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 SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-14603
THE MONY GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3976138
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1740 BROADWAY
NEW YORK, NEW YORK 10019
(212) 708-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
As of December 23, 1998, there were 47,241,084 shares of the Registrant's
common stock, par value $0.01, outstanding.
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2
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: Unaudited interim condensed consolidated balance sheets as
of September 30, 1998 and December 31, 1997................. 3
Unaudited interim condensed consolidated statements of
income and comprehensive income for the three-month periods
ended September 30, 1998 and 1997........................... 4
Unaudited interim condensed consolidated statements of
income and comprehensive income for the nine-month periods
ended September 30, 1998 and 1997........................... 5
Unaudited interim condensed consolidated statement of
changes in equity for the nine-month period ended September
30, 1998.................................................... 6
Unaudited interim condensed consolidated statements of cash
flows for the nine-month periods ended September 30, 1998
and 1997.................................................... 7
Notes to unaudited interim condensed consolidated financial
statements.................................................. 8
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Investments................................................. 45
PART OTHER INFORMATION
II
ITEM 1: Legal Proceedings........................................... 55
ITEM 2: Changes in Securities and Use of Proceeds................... 55
ITEM 3: Defaults upon Senior Securities............................. 56
ITEM 4: Submission of Matters to a Vote of Security Holders......... 56
ITEM 5: Other Information........................................... 56
ITEM 6: Exhibits and Reports on Form 8-K............................ 56
SIGNATURES................................................................... 57
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 order of the New York Supreme Court granting the Company's motion
for summary judgement in the case of Goshen v. The Mutual Life Insurance Company
of New York; (vi) deterioration in the experience of the closed block
established in connection with the Company's plan of reorganization; (vii) the
performance of the stock markets; (viii) the intensity of competition from other
financial institutions; (ix) the Company's mortality, morbidity, persistency and
claims experience; (x) the Company's ability to develop, distribute and
administer competitive products and services in a timely, cost-effective manner;
(xi) the Company's financial and claims paying ratings; (xii) the effect of
changes in laws and regulations affecting the Company's businesses, including
changes in tax laws affecting insurance and annuity products; (xiii) market
risks related to interest rates, equity prices, derivatives, foreign currency
exchange and credit; (xiv) the ability of the Company to identify and consummate
on successful terms any future acquisitions, and to successfully integrate
acquired businesses with minimal disruption and (xv) 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
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
INVESTMENTS:
Securities available-for-sale at fair value
Fixed maturities....................................... $ 6,552.5 $ 5,950.1
Equity securities...................................... 378.1 337.8
Mortgage loans on real estate............................. 1,404.3 1,430.1
Policy loans.............................................. 1,257.6 1,247.2
Real estate to be disposed of............................. 281.0 621.2
Real estate held for investment........................... 399.6 495.9
Other invested assets..................................... 57.1 68.6
--------- ---------
10,330.2 10,150.9
--------- ---------
Cash and cash equivalents................................. 388.1 313.4
Accrued investment income................................. 190.4 182.8
Amounts due from reinsurers............................... 589.3 574.5
Premiums receivables...................................... 18.9 21.6
Deferred policy acquisition costs......................... 923.9 1,007.1
Other assets.............................................. 241.7 243.0
Assets transferred in Group Pension Transaction (Note
4)..................................................... 5,721.9 5,714.9
Separate account assets................................... 5,501.3 5,403.1
--------- ---------
Total assets...................................... $23,905.7 $23,611.3
========= =========
LIABILITIES AND EQUITY
Future policy benefits.................................... $ 7,575.2 $ 7,469.4
Policyholder account balances............................. 2,221.3 2,352.8
Other policyholder liabilities............................ 264.7 238.5
Amounts due to reinsurers................................. 90.0 104.3
Accounts payable and other liabilities.................... 527.9 539.0
Long-term debt............................................ 373.7 423.6
Current federal income taxes payable...................... 148.5 120.5
Deferred federal income taxes............................. 35.4 11.5
Liabilities transferred in Group Pension Transaction (Note
4)..................................................... 5,649.7 5,638.7
Separate accounts liabilities............................. 5,490.8 5,392.4
--------- ---------
Total liabilities................................. 22,377.2 22,290.7
Commitments and contingencies (Note 5)
Retained earnings......................................... 1,356.3 1,202.5
Accumulated other comprehensive income.................... 172.2 118.1
--------- ---------
Total equity...................................... 1,528.5 1,320.6
--------- ---------
Total liabilities and equity...................... $23,905.7 $23,611.3
========= =========
See accompanying notes to unaudited interim condensed consolidated financial
statements.
5
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS)
1998 1997
------ ------
REVENUES:
Premiums.................................................... $167.5 $198.2
Universal life and investment-type product policy fees...... 37.6 32.3
Net investment income....................................... 197.1 184.1
Net realized gains on investment............................ 12.0 14.4
Group Pension Profits (Note 4).............................. 11.4 16.0
Other income................................................ 37.8 28.4
------ ------
463.4 473.4
------ ------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 182.7 203.7
Interest credited to policyholders' account balances........ 29.4 29.9
Amortization of deferred policy acquisition costs........... 32.1 30.5
Dividends to policyholders.................................. 55.2 58.6
Other operating costs and expenses.......................... 103.3 96.1
------ ------
402.7 418.8
------ ------
Income before income taxes and extraordinary item........... 60.7 54.6
Income tax expense.......................................... 19.5 10.3
------ ------
Income before extraordinary item............................ 41.2 44.3
Extraordinary item -- demutualization expenses, net......... 5.8 0.9
------ ------
Net income.................................................. 35.4 43.4
Other comprehensive income, net............................. 44.2 28.7
------ ------
Comprehensive income........................................ $ 79.6 $ 72.1
====== ======
See accompanying notes to unaudited interim condensed consolidated financial
statements.
6
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS)
1998 1997
-------- --------
REVENUES:
Premiums.................................................... $ 521.3 $ 605.8
Universal life and investment-type product policy fees...... 111.9 91.0
Net investment income....................................... 554.8 543.7
Net realized gains on investment............................ 169.6 57.0
Group Pension Profits (Note 4).............................. 34.1 44.2
Other income................................................ 116.2 87.2
-------- --------
1,507.9 1,428.9
-------- --------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 562.4 627.6
Interest credited to policyholders' account balances........ 84.0 92.9
Amortization of deferred policy acquisition costs........... 102.9 98.9
Dividends to policyholders.................................. 163.6 176.4
Other operating costs and expenses.......................... 334.4 300.0
-------- --------
1,247.3 1,295.8
-------- --------
Income before income taxes and extraordinary item........... 260.6 133.1
Income tax expense.......................................... 91.3 42.3
-------- --------
Income before extraordinary item............................ 169.3 90.8
Extraordinary item -- demutualization expenses, net......... 15.5 3.3
-------- --------
Net income.................................................. 153.8 87.5
Other comprehensive income, net............................. 54.1 11.4
-------- --------
Comprehensive income........................................ $ 207.9 $ 98.9
======== ========
See accompanying notes to unaudited interim condensed consolidated financial
statements.
7
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
(IN MILLIONS)
ACCUMULATED
OTHER
COMPREHENSIVE
TOTAL EQUITY RETAINED EARNINGS INCOME
------------ ----------------- -------------
Balance, December 31, 1997........................ $1,320.6 $1,202.5 $118.1
Comprehensive income
Net income...................................... 153.8 153.8
Other comprehensive income:
Unrealized gains on investments, net of
unrealized losses, reclassification
adjustments, and taxes..................... 54.1 54.1
-------- -------- ------
Comprehensive income.............................. 207.9 153.8 54.1
-------- -------- ------
Balance, September 30, 1998....................... $1,528.5 $1,356.3 $172.2
======== ======== ======
See accompanying notes to unaudited interim condensed consolidated financial
statements.
8
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS)
1998 1997
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 126.2 $ 103.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayment of:
Fixed maturities.......................................... 734.2 816.9
Equity securities......................................... 158.1 219.3
Mortgage loans on real estate............................. 300.4 248.6
Real estate............................................... 516.2 305.8
Other invested assets..................................... 45.8 9.2
Acquisitions of investments:
Fixed maturities.......................................... 1,174.0 1,165.9
Equity securities......................................... 176.2 194.2
Mortgage loans on real estate............................. 243.0 123.6
Real estate............................................... 28.2 34.4
Other invested assets..................................... 1.5 1.1
Policy loans, net......................................... 10.4 4.5
Other, net................................................ (9.3) (24.4)
Property plant & equipment, net............................. 13.0 10.2
--------- ---------
Net cash provided by investing activities................... 117.7 90.3
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITY:
Repayments of debt.......................................... (50.8) (125.2)
Receipts from annuity and universal life policies credited
to policyholder account balances.......................... 963.9 906.8
Return of policyholder account balances on annuity and
universal life policies................................... (1,082.3) (1,068.4)
--------- ---------
Net cash used in financing activities....................... (169.2) (286.8)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 74.7 (92.7)
Cash and cash equivalents, beginning of year................ 313.4 315.4
--------- ---------
Cash and cash equivalents, end of year...................... $ 388.1 $ 222.7
========= =========
See accompanying notes to unaudited interim condensed consolidated financial
statements.
7
9
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On November 16, 1998, pursuant to an order by the New York Superintendent
of Insurance approving its Plan of Reorganization (the "Plan") under Section
7312 of the New York Insurance Law, as amended, The Mutual Life Insurance
Company of New York ("MONY" or the "Company") converted from a mutual life
insurance company to a stock life insurance company and became a wholly owned
subsidiary of The MONY Group Inc., (the "MONY Group"), a Delaware corporation
organized for the purpose of becoming the parent holding company of 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 at an
initial public offering price of $23.50 per share. 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 MONY policyholders, pursuant to
the Plan, in exchange for their membership interests in MONY. Effective November
16, 1998, MONY changed its name to MONY Life Insurance Company ("MONY Life").
The MONY Group is the holding company parent of MONY Life and has no other
operations or subsidiaries. MONY Life, together with its wholly owned
subsidiaries, 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.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements are prepared in conformity with generally accepted accounting
principles ("GAAP") which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. These
statements should be read in conjunction with the consolidated financial
statements of MONY for the year ended December 31, 1997. The results of
operations for the three-month and nine-month periods ended September 30, 1998
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 MONY (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.
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 MONY 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), MONY aggregates its
mutual fund operations with its accumulation products segment.
8
10
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 (See Note 4), as well as the Group Pension Profits (See Note 4), and
(ii) disability income insurance products. Products comprising the accumulation
products segment primarily include fixed annuities, non-participating interest
sensitive products (including; single 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, 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.
Set forth in the table below is certain financial information with respect
to the Company's operating segments as of and for the three and nine month
periods ended September 30, 1998 and 1997 and as of the year ended December 31,
1997, as well as amounts not allocated to the segments. The Company evaluates
the performance of each operating segment based on profit or loss from
operations before income taxes and nonrecurring items (e.g. items of an unusual
or infrequent nature). MONY does not allocate nonrecurring items to the
segments. In addition, all segment revenues are from external customers.
Assets have been allocated to the segments in amounts sufficient to support
the associated liabilities of each segment and maintain a separately calculated
regulatory risk-based capital ("RBC") level for each segment equal to that of
the Company's statutory RBC level. Allocations of net investment income and net
realized gains on investments were based on the amount of assets allocated to
each segment. Other costs and operating expenses were allocated to each of the
segments based on: (i) a review of the nature of such costs, (ii) time studies
analyzing the amount of employee compensation costs incurred by each segment,
and (iii) cost estimates included in the Company's product pricing.
Substantially all non-cash transactions and impaired real estate (including real
estate acquired in satisfaction of debt) have been allocated to the Protection
Products segment.
Amounts reported as "unallocated amounts" in the table below primarily
relate to contracts issued by MONY relating to its employee benefit plans.
9
11
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
($ IN MILLIONS)
Premiums:
Protection Products........................ $164.6 $194.3 $508.4 $593.3
Accumulation Products...................... 0.5 1.0 2.3 3.8
Other Products............................. 2.4 2.9 10.6 8.7
------ ------ ------ ------
$167.5 $198.2 $521.3 $605.8
====== ====== ====== ======
Universal life and investment-type
product policy fees:
Protection Products........................ $ 21.7 $ 18.8 $ 63.6 $ 53.4
Accumulation Products...................... 15.9 13.3 47.5 36.5
Other Products............................. 0.0 0.2 0.8 1.1
------ ------ ------ ------
$ 37.6 $ 32.3 $111.9 $ 91.0
====== ====== ====== ======
Net investment income and net realized gains
(losses) on investments:
Protection Products........................ $163.9 $150.1 $560.9 $454.8
Accumulation Products...................... 31.3 33.4 109.1 98.7
Other Products............................. 12.8 14.0 51.7 44.9
Unallocated amounts........................ 1.1 1.0 2.7 2.3
------ ------ ------ ------
$209.1 $198.5 $724.4 $600.7
====== ====== ====== ======
Other income:
Protection Products(1)..................... $ 19.3 $ 16.5 $ 50.5 $ 54.1
Accumulation Products...................... 17.7 14.1 52.3 37.3
Other Products............................. 10.8 12.4 43.2 35.9
Unallocated amounts........................ 1.4 1.4 4.3 4.1
------ ------ ------ ------
$ 49.2 $ 44.4 $150.3 $131.4
====== ====== ====== ======
Amortization of deferred policy acquisition
costs:
Protection Products........................ $ 25.0 $ 24.9 $ 80.4 $ 80.7
Accumulation Products...................... 7.1 5.6 22.5 18.2
Other Products............................. 0.0 0.0 0.0 0.0
------ ------ ------ ------
$ 32.1 $ 30.5 $102.9 $ 98.9
====== ====== ====== ======
Benefits to policyholders:(2)
Protection Products........................ $184.2 $202.4 $554.4 $621.1
Accumulation Products...................... 19.5 21.1 56.3 67.7
Other Products............................. 6.1 7.7 28.7 25.3
Unallocated amounts........................ 2.3 2.4 7.0 6.4
------ ------ ------ ------
$212.1 $233.6 $646.4 $720.5
====== ====== ====== ======
Other operating costs and expenses:
Protection Products........................ $ 66.7 $ 65.7 $211.4 $202.8
Accumulation Products...................... 21.3 18.4 64.0 48.4
Other Products............................. 15.3 12.0 59.0 48.8
Unallocated amounts........................ 0.0 0.0 0.0 0.0
------ ------ ------ ------
$103.3 $ 96.1 $334.4 $300.0
====== ====== ====== ======
Income before income taxes:
Protection Products........................ $ 39.1 $ 28.7 $175.9 $ 77.1
Accumulation Products...................... 17.1 16.2 67.1 40.4
Other Products............................. 4.3 9.7 17.6 15.6
Unallocated amounts........................ 0.2 0.0 0.0 0.0
------ ------ ------ ------
$ 60.7 $ 54.6 $260.6 $133.1
====== ====== ====== ======
10
12
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS:
Protection Products(3).................................... $16,216.7 $15,776.5
Accumulation Products..................................... 5,711.4 5,757.9
Other Products............................................ 1,155.8 1,234.2
Unallocated amounts....................................... 821.8 842.7
--------- ---------
$23,905.7 $23,611.3
========= =========
Deferred policy acquisition costs:
Protection Products....................................... $ 796.6 $ 874.1
Accumulation Products..................................... 127.3 133.0
Other Products............................................ 0.0 0.0
--------- ---------
$ 923.9 $ 1,007.1
========= =========
Policyholders' liabilities:
Protection Products(4).................................... $10,120.0 $10,105.7
Accumulation Products..................................... 1,301.4 1,416.1
Other Products............................................ 472.0 513.4
Unallocated amounts....................................... 18.0 16.5
--------- ---------
$11,911.4 $12,051.7
========= =========
Separate account liabilities:(5)
Protection Products(6).................................... $ 3,990.6 $ 3,720.1
Accumulation Products..................................... 4,035.8 4,002.6
Other Products............................................ 528.0 547.7
Unallocated amounts....................................... 708.8 736.0
--------- ---------
$ 9,263.2 $ 9,006.4
========= =========
- ---------------
(1) Includes Group Pension Profits of $34.1 million and $44.2 million for the
nine month periods ended September 30, 1998 and 1997, respectively and $11.4
million and $16.0 million for the three month periods ended September 30,
1998 and 1997, respectively.
(2) Includes interest credited to policyholders' account balances.
(3) Includes assets transferred in the Group Pension Transaction of $5,721.9
million and $5,714.9 million as of September 30, 1998 and December 31, 1997,
respectively.
(4) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,850.2 million and $1,991.0 million as of September 30,
1998 and December 31, 1997, respectively.
(5) Each segment includes separate account assets in an amount equal to the
corresponding liability reported.
(6) Includes separate account liabilities transferred in the Group Pension
Transaction of $3,772.4 million and $3,614.0 million as of September 30,
1998 and December 31, 1997 respectively.
The following is a summary of premiums and universal life and
investment-type product policy fees by product for the three-month periods and
nine-month periods ended September 30, 1998 and 1997, respectively ($ in
millions).
11
13
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
PREMIUMS:
Individual Life......................................... $165.1 $175.9 $508.2 $537.6
Disability income insurance............................. (0.5) 18.4 0.2 55.7
Group insurance......................................... 2.7 2.8 8.4 7.8
Other................................................... 0.2 1.1 4.5 4.7
------ ------ ------ ------
Total......................................... $167.5 $198.2 $521.3 $605.8
====== ====== ====== ======
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES:
Universal life.......................................... $ 13.6 $ 13.1 $ 38.5 $ 38.8
Variable universal life................................. 5.2 3.4 17.1 8.3
Group universal life.................................... 2.9 2.3 8.0 6.3
Individual variable annuities........................... 15.6 12.8 47.1 35.9
Individual fixed annuities.............................. 0.3 0.7 1.2 1.7
------ ------ ------ ------
Total......................................... $ 37.6 $ 32.3 $111.9 $ 91.0
====== ====== ====== ======
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 annuity, 401(k)
and managed funds lines of business, to AEGON's wholly-owned subsidiary, AUSA
Life Insurance Company, Inc. ("AUSA"). MONY 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, MONY and AEGON have entered into certain service
agreements. These agreements, among other things, provide that MONY will
continue to manage the transferred assets, and that AUSA will continue to
provide certain administrative services to MONY'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 was 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 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
12
14
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
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, MONY 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.
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
13
15
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
"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
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
($ IN MILLIONS)
ASSETS:
General Account
Fixed Maturities:
Available for sale, at estimated fair value (amortized
cost $1,515.8 and $1,585.4, respectively)............. $1,592.9 $1,645.0
Mortgage loans on real estate.......................... 249.2 347.9
Real estate held for investment........................ 47.0 50.4
Cash and cash equivalents.............................. 36.2 24.5
Other assets........................................... 24.2 33.1
-------- --------
Total general account assets...................... 1,949.5 2,100.9
Separate account assets................................... 3,772.4 3,614.0
-------- --------
Total assets...................................... $5,721.9 $5,714.9
======== ========
LIABILITIES:
General Account(1)
Policyholders' account balances........................ 1,850.2 1,991.0
Other liabilities...................................... 27.1 33.7
-------- --------
Total general account liabilities................. 1,877.3 2,024.7
Separate account liabilities(2)........................... 3,772.4 3,614.0
-------- --------
Total liabilities................................. $5,649.7 $5,638.7
======== ========
- ---------------
(1) Includes general account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $129.0
million and $142.8 million as of September 30, 1998 and December 31, 1997,
respectively.
(2) Includes separate account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $29.8 million
and $31.1 million as of September 30, 1998 and December 31, 1997,
respectively.
14
16
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1998 1997 1998 1997
------- ------- ------ ------
($ IN MILLIONS)
REVENUES:
Product policy fees................................. $ 5.5 $ 5.5 $ 16.6 $ 16.5
Net investment income............................... 38.5 42.7 119.1 128.6
Net realized gains (losses) on investments.......... (0.9) 1.8 (3.3) 4.0
----- ----- ------ ------
Total revenues............................ 43.1 50.0 132.4 149.1
BENEFITS AND EXPENSES:
Interest credited to policyholders' account
Balances.......................................... 26.9 28.9 82.6 88.7
Other operating costs and expenses.................. 4.8 5.1 15.7 16.2
----- ----- ------ ------
Total benefits and expenses............... 31.7 34.0 98.3 104.9
Group Pension Profits..................... $11.4 $16.0 $ 34.1 $ 44.2
===== ===== ====== ======
5. COMMITMENTS AND CONTINGENCIES
In late 1995 and during 1996, a number of purported class actions were
commenced in various state and federal courts against MONY alleging that MONY
engaged in deceptive sales practices in connection with the sale of whole and
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
violation of state insurance and/or deceptive business practice laws). MONY has
answered the complaints in each action (except for one being voluntarily held in
abeyance), has denied any wrongdoing, and has asserted numerous affirmative
defenses.
On June 7, 1996, the New York State Supreme Court certified 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 MONY and sold on an alleged "vanishing premium" basis
during the period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY
filed a motion to dismiss or, alternatively, for summary judgment on all counts
of the complaint. All of the other putative class actions have been consolidated
and transferred by the Judicial Panel on Multidistrict Litigation to the United
States District Court for the District of Massachusetts, or are being
voluntarily held in abeyance pending the outcome of Goshen. The Massachusetts
District Court in the Multidistrict Litigation has entered an order recognizing
the Goshen case as the lead case and 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 MONY's motion
for summary judgment and dismissed all claims filed in the Goshen case against
MONY. The order by the New York State Supreme Court has been appealed to the
Appellate Division by plaintiffs and all actions before the United States
District Court for the District of Massachusetts are still pending.
In addition to the matters discussed above, MONY 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. In connection with such matters, MONY recorded a provision
of $10.0 million during the nine-month period ended September 30, 1998.
15
17
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998, the total reserve for such litigation, which is
reflected in Accounts Payable and Other Liabilities, amounted to $39.5 million.
While the outcome of such matters cannot be predicted with certainty, in the
opinion of management, any additional liability beyond that recorded at
September 30, 1998, resulting from the resolution of these matters will not have
a material adverse effect on MONY's consolidated financial position or results
of operations.
In addition, MONY has two bank line of credit facilities with domestic
banks aggregating $150.0 million, with scheduled renewal dates in September 1999
and September 2003. The purpose of these facilities is to provide additional
liquidity for any unanticipated short-term cash needs MONY might experience.
MONY has not borrowed against these lines of credit.
At September 30, 1998, MONY had commitments to issue $49.5 million of fixed
rate agricultural loans with periodic interest rate reset dates. The initial
interest rates on such loans range from approximately 6.7% to 8.0%. In addition,
MONY had commitments to issue $77.3 million of fixed rate commercial mortgage
loans with interest rates ranging from 6.88% to 7.72%. MONY also had commitments
outstanding to purchase $23.7 million of private fixed maturity securities as of
September 30, 1998 with interest rates ranging from 6.86% to 6.94%.
6. PRO FORMA FINANCIAL INFORMATION
The pro forma condensed consolidated financial information presented below
gives effect to the Offerings, the reorganization of MONY, and establishment of
a Closed Block (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Closed Block") pursuant to the Plan (hereafter
collectively referred to as the "Transaction"), as if the Transaction had
occurred as of September 30, 1998 for purposes of the pro forma condensed
consolidated balance sheet information and as of January 1, 1998 for purposes of
the pro forma condensed consolidated income statement information (see Note 1).
The pro forma balance sheet information reflects gross and net proceeds of
the Offerings of $304.0 million and $282.5 million, respectively. Of the net
proceeds, pursuant to the terms of the Plan, approximately $20.6 million has
been used to pay cash to Eligible Policyholders in exchange for their membership
interests in MONY in lieu of the distribution of common stock, including the
amount used to pay cash pursuant to an expression of a preference to receive
cash in lieu of common stock, and approximately $13.1 million has been
contributed by MONY Group to MONY Life to fund policy credits to be provided to
certain Eligible Policyholders in exchange for their membership interests in
MONY in lieu of the distribution of common stock. The pro forma balance sheet
information also reflects $9.2 million for the estimated after-tax cost of
additional nonrecurring expenses related to the reorganization of MONY assumed
to be incurred as of September 30, 1998.
The pro forma per share amounts are based on approximately 47,241,000
outstanding shares consisting of 12,937,500 shares issued in the Offerings and
approximately 34,303,000 shares distributed to Eligible Policyholders pursuant
to the Plan. The pro forma per share amounts assume that the MONY Group's
outstanding warrants are not dilutive.
The pro forma information is provided for informational purposes only and
should not be construed to be indicative of MONY's consolidated financial
position or its consolidated results of operations had the Transaction been
consummated on the dates assumed, and does not in any way represent a projection
or forecast of the MONY Group's consolidated financial position or consolidated
results of operations as of any future date or for any future period.
16
18
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION:
AS OF SEPTEMBER 30, 1998
--------------------------------------------------------
ESTABLISHMENT
OF THE CLOSED TRANSACTION
HISTORICAL BLOCK ADJUSTMENTS(1) PRO FORMA
---------- ------------- -------------- ---------
($ IN MILLIONS)
ASSETS:
Investments:
Securities available-for-sale at fair value
Fixed maturities.................................. $ 6,552.5 $(3,552.9) $ 2,999.6
Equity securities................................. 378.1 378.1
Mortgage loans on real estate....................... 1,404.3 (477.0) 927.3
Policy loans........................................ 1,257.6 (1,200.2) 57.4
Real estate to be disposed of....................... 281.0 281.0
Real estate held for investment..................... 399.6 399.6
Other invested assets............................... 57.1 57.1
--------- ---------- --------- ---------
Total investments............................. 10,330.2 (5,230.1) 5,100.1
Cash and cash equivalents............................. 388.1 (136.9) (20.6) A 503.9
(9.2) B
282.5C
Accrued investment income............................. 190.4 (120.9) 69.5
Amounts due from reinsurers........................... 589.3 (127.9) 461.4
Premiums receivable................................... 18.9 (15.3) 3.6
Deferred policy acquisition costs..................... 923.9 (513.2) 410.7
Other assets.......................................... 241.7 (0.3) 241.4
Assets transferred in Group Pension Transaction....... 5,721.9 5,721.9
Separate account assets............................... 5,501.3 5,501.3
Closed Block assets................................... 0.0 6,144.6 6,144.6
--------- ---------- --------- ---------
Total assets.................................. 23,905.7 252.7 24,158.4
========= ========== ========= =========
LIABILITIES:
Future policy benefits................................ 7,575.2 (6,650.0) 13.1A 938.3
Policyholders' account balances....................... 2,221.3 (297.0) 1,924.3
Other policyholder liabilities........................ 264.7 (171.3) 93.4
Amounts due to reinsurers............................. 90.0 4.4 94.4
Accounts payable and other liabilities................ 527.9 (42.0) 485.9
Long-term debt........................................ 373.7 373.7
Current federal income taxes payable.................. 148.5 148.5
Deferred federal income taxes......................... 35.4 (81.3) (45.9)
Liabilities transferred in Group Pension
Transaction......................................... 5,649.7 5,649.7
Separate account liabilities.......................... 5,490.8 5,490.8
Closed Block liabilities.............................. 0.0 7,237.2 7,237.2
--------- ---------- --------- ---------
Total liabilities............................. 22,377.2 13.1 22,390.3
EQUITY:
Common Stock, $0.01 par value; 400 million shares
authorized; 47.2 million shares issued and
outstanding......................................... 0.1C 0.5
0.4D
Capital in excess of par.............................. 282.4C 1,595.4
1,313.0D
Retained earnings (Note 2B)........................... 1,356.3 (33.7) A
(9.2) B
(1,313.4) D
Accumulated other comprehensive income................ 172.2 172.2
--------- ---------- --------- ---------
Total equity.................................. 1,528.5 239.6 1,768.1
--------- ---------- --------- ---------
Total liabilities and equity.................. $23,905.7 $ 252.7 $24,158.4
========= ========== ========= =========
17
19
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) The following adjustments reflect the pro forma effects of the Transaction
on the pro forma condensed consolidated balance sheet:
(A) Represents the payment of cash in lieu of the distribution of common
stock to certain Eligible Policyholders (as defined in the Plan)
allocated approximately 0.9 million shares of common stock and the
provision of policy credits by MONY in lieu of the distribution of
common stock to certain Eligible Policyholders who are allocated
approximately 0.5 million shares of common stock at a per share price
equal to the initial public offering price of $23.50 per share.
(B) Represents approximately $9.2 million for the estimated after-tax cost
of additional nonrecurring expenses related to the reorganization of
MONY assumed to be incurred as of the date of the pro forma condensed
consolidated balance sheet. Such expenses will be reported as an
extraordinary item.
(C) Represents the gross proceeds of $304.0 million from the sale of
12,937,500 shares of common stock in the Offerings, less underwriting
discounts and expenses of $21.5 million.
(D) Represents the reclassification of retained earnings to reflect MONY's
conversion to a stock life insurance company and the distribution of
34.3 million shares of common stock to Eligible Policyholders.
18
20
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT INFORMATION:
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------
ESTABLISHMENT
OF THE TRANSACTION
HISTORICAL CLOSED BLOCK ADJUSTMENTS PRO FORMA
---------- ------------- ----------- -----------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES:
Premiums.................................. $ 521.3 (465.7) $ 55.6
Universal life and investment-type product
policy fees............................. 111.9 111.9
Net investment income..................... 554.8 (279.7) 275.1
Net realized gains on investments......... 169.6 (15.0) 154.6
Group Pension Profits..................... 34.1 34.1
Other income.............................. 116.2 (0.3) 115.9
Contribution from the Closed Block........ 55.2 55.2
-------- ------ -------- -----------
Total revenues.................. 1,507.9 (705.5) 802.4
BENEFITS AND EXPENSES:
Benefits to policyholders................. 562.4 (472.7) 89.7
Interest credited to policyholders'
account balances........................ 84.0 (6.1) 77.9
Amortization of deferred policy
acquisition
costs................................... 102.9 (61.1) 41.8
Dividends to policyholders................ 163.6 (161.2) 2.4
Other operating costs and expenses........ 334.4 (4.4) 330.0
-------- ------ -------- -----------
Total benefits and expenses..... 1,247.3 (705.5) 541.8
-------- ------ -------- -----------
Income before income taxes and
extraordinary item...................... 260.6 260.6
Income tax expense........................ 91.3 91.3
-------- -----------
Income before extraordinary item.......... 169.3 169.3
Other comprehensive income, net........... 54.1 54.1
-------- -----------
Comprehensive income before
extraordinary item................... $ 223.4 $ 223.4
======== ===========
Shares used in the calculation of basic
and diluted net income per share:....... 47,241,000
===========
Basic and diluted income before
extraordinary item per share............ $ 3.58
===========
19
21
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY INFORMATION -- PRO FORMA CLOSED BLOCK ASSETS:
Presented below is certain supplementary information with respect to the pro
forma Closed Block assets as of September 30, 1998:
The pro forma amortized cost, gross unrealized gains and losses, and
estimated fair value of fixed maturities allocated to the Closed Block at
September 30, 1998 are as follows ($ in millions):
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
TYPE COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- ---------
(a) (b) (c) (d) (e)
US Treasuries/Other Agencies..................... $ 63.2 $ 2.3 $ 0.0 $ 65.5
CMOs:
- --Government Agency.............................. 250.6 5.4 0.0 256.0
- --Non Agency Backed.............................. 51.2 2.0 0.0 53.2
Other Mortgage/Asset Backed
- --Government Agency.............................. 22.2 0.2 0.0 22.4
- --Non Agency Backed.............................. 177.9 10.1 0.0 188.0
Utilities........................................ 451.0 38.2 2.8 486.4
Corporate Bonds.................................. 2,335.0 155.5 9.1 2,481.4
-------- ------ ----- --------
Totals................................. $3,351.1 $213.7 $11.9 $3,552.9
======== ====== ===== ========
The pro forma amortized cost and estimated fair value, by contractual
maturity dates (excluding scheduled sinking funds), of fixed maturity securities
allocated to the Closed Block as of September 30, 1998 are as follows ($ in
millions):
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
Due in one year or less............................. $ 42.0 $ 42.6
Due after one year through five years............... 812.1 839.0
Due after five years through ten years.............. 1,401.2 1,503.5
Due after ten years................................. 593.9 648.2
-------- --------
Subtotal.................................. 2,849.2 3,033.3
Mortgage Backed Securities.......................... 501.9 519.6
-------- --------
Total..................................... $3,351.1 $3,552.9
======== ========
20
22
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the pro forma carrying value of mortgage
loans allocated to the Closed Block as of September 30, 1998 by contractual
maturity ($ in millions):
CARRYING % OF
VALUE TOTAL
-------- -----
1 year or less............................................. $ 44.6 9.4%
Over 1 year but less than or equal to 2 years.............. 32.0 6.7
Over 2 years but less than or equal to 3 years............. 58.7 12.3
Over 3 years but less than or equal to 4 years............. 30.7 6.4
Over 4 years but less than or equal to 5 years............. 45.2 9.5
Over 5 years but less than or equal to 6 years............. 22.1 4.6
Over 6 years but less than or equal to 7 years............. 23.5 4.9
Over 7 years but less than or equal to 8 years............. 32.3 6.8
Over 8 years but less than or equal to 9 years............. 29.6 6.2
Over 9 years but less than or equal to 10 years............ 49.9 10.5
Over 10 years.............................................. 108.4 22.7
------ -----
Total............................................ $477.0 100.0%
====== =====
The pro forma contribution from the Closed Block for the period January 1,
1998 through September 30, 1998 is not necessarily indicative of the Closed
Block's contribution had the Closed Block been established as of January 1,
1998.
7. ACQUISITION
On November 18, 1998, MONY Life announced an agreement to purchase Sagamore
Financial Corporation, the parent company of U.S. Financial Life Insurance
Company ("U.S. Financial") for a purchase price of approximately $48 million.
U.S. Financial is a special-risk carrier based in Ohio, which distributes its
products in 41 states through brokerage general agencies. The acquisition is
expected to close December 31, 1998 and will be accounted for as a purchase. The
closing of the acquisition is subject to customary conditions to closing,
including receipt of regulatory approval.
21
23
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For purposes of this discussion, the term "Company" refers, at all times
prior to the Plan Effective Date (as hereinafter defined), to The Mutual Life
Insurance Company of New York, a mutual life insurance company organized under
the laws of the State of New York ("MONY"), and its subsidiaries, and at all
times on and after the Plan Effective Date, to The MONY Group Inc., a Delaware
corporation (the "Holding Company"), and its subsidiaries, including MONY Life
Insurance Company, the successor to MONY as of the Plan Effective Date.
References to MONY on and after the Plan Effective Date refer to MONY Life
Insurance Company and the other operating subsidiaries of the Holding Company.
Set forth below is a summary of certain significant matters relevant to an
understanding of the financial condition and results of operations of the
Company. Following this summary is a discussion addressing the consolidated
results of operations and financial condition of the Company for the periods
indicated. This discussion 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.
THE DEMUTUALIZATION
On November 16, 1998 (the "Plan Effective Date"), pursuant to an order by
the New York Superintendent of Insurance approving its Plan of Reorganization
(the "Plan") under Section 7312 of the New York Insurance Law, as amended, MONY
converted from a mutual life insurance company to a stock life insurance company
and became a wholly owned subsidiary of the Holding Company, a Delaware
corporation organized for the purpose of becoming the parent holding company of
MONY. In conjunction therewith, the following occurred: (i) all policyholders'
membership interests in MONY were extinguished and in exchange therefor
policyholders who owned a policy that was in force on August 14, 1998 (the
"Board Adoption Date") and which remained in force on the Plan Effective Date
(an "Eligible Policyholder") received shares of common stock of the Holding
Company or, in certain circumstances, cash or policy credits and Eligible
Policyholders owning a life or accident and health insurance policy or annuity
contract issued by MONY, under which there is a right to participate in the
divisible surplus of MONY to the extent that dividends are apportioned thereon
(a "Participating Policyholder"), received additional shares of common stock of
the Holding Company or, in certain circumstances, cash or policy credits, (ii) a
closed block (the "Closed Block") of certain individual MONY participating
policies in classes for which MONY had a current payable dividend scale was
created, and assets were allocated to the Closed Block to support the future
payment of benefits and dividends on, and certain expenses and taxes relating
to, the policies included therein, (iii) the Holding Company consummated an
initial public offering (the "Offerings") of approximately 12.9 million shares
of its common stock at an initial public offering price of $23.50 per share. The
shares of common stock issued in the Offerings are in addition to approximately
34.3 million shares of common stock of the Holding Company which were
distributed to certain Eligible Policyholders under the Plan, as described in
(i) above, and (iv) MONY changed its name to MONY Life Insurance Company ("MONY
Life").
THE INVESTMENT
On December 30, 1997, affiliates of Goldman, Sachs & Co. (the "Investors"),
one of the underwriters in the Offerings, bought 9.50% Surplus Notes due
December 30, 2012 (the "MONY Notes") in an aggregate principal amount of $115.0
million from MONY for a purchase price of $115.0 million and, for a purchase
price of $10.0 million, warrants (the "Warrants") to purchase from the Holding
Company in the aggregate 7.0% of the fully diluted common stock (after giving
effect to the Offerings) as of the Plan Effective Date or, if later, the first
date following such effectiveness on which the shares of common stock are first
issued to Eligible Policyholders (the "Demutualization Date"). The price payable
for each share of the common stock issuable upon exercise of Warrants initially
is (a) the initial public offering price of the common stock in the Offerings,
unless the average of the daily closing prices of the common stock for the 40
trading days following the first 20 trading days after the Demutualization Date
is greater than 115% of the initial public offering
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price, in which case such initial exercise price shall be equal to the sum of
the initial public offering price plus an amount equal to one half of the excess
of such 40-day average over 115% of the initial public offering price. The
Warrants contain standard anti-dilution provisions providing for adjustment to
the exercise price in the event of, among other things, a dividend or other
distribution of capital stock, evidences of indebtedness or other property,
issuances of rights, options or warrants, certain cash dividends and certain
tender offers.
At any time from and after the Plan Effective Date or, if later, the
Demutualization Date, the Investors may elect to exchange the MONY Notes then
held by them for Holding Company Subordinated Notes (the "Holding Company
Subordinated Notes"). If such exchange occurs, the Holding Company will hold one
or more surplus notes in an aggregate principal amount equal to the principal
amount of the Holding Company Subordinated Notes (the "Intercompany Surplus
Notes").
CLOSED BLOCK
Pursuant to the Plan, MONY established the Closed Block on the Plan
Effective Date. The assets allocated to the Closed Block are expected to produce
cash flows which, together with anticipated revenues from the policies included
in the Closed Block and specified in the Plan (the "Closed Block Business"), are
reasonably expected to be sufficient to support the Closed Block Business,
including provision for the payment of claims, certain expenses and taxes and
continuation of current payable dividend scales, assuming the experience
underlying such dividend scales continues and for appropriate adjustments in
such scales if the experience changes.
The assets, including the revenue therefrom, allocated to the Closed Block
will inure solely to the benefit of the Closed Block Business. In determining
the amount of assets to be allocated to the Closed Block, management has 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 assets and liabilities
allocated to the Closed Block will be recorded in the Company's financial
statements at their historical carrying values. The carrying value of the assets
allocated to the Closed Block will be 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.
The estimated net cash flows assumed in determining the Closed Block
funding consist 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,
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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
future post-tax contribution from the Closed Block is not affected by the
aggregate actual experience of the Closed Block assets and the Closed Block
Business subsequent to the Plan Effective Date, except in the unlikely event
that the Closed Block assets and the actual experience of the Closed Block
Business subsequent to the Plan Effective Date are not sufficient to pay the
guaranteed benefits on the Closed Block Policies, in which case the Company will
be required to fund any such deficiency from its general account assets outside
of the Closed Block. In addition, MONY has undertaken to reimburse the Closed
Block from its general account assets outside the Closed Block for any reduction
in principal payments due on the Series A Notes (which have been allocated to
the Closed Block) pursuant to the terms thereof, as described in Note 4. Since
the Closed Block will be funded to provide for payment of guaranteed benefits on
such Policies and, in addition, for continuation of current payable dividends,
it will not be necessary to use general funds to pay guaranteed benefits unless
the Closed Block Business experiences very substantial ongoing adverse
experience in investment, mortality, persistency or other experience factors.
The Company will regularly (at least quarterly) monitor the experience from the
Closed Block and make changes to the dividend scale, when appropriate, to ensure
that the profits are distributed to the policyholders in a fair and equitable
manner. In addition, periodically the New York Insurance Department will require
the filing of an independent auditor report on the operations of the Closed
Block.
As a result of the establishment of the Closed Block, certain line items in
the Company's financial statements subsequent to the establishment of the Closed
Block will 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 actual results of the Closed Block assets and the Closed Block
Business will be 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 from the underlying business 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 acquisition costs, etc. The Contribution from
the Closed Block is expected to be equal to the periodic amortization of the
gain resulting from the difference between the carrying value of the assets
allocated to the Closed Block and the Closed Block liabilities at the Plan
Effective Date. 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. See
Note 6 to the unaudited interim condensed consolidated financial statements
included elsewhere herein.
THE GROUP PENSION TRANSACTION
On December 31, 1993 (the "Group Pension Transaction Date"), the Company
entered into an agreement (the "Agreement") with AEGON USA, Inc. ("AEGON") under
which the Company transferred a substantial portion of its group pension
business (hereafter referred to as the "Group Pension Transaction"), including
its full service group pension contracts, consisting primarily of tax-deferred
annuity, 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 was 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
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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 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.
The Company 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
the Company 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, the Company 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 an 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 the Company'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 the Company's
results of operations (after adjustments to reflect such losses in accordance
with GAAP) only up to the amount for which the Company 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 the Company. If a deficit still remains, it will be
applied (as provided for in the Aegon
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27
Agreement) as an offset against the principal payment due to the Company upon
maturity of the Series A Notes.
The Group Pension Profits have represented a significant portion of the
Company's net income. For the nine-month periods ended September 30, 1998 and
1997, AUSA reported earnings to the Company pursuant to the application of the
Earnings Formula of $35.8 million and $39.7 million, respectively and the
Company recorded Group Pension Profits of $34.1 million and $44.2 million,
respectively. In addition, management expects that Group Pension Profits will
decline in each succeeding annual period consistent with the continuing run-off
of the underlying business until they terminate as of December 31, 2002.
Accordingly, the Company's financial position and results of operations could be
adversely affected unless management takes actions which will increase its
revenues and net income in each succeeding year and, particularly, subsequent to
December 31, 2002, to replace the Group Pension Profits.
THE DI TRANSACTION
Effective December 31, 1997, the Company ceased writing new disability
insurance business because of changes in the economics of the disability
insurance market (particularly, expansive views of insurance companies'
obligations under these types of policies by the judicial system, pressure on
pricing from competitors with greater economies of scale and the consolidation
trend among the disability insurance carriers). In conjunction therewith, the
Company transferred all of its existing in-force disability income insurance
business to a third party reinsurer, Centre Life Reinsurance, Ltd. ("Centre
Re"), under an indemnity reinsurance contract (the "DI Transaction"). MONY will
remain contingently liable for all benefits payable even if Centre Re fails to
meet its obligations to MONY.
RESULTS OF OPERATIONS
The following table presents summary consolidated financial information for
the Company for the three-month and nine-month periods ended September 30, 1998
and 1997.
FOR THE THREE-MONTH FOR THE NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
($ IN MILLIONS)
REVENUES:
Premiums........................................... $167.5 $198.2 $ 521.3 $ 605.8
Universal life and investment-type product policy
fees............................................ 37.6 32.3 111.9 91.0
Net investment income.............................. 197.1 184.1 554.8 543.7
Net realized gains on investments.................. 12.0 14.4 169.6 57.0
Group Pension Profits.............................. 11.4 16.0 34.1 44.2
Other income....................................... 37.8 28.4 116.2 87.2
------ ------ -------- --------
Total revenues............................. 463.4 473.4 1,507.9 1,428.9
BENEFITS AND EXPENSES:
Benefits to policyholders.......................... 182.7 203.7 562.4 627.6
Interest credited to policyholders' account
balances........................................ 29.4 29.9 84.0 92.9
Amortization of deferred policy acquisition
costs........................................... 32.1 30.5 102.9 98.9
Dividends to policyholders......................... 55.2 58.6 163.6 176.4
Other operating costs and expenses................. 103.3 96.1 334.4 300.0
------ ------ -------- --------
Total benefits and expenses................ 402.7 418.8 1,247.3 1,295.8
Income before income taxes and extraordinary item.... 60.7 54.6 260.6 133.1
Income tax expense................................... 19.5 10.3 91.3 42.3
------ ------ -------- --------
Income before extraordinary item..................... 41.2 44.3 169.3 90.8
Extraordinary item -- demutualization expenses,
net................................................ 5.8 0.9 15.5 3.3
------ ------ -------- --------
Net income........................................... 35.4 43.4 153.8 87.5
Other comprehensive income, net...................... 44.2 28.7 54.1 11.4
------ ------ -------- --------
Comprehensive income................................. $ 79.6 $ 72.1 $ 207.9 $ 98.9
====== ====== ======== ========
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RESULTS OF OPERATIONS --
Consolidated -- For the Three-Month Period Ended September 30, 1998 Compared
to the Three-Month Period Ended September 30, 1997
Consolidated pre-tax earnings (before extraordinary items) for the
three-month period ended September 30, 1998 was $60.7 million ($41.2 million
after tax) an increase of $6.1 million or 11.2% (a decrease of $3.1 million or
7.0% after tax), as compared to $54.6 million ($44.3 million after tax),
reported in the corresponding period in the prior year. The Company's provision
for federal income taxes for the three-month period ended September 30, 1998 and
1997, including the tax effect of demutualization expenses, of approximately
$19.5 million and $10.0 million, respectively, included a net credit of $1.9
million and $8.8 million, respectively, relating to revised estimates of the
amount of surplus tax payable as of the periods then ended. The Company's
effective tax rate before the surplus tax and extraordinary items was
approximately 35% for the three-month periods ended September 30, 1998 and 1997.
Premium revenue was $167.5 million for the three-month period ended
September 30, 1998, a decrease of $30.7 million, or 15.5%, from $198.2 million
reported in the comparable period ended September 30, 1997. Approximately $18.9
million of the decrease resulted from lower premiums due to the transfer of the
Company's disability income insurance business in 1997 pursuant to the DI
Transaction. The balance of the decrease resulted primarily from lower new
traditional life premiums of $1.2 million, lower single premiums of $3.0 million
due to a reduction in the Company's dividend scales (substantially all single
premiums result from policyholders electing to buy additional insurance coverage
with dividends received on existing policies), and lower renewal premiums of
$6.6 million.
Universal life and investment-type product policy fees were $37.6 million
for the three-month period ended September 30, 1998, an increase of $5.3 million
or 16.4% from $32.3 million reported in the comparable prior year period ended
September 30, 1997. This increase was primarily the result of higher fees
relating to the Company's flexible premium deferred annuity ("FPVA") business
and variable universal life ("VUL") business of $2.8 million and $2.3 million,
respectively. The Company reported total fees from its FPVA business during the
period of $15.6 million, as compared to $12.8 million reported for the
comparable period in the prior year. The Company reported total fees from its
VUL business during the period of $7.0 million, as compared to $4.7 million
reported for the comparable period in the prior year. The increase in FPVA fees
resulted from an increase in the average FPVA account value of $654.8 million
during the three-month period ended September 30, 1998 to $4,347.5 million, as
compared to $3,692.7 million for the comparable prior year period. See
"Accumulation Products Segment". The increase in VUL fees is primarily due to
higher cost of insurance charges of approximately $1.4 million, consistent with
the in force growth of such business.
Net investment income for the three-month period ended September 30, 1998
was $197.1 million, an increase of $13.0 million, or 7.1%, from $184.1 million
reported in the comparable prior year period. The increase primarily resulted
from higher investment income from fixed maturities, investments in limited
partnership interests, and policy loans of $7.0 million, $7.5 million, and $2.1
million, respectively, offset by lower investment income from investments in
real estate and mortgage loans of approximately $2.8 million and $1.8 million,
respectively. For the three-month period ended September 30, 1998, as compared
to the comparable period in the prior year, the Company's average investment in
fixed maturity securities (before cumulative unrealized gains or losses),
mortgage loans, real estate, and policy loans were $6,142.5 million, $1,441.6
million, $736.1 million, and $1,255.1 million, respectively, as compared to
$5,548.3 million, $1,505.9 million, $1,221.5 million, and $1,234.4 million for
the comparable period in the prior year. At September 30, 1998 fixed maturity
securities, mortgage loans and real estate represented approximately 61.2%,
13.1% and 6.3% of total invested assets, as compared to 56.4%, 14.1% and 11.7%
at September 30, 1997. The annualized yield on the Company's invested assets
before and after realized gains/(losses) on investments was 7.5% and 8.0%,
respectively, for the three month period ended September 30, 1998, as compared
to 7.2% and 7.7%, respectively, for the three month period ended September 30,
1997.
Net realized gains on investments were $12.0 million for the three-month
period ended September 30, 1998, a decrease of $2.4 million, or 16.7%, from
$14.4 million for the comparable prior year period. The decrease is primarily
due to losses on sales of common stocks and, higher provisions for other than
temporary
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impairment on fixed maturity securities, offset by higher gains on sales of
fixed maturities and real estate. Losses on sales of common stock were $10.1
million for the three-month period ended September 30, 1998, as compared to
gains of $6.4 million for the comparable prior year period. Writedowns for other
than temporary impairment of fixed maturity securities were $9.9 million for the
three-month period ended September 30, 1998, as compared to $1.8 million for the
comparable prior year period. The writedowns for the three month period
primarily related to foreign and emerging market government debt securities.
Realized gains on fixed maturities were $6.5 million for the three-month period
ended September 30, 1998, as compared to $2.4 million in the comparable prior
year period. Gains on sales of real estate and real estate partnerships were
$22.5 million in the three-month period ended September 30, 1998 as compared to
$5.2 million in the comparable prior year period.
Group Pension Profits were $11.4 million for the three-month period ended
September 30, 1998, a decrease of $4.6 million, or 28.8%, from $16.0 million
reported in the comparable prior year period. Group Pension Profits consisted of
$12.3 million of Group Pension Payments, offset by an increase of $0.9 million
in valuation allowances relating to adjustments required to reflect the earnings
from such payments in accordance with GAAP. Such adjustments primarily relate to
changes in the valuation allowances established to recognize impairment of
assets supporting the business transferred in the Group Pension Transaction. In
the comparable prior year period, Group Pension Profits consisted of $15.4
million of Group Pension Payments and $0.6 million relating to a decrease in the
aforementioned valuation allowances. Group Pension Payments during the
three-month period ended September 30, 1998 decreased from that reported in the
comparable prior year period primarily because of the continuing run-off of the
Existing Deposits and lower reinvestment rates. The decrease in the valuation
allowance reported during the three-month period ended September 30, 1997
resulted primarily from the paydown of certain mortgage loans.
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 $37.8 million for the three-month period ended September 30, 1998,
an increase of $9.4 million, or 33.1%, as compared to $28.4 million reported in
the comparable prior year period. The increase was primarily the result of
higher fees of $5.2 million earned by the Company's mutual fund management
operations and an increase of $4.1 million relating to reinsurance expense
allowances.
Benefits to policyholders were $182.7 million for the three-month period
ended September 30, 1998, a decrease of $21.0 million, or 10.3%, as compared to
$203.7 million reported in the comparable prior year period. The decrease
primarily resulted from a $13.0 million decrease relating to the transfer of the
Company's disability income insurance business pursuant to the DI Transaction.
In addition, the decrease in benefits to policyholders consists of lower
surrenders on traditional business of approximately $6.4 million, higher death
benefits on traditional business, net of reinsurance, of approximately $7.1
million, and a decrease in the change of reserves on traditional business of
approximately $8.3 million consistent with a decline in the amount of in-force,
new and single traditional business, lower surrenders and higher death benefit
payments.
Interest credited to policyholder account balances was $29.4 million for
the three-month period ended September 30, 1998, a decrease of $0.5 million, or
1.7%, as compared to $29.9 million reported in the comparable prior year period.
Interest credited remained relatively flat due primarily to increases in
interest credited on the sale of corporate sponsored variable universal life
("CSVUL") of $1.5 million, prior to the transfer of funds to the separate
account, and increases in traditional life business of $0.8 million, offset by
decreases in disability income insurance of $0.8 million and decreases in all
accumulation products except for FPVA of $3.0 million.
Amortization of deferred policy acquisition costs was $32.1 million for the
three-month period ended September 30, 1998, an increase of $1.6 million, or
5.2%, as compared to $30.5 million reported in the comparable prior year period.
The increase primarily resulted from higher amortization of approximately $2.2
million and $1.8 million relating to the Company's FPVA and VUL product lines,
respectively, offset by a decrease in amortization of approximately $1.5 million
relating to the transfer of the Company's disability income insurance business
pursuant to the DI Transaction and a $1.4 million decrease in amortization
relating
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30
to the Company's universal life business. The increase in amortization relating
to FPVA resulted from higher profits from such business due to an increase in
the average FPVA account value of $654.8 million during the three-month period
ended September 30, 1998 to $4,347.5 million, as compared to $3,692.7 million
for the comparable prior year period. See "Accumulation Products Segment".
Other operating costs and expenses were $103.3 million for the three-month
period ended September 30, 1998, an increase of $7.2 million, or 7.5%, as
compared to $96.1 million reported in the comparable prior year period. The
increase primarily consisted of $1.7 million of higher costs associated with
addressing the Year 2000 issue, $4.5 million of higher costs associated with
restructuring the Company's career agency sales force and other strategic
initiatives, $3.7 million of higher sub-advisory fees and other expenses
incurred by the Company's mutual fund management operations, $1.9 million of
higher commissions and other expenses incurred by the Company's broker-dealer
operations and $3.0 million of higher interest expense as a result of the MONY
Notes issued on December 30, 1997, offset by a decrease of approximately $10.1
million in the fair value of the Company's liability under its non-qualified
pension plan.
Dividends to policyholders of $55.2 million for the three-month period
ended September 30, 1998 decreased $3.4 million, or 5.8% from $58.6 million
reported in the comparable prior year period. The decrease primarily resulted
from a reduction in the fourth quarter of 1997 in the interest component of the
dividend scales on all policies by amounts ranging from 15 to 50 basis.
Consolidated -- For the Nine-Month Period Ended September 30, 1998 Compared to
the Nine-Month Period Ended September 30, 1997
Consolidated pre-tax earnings (before extraordinary items) for the
nine-month period ended September 30, 1998 was $260.6 million ($169.3 million
after tax) an increase of $127.5 million or 95.8% ($78.5 million or 86.5% after
tax), as compared to $133.1 million ($90.8 million after tax), reported in the
corresponding period in the prior year. The Company's provision for federal
income taxes for the nine-month period ended September 30, 1998 and 1997,
including the tax effect of demutualization expenses, of approximately $90.3
million and $40.6 million, respectively, included no provision for surplus tax
for the period ended September 30, 1998 and a net credit of $4.4 million for the
period ended September 30, 1997, which related to a revised estimate of the
amount of surplus tax payable as of the period then ended. The Company's
effective tax rate before the surplus tax and extraordinary items was
approximately 35% for the nine-month periods ended September 30, 1998 and 1997.
Premium revenue was $521.3 million for the nine-month period ended
September 30, 1998, a decrease of $84.5 million, or 13.9%, from $605.8 million
reported in the comparable prior year period. Approximately $55.5 million of the
decrease resulted from lower premiums due to the transfer of the Company's
disability income insurance business in 1997 pursuant to the DI Transaction. In
addition, the decrease resulted from lower new traditional life premiums of $5.5
million, lower single premiums of $8.4 million due to a reduction in the
Company's dividend scales (substantially all single premiums result from
policyholders electing to buy additional insurance coverage with dividends
received on existing policies), and lower renewal premiums of $15.5 million.
Universal life and investment-type product policy fees were $111.9 million
for the nine-month period ended September 30, 1998, an increase of $20.9 million
or 22.9% from $91.0 million reported in the comparable prior year period ended
September 30, 1997. This increase was primarily the result of higher fees
relating to the Company's FPVA and VUL business of $11.2 million and $7.3
million, respectively. The Company reported total fees from its FPVA business of
$47.1 million, as compared to $35.9 million reported for the comparable periods
ended September 30, 1997. The Company reported total fees from its VUL business
of $19.4 million, as compared to $12.1 million reported for the comparable prior
year period ended September 30, 1997. The increase in FPVA fees resulted from an
increase in the average FPVA account value of $979.6 million during the
nine-month period ended September 30, 1998 to $4,281.7 million, as compared to
$3,302.1 million for the comparable prior year period. See "Accumulation
Products Segment". The increase in VUL fees is primarily due to higher cost of
insurance charges of approximately $4.1 million, consistent with the in force
growth of such business.
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31
Net investment income for the nine-month period ended September 30, 1998
was $554.8 million an increase of $11.1 million, or 2.0%, from $543.7 million
reported for the comparable prior period. The increase consisted primarily of
higher income on investments in fixed maturity securities and limited
partnership interests of $22.3 million and $4.2 million, respectively, offset by
lower income on investments in mortgage loans of $9.1 million and higher
investment expenses of $3.8 million. For the nine-month period ended September
30, 1998, as compared to the comparable period in the prior year, the Company's
average investment in fixed maturity securities (before unrealized gains or
losses) increased by approximately $438.0 million, while its average investment
in mortgage loans and real estate decreased by approximately $104.8 million and
$461.0 million, respectively. At September 30, 1998 fixed maturity securities,
mortgage loans and real estate represented approximately 61.2%, 13.1% and 6.3%,
respectively, of total invested assets, as compared to 56.4%, 14.1% and 11.7%,
respectively, at September 30, 1997. The annualized yield on the Company's
invested assets before and after realized gains/(losses) on investments was 7.2%
and 9.4%, respectively, for the nine month period ended September 30, 1998, as
compared to 7.0% and 7.7%, respectively, for the nine-month period ended
September 30, 1997.
Net realized gains on investments were $169.6 million for the nine-month
period ended September 30, 1998, an increase of $112.6 million, or 197.5%, from
$57.0 million for the comparable prior year period. The increase is due to lower
valuation allowances on real estate to be disposed of, higher realized gains on
sales of real estate, higher gains on dispositions of bonds and higher mortgage
prepayment gains, offset by lower gains on sales of common stocks, higher
charges for other than temporary impairments of fixed maturities related
primarily to foreign and emerging market government debt securities and higher
mortgage loan valuation allowances. Provisions for valuation allowances on real
estate to be disposed of aggregated $2.5 million for the nine-month period ended
September 30, 1998, as compared to $45.2 million for the comparable prior year
period, primarily as a result of additional properties put up for sale in 1997
that had carrying values in excess of their fair values less costs to sell. Net
realized gains on sales of investments in real estate and real estate
partnership equities aggregated $145.1 million for the nine-month period ended
September 30, 1998, as compared to $52.7 million in the comparable prior year
period. Net realized gains on the sales and prepayments of fixed maturities were
$21.4 million for the nine-month period ended September 30, 1998, as compared to
$8.9 million in the comparable prior year period. Sales and prepayments of
mortgage loans resulted in net realized gains of $4.4 million for the nine-month
period ended September 30, 1998, as compared to $1.0 million in the comparable
prior year period. Net gains on sales of common stock were $8.3 million for the
nine-month period ended September 30, 1998, as compared to $32.2 million for the
comparable prior year period. Charges for other than temporary impairments of
fixed maturity investments were $12.6 million for the nine-month period ended
September 30, 1998, as compared to $1.8 million for the comparable prior year
period. Losses resulting from increases in mortgage loan valuation allowances
totaled $0.3 million in the nine-month period ended September 30, 1998, as
compared to gains of $10.1 million resulting from the decrease in such
allowances in the comparable prior year period.
Group Pension Profits were $34.1 million for the nine-month period ended
September 30, 1998, a decrease of $10.1 million, or 22.9%, from $44.2 million
reported in the comparable prior year period. Group Pension Profits consisted of
a $35.8 million of Group Pension Payments, offset by an increase of $1.7 million
in valuation allowances relating to adjustments required to reflect the earnings
from such payments in accordance with GAAP. Such adjustments primarily relate to
changes in the valuation allowances established to recognize impairment of
assets supporting the business transferred in the Group Pension Transaction. In
the comparable prior year period, Group Pension Profits consisted of $39.7
million of Group Pension Payments and $4.5 million relating to a decrease in the
aforementioned valuation allowances. Group Pension Payments during the
nine-month period ended September 30, 1998 decreased from that reported in the
comparable prior year period primarily because of the continuing run-off of the
Existing Deposits and lower reinvestment rates. The decrease in the valuation
allowance reported during the nine-month period ended September 30, 1997
resulted primarily from the paydown of certain mortgage loans.
Other income was $116.2 million for the nine-month period ended September
30, 1998, an increase of $29.0 million, or 33.3%, as compared to $87.2 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
30
32
of $16.0 million and higher commission earned by the Company's broker-dealer
operations of $8.7 million. The Company's mutual fund operations reported $45.5
million in fees from advisory, underwriting and distribution services, as
compared to $29.5 million in the comparable prior year period. The Company's
broker-dealer operations reported $32.2 million in commissions, as compared to
$23.5 million in the comparable prior year period.
Benefits to policyholders were $562.4 million for the nine-month period
ended September 30, 1998, a decrease of $65.2 million, or 10.4%, as compared to
$627.6 million reported in the comparable prior year period. The decrease
primarily resulted from a $50.9 million decrease related to the transfer of the
Company's disability income insurance business in 1997 pursuant to the DI
Transaction. In addition, the decrease in benefits to policyholders consisted of
lower surrenders on traditional business of approximately $10.3 million, higher
death benefits, net of reinsurance, of approximately $13.2 million relating
primarily to traditional and variable universal life business, and a decrease in
the change in reserves on traditional business of approximately $20.3 million
consistent with a decline in the amount of in-force new and single traditional
business, lower surrenders and higher death benefit payments.
Interest credited to policyholder account balances was $84.0 million for
the nine-month period ended September 30, 1998, a decrease of $8.9 million, or
9.6%, as compared to $92.9 million reported in the comparable prior year period.
The decrease primarily resulted from lower interest crediting across
substantially all accumulation product lines.
Amortization of deferred policy acquisition costs was $102.9 million for
the nine-month period ended September 30, 1998, an increase of $4.0 million, or
4.0%, as compared to $98.9 million reported in the comparable prior year period.
The increase is primarily the result of: (i) higher amortization of
approximately $6.3 million relating to the Company's FPVA product line and (ii)
higher amortization of approximately $3.4 million, relating to the traditional
product line, offset by a decrease in amortization of approximately $2.3 million
relating to the transfer of the Company's disability income insurance business
pursuant to the DI Transaction and $1.8 million relating to the Company's term
life products, respectively. The increase in amortization relating to FPVA
resulted from higher profits from such business due to an increase in the
average FPVA account value of $979.6 million during the nine-month period ended
September 30, 1998 to $4,281.7 million, as compared to $3,302.1 million for the
comparable prior year period. See "Accumulation Products Segment".
Other operating costs and expenses were $334.4 million for the nine-month
period ended September 30, 1998, an increase of $34.4 million, or 11.5%, as
compared to $300.0 million reported in the comparable prior year period. The
increase primarily consisted of $6.2 million of higher costs associated with
addressing the Year 2000 issue, $13.1 million of higher cost associated with
restructuring the Company's career agency sales force and other strategic
initiatives, $12.5 million of higher sub-advisory fees and other expenses
incurred by the Company's mutual fund management operations, $10.4 million of
higher commissions and other expenses incurred by the Company's broker-dealer
operations, $6.2 million of higher interest expense primarily relating to the
MONY Notes issued on December 30, 1997, and a decrease of approximately $12.8
million relating to a reduction in the fair value of the Company's liability
under its non-qualified pension plan.
Dividends to policyholders of $163.6 million for the nine-month period
ended September 30, 1998 decreased $12.8 million, or 7.3% from $176.4 million
reported in the comparable prior year period. The decrease primarily resulted
from a reduction in the fourth quarter of 1997 in the interest component of the
dividend scales on all policies by amounts ranging from 15 to 50 basis points.
RESULTS OF OPERATIONS BY SEGMENT
For management and reporting purposes, the Company's business is organized
in two principal operating segments, the "Protection Products" segment and the
"Accumulation Products" segment. Substantially all of the Company's other
business activities are combined and reported in the "Other Products" segment.
In its Protection Products segment, the Company offers a wide range of
individual life insurance products, including whole life, term life, universal
life, variable universal life, last survivor life and group universal life. Also
included in the Protection Products segment are the: (i) assets and liabilities
transferred pursuant to the
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33
Group Pension Transaction, as well as the Group Pension Profits, and (ii) the
Company's disability income insurance business which was transferred in the DI
Transaction. For accounting purposes, the Protection Products segment includes,
the contribution from the Closed Block. In its Accumulation Products segment,
the Company offers fixed annuities, single premium deferred annuities, immediate
annuities, flexible payment variable annuities and proprietary retail mutual
funds. The Company's Other Products segment primarily consists of a securities
broker-dealer operation, an insurance brokerage operation and the Run-Off
Businesses (as defined below). In addition to selling the Company's proprietary
investment products, the securities broker-dealer operation provides customers
of the Company's protection and accumulation products access to other
non-proprietary investment products (including stocks, bonds, limited
partnership interests, tax-exempt unit investment trusts and other investment
securities). The insurance brokerage operation provides the Company's career
agency sales force with access to life, annuity, small group health and
specialty insurance products written by other carriers to meet the insurance and
investment needs of its customers. The Run-Off Businesses primarily consist of
group life and health insurance as well as the group pension business that was
not included in the Group Pension Transaction.
Protection Products Segment
The following table presents certain summary financial data relating to the
Company's Protection Products segment for the periods indicated.
FOR THE THREE-MONTH FOR THE NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN MILLIONS)
REVENUES:
Premiums............................................. $164.6 $194.3 $ 508.4 $ 593.3
Universal life policy fees........................... 21.7 18.8 63.6 53.4
Net investment income and net realized gains on
investments........................................ 163.9 150.1 560.9 454.8
Group Pension Profits................................ 11.4 16.0 34.1 44.2
Other income......................................... 7.9 0.5 16.4 9.9
------ ------ -------- --------
Total revenues............................. 369.5 379.7 1,183.4 1,155.6
BENEFITS AND EXPENSES:
Benefits to policyholders............................ 171.4 191.9 521.2 589.9
Interest credited to policyholders' account
balances........................................... 12.8 10.5 33.2 31.2
Amortization of deferred policy acquisition costs.... 25.0 24.9 80.4 80.7
Other operating costs and expenses................... 66.7 65.7 211.4 202.8
Dividends to policyholders........................... 54.5 58.0 161.3 173.9
------ ------ -------- --------
Total benefits and expenses................ 330.4 351.0 1,007.5 1,078.5
Income before income taxes........................... $ 39.1 $ 28.7 $ 175.9 $ 77.1
====== ====== ======== ========
RESULTS OF OPERATIONS --
Protection Segment -- For the Three-Month Period Ended September 30, 1998
Compared to the Three-Month Period Ended September 30, 1997
Premium revenue was $164.6 million for the three-month period ended
September 30, 1998, a decrease of $29.7 million, or 15.3%, from $194.3 million
reported in the comparable prior year. Approximately $18.9 million of the
decrease resulted from lower premiums due to the transfer of the Company's
disability income insurance business in 1997 pursuant to the DI Transaction. In
addition, the decrease resulted from lower new traditional life premiums of $1.2
million, lower single premiums of $3.0 million due to a reduction in the
Company's dividend scales (substantially all single premiums result from
policyholders electing to buy
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34
additional insurance coverage with dividends received on existing policies), and
lower renewal premiums of $6.6 million.
Universal life policy fees were $21.7 million for the three-month period
ended September 30, 1998, an increase of $2.9 million or 15.4% from $18.8
million reported in the comparable prior year period. This increase was
primarily the result of higher fees relating to the Company's VUL business of
$2.3 million. The Company reported total fees from its VUL business of $7.0
million for the three-month period ended September 30, 1998, as compared to $4.7
million reported for the comparable prior year period. The increase in VUL fees
is primarily due to higher cost of insurance charges of approximately $1.4
million consistent with the in-force growth of such business.
Net investment income and net realized gains on investments were $163.9
million for the three-month period ended September 30, 1998, an increase of
$13.8 million, or 9.2%, from $150.1 million reported in the comparable prior
year period. The increase was primarily due to higher average invested assets,
higher gains in sales of real estate and higher income from equity partnerships.
Group Pension Profits were $11.4 million for the three-month period ended
September 30, 1998, a decrease of $4.6 million, or 28.8%, from $16.0 million
reported in the comparable prior year period. Group Pension Profits consisted of
$12.3 million of Group Pension Payments, offset by an increase of $0.9 million
in valuation allowances relating to adjustments required to reflect the earnings
from such payments in accordance with GAAP. Such adjustments primarily relate to
changes in the valuation allowances established to recognize impairment of
assets supporting the business transferred in the Group Pension Transaction. In
the comparable prior year period, Group Pension Profits consisted of $15.4
million of Group Pension Payments and $0.6 million relating to a decrease in the
aforementioned valuation allowances. Group Pension Payments during the
three-month period ended September 30, 1998 decreased from that reported in the
comparable prior year period primarily because of the continuing run-off of the
Existing Deposits and lower reinvestment rates. The decrease in the valuation
allowance reported during the three-month period ended September 30, 1997
resulted primarily from the paydown of certain mortgage loans.
Other income was $7.9 million for the three-month period ended September
30, 1998, an increase of $7.4 million, as compared to $0.5 million reported in
the comparable prior year period. The increase was primarily the result of a
$4.1 million increase in reinsurance expense allowances.
Benefits to policyholders were $171.4 million for the three-month period
ended September 30, 1998, a decrease of $20.5 million, or 10.7%, as compared to
$191.9 million reported in the comparable prior year period. The decrease
primarily resulted from a $13.0 million decrease relating to the transfer of the
Company's disability income insurance business pursuant to the DI Transaction
during the fourth quarter of 1997. In addition, the decrease in benefits to
policyholders consists of lower surrenders on traditional business of
approximately $6.4 million higher death benefits on traditional business, net of
reinsurance, of $7.1 million and a decrease in the change in reserves on
traditional business of approximately $8.3 million, consistent with a decline in
the amount of in-force, new and single traditional business lower surrenders and
higher death benefit payments.
Interest credited to policyholder account balances was $12.8 million for
the three-month period ended September 30, 1998, an increase of $2.3 million, or
21.9%, as compared to $10.5 million reported in the comparable prior year
period. This increase was primarily due to interest credited on the sale of
CSVUL products, of $1.5 million, prior to the transfer of funds to the separate
account.
Amortization of deferred policy acquisition costs ("DAC") was $25.0 million
for the three-month period ended September 30, 1998, an increase of $0.1
million, or 0.4%, as compared to $24.9 million reported in the comparable prior
year period. The increase is primarily the result of: (i) higher amortization of
approximately $1.8 million, relating to the VUL product line, and (ii) higher
amortization related to traditional life business of $1.0 million, offset by (i)
a decrease in amortization of $1.5 million relating to the transfer of the
Company's disability income insurance business pursuant to the DI Transaction
and (ii) a decrease of approximately $1.4 million relating to the Company's
universal life business.
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35
Other operating costs and expenses were $66.7 million for the three-month
period ended September 30, 1998, an increase of $1.0 million, or 1.5%, as
compared to $65.7 million reported in the comparable prior year period. The
increase primarily consists of higher interest expense, as a result of the
issuance of the MONY Notes on December 31, 1997, higher costs incurred in
connection with the Year 2000 issue, restructuring the Company's career agency
sales force, and other strategic initiatives, offset by a reduction in the fair
value of the Company's liability under its non-qualified pension plan.
Dividends to policyholders of $54.5 million for the three-month period
ended September 30, 1998 decreased $3.5 million, or 6.0% from $58.0 million
reported in the comparable prior year period. The decrease primarily resulted
from a reduction in the fourth quarter of 1997 in the interest component of the
dividend scales on all policies by amounts ranging from 15 to 50 basis points.
Protection Segment -- For the Nine-Month Period Ended September 30, 1998
Compared to the Nine-Month Period Ended September 30, 1997
Premium revenue was $508.4 million for the nine-month period ended
September 30, 1998, a decrease of $84.9 million, or 14.3%, from $593.3 million
reported in the comparable prior year period. Approximately $55.5 million of the
decrease resulted from lower premiums due to the transfer of the Company's
disability income insurance business in 1997 pursuant to the DI Transaction. In
addition, the decrease resulted from lower new traditional life premiums of $5.5
million, lower single premiums of $8.4 million due to a reduction in the
Company's dividend scales, and lower renewal premiums of $15.5 million.
Universal life policy fees were $63.6 million for the nine-month period
ended September 30, 1998, an increase of $10.2 million or 19.1% from $53.4
million reported in the comparable prior year period ended September 30, 1997.
This increase was primarily the result of higher fees relating to the Company's
VUL business of $7.3 million. The Company reported total fees from its VUL
business of $19.4 million, as compared to $12.1 million reported for the
comparable period ended September 30, 1997. The increase in VUL fees is
primarily due to higher cost of insurance charges of approximately $4.1 million,
consistent with the in-force growth of such business.
Net investment income and net realized gains on investments were $560.9
million for the nine-month period ended September 30, 1998, an increase of
$106.1 million, or 23.3%, from $454.8 million reported in the comparable period
ended September 30, 1997. The increase was primarily due to higher average
invested assets, higher gains from sales of real estate and higher income from
equity partnerships.
Group Pension Profits were $34.1 million for the nine-month period ended
September 30, 1998, a decrease of $10.1 million, or 22.9%, from $44.2 million
reported in the comparable prior year period. Group Pension Profits consisted of
$35.8 million of Group Pension Payments, offset by an increase of $1.7 million
in valuation allowances relating to adjustments required to reflect the earnings
from such payments in accordance with GAAP. Such adjustments primarily relate to
changes in the valuation allowances established to recognize impairment of
assets supporting the business transferred in the Group Pension Transaction. In
the comparable prior year period Group Pension Profits consisted of $39.7
million of Group Pension Payments and $4.5 million relating to a decrease in the
aforementioned valuation allowances. Group Pension Payments during the
nine-month period ended September 30, 1998 decreased from that reported in the
comparable prior year period primarily because of the continuing run-off of the
Existing Deposits and lower reinvestment rates. The decrease in the valuation
allowance reported during the nine-month period ended September 30, 1997
resulted primarily from the paydown of certain mortgage loans.
Other income was $16.4 million for the nine-month period ended September
30, 1998, an increase of $6.5 million, or 65.7%, as compared to $9.9 million
reported in the comparable prior year period. The increase was primarily due to
an increase of $2.9 million relating to reinsurance expense allowances.
Benefits to policyholders were $521.2 million for the nine-month period
ended September 30, 1998, a decrease of $68.7 million, or 11.6%, as compared to
$589.9 million reported in the comparable prior year period. The decrease
primarily resulted from a decrease of $50.9 million relating to the transfer of
the
34
36
Company's disability income insurance business pursuant to the DI Transaction
during the fourth quarter of 1997. In addition, the decrease in benefits to
policyholders consists of lower surrenders on traditional business of
approximately $10.3 million, higher death benefits, net of reinsurance, of
approximately $13.2 million and, a decrease in the change in reserves on
traditional business of approximately $20.3 million, consistent with a decline
in the amount of in-force new and single traditional business lower surrenders
and higher death benefit payments.
Interest credited to policyholder account balances was $33.2 million for
the nine-month period ended September 30, 1998, an increase of $2.0 million, or
6.4%, as compared to $31.2 million reported in the comparable prior year period.
The increase was primarily due to interest credited on the sale of CSVUL
products prior to the transfer of funds to the separate account, of $1.5
million.
Amortization of DAC was $80.4 million for the nine-month period ended
September 30, 1998, a decrease of $0.3 million, or 0.4%, as compared to $80.7
million reported in the comparable prior year period. The decrease is primarily
the result of: (i) lower amortization of approximately $1.8 million, relating to
the term life product line, and (ii) lower amortization related to the health
business of $2.3 million and (iii) lower amortization of $1.2 million on the
variable universal life product line, offset by (i) an increase in amortization
of approximately $3.4 million in traditional whole life products.
Other operating costs and expenses were $211.4 million for the nine-month
period ended September 30, 1998, an increase of $8.6 million, or 4.2%, as
compared to $202.8 million reported in the comparable prior year period. The
increase primarily consists higher interest expense, as a result of the issuance
of the MONY Notes on December 31, 1997, higher costs incurred in connection with
the Year 2000 issue and in connection with restructuring of the Company's career
agency sales force and other strategic initiatives.
Dividends to policyholders of $161.3 million for the nine-month period ended
September 30, 1998 decreased $12.6 million, or 7.2% from $173.9 million reported
in the comparable prior year period. The decrease primarily resulted from a
reduction in the fourth quarter of 1997 in the interest component of the
dividend scales on all policies by amounts ranging from 15 to 50 basis points.
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 THREE-MONTH FOR THE NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1998 1997 1998 1997
-------- -------- ------- -------
(IN MILLIONS)
REVENUES:
Premiums................................................ $ 0.5 $ 1.0 $ 2.3 $ 3.8
Investment-type product fees............................ 15.9 13.3 47.5 36.5
Net investment income and net realized gains on
investments........................................... 31.3 33.4 109.1 98.7
Other income............................................ 17.7 14.1 52.3 37.3
------ ------ ------ ------
Total revenues................................ 65.4 61.8 211.2 176.3
BENEFITS AND EXPENSES:
Benefits to policyholders............................... 5.2 4.2 14.1 15.5
Interest credited to policyholders' account balances.... 14.3 16.9 42.2 52.2
Amortization of deferred policy acquisition costs....... 7.1 5.6 22.5 18.2
Other operating costs and expenses...................... 21.3 18.4 64.0 48.4
Dividends to policyholders.............................. 0.4 0.5 1.3 1.6
------ ------ ------ ------
Total benefits and expenses................... 48.3 45.6 144.1 135.9
Income before income taxes.............................. $ 17.1 $ 16.2 $ 67.1 $ 40.4
====== ====== ====== ======
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37
Accumulation Segment -- For the Three-Month Period Ended September 30, 1998
Compared to the Three-Month Period Ended September 30, 1997
Investment-type product policy fees were $15.9 million for the three-month
period ended September 30, 1998, an increase of $2.6 million, or 19.5%, from
$13.3 million reported in the comparable period ended September 30, 1997. This
increase was primarily the result of higher fees relating to the Company's FPVA
business of $2.8 million. The Company reported total fees from its FPVA business
for the three-month period ended September 30, 1998 of $15.6 million, as
compared to $12.8 million reported for the comparable period ended September 30,
1997. The increase in FPVA fees resulted from an increase in the average FPVA
account value of $654.8 million during the three-month period ended September
30, 1998 to $4,347.5 million, as compared to $3,692.7 million for the comparable
prior year period.
Net investment income and net realized gains on investments were $31.3
million for the three-month period ended September 30, 1998, a decrease of $2.1
million, or 6.3%, from $33.4 million reported in the comparable period ended
September 30, 1997. The decrease was primarily due to lower average invested
assets.
Other income (which consists primarily of fees earned by the Company's
mutual fund management and supplementary contracts with life contingencies) was
$17.7 million for the three-month period ended September 30, 1998, an increase
of $3.6 million, or 25.6%, as compared to $14.1 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 $5.2 million
offset by a decrease of $0.4 relating to supplementary contracts with life
contingencies.
Benefits to policyholders were $5.2 million for the three-month period
ended September 30, 1998, an increase of $1.0 million, or 23.8%, as compared to
$4.2 million reported in the comparable prior year period. The increase is
primarily due to higher reserves on immediate annuities.
Interest credited to policyholder account balances was $14.3 million for
the three-month period ended September 30, 1998, a decrease of $2.6 million, or
15.4%, as compared to $16.9 million reported in the comparable prior year
period. The decrease primarily resulted from lower interest crediting on all
accumulation products, except for FPVA, consistent with the decrease in such
corresponding account balances.
Amortization of DAC was $7.1 million for the three-month period ended
September 30, 1998, an increase of $1.5 million, or 26.8%, as compared to $5.6
million reported in the comparable prior year period. The increase is primarily
the result of higher amortization of approximately $2.2 million relating to the
Company's FPVA product line. The increase in amortization relating to FPVAs
resulted from higher profits from such business due to an increase in the
average FPVA account value of $654.8 million during the three-month period ended
September 30, 1998 to $4,347.5 million, as compared to $3,692.7 million for the
comparable prior year period.
Other operating costs and expenses were $21.3 million for the three-month
period ended September 30, 1998, an increase of $2.9 million, or 15.8%, as
compared to $18.4 million reported in the comparable prior year period. The
increase primarily consists of higher commission and other operating expenses of
$3.7 million from its investment advisor subsidiary.
Accumulation Segment -- For the Nine-Month Period Ended September 30, 1998
Compared to the Nine-Month Period Ended September 30, 1997
Investment-type product policy fees were $47.5 million for the nine-month
period ended September 30, 1998, an increase of $11.0 million, or 30.0%, from
$36.5 million reported in the comparable period ended September 30, 1997. This
increase was primarily the result of higher fees relating to the Company's FPVA
business of $11.2 million. The Company reported total fees from its FPVA
business of $47.1 million, as compared to $35.9 million reported for the
comparable prior year period. The increase in FPVA fees resulted from an
increase in the average FPVA account value of $979.6 million during the
nine-month period ended September 30, 1998 to $4,281.7 million, as compared to
$3,302.1 million for the comparable prior year period.
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38
Net investment income and net realized gains on investments were $109.1
million for the nine-month period ended September 30, 1998, an increase of $10.4
million, or 10.5%, from $98.7 million reported in the comparable period ended
September 30, 1997. The increase was primarily due to higher gains from the
sales of real estate offset by lower average invested assets.
Other income was $52.3 million for the nine-month period ended September
30, 1998, an increase of $15.0 million, or 40.2%, as compared to $37.3 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 $16.0 million.
Benefits to policyholders were $14.1 million for the nine-month period
ended September 30, 1998, a decrease of $1.4 million, or 9.0%, as compared to
$15.5 million reported in the comparable prior year period. The decrease is
primarily due to lower reserves on immediate annuities resulting from lower
sales and a decrease in the issuance of supplementary contracts with life
contingencies during the period.
Interest credited to policyholder account balances was $42.2 million for
the nine-month period ended September 30, 1998, a decrease of $10.0 million, or
19.2%, as compared to $52.2 million reported in the comparable prior year
period. The decrease primarily resulted from lower interest crediting on all
accumulation products, except for FPVA, consistent with the decrease in such
corresponding account balances.
Amortization of DAC was $22.5 million for the nine-month period ended
September 30, 1998, an increase of $4.3 million, or 23.6%, as compared to $18.2
million reported in the comparable prior year period. The increase is primarily
the result of higher amortization of approximately $6.3 million relating to the
Company's FPVA product line. The increase in amortization relating to FPVAs
resulted from higher profits from such business due to an increase in the
average FPVA account value of $979.6 million during the nine-month period ended
September 30, 1998 to $4,281.7 million, as compared to $3,302.1 million for the
comparable prior year period.
Other operating costs and expenses were $64.0 million for the nine-month
period ended September 30, 1998, an increase of $15.6 million, or 32.2%, as
compared to $48.4 million reported in the comparable prior year period. The
increase primarily consists of higher commission and other operating expenses of
$12.5 million from its investment advisor subsidiary.
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39
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 THREE-MONTHS FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------------
1998 1997 1998 1997
------- ------- --------- --------
(IN MILLIONS)
REVENUES:
Premiums......................................... $ 2.4 $ 2.9 $ 10.6 $ 8.7
Investment-type product policy fees.............. 0.0 0.2 0.8 1.1
Net investment income and net realized gains on
investments.................................... 12.8 14.0 51.7 44.9
Other income..................................... 10.8 12.4 43.2 35.9
----- ----- ------ -----
Total revenues......................... 26.0 29.5 106.3 90.6
BENEFITS AND EXPENSES:
Benefits to policyholders........................ 3.8 5.2 20.1 15.8
Interest credited to policyholders' account
balances....................................... 2.3 2.5 8.6 9.5
Other operating costs and expenses............... 15.3 12.0 59.0 48.8
Dividends to policyholders....................... 0.3 0.1 1.0 0.9
----- ----- ------ -----
Total benefits and expenses............ 21.7 19.8 88.7 75.0
Income before income taxes....................... $ 4.3 $ 9.7 $ 17.6 $15.6
===== ===== ====== =====
Other Products Segment -- For the Three-Month Period Ended September 30, 1998
Compared to the Three-Month Period Ended September 30, 1997
Premium revenue was $2.4 million for the three-month period ended September
30, 1998, a decrease of $0.5 million, or 17.2%, from $2.9 million reported in
the comparable period ended September 30, 1997. The decrease primarily relates
to a decrease of $0.4 million in premiums on group pension business.
Net investment income and net realized gains on investments were $12.8
million for the three-month period ended September 30, 1998, a decrease of $1.2
million, or 8.6%, from $14.0 million reported in the comparable period ended
September 30, 1997. The decrease was due to lower average invested assets.
Other income was $10.8 million for the three-month period ended September
30, 1998, a decrease of $1.6 million, or 12.9%, as compared to $12.4 million
reported in the comparable prior year period. The decrease was primarily the
result of lower fees earned by MONY Securities Corp. and the Company's other
non-life subsidiaries.
Benefits to policyholders were $3.8 million for the three-month period
ended September 30, 1998, a decrease of $1.4 million, or 26.9%, as compared to
$5.2 million reported in the comparable prior year period. The decrease was
primarily due to a decrease in group insurance of $1.5 million.
Other operating costs and expenses were $15.3 million for the three-month
period ended September 30, 1998, an increase of $3.3 million, or 27.5%, as
compared to $12.0 million reported in the comparable prior year period. The
increase primarily consists of higher commission and allocated expenses to the
Company's broker-dealer operations of $1.9 million.
Other Products Segment -- For the Nine-Month Period Ended September 30, 1998
Compared to the Nine-Month Period Ended September 30, 1997
Premium revenue was $10.6 million for the nine-month period ended September
30, 1998, an increase of $1.9 million, or 21.8%, from $8.7 million reported in
the comparable period ended September 30, 1997. The increase primarily relates
to an increase of $1.3 million in group pension business during the period.
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40
Net investment income and net realized gains on investments were $51.7
million for the nine-month period ended September 30, 1998, an increase of $6.8
million, or 15.1%, from $44.9 million reported in the comparable period ended
September 30, 1997. The increase was due to higher gains from the sales of real
estate offset by lower average invested assets.
Other income was $43.2 million for the nine-month period ended September
30, 1998, an increase of $7.3 million, or 20.3%, as compared to $35.9 million
reported in the comparable prior year period. The increase was primarily the
result of higher fees earned by MONY Securities Corp. of $8.7 million.
Benefits to policyholders were $20.1 million for the nine-month period
ended September 30, 1998, an increase of $4.3 million, or 27.2%, as compared to
$15.8 million reported in the comparable prior year period. The increase was
primarily due to an increase in group pension business of $1.8 million as a
result of higher annuitization of pension contracts and an increase of $2.5
million in group insurance reserves.
Other operating costs and expenses were $59.0 million for the nine-month
period ended September 30, 1998, an increase of $10.2 million, or 20.9%, as
compared to $48.8 million reported in the comparable prior year period. The
increase primarily consists of higher commission and allocated expenses to the
Company's broker-dealer operations and other operating expenses of $10.4
million.
EXTRAORDINARY CHARGE FOR DEMUTUALIZATION; HOLDING COMPANY EXPENSES
The $15.5 million and $3.3 million reflected as after-tax demutualization
expenses on the Company's consolidated statements of income for the nine-month
periods ended September 30, 1998 and 1997, respectively, were direct
nonrecurring costs specifically related to the demutualization of MONY. Such
extraordinary expenses for the three-month period ended September 30, 1998 and
1997 were $5.8 million and $0.9 million, respectively. Management estimates
approximately $9.2 million of such demutualization expenses remain to be
incurred subsequent to September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company
The Holding Company's cash flow will consist of dividends from
subsidiaries, if declared and paid, principal and interest payments with respect
to the Intercompany Surplus Notes, if issued in connection with the issuance of
the Holding Company Subordinated Notes, and investment income on assets held by
the Holding Company, offset by expenses incurred for debt service on the Holding
Company Subordinated Notes, if issued, salaries and other expenses. Assuming
that the entire $115 million aggregate principal amount of Holding Company
Subordinated Notes that could be issued is actually issued, annual interest
payments on the Holding Company Subordinated Notes will be $10.9 million per
year. As a holding company, the Holding Company's ability to meet its cash
requirements and pay dividends on the Common Stock depends upon the receipt of
dividends and other payments from MONY. The payment of dividends by MONY to the
Holding Company is regulated under state insurance law. Under the New York
Insurance Law, MONY will be permitted to pay shareholder dividends to the
Holding Company 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 to pay dividends to the Holding
Company. There can be no assurance that MONY will have statutory earnings to
support the payment of dividends to the Holding Company in an amount sufficient
to fund its cash requirements and pay cash dividends. In addition, the Arizona
insurance laws contain similar restrictions on the ability of its subsidiary,
MONY Life Insurance Company of America ("MLOA") to pay dividends to MONY. There
can be no assurance that the Arizona insurance laws will in the future permit
the payment of dividends by MLOA to MONY in an amount sufficient to support the
ability of MONY to pay dividends to the Holding Company.
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41
If the Holding Company Subordinated Notes are issued, the Holding Company
may also receive payments of principal and interest from MONY 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 will obtain the
requisite approval for payments with respect to the Intercompany Surplus Notes,
or that surplus funds will be available for such payments.
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 September 30, 1998 and December 31, 1997.
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42
WITHDRAWAL CHARACTERISTICS OF
ANNUITY RESERVES AND DEPOSIT LIABILITIES
AMOUNT AT AMOUNT AT
SEPTEMBER 30, PERCENT DECEMBER 31, PERCENT
1998 OF TOTAL 1997 OF TOTAL
------------- -------- ------------ --------
($ IN MILLIONS)
NOT SUBJECT TO DISCRETIONARY WITHDRAWAL
PROVISIONS................................... $ 923.3 12.6% $ 944.2 12.6%
Subject to discretionary withdrawal -- with
market value adjustment or at carrying value
less surrender charge........................ 5,163.2 70.4 5,236.4 70.1
-------- ----- -------- -----
Subtotal....................................... 6,086.5 83.0 6,180.6 82.7
Subject to discretionary withdrawal -- without
adjustment at carrying value................. 1,248.6 17.0 1,295.3 17.3
-------- ----- -------- -----
Total annuity reserves and deposit liabilities
(gross)...................................... 7,335.1 100.0% 7,475.9 100.0%
-------- ----- -------- -----
Less reinsurance............................... 129.4 145.7
-------- --------
Total annuity reserves and deposit liabilities
(net)........................................ $7,205.7 $7,330.2
======== ========
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
SURRENDERS AND WITHDRAWALS
FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30,
-------------------------
1998 1997
------ ------
($ IN MILLIONS)
PRODUCT LINE:
Traditional life............................................ $239.3 $246.5
Variable and universal life................................. 24.0 20.9
Annuities................................................... 390.0 339.4
------ ------
Total............................................. $653.3 $606.8
====== ======
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
nine-month period ended September 30, 1998, the Company reported a net increase
in cash and cash equivalents of $74.7 million, as compared to a net decrease in
cash and cash equivalents of $92.7 million during the nine-month period ended
September 30, 1997, a change of $167.4 million due primarily to (i) the
repayment of Eurobond debt in 1997 of $89.2 million; (ii) increased cash inflows
from sales of real estate in 1998 of $210.4 million compared to the comparable
period in the prior year; and (iii) increased receipts from annuity and
universal life policies, of $57.1 million compared to the comparable period in
the prior year.
In addition, the Company has two bank line of credit facilities with
domestic banks aggregating $150.0 million, with scheduled renewal dates in
September 1999 and September 2003. The purpose of these facilities is to provide
additional liquidity for any unanticipated short-term cash needs the Company
might experience. The Company has not borrowed against these lines of credit.
At September 30, 1998, MONY had commitments to issue $49.5 million of fixed
rate agricultural loans with periodic interest rate reset dates. The initial
interest rates on such loans range from 6.7% to 8.0%. In addition, MONY had
commitments to issue $77.3 million of fixed rate commercial mortgage loans with
interest rates ranging from 6.88% to 7.72%. MONY also had commitments
outstanding to purchase $23.7 million of private fixed maturity securities as of
September 30, 1998 with interest rates ranging from 6.86% to 6.94%.
41
43
Of the $810.5 million of currently outstanding commercial mortgage loans in
the Company's investment portfolio at September 30, 1998, $79.3 million, $55.4
million, $85.7 million, and $59.2 million are scheduled to mature in 1998, 1999,
2000, and 2001, 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 9.50%, 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 7.9% to 8.7%. Maturities range from
June 2000 to July 2009. Interest expense on such mortgage loans was $2.1 million
and $3.1 million for the three-month periods ended September 30, 1998 and 1997,
respectively, and $8.0 million and $9.2 million for the nine-month periods ended
September 30, 1998 and 1997, 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% 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 September 30, 1998 and December 31, 1997, the outstanding balance
of the obligation including accrued interest was $42.5 million and $41.3
million, respectively. Interest expense on the obligation of $0.8 million and
$0.7 million for the three-month periods ended September 30, 1998 and 1997,
respectively, and $2.3 million and $2.2 million for the nine-month periods ended
September 30, 1998 and 1997, 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 $7.0 million in 1998, $7.1 million in 1999, $7.3 million in 2000,
$7.4 million in 2001, $7.6 million in 2002, and $48.7 million thereafter. The
Company has the option to renew the lease at the end of the lease term.
At September 30, 1998, aggregate maturities of long-term debt based on
required remaining principal payments for 1998 and the succeeding four years are
$0.5 million, $12.5 million, $87.4 million, $36.2 million and $0.5 million,
respectively, and $248.1 million thereafter.
Aggregate contractual debt service payments on the Company's debt at
September 30, 1998, for the remainder of 1998 and the succeeding four years are
$5.1 million, $30.7 million, $117.6 million, $63.7 million and $25.7 million,
respectively.
Among the assets allocated to the Closed Block are the Series A Notes. MONY
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 "-- The Group Pension
Transaction".
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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 September 30, 1998 and December
31, 1997 were in excess of the minimum required RBC.
YEAR 2000
State of Readiness
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 Command Systems,
Inc., and Keane, Inc. to assist the Company in bringing the Company's computer
and information systems into Year 2000 compliance. The Company's overall goal
for information technology ("IT") related items is to have business-critical
hardware and software compliant by December 31, 1998, with additional testing
and enterprise end-to-end testing occurring in 1999. MONY has also retained
Technology Resource Solutions to assist in the evaluation of Year 2000 issues
affecting the Company's non-IT systems in facilities and equipment which may
contain date logic in embedded chips. MONY's overall goal is to have all non-IT
systems compliant by mid-1999.
The scope of the Project includes: ensuring the compliance of all
applications, operating systems and hardware on mainframe, PC and 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. For business-critical non-IT systems in buildings,
facilities and equipment, approximately 50% had been remediated as of September
30, 1998.
The inventory and assessment phases of the Project were completed prior to
mid 1998. At September 30, 1998, approximately 80% of the Company's application
systems had been remediated, tested and re-implemented into production.
Approximately 85% of the operating systems, systems software, and hardware for
mainframe, PC and LAN platforms were deemed compliant based on information
supplied by vendors verbally, in writing, or on the vendor's Internet site.
Business critical items are scheduled to be compliant and tested by December 31,
1998. Approximately 50% of non-IT business critical items had been remediated as
of September 30, 1998. Ongoing testing for Year 2000 compliance will continue in
the fourth quarter of 1998 and in 1999, and is expected to be completed by mid
1999.
As part of the Project, significant service providers, vendors, suppliers,
and other third parties that are believed to be critical to business operations
after January 1, 2000, have been identified and steps are being
43
45
undertaken in an attempt to reasonably ascertain their stage of Year 2000
readiness through questionnaires, 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 September 30, 1998 was
$19.0 million which includes $13 million for external vendor costs, and $6
million for internal costs. The estimated future cost of completing the Year
2000 Project is estimated to be approximately $6 million, which includes $4
million for external vendor costs, and $2 million for internal costs. These
amounts include costs associated with the current 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 or those third parties on which the
Company relies will be Year 2000 compliant in a timely manner or that the
Company's or third parties' contingency plans will mitigate the effects of any
noncompliance. The failure of the systems or equipment of the Company or third
parties (which the Company believes is the most reasonable likely worst case
scenario) could affect the distribution and sale of life insurance, annuity and
investment products and could have a material effect on the Company's financial
position and results of operations.
Contingency Plans
The Company has retained outside consultants to assist in the development
of Business Continuity Plans, which includes 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 failures due to the Year 2000 problem of third
parties and other items, which are critical to the ongoing operation of the
business. The Contingency Plan includes the performance of alternate processing
as well as consideration for changing third party service providers, vendors,
and suppliers if necessary. The scheduled date for completion of the Contingency
Plan is mid 1999. The Company believes that due to the pervasive 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.
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INVESTMENTS
The following discussion excludes invested assets transferred in the Group
Pension Transaction. This discussion should be read in conjunction with the
summary financial information presented in Note 4 to the Unaudited Interim
Condensed Consolidated Financial Statements and "Management Discussion and
Analysis of Financial Condition and Results of Operations".
The yield on general account invested assets (including net realized gains
and losses on investments) was 8.0% and 7.7% for the three-month period ended
September 30, 1998 and 1997, respectively, and 9.4% and 7.7% for the nine-month
period ended September 30, 1998 and 1997, 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
nine-month periods ended September 30, 1998 and 1997, 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-MONTHS ENDED THREE-MONTHS ENDED NINE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------- --------------------
YIELD(2) AMOUNT YIELD(2) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- --------- -------- --------- -------- --------- -------- ---------
($ IN MILLIONS)
FIXED MATURITIES:
Investment income....... 7.4% $ 113.9 7.7% $ 106.2 7.4% $ 333.8 7.5% $ 313.5
Net realized gains
(losses).............. (0.2) (3.5) 0.0 0.6 0.2 8.8 0.2 7.1
Total................... 7.2% 110.4 7.7% 106.8 7.6% 342.6 7.7% 320.6
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 6,214.4 $ 5,729.0 $ 6,214.4 $ 5,729.0
EQUITY SECURITIES:(3)
Investment income....... 27.1% $ 25.6 23.8% $ 18.4 17.3% $ 46.4 17.8% $ 42.1
Net realized gains
(losses).............. (10.7) (10.1) 8.3 6.4 2.9 7.8 13.2 31.3
Total................... 16.4% 15.5 32.1% 24.8 20.2% 54.2 31.0% 73.4
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 378.1 $ 326.1 $ 378.1 $ 326.1
MORTGAGE LOANS:
Investment income....... 8.8% $ 31.7 8.9% $ 33.5 8.9% $ 94.8 9.1% $ 104.1
Net realized gains
(losses).............. 1.0 3.5 0.4 1.5 0.8 8.1 1.3 14.8
Total................... 9.8% 35.2 9.3% 35.0 9.7% 102.9 10.4% 118.9
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 1,404.3 $ 1,461.7 $ 1,404.3 $ 1,461.7
REAL ESTATE:(4)
Investment income....... 3.7% $ 6.9 3.1% $ 9.6 4.8% $ 32.6 3.2% $ 33.0
Net realized gains
(losses).............. 12.7 23.3 1.6 5.0 18.3 123.4 0.5 5.1
Total................... 16.4% 30.2 4.7% 14.6 23.1% 156.0 3.7% 38.1
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 680.6 $ 1,214.5 $ 680.6 $ 1,214.5
POLICY LOANS:
Investment income....... 6.9% $ 21.6 6.3% $ 19.5 6.5% $ 61.2 6.4% $ 59.5
Net realized gains
(losses).............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total................... 6.9% 21.6 6.3% 19.5 6.5% 61.2 6.4% 59.5
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 1,257.6 $ 1,235.8 $ 1,257.6 $ 1,235.8
CASH & CASH EQUIVALENTS:
Investment income....... 5.4% $ 5.9 5.5% $ 5.3 4.9% $ 12.8 7.5% $ 15.1
Net realized gains
(losses).............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total................... 5.4% 5.9 5.5% 5.3 4.9% 12.8 7.5% 15.1
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 388.1 $ 222.7 $ 388.1 $ 222.7
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AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
THREE-MONTHS ENDED THREE-MONTHS ENDED NINE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------- --------------------
YIELD(2) AMOUNT YIELD(2) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- --------- -------- --------- -------- --------- -------- ---------
($ IN MILLIONS)
OTHER INVESTED ASSETS:
Investment income(5).... 5.6% $ 0.8 0.6% $ 0.1 1.7% $ 0.8 0.4% $ 0.2
Net realized gains
(losses).............. (8.4) (1.2) 5.0 0.9 45.6 21.5 (2.5) (1.3)
Total................... (2.8)% (0.4) 5.6% 1.0 47.3% 22.3 (2.1)% (1.1)
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $ 57.1 $ 70.8 $ 57.1 $ 70.8
TOTAL BEFORE INVESTMENT
EXPENSES:
Investment income(6).... 7.9% $ 206.4 7.5% $ 192.6 7.5% $ 582.4 7.3% $ 567.5
Net realized gains
(losses).............. 0.5 12.0 0.6 14.4 2.2 169.6 0.7 57.0
Total................... 8.4% 218.4 8.1% 207.0 9.7% 752.0 8.0% 624.5
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $10,380.2 $10,260.6 $10,380.2 $10,260.6
INVESTMENT EXPENSES NET
OF OTHER FEE
INCOME(7)............. (0.4%) $ (9.3) (0.3%) $ (8.5) (0.4%) $ (27.6) (0.3)% $ (23.8)
TOTAL AFTER INVESTMENT
EXPENSES:
Investment income(7).... 7.5% $ 197.1 7.2% $ 184.1 7.2% $ 554.8 7.0% $ 543.7
Net realized gains
(losses).............. 0.5 12.0 0.5 14.4 2.2 169.6 0.7 57.0
Total................... 8.0% 209.1 7.7% 198.5 9.4% 724.4 7.7% 600.7
----- --------- ---- --------- ---- --------- ---- ---------
Ending assets........... $10,380.2 $10,260.6 $10,380.2 $10,260.6
Net unrealized gains
(losses) on fixed
maturities............ 338.1 138.2 338.1 138.2
--------- --------- --------- ---------
Total invested assets... $10,718.3 $10,398.8 $10,718.3 $10,398.8
- ---------------
(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 nine- month periods ended September 30,
1998 and 1997 would have resulted in a total yield of 14.5% and 27.7%,
respectively, which would have resulted in a total return on invested
assets of 9.2% and 7.7% 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 September 30,
1998 and 1997 would have resulted in a total yield of (4.8%) and 49.9%,
respectively, which would have resulted in a total return on invested
assets of 7.2% and 8.3% 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 $42.4
million and $38.5 million for the nine-months ended September 30, 1998 and
1997, respectively. In addition, real estate investment income is shown net
of depreciation of $21.1 million and $36.6 million for the aforementioned
periods, respectively. Total investment income includes non-cash income
from amortization, payment-in-kind distributions and undistributed equity
earnings of $24.2 million and $16.3 million for the three-months ended
September 30, 1998 and 1997, respectively. In addition, real estate
investment income is shown net of depreciation of $7.0 million and $8.8
million for the aforementioned periods, respectively.
46
48
(7) Includes mortgage servicing fee and other miscellaneous fee income of
approximately $4.0 million and $2.3 million for the nine-months ended
September 30, 1998 and 1997, respectively. Includes mortgage servicing fee
and other miscellaneous fee income of approximately $2.2 million and $0.7
million for the three-months ended September 30, 1998 and 1997,
respectively.
FIXED MATURITIES
Fixed maturities consist of publicly traded debt securities, privately
placed debt securities and small amounts of redeemable preferred stock, and
represented 61.1% and 56.9% of total invested assets at September 30, 1998 and
December 31, 1997, 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 September
30, 1998, 54.8%, 39.2%, and 5.3% had NAIC Designations of 1, 2, and 3,
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.
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.
47
49
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 SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- ------------------
($ IN MILLIONS)
Total fixed maturities (public and
private)................................ $6,552.5 $5,950.1
-------- --------
Problem fixed maturities.................. 24.8 30.2
Potential problem fixed maturities........ 45.2 86.2
Restructured fixed maturities............. 11.5 0.0
-------- --------
Total problem, potential problem &
restructured fixed maturities........... 81.5 $ 116.4
-------- --------
Total problem, potential problem &
restructured fixed maturities as a
percent of total fixed maturities....... 1.2% 2.0%
-------- --------
At September 30, 1998, the Company's largest unaffiliated single
concentration of fixed maturities were $258.4 million of Federal Home Loan
Mortgage Corporation ("FHLMC") which represents 2.4% of total invested assets.
The second largest single concentration consists of $196.4 million of the Notes
purchased in connection with the Group Pension Transaction. These Notes
represent approximately 1.8% of total invested assets at September 30, 1998. No
other individual non-government issuer represents more than 0.5% of invested
assets.
The Company held approximately $1,157.3 million and $1,082.7 million of
mortgage-backed and asset-backed securities as of September 30, 1998 and
December 31, 1997, respectively. Of such amounts, $472.2 million and $474.3
million, or 40.8% and 43.8%, respectively, represented agency-issued
pass-through and collateralized mortgage obligations ("CMOs") secured by Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation,
Government National Mortgage Association and Canadian Housing Authority
collateral. The balance of such amounts were comprised of other types of
mortgage-backed and asset-backed securities. The Company believes that its
active monitoring of its portfolio of mortgage-backed securities and the limited
extent of its holdings of more volatile types of mortgage-backed securities
mitigate the Company's exposure to losses from prepayment risk associated with
interest rate fluctuations for this portfolio. At September 30, 1998 and
December 31, 1997 91.4% and 93.2%, respectively, of the Company's
mortgage-backed and asset-backed securities were assigned an NAIC Designation of
1. In addition, the Company believes that it holds a relatively low percentage
of CMOs compared to other life insurance companies.
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated.
MORTGAGE AND ASSET-BACKED SECURITIES
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
($ IN MILLIONS)
CMOs............................................... $ 574.0 $ 522.0
Pass-through securities............................ 43.0 106.4
Commercial MBSs.................................... 88.4 122.1
Asset-backed securities............................ 451.9 332.2
-------- --------
Total MBSs and asset backed securities... $1,157.3 $1,082.7
======== ========
48
50
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of
September 30, 1998 and December 31, 1997 are as follows:
FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
AS OF SEPTEMBER 30, 1998 AS OF DECEMBER 31, 1997
------------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- --------- ----------
($ IN MILLIONS)
Due in one year or less.......................... $ 138.7 $ 139.7 $ 58.6 $ 58.5
Due after one year through five years............ 1,429.0 1,479.7 1,250.3 1,273.0
Due after five years through ten years........... 2,366.2 2,524.7 2,412.3 2,499.7
Due after ten years.............................. 1,171.8 1,251.1 989.4 1,036.2
-------- -------- -------- --------
Subtotal............................... 5,105.7 5,395.2 4,710.6 4,867.4
Mortgage-backed and other asset-backed
securities..................................... 1,108.7 1,157.3 1,053.8 1,082.7
-------- -------- -------- --------
Total.................................. $6,214.4 $6,552.5 $5,764.4 $5,950.1
======== ======== ======== ========
MORTGAGE LOANS
Mortgage loans consist of commercial, agricultural and residential loans.
From 1992 through 1995, the Company stopped making new commercial mortgage
loans. Beginning in 1995, the Company began making new commercial mortgage loans
but followed a more selective program involving the investment of new funds in
this asset category.
Mortgage loans comprised 13.1% and 13.7% of total invested assets as of
September 30, 1998 and December 31, 1997, respectively. As of September 30, 1998
and December 31, 1997 commercial mortgage loans comprised $810.5 million and
$914.9 million or 57.7% and 64.0% of total mortgage loan investments,
respectively. Agricultural loans comprise $591.6 and $512.7 million, or 42.1%
and 35.8% of total mortgage loans, respectively. Residential mortgage loans
comprised $2.2 million and $2.5 million, or 0.2% and 0.2% of total mortgage loan
investments at September 30, 1998 and December 31, 1997, respectively.
COMMERCIAL MORTGAGE LOANS
For commercial mortgages, the largest amount loaned on any one single
property aggregated $46.2 million and represented less than 0.5% of general
account invested assets as of September 30, 1998. Amounts loaned on 5 properties
were $20 million or greater, representing in the aggregate 23.6 % of the total
carrying value of the commercial loan portfolio at the same date. Total mortgage
loans to the 5 largest borrowers accounted in the aggregate for approximately
33.5% of the total carrying value of the commercial loan portfolio and less than
2.6% of total invested assets at September 30, 1998.
49
51
The following table presents the Company's commercial mortgage loan
maturity profile for the periods indicated.
COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- -------------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
--------- ------ --------- ------
($ IN MILLIONS)
1 year or less................................... $113.1 13.9% $220.1 24.0%
Over 1 year but less than or equal to 2 years.... 66.6 8.2 79.6 8.7
Over 2 years but less than or equal to 3 years... 79.2 9.8 86.5 9.5
Over 3 years but less than or equal to 4 years... 48.2 5.9 62.0 6.8
Over 4 years but less than or equal to 5 years... 87.2 10.8 98.4 10.8
Over 5 years but less than or equal to 6 years... 20.1 2.5 62.3 6.8
Over 6 years but less than or equal to 7 years... 46.8 5.8 47.9 5.2
Over 7 years but less than or equal to 8 years... 57.4 7.1 25.9 2.8
Over 8 years but less than or equal to 9 years... 27.2 3.4 44.6 4.9
Over 9 years but less than or equal to 10
years.......................................... 108.2 13.3 33.6 3.7
Over 10 years.................................... 156.5 19.3 154.0 16.8
------ ----- ------ -----
Total.................................. $810.5 100.0% $914.9 100.0%
====== ===== ====== =====
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 to commercial mortgages defined as problem, potential problem and
restructured as of each of the dates indicated.
50
52
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL
MORTGAGES AT CARRYING VALUE
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
($ IN MILLIONS)
Total commercial mortgages.................................. $810.5 $914.9
------ ------
Problem commercial mortgages(1)............................. $ 16.5 $ 11.3
Potential problem commercial mortgages...................... 67.2 74.7
Restructured commercial mortgages........................... 166.8 225.6
------ ------
Total problem, potential problem & restructured commercial
mortgages................................................. $250.5 $311.6
====== ======
Total problem, potential problem and restructured commercial
mortgages as a percent of total commercial mortgages...... 30.9% 34.1%
====== ======
Valuation allowances/writedowns(2):
Problem loans............................................. $ 3.9 $ 2.1
Potential problem loans................................... 14.3 15.8
Restructured loans........................................ 38.8 40.9
------ ------
Total valuation allowances/writedowns(2).................... $ 57.0 $ 58.8
====== ======
Total valuation allowances as a percent of problem,
potential problem and restructured commercial mortgages at
carrying value before valuation allowances and
writedowns................................................ 18.5% 15.9%
====== ======
- ---------------
(1) Problem commercial mortgages included mortgage loans in the process of
foreclosure of $16.5 million and $11.3 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 and
$27.4 million at September 30, 1998 and December 31, 1997, respectively.
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 September 30, 1998 and December 31, 1997,
such reserves were $13.5 million, and $17.2 million, respectively.
AGRICULTURAL MORTGAGE LOANS
Problem, Potential Problem and Restructured Agricultural Mortgages
The Company defines problem, potential problem and restructured
agricultural mortgages in the same manner as it does for commercial mortgages.
The following table presents the carrying amounts of problem, potential problem
and restructured agricultural mortgages relative to the carrying value of all
agricultural mortgages as of the dates indicated. The table also presents the
valuation allowances established by the Company relative to agricultural
mortgages defined as problem, potential problem and restructured as of each of
the aforementioned dates indicated.
51
53
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL
MORTGAGES AT CARRYING VALUE
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
($ IN MILLIONS)
Total agricultural mortgages................................ $591.6 $512.7
------ ------
Problem agricultural mortgages (1).......................... $ 8.1 $ 2.1
Potential problem agricultural mortgages.................... 1.9 2.6
Restructured agricultural mortgages......................... 12.0 17.2
------ ------
Total problem, potential problem & restructured agricultural
mortgages................................................. $ 22.0 $ 21.9
====== ======
Total problem, potential problem and restructured
agricultural mortgages as a percent of total agricultural
mortgages................................................. 3.7% 4.3%
====== ======
Valuation allowances/writedowns:
Problem loans............................................. $ 0.0 $ 0.9
Potential problem loans................................... 0.1 0.1
Restructured loans........................................ 0.4 0.4
------ ------
Total valuation allowances/writedowns....................... $ 0.5 $ 1.4
====== ======
Total valuation allowances as a percent of problem,
potential problem and restructured agricultural mortgages
at carrying value before valuation allowances and
writedowns................................................ 2.2% 6.0%
====== ======
- ---------------
(1) Problem agricultural mortgages included delinquent mortgage loans of $8.1
million and $1.2 million at September 30, 1998 and December 31, 1997,
respectively, and mortgage loans in the process of foreclosure of $0.0
million, and $0.9 million, 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 September 30, 1998 and December 31,
1997, such reserves were $5.8 million and $5.0 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 September 30, 1998 and December 31, 1997, the
carrying value of the Company's real estate investments was $680.6 million and
$1,117.1 million, respectively, or 6.3% and 10.6%, respectively, of general
account invested assets. The Company owns real estate, interests in real estate
joint ventures (both majority owned and minority owned), and real estate
acquired upon
52
54
foreclosure of commercial and agricultural mortgage loans. The following table
presents the carrying value of the Company's equity real estate investments by
such classifications.
EQUITY REAL ESTATE
AS OF SEPTEMBER 30, AS OF DECEMBER 31
TYPE 1998 1997
---- ------------------- -----------------
($ IN MILLIONS)
Real estate................................................ $301.4 $ 449.9
Joint ventures............................................. 218.5 341.1
------ --------
Subtotal................................................. 519.9 791.0
Foreclosed................................................. 160.7 326.1
------ --------
Total............................................ $680.6 $1,117.1
------ --------
REAL ESTATE SALES
In accordance with its ongoing strategy to strengthen the Company's
financial position, management expects to continue to selectively sell equity
real estate. Once management identifies a real estate property to be sold and
commences a plan for marketing the property, the property is classified as to be
disposed of and a valuation allowance is established and periodically revised,
if necessary, to adjust the carrying value of the property to reflect the lower
of its current carrying value or the fair value, less associated selling costs.
At September 30, 1998 and December 31, 1997, the carrying value of real estate
to be disposed of was $281.0 million and $621.2 million, respectively, or 2.6%
and 5.9%, respectively of invested assets at such dates, respectively. The
aforementioned carrying values are net of valuation allowances of $25.7 million
and $82.7 million, respectively. In addition, the carrying value of real estate
to be disposed of at such dates is net of $97.2 million and $182.3 million of
impairment adjustments. For the nine-months ended September 30, 1998 and the
year ended December 31, 1997, such increases in valuation allowances aggregated
$2.5 million and $63.8 million, respectively.
The following table analyzes the Company's real estate sales (both
commercial and agricultural) during the periods indicated.
REAL ESTATE SALES
FOR THE THREE-MONTH FOR THE NINE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1998 1997 1998 1997
------- ------- ------ ------
($ IN MILLIONS)
Sales proceeds........................................ $84.2 $29.1 $512.3 $308.1
----- ----- ------ ------
Carrying value before impairment adjustments and
valuation allowance................................. $67.9 $33.4 $499.9 $333.3
Impairment adjustments................................ (7.4) (7.2) (81.7) (60.6)
Valuation allowances.................................. (1.6) (2.2) (41.4) (16.6)
----- ----- ------ ------
Carrying value after impairment adjustments and
valuation allowances................................ $58.9 $24.0 $376.8 $256.1
----- ----- ------ ------
Gain/(loss)........................................... $25.3 $ 5.1 $135.5 $ 52.0
----- ----- ------ ------
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.
53
55
EQUITY SECURITIES
The Company's equity securities primarily consist of investments in common
stock 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 commons stocks and limited partnership interests at the dates
indicated. Included in common stocks at September 30, 1998 and December 31, 1997
are $11.8 million, and $0.8 million, respectively, of non-marketable private
equity securities.
INVESTMENTS IN EQUITY SECURITIES
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- ------------------
($ IN MILLIONS)
Common stocks............................. $215.0 $191.4
Limited partnership interests............. 163.1 146.4
------ ------
Total........................... $378.1 $337.8
====== ======
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES
The cumulative asset specific impairment adjustments and provisions for
valuation allowances that were recorded as of the end of each period are shown
in the table below and are reflected in the corresponding asset values discussed
above.
CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- ------------------
($ IN MILLIONS)
Fixed maturities.......................... $ 14.1 $ 7.3
Equity securities......................... 10.9 17.8
Mortgages................................. 26.3 27.4
Real estate(1)............................ 181.3 244.0
Other..................................... 0.0 0.0
------ ------
Total........................... $232.6 $296.5
====== ======
- ---------------
(1) Includes $59.0 million and $110.0 million as of September 30, 1998 and
December 31, 1997, respectively, relating to impairments taken upon
foreclosure of mortgage loans.
CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- ------------------
($ IN MILLIONS)
Mortgages................................. 50.4 54.9
Real estate............................... 25.7 82.7
Other..................................... 0.0 3.5
----- ------
Total........................... $76.1 $141.1
===== ======
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TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS
FOR VALUATION ALLOWANCES ON INVESTMENTS
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
------------------- ------------------
($ IN MILLIONS)
Fixed maturities.......................... $ 14.1 $ 7.3
Equity securities......................... 10.9 17.8
Mortgages................................. 76.7 82.3
Real estate............................... 207.0 326.7
Other..................................... 0.0 3.5
------ ------
Total........................... $308.7 $437.6
====== ======
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In late 1995 and during 1996 a number of purported class actions were
commenced in various state and federal courts against MONY alleging that MONY
engaged in deceptive sales practices in connection with the sale of whole and
universal life insurance policies from the early 1980s through the mid 1990s.
Although the claims asserted in each case are not identical, they seek
substantially the same relief under essentially the same theories of recovery
(i.e., breach of contract, fraud, negligent misrepresentation, negligent
supervision and training, breach of fiduciary duty, unjust enrichment and
violation of state insurance and/or deceptive business practice laws).
Plaintiffs in these cases (including the Goshen case discussed below) seek
primarily equitable relief (e.g., reformation, specific performance, mandatory
injunctive relief prohibiting MONY Life from canceling policies for failure to
make required premium payments, imposition of a constructive trust and creation
of a claims resolution facility to adjudicate any individual issues remaining
after resolution of all class-wide issues) as opposed to compensatory damages,
although they also seek compensatory damages in unspecified amounts. MONY Life
has answered the complaints in each action (except for one being voluntarily
held in abeyance), has denied any wrongdoing and has asserted numerous
affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified 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 MONY and sold on an alleged "vanishing premium" basis
during the period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY
filed a motion to dismiss or, alternatively, for summary judgment on all counts
of the complaint. All of the other putative class actions have been consolidated
and transferred by the Judicial Panel on Multidistrict Litigation to the United
States District Court for the District of Massachusetts, or are being
voluntarily held in abeyance pending the outcome of the Goshen case. The
Massachusetts District Court in the Multidistrict Litigation has entered an
order essentially holding all of the federal cases in abeyance pending the
outcome of the Goshen case.
On October 21, 1997, the New York State Supreme Court granted MONY's motion
for summary judgment and dismissed all claims filed in the Goshen case against
MONY on the merits. The order by the New York State Supreme Court has been
appealed by plaintiffs and all actions before the United States District Court
for the District of Massachusetts are still pending. There can be no assurance,
however, that the present or any future litigation relating to sales practices
will not have a material adverse effect on MONY.
In addition to the foregoing, from time to time MONY 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 MONY.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 10, 1998, the Securities and Exchange Commission declared
effective the Registration Statement on Form S-1 (No. 333-63835) of the Company,
as then amended, relating to the Offerings. The managing underwriters for the
U.S. offering were Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette
55
57
Securities Corporation, Morgan Stanley & Co. and Salomon Smith Barney, and the
managing underwriters for the international offering were Goldman Sachs
International, Donaldson, Lufkin & Jenrette International, Morgan Stanley & Co.
International Limited and Salomon Brothers International Limited (collectively,
the "Underwriters"). The Offerings commenced on November 10, 1998, and
terminated upon the sale of all the 12,937,500 shares of common stock (including
1,687,500 shares sold pursuant to the Underwriters' over-allotment option) which
were registered for sale. The aggregate offering price of the securities sold
was $304,031,250 (including $39,656,250 of proceeds from the exercise of the
Underwriters' over-allotment option). The Company incurred the following
expenses in connection with the Offerings:
Underwriting discounts and commissions.................. $19,147,500
Other expenses (legal and accounting fees, printing and
engraving expenses, filing and listing fees, transfer
agent and registrar fees and miscellaneous)........... 2,400,000
-----------
Total......................................... $21,547,500
===========
The net proceeds to the Company from the Offerings, after deducting the
foregoing expenses, were approximately $282,483,750. In connection with the
Offerings, except as otherwise noted below, the Company did not make any direct
or indirect payments to directors or officers of the Company or, to the
Company's knowledge, their associates; persons owning 10% or more of any class
of equity securities of the Company; or affiliates of the Company. Approximately
$60.6 million of the net proceeds were retained by the Company and the balance
of approximately $221.9 million was contributed to MONY Life.
Of the net proceeds contributed by the Company to MONY Life, approximately
$170.8 million is expected to be used by MONY Life in its general operations,
approximately $13.1 million is expected to be used to fund policy credits
required to be credited to Eligible Policyholders pursuant to the Plan, and
approximately $38.0 million represents a reimbursement for the estimated
after-tax cost of expenses incurred by MONY Life to effect the demutualization,
as required by the New York Insurance Law.
Of the net proceeds retained by the Company, approximately $2.5 million is
expected to be used to pay all of the cash to Eligible Policyholders who are to
receive cash as described in the Plan (other than pursuant to an expression of a
preference to receive cash), $10.0 million is expected to be used to provide
working capital for the Company, $30.0 million is expected to be used to pay
dividends on the Company's stock, and approximately $18.1 million is expected to
be retained by the Company to pay cash to Eligible Policyholders who are to
receive cash pursuant to an expression of a preference to receive cash in
accordance with the Plan.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter covered by this
report.
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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
Date: December 23, 1998 Principal Financial Officer)
By: /s/ Larry Cohen
------------------------------------
Larry Cohen
Vice President and Controller
Date: December 23,1998 (Principal Accounting Officer)
57
59
EXHIBIT INDEX
Exhibit 27 -- Financial Data Schedule