other factors warrant. The plan may be discontinued at any time. As of March 31, 2000, 494,100 shares had been repurchased at a cost of $14.2 million. b) In January 2000, the New York Insurance Department approved, and MONY Life paid, a dividend to MONY Group in the amount of $75 million. c) On January 12, 2000, the Holding Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (the "SEC") to register certain securities. This registration, known as a "Shelf Registration", provides the Company with the ability to offer various securities to the public, when it deems appropriate, to raise proceeds up to an amount not to exceed $1.0 billion in the aggregate for all issuances of securities thereunder. It is the intention of the Company to use this facility to raise proceeds for mergers and acquisitions and for other general corporate matters, as it considers necessary. d) On March 8, 2000, the Holding Company issued $300.0 million principal amount of senior notes (the "Senior Notes") pursuant to the aforementioned Shelf Registration. The Senior Notes mature on March 15, 2010 and bear interest at 8.35% per annum. The principal amount of the Senior Notes is payable at maturity and interest is payable semi-annually. The net proceeds to the Company from the issuance of the Senior Notes, after deducting underwriting commissions and other expenses (primarily legal and accounting fees), were approximately $296.7 million. Approximately $280.0 million of the net proceeds from the issuance of the Senior Notes was used by the Holding Company to finance the repurchase, on March 8, 2000, by MONY Life of all of its outstanding $115.0 million face amount 9.5% coupon surplus notes, and $116.5 million face amount of its $125.0 million face amount 11.25% coupon surplus notes (hereafter referred to as the "9.5% Notes" and "11.25% Notes", respectively), which were outstanding at December 31, 1999. The balance of the net proceeds from the issuance of the Senior Notes will be used by the Holding Company for general corporate purposes. 19 21 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of the repurchase of the 9.5% Notes and substantially all of the 11.25% Notes, the Company recorded a before tax loss of $56.5 million ($36.7 million after tax) during the first quarter of 2000. The loss resulted from the premium paid by MONY Life to the holders of the 9.5% Notes and the 11.25% Notes reflecting the excess of their fair value over their carrying value on the Company's books at the date of the transaction of approximately $7.0 million and $49.5 million, respectively. This loss is reported, net of tax, as an extraordinary item on the Company's income statement for the three-month period ended March 31, 2000. 20 22 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion addresses the financial condition and results of operations of the Company for the periods indicated. The discussion of the Company's financial results of operations is based on the results of the Closed Block combined on a line by line basis with the results of operations outside the Closed Block, for such respective periods as further discussed below. The discussion and analysis of the Company's financial condition and results of operations presented below should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements and related notes to the unaudited interim condensed consolidation financial statements included elsewhere herein and the Company's 1999 Annual Report on Form 10-K. GENERAL The MONY Group was incorporated on June 24, 1997, under the laws of Delaware, as a wholly owned subsidiary of MONY. The MONY Group was formed for the purpose of becoming the parent holding company of MONY pursuant to the Plan. On November 16, 1998, the Plan was approved by the New York Superintendent of Insurance and MONY converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of the MONY Group. In connection with the Plan, MONY established the Closed Block to fund the guaranteed benefits and dividends of certain participating insurance policies (see Note 3 to the Consolidated Financial Statements) and eligible policyholders of MONY received either cash, policy credits, or shares of common stock in the MONY Group in exchange for their membership interests in MONY. Also, on November 16, 1998, the MONY Group consummated an initial public offering (the "Offerings") of approximately 12.9 million shares of its common stock (see "Liquidity and Capital Resources") and MONY changed its name to MONY Life. The shares of common stock issued in the Offerings are in addition to approximately 34.3 million shares of common stock of the MONY Group distributed to the aforementioned eligible policyholders. The MONY Group has no other operations or subsidiaries. MONY's conversion to a stock life insurance company and the establishment of the Closed Block have significantly affected the presentation of the consolidated financial statements of the Company. The most significant affects are as follows: (i) the actual results of the Closed Block's operations are reflected as a single line item in the Company's statements of income, entitled "Contribution from the Closed Block", whereas, prior to the establishment of the Closed Block the results of its operations were reported in various line items in the Company's income statement, including premiums, net investment income, net realized gains, benefits, amortization of deferred policy acquisition costs, etc. (ii) all assets and liabilities allocated to the Closed Block are reported separately in the Company's balance sheet under the captions "Closed Block assets" and "Closed Block liabilities", respectively, whereas prior to the establishment of the Closed Block such assets and liabilities were reported in various line items in the Company's balance sheet, including fixed maturity securities, mortgage loans on real estate, policy loans, deferred policy acquisition costs, etc. The pre-tax Contribution from the Closed Block for the three-month periods ended March 31, 2000 and 1999 was $10.6 million and $10.5 million, respectively. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the business in the Closed Block. As a result, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block. 21 23 SEGMENTS For management and reporting purposes, the Company's business is organized in two principal operating segments, the "Protection Products" segment and the "Accumulation Products" segment. Substantially all of the Company's other business activities are combined and reported in the "Other Products" segment. In its Protection Products segment, the Company currently offers a wide range of individual life insurance products, including; whole life, term life, universal life, variable universal life, corporate-owned life insurance, last survivor variable universal life, group universal life and special risk products. The Protection Products segment also includes the in-force business from sales of last survivor universal life and last survivor whole life. Also included in the Protection Products segment are the: (i) assets and liabilities transferred pursuant to the Group Pension Transaction, as well as the related profits therefrom (see Note 4 to the Unaudited Interim Condensed Consolidated Financial Statements included elsewhere herein), and (ii) the Closed Block assets and liabilities, as well as the Contribution from the Closed Block. In its Accumulation Products segment, the Company primarily offers flexible premium variable annuities and proprietary retail mutual funds. The Accumulation Products segment also includes the in-force business from single premium deferred annuities and immediate annuities. The Company's Other Products segment primarily consists of a securities broker-dealer operation, an insurance brokerage operation and the runoff businesses which consist primarily of group life and health business, as well as group pension business that was not included in the Group Pension Transaction. In addition to selling the Company's proprietary investment products, the securities broker-dealer operation provides customers of the Company's protection and accumulation products access to other non-proprietary investment products (including stocks, bonds, limited partnership interests, tax-exempt unit investment trusts and other investment securities). The insurance brokerage operation provides the Company's career agency sales force with access to life, annuity, small group health and specialty insurance products written by other carriers to meet the insurance and investment needs of its customers. The Run-Off Businesses primarily consist of group life and health insurance as well as the group pension business that was not included in the Group Pension Transaction. Except for various allocations discussed below, the accounting policies of the segments are the same as those described in the preparation of the Unaudited Interim Condensed Consolidated Financial Statements. The Company evaluates the performance of each operating segment based on profit or loss from operations before income taxes and nonrecurring items (e.g. items of an unusual or infrequent nature). The Company does not allocate certain nonrecurring items to the segments. In addition, all segment revenues are from external customers. Assets have been allocated to the segments in amounts sufficient to support the associated liabilities of each segment. Capital is allocated to each segment in amounts sufficient to maintain a targeted regulatory risk-based capital ("RBC") level for each segment. Allocations of net investment income and net realized gains on investments were primarily based on the amount of assets allocated to each segment. Other costs and operating expenses were allocated to each of the segments based on: (i) a review of the nature of such costs, (ii) time studies analyzing the amount of employee compensation costs incurred by each segment, and (iii) cost estimates included in the Company's product pricing. Substantially all non-cash transactions and impaired real estate (including real estate acquired in satisfaction of debt) have been allocated to the Protection Products segment. FACTORS AFFECTING PROFITABILITY The Company derives its revenues principally from: (i) premiums on participating individual life insurance, (ii) insurance, administrative and surrender charges on universal life and annuity products, (iii) asset management fees from separate account and mutual fund products, (iv) net investment income on general account assets, (v) the Group Pension Profits, See "-- The Group Pension Transaction" and (vi) commissions from securities and insurance brokerage operations. The Company's expenses consist of insurance benefits provided to policyholders, interest credited on policyholders' account balances, dividends to policyholders, the cost of selling and servicing the various products sold by the Company, including commissions to sales representatives (net of any deferrals), and general business expenses. 22 24 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 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. The following tables present the Company's consolidated and segment results of operations for the three-month periods ended March 31, 2000 and 1999. Management's Discussion and Analysis, which follows this table, discusses the Company's consolidated and segment results of operations on the aforementioned combined basis unless otherwise noted. See Note 6 to the Unaudited Interim Condensed Consolidated Financial Statements for a summarized Closed Block income statement which has been combined on a line by line basis with the results of operations outside the Closed Block for purposes of the following table and discussion. RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000 ----------------------------------------------------------------- PROTECTION ACCUMULATION OTHER RECONCILING(1) CONSOLIDATED ---------- ------------ ----- -------------- ------------ REVENUES: Premiums.................................... $162.5 $ 0.1 $ 2.4 $ -- $165.0 Universal life and investment-type product policy fees............................... 30.3 18.9 0.7 -- 49.9 Net investment income and realized gains on investments............................... 283.6 50.6 33.7 2.5 370.4 Group Pension Profits(2).................... 10.1 -- -- -- 10.1 Other income................................ 4.1 31.3 22.9 1.3 59.6 ------ ------ ----- ----- ------ 490.6 100.9 59.7 3.8 655.0 BENEFITS AND EXPENSES: Benefits to policyholders................... 170.4 5.3 3.9 1.1 180.7 Interest credited to policyholders' account balances.................................. 13.4 12.5 2.5 -- 28.4 Amortization of deferred policy acquisition costs..................................... 30.0 7.5 -- -- 37.5 Dividends to policyholders.................. 56.6 0.4 0.2 -- 57.2 Other operating costs and expenses.......... 79.1 29.9 27.6 2.4 139.0 ------ ------ ----- ----- ------ 349.5 55.6 34.2 3.5 442.8 ------ ------ ----- ----- ------ Income before income taxes and extraordinary item...................................... $141.1 $ 45.3 $25.5 $ 0.3 212.2 ====== ====== ===== ===== Income tax expense.......................... 74.3 ------ Income before extraordinary items........... 137.9 Extraordinary items......................... 36.7 ------ Net Income.................................. $101.2 ======
23 25
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 ----------------------------------------------------------------- PROTECTION ACCUMULATION OTHER RECONCILING(1) CONSOLIDATED ---------- ------------ ----- -------------- ------------ REVENUES: Premiums.................................... $166.9 $ 0.4 $ 2.4 $ -- $169.7 Universal life and investment-type product policy fees............................... 27.8 17.2 0.4 -- 45.4 Net investment income and realized gains on investments............................... 179.6 28.9 10.9 1.9 221.3 Group Pension Profits(2).................... 14.3 -- -- -- 14.3 Other income................................ 3.7 20.9 16.8 1.0 42.4 ------ ------ ----- ----- ------ 392.3 67.4 30.5 2.9 493.1 BENEFITS AND EXPENSES: Benefits to policyholders................... 176.8 4.3 3.5 2.3 186.9 Interest credited to policyholders' account balances.................................. 12.5 14.0 3.6 -- 30.1 Amortization of deferred policy acquisition costs..................................... 27.0 7.7 -- -- 34.7 Dividends to policyholders.................. 62.9 0.4 0.3 -- 63.6 Other operating costs and expenses.......... 63.3 23.4 20.3 -- 107.0 ------ ------ ----- ----- ------ 342.5 49.8 27.7 2.3 422.3 ------ ------ ----- ----- ------ Income before income taxes and extraordinary item...................................... $ 49.8 $ 17.6 $ 2.8 $ 0.6 70.8 ====== ====== ===== ===== Income tax expense.......................... 24.8 ------ Income before extraordinary items........... 46.0 Extraordinary items......................... -- ------ Net Income.................................. $ 46.0 ======
- --------------- (1) Amounts reported as "reconciling" primarily relate to: (i) contracts issued by MONY Life relating to its employee benefit plans, and (ii) revenues and expenses of the MONY Group. (2) See Note 4 to the Unaudited Interim Condensed Consolidated Financial Statements contained herein. Three-Month Period Ended March 31, 2000 Compared to the Three-Month Period Ended March 31, 1999. Premiums -- Premium revenue was $165.0 million for the three-month period ended March 31, 2000, a decrease of $4.7 million, or 2.8%, from $169.7 million reported for the comparable prior year period ended March 31, 1999. Substantially all of the decrease related to traditional life insurance products offered through the Company's Protection Products segment. The decrease was comprised of (i) lower new and single premiums of $7.2 million, and (ii) lower renewal premiums of $2.9 million, offset by (iii) an increase of $5.7 million in new premiums on special risk term insurance products offered by the Company's U.S. Financial Life Insurance Company ("USFL") subsidiary. Contributing to the increase in premiums generated by USFL was an abnormally high volume of applications received in the 4th quarter of 1999, which management attributes to customers anticipation of higher rates resulting from new regulation, known as "Triple X", requiring companies to increase reserves on term life insurance business. Management believes that the decrease in traditional life insurance new, single and renewal premiums is consistent with industry trends, particularly the continuing shift by consumers from traditional protection products to asset accumulation products. Universal life and investment-type product policy fees -- Universal life and investment-type product policy fees were $49.9 million for three-month period ended March 31, 2000, an increase of $4.5 million, or 9.9%, from $ 45.4 million reported for the comparable prior year period ended March 31, 1999. The increase consisted primarily of higher Protection Products segment fees of $2.5 million and higher Accumulation Product segment fees of $1.7 million. The increase in fees in the Protection Products segment was primarily due to higher fees from the Company's variable universal life 24 26 ("VUL") business of approximately $4.2 million. This increase was offset by higher ceded reinsurance of $2.4 million across the Protection Products segment. For the three-month period ended March 31, 2000, the Company reported total fees from its VUL business of $11.1 million, as compared to $6.9 million reported for comparable prior year period. The increase in fees resulted primarily from new sales of such business and the growing inforce block. The VUL fees consist of charges for the cost of insurance, loading, and surrender charges. The increase in fees in the Accumulation Products segment was primarily due to an increase in surrender charges of $1.8 million on the Company's FPVA business. Surrenders were $245.3 million, as compared to $180.1 million for the three-month period ended March 31, 1999. The increase in surrenders was primarily due to the aging of the block of business and an increase in competition in the marketplace. For the three-month period ended March 31, 2000, the Company reported total fees from its FPVA business of $18.7 million, as compared to $17.0 million reported for the comparable prior year period. Management has undertaken several actions in response to the increase in surrenders which it believes will normalize such experience. Such actions included; the establishment of a conservation unit, institution of product improvements, changes in agents compensations plans, and enhanced training of agents. See "New Business Information". Net investment income and realized gains on investments -- Net investment income was $351.8 million for the three-month period ended March 31, 2000, an increase of $163.7 million, or 87.0%, from $188.1 million reported for the comparable prior year period. The increase in net investment income is primarily related to an increase in income recorded by the Company from its investments in limited partnership interests. Such partnerships provide venture capital funding to companies through the purchase of, or investment in, equity securities issued by such companies. For the three month period ended March 31, 2000, the company earned 165.8 million relating to such partnership investments, an increase of $152.9 million from $12.9 million recorded for the three-month period ended March 31, 1999. The balance of the increase in investment income resulted from other invested asset categories collectively and is attributable primarily to higher yields and an increase in average invested assets. As of March 31, 2000, invested assets were $10,968.7 million (including cumulative unrealized losses of $208.1 million for fixed maturity securities) compared to $10,948.9 million (including cumulative unrealized gains of $124.2 million for fixed maturity securities) as of the comparable prior year period. The annualized yield on the Company's invested assets, excluding limited partnership interests, before and after realized gains/(losses) on investments was 6.9% and 7.6%, respectively, for the three-month periods ended March 31, 2000, as compared to 6.6% and 7.9%, respectively, for the three-month period ended March 31, 1999. The annualized yield on the Company's invested assets, including limited partnership interests, before and after realized gains/(losses) on investments was 12.7% and 13.4%, respectively, for the three-month periods ended March 31, 2000, as compared to 6.9% and 8.1%, respectively, for the three-month period ended March 31, 1999. See "Investments." As of March 31, 2000, the company had approximately $167 million of additional pretax gains related to its partnership investments that may be realized in the future subject to market fluctuations. Net realized gains on investments were $18.6 million for the three-month period ended March 31, 2000, a decrease of $14.6 million, from $33.2 million for the comparable prior year period. The decrease is due to lower gains on sales of equity securities of $12.2 million, lower sales and prepayment gains on fixed maturity securities of $5.0 million, lower gains on sales of real estate of $3.9 million, and higher losses on other than temporary impairments of fixed maturity securities of $2.9 million, offset with lower valuation allowances for real estate added to the held for sale category of $6.8 million, lower valuation allowances on mortgages of $1.8 million, and lower provisions for other-than-temporary impairments on equity securities of $0.8 million. Gains on the sales of equity securities were $20.9 million for the three-month period ended March 31, 2000, compared to $33.1 million for the prior year period. Prepayment and sales gains and losses for fixed maturities were losses of $0.1 million for the three-month period ended March 31, 2000, compared to gains of $4.9 million for the prior year period. Losses on the sale of real estate properties were $1.5 million for the three-month period ended March 31, 2000, compare to gains of $2.4 million for the prior year period. Losses from other than temporary impairments on fixed maturity securities were $2.9 million for the three-month period ended March 31, 2000, compared to $0.0 million for the prior year period. Additional provisions for valuation allowances on real estate held for sale were recoveries of $0.9 million for the three-month period ended March 31, 2000, compared to 25 27 losses of $5.9 million for the prior year period. Recoveries on allowances for mortgages were $2.1 million for three-month period ended March 31, 2000, compared to recoveries of $0.3 million for the prior year period. Losses on other than temporary impairments on equity securities were $0.7 million for the three-month period ended March 31, 2000, compared to $1.5 million for the prior year period. Net investment income and net realized gains on investments are allocated to the Company's segments based on the assets allocated to such segments to support the associated liabilities of each segment and to maintain a targeted regulatory risk-based capital level for each segment. See "Segments". Group Pension Profits -- Group Pension Profits were $10.1 million for the three-month period ended March 31, 2000, a decrease of $4.2 million, or 29.4%, from $14.3 million in the comparable prior period ended March 31, 1999. Group Pension Profits for the three-month period ended March 31, 2000 and 1999, consisted of $1.2 million and $9.1 million, respectively of Group Pension Payments and $8.9 million and $5.2 million, respectively relating to adjustments required to reflect the earnings from such payments in accordance with GAAP. Such adjustments primarily relate to changes in the valuation allowances established to recognize impairment of assets supporting the business transferred in the Group Pension Transaction as well as certain adjustments relating to policyholder liabilities. The decrease of $4.2 million in the Group Pension Profits is primarily due to lower realized gains of $2.7 million on investments between the periods due to recoveries on mortgage allowances that occurred in the first quarter of 1999, as well as a decrease in operating income of $1.5 million due to the normal run-off of the Group Pension business. For a description of the Group Pension Transaction, the Group Pension Profits and certain summary financial information relating thereto, refer to Note 4 of the Consolidated Financial Statements included herein. Management expects that Group Pension Profits will decline in future periods through to the termination of the Group Pension Transaction on December 31, 2002 consistent with the continuing run-off of the underlying business. Other income -- Other income (which consists primarily of fees earned by the Company's mutual fund management, broker-dealer, and insurance brokerage operations, as well as revenues from interest on deposits held under financial reinsurance arrangements, certain other asset management fees, and other miscellaneous revenues) was $59.6 million for the period ended March 31, 2000, an increase of $17.2 million, or 40.6%, from $42.4 million reported for the comparable prior period ended March 31, 1999. The increase was primarily due to higher income of $10.4 million and $6.1 million in the Accumulation Products and Other Products segments, respectively. The increase in income recorded in the Accumulation Products segment was primarily attributable to higher fees earned by the Company's mutual fund management operations. The Company's mutual fund management operations reported $27.3 million in fees from advisory, underwriting and distribution services in the three-month period ended March 31, 2000, as compared to $18.4 million reported in the comparable prior period ended March 31, 1999, as assets under management increased to approximately $9.1 billion at March 31, 2000 from $7.3 billion at March 31, 1999. The increase in income recorded in the Other Products segment was primarily due to higher commissions earned by the Company's broker-dealer operations of $5.3 million. During the three-month period ending March 31, 2000, the Company's broker-dealer operations reported commission earnings of $18.5 million, as compared to $13.2 million reported in the comparable prior period ended March 31, 1999. Benefits to policyholders -- Benefits to policyholders were $180.7 million for the three-month period ended March 31, 2000, a decrease of $6.2 million, or 3.3%, from $186.9 million reported for comparable prior year period. The decrease occurred primarily in the Protection Products Segment and consisted of the following: (i) lower change in traditional reserves of $3.2 million, (ii) a $3.2 million decrease in surrenders on traditional business, and 26 28 (iii) a $3.4 million decrease in universal life death benefits, offset by an increase of $2.8 million related to USFL. Interest credited to policyholders' account balances -- Interest credited to policyholders' account balances was $28.4 million for the three-month period ended March 31, 2000, a decrease of $1.7 million, or 5.6%, from $30.1 million reported for the comparable prior year period. The decrease consisted primarily of lower interest crediting of $1.1 million on the Company's retained group pension business which is reported in the Other Products segment, and a decrease of $1.1 million relating to the Company's single premium deferred annuity ("SPDA) business which is reported in the Accumulation Products segment. This was offset by higher crediting of $0.9 million in the Protection Products segment. During the first quarter of 2000, SPDA account value decreased approximately $17.2 million to $362.3 million. The decrease in account value in the three-month period ended March 31, 2000 was primarily due to continuing withdrawals, which management believes partially reflects consumer preferences for separate account products as well as the aging of the inforce block of business. Average interest crediting rates on the Company SPDA's were approximately 5.21% and 5.29% in the first quarter of 2000 and 1999, respectively. Amortization of deferred policy acquisition costs -- Amortization of deferred policy acquisition costs ("DAC") was $37.5 million for the three-month period ended March 31, 2000, an increase of $2.8 million, or 8.1%, from $34.7 million reported in the comparable prior year period. The increase primarily resulted from higher amortization in the Protection Products segments of approximately $3.0 million. The increase in DAC amortization in the Protection Products segment primarily consisted of: (i) $1.1 million of higher amortization related to the Company's VUL business due to higher profits and the growth of variable business, (ii) $0.9 million of higher UL amortization due to lower death claims, and (iii) a $0.8 million increase in USFL's amortization. Dividends to policyholders -- Dividends to policyholders were $57.2 million for three-month period ended March 31, 2000, a decrease of $6.4 million, or 10.1%, from $63.6 million reported for the comparable prior period. The decrease, substantially all of which occurred in the Protection Products segment, resulted primarily from a reduction in the additional dividend liability established in the Closed Block as of March 31, 2000, as compared to March 31, 1999. As further discussed in Note 6 to the Unaudited Interim Condensed Consolidated Financial Statements included elsewhere herein, all the assets in the Closed Block inure solely to the benefit of the Closed Block policyholders, and to the extent that the results of the Closed Block are more favorable than assumed in establishing the Closed Block, total dividends paid to Closed Block policyholders will be increased and are, accordingly, accrued as an additional dividend liability. Only the excess of the Closed Block liabilities over the Closed Block assets at the date of the establishment of the Closed Block (November 16, 1998) will be recognized in the Company's income over the period the policies and contracts in the Closed Block remain in force. Other operating costs and expenses -- Other operating costs and expenses were $139.0 million for the three-month period ended March 31, 2000, an increase of $32.0 million, or 29.9%, from $107.0 million reported for the comparable prior year period. The increase consisted of $4.3 million, $5.0 million, and $5.7 million of costs directly attributable to the Protection Products, Accumulation Products and Other Products segment, respectively, as well as higher allocable and other miscellaneous direct costs of approximately $17.0 million. To the extent that costs are not directly identifiable with an operating segment, such costs are allocated to the Company's operating segments based on cost allocations utilizing time studies, and cost estimates included in the Company's product pricing (see "Segments"). As further discussed below, the increase in operating costs and expenses in the first quarter of 2000 as compared to the first quarter of 1999 was primarily attributable to: (i) higher commissions and other selling costs associated with the increase in revenues reported by the Company's mutual fund and 27 29 broker-dealer operations, and (ii) the Company's continuing investment in its international operations, offset by (iii) certain operating efficiencies and other cost reductions. The following sets forth additional information with respect to the increase in operating costs in the first quarter of 2000, as compared to the first quarter 1999: The increase of $4.3 million in costs directly attributable to the Protection Products segment consisted of $2.1 million related to an increase in USFL's expenses, and an increase of $2.2 million in costs related to the company's international operations, which was primarily due to increased compensation costs associated with the recruitment of additional international sales representatives and costs incurred to develop and administer new products. The increase of $5.0 million in costs directly attributable to the Accumulation Products segment primarily consisted of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The increase of $5.7 million in costs directly attributable to the Other Products segment primarily consisted of higher commissions and other expenses incurred by the Company's broker-dealer operations, which directly corresponded with an increase in revenues from such operations (see discussion and analysis of other income above). The increase in allocable costs of $17.0 million was due primarily to a $10.0 million increase in long term incentive compensation and increases in other miscellaneous items. NEW BUSINESS INFORMATION The Company distributes its products primarily through its career agency sales force and various complementary distribution channels which include: (i) sales of proprietary retail mutual funds through third party broker-dealers, (ii) sales of Protection Products by the Company's U.S. Financial subsidiary through brokerage general agencies, (iii) sales of COLI products by the Company's corporate marketing team, and (iv) sales of a variety of financial products and services through the Company's Trusted Advisors subsidiary. The table below and discussion which follows presents certain information with respect to the Company's sales of protection and accumulation products during the three-month period ended March 31, 2000 and 1999 by source of distribution. Management uses this information to measure the Company's sales production from period to period by source of distribution. The amounts presented with respect to life insurance sales represent annualized statutory-basis premiums. Statutory basis premiums are used in lieu of GAAP basis premiums because, in accordance with statutory accounting practices, revenues from all classes of long-duration contracts are measured on the same basis, whereas GAAP provides different revenue recognition rules for different classes of long-duration contracts as defined by the requirements of SFAS No. 60, Accounting and Reporting by Insurance Enterprises, SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments, and SOP 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises. The amounts presented with respect to annuity and mutual funds sales represent deposits made by customers during the periods presented. 28 30
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, ---------------- 2000 1999 ------ ------ ($ IN MILLIONS) SOURCE OF DISTRIBUTION/SEGMENT PROTECTION PRODUCTS(1): Career Agency System(2)..................................... $20.2 $20.8 U.S. Financial(2)........................................... 8.9 3.5 Complementary Distribution.................................. 23.6 19.3 ----- ----- Total New Annualized Life Insurance Premiums................ $52.7 $43.6 ===== ===== ACCUMULATION PRODUCTS(1): Variable Annuity(2)(3)...................................... $ 116 $ 104 Career Agency System -- Proprietary Retail Mutual Funds..... 212 141 Third-Party Distribution -- Proprietary Retail Mutual Funds..................................................... 549 287 ----- ----- Total Accumulation Product Sales............................ $ 877 $ 532 ===== =====
- --------------- (1) Annualized premiums represent the total premium scheduled to be collected on a policy or contract over a twelve-month period. Pursuant to the terms of certain of the policies and contracts issued by the Company, premiums and deposits may be paid or deposited on a monthly, quarterly, or semi-annual basis. Annualized premium does not apply to COLI business or single premium paying business. All premiums received on COLI business and single premium paying policies during the periods presented are included. (2) Includes premiums or deposits that have been annualized. (3) Excludes annualized premiums associated with an exchange program offered by the Company wherein contractholders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company. Protection Segment -- New Business Information for the three-month period ended March 31, 2000 compared to the three-month period ended March 31, 1999. Total new annualized and single life insurance premiums for the three-month period ended March 31, 2000 were $52.7 million, an increase of $9.1 million or 21% from $43.6 million for the comparable prior year period year. The increase was primarily attributable to an increase in sales of USFL products through brokerage general agencies and an increase in sales of corporate-owned life insurance and bank-owned life insurance ("COLI" and "BOLI"). COLI and BOLI are large premium cases that typically fluctuate over the course of the year. Sales of COLI and BOLI through the Company's complementary distribution channels rose to $23.2 million in the first quarter 2000 from $19.3 million in the first quarter of 1999. $20.7 million or 89% of COLI sales in the three-month period ended March 31, 2000 consisted of recurring premiums compared to $7.0 million in the three-month period ended March 31, 1999. USFL more than doubled its first-quarter 2000 new premiums through this brokerage general agency distribution channel. New premiums rose to $8.9 million in the first quarter of 2000 from $3.5 million for the first quarter of 1999. Contributing to the increase in premiums generated by USFL was an abnormally high volume of applications received in the 4th quarter of 1999, which management attributes to customers anticipation of higher rates resulting from new regulation, known as "Triple X", requiring companies to increase reserves on terms life insurance business. New career agency life insurance premiums (first-year and single premiums) were $20.2 million in the first quarter of 2000, in line with the company's expectations and roughly even with 1999's strong first-quarter production of $20.8 million. The agent count (career and international) was 2,285 at March 31, 2000, compared with 2,335 at March 31, 1999 and 2,417 at December 31, 1999. The decrease in the number of 29 31 agents from period to period was primarily due to actions taken by the Company to terminate unproductive agents. Per-agent productivity continued to increase in the first quarter of 2000. Accumulation Segment -- The following tables set forth assets under management at March 31, 2000 and 1999, as well as the changes in the primary components of assets under management during the years then ended:
MARCH 31, --------- 2000 1999 ----- ----- ($ IN BILLIONS) ASSETS UNDER MANAGEMENT:(1) Individual variable annuities............................... $ 4.9 $ 4.7 Individual fixed annuities.................................. 0.8 1.0 Proprietary retail mutual funds............................. 5.2 3.3 ----- ----- $10.9 $ 9.0 ===== ===== INDIVIDUAL VARIABLE ANNUITIES: Beginning account value..................................... $ 4.9 $ 4.8 Sales(2).................................................... 0.1 0.1 Market appreciation......................................... 0.1 -- Surrenders and withdrawals(2)............................... (0.2) (0.2) ----- ----- Ending account value........................................ $ 4.9 $ 4.7 PROPRIETARY RETAIL MUTUAL FUNDS: Beginning account value..................................... $ 4.8 $ 3.0 Sales....................................................... 0.8 0.4 Dividends reinvested........................................ 0.1 -- Market appreciation......................................... (0.2) 0.1 Redemptions................................................. (0.3) (0.2) ----- ----- Ending account value........................................ $ 5.2 $ 3.3 ===== =====
- --------------- (1) Results exclude recently acquired subsidiary -- U.S. Financial Life (2) Amounts presented in the three-month periods ended March 31, 2000 and 1999 are net of transfers to the new product series. New Business Information for the three months ended March 31, 2000 compared to the three months ended March 31, 1999. New sales of variable annuities during the three-month period ended March 31, 2000 were $116 million, a increase of $12 million, or 12%, from $104 million reported for the three-month period ended March 31, 1999. The increase reflects the positive impact of actions undertaken in 1999 and early 2000 which include changes in compensation plans, product improvements and enhanced training as well as the receipt of regulatory product approvals in all key states. Sales of proprietary retail mutual funds offered by the Company's mutual fund subsidiary increased by $333 million, or 78%, to $761 million for the three-month period ended March 31, 2000, as compared to $428 million for the three-month period ended March 31, 1999. Proprietary mutual fund sales through the Company's career agency system increased approximately $71 million, or 50% to $212 million for the three-month period ended March 31, 2000 from $141 million for the three-month period ended March 31, 1999, while proprietary mutual fund sales through third-party broker-dealers increased approximately $262 million, or 91%, to $549 million for the three-month period ended March 31, 2000 from approximately $287 million for the three-month period ended March 31, 1999. The increase in sales primarily resulted from the expansion of third party distribution arrangements and the introduction of a new internet fund and a multicap fund. 30 32 REPURCHASE OF SURPLUS NOTES On March 8, 2000, MONY Life repurchased substantially all of the surplus note indebtedness it had outstanding at December 31, 1999. As a result of the repurchase, the Company will record an after-tax loss of approximately $36.7 million during the first quarter of 2000. The loss resulted from the premium paid by MONY Life to the holders of the aforementioned surplus notes, reflecting the excess of their fair value over their carrying value on the Company's books at the date if the transaction, which aggregated approximately $56.5 million, This loss will be reported, net of tax, as an extraordinary item of the Company's income statement in 2000. See Liquidity and Capital Resources -- Issuance of Senior Notes and Repurchase of Surplus Notes and Note 7 to the Unaudited Interim Condensed Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Holding Company MONY Group's cash flow consists of investment income from its invested assets (including interest form intercompany Surplus Notes, as hereafter defined), and dividends from MONY Life, if declared and paid, offset by expenses incurred in connection with the administration of MONY Group's affairs and interest expense on the Senior Notes, as hereafter defined (sees Insurance of Senior Notes and Repurchase of Surplus Notes below). As a holding company, MONY Group's ability to meet its cash requirements pay interest expense on Senior Notes, and pay dividends on its Common Stock substantially depend upon payments from MONY Life, including the receipt of; (i) dividends, (ii) interest income on the Inter-company Surplus Notes, and (iii) other payments. The payment of dividends by MONY Life to MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life will be permitted to pay shareholder dividends to the MONY Group only if it files notice of its intention to declare such a dividend and the amount thereof with the New York Superintendent and the New York Superintendent does not disapprove the distribution. Under the New York Insurance Law, the New York Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. The New York Insurance Department has established informal guidelines for the New York Superintendent's determinations that focus on, among other things, overall financial condition and profitability under statutory accounting practices. In addition, payments of principal and interest on the Inter-company Surplus Notes can only be made with the prior approval of the New York Superintendent "whenever, in his judgement, the financial condition of such insurer warrants". Such payments further may be made only out of surplus funds, which are available for such payments under the New York Insurance Law. There can be no assurance that MONY Life will have statutory earnings to support the payment of dividends to the MONY Group or that the New York Superintendent will approve interest payments to MONY Group on the Inter-company Surplus Notes. Accordingly, there can be no assurance that MONY Group will have sufficient funds to meet its cash requirements and pay cash dividends to shareholders. In addition, state insurance laws contain similar restrictions on the ability of the life insurance subsidiaries to pay dividends to MONY Life. There can be no assurance that state insurance laws will in the future permit the payment of dividends by the life insurance subsidiaries to MONY Life in an amount sufficient to support the ability of MONY Life to pay dividends to the MONY Group. In January 2000, the New York State Insurance Department approved, and MONY life paid, a dividend to MONY Group in the amount of $75.0 million. The MONY Group expects to continue to pay a dividend on its common stock of at least $0.40 per share in 2000. However, because the company has changed the frequency of dividend payments from quarterly to annual it expects to increase the $0.40 per share dividend to compensate shareholders for the time value of money. Issuance of Senior Notes and Repurchase of Surplus Notes -- On January 12, 2000, the Holding Company filed a registration statement of Form S-3 with the Securities and Exchange Commission (the "SEC") to register certain securities. This registration, known as a "Shelf Registration", provides the Company with the ability to offer various securities to the public, when it 31 33 deems appropriate, to raise proceeds up to an amount not to exceed $1.0 billion in the aggregate for all issuance's of securities thereunder. It is the intention of the Company to use this facility to raise proceeds for mergers and acquisitions and for other general corporate matters, as it considers necessary. On March 8, 2000, the Holding Company issued $300.00 million principal amount of senior notes (the "Senior Notes") pursuant to the aforementioned Shelf Registration. The senior notes mature on March 15, 2010, bear interest at 8.35% per annum and were priced at a discount to yield 8.38%. The principal amount of senior notes is payable at maturity and interest is payable semi-annually. The net proceeds to the Company from the issuance of the senior notes, after deducting underwriting commissions and other expenses (primarily legal and accounting fees), were approximately $296.7 million. Approximately $280.0 million of the net proceeds from the issuance of the senior notes was used by the Holding Company as discussed below to finance the repurchase, on March 3, 2000, by MONY Life of all of its outstanding $115.0 million face amount 9.5% coupon surplus notes, and a $116.5 million face amount of its $125.0 million face amount 11.25% coupon surplus notes (hereafter referred to as the "9.5% Notes" and "11.25% Notes, respectively), which were outstanding at December 31, 1999. To finance MONY Life's repurchase of the 9.5% Notes and the 11.25% Notes, the Holding Company, on March 8, 2000; (i) purchased two surplus notes from MONY Life (hereafter referred to as the "Inter-company Surplus Notes") to replace the 9.5% Notes and the 11.25% Notes. The terms of the Inter-company Surplus Notes are identical to the 9.5% Notes and the 11.25% notes, except that the Inter-company Surplus Notes were priced to yield a current market rate of interest and the inter-company surplus note issued to replace the $116.5 million face amount of the 11.25% Notes was issued at a face amount of $100.0 million and (ii) contributed capital to MONY Life in the amount of $65.0 million As a result of the repurchase of the 9.5% Notes and substantially all of the 11.25% Notes, the Company will record an after-tax loss of approximately $36.7 million during the first quarter of 2000. The loss resulted from the premium paid by MONY Life to the holders of the 9.5% Notes and the 11.25% Notes reflecting the excess of their fair value over their carrying value on the Company's books at the date of the transaction of approximately $7.0 million and $49.5 million, respectively. This loss will be reported, net of tax, as an extraordinary item on the Company's income statement in 2000. Capitalization The Company's total capitalization, excluding accumulated comprehensive income, increased $152.2 million or 7.1%, to $2,305.9 million at March 31, 2000, as compared to $2,153.7 million at December 31, 1999. The increase was primarily the result of net income of $101.2 million. The Company's total debt to equity (excluding accumulated comprehensive income) and total debt to total capitalization ratios increased to 18.7% and 15.8% at March 31, 2000, respectively, from 16.1% and 13.9% at December 31, 1999, respectively. Included in total debt used in the above calculations are $58.7 million and $58.8 million of non-recourse indebtedness at March 31, 2000 and December 31, 1999, respectively. MONY Life MONY Life's cash inflows are provided mainly from life insurance premiums, annuity considerations and deposit funds, investment income and maturities and sales of invested assets. Cash outflows primarily relate to the liabilities associated with its various life insurance and annuity products, dividends to policyholders, operating expenses, income taxes, acquisitions of invested assets, and principal and interest on its outstanding debt obligations. 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 32 34 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 March 31, 2000 and December 31, 1999. WITHDRAWAL CHARACTERISTICS OF ANNUITY RESERVES AND DEPOSIT LIABILITIES
AMOUNT AT AMOUNT AT MARCH 31, PERCENT DECEMBER 31, PERCENT 2000 OF TOTAL 1999 OF TOTAL --------- -------- ------------ -------- ($ IN MILLIONS) Not subject to discretionary withdrawal Provisions.... $1,436.8 18.7% $1,449.9 18.5% Subject to discretionary withdrawal -- with market value adjustment or at carrying value less surrender charge.............................................. 5,084.7 66.0 5,165.6 66.1 -------- ----- -------- ----- Subtotal.............................................. 6,521.5 84.7 6,615.5 84.6 -------- ----- -------- ----- Subject to discretionary withdrawal --without adjustment at carrying value........................ 1,181.4 15.3 1,205.1 15.4 -------- ----- -------- ----- Total annuity reserves and deposit liabilities (gross)............................................. 7,702.9 100.0% 7,820.6 100.0% ======== ===== ======== ===== Less reinsurance...................................... 83.8 89.3 -------- -------- Total annuity reserves and deposit liabilities (net)............................................... $7,619.1 $7,731.3 ======== ========
The following table sets forth by product line the actual surrenders and withdrawals paid for the periods indicated. SURRENDERS AND WITHDRAWALS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, ------------------- 2000 1999 -------- -------- ($ IN MILLIONS) PRODUCT LINE:(1) Traditional life(2)......................................... $109.5 $110.9 Variable and universal life................................. 10.3 12.3 Annuities(3)................................................ 241.1 182.7 Pensions(4)................................................. 102.8 32.4 ------- ------- TOTAL.................................................. $463.7 $338.3 ======= =======
- --------------- (1) Prior years' amounts have been restated primarily to include surrenders and withdrawals related to the retained group pension business and the Company's benefit plans. 33 35 (2) Includes approximately $19 million in 1999 of surrenders in the Closed Block, the proceeds from which remained with the Company to fund premiums on newly issued traditional life policies outside the Closed Block. (3) Excludes surrenders associated with an exchange program offered by the Company wherein contractholders surrendered old FPVA contracts and reinvested the proceeds therefrom in a new enhanced FPVA product offered by the Company. (4) Excludes transfers between funds within the company benefit plans. Annuity surrenders have increased for the three-month period ended March 31, 2000 as compared to the comparable prior year periods 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 responded to this trend by enhancing its variable annuity products by offering new investment fund choices. In addition, the Company has established a special conservation unit and offers policyholders the opportunity to exchange their contracts for a new product series. The Company's principal sources of liquidity to meet cash outflows are its portfolio of liquid assets and its net operating cash flow. During the three-month period ended March 31, 2000, the net cash flow from operations reported in the Company's consolidated cash flow statement was $22.1 million. This amount excludes $0.1 million of cash flow relating to the Closed Block. Total combined cash flow for the three-month period ended March 31, 2000 (including the Closed Block) was $22.2 million, a decrease of $42.1 million from $64.3 million reported for the three-month period ended March 31, 1999. The decrease primarily relates to higher operating expenses, higher death benefits and lower Group Pension Payments. The Company's liquid assets include substantial U.S. Treasury holdings, short-term money market investments and marketable long-term fixed maturity securities. Management believes that the Company's sources of liquidity are adequate to meet its anticipated needs. As of March 31, 2000, the Company had readily marketable fixed maturity securities with a carrying value of $6,580.2 million (including fixed maturities in the Closed Block), which were comprised of $3,609.7 million public and $2,970.5 million private fixed maturity securities. At that date, approximately 93.1% 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 March 31, 2000 the Company had cash and cash equivalents of $341.5 million (including cash and cash equivalents in the Closed Block). In addition, the Company maintains two bank line of credit facilities with domestic banks aggregating $150.0 million, with scheduled renewal dates in September 2000 and September 2003. In accordance with certain covenants under these lines of credit, the Company is required to maintain a certain statutory tangible net worth and debt to capitalization ratio. The purpose of these facilities is to provide additional liquidity for any unanticipated short-term cash needs the Company might experience and also to serve as support for the Company's $250 million commercial paper program which was activated in the second quarter of 1999. The Company has complied with all covenants under these lines of credit, has not borrowed against these lines of credit since their inception, and does not have any commercial paper outstanding as of March 31, 2000. On January 12, 2000, the Company announced a plan to repurchase up to 5% or approximately 2.4 million shares of the outstanding common shares of the Company. Under the repurchase plan, the Company may repurchase common shares from time to time, as market conditions and other factors warrant. The repurchase program may be discontinued at any time. At March 31, 2000, the Company had commitments to issue $9.2 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 8.4% to 9.2%. In addition, the Company had commitments to issue $92.4 million of fixed rate commercial mortgage loans with interest rates ranging from 7.0% to 9.14%. The Company also had commitments outstanding to purchase $131.6 million of private fixed and floating maturity securities as of March 31, 2000 with interest rates ranging from 6.2% to 11.0%. At March 31, 2000, the Company had commitments to contribute capital to its equity partnership investments of $118.5 million. 34 36 Of the $1,261.6 million of currently outstanding commercial mortgage loans in the Company's investment portfolio at March 31, 2000, $29.2 million, $94.3 million, $202.6 million, and $67.8 million are scheduled to mature in 2000, 2001, 2002 and 2003, respectively. The Company has mortgage loans on certain of its real estate properties. The interest rates on these loans range from 7.29% to 7.89%. Maturities range from June 2000 to February 2002. Interest expense on mortgage loans was $0.9 million and $1.5 million for the three-month period ended March 31, 2000 and 1999, respectively. In 1988, the Company financed one of its real estate properties under a sale/leaseback arrangement. The facility was sold for $66.0 million, $56.0 million of which was in the form of an interest bearing note receivable and $10.0 million in cash. The note was due January 1, 2009. The remaining balance of the interest-bearing note was paid in full on December 1, 1999, as part of the sale of the property to a third party. This transactions continues to be accounted for as a sale/leaseback arrangement, with the proceeds received of approximately $44 million amortized into income over the life of the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.3 million in 2000, $7.4 million in 2001, $7.6 million 2002, $7.7 million in 2003, $7.9 million in 2004 and $33.1 million thereafter. The Company has the option to renew the lease at the end of the lease term. At March 31, 2000, aggregate maturities of long-term debt based on required remaining principal payments for 2000 and the succeeding four years are $0.0 million, $0.0 million, $5.7 million, $0.0 million and $0.0 million, respectively, and $308.5 million thereafter. Aggregate contractual debt service payments on the Company's long term debt at March 31, 2000, for the remainder of 2000 and the succeeding four years are $15.0 million, $26.4 million, $31.7 million, $26.0 million and $26.0 million, respectively and $465.4 million thereafter. Among the assets allocated to the Closed Block are the Series A Notes. MONY Life has undertaken to reimburse the Closed Block from its general account assets outside the Closed Block for any reduction in principal payments on the Series A Notes pursuant to the terms thereof, as described in Note 4 to the Unaudited Condensed Consolidated Financial Statements The NAIC established 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 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 adjusted RBC capital ratios of all the Company's insurance subsidiaries at March 31, 2000 and December 31, 1999 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 of mainframe, PC and local area network ("LAN") platforms; ensuring the compliance of voice and data network software and hardware; addressing the compliance of key vendors and other third parties. The total cost of the Project was $25.4 million. The Company does not expect to incur any material future cost on the Project. The Company has not experienced any significant Year 2000 related problems post-December 31, 1999 with its operations of with any external parties with which business is conducted. Based on this experience and 35 37 the amount of work and testing previously performed, the Company believes the likelihood of a Year 2000 issue that would have a material effect on the Company's consolidated 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 of equipment and/or failure of external parties to achieve Year 2000 compliance could have a material adverse effect on the Company's consolidated financial position and results of its operations. 36 38 INVESTMENTS On the effective date of the Plan, the Company's invested assets were allocated between the Closed Block and operations outside the Closed Block. In view of the similar asset quality characteristics of the major asset categories in the two portfolios, the invested assets in the Closed Block have been combined with the Company's invested assets outside the Closed Block for purposes of the following discussion and analysis. In addition, the following discussion excludes invested assets transferred in the Group Pension Transaction. Accordingly, this discussion should be read in conjunction with the summary financial information regarding assets transferred in the Group Pension Transaction presented in Note 4 to the Unaudited Interim Condensed Consolidated Financial Statements. The yield on general account invested assets (including net realized gains and losses on investments) was 13.4% and 8.1% for the three-month periods ended March 31, 2000 and 1999, respectively. The following table illustrates the net investment income yields on average assets for each of the components of the Company's investment portfolio, excluding net realized gains. The yields are based on quarterly average carrying values, (excluding unrealized gains (losses) in the fixed maturity asset category). Equity real estate income is shown net of operating expenses, depreciation and minority interest. INVESTMENT RESULTS BY ASSET CATEGORY
THREE-MONTHS ENDED MARCH 31, ------------------------------------------------------------------ 2000 1999 ------------------------------- ------------------------------- NET INVESTMENT AVERAGE ASSET NET INVESTMENT AVERAGE ASSET INCOME YIELD BALANCES INCOME YIELD BALANCES -------------- ------------- -------------- ------------- Fixed maturities...................... 7.3% $ 6,770.5 7.3% $ 6,516.7 Equity securities..................... 128.6 518.7 12.9 436.1 Mortgage loans on real estate......... 8.0 1,769.3 7.8 1,454.7 Policy loans.......................... 6.7 1,265.8 6.3 1,270.8 Real estate........................... 6.7 371.3 5.1 638.1 Other invested assets................. 17.4 52.8 (3.2) 37.3 Cash and cash equivalents............. 6.7 359.3 5.0 428.2 --------- --------- Total invested assets before investment expenses.............. 13.0% $11,107.7 7.2% $10,781.9 ========= ========= Investment expenses................. (0.3) (0.2) ----- ---- Total invested assets after investment expenses(1)........... 12.7% 6.9% ===== ====
- --------------- (1) The increase in net investment income yields was primarily due to an increase in limited partnership income included in the equity securities asset category of $152.9 million. The net investment income yields excluding limited partnership income is 6.9% and 6.6% for the three-month periods ended March 31, 2000 and 1999, respectively. FIXED MATURITIES Fixed maturities consist of publicly traded debt securities, privately placed debt securities and small amounts of redeemable preferred stock, and represented 60.0% and 60.4% of total invested assets at March 31, 2000 and December 31, 1999, 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 37 39 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). Of the Company's total portfolio of fixed maturity securities at March 31, 2000, 93.1% were investment grade and 6.9% were below-investment grade. The Company reviews all fixed maturity securities at least once each quarter and identifies investments that management concludes require additional monitoring. Among the criteria are: (i) violation of financial covenants, (ii) public securities trading at a substantial discount as a result of specific credit concerns, and (iii) other subjective factors relating to the issuer. The Company defines problem securities in the fixed maturity category as securities (i) as to which principal and/or interest payments are in default or are to be restructured pursuant to commenced negotiations or (ii) issued by a company that went into bankruptcy subsequent to the acquisition of such securities or (iii) are deemed to have other than temporary impairments to value. The Company defines potential problem securities in the fixed maturity category as securities that are deemed to be experiencing significant operating problems or difficult industry conditions. Typically these credits are experiencing or anticipating liquidity constraints, having difficulty meeting projections/budgets and would most likely be considered a below investment grade risk. The Company defines restructured securities in the fixed maturity category as securities where a concession has been granted to the borrower related to the borrower's financial difficulties that the Company would not have otherwise considered. The Company restructures certain securities in instances where a determination was made that greater economic value will be realized under the new terms than through liquidation or other disposition. The terms of the restructure generally involve some or all of the following characteristics: a reduction in the interest rate, an extension of the maturity date and a partial forgiveness of principal and/or interest. There were no restructured fixed maturities at March 31, 2000 and December 31, 1999. As of March 31, 2000 the fair value of the Company's problem, potential problem and restructured fixed maturities were $57.0 million, $46.0 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.6% of total fixed maturities. As of December 31, 1999, the fair value of the Company's problem, potential problem and restructured fixed maturities were $45.9 million, $32.8 million and $0.0 million, respectively, which, in the aggregate, represented approximately 1.9% of total fixed maturities. At March 31, 2000, the Company's largest unaffiliated single concentration of fixed maturities was $231.7 million of Federal National Mortgage Association ("FNMA") which represents 2.1% of total invested assets. The largest non-government issuer consists of $193.4 million of AEGON notes purchased in connection with the Group Pension Transaction. These notes represent approximately 1.8% of total invested assets at March 31, 2000. No other individual non-government issuer represents more than 0.4% of invested assets. The Company held approximately $1,165.0 million and $1,138.5 million of mortgage-backed and asset-backed securities as of March 31, 2000 and December 31, 1999, respectively. Of such amounts, $380.8 million and $391.5 million, or 32.7% and 34.4%, respectively, represented agency-issued pass-through and collateralized mortgage obligations ("CMOs") secured by Federal National Mortgage Association, FHLMC, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts were comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company's exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At March 31, 2000 and December 31, 1999, 85.6% and 85.7%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned an NAIC Designation of 1. 38 40 The following table presents the types of mortgage-backed securities ("MBSs"), as well as other asset-backed securities, held by the Company as of the dates indicated. MORTGAGE AND ASSET-BACKED SECURITIES
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) CMOs........................................................ $ 522.9 $ 500.1 Pass-through securities..................................... 30.2 31.0 Commercial MBSs............................................. 99.8 118.5 Asset-backed securities..................................... 512.1 488.9 -------- -------- Total MBSs and asset-backed securities............ $1,165.0 $1,138.5 ======== ========
The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, (excluding scheduled sinking funds) as of March 31, 2000 and December 31, 1999 are as follows: FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
AS OF AS OF MARCH 31, 2000 DECEMBER 31, 1999 ---------------------- ---------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- ($ IN MILLIONS) Due in one year or less............................. $ 192.5 $ 193.3 $ 206.5 $ 208.5 Due after one year through five years............... 1,574.7 1,545.3 1,506.6 1,487.9 Due after five years through ten years.............. 2,717.2 2,614.2 2,711.9 2,612.9 Due after ten years................................. 1,111.1 1,062.4 1,153.9 1,098.4 -------- -------- -------- -------- Subtotal.................................. 5,595.5 5,415.2 5,578.9 5,407.7 Mortgage-backed and other asset-backed securities... 1,192.7 1,165.0 1,173.7 1,138.5 -------- -------- -------- -------- Total..................................... $6,788.2 $6,580.2 $6,752.6 $6,546.2 ======== ======== ======== ========
MORTGAGE LOANS Mortgage loans comprised 16.6% and 15.8% of total invested assets as of March 31, 2000 and December 31, 1999, respectively. Mortgage loans consist of commercial, agricultural and residential loans. As of March 31, 2000 and December 31, 1999 commercial mortgage loans comprised $1,261.6 million and $1,141.4 million or 69.1% and 66.6% of total mortgage loan investments, respectively. Agricultural loans comprise $562.3 million and $570.7 million, or 30.8% and 33.3% of total mortgage loans, respectively. Residential mortgage loans comprised $1.3 million and $1.3 million, or 0.1% and 0.1% of total mortgage loan investments at March 31, 2000 and December 31, 1999, respectively. COMMERCIAL MORTGAGE LOANS For commercial mortgages, the carrying value of the largest amount loaned on any one single property aggregated $45.5 million and represented less than 0.5% of general account invested assets as of March 31, 2000. Amounts loaned on 19 properties were $20 million or greater, representing in the aggregate 43.6% of the total carrying value of the commercial loan portfolio at the same date. Total mortgage loans to the five largest borrowers accounted in the aggregate for approximately 22.5% of the total carrying value of the commercial loan portfolio and less than 2.6% of total invested assets at March 31, 2000. 39 41 The following table presents the Company's commercial mortgage loan maturity profile for the periods indicated. COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
AS OF AS OF MARCH 31, 2000 DECEMBER 31, 1999 ---------------- ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ----- --------- ------ ($ IN MILLIONS) 1 year or less........................................... $ 48.7 3.9% $ 26.6 2.3% Due after one year through five years.................... 467.0 37.0 401.0 35.2 Due after five years through ten years................... 454.3 36.0 425.6 37.3 Due after ten years...................................... 291.6 23.1 288.2 25.2 -------- ----- -------- ----- $1,261.6 100.0% $1,141.4 100.0% ======== ===== ======== =====
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 of 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 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 following table presents the carrying amounts of problem, potential problem and restructured commercial mortgage loans relative to the carrying value of all commercial mortgage loans 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, potential problem and restructured as of each of the dates indicated. PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING VALUE
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Total commercial mortgages.................................. $1,261.6 $1,141.4 -------- -------- Problem commercial mortgages(1)............................. 7.7 0.0 Potential problem commercial mortgages...................... 72.0 72.1 Restructured commercial mortgages........................... 129.0 134.8 Total problem, potential problem & restructured commercial mortgages................................................. $ 208.7 $ 206.9 -------- -------- Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages...... 16.5% 18.1% ======== ========
40 42
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Valuation allowances/writedowns(2) Problem loans............................................... $ -- $ -- Potential problem loans..................................... 15.9 16.2 Restructured loans.......................................... 23.8 26.0 -------- -------- Total valuation allowances/writedowns(2).................... $ 39.7 $ 42.2 -------- -------- Total valuation allowances/writedowns as a percent of problem, potential problem and restructured commercial mortgages at carrying value before valuation allowances and writedowns............................................ 16.0% 16.9% ======== ========
- --------------- (1) Problem commercial mortgages included delinquent mortgages of $7.7 million and $0.0 million at March 31, 2000 and December 31, 1999 respectively. There were no loans in process of foreclosure at either date. (2) Includes impairment writedowns recorded prior to the adoption of FASB No. 114, Accounting by Creditors for Impairment of a Loan, of $26.3 million at March 31, 2000 and December 31, 1999. In addition to valuation allowances and impairment writedowns recorded on specific commercial mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other such mortgage loans based on its historical loss experience for such investments. As of March 31, 2000 and December 31, 1999 1999, such reserves were $15.3 million, and $15.9 million, respectively. AGRICULTURAL MORTGAGE LOANS Problem, Potential Problem and Restructured Agricultural Mortgages The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. The following table presents the carrying amounts of problem, potential problem and restructured agricultural mortgages relative to the carrying value of all agricultural mortgages as of the dates indicated. The table also presents the valuation allowances established by the Company relative to agricultural mortgages defined as problem, potential problem and restructured as of each of the aforementioned dates indicated. PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES AT CARRYING VALUE
AS OF AS OF MARCH 31, DECEMBER 31, 1999 1999 --------- ------------ ($ IN MILLIONS) Total agricultural mortgages................................ $562.3 $ 570.7 ------ -------- Problem agricultural mortgages(1)........................... $ 14.4 $ 7.4 Potential problem agricultural mortgages.................... 0.5 1.4 Restructured agricultural mortgages......................... 5.8 9.3 ------ -------- Total problem, potential problem & restructured agricultural mortgages................................................. $ 20.7 $ 18.1 ------ -------- Total problem, potential problem and restructured agricultural mortgages as a percent of total agricultural mortgages................................................. 3.7% 3.2% ====== ========
41 43
AS OF AS OF MARCH 31, DECEMBER 31, 1999 1999 --------- ------------ ($ IN MILLIONS) Valuation allowances/writedowns: Problem loans............................................. $ 0.2 $ 0.2 Potential problem loans................................... 0.1 0.1 Restructured loans........................................ 0.2 0.5 ------ -------- Total valuation allowances/writedowns....................... $ 0.5 $ 0.8 ------ -------- Total valuation allowances as a percent of problem, potential problem and restructured agricultural mortgages at carrying value before valuation allowances and writedowns................................................ 2.4% 4.2% ====== ========
- --------------- (1) Problem agricultural mortgages include delinquent mortgage loans of $13.0 million and $3.1 million and loans in process of foreclosure of $1.4 million and $4.3 million at March 31, 2000 and December 31, 1999, respectively. In addition to valuation allowances and impairments writedowns recorded on specific agricultural mortgage loans classified as problem, potential problem, and restructured mortgage loans, the Company records a non-specific estimate of expected losses on all other agricultural mortgage loans based on its historical loss experience for such investments. As of March 31, 2000 and December 31, 1999, such reserves were $5.5 million and $5.6 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 March 31, 2000 and December 31, 1999, the carrying value of the Company's real estate investments was $373.5 million and $369.1 million, respectively, or 3.5% and 3.4%, respectively, of general account invested assets. The Company owns real estate, interests in real estate joint ventures (both majority owned and minority owned), and real estate acquired upon foreclosure of commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's equity real estate investments by such classifications. EQUITY REAL ESTATE
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Real estate................................................. $140.7 $140.3 Joint ventures.............................................. 108.6 107.8 ------ ------ Subtotal.......................................... 249.3 248.1 Foreclosed.................................................. 124.2 121.0 ------ ------ Total............................................. $373.5 $369.1 ====== ======
REAL ESTATE SALES In accordance with its ongoing strategy to strengthen the Company's financial position, management expects to continue to selectively sell equity real estate. 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. At March 31, 2000 and December 31, 1999, the carrying value of real estate to be disposed of was $326.9 million 42 44 and $322.9 million, respectively, or 3.1% and 3.0%, respectively of invested assets at such dates. The aforementioned carrying values are net of valuation allowances of $21.1 million and $22.0 million, at March 31, 2000 and December 31, 1999, respectively. In addition, the carrying value of real estate to be disposed of at such dates is net of $62.3 million and $62.3 million of impairment adjustments. For the three-months period ended March 31, 2000 and the year ended December 31 1999, such changes in valuation allowances aggregated ($0.9) million and $12.1 million, respectively. The following table analyzes the Company's real estate sales during the periods indicated. REAL ESTATE SALES(1)
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, --------------- 2000 1999 ----- ------ ($ IN MILLIONS) Sales proceeds.............................................. $0.3 $17.5 ---- ----- Carrying value before impairment adjustments and valuation allowances................................................ $0.2 $22.2 Impairment adjustments...................................... 0.0 (6.1) Valuation allowances........................................ 0.0 (1.0) ---- ----- Carrying value after impairment adjustments and valuation allowances................................................ $0.2 $15.1 ---- ----- Gain (loss)................................................. $0.1 $ 2.4 ---- -----
Most of the proceeds from real estate sales have been invested in investment grade bonds. This has served to make the overall asset portfolio somewhat more sensitive to changes in interest rates. It has also served to reduce exposure to an illiquid asset class, real estate, and increase exposure to a more liquid asset class, investment grade public bonds. EQUITY SECURITIES The Company's equity securities consist of investments in common stocks and limited partnership interests. The following table presents the carrying values of the Company's equity securities at the dates indicated: INVESTMENTS IN EQUITY SECURITIES
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Common stocks............................................... $213.5 $277.2 Limited partnership interests............................... 304.0 242.6 ------ ------ Total.................................................. $517.5 $519.8 ====== ======
Common Stocks: The Company's investments in common stocks represented 1.9% and 2.6% of invested assets at March 31, 2000 and December 31, 2000, respectively. The Company's investments in common stocks are classified as available-for-sale and are reported at estimated fair value. Unrealized gains and losses on the Company's common stocks 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. 43 45 Limited Partnership Interests: The Company accounts for its investments in limited partnership interests in accordance with either the equity method of accounting or the cost method of accounting depending upon the Company's percentage of ownership of the partnership and the date the partnership was acquired. In general, partnership interests acquired after May 18, 1995 are accounted for in accordance with the equity method of accounting if the Company's ownership interest exceeds 3 percent, whereas, if the partnership was acquired prior to May 18, 1995, the equity method would be applied only if the Company's ownership interest exceeded 20 percent. In all other circumstances, the Company accounts for its investment in equity limited partnership interests in accordance with the cost method. Under the equity method of accounting, an investor is required to record in its income its share of the income or loss reported by the investee, and correspondingly, increase or decrease the carrying value of such investment in its balance sheet. Distributions of income or dividends from the partnership are recorded as a reduction in the carrying value of the investment. In applying the equity method, the investor is not permitted to adjust the income reported by an investee to conform the investee's accounting policies to that followed by the investor. Under the cost method of accounting, the investment is carried at its original cost and income is recognized when distributed as dividends from the partnership. The carrying amount of the investment is reduced upon receipt of a distribution characterized by the partnership as a return of capital or liquidating dividend or when management has determined that the investment or portion thereof may not be recovered. In accordance with GAAP, limited partnerships report their investments at fair value. Changes in the fair value of the investments are reflected in the net income of the partnerships. Accordingly, a significant portion of the income reported by the Company from partnerships accounted for under the equity method results from unrealized appreciation in the investments of the partnerships. The limited partnerships in which the Company has invested are partnerships, which invest in the equity of private companies, generally in the form of common stock. These partnerships will generally hold such equity until the underlying company issues its securities to the public through an initial public offering, or the equity is purchased by other public companies through exchange of stock. At that time or thereafter, at the general partners' discretion, the partnership will generally distribute the underlying publicly traded common stock to its partners. Upon distribution, the Company will record the common stock received at fair value, reverse the carrying value of the corresponding limited partnership investment, and record as investment income any excess of the fair value of the common stock distributed over the carrying value of the limited partnership investment. Accordingly, certain of the common stocks owned by the Company at March 31, 2000 and December 31, 1999 were acquired through distributions from the Company's investments in limited partnership interests. However, it has been the Company's practice to sell such positions shortly after such distributions occur. 44 46 The following table sets forth the carrying value of the Company's investments in limited partnership interests sorted by the basis upon which the Company accounts for such investments, as well as the amount of such investments attributable to the partnerships' ownership of public and private common stock at March 31, 2000 and December 31, 1999:
CARRYING VALUE AT ------------------------- MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) EQUITY METHOD Public common stock....................................... $124.3 $ 57.6 Private common stock...................................... 59.0 69.3 ------ ------ Sub Total.............................................. 183.3 126.9 COST METHOD Public common stock....................................... 46.6 40.8 Private common stock...................................... 74.1 74.9 ------ ------ Sub Total.............................................. 120.7 115.7 Total Limited Partnership Interests.................... $304.0 $242.6 ====== ======
At March 31, 2000, and December 31, 1999, the Company had investments in approximately 53 and 50 different limited partnerships which represented 2.8% and 2.2%, respectively, of the Company's general account invested assets. Investment results for the portfolio are dependent upon, among other things, general market conditions for initial and secondary offerings of common stock. For the three month period ended March 31, 2000 and March 31, 1999, investment income from equity limited partnership interests (which is comprised primarily of the Company's pro rata share of income reported by partnerships accounted for under the equity method and income recognized upon distribution for partnership investments accounted for under the cost method) was approximately $165.8 million and $12.9 million, respectively, representing 47.1% and 6.8% respectively, of the net investment income for such periods. There can be no assurance that the recent level of investment income and returns achieved on limited partnership investments can be sustained in the future, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations. INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of the end of each period are shown in the table below and are reflected in the corresponding asset values discussed above. CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Fixed maturities............................................ $ 13.3 $ 19.2 Equity securities........................................... 4.5 4.7 Mortgages................................................... 26.3 26.3 Real estate(1).............................................. 73.2 73.2 ------ ------ Total.................................................. $117.3 $123.4 ====== ======
- --------------- (1) Includes $48.0 million and $48.0 million as of March 31, 2000 and December 31, 1999, respectively, relating to impairments taken upon foreclosure of mortgage loans. 45 47 CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Mortgages................................................... $35.2 $37.3 Real estate................................................. 21.2 22.0 ----- ----- Total.................................................. $56.4 $59.3 ===== =====
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF AS OF MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ ($ IN MILLIONS) Fixed maturities............................................ $ 13.3 $ 19.2 Equity securities........................................... 4.5 4.7 Mortgages................................................... 61.5 63.6 Real estate................................................. 94.4 95.2 ------ ------ Total.................................................. $173.7 $182.7 ====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to the Company's 1999 Annual Report on Form 10-K for a description of the Company's exposures to market risk, as well as the Company's objectives, policies and strategies relating to the management of such risks. The relative sensitivity to changes in fair value from interest rates and equity prices at March 31, 2000 is not materially different from that presented in the Company's 1999 Annual Report on Form 10-K at December 31, 1999. 46 48 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Since late 1995 a number of purported class actions were 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 from the early 1980s through the mid 1990s. Although the claims asserted in each case are not identical, they seek substantially the same relief under essentially the same theories of recovery (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), 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 the 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 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 judgment on all counts of the complaint. All of the other putative class actions have been consolidated and transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of Massachusetts, 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 judgment and dismissed all claims filed in the Goshen case against the Company on the merits. 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 to defend itself vigorously against the sole remaining claim. There can be no assurance that the present litigation relating to sales practices will not have a material adverse effect on the Company. On March 27, 2000, the MONY Group and MONY Life Insurance Company were served with a complaint in an action entitled Calvin Chatlos, M.D. and Alvin H. Clement, On Behalf of Themselves And All Others Similarly Situated v. The MONY Life Insurance Company, The MONY Group Inc., And Neil Levin, Superintendent, New York Insurance Department, filed in the Supreme Court of the State of New York, County of New York. The action purports to be a class action on behalf of all persons or entities who had an ownership interest in one or more in-force life insurance policies issued by MONY Life Insurance Company as of November 16, 1998. Plaintiffs seek a declaratory judgment that the New York Superintendent of Insurance and the Company violated Section 7312 of the New York Insurance Law in connection with its demutualization. Plaintiffs also allege that the Company breached its contractual obligations and alleged fiduciary duties to its policyholders in connection with the demutualization. Plaintiffs seek damages against the Company for wrongfully denying them a fair and equitable amount for their membership interests. The Company believes that the claims are without merit and intends to defend itself vigorously. In addition to the foregoing, from time to time the Company is a 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. 47 49 ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company filed a report in Form 8-K on March 3, 2000 announcing fourth quarter 1999 financial results and the sale and issuance of $300 million face amount of 8.35% Senior Notes due in 2010. 48 50 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MONY GROUP INC. By: /s/ RICHARD DADDARIO ------------------------------------ Richard Daddario Executive Vice President and Chief Financial Officer (Authorized Signatory and Principal Financial Officer) Date: May 12, 2000 By: /s/ LARRY COHEN ------------------------------------ Larry Cohen Vice President and Controller (Principal Accounting Officer) Date: May 12, 2000 S-1 EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET AND STATEMENTS OF INCOME AND COMPREHENSIVE INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH MONY GROUP INC AND SUBSIDIARIES FORM 10-Q FOR THREE MONTHS ENDED 3-31-00. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 3,090 0 0 518 1,335 357 5,428 295 491 593 24,872 968 0 117 1,899 311 0 0 0 1,898 24,872 79 255 21 80 39 20 137 212 74 138 0 37 0 101 2.15 2.12 0 0 0 0 0 0 0 consists of amounts due from reinsures on paid and unpaid losses consists of other operating costs and expenses consists of long-term debt only includes premiums and universal life and investment-type product policy
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