MONY CLOSED BLOCK OF BUSINESS

9 Months Ended

Sep. 30, 2019

In 1998, MONY Life Insurance Company (“MONY”) converted from a mutual insurance company to a stock corporation (“demutualization”). In connection with its demutualization, an accounting mechanism known as a closed block (the “Closed Block”) was established for certain individuals’ participating policies in force as of the date of demutualization. Assets, liabilities, and earnings of the Closed Block are specifically identified to support its participating policyholders. The Company acquired the Closed Block in conjunction with the acquisition of MONY in 2013.

Assets allocated to the Closed Block inure solely to the benefit of each Closed Block’s policyholders and will not revert to the benefit of MONY or the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of MONY’s general account, any of MONY’s separate accounts or any affiliate of MONY without the approval of the Superintendent of The New York State Department of Financial Services (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income (loss) (“AOCI”) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY’s Closed Block earnings was recalculated and reset as February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.

Summarized financial information for the Closed Block as of September 30, 2019 and December 31, 2018 is as follows:


	As of
	September 30, 2019		December 31, 2018
	(Dollars In Thousands)
Closed block liabilities
Future policy benefits, policyholders’ account balances and other policyholder liabilities	$	5,579,389	$	5,679,732
Policyholder dividend obligation	319,865		—
Other liabilities	11,366		22,505
Total closed block liabilities	5,910,620		5,702,237
Closed block assets
Fixed maturities, available-for-sale, at fair value	$	4,694,274	$	4,257,437

Mortgage loans on real estate	73,563		75,838
Policy loans	648,805		672,213
Cash	75,828		116,225
Other assets	106,481		136,388
Total closed block assets	5,598,951		5,258,101
Excess of reported closed block liabilities over closed block assets	311,669		444,136
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses) net of policyholder dividend obligation: $198,285 and $(141,128); and net of income tax: $(41,640) and $61,676	—		(120,528)
Future earnings to be recognized from closed block assets and closed block liabilities	$	311,669	$	323,608

Reconciliation of the policyholder dividend obligation is as follows:


	For The Nine Months Ended September 30,
	2019		2018
	(Dollars In Thousands)
Policyholder dividend obligation, beginning of period	$	—	$	160,712
Applicable to net revenue (losses)	(19,548)		(24,922)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation	339,413		(135,790)
Policyholder dividend obligation, end of period	$	319,865	$	—

Closed Block revenues and expenses were as follows:


	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Revenues
Premiums and other income	$	37,652	$	39,691	$	115,202	$	121,768
Net investment income	52,018		50,833		154,808		152,248
Net investment gains (losses)	1,104		40		693		66
Total revenues	90,774		90,564		270,703		274,082
Benefits and other deductions
Benefits and settlement expenses	84,531		83,588		250,410		251,480
Other operating expenses	229		291		836		310
Total benefits and other deductions	84,760		83,879		251,246		251,790
Net revenues before income taxes	6,014		6,685		19,457		22,292
Income tax expense	1,263		1,404		4,086		4,681
Net revenues	$	4,751	$	5,281	$	15,371	$	17,611