-----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, DHugXtnRi432G3LlCtVtvltdRUzVzRXCgmYVjJKhmT497yE4raf45HY0jXoeUMtm 8vbADq2F1JXX6PiUmNl3Aw== 0000950123-99-007733.txt : 19990817 0000950123-99-007733.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950123-99-007733 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692404 BUSINESS ADDRESS: STREET 1: 1740 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 THE 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 JUNE 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-14603 THE MONY GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 13-3976138 (I.R.S. EMPLOYER 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 July 31, 1999 there were 47,237,950 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 June 30, 1999 and December 31, 1998.................... 3 Unaudited interim condensed consolidated statements of income and comprehensive income for the three-month periods ended June 30, 1999 and 1998...................... 4 Unaudited interim condensed consolidated statements of income and comprehensive income for the six-month periods ended June 30, 1999 and 1998.............................. 5 Unaudited interim condensed consolidated statement of changes in shareholders' equity for the six-month period ended June 30, 1999....................................... 6 Unaudited interim condensed consolidated statements of cash flows for the six-month periods ended June 30, 1999 and 1998...................................................... 7 Notes to unaudited interim condensed consolidated financial statements................................................ 8 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Investments................................................. 42 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk...................................................... 52 PART II OTHER INFORMATION ITEM 1: Legal Proceedings........................................... 53 ITEM 2: Changes in Securities....................................... 54 ITEM 3: Defaults upon Senior Securities............................. 54 ITEM 4: Submission of Matters to a Vote of Security Holders......... 54 ITEM 5: Other Information........................................... 54 ITEM 6: Exhibits and Reports on Form 8-K............................ 54 SIGNATURES........................................................... S-1
1 3 FORWARD-LOOKING STATEMENTS The management of The MONY Group Inc. (the "Company") has made in this report, and from time to time may make in its public filings and press releases as well as in oral presentations and discussions, forward-looking statements concerning the Company's operations, economic performance and financial condition. Forward-looking statements include, among other things, discussions concerning the Company's potential exposure to market risks, as well as statements expressing management's expectations, beliefs, estimates, forecasts, projections and assumptions, as indicated by words such as "believes," "estimates," "intends," "anticipates," "expects," "projects," "should," "probably," "risk," "target," "goals," "objectives," or similar expressions. The Company claims the protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and assumes no duty to update any forward-looking statement. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those anticipated by forward-looking statements due to a number of important factors including those discussed elsewhere in this report and in the Company's 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 recently implemented "tiering" of the Company's career agency sales force, and the ability to attract and retain productive agents; (iii) the Company's ability to control operating expenses; (iv) a successful appeal of the order of the New York Superintendent of Insurance approving the Company's plan of reorganization; (v) a successful appeal of the decision and order of the New York State Appellate Division, First Department, affirming the successful appeal of the decision and order of the New York Supreme Court grant of summary judgement in the case of Goshen v. The Mutual Life Insurance Company of New York; (vi) the cost of defending other litigation and the risk of unanticipated material adverse outcomes in such litigation; (vii) deterioration in the experience of the closed block established in connection with the Company's Demutualization, as hereafter defined; (viii) the performance of the stock markets; (ix) the intensity of competition from other financial institutions; (x) the Company's mortality, morbidity, persistency and claims experience; (xi) the Company's ability to develop, distribute and administer competitive products and services in a timely, cost-effective manner; (xii) the Company's financial and claims paying ratings; (xiii) the effect of changes in laws and regulations affecting the Company's businesses, including changes in tax laws affecting insurance and annuity products; (xiv) market risks related to interest rates, equity prices, derivatives, foreign currency exchange and credit; (xv) the ability of the Company to identify and consummate on successful terms any future acquisitions, and to successfully integrate acquired businesses with minimal disruption and (xvi) the risks associated with Year 2000 non-compliance by the Company and third-parties (including vendors and suppliers, reinsurers and others doing business with the Company), unanticipated costs associated with Year 2000 compliance due to, among other things the inability to locate, correct and successfully test all relevant computer code according to schedule, the continued availability of resources including personnel and timely and accurate responses and corrections by third parties. 2 4 ITEM 1: THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
JUNE 30, DECEMBER 31, 1999 1998 --------- ------------ ($ IN MILLIONS) ASSETS Investments: Fixed maturity securities available-for-sale, at fair value.................................................. $ 3,037.0 $ 3,132.0 Equity securities available-for-sale, at fair value....... 453.8 457.2 Mortgage loans on real estate............................. 1,149.6 988.3 Policy loans.............................................. 63.7 61.1 Real estate to be disposed of............................. 322.6 312.9 Real estate held for investment........................... 142.8 321.3 Other invested assets..................................... 43.4 40.7 --------- --------- 5,212.9 5,313.5 Cash and cash equivalents................................... 331.4 329.1 Accrued investment income................................... 70.5 68.9 Amounts due from reinsurers................................. 479.9 475.9 Deferred policy acquisition costs........................... 500.0 439.7 Other assets................................................ 384.2 325.6 Assets transferred in Group Pension Transaction (Note 4).... 5,337.1 5,751.8 Separate account assets..................................... 6,372.4 6,090.3 Closed Block assets (Note 6)................................ 6,125.6 6,161.2 --------- --------- Total assets...................................... $24,814.0 $24,956.0 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Future policy benefits...................................... $ 956.8 $ 960.0 Policyholders' account balances............................. 1,974.6 1,991.7 Other policyholders' liabilities............................ 96.3 104.8 Amounts due to reinsurers................................... 93.8 93.4 Accounts payable and other liabilities...................... 496.8 526.7 Short-term debt............................................. 97.1 -- Long-term debt.............................................. 255.5 375.4 Current federal income taxes payable........................ 138.0 79.1 Liabilities transferred in Group Pension Transaction (Note 4)........................................................ 5,334.2 5,678.5 Separate account liabilities................................ 6,358.4 6,078.1 Closed Block liabilities (Note 6)........................... 7,249.1 7,290.7 --------- --------- Total liabilities................................. 23,050.6 23,178.4 Commitments and contingencies (Note 5) Common stock, $0.01 par value; 400 million shares authorized; 47.2 million shares issued and outstanding.... 0.5 0.5 Capital in excess of par.................................... 1,615.9 1,615.9 Retained earnings........................................... 106.8 8.8 Accumulated other comprehensive income...................... 40.2 152.4 --------- --------- Total shareholders' equity........................ 1,763.4 1,777.6 --------- --------- Total liabilities and shareholders' equity........ $24,814.0 $24,956.0 ========= =========
See accompanying notes to unaudited interim condensed consolidated financial statements. 3 5 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
1999 1998 ------------ ------------ ($ IN MILLIONS, EXCEPT SHARE DATA AND PER SHARE AMOUNTS) REVENUES: Premiums.................................................... $ 20.9 $ 177.4 Universal life and investment-type product policy fees...... 52.5 37.7 Net investment income....................................... 103.2 175.5 Net realized gains on investment............................ 41.7 100.1 Group Pension Profits (Note 4).............................. 12.0 13.1 Other income................................................ 49.7 43.3 Contribution from the Closed Block (Note 6)................. 11.4 -- ---------- ---------- 291.4 547.1 ---------- ---------- BENEFITS AND EXPENSES: Benefits to policyholders................................... 33.5 193.2 Interest credited to policyholders' account balances........ 26.4 28.4 Amortization of deferred policy acquisition costs........... 15.4 37.9 Dividends to policyholders.................................. 0.7 53.8 Other operating costs and expenses.......................... 123.2 117.6 ---------- ---------- 199.2 430.9 ---------- ---------- Income before income taxes and extraordinary item........... 92.2 116.2 Income tax expense.......................................... 30.8 41.5 ---------- ---------- Income before extraordinary item............................ 61.4 74.7 ---------- ---------- Extraordinary item -- demutualization expenses, net......... -- 4.6 ---------- ---------- Net income.................................................. 61.4 70.1 Other comprehensive (loss)/income, net...................... (57.1) 10.6 ---------- ---------- Comprehensive income........................................ $ 4.3 $ 80.7 ========== ========== PER SHARE DATA: Income before extraordinary item/Net income................. $ 61.4 ========== Basic earnings per share.................................... $ 1.30 ========== Diluted earnings per share.................................. $ 1.29 ========== SHARE DATA: Weighted-average shares used in basic per share calculation............................................... 47,237,950 Plus: incremental shares from assumed conversion of warrants.................................................. 473,925 ---------- Weighted-average shares used in diluted per share calculations.............................................. 47,711,875 ==========
See accompanying notes to unaudited interim condensed consolidated financial statements. 4 6 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
1999 1998 ------------ ------------ ($ IN MILLIONS, EXCEPT SHARE DATA AND PER SHARE AMOUNTS) REVENUES: Premiums.................................................... $ 44.2 $ 353.8 Universal life and investment-type product policy fees...... 97.9 74.3 Net investment income....................................... 198.0 357.7 Net realized gains on investment............................ 70.6 157.6 Group Pension Profits (Note 4).............................. 26.3 22.7 Other income................................................ 91.7 78.4 Contribution from the Closed Block (Note 6)................. 21.9 -- ---------- ---------- 550.6 1,044.5 ---------- ---------- BENEFITS AND EXPENSES: Benefits to policyholders................................... 73.4 379.7 Interest credited to policyholders' account balances........ 54.3 58.7 Amortization of deferred policy acquisition costs........... 32.2 70.8 Dividends to policyholders.................................. 0.7 108.4 Other operating costs and expenses.......................... 227.0 227.0 ---------- ---------- 387.6 844.6 ---------- ---------- Income before income taxes and extraordinary item........... 163.0 199.9 Income tax expense.......................................... 55.6 71.8 ---------- ---------- Income before extraordinary item............................ 107.4 128.1 ---------- ---------- Extraordinary item -- demutualization expenses, net......... -- 9.7 ---------- ---------- Net income.................................................. 107.4 118.4 Other comprehensive (loss)/income, net...................... (112.2) 9.9 ---------- ---------- Comprehensive (loss)/income................................. $ (4.8) $ 128.3 ---------- ---------- PER SHARE DATA: Income before extraordinary item/Net income................. $ 107.4 ========== Basic earnings per share.................................... $ 2.27 ========== Diluted earnings per share.................................. $ 2.25 ========== SHARE DATA: Weighted-average shares used in basic per share calculation............................................... 47,237,950 Plus: incremental shares from assumed conversion of warrants.................................................. 432,851 ---------- Weighted-average shares used in diluted per share calculations.............................................. 47,670,801 ==========
See accompanying notes to unaudited interim condensed consolidated financial statements. 5 7 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
ACCUMULATED CAPITAL OTHER TOTAL COMMON IN EXCESS RETAINED COMPREHENSIVE SHAREHOLDERS' STOCK OF PAR EARNINGS INCOME EQUITY ------ --------- -------- ------------- ------------- ($ IN MILLIONS) Balance, December 31, 1998......... $0.5 $1,615.9 $ 8.8 $152.4 $1,777.6 Dividends.......................... (9.4) (9.4) Comprehensive loss Net income....................... 107.4 107.4 Other comprehensive loss: Unrealized gains on investments, net of unrealized losses, reclassification adjustments, and taxes...... (112.2) (112.2) -------- Comprehensive loss................. (4.8) ---- -------- ------ ------ -------- Balance, June 30, 1999............. $0.5 $1,615.9 $106.8 $ 40.2 $1,763.4 ==== ======== ====== ====== ========
See accompanying notes to unaudited interim condensed consolidated financial statements. 6 8 THE MONY GROUP INC. AND SUBSIDIARIES UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
1999 1998 ------- ------- ($ IN MILLIONS) NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 75.8 $ 91.6 CASH FLOWS FROM INVESTING ACTIVITIES: Sales, maturities or repayment of: Fixed maturity securities................................. 344.7 533.9 Equity securities......................................... 126.9 100.5 Mortgage loans on real estate............................. 74.9 152.0 Real estate............................................... 169.4 424.9 Other invested assets..................................... 4.1 45.5 Acquisitions of investments: Fixed maturity securities................................. (381.6) (826.5) Equity securities......................................... (68.4) (104.6) Mortgage loans on real estate............................. (231.5) (171.9) Real estate............................................... (15.2) (19.1) Other invested assets..................................... (2.4) (0.4) Policy loans, net......................................... (22.5) (5.4) Other, net................................................ (0.6) 57.0 Property, plant and equipment, net........................ (27.6) (4.0) ------- ------- Net cash (used in)/provided by investing activities......... (29.8) 181.9 CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt.......................................... (29.8) (1.8) Receipts from annuity and universal life policies credited to policyholders' account balances........................ 831.6 655.3 Return of policyholders' account balances on annuity and universal life policies................................... (828.0) (748.0) Dividends paid to shareholders.............................. (9.4) -- Payments to eligible policyholders.......................... (8.1) -- ------- ------- Net cash used in financing activities....................... (43.7) (94.5) ------- ------- Net increase in cash and cash equivalents................... 2.3 179.0 Cash and cash equivalents, beginning of period.............. 329.1 313.4 ------- ------- Cash and cash equivalents, end of period.................... $ 331.4 $ 492.4 ======= =======
See accompanying notes to unaudited interim condensed consolidated financial statements 7 9 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"), 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 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. The Company distributes its products primarily through its career agency sales force. 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. On December 31, 1998, MONY Life acquired Sagamore Financial Corporation ("Sagamore"), the parent company of U.S. Financial Life Insurance Company ("USFL") for a purchase price of $48 million. USFL is a special-risk carrier based in Ohio, which distributes its products in 41 states through brokerage general agencies. 2. BASIS OF PRESENTATION: The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with generally accepted accounting principles ("GAAP") which require 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, 1998, which are presented in the Company's 1998 Report on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 1999 are 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. 8 10 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, since substantially all the mutual funds sold by the Company are offered through, and in conjunction with, 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 individual life insurance products, including; permanent and last survivor whole life, term life, universal life, variable universal life, group life, and group universal life. 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), (ii) the Closed Block assets and liabilities, as well as the Contribution from the Closed Block which is reflected in "Other Income" in the table below (see Note 6), and (iii) the Company's disability income insurance business. Products comprising the accumulation products segment primarily include fixed annuities, non-participating interest sensitive products (including single premium deferred annuities, flexible premium deferred annuities, immediate annuities, and flexible premium variable 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, and 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 June 30, 1999 and December 31, 1998 and for the three-month and six-month periods ended June 30, 1999 and 1998, 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. The Company does not allocate certain nonrecurring items to the segments (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 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. Amounts reported as "unallocated amounts" in the table below 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. 9 11 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEGMENT SUMMARY FINANCIAL INFORMATION
FOR THE THREE-MONTH FOR THE SIX-MONTH PERIOD PERIOD ENDED JUNE 30, ENDED JUNE 30, -------------------- ------------------ 1999 1998 1999 1998 -------- -------- ------- ------- ($ IN MILLIONS) PREMIUMS: Protection Products(1).................................. $ 18.8 $173.4 $ 39.3 $343.8 Accumulation Products................................... 0.4 1.3 0.8 1.8 Other Products.......................................... 1.7 2.7 4.1 8.2 ------ ------ ------ ------ $ 20.9 $177.4 $ 44.2 $353.8 ====== ====== ====== ====== UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES: Protection Products..................................... $ 33.8 $ 20.8 $ 61.6 $ 41.8 Accumulation Products................................... 18.8 16.6 36.0 31.6 Other Products.......................................... (0.1) 0.3 0.3 0.9 ------ ------ ------ ------ $ 52.5 $ 37.7 $ 97.9 $ 74.3 ====== ====== ====== ====== NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS: Protection Products(2).................................. $ 96.0 $212.4 $178.0 $397.0 Accumulation Products................................... 32.6 41.6 61.5 77.8 Other Products.......................................... 17.0 20.4 27.9 38.9 Unallocated amounts..................................... (0.7) 1.2 1.2 1.6 ------ ------ ------ ------ $144.9 $275.6 $268.6 $515.3 ====== ====== ====== ====== OTHER INCOME: Protection Products(3)(9)............................... $ 27.2 $ 16.1 $ 55.3 $ 31.2 Accumulation Products................................... 23.1 19.3 44.0 34.6 Other Products.......................................... 21.7 19.6 38.5 32.4 Unallocated amounts..................................... 1.1 1.4 2.1 2.9 ------ ------ ------ ------ $ 73.1 $ 56.4 $139.9 $101.1 ====== ====== ====== ====== AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS: Protection Products(13)................................. $ 8.2 $ 29.3 $ 17.3 $ 55.4 Accumulation Products................................... 7.2 8.6 14.9 15.4 ------ ------ ------ ------ $ 15.4 $ 37.9 $ 32.2 $ 70.8 ====== ====== ====== ====== BENEFITS TO POLICYHOLDERS:(4) Protection Products..................................... $ 33.6 $186.8 $ 73.7 $370.5 Accumulation Products................................... 19.0 20.5 37.3 40.6 Other Products.......................................... 7.3 10.2 14.4 22.6 Unallocated amounts..................................... -- 4.1 2.3 4.7 ------ ------ ------ ------ $ 59.9 $221.6 $127.7 $438.4 ====== ====== ====== ======
10 12 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE-MONTH FOR THE SIX-MONTH PERIOD PERIOD ENDED JUNE 30, ENDED JUNE 30, -------------------- ------------------ 1999 1998 1999 1998 -------- -------- ------- ------- ($ IN MILLIONS) DIVIDENDS TO POLICYHOLDERS: Protection Products..................................... (0.1) 52.9 (0.8) 106.8 Accumulation Products................................... 0.5 0.4 0.9 0.9 Other Products.......................................... 0.3 0.5 0.6 0.7 ------ ------ ------ ------ $ 0.7 $ 53.8 $ 0.7 $108.4 ====== ====== ====== ====== OTHER OPERATING COSTS AND EXPENSES: Protection Products..................................... $ 70.7 $ 71.0 $130.8 $144.4 Accumulation Products................................... 27.8 20.3 51.2 38.9 Other Products.......................................... 24.7 26.3 45.0 43.7 ------ ------ ------ ------ $123.2 $117.6 $227.0 $227.0 ====== ====== ====== ====== INCOME BEFORE INCOME TAXES: Protection Products..................................... $ 63.4 $ 82.7 $113.2 $136.7 Accumulation Products................................... 20.4 29.0 38.0 50.0 Other Products.......................................... 8.0 6.0 10.8 13.4 Unallocated amounts..................................... 0.4 (1.5) 1.0 (0.2) ------ ------ ------ ------ $ 92.2 $116.2 $163.0 $199.9 ====== ====== ====== ======
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 --------- ------------ ASSETS:(7) Protection Products(5)(10).................................. $16,142.7 $16,578.7 Accumulation Products....................................... 6,243.8 6,171.3 Other Products.............................................. 1,233.5 1,256.2 Unallocated amounts......................................... 1,194.0 949.8 --------- --------- $24,814.0 $24,956.0 ========= ========= DEFERRED POLICY ACQUISITION COSTS: Protection Products(11)..................................... $ 1,009.4 $ 857.6 Accumulation Products....................................... 149.3 136.7 --------- --------- $ 1,158.7 $ 994.3 ========= ========= POLICYHOLDERS' LIABILITIES: Protection Products(6)(12).................................. $10,189.0 $10,267.0 Accumulation Products....................................... 1,287.4 1,318.6 Other Products.............................................. 442.8 455.6 Unallocated amounts......................................... 15.4 17.4 --------- --------- $11,934.6 $12,058.6 ========= =========
11 13 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 --------- ------------ SEPARATE ACCOUNT LIABILITIES:(7) Protection Products(8)...................................... $ 3,891.1 $ 4,056.8 Accumulation Products....................................... 4,582.7 4,452.6 Other Products.............................................. 644.7 621.9 Unallocated amounts......................................... 819.1 776.4 --------- --------- $ 9,937.6 $ 9,907.7 ========= =========
- --------------- (1) Excludes $158.0 million and $304.4 million of revenues in individual life related to the Closed Block for the three-month and six-month period ended June 30, 1999, respectively. (2) Excludes net investment income and net realized capital gains on investments in individual life related to the Closed Block of $94.3 million and $191.9 million for the three-month and six-month period ended June 30, 1999, respectively. (3) Includes Group Pension Profits of $12.0 million and $13.1 million for the three-month period ended June 30, 1999 and 1998, respectively, and $26.3 million and $22.7 million for the six-month period ended June 30, 1999 and 1998, respectively. (4) Includes interest credited to policyholders' account balances. Excludes $169.2 million and $318.4 million of benefits and interest credited to policyholders' account balances in individual life in the Closed Block for the three-month and six-month period ended June 30, 1999, respectively. (5) Includes assets transferred in the Group Pension Transaction of $5,337.1 million and $5,751.8 million as of June 30, 1999 and December 31, 1998, respectively. (6) Includes policyholder liabilities transferred in the Group Pension Transaction of $1,732.0 million and $1,824.9 million as of June 30, 1999 and December 31, 1998, respectively. (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 $3,579.2 million and $3,829.6 million as of June 30, 1999 and December 31, 1998 respectively. (9) Includes $11.4 million and $21.9 relating to the Contribution from the Closed Block for the three-month and six-month period ended June 30, 1999. (10) Includes Closed Block assets of $6,125.6 million and $6,161.2 million as of June 30, 1999 and December 31, 1998, respectively (see Note 6). (11) Includes deferred policy acquisition costs allocated to the Closed Block of $658.7 million and $554.6 million as of June 30, 1999 and December 31, 1998, respectively (see Note 6). (12) Includes Closed Block policyholders' liabilities of $7,174.9 million and $7,177.1 million as of June 30, 1998 and December 31, 1998, respectively (see Note 6) (13) Excludes $17.2 million and $35.1 million of amortization of deferred policy acquisition costs related to the Closed Block for the three-month and six-month period ended June 30, 1999. 12 14 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of premiums and universal life and investment-type product policy fees by product for the three-month and six-month periods ended June 30, 1999 and 1998, respectively.
THREE-MONTH SIX-MONTH PERIOD PERIOD ENDED JUNE 30, ENDED JUNE 30, --------------- --------------- 1999 1998 1999 1998 ----- ------ ----- ------ ($ IN MILLIONS) PREMIUMS: Individual life(1)................................ $18.6 $173.4 $39.0 $343.1 Disability income insurance....................... 0.2 0.3 0.7 Group insurance................................... 2.0 2.8 4.7 5.7 Other............................................. 0.1 1.2 0.2 4.3 ----- ------ ----- ------ Total................................... $20.9 $177.4 $44.2 $353.8 ===== ====== ===== ====== UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES: Universal life.................................... $19.1 $ 11.2 $36.7 $ 23.1 Variable universal life........................... 11.0 7.1 18.7 13.5 Group universal life.............................. 3.7 2.5 6.2 5.2 Individual variable annuities..................... 18.7 16.3 35.7 31.2 Individual fixed annuities........................ -- 0.6 0.6 1.3 ----- ------ ----- ------ Total................................... $52.5 $ 37.7 $97.9 $ 74.3 ===== ====== ===== ======
- --------------- (1) Excludes revenues from individual life in the Closed Block of $158.0 million and $304.4 million for the three-month and six-month periods ended June 30, 1999. 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 MONY transferred a substantial portion of its group pension business (hereafter referred to as the "Group Pension Transaction"), including its full service group pension contracts, consisting primarily of tax-deferred annuities, 401(k) and managed funds lines of business, 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. The transferred group pension business consisted of approximately $6.4 billion in group pension assets and liabilities, which were comprised of approximately $2.8 billion of general account assets and liabilities, and $3.6 billion of separate account assets and liabilities. The transfer was initially structured in the form of indemnity reinsurance, however, the Agreement contemplated that the transfer would be restructured in the form of assumption reinsurance as soon as practicable following the consent of contractholders to assumption of their contracts. Substantially all of the contractholders consented to the assumption of their contracts by AUSA. In addition, 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 13 15 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes (hereinafter referred to as the "Notes"). The Series A Notes pay interest at 6.44% per annum and the Series B Notes pay interest at 6.24% 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. MONY retained all the profits resulting from the $6.4 billion of deposits on contracts in force and transferred to AEGON on the Group Pension Transaction Date (the "Existing Deposits"). As consideration for the transaction, MONY remunerated AEGON by transferring to AUSA (i) the intangible value associated with MONY's group pension franchise, including established customer relationships, (ii) rights to substantially all the profits associated with any new deposits made after the Group Pension Transaction Date on the contracts which were in force and transferred by MONY to AUSA on the Group Pension Transaction Date, and (iii) rights to substantially all the profits on any new business generated subsequent to the Group Pension Transaction Date. In accordance with GAAP, the transaction did not constitute a sale because MONY retained substantially all the risks and rewards associated with 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 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. 14 16 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 JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) ASSETS: General Account Fixed maturity securities: available for sale, at estimated fair value (amortized cost: $1,539.9 and $1,564.6, respectively)............................... $1,546.4 $1,620.2 Mortgage loans on real estate.......................... 134.3 214.8 Real estate held for investment........................ 34.8 37.9 Cash and cash equivalents.............................. 15.8 21.7 Accrued investment income.............................. 26.6 27.6 -------- -------- Total general account assets........................... 1,757.9 1,922.2 Separate account assets................................... 3,579.2 3,829.6 -------- -------- Total assets...................................... $5,337.1 $5,751.8 ======== ======== LIABILITIES: General Account(1) Policyholders' account balances........................ $1,732.0 $1,824.9 Other liabilities...................................... 23.0 24.0 -------- -------- Total general account liabilities................. 1,755.0 1,848.9 Separate account liabilities(2)........................... 3,579.2 3,829.6 -------- -------- Total liabilities................................. $5,334.2 $5,678.5 ======== ========
- --------------- (1) Includes general account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $117.3 million and $121.7 million as of June 30, 1999 and December 31, 1998, respectively. (2) Includes separate account liabilities transferred in connection with the Group Pension Transaction pursuant to indemnity reinsurance of $34.0 million and $33.3 million as of June 30, 1999 and December 31, 1998, respectively. 15 17 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FOR THE THREE-MONTH SIX-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, JUNE 30, -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- ($ IN MILLIONS) REVENUES: Product policy fees................................. $ 6.0 $ 6.0 $12.1 $11.1 Net investment income............................... 32.5 42.5 66.6 80.6 Net realized gains (losses) on investments.......... 1.0 (1.9) 4.3 (2.4) ----- ----- ----- ----- Total revenues............................ 39.5 46.6 83.0 89.3 BENEFITS AND EXPENSES: Interest credited to policyholders' account balances.......................................... 23.0 27.6 45.5 55.7 Other operating costs and expenses.................. 4.5 5.9 11.2 10.9 ----- ----- ----- ----- Total benefits and expenses............... 27.5 33.5 56.7 66.6 ----- ----- ----- ----- Group Pension Profits..................... $12.0 $13.1 $26.3 $22.7 ===== ===== ===== =====
5. COMMITMENTS AND CONTINGENCIES: In late 1995 and thereafter, 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/or universal life insurance policies from the early 1980s to 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/or violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases (including the Goshen case discussed below) seek primary 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/or 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 seek compensatory damages in unspecified amounts. The Company has answered the complaints in each action (except for one action 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 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 (with one exception discussed below) 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. The Massachusetts District Court in the Multidistrict Litigation has entered an order essentially holding all of the federal cases in abeyance pending the action 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 March 18, 1999 the order by the New York State Supreme Court was affirmed by the New York State Appellate Division, First Department. On June 8, 1999, plaintiffs obtained leave from the New York State Court of Appeals to appeal the Appellate Division decision. Briefs will be filed during the summer and early fall, and 16 18 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) oral argument before the Court of Appeals will take place on October 14, 1999. All actions before the United States District Court for the District of Massachusetts are still pending. In addition, on or about February 25, 1999, a purported class action was filed against MONY Life Insurance Company of America ("MLOA"), a subsidiary of MONY Life in Kentucky state court covering policyholders who purchased individual universal life insurance policies from MLOA after January 1, 1988 claiming breach of contract and violations of the Kentucky Consumer Protection Act. On March 26, 1999, MLOA removed that action to the United States District Court for the Eastern District of Kentucky, requested the Judicial Panel on Multidistrict Litigation to transfer the action to the Multidistrict Litigation in the District of Massachusetts and sought a stay of further proceedings in the Kentucky District Court pending a determination on multidistrict transfer. On April 19, 1999, the Judicial Panel entered a conditional transfer order transferring the case to the Federal District Court in Massachusetts. Plaintiffs have opposed the transfer, and oral argument on MLOA's transfer motion took place before the Judicial Panel on July 22, 1999. On April 20, 1999, plaintiffs moved to remand the case to the Kentucky State Court. MLOA has opposed the motion. On June 18, 1999, the Federal District Court denied MLOA's motion for a stay and preliminary discovery has been initiated in the case. 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. With respect to all of the other aforementioned pending litigation, the Company recorded a provision, which is reflected in Other Operating Costs and Expenses, of $0.4 million and $11.3 million during the six-month period ended June 30, 1999 and 1998, respectively. 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 June 30, 1999, 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 aggregating $150.0 million, with scheduled renewal dates in September 1999 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 June 30, 1999. At June 30, 1999, the Company had commitments to issue $23.9 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from approximately 7.13% to 8.25%. In addition, the Company had commitments to issue $95.2 million of fixed rate commercial mortgage loans with interest rates ranging from 7.00% to 8.09%. The Company also had commitments outstanding to purchase $86.1 million of private fixed maturity securities as of June 30, 1999 with interest rates ranging from 7.26% to 9.32%. At June 30, 1999, the Company had commitments to contribute capital to its equity partnership investments of $112.9 million. On July 29, 1999, the MONY Group's Board of Directors approved a quarterly dividend of $0.10 per share. The dividend will be payable September 24, 1999 to shareholders of record on September 3, 1999. 17 19 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CLOSED BLOCK: 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. The assets and liabilities allocated to the Closed Block are 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. In determining the amount of assets to be allocated to the Closed Block, management made certain estimates and assumptions regarding the expected cash flows from the Closed Block assets and the Closed Block Business, including estimates and assumptions regarding investment cash flows, mortality, persistency, and expenses which are to be funded in the Closed Block. The estimated net cash flows assumed in determining the Closed Block funding consisted of premiums from policies included in the Closed Block, investment income from Closed Block assets, proceeds from maturities and dispositions of Closed Block assets, less benefits paid on Closed Block policies, certain expenses (including taxes) funded in the Closed Block, and dividends on Closed Block policies based on current payable dividend scales. 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. 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 will be 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 18 20 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, are not funded in the Closed Block. These 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, and reflect certain adjustments made to revise estimates made in connection with the establishment of the Closed Block which resulted in a net increase to the Closed Block deficit:
JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) ASSETS: Fixed maturity securities: available for sale, at estimated fair value (amortized cost; $3,492.8 and $3,423.0, respectively)................................ $3,474.8 $3,574.0 Mortgage loans on real estate............................. 458.4 431.7 Policy loans.............................................. 1,205.5 1,208.4 Real estate held for investment........................... 21.2 -- Cash and cash equivalents................................. 73.6 134.4 Premiums receivable....................................... 10.6 16.8 Deferred policy acquisition costs......................... 658.7 554.6 Other assets.............................................. 222.8 241.3 -------- -------- Total Closed Block assets......................... $6,125.6 $6,161.2 ======== ======== LIABILITIES: Future policy benefits.................................... $6,718.6 $6,715.6 Policyholders' account balances........................... 295.2 298.0 Other policyholders' liabilities.......................... 161.1 163.5 Other liabilities......................................... 74.2 113.6 -------- -------- Total Closed Block liabilities.................... $7,249.1 $7,290.7 ======== ========
19 21 THE MONY GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTH FOR THE SIX MONTH PERIOD ENDED PERIOD ENDED JUNE 30, 1999 JUNE 30, 1999 ------------------- ----------------- ($ IN MILLIONS) REVENUES: Premiums.......................................... $158.0 $304.4 Investment-type product fees...................... -- -- Net investment income and net realized gains on investments..................................... 94.3 191.9 Other income...................................... 0.3 0.7 ------ ------ Total revenues.......................... 252.6 497.0 BENEFITS AND EXPENSES: Benefits to policyholders......................... 167.0 314.0 Interest credited to policyholders' account balances........................................ 2.2 4.4 Amortization of deferred policy acquisition costs........................................... 17.2 35.1 Dividends to policyholders........................ 52.8 116.4 Other operating costs and expenses................ 2.0 5.2 ------ ------ Total benefits and expenses............. 241.2 475.1 ------ ------ Contribution from Closed Block.................... $ 11.4 $ 21.9 ====== ======
At June 30, 1999 and December 31, 1998, there were no adjustments in the value of fixed maturity securities in the Closed Block deemed to be other than temporary or fixed maturity securities which have been non-income producing for the twelve months preceding such dates. At June 30, 1999 and December 31, 1998, the carrying value of mortgage loans in the Closed Block that were non-income producing for the twelve months preceding such date, were $2.0 million and $0.5 million, respectively. 7. EARLY RETIREMENT PROGRAM On June 30, 1999, the Company announced a voluntary early retirement program for approximately 500 eligible employees. The program is part of an overall company-wide realignment of staff and resources, which may also include the elimination and/or shifting of certain job functions and the addition of employees with new skill sets. The Company anticipates a one-time restructuring charge will be taken in the third quarter of 1999, after the completion of the realignment program. 20 22 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion addresses the consolidated financial condition and results of operations of the Company for the periods indicated. The discussion of the Company's consolidated financial results of operations is based on the results of the Closed Block for the three-month and six-month periods ended June 30, 1999 combined on a line by line basis with the results of operations outside the Closed Block for such period, as further discussed below. This discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements and the related notes to the unaudited interim condensed consolidated financial statements included elsewhere herein and the Company's 1998 Annual Report on Form 10-K. 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 6 to the Unaudited Interim Condensed 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 effects 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 and six-month periods ended June 30, 1999 was $11.4 million and $21.9 million, respectively. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the business in the Closed Block. As a result, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block. 21 23 GROUP PENSION TRANSACTION Management expects that Group Pension Profits will decline in future periods consistent with the continuing run-off of the underlying business until they terminate as of December 31, 2002. For a description of the Group Pension Transaction, the Group Pension Profits and certain summary financial information relating thereto, refer to Note 4 of the unaudited interim condensed consolidated financial statements included herein. For comparability with prior periods, the table below presents the results of operations of the Closed Block for the three-month and six-month periods ended June 30, 1999, combined on a line by line basis with the results of operations outside the Closed Block. In all other respects, the financial information herein is presented in accordance with GAAP unless otherwise noted. Management's Discussion and Analysis, which follows this table, addresses the results of operations of the Company on the aforementioned combined basis unless otherwise noted. RESULTS OF OPERATIONS
FOR THE FOR THE THREE-MONTH PERIOD SIX-MONTH PERIOD ENDED JUNE 30, ENDED JUNE 30, ------------------ -------------------- 1999 1998 1999 1998 ------- ------- -------- -------- ($ IN MILLIONS) REVENUES: Premiums............................................. $178.9 $177.4 $ 348.6 $ 353.8 Universal life and investment-type product policy fees............................................... 52.5 37.7 97.9 74.3 Net investment income................................ 196.1 175.5 384.2 357.7 Net realized gains on investments.................... 43.1 100.1 76.3 157.6 Group Pension Profits................................ 12.0 13.1 26.3 22.7 Other income......................................... 50.0 43.3 92.4 78.4 ------ ------ -------- -------- Total revenues............................. 532.6 547.1 1,025.7 1,044.5 BENEFITS AND EXPENSES: Benefits to policyholders............................ 200.5 193.2 387.4 379.7 Interest credited to policyholders' account balances........................................... 28.6 28.4 58.7 58.7 Amortization of deferred policy acquisition costs.... 32.6 37.9 67.3 70.8 Dividends to policyholders........................... 53.5 53.8 117.1 108.4 Other operating costs and expenses................... 125.2 117.6 232.2 227.0 ------ ------ -------- -------- Total benefits and expenses................ 440.4 430.9 862.7 844.6 ------ ------ -------- -------- Income before income taxes and extraordinary item.... $ 92.2 $116.2 $ 163.0 $ 199.9 ====== ====== ======== ========
Consolidated -- For the Three-month Period Ended June 30, 1999 Compared to the Three-month Period Ended June 30, 1998. Premium revenue was $178.9 million for the three-month period ended June 30, 1999, an increase of $1.5 million, or 0.8% from $177.4 million reported in the comparable prior year period. The increase consisted primarily of $4.3 million of premiums from Sagamore Financial Corporation ("Sagamore"), which was acquired December 31, 1998, (see Notes to the Unaudited Interim Condensed Consolidated Financial Statements included elsewhere herein), and an increase of $1.1 million in single premiums, offset primarily by lower renewal premiums on traditional life business of $2.3 million due to the decrease of such in-force business, and lower premiums of $1.0 million from the run-off businesses. Management believes that the decrease in premium revenues, excluding Sagamore, is consistent with trends in the industry, particularly the continuing shift by consumers from traditional protection products to asset accumulation and retirement income products. 22 24 Universal life and investment-type product policy fees were $52.5 million for the three-month period ended June 30, 1999, an increase of $14.8 million or 39.3% from $37.7 million reported in the comparable prior year period ended June 30, 1998. This increase was primarily the result of fees earned by Sagamore of $5.4 million and higher fees relating to the Company's flexible premium variable annuity ("FPVA"), variable universal life ("VUL") and universal life ("UL") businesses of $2.4 million, $4.6 million and $1.0 million, respectively. The Company reported total fees from its FPVA business during the period of $18.7 million, as compared to $16.3 million reported for the comparable prior year period. The increase was primarily due to higher surrender charges of $2.0 million for the quarter ending June 30, 1999 compared to the comparable prior year period. The average FPVA fund value remained relatively unchanged for the three-month period ended June 30, 1999 as compared to the comparable prior year period, however, FPVA sales decreased to $112.4 million in the second quarter of 1999, as compared to $190.6 million in the second quarter of 1998. Management believes that the decline in sales is primarily due to delays in state regulatory approvals of new products introduced by the Company in connection with its reorganization in November 1998. See "Accumulation Products Segment." The Company reported total fees from its VUL business during the period of $9.7 million, as compared to $5.1 million reported for the comparable period in the prior year. This increase is consistent with the growth of such in force business. The Company reported total fees from its UL business of $15.8 million during the period as compared to $14.8 million during the comparable prior year period. Net investment income was $196.1 million for the three-month period ended June 30, 1999, an increase of $20.6 million, or 11.7%, from $175.5 million reported for the comparable prior year period. The increase in net investment income is primarily due to the combination of higher yields on invested assets (mostly due to higher equity partnerships income), higher average balances, and changes in the mix of invested assets for the three-month period ended June 30, 1999 compared to the prior year period. Higher yields on invested assets for the three-month period ended June 30, 1999 compared to the three month period ended June 30, 1998, resulted in higher investment income of approximately $13.3 million. In addition, an increase in the Company's average total invested assets between the periods of approximately $352.7 million, as well as changes in the mix of invested assets from lower yielding real estate to relatively higher yielding fixed maturity securities, mortgages and equity securities resulted in additional increases in investment income of approximately $7.3 million. The increase in average invested assets was primarily a result of IPO proceeds received, gains on sales of real estate, and positive cash flow from operations and investing activities between the periods. For the three-month period ended June 30, 1999, the Company's average investment in fixed maturity securities (before cumulative unrealized gains or losses), mortgages, equity securities, cash and short term securities increased by approximately $549.5 million, $78.8 million, $74.0 million and $28.8 million, respectively, while real estate and other invested assets (mostly real estate partnerships) decreased by approximately $371.3 million and $26.6 million, respectively. As of June 30, 1999, invested assets were $10,778.4 million (including cumulative unrealized losses of $48.0 million for fixed maturity securities) compared to $10,732.9 million (including cumulative unrealized gains of $211.9 million for fixed maturity securities) for the prior year period. At June 30, 1999, fixed maturity securities, mortgage loans and real estate represented approximately 60.4%, 14.9% and 4.5%, respectively, of total invested assets, as compared to 58.5%, 13.8% and 7.4%, respectively, at June 30, 1998. The annualized yield on the Company's invested assets before and after realized gains/(losses) on investments was 7.2% and 8.8%, respectively, for the three-month periods ended June 30, 1999, as compared to 6.7% and 10.5%, respectively, for the three-month period ended June 30, 1998. Net realized capital gains were $43.1 million for the three-month period ended June 30, 1999, a decrease of $57.0 million, or 56.9%, from $100.1 million for the comparable prior year period. The decrease is due primarily to lower gains on sales of real estate and real estate partnership equities of $46.6 million, lower gains on prepayments and sales of fixed maturity securities and mortgages of $12.5 million, lower allowances for mortgages of $2.2 million, higher losses on other than temporary impairments of fixed maturity securities of $1.9 million, offset with higher sales gains on equity securities of $5.9 million. Gains on the sale of real estate and real estate partnerships were $39.2 million for the three-month period ended June 30, 1999, compared to $85.8 million for the prior year period. Prepayment/sales gains for fixed maturities and mortgages were $2.5 million for the three-month period ended June 30, 1999 compared to $15.0 million for the three-month 23 25 period ended June 30, 1998. Additional provisions for valuation allowances for mortgages were $1.3 million for the three-month period ended June 30, 1999, compared to releases of $0.9 million for the prior year period. Losses on other than temporary impairments on fixed maturity securities were $1.9 million for the three-month period ended June 30, 1999, compared to $0.0 for the prior year period. Gains on sales of equity securities were $6.9 million for the three-month period ended June 30, 1999, compared to $1.0 million for the prior year period. Group Pension Profits were $12.0 million for the three-month period ended June 30, 1999, a decrease of $1.1 million, or 8.4%, from $13.1 million reported in the comparable prior year period. Group Pension Profits consisted primarily of $7.3 million of Group Pension Payments, and a decrease of $4.6 million in mortgage loan valuation allowances, which primarily related to the reversal of a valuation allowance on a mortgage loan sold during the period. In the comparable prior year period, Group Pension Profits consisted of $18.9 million of Group Pension Payments, offset by $5.8 million relating to an increase in the aforementioned valuation allowances. The decrease in Group Pension Payments is consistent with the runoff of Group Pension business. See Notes to Unaudited Interim Condensed Consolidated Financial Statements. 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 $50.0 million for the three-month period ended June 30, 1999, an increase of $6.7 million, or 15.5%, as compared to $43.3 million reported in the comparable prior year period. The increase was primarily the result of higher fees of $4.9 million earned by the Company's mutual fund management operations, and an increase of $2.5 million earned by the Company's broker-dealer operations. During the three-month period ended June 30, 1999, the Company's broker-dealer operations reported commission earnings of $17.5 million, as compared to $15.0 million reported in the comparable prior year period. Also, during the second quarter of 1999, the Company's mutual fund management operations reported $20.8 million in fees from advisory, underwriting and distribution services, as compared to $15.9 million reported in the comparable prior year period, as its assets under management increased to approximately $7.9 billion from $6.8 billion at June 30, 1999 and 1998, respectively. Benefits to policyholders were $200.5 million for the three-month period ended June 30, 1999, an increase of $7.3 million, or 3.8%, as compared to $193.2 million reported in the comparable prior year period. The increase was primarily due to $6.3 million of benefits from Sagamore, an increase of $8.9 million relating to death benefits paid, net of reinsurance, offset by a $2.4 million decrease in benefits relating to the runoff businesses included in the other products segment and a $4.1 million decrease in benefits incurred by the Company's benefits plans. Interest credited to policyholders' account balances was $28.6 million for the three-month period ended June 30, 1999, an increase of $0.2 million, or 0.7%, as compared to $28.4 million reported in the comparable prior year period. The increase primarily resulted from: (i) an increase of $1.1 related to Sagamore, (ii) an increase of $0.6 million in interest crediting on the traditional life business, and (iii) an increase in accumulation products, other than single premium deferred annuities ("SDPA"), of $1.2 million, offset by lower interest crediting during the three-month period ended June 30, 1999, as compared to the comparable prior year period, of $2.8 million relating to SPDA. Declines in SPDA fund balances and modestly lower interest rates contributed to the decline in interest crediting. Amortization of deferred policy acquisition ("DAC") costs was $32.6 million for the three-month period ended June 30, 1999, a decrease of $5.3 million, or 14.0%, as compared to $37.9 million reported in the comparable prior year period. The decrease primarily resulted from: (i) lower amortization of approximately $5.1 million relating to traditional life business due to lower realized gains on investments, (ii) lower amortization of approximately $1.5 million relating to lower earnings in the Company's UL business, and (iii) an increase in future expected profitability of the FPVA business, offset by (i) an increase in amortization of $1.0 million relating the growth of the Company's VUL business and (ii) a $1.3 million decrease relating to term business. 24 26 Other operating costs and expenses were $125.2 million for the three-month period ended June 30, 1999, an increase of $7.6 million, or 6.5%, as compared to $117.6 million reported in the comparable prior year period. The increase primarily consisted of: (i) higher expenses of $7.8 million relating to certain of the Company's benefit plans, (ii) $4.5 million of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, (iii) $3.8 million from Sagamore and (iv) $1.7 million of commission expenses incurred under a new commission structure designed to reward the Company's career agents for policy persistency, offset by, (i) lower Year 2000 costs of $3.6 million, (ii) lower charitable contributions and corporate advertising of $2.7 million, (iii) a $0.7 million savings due to the outsourcing of certain benefit administration functions, (iv) $1.0 million in lower consulting costs, (v) $1.0 million in lower guaranty assessments and, (vi) a $1.2 million recurring savings resulting from a change in benefits under the Company's pension plan. Consolidated -- For the Six-month Period Ended June 30, 1999 Compared to the Six-month Period Ended June 30, 1998 Premium revenue was $ 348.6 million for the six-month period ended June 30, 1999, a decrease of $5.2 million, or 1.5% from $353.8 million reported in the comparable prior year period. The decrease resulted primarily from lower renewal premiums on traditional life business of $15.2 million resulting from the decrease in such in-force business, and lower premiums of $4.1 million from the run-off businesses, offset primarily by $7.6 million of premiums from Sagamore, which was acquired December 31, 1998, (see Notes to Unaudited Interim Condensed Financial Statements included elsewhere herein), $2.2 million of higher single premiums, and higher new premiums of approximately $5.7 million. Management believes that the overall decrease in premium revenue, excluding Sagamore, is consistent with trends in the industry, particularly the continuing shift by consumers from traditional protection products to asset accumulation and retirement income products. Universal life and investment-type product policy fees were $97.9 million for the six-month period ended June 30, 1999, an increase of $23.6 million or 31.8% from $74.3 million reported in the comparable prior year period ended June 30, 1998. This increase was primarily the result of fees earned by Sagamore of $10.3 million, and higher fees relating to the Company's FPVA business, VUL business and UL business of $4.5 million, $7.3 million and $1.8 million, respectively. The Company reported total fees from its FPVA business during the period of $35.7 million, as compared to $31.2 million reported for the comparable prior year period. The increase was primarily due to an increase in surrender charges of $3.4 million from the comparable prior year period. The average FPVA fund value remained relatively unchanged for the three-month period ended June 30, 1999 as compared to the comparable prior year period, however, FPVA sales were $216.5 million in 1999, as compared to $346.5 million in 1998. Management believes that the decline in sales is primarily due to delays in state regulatory approvals of new products introduced by the Company in connection with its reorganization in November 1998. The Company reported total fees from its VUL business during the period of $16.6 million, as compared to $9.3 million reported for the comparable period in the prior year. This increase is consistent with the growth of such in force business. The Company reported total fees from its UL business of $31.4 million during the period as compared to 29.6 million in the prior year period. Net investment income was $384.2 million for the six-month period ended June 30, 1999, an increase of $26.5 million, or 7.4%, from $357.7 million reported for the comparable prior year period. The increase in net investment income was primarily due to the combination of higher yields on invested assets (mostly due to higher equity partnership income) and higher average balances, and changes in the mix of invested assets for the six-month period ended June 30, 1999 compared to the prior year period. Higher yields on invested assets for the six month period ended June 30, 1999 compared to the six month period ended June 30, 1998 resulted in higher investment income of approximately $12.3 million. In addition, an increase in the Company's average total invested assets between the periods of approximately $274.0 million, as well as changes in the mix of invested assets from lower yielding real estate to higher yielding fixed maturity securities, mortgages and equity securities resulted in an additional increases in investment income of approximately $14.2 million. Average total invested assets for the six-month period ended June 30, 1999 increased as compared to the prior 25 27 year period, primarily as a result of IPO proceeds received, gains from sales of real estate, and positive cash flow from operations and investing activities between the periods. For the six-month period ended June 30, 1999, the Company's average investment in fixed maturity securities (before cumulative unrealized gains or losses), mortgages, equity securities, cash and short term securities increased by approximately $397.7 million, $89.0 million, $58.0 million and $45.9 million, respectively, while real estate and other invested assets (mostly real estate partnerships) decreased by approximately $315.3 million and $12.3 million, respectively. As of June 30, 1999, invested assets were $10,778.4 million (including cumulative unrealized losses of $48.0 million for fixed maturity securities) compared to $10,732.9 million (including cumulative unrealized gains of $211.9 million for fixed maturity securities) for the prior year period. At June 30, 1999, fixed maturity securities, mortgage loans and real estate represented approximately 60.4%, 14.9% and 4.5%, respectively, of total invested assets, as compared to 58.5%, 13.8% and 7.4%, respectively, at June 30, 1998. The annualized yield on the Company's invested assets before and after realized gains/(losses) on investments was 7.2% and 8.6%, respectively, for the six-month period ended June 30, 1999, as compared to 6.9% and 9.9%, respectively, for the six-month ended June 30, 1998. Net realized capital gains were $76.3 million for the six-month period ended June 30, 1999, a decrease of $81.3 million, or 51.6%, from $157.6 million for the comparable prior year period. The decrease is due primarily to lower sales gains on real estate and real estate partnership equities of $81.0 million, lower gains on prepayments and sales of fixed maturity securities and mortgages of $9.9 million, higher valuation allowances for real estate added to the held for sale category of $4.4 million, changes in foreign currency translation losses of $2.4 million, higher allowances on mortgages of $1.8 million, higher losses on other than temporary impairments on equity securities of $1.0 million, offset with higher sales gains on equity securities of $21.5 million. Gains on the sale of real estate and real estate partnerships were $122.6 million for the six-month period ended June 30, 1999, compared to $41.6 million for the prior year period. Prepayment/sales gains for fixed maturity securities and mortgages were $7.9 million for the six-month period ended June 30, 1999 compared to $17.8 million for the six-month period ended June 30, 1998. Additional provisions for valuation allowances on real estate held for sale were $6.0 million for the six-month period ended June 30, 1999, compared to $1.6 million for the comparable prior year period. Foreign currency translation losses were $1.8 million for the six-month period ended June 30, 1999 as compared to gains of $0.6 million for the six-month period ended June 30, 1998. Losses for other than temporary impairment on equity securities were $1.6 million for the six-month period ended June 30, 1999, compared to $0.6 million for the prior year period. Gains on sales of equity securities were $39.9 million for the six-month period ended June 30, 1999, compared to $18.5 million for the prior year period. Group Pension Profits were $26.3 million for the six-month period ended June 30, 1999, an increase of $3.6 million, or 15.9%, from $22.7 million reported in the comparable prior year period. Group Pension Profits consisted primarily of $16.4 million of Group Pension Payments, and a decrease of $9.8 million in mortgage loan valuation allowances which primarily related to the reversal of a valuation allowance on a mortgage loan sold during the period. In the comparable prior year period, Group Pension Profits consisted of $27.7 million of Group Pension Payments and $5.0 million relating to an increase in the valuation allowances. The decrease in Group Pension Payments is consistent with the runoff of Group Pension business. See Notes to Unaudited Interim Condensed Consolidated Financial Statements. 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 $92.4 million for the six-month period ended June 30, 1999, an increase of $14.0 million, or 17.9%, as compared to $78.4 million reported in the comparable prior year period. The increase was primarily the result of higher fees of $9.7 million earned by the Company's mutual fund management operations and an increase of $6.5 million earned by the Company's broker-dealer operations. During the six-month period ended June 30, 1999, the Company's broker-dealer operations reported commission earnings of $30.7 million, as compared to $24.2 million reported in the comparable prior year period. Also, during the six-month period ended June 30, 1999, the Company's mutual fund management operations reported $39.2 million in fees from advisory, 26 28 underwriting and distribution services, as compared to $29.5 million reported in the comparable prior year period, as its assets under management increased to approximately $7.9 billion from $6.8 billion at June 30, 1999 and 1998, respectively. Benefits to policyholders were $387.4 million for the six-month period ended June 30, 1999, an increase of $7.7 million, or 2.0%, as compared to $379.7 million reported in the comparable prior year period. The increase primarily due to $10.8 million of benefits from Sagamore, and an increase of $8.8 million relating to death benefits paid, net of reinsurance, offset by an $ 8.1 million decrease in the run-off businesses included in the other segment and a $2.4 million decrease in benefits related to the Company's benefit plans. Interest credited to policyholders' account balances was $58.7 million for the six-month period ended June 30, 1999, as compared to $58.7 million reported in the comparable prior year period. Increases in interest crediting of $2.2 relating to the consolidation of Sagamore, $0.7 million relating to traditional life business and $0.5 million related to other accumulation products were offset primarily by a decrease of $4.2 million in interest crediting related to the SPDA product line. Declines in fund balances and modestly lower interest rates in these products contributed to declines in overall interest crediting. Amortization of DAC was $67.3 million for the six-month period ended June 30, 1999, a decrease of $3.5 million, or 4.9%, as compared to $70.8 million reported in the comparable prior year period. The decrease primarily resulted from: (i) lower amortization of approximately $6.9 million relating to traditional life business due to higher realized gains on investments, (ii) lower amortization of $2.7 million due to lower earnings on the Company's UL business, and (iii) an increase in the future expected profitability of the FPVA business, offset by, (iii) an increase in amortization of approximately $2.5 million relating to the growth of the Company's VUL business and (iv) $2.0 million relating to term life insurance business. Dividends to policyholders of $117.1 million for the six-month period ended June 30, 1999 increased $8.7 million, or 8.0% from $108.4 million reported in the comparable prior year period. Substantially all of the increase relates to the accrual of an additional dividend liability in the Closed Block reflecting results that were more favorable than assumed in the funding of the Closed Block. 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 Close Block policyholders will be increased accordingly. Only the excess of the Closed Block liabilities over the Closed Block assets at the date of the establishment of the Closed Block 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 were $232.2 million for the six-month period ended June 30, 1999, an increase of $5.2 million, or 2.3%, as compared to $227.0 million reported in the comparable prior year period. The increase primarily consisted of: (i) $8.5 million of higher sub-advisory fees and other expenses incurred by the Company's mutual fund management operations, (ii) $7.1 million from Sagamore, (iii) $3.1 million related to the Company's broker-dealer operations, (iv) $3.0 million related to the consolidation and closing of certain agency offices and resultant employee reductions, and (v) a $2.7 million increase in commission expenses incurred under a new commission structure to reward the Company's career agents for policy persistency, offset by: (i) a $1.3 million decrease with respect to certain of the Company's benefit plans, (ii) a $2.4 million recurring savings resulting from a change in benefits under the Company's pension plan (iii) lower Year 2000 costs of $5.2 million, (iv) $3.7 million of lower compensation costs, (v) a $2.7 million decrease in charitable contributions and corporate advertising, (vi) lower guaranty fund assessments of $1.0 million, (vii) a $1.0 million decrease in outside consulting costs, and (vii) $1.3 million in savings due to the outsourcing of certain benefit administration functions. RESULTS OF OPERATIONS BY SEGMENT Presented below is a discussion and analysis of the results of operations of the Company's reportable segments. For a discussion of such segments and a reconciliation of the amounts reported in the segments with the amounts reported in the Unaudited Interim Condensed Consolidated Financial Statements, see Note 3 to the Unaudited Interim Condensed Consolidated Financial Statements. 27 29 The following table presents certain summary financial data relating to the Company's Protection Products segment for the periods indicated. PROTECTION PRODUCTS SEGMENT
FOR THE FOR THE THREE-MONTH PERIOD SIX-MONTH PERIOD ENDED JUNE 30, ENDED JUNE 30, ------------------ ---------------- 1999 1998 1999 1998 ------- ------- ------ ------ ($ IN MILLIONS) REVENUES: Premiums................................................ $176.8 $173.4 $343.7 $343.8 Universal life policy fees.............................. 33.8 20.8 61.6 41.8 Net investment income and net realized gains on investments........................................... 190.3 212.4 369.9 397.0 Group Pension Profits................................... 12.0 13.1 26.3 22.7 Other income............................................ 4.1 3.0 7.8 8.5 ------ ------ ------ ------ 417.0 422.7 809.3 813.8 BENEFITS AND EXPENSES: Benefits to policyholders............................... 191.0 177.1 367.8 349.8 Interest credited to policyholders' account balances.... 11.8 9.7 24.3 20.7 Amortization of deferred policy acquisition costs....... 25.4 29.3 52.4 55.4 Dividends to policyholders.............................. 52.7 52.9 115.6 106.8 Other operating costs and expenses...................... 72.7 71.0 136.0 144.4 ------ ------ ------ ------ 353.6 340.0 696.1 677.1 ------ ------ ------ ------ Income before income taxes.............................. $ 63.4 $ 82.7 $113.2 $136.7 ====== ====== ====== ======
Protection Products Segment -- For the Three-month Period Ended June 30, 1999 Compared to the Three-month Period Ended June 30, 1998 Premium revenue was $176.8 million for the three-month period ended June 30, 1999, an increase of $3.4 million, or 2.0%, from $173.4 million reported in the comparable prior year period. The increase consisted primarily of $4.3 million of premiums from Sagamore which was acquired December 31, 1998, (see Notes to Unaudited Interim Condensed Financial Statements included elsewhere herein), and an increase of $1.1 million in single premiums, offset primarily by lower renewal premiums on traditional life business of $2.3 million due to the decrease of such in-force business. Management believes that the decrease in premium revenue, excluding Sagamore, is consistent with trends in the industry, particularly the continuing shift by consumers from traditional protection products to asset accumulation and retirement income products. Universal life policy fees were $33.8 million for the three-month period ended June 30, 1999, an increase of $13.0 million or 62.5% from $20.8 million reported in the comparable prior year period. This increase was primarily the result of fees earned by Sagamore of $5.4 million and higher fees relating to the Company's VUL and UL business of $4.6 million and $1.0 million, respectively. The Company reported total fees from its VUL business during the period of $9.7 million, as compared to $5.1 million reported for the comparable period in the prior year. This increase is consistent with the growth of such in force business. The Company reported total fees from its UL business of $15.8 million during the period as compared to $14.8 million during the comparable prior year period. Net investment income and net realized gains on investments were $190.3 million for the three-month period ended June 30, 1999, a decrease of $22.1 million, or 10.4%, from $212.4 million reported in the comparable prior year period. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. 28 30 Group Pension Profits were $12.0 million for the three-month period ended June 30, 1999, a decrease of $1.1 million, or 8.4%, from $13.1 million reported in the comparable prior year period. Group Pension Profits consisted primarily of $7.3 million of Group Pension Payments, and a decrease of $4.6 million in mortgage loan valuation allowances, which primarily related to the reversal of a valuation allowance on a mortgage loan sold during the period. In the comparable prior year period, Group Pension Profits consisted of $18.9 million of Group Pension Payments offset by $5.8 million relating to an increase in the aforementioned valuation allowances. The decrease in Group Pension Payments is consistent with the runoff of Group Pension business. See "Notes to Unaudited Interim Condensed Consolidated Financial Statements." Benefits to policyholders were $191.0 million for the three-month period ended June 30, 1999, an increase of $13.9 million, or 7.8%, as compared to $177.1 million reported in the comparable prior year period. The increase primarily was due to the addition of $5.6 million of benefits related to Sagamore and an $8.9 million increase in death benefits paid, net of reinsurance. Interest credited to policyholders' account balances was $11.8 million for the three-month period ended June 30, 1999, an increase of $2.1 million, or 21.6%, as compared to $9.7 million reported in the comparable prior year period. This increase was primarily due to additional interest crediting of $0.9 million from Sagamore and an increase of $0.6 million relating to traditional life business. Amortization of DAC was $25.4 million for the three-month period ended June 30, 1999, a decrease of $3.9 million, or 13.3%, as compared to $29.3 million reported in the comparable prior year period. The decrease primarily resulted from: (i) lower amortization of approximately $5.1 million relating to traditional life business due to lower realized gains on investments, and (ii) lower amortization of approximately $1.5 million relating to lower earnings in the Company's UL business, offset by (i) an increase in amortization of $1.0 million relating to the growth of the Company's VUL business, and (ii) a $1.3 million decrease relating to term business. Other operating costs and expenses were $72.7 million for the three-month period ended June 30, 1999, an increase of $1.7 million, or 2.4%, as compared to $71.0 million reported in the comparable prior year period. The increase primarily consists of: (i) a $7.8 million increase with respect to certain of the Company's benefit plans, (ii) $3.8 million from Sagamore offset by, (i) lower Year 2000 costs of $3.6 million, (ii) lower charitable contributions and corporate advertising of $2.7 million, (iii) a $0.7 million savings due to the outsourcing of certain benefit administration functions, (iv) $1.0 million in lower guaranty assessments (v) $1.0 million related to lower consulting fees, and (vi) a $1.0 million recurring savings resulting from a change in benefits under the Company's pension plan. Protection Products Segment -- For the Six-month Period Ended June 30, 1999 Compared to the Six-month Period Ended June 30, 1998 Premium revenue was $343.7 million for the six-month period ended June 30, 1999, a decrease of $0.1 million from $343.8 million reported in the comparable prior year period. The decrease resulted primarily from lower renewal premiums on traditional life business of $15.2 million resulting from the decrease in such in-force business, offset primarily by $7.6 million of premiums from Sagamore, which was acquired December 31, 1998, (see Notes to Unaudited Interim Condensed Financial Statements included elsewhere herein), $2.2 million of higher single premiums, and higher new premiums of approximately $5.7 million. Management believes that the overall decrease in premium revenue excluding Sagamore, is consistent with trends in the industry, particularly the continuing shift by consumers from traditional protection products to asset accumulation and retirement income products. Universal life policy fees were $61.6 million for the six-month period ended June 30, 1999, an increase of $19.8 million or 47.4% from $41.8 million reported in the comparable prior year period. This increase was primarily the result of fees earned by Sagamore of $10.3 million, and higher fees relating to the Company's VUL business and UL business of $7.3 million and $1.8 million, respectively. The Company reported total fees from its VUL business during the period of $16.6 million, as compared to $9.3 million reported for the comparable period in the prior year. This increase is consistent with the growth of such in force business. The 29 31 Company reported total fees from its UL business of $31.4 million during the period as compared to $29.6 million in the prior year period. Net investment income and net realized gains on investments were $369.9 million for the six-month period ended June 30, 1999, a decrease of $27.1 million, or 6.8%, from $397.0 million reported in the comparable prior year period. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. Group Pension Profits were $26.3 million for the six-month period ended June 30, 1999, an increase of $3.6 million, or 15.9%, from $22.7 million reported in the comparable prior year period. Group Pension Profits consisted primarily of $16.4 million of Group Pension Payments, and a decrease of $9.8 million in mortgage loan valuation allowances which primarily related to the reversal of a valuation allowance on a mortgage loan sold during the period. In the comparable prior year period, Group Pension Profits consisted of $27.7 million of Group Pension Payments and $5.0 million relating to an increase in the valuation allowances. The decrease in Group Pension Payments is consistent with the run-off of Group Pension business. See "Notes to Unaudited Interim Condensed Consolidated Financial Statements." Benefits to policyholders were $367.8 million for the six-month period ended June 30, 1999, an increase of $18.0 million, or 5.1%, as compared to $349.8 million reported in the comparable prior year period. The increase was primarily due to $10.1 million of benefits related to Sagamore, and an $8.8 million increase in death benefits paid, net of reinsurance. Interest credited to policyholders' account balances was $24.3 million for the six-month period ended June 30, 1999, an increase of $3.6 million, or 17.4%, as compared to $20.7 million reported in the comparable prior year period. This increase was primarily due to $2.0 million from Sagamore and an increase of $0.7 million relating to traditional life business. Amortization of DAC was $52.4 million for the six-month period ended June 30, 1999, a decrease of $3.0 million, or 5.4%, as compared to $55.4 million reported in the comparable prior year period. The decrease primarily resulted from lower amortization of approximately $6.9 million from traditional whole life due to lower realized gains from the sale of real estate, and a decrease of $2.7 million relating to the Company's UL business. Offsetting this decrease was higher amortization of approximately $2.0 million from term business and $2.5 million relating to the growth of the Company's VUL business. Dividends to policyholders of $115.6 million for the six-month period ended June 30, 1999 increased $8.8 million, or 8.2% from $106.8 million reported in the comparable prior year period. Substantially all of the increase relates to the accrual of an additional dividend liability in the Closed Block reflecting results that were more favorable than assumed in the funding of the Closed Block. 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 accordingly. Only the excess of the Closed Block liabilities over the Closed Block assets at the date of the establishment of the Closed Block 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 were $136.0 million for the six-month period ended June 30, 1999, a decrease of $8.4 million, or 5.8%, as compared to $144.4 million reported in the comparable prior year period. The decrease primarily consists of: (i) a $1.3 million decrease with respect to certain of the Company's benefit plans, (ii) lower Year 2000 costs of $5.2 million, (iii) lower compensation costs of $3.7 million, (iv) a $2.4 million recurring savings resulting from a change in benefits under the Company's pension plan, (v) lower guaranty fund assessments of $1.0 million, and (vi) a $1.0 million decrease in outside consulting costs, (vii) lower charitable contributions and corporate advertising of $2.7 million, and (viii) $1.3 million in savings due to the outsourcing of certain benefit administration functions, offset by (i) $7.1 million from Sagamore (ii) $3.0 million related to the consolidation and closing of certain agency offices and resultant employee reductions. 30 32 Accumulation Products Segment The following table presents certain summary financial data relating to the Company's Accumulation Products segment for the periods indicated.
FOR THE FOR THE THREE-MONTH PERIOD SIX-MONTH PERIOD ENDED JUNE 30, ENDED JUNE 30, ------------------ ---------------- 1999 1998 1999 1998 ------ ------ ------ ------ ($ IN MILLIONS) REVENUES: Premiums................................................ $ 0.4 $ 1.3 $ 0.8 $ 1.8 Investment-type product fees............................ 18.8 16.6 36.0 31.6 Net investment income and net realized gains on investments........................................... 32.6 41.6 61.5 77.8 Other income............................................ 23.1 19.3 44.0 34.6 ----- ----- ------ ------ 74.9 78.8 142.3 145.8 BENEFITS AND EXPENSES: Benefits to policyholders............................... 4.8 4.9 9.1 8.9 Interest credited to policyholders' account balances.... 14.2 15.6 28.2 31.7 Amortization of deferred policy acquisition costs....... 7.2 8.6 14.9 15.4 Dividends to policyholders.............................. 0.5 0.4 0.9 0.9 Other operating costs and expenses...................... 27.8 20.3 51.2 38.9 ----- ----- ------ ------ 54.5 49.8 104.3 95.8 ----- ----- ------ ------ Income before income taxes.............................. $20.4 $29.0 $ 38.0 $ 50.0 ===== ===== ====== ======
Accumulation Products Segment -- For the Three-month Period Ended June 30, 1999 Compared to the Three-month Period Ended June 30, 1998 Investment-type product policy fees were $18.8 million for the three-month period ended June 30, 1999, an increase of $2.2 million, or 13.3%, from $16.6 million reported in the comparable prior year period. This increase was primarily the result of higher fees relating to the Company's FPVA business of $2.4 million. The Company reported total fees from its FPVA business during the period of $18.7 million, as compared to $16.3 million reported for the comparable prior year period. The increase was primarily due to higher surrender charges of $2.0 million for the quarter ending June 30, 1999 compared to the comparable prior year period. The average FPVA fund value remained relatively unchanged for the three-month period ended June 30, 1999 as compared to the comparable prior year period, however, FPVA sales decreased to $112.4 million in the second quarter of 1999, as compared to $190.6 million in the second quarter of 1998. Management believes that the decline in sales is primarily due to delays in state regulatory approvals of new products introduced by the Company in connection with its reorganization in November 1998. Net investment income and net realized gains on investments were $32.6 million for the three-month period ended June 30, 1999, a decrease of $9.0 million, or 21.6%, from $41.6 million reported in the comparable period ended June 30, 1998. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. Other income (which consists primarily of fees earned by the Company's mutual fund management and supplementary contracts) was $23.1 million for the three-month period ended June 30, 1999, an increase of $3.8 million, or 19.7%, as compared to $19.3 million reported in the comparable prior year period. The increase was primarily the result of higher fees earned by the Company's mutual fund management operations of $4.9 million. The Company's mutual fund management operations reported $20.8 million in fees from advisory, underwriting and distribution services, as compared to $15.9 million reported in the comparable prior year period, as its assets under management increased to approximately $7.9 billion from $6.8 billion at June 30, 1999 and 1998, respectively. 31 33 Interest credited to policyholders' account balances was $14.2 million for the three-month period ended June 30, 1999, a decrease of $1.4 million, or 9.0%, as compared to $15.6 million reported in the comparable prior year period. The decrease primarily resulted from lower interest crediting of $2.8 million relating to SPDA products. Declines in fund balances in these products and modestly lower interest crediting rates contributed to declines in overall interest crediting. This decrease was offset by increases in interest crediting on other accumulation products. Amortization of DAC was $7.2 million for the three-month period ended June 30, 1999, a decrease of $1.4 million, or 16.3%, as compared to $8.6 million reported in the comparable prior year period. The decrease was due primarily to an increase in future expected profitability of the FPVA business. Other operating costs and expenses were $27.8 million for the three-month period ended June 30, 1999, an increase of $7.5 million, or 36.9%, as compared to $20.3 million reported in the comparable prior year period. The increase primarily consists of higher sub-advisory fees and commissions incurred by the Company's mutual fund management operations of approximately $4.5 million and an increase in commission expenses incurred under a new commission structure to reward the Company's career agents for policy persistency of $1.7 million. Accumulation Products Segment -- For the Six-month Period Ended June 30, 1999 Compared to the Six-month Period Ended June 30, 1998. Investment-type product policy fees were $36.0 million for the six-month period ended June 30, 1999, an increase of $4.4 million, or 13.9%, from $31.6 million reported in the comparable period ended June 30, 1998. This increase was primarily the result of higher fees relating to the Company's FPVA business of $4.5 million. The Company reported total fees from its FPVA business during the period of $35.7 million, as compared to $31.2 million reported for the comparable prior year period. The increase was primarily due to an increase in surrender charges of $3.4 million from the comparable prior year period. The average FPVA fund value remained relatively unchanged for the three-month period ended June 30, 1999 as compared to the comparable prior year period, however, FPVA sales were $216.5 million in 1999, as compared to $346.5 million in 1998. Management believes that the decline in sales is primarily due to delays in state regulatory approvals of new products introduced by the Company in connection with its reorganization in November 1998. Net investment income and net realized gains on investments were $61.5 million for the six-month period ended June 30, 1999, a decrease of $16.3 million, or 21.0%, from $77.8 million reported in the comparable period ended June 30, 1998. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities, offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. Other income was $44.0 million for the six-month period ended June 30, 1999, an increase of $9.4 million, or 27.2%, as compared to $34.6 million reported in the comparable prior year period. The increase was primarily the result of higher fees earned by the Company's mutual fund management operations of $9.7 million. During the first quarter of 1999, the Company's mutual fund management operations reported $39.2 million in fees from advisory, underwriting and distribution services, as compared to $29.5 million reported in the comparable prior year period, as its assets under management increased to approximately $7.9 billion from $6.8 billion at June 30, 1999 and 1998, respectively. Interest credited to policyholder account balances was $28.2 million for the six-month period ended June 30, 1999, a decrease of $3.5 million, or 11.0%, as compared to $31.7 million reported in the comparable prior year period. The decrease primarily resulted from lower interest crediting of $4.2 million relating to SPDA products and $0.9 million relating to certain group deferred annuities. Declines in fund balances and modestly lower interest rates in these products contributed to declines in overall interest crediting Amortization of DAC was $14.9 million for the six-month period ended June 30, 1999, an decrease of $0.5 million, or 3.2%, as compared to $15.4 million reported in the comparable prior year period. The decrease was due primarily to an increase in future expected profitability of the FPVA business. 32 34 Other operating costs and expenses were $51.2 million for the six-month period ended June 30, 1999, an increase of $12.3 million, or 31.6%, as compared to $38.9 million reported in the comparable prior year period. The increase primarily consists of higher sub-advisory fees and commissions incurred by the Company's mutual fund management operations of approximately $8.5 million and an increase in commission expenses incurred under a new commission structure to reward the Company's career agents for policy persistency of $2.7 million. Other Products Segment The following table presents certain summary financial data relating to the Company's Other Products segment for the periods indicated.
FOR THE FOR THE THREE-MONTH PERIOD SIX-MONTH PERIOD ENDED JUNE 30, ENDED JUNE 30, ------------------ ---------------- 1999 1998 1999 1998 ------ ------ ------ ------ ( $ IN MILLIONS) REVENUES: Premiums.................................................. $ 1.7 $ 2.7 $ 4.1 $ 8.2 Investment-type product policy fees....................... (0.1) 0.3 0.3 0.9 Net investment income and net realized gains.............. 17.0 20.4 27.9 38.9 Other income.............................................. 21.7 19.6 38.5 32.4 ----- ----- ----- ----- 40.3 43.0 70.8 80.4 BENEFITS AND EXPENSES: Benefits to policyholders................................. 4.7 7.1 8.2 16.3 Interest credited to policyholders' account balances...... 2.6 3.1 6.2 6.3 Dividends to policyholders................................ 0.3 0.5 0.6 0.7 Other operating costs and expenses........................ 24.7 26.3 45.0 43.7 ----- ----- ----- ----- 32.3 37.0 60.0 67.0 ----- ----- ----- ----- Income before income taxes................................ $ 8.0 $ 6.0 $10.8 $13.4 ===== ===== ===== =====
Other Products Segment -- For the Three-month Period Ended June 30, 1999 Compared to the Three-month Period Ended June 30, 1998 Premium revenue was $1.7 million for the three-month period ended June 30, 1999, a decrease of $1.0 million, or 37.0%, from $2.7 million reported in the comparable period ended June 30, 1998. The decrease relates to a decrease in premiums on the run-off businesses. Net investment income and net realized gains on investments were $17.0 million for the three-month period ended June 30, 1999, a decrease of $3.4 million, or 16.7%, from $20.4 million reported in the comparable period ended June 30, 1998. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities, offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. Other income was $21.7 million for the three-month period ended June 30, 1999, an increase of $2.1 million, or 10.7%, as compared to $19.6 million reported in the comparable prior year period. The increase was primarily the result of $2.5 million of higher commissions earned by the Company's broker- dealer operations. During the three-month period ended June 30, 1999, the Company's broker-dealer operations reported commission earnings of $17.5 million, as compared to $15.0 million reported in the comparable prior year period. Benefits to policyholders were $4.7 million for the three-month period ended June 30, 1999, a decrease of $2.4 million, or 33.8%, as compared to $7.1 million reported in the comparable prior year period. The decrease was due to decreases in the runoff businesses. 33 35 Other operating costs and expenses were $24.7 million for the three-month period ended June 30, 1999, a decrease of $1.6 million, or 6.1%, as compared to $26.3 million reported in the comparable prior year period. The decrease was primarily due to a decrease in certain miscellaneous expenses partially offset by an increase in commission and other expenses incurred by the Company's broker-dealer operations. Other Products Segment -- For the Six-month Period Ended June 30, 1999 Compared to the Six-month Period Ended June 30, 1998 Premium revenue was $4.1 million for the six-month period ended June 30, 1999, a decrease of $4.1 million, or 50.0%, from $8.2 million reported in the comparable period ended June 30, 1998. The decrease relates to a decrease in premiums on the runoff businesses. Net investment income and net realized gains on investments were $27.9 million for the six-month period ended June 30, 1999, a decrease of $11.0 million, or 28.3%, from $38.9 million reported in the comparable period ended June 30, 1998. The decrease was primarily due to lower realized gains on sales of real estate and real estate partnership equities offset in part by increased net investment income primarily attributable to the investment of IPO proceeds. Other income was $38.5 million for the six-month period ended June 30, 1999, an increase of $6.1 million, or 18.8%, as compared to $32.4 million reported in the comparable prior year period. The increase was primarily the result of $6.5 million in higher commissions earned by the Company's broker-dealer operations. During the six-month period ended June 30, 1999, the Company's broker-dealer operations reported commission earnings of $30.7 million, as compared to $24.2 million reported in the comparable prior year period. Benefits to policyholders were $8.2 million for the six-month period ended June 30, 1999, a decrease of $8.1 million, or 49.7%, as compared to $16.3 million reported in the comparable prior year period. The decrease was due to decreases in the runoff businesses. Other operating costs and expenses were $45.0 million for the six-month period ended June 30, 1999, an increase of $1.3 million, or 3.0%, as compared to $43.7 million reported in the comparable prior year period. The increase primarily consists of higher commission and other expenses incurred by the Company's broker-dealer operations of $3.1 million. EARLY RETIREMENT PROGRAM On June 30, 1999, the Company announced a voluntary retirement program for approximately 500 eligible employees. The program is part of a company wide realignment of staff and resources, which may also include the elimination and/or shifting of certain job functions and the addition of employees with new skill sets. The Company plans to take a one time restructuring charge in the third quarter of 1999 related to this program. EXTRAORDINARY CHARGE FOR DEMUTUALIZATION The $4.6 million and $9.7 million reflected as after-tax demutualization expenses on the Company's consolidated statements of income for the three month and six month periods ended June 30, 1998 were direct nonrecurring costs specifically related to the demutualization of MONY. There were no extraordinary items recorded in the three-month or six-month periods ended June 30, 1999. In connection with the Plan, the Company will begin its commission-free sale and purchase program on August 17, 1999, which will offer shareholders who own fewer than 100 shares the opportunity to sell all of their shares or purchase additional shares to round up to 100 shares. The program will continue for three months. As a result of this program the Company will incur certain expenses, which will be reported as an extraordinary item. 34 36 LIQUIDITY AND CAPITAL RESOURCES Holding Company The MONY Group's cash flow consists of investment income from its invested assets, as well as dividends from MONY Life, if declared and paid, offset by expenses incurred in connection with the administration of the MONY Group's affairs, including salaries and other expenses. As a holding company, the MONY Group's ability to meet its cash requirements and pay dividends on its common stock substantially depends upon the receipt of dividends and other payments from MONY Life. The payment of dividends from MONY Life to the MONY Group is regulated under state insurance law. Under the New York Insurance Law, MONY Life will be permitted to pay shareholder dividends and other payments 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. Management believes these guidelines may limit the ability of MONY Life to pay dividends to the MONY Group. There can be no assurance that MONY Life will have statutory earnings to support the payment of dividends to the MONY Group in an amount sufficient to fund its cash requirements and pay cash dividends. 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 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. On December 30, 1997, the Investors entered into the Investment Agreement with MONY, pursuant to which among other things the Investors purchased, for $115.0 million (the "Consideration"), MONY Notes with an aggregate principal amount equal to the Consideration. Pursuant to the terms of the Investment Agreement, the Investors may elect to exchange the MONY Notes for Holding Company Subordinated Notes. If such exchange occurs, the MONY Group will hold one or more Intercompany Surplus Notes in an aggregate principal amount equal to the principal amount of the Holding Company Subordinated Notes. If the Holding Company Subordinated Notes are issued, the MONY Group will receive payments of principal and interest from MONY Life on the Intercompany Surplus Notes. The Intercompany Surplus Notes will be in an aggregate principal amount equal to the aggregate principal amount of the Holding Company Subordinated Notes and bear interest at 9.50% per annum, which is payable semiannually. Principal is payable at maturity. Payments of principal and interest on the Intercompany Surplus Notes can only be made with the prior approval of the New York Superintendent "whenever, in his judgment, 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 obtain the requisite approval for payments with respect to the Intercompany Surplus Notes, or that surplus funds will be available for such payments. On July 29, 1999, the MONY Group's Board of Directors approved a quarterly dividend of $0.10 per share. The dividend will be payable September 24, 1999 to shareholders of record as of September 3, 1999. The MONY Group expects to continue paying quarterly dividends on its common stock of $0.10 per share throughout 1999. Capitalization The Company's total capitalization, including short-term debt and excluding accumulated other comprehensive income, increased $75.2 million or 3.8%, to $2,075.8 million at June 30, 1999, as compared to $2,000.6 million at December 31, 1998. The increase was primarily the result of net income of $107.4 million. The Company's total debt to equity (excluding accumulated other comprehensive income) and total debt to total capitalization ratios decreased to 20.5% and 17.0% at June 30, 1999, respectively, from 23.1% and 18.8% 35 37 at December 31, 1998, respectively. Included in total debt used in the above calculations are $71.4 million and $101.3 million of non-recourse indebtedness. 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 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 June 30, 1999 and December 31, 1998. WITHDRAWAL CHARACTERISTICS OF ANNUITY RESERVES AND DEPOSIT LIABILITIES
AMOUNT AT AMOUNT AT JUNE 30, PERCENT DECEMBER 31, PERCENT 1999 OF TOTAL 1998(1) OF TOTAL --------- -------- ------------ -------- ($ IN MILLIONS) Not subject to discretionary withdrawl provisions...................................... $1,454.9 18.2% $1,092.6 14.0% Subject to discretionary withdrawal -- with market value adjustment or at carrying value less surrender charge................................ 5,282.8 66.0 5,475.4 69.9 -------- ------ -------- ------ Subtotal.......................................... 6,737.7 84.2 6,568.0 83.9 ------ Subject to discretionary withdrawal -- without adjustment at carrying value.................... 1,266.1 15.8 1,264.5 16.1 -------- ------ -------- ------ Total annuity reserves and deposit liabilities (gross)......................................... 8,003.8 100.0% 7,832.5 100.0% -------- ====== -------- ====== Less reinsurance.................................. 117.7 121.7 -------- -------- Total annuity reserves and deposit liabilities (net)........................................... $7,886.1 $7,710.8 ======== ========
- --------------- (1) Reflects certain reclassifications of amounts previously reported. 36 38 The following table sets forth by product line the actual surrenders and withdrawals paid for the periods indicated. SURRENDERS AND WITHDRAWALS
FOR THE FOR THE THREE-MONTH PERIOD SIX-MONTH PERIOD ENDED JUNE 30, ENDED JUNE 30, ------------------ ---------------- 1999 1998 1999 1998 ------- ------- ------ ------ ($ IN MILLIONS) PRODUCT LINE: Traditional life(1)..................................... $ 96.9 $ 78.9 $207.9 $162.0 Variable and universal life............................. 11.7 8.7 23.9 16.3 Annuities(2)............................................ 216.8 146.5 399.5 271.7 ------ ------ ------ ------ Total......................................... $325.4 $234.1 $631.3 $450.0 ====== ====== ====== ======
- --------------- (1) Includes $19.0 million 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. (2) Excludes approximately $147.0 million and $253.0 million for the three-month and six-month periods ended June 30, 1999, respectively, relating to 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. Annuity surrenders have increased for the three-month and six-month periods ended June 30, 1999 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 replacement activity. In July, 1999, the Company has responded to this trend by enhancing its variable annuity products by offering new investment fund choices. 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 six-month period ended June 30, 1999, the net cash flow from operations reported in the Company's consolidated cash flow statement was $75.8 million. This amount excludes $55.4 million of cash flow relating to the Closed Block. Total combined cash flow for the six-month period ended June 30, 1999 (including the Closed Block) was $131.2 million, an increase of $39.6 million from $91.6 million reported for the six-month period ended June 30, 1998. The increase primarily relates to lower tax payments and higher net investment income, offset by 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 June 30, 1999, the Company had readily marketable fixed maturity securities with a carrying value of $6,511.8 million (including fixed maturities in the Closed Block), which were comprised of $3,568.2 million public and $2,943.6 million private fixed maturity securities. At that date, approximately 93.9% of the Company's fixed maturity securities were designated in NAIC rating categories 1 and 2 (considered investment grade, with a rating of "Baa" or higher by Moody's or "BBB" or higher by S&P). In addition, at June 30, 1999 the Company had cash and cash equivalents of $405.0 million. In addition, the Company maintains two bank line of credit facilities with domestic banks aggregating $150.0 million, with scheduled renewal dates in September 1999 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 37 39 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 June 30, 1999. At June 30, 1999, the Company had commitments to issue $23.9 million of fixed rate agricultural loans with periodic interest rate reset dates. The initial interest rates on such loans range from 7.13% to 8.25%. In addition, the Company had commitments to issue $95.2 million of fixed rate commercial mortgage loans with interest rates ranging from 7.00% to 8.09%. The Company also had commitments outstanding to purchase $86.1 million of private fixed maturity securities as of June, 1999 with interest rates ranging from 7.26% to 9.32%. At June 30, 1999, the Company had commitments to contribute capital to its equity partnership investments of $112.9 million. Of the $1,045.5 million of currently outstanding commercial mortgage loans in the Company's investment portfolio at June 30, 1999, $52.5 million, $24.9 million, $77.2 million, and $91.1 million are scheduled to mature in 1999, 2000, 2001 and 2002, respectively. In 1994, the Company completed the sale of $125.0 million face amount of its 11.25% Surplus Notes due August 15, 2024, which generated net proceeds of $70.0 million after a discount of approximately 42.2% from the principal amount payable at maturity and issuance expenses of approximately $2.3 million. Following the discount accretion period, interest will begin to accrue on August 15, 1999; thereafter, interest is scheduled to be paid on February 15 and August 15 of each year, commencing February 15, 2000, at a rate of 11.25% per annum. To the extent that the MONY Notes are not exchanged for Holding Company Subordinated Notes, they will remain as surplus notes of MONY having an interest rate of 9.5%, payable semiannually in arrears on June 30 and December 31 in each year. The Company has mortgage loans on certain of its real estate properties. The interest rates on these loans range from 6.3% to 8.5%. Maturities range from June 2000 to February 2002. Interest expense on mortgage loans was $1.2 million and $3.0 million for the three-month periods ended June 30, 1999 and 1998, respectively, and $2.7 million and $5.9 million for the six-month periods ended June 30, 1999 and 1998, respectively. During 1989, the Company entered into a transaction, which is accounted for as a financing arrangement involving certain real estate properties held for investment. Pursuant to the terms of the agreement, the Company effectively pledged the real estate properties as collateral for a loan of approximately $35.0 million bearing simple interest at a rate of 8.0% per annum. Interest is cumulative. Periodic interest payments are not required. All principal and interest are effectively due at the maturity of the obligation (March 30, 2000) which is subject to extension at the option of the creditor. However, interest may be paid periodically subject to available cash flow from the real estate properties. At June 30, 1999 and December 31, 1998, the outstanding balance of the obligation including accrued interest was $42.9 million and $42.4 million, respectively. Interest expense on the obligation of $0.8 million and $0.7 million for the three-month periods ended June 30, 1999 and 1998, respectively, and $1.6 million and $1.5 million for the six-months period ended June 30, 1999 and 1998, respectively, is reflected in other operating costs and expenses. 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 is due January 1, 2009. The transaction is accounted for as a financing. Accordingly, the facility remains on the Company's books and continues to be depreciated. An obligation representing the total proceeds on the sale was recorded by the Company at the effective date of the transaction, and is reduced based on payments under the lease. The lease has a term of 20 years beginning December 21, 1988 and requires minimum annual rental payments of $7.1 million in 1999, $7.3 million in 2000, $7.4 million in 2001, $7.6 million in 2002, $7.7 million in 2003, and $41.0 million thereafter. The Company has the option to renew the lease at the end of the lease term. 38 40 At June 30, 1999, aggregate maturities of long-term debt based on required remaining principal payments for 1999 and the succeeding four years are $0.1 million, $0.3 million, $10.6 million, $0.2 million and $0.2 million, respectively, and $245.7 million thereafter. Aggregate contractual debt service payments on the Company's debt at June 30, 1999, for the remainder of 1999 and the succeeding four years are $6.0 million, $26.7 million, $32.0 million, $33.7 million and $25.2 million, respectively and $638.4 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 June 30, 1999 and December 31, 1998 were in excess of the minimum required RBC. YEAR 2000 In 1996, the Company initiated a formal Year 2000 Project (the "Project") to resolve the Year 2000 issue. The scope of the Project was identified, and funding was established. In early 1997, the Company retained a consulting firm to assist in bringing the Company's computer and information systems into Year 2000 compliance. The Company's overall goal for information technology ("IT") related items was to have business-critical hardware and software compliant by December 31, 1998, with additional testing and enterprise end-to-end testing occurring in 1999. The Company has also retained a consulting firm to assist in the evaluation of Year 2000 issues affecting the Company's facilities, equipment and related systems which may contain date logic in embedded chips. The Company's overall goal is to have these items compliant by September 30, 1999. The scope of the Company's Project includes: ensuring the compliance of all applications, operating systems and hardware on mainframe, PC and local area network ("LAN") platforms; ensuring the compliance of voice and data network software and hardware; addressing issues related to non-IT systems in buildings, facilities and equipment which may contain date logic in embedded chips; and addressing the compliance of key vendors and other third parties. The phases of the Project are: (i) inventorying Year 2000 items and assigning priorities; (ii) assessing the Year 2000 compliance of items; (iii) remediating or replacing items that are determined not to be Year 2000 compliant; (iv) testing items for Year 2000 compliance; and (v) designing and implementing Year 2000 contingency and business continuity plans. To determine that all IT systems (whether internally developed or purchased) are Year 2000 compliant, each system is tested using a standard testing methodology which includes unit testing, baseline testing, and future date testing. Future date testing includes critical dates near the end of 1999 and into the year 2000, including leap year testing. The inventory and assessment phases of the Project were completed prior to mid 1998. At June 30, 1999, all of the Company's existing application systems had been remediated, current date tested and future date 39 41 tested. Newly acquired applications and new releases of software packages are being tested in 1999 as they are implemented. In late 1998 and early 1999, the Company contracted with a consulting firm to perform an Independent Validation and Verification ("IV&V") of the Year 2000 remediation of selected critical applications. The results of the IV&V indicated that the Company's remediation and testing processes were highly effective and had achieved a high level of compliance. Approximately 95% of the operating systems, systems software, and hardware for mainframe, PC and LAN platforms are deemed compliant based on information supplied by vendors verbally, in writing, or on the vendor's Internet site. Essentially all critical hardware and software were compliant and tested by December 31, 1998. The remaining items will be resolved and tested by the third quarter of 1999. Ongoing testing for Year 2000 compliance is continuing in 1999 as applications, systems software and hardware are upgraded or replaced. Approximately 70% of critical non-IT systems had been remediated as of June 30, 1999, and ongoing testing for year 2000 compliance will continue through 1999. As part of the Project, we identified and contacted significant service and information providers, external vendors, suppliers, and other third parties (including telecommunication, electrical, security, and HVAC systems) that believe will be critical to business operations after January 1, 2000. Procedures are being undertaken to ascertain with reasonable certainty their current and reasonably anticipated states of Year 2000 readiness through questionnaires, compliance letters, interviews, on-site visits, and other available means. Costs The estimated total cost of the Year 2000 Project is approximately $26.0 million. The total amount expended on the Project through June 30, 1999 was $24.0 million, which includes $16.0 million for external vendor costs, and $8.0 million for internal costs. The future cost of completing the Year 2000 Project is estimated to be approximately $2.0 million, which includes $1.0 million for external vendor costs, and $1.0 million for internal costs; the future Project cost will be funded through operating cash flows. These amounts also include costs associated with the development of contingency plans. Risks The Company believes that completed and planned modifications and conversions of its internal systems and equipment will allow it to be Year 2000 compliant in a timely manner. There can be no assurance, however, that the Company's internal systems or equipment will be entirely error-free, or those external parties on which the Company relies will be Year 2000 compliant in a timely manner, or that the Company's or external parties' contingency plans will mitigate sufficiently the effects of any noncompliance. Based upon currently available information and considering the Company's Year 2000 Project status, management believes that the most reasonably likely worst case scenario would be short-term interruptions to Company business operations. However, Year 2000 related failures in the Company's systems or equipment and/or failure of external parties to achieve Year 2000 compliance could have a material adverse effect on the Company's consolidated financial position and results of its operations. Contingency Plans The Company has retained outside consultants to assist in the development of Business Continuity Plans ("BCP"), which include identification of third party service providers, information systems, equipment, facilities and other items which are mission-critical to the operation of the business. In conjunction with this effort, the Company is developing a Year 2000 Contingency Plan (the "Contingency Plan") to address Year 2000 related failures of third parties, among other factors that are critical to the ongoing operation of the business. The Contingency Plan provides alternate means of processing critical work and services, as well as a methodology for selection and retention of alternate service providers, vendors, and suppliers, if necessary. At 40 42 June 30 1999, development of BCP has been completed. Additional testing, maintenance and refinement of BCP will continue through 1999. The scheduled date for completion of the Contingency Plan is September 30, 1999, with ongoing evaluation and refinements through 1999. The Company believes that due to the pervasive and evolving nature of potential Year 2000 issues, the contingency planning process is an ongoing one that will require further modifications as the Company obtains additional information regarding the status of third party Year 2000 readiness. 41 43 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 8.8% and 10.5% for the three-month periods ended June 30, 1999 and 1998, respectively, and 8.6% and 9.9% for the six-month period ended June 30, 1999 and 1998, respectively. The following table illustrates the yields on average assets for each of the components of the Company's investment portfolio for the three-month and six-month periods ended June 30, 1999 and 1998, respectively. INVESTMENT RESULTS BY ASSET CATEGORY
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE THREE-MONTH THREE-MONTH SIX-MONTH SIX-MONTH PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998 --------------------- --------------------- --------------------- --------------------- YIELD(2) AMOUNT YIELD(2) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- --------- -------- --------- -------- --------- -------- --------- FIXED MATURITIES: Investment income......... 7.2% $ 118.1 7.3% $ 109.8 7.5% $ 237.2 7.4% $ 219.9 Net realized gains (losses)................ 0.0 0.5 0.8 12.2 0.2 5.5 0.4 12.3 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 7.2% $ 118.6 8.1% $ 122.0 7.7% $ 242.7 7.8% $ 232.2 Ending assets............. 6,559.8 6,070.5 6,559.8 6,070.5 EQUITY SECURITIES:(3) Investment income......... 18.4% $ 20.0 11.9% $ 10.7 16.4% $ 34.1 11.6% $ 20.8 Net realized gains (losses)................ 6.2 6.7 0.4 0.4 18.4 38.3 10.0 17.9 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 24.6% $ 26.7 12.3% $ 11.1 34.8% $ 72.4 21.6% $ 38.7 Ending assets............. 453.8 378.1 453.8 378.1 MORTGAGE LOANS: Investment income......... 8.0% $ 30.9 8.6% $ 31.6 7.7% $ 59.3 8.7% $ 63.1 Net realized gains (losses)................ (0.3) (1.2) 1.0 3.8 (0.1) (0.5) 0.6 4.6 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 7.7% $ 29.7 9.6% $ 35.4 7.6% $ 58.8 9.3% $ 67.7 Ending assets............. 1,608.0 1,478.8 1,608.0 1,478.8 REAL ESTATE:(4) Investment income......... 8.5% $ 12.0 4.1% $ 9.6 6.3% $ 20.1 5.4% $ 25.7 Net realized gains (losses)................ 27.4 38.6 36.0 84.1 10.9 34.8 21.0 100.1 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 35.9% $ 50.6 40.1% $ 93.7 17.2% $ 54.9 26.4% $ 125.8 Ending assets............. 486.6 791.6 486.6 791.6 POLICY LOANS: Investment income......... 6.4% $ 20.4 6.3% $ 19.7 6.4% $ 40.5 6.3% $ 39.6 Net realized gains (losses)................ 0.0 0.0 0.0 -- 0.0 0.0 0.0 0.0 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 6.4% $ 20.4 6.3% $ 19.7 6.4% $ 40.5 6.3% $ 39.6 Ending assets............. 1,269.2 1,252.6 1,269.2 1,252.6 CASH & CASH EQUIVALENTS: Investment income......... 3.5% $ 3.5 3.4% $ 3.1 3.9% $ 8.8 3.4% $ 6.9 Net realized gains (losses)................ 0.0 0.0 0.0 -- 0.0 0.0 0.0 0.0 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 3.5% $ 3.5 3.4% $ 3.1 3.9% $ 8.8 3.4% $ 6.9 Ending assets............. 405.0 492.4 405.0 492.4
42 44
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE THREE-MONTH THREE-MONTH SIX-MONTH SIX-MONTH PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998 --------------------- --------------------- --------------------- --------------------- YIELD(2) AMOUNT YIELD(2) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT -------- --------- -------- --------- -------- --------- -------- --------- OTHER INVESTED ASSETS: Investment income(5)...... (1.0)% $ (0.1) 0.0% $ -- (1.6)% $ (0.4) 0.0% $ 0.0 Net realized gains (losses)................ (15.4) (1.5) (2.4) (0.4) (7.1) (1.8) 72.3 22.7 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... (16.4)% $ (1.6) (2.4)% $ (0.4) (8.7)% $ (2.2) 72.3% $ 22.7 Ending assets............. 44.0 57.0 44.0 57.0 TOTAL BEFORE INVESTMENT EXPENSES: Investment income(6)...... 7.6% $ 204.8 7.1% $ 184.5 7.5% $ 399.6 7.3% $ 376.0 Net realized gains (losses)................ 1.6 43.1 3.8 100.1 1.4 76.3 3.0 157.6 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 9.2% $ 247.9 10.9% $ 284.6 8.9% $ 475.9 10.3% $ 533.6 Ending assets............. 10,826.4 10,521.0 10,826.4 10,521.0 Investment expenses net of fee income(7)........... (0.3)% $ (8.7) (0.3)% $ (9.0) (0.3)% $ (15.4) (0.4)% $ (18.3) TOTAL AFTER INVESTMENT EXPENSES: Investment income(7)...... 7.2% $ 196.1 6.7% $ 175.5 7.2% $ 384.2 6.9% $ 357.7 Net realized gains (losses)................ 1.6 43.1 3.8 100.1 1.4 76.3 3.0 157.6 ----- --------- ---- --------- ---- --------- ---- --------- Total..................... 8.8% $ 239.2 10.5% $ 275.6 8.6% $ 460.5 9.9% $ 515.3 Ending assets............. 10,826.4 10,521.0 10,826.4 10,521.0 Net unrealized gains (losses) on fixed maturities.............. (48.0) 211.9 (48.0) 211.9 --------- --------- --------- --------- Total invested assets..... $10,778.4 $10,732.9 $10,778.4 $10,732.9 ========= ========= ========= =========
- --------------- (1) Yields are based on year-to-date average asset carrying values, excluding unrealized gains (losses) in the fixed maturity asset category. (2) Yields are based on quarterly average asset carrying values, excluding unrealized gains (losses) in the fixed maturity asset category. (3) Including net unrealized gains and losses in the determination of the total yield on equity securities for the six-month periods ended June 30, 1999 and 1998 would have resulted in a total yield of 31.2% and 24.2%, respectively, which would have resulted in a total return on invested assets of 8.5% and 10.0% for the aforementioned periods, respectively. Including net unrealized gains and losses in the determination of the total yield on equity securities for the three-month periods ended June 30, 1999 and 1998 would have resulted in a total yield of 24.6% and 18.7%, respectively, which would have resulted in a total return on invested assets of 9.4% and 10.7% for the aforementioned periods, respectively. (4) Equity real estate income is shown net of operating expenses, depreciation and minority interest. (5) Excludes amounts referred to in (7) below. (6) Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings of $31.0 million and $18.2 million for the six-months ended June 30, 1999 and 1998, respectively. In addition, real estate investment income is shown net of depreciation of $6.0 million and $14.1 million for the aforementioned periods, respectively. Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings of $15.9 million and $8.6 million for the three-months ended June 30, 1999 and 1998, respectively. In addition, real estate investment income is shown net of depreciation of $2.4 million and $6.9 million for the aforementioned periods, respectively. (7) Includes mortgage servicing fee and other miscellaneous fee income of approximately $2.3 million and $1.8 million for the six-months ended June 30, 1999 and 1998, respectively. Includes mortgage servicing fee and other miscellaneous fee income of approximately $1.1 million and $1.0 million for the three-months ended June 30, 1999 and 1998, respectively. 43 45 FIXED MATURITIES Fixed maturities consist of publicly traded debt securities, privately placed debt securities and small amounts of redeemable preferred stock, and represented 60.4% and 61.0% of total invested assets at June 30, 1999 and December 31, 1998, respectively. The Securities Valuation Office of the NAIC evaluates the bond investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC Designations". The NAIC Designations closely mirror the Nationally Recognized Securities Rating Organizations' credit ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered investment grade ("Baa" or higher by Moody's, or "BBB" or higher by S&P) by such rating organizations. NAIC Designations 3 through 6 are referred to as below investment grade ("Ba" or lower by Moody's, or "BB" or lower by S&P). Of the Company's total portfolio of fixed maturity securities at June 30, 1999, 93.9% were investment grade and 6.1% were below-investment grade, where 57.9%, 36.0%, 5.3%, 0.3%, 0.4% and 0.1% had NAIC Designations of 1, 2, 3, 4, 5 and 6, respectively. 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. 44 46 The following table sets forth the total carrying values of the Company's fixed maturity portfolio, as well as its problem, potential problem and restructured fixed maturities as of the dates indicated: PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED FIXED MATURITIES AT FAIR VALUE
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) Total fixed maturities (public and private)................. $6,511.8 $6,706.0 ======== ======== Problem fixed maturities.................................... 34.8 33.9 Potential problem fixed maturities.......................... 60.5 82.9 Restructured fixed maturities............................... 8.2 8.6 -------- -------- Total problem, potential problem & restructured fixed maturities................................................ $ 103.5 $ 125.4 ======== ======== Total problem, potential problem & restructured fixed maturities as a percent of total fixed maturities......... 1.6% 1.9% ======== ========
At June 30, 1999, the Company's largest unaffiliated single concentration of fixed maturities was $232.8 million of Federal Home Loan Mortgage Corporation ("FHLMC") which represents 2.2% of total invested assets. The second largest single concentration consists of $197.2 million of the Notes purchased in connection with the Group Pension Transaction. These Notes represent approximately 1.8% of total invested assets at June 30, 1999. No other individual non-government issuer represents more than 0.5% of invested assets. The Company held approximately $1,152.1 million and $1,161.3 million of mortgage-backed and asset-backed securities as of June 30, 1999 and December 31, 1998, respectively. Of such amounts, $421.3 million and $471.5 million, or 36.6% and 40.6%, respectively, represented agency-issued pass-through and collateralized mortgage obligations ("CMOs") secured by Federal National Mortgage Association, FHLMC, Government National Mortgage Association and Canadian Housing Authority collateral. The balance of such amounts were comprised of other types of mortgage-backed and asset-backed securities. The Company believes that its active monitoring of its portfolio of mortgage-backed securities and the limited extent of its holdings of more volatile types of mortgage-backed securities mitigate the Company's exposure to losses from prepayment risk associated with interest rate fluctuations for this portfolio. At June 30, 1999 and December 31, 1998, 87.6% and 88.6%, respectively, of the Company's mortgage-backed and asset-backed securities were assigned an NAIC Designation of 1. In addition, the Company believes that it holds a relatively low percentage of CMOs compared to other life insurance companies. The following table presents the types of mortgage-backed securities ("MBSs"), as well as other asset-backed securities, held by the Company as of the dates indicated. MORTGAGE AND ASSET-BACKED SECURITIES
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) CMOs........................................................ $ 518.0 $ 569.5 Pass-through securities..................................... 33.8 40.6 Commercial MBSs............................................. 99.4 85.7 Asset-backed securities..................................... 500.9 465.5 -------- -------- Total MBS's and asset-backed securities........... $1,152.1 $1,161.3 ======== ========
45 47 The amortized cost and estimated fair value of fixed maturity securities, by contractual maturity dates, (excluding scheduled sinking funds) as of June 30, 1999 and December 31, 1998 are as follows: FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
AS OF AS OF JUNE 30, 1999 DECEMBER 31, 1998 ----------------------- ----------------------- AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- ($ IN MILLIONS) Due in one year or less.......................... $ 126.0 $ 127.5 $ 155.3 $ 155.9 Due after one year through five years............ 1,510.0 1,514.5 1,536.2 1,573.5 Due after five years through ten years........... 2,541.1 2,518.0 2,441.8 2,565.6 Due after ten years.............................. 1,221.5 1,199.7 1,187.4 1,249.7 -------- -------- -------- -------- Subtotal............................... 5,398.6 5,359.7 5,320.7 5,544.7 Mortgage-backed and other asset-backed securities..................................... 1,161.2 1,152.1 1,132.8 1,161.3 -------- -------- -------- -------- Total.................................. $6,559.8 $6,511.8 $6,453.5 $6,706.0 ======== ======== ======== ========
MORTGAGE LOANS Mortgage loans comprised 14.9% and 12.9% of total invested assets as of June 30, 1999 and December 31, 1998, respectively. Mortgage loans consist of commercial, agricultural and residential loans. As of June 30, 1999 and December 31, 1998 commercial mortgage loans comprised $1,045.5 million and $886.9 million or 65.0% and 62.5% of total mortgage loan investments, respectively. Agricultural loans comprise $560.9 million and $531.2 million, or 34.9% and 37.4% of total mortgage loans, respectively. Residential mortgage loans comprised $1.6 million and $1.9 million, or 0.1% and 0.1% of total mortgage loan investments at June 30, 1999 and December 31, 1998, respectively. COMMERCIAL MORTGAGE LOANS For commercial mortgages, the carrying value of the largest amount loaned on any one single property aggregated $45.8 million and represented less than 0.5% of general account invested assets as of June 30, 1999. Amounts loaned on 12 properties were $20.0 million or greater, representing in the aggregate 33.4% of the total carrying value of the commercial loan portfolio at the same date. Total mortgage loans to the 5 largest borrowers accounted in the aggregate for approximately 24.8% of the total carrying value of the commercial loan portfolio and less than 2.5% of total invested assets at June 30, 1999. 46 48 The following table presents the Company's commercial mortgage loan maturity profile for the periods indicated. COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
AS OF JUNE 30, AS OF DECEMBER 31, 1999 1998 ------------------ ------------------ CARRYING % OF CARRYING % OF VALUE TOTAL VALUE TOTAL -------- ------ -------- ------ ($ IN MILLIONS) 1 year or less.......................................... $ 69.2 6.6% $124.0 14.0% Over 1 year but less than or equal to 2 years........... 33.6 3.2 50.7 5.7 Over 2 years but less than or equal to 3 years.......... 90.0 8.6 56.9 6.4 Over 3 years but less than or equal to 4 years.......... 73.2 7.0 79.3 9.0 Over 4 years but less than or equal to 5 years.......... 74.7 7.1 50.5 5.7 Over 5 years but less than or equal to 6 years.......... 47.3 4.5 42.8 4.8 Over 6 years but less than or equal to 7 years.......... 105.8 10.1 50.8 5.7 Over 7 years but less than or equal to 8 years.......... 26.9 2.6 49.5 5.6 Over 8 years but less than or equal to 9 years.......... 34.3 3.3 32.0 3.6 Over 9 years but less than or equal to 10 years......... 208.7 20.0 122.1 13.8 Over 10 years........................................... 281.8 27.0 228.3 25.7 -------- ------ ------ ------ Total......................................... $1,045.5 100.0% $886.9 100.0% ======== ====== ====== ======
Problem, Potential Problem and Restructured Commercial Mortgages Commercial mortgage loans are stated at their unpaid principal balances, net of valuation allowances and writedowns for impairment. The Company provides valuation allowances for commercial mortgage loans considered to be impaired. Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance for loss is established for the excess of the carrying value of the mortgage loan over its estimated fair value. Estimated fair value is based on either the present value of expected future cash flows discounted at the loan's original effective interest rate, the loan's observable market price or the fair value of the collateral. The provision for loss is reported as a realized loss on investment. The Company reviews its mortgage loan portfolio and analyzes the need for a valuation allowance for any loan which is delinquent for 60 days or more, in process of foreclosure, restructured, on "watchlist", or which currently has a valuation allowance. Loans which are delinquent and loans in process of foreclosure are categorized by the Company as "problem" loans. Loans with valuation allowances, but which are not currently delinquent, and loans which are on 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 47 49 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 JUNE 30, DECEMBER 31, -------- ------------ 1999 1998 -------- ------------ ($ IN MILLIONS) Total commercial mortgages.................................. $1,045.5 $886.9 ======== ====== Problem commercial mortgages(1)............................. $ 12.0 $ 11.6 Potential problem commercial mortgages...................... 59.5 86.1 Restructured commercial mortgages........................... 145.5 153.6 -------- ------ Total problem, potential problem & restructured commercial mortgages............................ $ 217.0 $251.3 ======== ====== Total problem, potential problem and restructured commercial mortgages as a percent of total commercial mortgages............................ 20.8% 28.3% Valuation allowances/writedowns(2): Problem loans............................................... $ 1.3 $ 1.8 Potential problem loans..................................... 15.4 26.7 Restructured loans.......................................... 25.9 25.8 -------- ------ Total valuation allowances/writedowns(2).......... $ 42.6 $ 54.3 ======== ====== Total valuation allowances/writedowns as a percent of problem, potential problem and restructured commercial mortgages at carrying value before valuation allowances and writedowns............. 16.4% 17.8% ======== ======
- --------------- (1) Problem commercial mortgages included mortgage loans in the process of foreclosure of $12.0 million and $11.6 million at such dates, respectively. (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 June 30, 1999 and December 31, 1998. 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 June 30, 1999 and December 31, 1998, such reserves were $13.7 million, and $13.2 million, respectively. AGRICULTURAL MORTGAGE LOANS Problem, Potential Problem and Restructured Agricultural Mortgages The Company defines problem, potential problem and restructured agricultural mortgages in the same manner as it does for commercial mortgages. The following table presents the carrying amounts of problem, potential problem and restructured agricultural mortgages relative to the carrying value of all agricultural mortgages as of the dates indicated. The table also presents the valuation allowances established by the 48 50 Company relative to agricultural mortgages defined as problem, potential problem and restructured as of each of the aforementioned dates indicated. PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES AT CARRYING VALUE
AS OF AS OF JUNE 30, DECEMBER 1999 1998 -------- -------- ($ IN MILLIONS) Total agricultural mortgages................................ $560.9 531.2 ====== ====== Problem agricultural mortgages(1)........................... $ 12.5 2.1 Potential problem agricultural mortgages.................... 1.5 1.7 Restructured agricultural mortgages......................... 10.8 11.7 ------ ------ Total problem, potential problem & restructured agricultural mortgages................................................. $ 24.8 15.5 ====== ====== Total problem, potential problem and restructured agricultural mortgages as a percent of total agricultural mortgages................................................. 4.4% 2.9% ====== ====== Valuation allowances/writedowns: problem loans.............. $ -- $ -- Potential problem loans..................................... 0.1 0.1 Restructured loans.......................................... 0.3 0.3 ------ ------ Total valuation allowances/writedowns....................... $ 0.4 $ 0.4 ====== ====== Total valuation allowances as a percent of problem, potential problem and restructured agricultural mortgages at carrying value before valuation allowances and writedowns................................................ 1.6% 2.5% ====== ======
- --------------- (1) Problem agricultural mortgages included delinquent mortgage loans of $11.2 million and $2.1 million and loans in process of foreclosure of $1.3 million and $0.0 at June 30, 1999 and December 31, 1998, 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 June 30, 1999 and December 31, 1998, such reserves were $5.4 million and $5.2 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 June 30, 1999 and December 31, 1998, the carrying value of the Company's real estate investments was $486.6 million and $634.2 million, respectively, or 4.5% and 5.7%, respectively, of general account invested assets. The Company owns real estate, interests in real estate joint ventures (both majority owned and minority owned), and real estate acquired upon foreclosure of 49 51 commercial and agricultural mortgage loans. The following table presents the carrying value of the Company's equity real estate investments by such classifications. EQUITY REAL ESTATE
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) Real estate................................................. $223.8 $271.1 Joint ventures.............................................. 118.5 219.9 ------ ------ Subtotal.................................................... 342.3 491.0 Foreclosed.................................................. 144.3 143.2 ------ ------ Total....................................................... $486.6 $634.2 ====== ======
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 June 30, 1999 and December 31, 1998, the carrying value of real estate to be disposed of was $322.6 million and $312.9 million, respectively, or 3.0% and 2.8%, respectively of invested assets at such dates. The aforementioned carrying values are net of valuation allowances of $30.0 million and $30.6 million, at June 30, 1999 and December 31, 1998, respectively. In addition, the carrying value of real estate to be disposed of at such dates is net of $97.9 million and $79.1 million of impairment adjustments. For the six-months period ended June 30, 1999 and the year ended December 31, 1998, such increases in valuation allowances aggregated $6.0 million and $6.7 million, respectively. The following table analyzes the Company's real estate sales during the periods indicated. REAL ESTATE SALES(1)
FOR THE FOR THE SIX-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, JUNE 30, ---------------- ---------------- 1999 1998 1999 1998 ------ ------ ------ ------ ($ IN MILLIONS) Sales proceeds.................................. $155.6 $371.4 $173.1 $428.1 ====== ====== ====== ====== Carrying value before impairment adjustments and valuation allowances.......................... $144.6 $329.1 $160.7 $431.2 Impairment adjustments.......................... 25.2 18.8 25.2 74.3 Valuation allowances............................ 3.0 34.8 4.0 39.9 ------ ------ ------ ------ Carrying value after impairment adjustments and valuation allowances.......................... $116.4 $275.5 $131.5 $317.0 ====== ====== ====== ====== Gain (loss)..................................... $ 39.2 $ 95.9 $ 41.6 $111.1 ====== ====== ====== ======
- --------------- (1) Excludes sales of unconsolidated real estate joint ventures. Unconsolidated real estate joint venture interests are included in "Other invested assets". Gains from the sale of such interests were $0.0 million and $21.6 million for June 30, 1999 and 1998, respectively. 50 52 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 primarily consist of investments in common stocks and limited partnership interests. Substantially all the common stocks owned by the Company are publicly traded on national security exchanges. The following table presents the carrying values of the Company's investments in common stocks and limited partnership interests at the dates indicated. Included in common stocks at June 30, 1999 and December 31, 1998 are $5.6 million, and $19.1 million, respectively, of non-marketable private equity securities. INVESTMENTS IN EQUITY SECURITIES
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ Common stocks............................................... $267.0 $294.6 Limited partnership interests............................... 186.8 162.6 ------ ------ Total............................................. $453.8 $457.2 ====== ======
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES The cumulative asset specific impairment adjustments and provisions for valuation allowances that were recorded as of the end of each period are shown in the table below and are reflected in the corresponding asset values discussed above. CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) Fixed maturities............................................ $ 15.0 $ 15.1 Equity securities........................................... 6.5 5.8 Mortgages................................................... 26.3 26.3 Real estate(1).............................................. 136.2 166.6 ------ ------ Total............................................. $184.0 $213.8 ====== ======
- --------------- (1) Includes $51.8 million and $55.8 million as of June 30, 1999 and December 31, 1998, respectively, relating to impairments taken upon foreclosure of mortgage loans. 51 53 CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) Mortgages................................................... $35.8 $46.8 Real estate................................................. 30.0 30.6 ----- ----- Total............................................. $65.8 $77.4 ===== =====
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF AS OF JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ ($ IN MILLIONS) Fixed maturities............................................ $ 15.0 $ 15.1 Equity securities........................................... 6.5 5.8 Mortgages................................................... 62.1 73.1 Real estate................................................. 166.2 197.2 ------ ------ Total............................................. $249.8 $291.2 ====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to the Company's 1998 Annual Report on Form 10-K for a description of the Company's exposures to market risk, as well as the Company's objectives, policies and strategies relating to the management of such risks. The relative sensitivity to changes in fair value from interest rates and equity prices at June 30, 1999 is not materially different from that presented in the Company's 1998 Annual Report on Form 10-K at December 31, 1998. 52 54 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In late 1995 and thereafter, 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/or universal life insurance policies from the early 1980s to 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/or violation of state insurance and/or deceptive business practice laws). Plaintiffs in these cases (including the Goshen case discussed below) seek primary 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/or 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 seek compensatory damages in unspecified amounts. The Company has answered the complaints in each action (except for one action 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 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 (with one exception discussed below) 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. The Massachusetts District Court in the Multidistrict Litigation has entered an order essentially holding all of the federal cases in abeyance pending the action 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 March 18, 1999 the order by the New York State Supreme Court was affirmed by the New York State Appellate Division, First Department. On June 8, 1999, plaintiffs obtained leave from the New York State Court of Appeals to appeal the Appellate Division decision. Briefs will be filed during the summer and early fall, and oral argument before the Court of Appeals will take place on October 14, 1999. All actions before the United States District Court for the District of Massachusetts are still pending. In addition, on or about February 25, 1999, a purported class action was filed against MONY Life Insurance Company of America ("MLOA"), a subsidiary of MONY Life in Kentucky state court covering policyholders who purchased individual universal life insurance policies from MLOA after January 1, 1988 claiming breach of contract and violations of the Kentucky Consumer Protection Act. On March 26, 1999, MLOA removed that action to the United States District Court for the Eastern District of Kentucky, requested the Judicial Panel on Multidistrict Litigation to transfer the action to the Multidistrict Litigation in the District of Massachusetts and sought a stay of further proceedings in the Kentucky District Court pending a determination on multidistrict transfer. On April 19, 1999, the Judicial Panel entered a conditional transfer order transferring the case to the Federal District Court in Massachusetts. Plaintiffs have opposed the transfer, and oral argument on MLOA's transfer motion took place before the Judicial Panel on July 22, 1999. On April 20, 1999, plaintiffs moved to remand the case to the Kentucky State Court. MLOA has opposed the motion. On June 18, 1999, the Federal District Court denied MLOA's motion for a stay and preliminary discovery has been initiated in the case. There can be no assurance that the present or any future litigation relating to sales practices will not have a material adverse effect on the Company. 53 55 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. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Board of Directors consists of three classes of directors: one class to hold office initially for a term expiring at the Annual Meeting of Shareholders held on May 26, 1999, another class to hold office initially for a term expiring at the Annual Meeting of Shareholders to be held in the 2000, and another class to hold office initially for a term expiring at the Annual Meeting of Shareholders to be held in 2001, with the members of each class to hold office until their successors are duly elected and qualified. At each Annual Meeting of Shareholders of the Company, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the Annual Meeting of Shareholders held in the third year following the year of their election. At the Annual Meeting of the Company's Shareholders held on May 26, 1999, the five nominees listed below were elected as directors to hold office until the 2002 Annual Meeting and until their successors shall have been elected and qualified. In addition, at such meeting, the Company's shareholders ratified the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants. The number of votes with respect to each of these matters was as follows: (a) Election of Directors:
VOTES NAME VOTES FOR WITHHELD ---- ---------- -------- Claude M. Ballard........................................... 21,846,287 413,100 G. Robert Durham............................................ 21,849,419 409,970 James L. Johnson............................................ 21,846,134 413,253 Kenneth M. Levine........................................... 21,851,484 407,903 John R. Meyer............................................... 21,844,642 414,745
(b) Ratification of the Appointment of PricewaterhouseCoopers LLP as Independent Accountants:
VOTES FOR VOTES AGAINST ABSTENTIONS --------- ------------- ----------- 21,962,169 101,538 195,680
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 No report on Form 8-K was filed during the quarter covered by this report. 54 56 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: August 13, 1999 By: /s/ LARRY COHEN ------------------------------------ Larry Cohen Vice President and Controller (Principal Accounting Officer) Date: August 13, 1999 S-1 EX-27.1 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 SIX MONTHS ENDED 6-30-99 1,000,000 6-MOS DEC-31-1998 JAN-01-1999 JUN-30-1999 3,037 0 0 454 1,150 465 5,213 331 480 500 24,814 957 0 96 1,975 256 0 0 0 1,763 24,814 142 198 71 140 73 32 227 163 56 107 0 0 0 107 2.27 2.25 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 fees.
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