<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1998
REGISTRATION NO. 333-63835
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MONY GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6719 13-3976138
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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)
------------------------
RICHARD E. MULROY, JR., ESQ.
THE MONY GROUP INC.
1740 BROADWAY
NEW YORK, NEW YORK 10019
(212) 708-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
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<S> <C>
WILLIAM W. ROSENBLATT, ESQ. WILLIAM D. TORCHIANA, ESQ.
JONATHAN L. FREEDMAN, ESQ. SULLIVAN & CROMWELL
DEWEY BALLANTINE LLP 125 BROAD STREET
1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10004
NEW YORK, NEW YORK 10019 (212) 558-4000
(212) 259-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE(4)
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<S> <C> <C>
Common Stock, par value $0.01 per share(3)................ $304,031,250 $89,690
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(1) A portion of the shares of Common Stock to be registered represents shares
that are to be offered outside of the United States but that may be resold
from time to time in the United States. Such shares are not being registered
for the purpose of offers or sales outside of the United States.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
(3) Includes the related preferred stock purchase rights as described under
"Description of Capital Stock".
(4) Includes payments of $29,500 and $52,557 which were previously paid on
September 17, 1998 and October 19, 1998, respectively, in accordance with
Rule 457(o) under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1998
11,250,000 SHARES
THE MONY GROUP INC.
[MONY LOGO]
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
Of the 11,250,000 shares of Common Stock offered by The MONY Group Inc.
(the "Holding Company"), 9,500,000 shares are being offered hereby in the United
States and 1,750,000 shares are being offered in a concurrent international
offering outside the United States. The initial public offering price and the
aggregate underwriting discount per share are identical for both Offerings. See
"Underwriting".
The shares of Common Stock offered in the Offerings are in addition to the
shares of Common Stock distributable to policyholders in connection with a plan
of reorganization under which The Mutual Life Insurance Company of New York will
convert from a mutual life insurance company organized under the laws of the
State of New York into a New York stock life insurance company in accordance
with the requirements of Section 7312 of the New York Insurance Law and become a
wholly-owned subsidiary of the Holding Company. See "The Demutualization".
Prior to the Offerings, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share will be between $21.50 and $23.50. For factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "MNY".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE NEW YORK
SUPERINTENDENT OF INSURANCE NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, ANY
STATE SECURITIES COMMISSION OR THE NEW YORK SUPERINTENDENT OF INSURANCE PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO THE
OFFERING PRICE DISCOUNT(1) HOLDING COMPANY(2)
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<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(1) The Holding Company and MONY have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting".
(2) Before deducting estimated expenses of $2,400,000 payable by the Holding
Company.
(3) The Holding Company has granted the U.S. Underwriters an option for 30 days
to purchase up to an additional 1,425,000 shares at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Holding Company has granted the
International Underwriters a similar option with respect to an additional
262,500 shares as part of the concurrent International Offering. If such
options are exercised in full, the initial public offering price,
underwriting discount and proceeds to the Holding Company will be
$ , $ and $ , respectively. See "Underwriting".
------------------------
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York on
or about , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY
------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary", "Risk Factors",
"Certain Provisions of the Investment", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business". Actual events or
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed under "Risk Factors" as well as those discussed in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and in the other sections of this
Prospectus.
------------------------
The Holding Company intends to furnish holders of Common Stock with annual
reports that include audited annual consolidated financial statements and an
opinion thereon expressed by independent certified public accountants.
------------------------
UNDER THE NEW YORK INSURANCE LAW, FOR A PERIOD OF FIVE YEARS FOLLOWING THE
PLAN EFFECTIVE DATE (AS HEREINAFTER DEFINED), NO PERSON MAY ACQUIRE BENEFICIAL
OWNERSHIP OF 5% OR MORE OF THE OUTSTANDING SHARES OF THE COMMON STOCK WITHOUT
THE PRIOR APPROVAL OF THE NEW YORK SUPERINTENDENT OF INSURANCE. INVESTORS IN
CERTAIN DEBT SECURITIES OF THE COMPANY HAVE RECEIVED A WAIVER OF THIS RULE FROM
THE NEW YORK SUPERINTENDENT OF INSURANCE IN CONNECTION WITH THE POTENTIAL
EXERCISE OF CERTAIN WARRANTS TO PURCHASE SHARES OF COMMON STOCK PRIOR TO THE END
OF SUCH FIVE-YEAR PERIOD. IN ADDITION, STATE INSURANCE HOLDING COMPANY STATUTES
APPLICABLE TO THE HOLDING COMPANY GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE
CONTROL OF THE HOLDING COMPANY, AND THUS INDIRECT CONTROL OF ITS INSURANCE
SUBSIDIARIES, WITHOUT THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE
REGULATORS. GENERALLY, ANY PERSON WHO ACQUIRES BENEFICIAL OWNERSHIP OF 10% OR
MORE OF THE OUTSTANDING SHARES OF THE COMMON STOCK WOULD BE PRESUMED TO HAVE
ACQUIRED SUCH CONTROL, UNLESS THE APPROPRIATE INSURANCE REGULATORS UPON
APPLICATION DETERMINE OTHERWISE. IN ADDITION, PERSONS WHO DO NOT ACQUIRE
BENEFICIAL OWNERSHIP OF MORE THAN 10% OF THE OUTSTANDING SHARES OF COMMON STOCK
MAY BE DEEMED TO HAVE ACQUIRED SUCH CONTROL IF APPROPRIATE REGULATORS DETERMINE
THAT SUCH PERSONS, DIRECTLY OR INDIRECTLY, EXERCISE A CONTROLLING INFLUENCE OVER
THE MANAGEMENT OR POLICIES OF THE INSURER. SEE "BUSINESS -- REGULATION".
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Certain insurance and other terms are defined in the Glossary,
which starts at page G-1. Except as otherwise indicated, the information in this
Prospectus assumes that the U.S. Underwriters' (the "U.S. Underwriters") and the
International Underwriters' (the "International Underwriters" and, together with
the U.S. Underwriters, the "Underwriters") over-allotment options are not
exercised. See "Underwriting". All financial data and ratios presented herein
have been prepared using generally accepted accounting principles ("GAAP")
unless otherwise indicated.
For purposes of this Prospectus, the term "Company" refers, at all times
prior to the effective date (the "Plan Effective Date") of the Demutualization
(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, including MONY Life Insurance Company of
America, an Arizona stock life insurance company ("MLOA"), and the Holding
Company, and at all times on and after the Plan Effective Date, to the Holding
Company and its subsidiaries, including MONY Life Insurance Company, the
successor to MONY as of the Plan Effective Date. References herein to "MONY" on
and after the Plan Effective Date refer to MONY Life Insurance Company and the
other operating subsidiaries of the Holding Company. The Plan Effective Date
will occur prior to, or simultaneously with, the completion of the offerings.
The term "Common Stock" refers to the Common Stock, par value $0.01 per share,
of the Holding Company. References to the "Investors" refer to, collectively, GS
Mezzanine Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone Street
Fund 1997, L.P., and Bridge Street Fund 1997, L.P. References to the
"Investment" refer to the Investors' investment in the Company as described more
fully herein.
THE COMPANY
The Company, which is one of the oldest and largest mutual life insurance
companies in the United States, provides a wide range of life insurance, annuity
and investment products primarily to higher income individuals, particularly
family builders, pre-retirees and small business owners. The Company distributes
its products through a career agency sales force in the United States which
consisted of 2,218 agents at June 30, 1998. The Company 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 and currently insures or provides other
financial services to more than 1.0 million people. Chartered in 1842, MONY was
the first mutual life insurance company in the United States to sell an
insurance policy and the first to pay a dividend to policyholders.
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 in the "Other Products" segment. In its
Protection Products segment, the Company offers a wide range of life insurance
products, including whole life, term life, universal life, variable universal
life, last survivor life and group universal life. 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 certain
insurance lines of business no longer written by the Company (the "Run-Off
Businesses"). 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
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specialty insurance products written by other carriers to meet the insurance and
investment needs of its customers.
In 1998, the Company had 513 agents in the "Million Dollar Round Table"
("MDRT"), an industry designation based on sales which result in annual
first-year commissions of $53,000 or more, up from 460 in 1996. The Company
believes that its rate of growth in MDRT members from 1995 to 1997 was among the
highest in the life insurance industry and that the percentage of its career
agents who are MDRT members is among the highest in the industry.
The Company had total consolidated assets and equity at June 30, 1998 of
approximately $24.6 billion and $1.4 billion, respectively. Of the Company's
total consolidated assets at such date, approximately $12.8 billion represented
assets held in the Company's general account, approximately $5.7 billion
represented assets transferred pursuant to the Group Pension Transaction (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 to the Consolidated Financial Statements) and
approximately $6.1 billion were held in the Company's separate accounts, for
which the Company does not generally bear investment risk.
Consolidated revenues reported by the Company for the six-month period
ended June 30, 1998 and the year ended December 31, 1997 were $1,044.5 million
and $1,976.4 million, respectively. Revenues reported for such periods by the
Company's Protection Products, Accumulation Products and Other Products segments
(which amounts are presented before unallocated amounts and non-recurring
items -- see Note 6 to the Consolidated Financial Statements and Note 5 to the
Unaudited Interim Condensed Consolidated Financial Statements) were $813.8
million, $145.8 million and $80.4 million, respectively, for the six-month
period ended June 30, 1998 and $1,598.7 million, $239.4 million and $131.1
million, respectively, for the year ended December 31, 1997.
Consolidated income before income taxes and extraordinary item reported by
the Company for the six-month period ended June 30, 1998 and the year ended
December 31, 1997 was $199.9 million and $187.7 million, respectively.
Consolidated pre-tax earnings reported by the Company's aforementioned operating
segments for such periods (which amounts are presented before unallocated
amounts and non-recurring items -- see Note 6 to the Consolidated Financial
Statements and Note 5 to the Unaudited Interim Condensed Consolidated Financial
Statements) were $136.7 million, $50.0 million and $13.4 million, respectively,
for the six-month period ended June 30, 1998 and $129.0 million, $44.1 million
and $18.3 million, respectively, for the year ended December 31, 1997.
MONY's current financial strength ratings are "A+" from Standard & Poor's
Ratings Group ("S&P"), "A3" from Moody's Investors Service, Inc. ("Moody's"),
"A-" from A.M. Best Company, Inc. ("A.M. Best") and "A+" from Duff & Phelps,
Inc. ("Duff & Phelps"). Moody's, on January 6, 1998, and Duff & Phelps, on
August 4, 1998, each announced that it had changed its respective outlook on
MONY's rating from stable to positive. The foregoing ratings reflect each rating
agency's current opinion of MONY's claims-paying ability, financial strength,
operating performance and ability to meet its obligations to policyholders and
are not evaluations directed toward the protection of investors in the Common
Stock. Such factors are of concern to policyholders, agents and intermediaries.
Such ratings should not be relied upon when making a decision to purchase shares
of Common Stock offered hereby. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Historical Overview" and
"Business -- Ratings".
STRATEGY
The Company's current business strategy to achieve earnings growth, improve
its return on equity and increase shareholder value is focused on: (i)
continuing to improve the quality of and increase the earnings on its invested
assets, (ii) emphasizing the core operating fundamentals of its protection
business, (iii) continuing the growth of its accumulation business and (iv)
expanding the size of and improving upon the productivity of its career agency
sales force. The Company believes
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that by focusing its expansion efforts on the career agency system, it will be
more successful at marketing value-added protection and accumulation products to
its core customer base which is typically comprised of small business owners and
higher income individuals, particularly family builders and pre-retirees.
Management further believes that by providing a range of protection and
accumulation products, the Company can respond to changes in the insurance
marketplace that may arise from changes in interest rates or volatility in the
general level of the stock market. In addition, the Company intends to seek
opportunities through selective mergers, acquisitions and strategic alliances.
CONTINUING TO IMPROVE THE QUALITY OF AND INCREASE THE EARNINGS ON INVESTED
ASSETS
Since December 31, 1992, the Company has decreased its exposure to equity
real estate, commercial mortgage loans and below investment grade securities
from 49.9% of total invested assets (which includes for all purposes of this
Prospectus cash and cash equivalents) to 19.1% at June 30, 1998. The effect of
such actions has been to significantly improve the credit quality of the
Company's total invested assets and increase the earnings thereon.
EMPHASIZING THE CORE OPERATING FUNDAMENTALS OF PROTECTION BUSINESS
The Company believes that the operating performance of its protection
business is significantly impacted by five basic elements: (i) mortality, (ii)
persistency, (iii) operating expenses, (iv) investment yield and (v) sales. The
Company believes that improvement with respect to each of these five basic
elements is important for increasing shareholder value.
CONTINUING THE GROWTH OF ACCUMULATION BUSINESS
Over the past several years, the Company has sought to take advantage of
demographic trends in the U.S. economy by continuing the growth of its asset
accumulation business. Since December 31, 1993, the Company has increased its
annuity assets under management from approximately $927.0 million to
approximately $4,309.5 million at June 30, 1998 and, through The Enterprise
Group of Funds, Inc. ("Enterprise Group of Funds"), its retail mutual fund
assets under management have increased from $485.9 million to $2,457.0 million
during this time period.
EXPANDING THE SIZE OF AND IMPROVING THE PRODUCTIVITY OF CAREER AGENCY SALES
FORCE
The Company is committed to the career agency distribution system.
Management believes that distribution through the Company's career agency sales
force is a competitive advantage over other large life insurance companies which
do not have such a career agency sales force and for whom it would be difficult
and expensive to create one. The career agency sales force allows the Company to
establish closer relationships with customers than is typical of insurers using
third party brokers, thereby enhancing the Company's ability to evaluate and
respond to customer needs and underwriting risks.
In early 1998, in order to increase the productivity and size of its career
agency sales force, the Company adopted a plan to "tier" its agents and agencies
and to provide focused marketing, recruiting and training support tailored to
meet the particular needs of each "tier". By restructuring its agencies into
tiers, the Company is able to segment its career agency sales force into groups
according to experience and productivity levels and to assign agency managers to
tiers based on their skill sets and the particular needs and goals of such
tiers. In January of 1998, the Company revised its compensation structure to
provide a salary plus incentive compensation system for all of its agency
managers and sales managers designed to more closely align the interests of the
managers with those of the Company. The Company believes that these actions will
improve the recruitment, retention and productivity of the Company's career
agency sales force.
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SEEKING OPPORTUNITIES THROUGH SELECTIVE MERGERS, ACQUISITIONS AND STRATEGIC
ALLIANCES
Management believes that making selective acquisitions and engaging in
selective joint ventures in the Company's core businesses could more fully
utilize the Company's career agency sales force and administrative capacity to
obtain improved economies of scale and a lower overall cost structure.
BACKGROUND
In response to higher interest rates in the 1980s, the Company invested
significant funds in higher yielding but higher risk assets in order to be
competitive with regard to crediting rates on its insurance products. However,
declines in the market values of these assets led to the deterioration of the
Company's financial strength and, along with the concurrent and highly
publicized failures of several financial institutions, resulted in ratings
downgrades. The Company's current management team was assembled in 1989 and MONY
adopted a new strategy designed to strengthen its financial position. Under this
strategy, the Company focused on: (i) its core businesses of individual
protection products, annuities, mutual funds and investment securities and (ii)
its key markets of small business owners and higher income individuals,
particularly family builders and pre-retirees. Significant specific actions
taken by the Company's current management team since 1989 have included:
- Repositioning the Company's product mix and upgrading the Company's sales
force
- Focusing on building its accumulation business, including variable
annuities
- Improving the quality of its career agency sales force and
increasing the number of MDRT qualifiers
- Reinsuring its group life and health insurance business during
1989-1990 and ceasing to write any new group life and health
insurance business
- Transferring a significant portion of its guaranteed investment
contract ("GIC") business to a third party reinsurer in 1991 and
ceasing the production of any new GIC business
- Transferring a substantial portion of its group pension business and
operations in 1993 (see "Business -- The Group Pension Transaction")
and ceasing the production of any new group pension business
- Transferring all of its disability income insurance business to a
third party reinsurer under an indemnity reinsurance contract in
1997 and ceasing to write new disability insurance business (the "DI
Transaction")
- Disposing of the Company's non-core businesses
- Disposing of North American Mortgage Company, its mortgage banking
subsidiary, in 1989
- Disposing of Financial Services Corporation, its wholesale
securities brokerage subsidiary, in 1989
- Disposing of Unified Management Corporation, its mutual fund,
transfer agent and clearing broker dealer subsidiary, in 1989
- Disposing of Evaluation Associates, Incorporated, its investment
management performance tracking and consulting subsidiary, in 1991
- Disposing of MONY Reinsurance Corporation, its property and casualty
reinsurance subsidiary, in 1991
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<PAGE> 8
- Repositioning the Company's investment portfolio
- Reducing the Company's exposure to commercial mortgage loans by: (i)
discontinuing new commercial mortgage loan investments through 1995,
followed by a more selective program involving the investment of new
funds in this asset class, (ii) aggressively foreclosing on
commercial mortgage loans and selling such loans and (iii)
encouraging prepayments, paydowns, and repayments in the commercial
mortgage loan portfolio. As a result, the Company's exposure to
commercial mortgage loans was reduced from a carrying value at
December 31, 1992 of approximately $3,576.5 million, or 27.2% of
total invested assets, to $892.1 million at June 30, 1998, or 8.3%
of total invested assets
- Upgrading the management of the Company's equity real estate
portfolio to improve the portfolio's cash flow and marketability
- Implementing and executing a plan for the orderly disposal of a
substantial portion of the Company's equity real estate assets,
which resulted in aggregate sales proceeds of $1,620.4 million from
January 1, 1995 through June 30, 1998. As a result, the Company's
exposure to real estate was reduced from a carrying value at
December 31, 1992 of approximately $1,828.5 million, or 13.9% of
total invested assets, to $791.6 million at June 30, 1998, or 7.4%
of total invested assets
- Reducing the Company's exposure to below investment grade securities
by selectively disposing of such securities and investing
substantially all new funds in investment grade fixed maturity
securities. As a result, the Company's exposure to below investment
grade securities was reduced from a carrying value at December 31,
1992 of approximately $1,023.4 million, or 7.8% of total invested
assets, to $369.3 million at June 30, 1998, or 3.4% of total
invested assets
- Taking significant cost reduction actions
- Reducing the rate of growth of operating expenses by, among other
things, (i) reducing the number of employees through early
retirement programs and attrition, (ii) disposing of certain
businesses and (iii) reducing certain costs incurred in connection
with operating the career agency sales force
- Raising additional statutory capital
- Issuing $125.0 million aggregate principal amount of 11.25% Surplus
Notes (the "11.25% Surplus Notes") in 1994
- Consummating the Investment on December 30, 1997
As a result of these actions during this time period, consolidated equity
increased from approximately $962.5 million at December 31, 1992 to $1,448.9
million at June 30, 1998.
THE DEMUTUALIZATION
The Holding Company is a Delaware corporation organized for the purpose of
becoming the parent holding company of MONY. Pursuant to a Plan of
Reorganization, which was adopted by the Board of Trustees of MONY (the "MONY
Board") on August 14, 1998 (the "Board Adoption Date") pursuant to Section 7312
of the New York Insurance Law ("Section 7312") and amended by certain clarifying
and technical amendments adopted by the MONY Board on September 9, 1998 (such
Plan, as amended, the "Plan"), MONY will convert from a mutual life insurance
company to a stock life insurance company (such conversion, together with other
matters addressed by the Plan, the "Demutualization") and become a wholly owned
subsidiary of the Holding Company.
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The following chart sets forth the organization of the Holding Company,
MONY and its subsidiaries prior to the Plan Effective Date:
[Mony Organizational Chart]
The following chart sets forth the organization of the Holding Company,
MONY and their subsidiaries as of and following the Plan Effective Date:
[Mony Organizational Chart]
The Plan was approved by MONY's policyholders on November 2, 1998 (of all
MONY's policyholders entitled to vote on the Plan 30.2% (252,562) voted and
91.9% (232,146) of these votes were cast in favor of the Plan) and on November
, 1998 the New York Superintendent of
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<PAGE> 10
Insurance (the "New York Superintendent") approved the Plan after a public
hearing. As part of the public hearing record, certain written objections to the
Plan were submitted to the New York Superintendent. See "Risk Factors -- Risk of
Challenge to the New York Superintendent's Order". The principal purpose of the
Demutualization is to enable MONY to obtain equity capital through the Holding
Company from sources currently unavailable to it as a mutual life insurance
company, thereby strengthening MONY's ability to maintain its strong marketplace
franchise while maximizing financial flexibility and future growth and providing
additional value to its policyholders.
In connection with the effectiveness of the Plan, the following will occur:
(i) MONY will convert from a mutual life insurance company to a stock life
insurance company, which will be named MONY Life Insurance Company, and will
become a wholly owned subsidiary of the Holding Company, (ii) all policyholders'
membership interests will be extinguished and in exchange therefor policyholders
who own a policy that was in force on the Board Adoption Date and which remains
in force on the Plan Effective Date (an "Eligible Policyholder") will receive
shares of Common Stock 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") will receive additional shares of
Common Stock or, in certain circumstances, cash or Policy Credits, (iii) a
closed block (the "Closed Block") of certain individual MONY participating
policies in classes for which MONY had a current payable dividend scale will be
created, and assets will be 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 and (iv) shares of Common Stock will be
offered to the public in the Offerings. See "The Demutualization" and "Pro Forma
Condensed Consolidated Financial Information" for a general discussion of the
Demutualization and a more detailed discussion of the amount and composition of
the assets and liabilities included in, and the accounting for, the Closed
Block, and the effect of the Closed Block on results of operations of MONY after
the Plan Effective Date.
MONY has received an opinion of a nationally recognized independent tax
counsel stating that the Demutualization will not result in any recognized gain
to the Holding Company or MONY.
THE INVESTMENT
On December 30, 1997 (the "First Closing Date"), the Investors, each of
whom is an affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), one of the
representatives (the "representatives") of the U.S. Underwriters, 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
warrants to purchase from the Holding Company in the aggregate 7.0% of the fully
diluted Common Stock (after giving effect to the Offerings) at the
Demutualization Date (as hereinafter defined) (collectively, the "Warrants") for
a purchase price of $10.0 million. The price payable for each share of the
Common Stock issuable upon exercise of Warrants initially is (a) in the event
the Offerings occur prior to, on or within five trading days after the
Demutualization Date, 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 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 or (b) in the
event the Offerings do not occur prior to, on or within five trading days after
the Demutualization Date, the lesser of (i) the average of the daily closing
prices of the Common Stock for the first 20 trading days following
Demutualization and (ii) 70% of the book value per share of the Common Stock as
of the Demutualization, determined in accordance with GAAP. 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.
9
<PAGE> 11
At any time from and after the date the Plan becomes effective pursuant to
Section 7312 or, if later, the first date following such effectiveness on which
shares of Common Stock are first distributed to Company policyholders (the
"Demutualization Date"), the Investors may elect to exchange the MONY Notes then
held by them for 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").
In addition to the MONY Notes and the Warrants, the Investors have agreed,
on the Company's request made within 90 days after the Demutualization Date and
subject to certain conditions precedent, to purchase an aggregate of one million
shares of Convertible Preferred Stock of the Holding Company, liquidation value
$100 per share, for a total purchase price of $100.0 million (the "Convertible
Preferred Stock"). The Convertible Preferred Stock is convertible into shares of
Common Stock at an initial conversion price equal to the initial exercise price
of the Warrants, with such conversion price subject to the same anti-dilution
adjustments as the exercise price of the Warrants. The conversion price of the
Convertible Preferred Stock is further subject to a one-time adjustment on the
third anniversary of original issuance to an amount equal to 70% of the GAAP
book value per share of Common Stock if the conversion price at that time is
greater than 70% of such book value per share. If the offering of Common Stock
being made hereby is consummated, management will not require the purchase of
the Convertible Preferred Stock.
RISK FACTORS
Potential investors should carefully consider the factors described in
"Risk Factors" as well as the other information contained in this Prospectus
before purchasing the shares of Common Stock offered hereby. Such "Risk Factors"
include:
<TABLE>
<C> <S>
(i) the risk that 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
and that the ability to pay such dividends may be limited by
applicable law,
(ii) the decline and expiration of certain payments and income to
MONY related to the Group Pension Transaction (as defined
below),
(iii) the risk of losses on real estate and commercial mortgage
loans,
(iv) other risks relating to the Company's investment portfolio,
(v) the risk that interest rate changes could make certain of
the Company's products less profitable to the Company or
less attractive to customers,
(vi) the risk of challenge to the New York Superintendent's
Order,
(vii) risks with respect to certain sales practice litigation,
(viii) the risk of increased surrenders of certain annuities as the
surrender charges with respect to such annuities expire,
(ix) risks with respect to the Closed Block,
(x) risks associated with certain economic and market factors,
(xi) the risk of variations in claims experience,
(xii) risks related to certain insurance regulatory matters,
(xiii) risks of competition,
(xiv) risks with respect to claims-paying ability ratings and
financial strength ratings,
(xv) risks with respect to Year 2000 computer programming issues,
(xvi) risks of potential adoption of new Federal income tax
legislation and the effect of such adoption on certain of
the Company's life and annuity products,
</TABLE>
10
<PAGE> 12
<TABLE>
<C> <S>
(xvii) the risk that anti-takeover statutes and provisions in
certain of the Company's agreements and corporate governance
documents may delay, defer or prevent an acquisition of the
Company that a stockholder might consider to be in the
Company's best interest,
(xviii) the risk of dilution to stockholders of the Company if the
Investors exercise the Warrants or purchase the Convertible
Preferred Stock,
(xix) risks with respect to shares eligible for future sale and
(xx) the lack of a prior public market for the Common Stock.
</TABLE>
------------------------
The Company's executive offices are located at 1740 Broadway, New York, New
York 10019 and its telephone number is (212) 708-2000.
11
<PAGE> 13
THE OFFERINGS
The offering of 9,500,000 shares of Common Stock initially being offered in
the United States (the "U.S. Offering") and the offering of 1,750,000 shares of
Common Stock initially being offered in a concurrent international offering
outside the United States (the "International Offering") are collectively
referred to as the "Offerings". The closing of each Offering is conditioned upon
the closing of the other Offering.
Common Stock offered(1):
U.S. Offering............... 9,500,000 shares
International Offering...... 1,750,000 shares
-----------------
Total....................... 11,250,000 shares
==================
Common Stock to be distributed
to Eligible
Policyholders(2)............ 34,000,000 shares
Common Stock to be outstanding
after the
Offerings(1)(2)(3).......... 45,250,000 shares
Use of proceeds............... The $234.9 million estimated net proceeds of
the Offerings will be: (i) first, contributed
to MONY in the amount of $100 million to be
used for general operations of MONY or, in the
absence of sufficient net proceeds in excess of
$100 million, to provide for the amounts
required for any of the purposes stated in
clauses (ii), (iii) or (iv) hereof; (ii) then,
contributed to MONY in an amount sufficient to
enable MONY to fund all of the Policy Credits
required to be credited to Eligible
Policyholders pursuant to the Plan; (iii) then,
retained by the Holding Company in an amount
sufficient to enable the Holding Company 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); (iv) then,
contributed to MONY in an amount sufficient to
enable MONY to satisfy the undertaking of MONY
to pay the expenses of the Demutualization as
required by the New York Insurance Law; (v)
then, retained by the Holding Company in an
amount not to exceed $10 million to provide
working capital for the Holding Company; (vi)
then, retained by the Holding Company in an
amount not to exceed $30 million to pay
dividends on the stock of the Holding Company;
(vii) then, retained by the Holding Company in
an amount not to exceed 25% of the proceeds of
the Offerings (net of underwriting commissions
and expenses related thereto) to pay cash to
Eligible Policyholders who are to receive cash
pursuant to an expression of a preference to
receive cash; and (viii) then, to the extent
that such net proceeds exceed the aggregate of
the amounts identified in clauses (i), (ii),
(iii), (iv), (v), (vi) and (vii), and, to the
extent that the amount retained by the Holding
Company pursuant to each of clauses (iii), (vi)
and (vii) is not used for the purpose stated in
each such clause, promptly contributed to MONY
to be used for general operations of MONY.
12
<PAGE> 14
New York Stock Exchange
listing....................... The Common Stock has been approved for listing,
subject to notice of issuance, on the New York
Stock Exchange ("NYSE") under the symbol "MNY".
- ---------------
(1) Exclusive of up to 1,425,000 shares and up to 262,500 shares that may be
purchased pursuant to the over-allotment options granted to the U.S.
Underwriters and the International Underwriters, respectively. See
"Underwriting".
(2) Estimated as of June 30, 1998. See "Pro Forma Condensed Consolidated
Financial Information".
(3) Does not include shares of Common Stock issuable upon exercise of the
Warrants and conversion of the Convertible Preferred Stock, if issued. See
"The Demutualization", "Pro Forma Condensed Consolidated Financial
Information", "Beneficial Ownership of Common Stock" and "Description of
Capital Stock".
13
<PAGE> 15
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information for the Company. The summary consolidated financial information for
each of the years in the three-year period ended December 31, 1997 and at
December 31, 1997 and 1996 has been derived from consolidated financial
statements audited by PricewaterhouseCoopers LLP, independent accountants,
included elsewhere herein. The consolidated financial information at December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 has
been derived from unaudited consolidated financial information not included
elsewhere herein which, in the opinion of management, presents fairly such
consolidated financial information in conformity with GAAP. The summary
consolidated financial information for the six-month periods ended June 30, 1998
and 1997, and at June 30, 1998, has been derived from unaudited interim
condensed consolidated financial statements included herein. The summary
consolidated financial information at June 30, 1997 has been derived from
unaudited interim condensed consolidated financial statements not included
elsewhere herein. In the opinion of the Company's management, all unaudited
interim condensed consolidated financial information presented in the table
below reflects all adjustments (consisting of normal, recurring accruals)
necessary for a fair statement of the Company's consolidated financial position
and results of operations for such periods. The results of operations for the
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full year. This summary financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Company's consolidated financial statements and
the notes thereto and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- --------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(1)
REVENUES:
Premiums................... $ 353.8 $ 411.9 $ 838.6 $ 859.8 $ 875.9 $ 890.6 $ 919.6
Universal life and
investment-type product
policy fees.............. 74.3 54.4 127.3 100.9 80.8 69.8 75.1
Net investment income...... 357.7 359.6 733.0 751.6 728.8 666.9 953.7
Net realized gains (losses)
on investments(2)........ 157.6 42.6 72.1 75.9 16.2 (8.8) 18.2
Group Pension Profits(3)... 22.7 28.2 60.0 59.5 61.7 90.4 0.0
Other income............... 78.4 58.8 145.4 117.3 96.2 107.6 72.4
---------- ---------- --------- --------- --------- --------- ---------
Total revenues....... 1,044.5 955.5 1,976.4 1,965.0 1,859.6 1,816.5 2,039.0
BENEFITS AND EXPENSES:
Benefits to
policyholders............ 379.7 423.9 840.1 872.2 883.6 866.5 895.4
Interest credited to
policyholders' account
balances................. 61.2 70.8 139.4 156.1 175.3 180.0 388.0
Amortization of deferred
policy acquisition
costs.................... 70.8 68.4 181.2 158.2 132.6 138.9 110.9
Dividends to
policyholders............ 108.4 117.8 224.3 231.4 222.5 211.1 221.1
Other operating costs and
expenses................. 224.5 196.1 403.7 446.6(4) 383.8 355.0 378.0
---------- ---------- --------- --------- --------- --------- ---------
Total benefits and
expenses........... 844.6 877.0 1,788.7 1,864.5 1,797.8 1,751.5 1,993.4
Income before income taxes
and extraordinary item..... 199.9 78.5 187.7 100.5 61.8 65.0 45.6
Income tax expense(5)........ 71.8 32.0 57.3 44.0 21.4 42.9 13.2
---------- ---------- --------- --------- --------- --------- ---------
Income before extraordinary
item....................... 128.1 46.5 130.4 56.5 40.4 22.1 32.4
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- --------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary item --
demutualization expenses,
net........................ 9.7 2.4 13.3 0.0 0.0 0.0 0.0
---------- ---------- --------- --------- --------- --------- ---------
Net income................... 118.4 44.1 117.1 56.5 40.4 22.1 32.4
========== ========== ========= ========= ========= ========= =========
Other comprehensive income
(loss), net(6)............. 9.9 (17.3) 33.0 (59.9) 191.5 (216.4) 141.6
---------- ---------- --------- --------- --------- --------- ---------
Comprehensive income
(loss), net........ $ 128.3 $ 26.8 $ 150.1 $ (3.4) $ 231.9 $ (194.3) $ 174.0
========== ========== ========= ========= ========= ========= =========
BALANCE SHEET DATA:(1)
GENERAL:
General account assets..... $ 12,753.6 $ 12,286.2 $12,493.3 $12,344.2 $12,531.9 $12,310.9 $12,397.1
Separate account assets.... 6,127.5 4,873.0 5,403.1 4,171.7 3,153.5 2,355.8 2,001.4
Assets transferred in Group
Pension Transaction...... 5,720.5 5,538.5 5,714.9 5,627.6 5,992.8 5,660.1 6,457.3
Total assets............... 24,601.6 22,697.7 23,611.3 22,143.5 21,678.2 20,326.8 20,855.8
Short-term debt............ -- 41.5 0.0 153.0 157.8 0.7 2.3
Long-term debt............. 418.9 273.4 423.6 269.7 420.6 504.0 458.5
Policyholders'
liabilities.............. 10,042.2 10,068.7 10,060.7 10,070.6 10,199.7 10,250.7 10,271.9
Separate account
liabilities.............. 6,115.5 4,862.1 5,392.4 4,162.1 3,144.2 2,348.4 1,994.9
Liabilities transferred in
Group Pension
Transaction(7)........... 5,682.3 5,518.6 5,638.7 5,544.1 5,855.7 5,608.0 6,386.7
Total liabilities........ 23,152.7 21,500.4 22,290.7 20,973.0 20,504.3 19,384.8 19,719.4
Equity..................... 1,448.9 1,197.3 1,320.6 1,170.5 1,173.9 942.0 1,136.4
REAL ESTATE AND MORTGAGE
LOANS:(8)
Real estate, to be disposed
of....................... $ 339.1 $ 578.6 $ 621.2 $ 434.8 $ 717.4 $ 611.3 $ 0.0
Real estate held for
investment............... 452.5 649.7 495.9 1,070.4 1,179.8 1,527.5 2,024.5
---------- ---------- --------- --------- --------- --------- ---------
Subtotal................. 791.6 1,228.3 1,117.1 1,505.2 1,897.2 2,138.8 2,024.5
Mortgage loans on real
estate................... 1,478.8 1,550.1 1,430.1 1,582.3 1,771.1 1,916.8 2,298.6
---------- ---------- --------- --------- --------- --------- ---------
Total real estate and
mortgage loans on real
estate................. $ 2,270.4 $ 2,778.4 $ 2,547.2 $ 3,087.5 $ 3,668.3 $ 4,055.6 $ 4,323.1
========== ========== ========= ========= ========= ========= =========
STATUTORY DATA:(9)
Capital and surplus(10).... $ 849.8 $ 719.6 $ 835.4 $ 703.5 $ 689.0 $ 680.1 $ 600.2
Asset valuation reserve
("AVR").................. 332.9 318.5 348.6 317.7 285.3 244.0 238.2
---------- ---------- --------- --------- --------- --------- ---------
Capital and surplus plus
AVR.................... $ 1,182.7 $ 1,038.1 $ 1,184.0 $ 1,021.2 $ 974.3 $ 924.1 $ 838.4
========== ========== ========= ========= ========= ========= =========
Net income................. $ 13.3 $ 43.3 $ 88.5 $ 62.7 $ 58.0 $ 87.5 $ 118.7
========== ========== ========= ========= ========= ========= =========
OTHER DATA:
Employee count............. 2,324 2,281 2,312 2,078 2,329 2,498 2,811
Agent count(15)............ 2,352 1,835 2,216 2,092 2,094 2,146 2,174
========== ========== ========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX AS OF AND FOR THE YEAR ENDED
MONTHS ENDED JUNE 30, DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SEGMENT DATA:(1)(11)
Protection Products:
Premiums................................... $ 343.8 $ 403.4 $ 817.0 $ 837.4 $ 845.1
Universal life policy fees................. 41.8 30.3 74.9 63.4 53.9
Net investment income and net realized
gains on investments..................... 397.0 304.7 611.9 605.3 501.5
Group Pension Profits(3)................... 22.7 28.2 60.0 59.5 61.7
Other income............................... 8.5 9.2 34.9 28.2 23.3
--------- --------- --------- --------- ---------
Total revenues........................... $ 813.8 $ 775.8 $ 1,598.7 $ 1,593.8 $ 1,485.5
========= ========= ========= ========= =========
Income before income taxes................. $ 136.7 $ 48.3 $ 129.0 $ 101.2 $ 28.7
========= ========= ========= ========= =========
Policyholders' liabilities(12)............. $10,102.9 $10,317.7 $10,105.7 $ 9,996.2 $ 9,936.3
Separate account liabilities(13)........... 3,967.8 3,455.9 3,720.1 3,393.0 3,500.1
Assets(14)................................. 16,218.3 15,291.9 15,776.5 15,158.5 15,213.2
Accumulation Products:
Premiums................................... $ 1.8 $ 2.8 $ 5.0 $ 4.2 $ 9.8
Investment-type product fees............... 31.6 23.2 50.9 36.6 24.8
Net investment income and net realized
gains on investments..................... 77.8 65.3 131.4 144.0 153.3
Other income............................... 34.6 23.4 52.1 32.2 26.0
--------- --------- --------- --------- ---------
Total revenues........................... $ 145.8 $ 114.7 $ 239.4 $ 217.0 $ 213.9
========= ========= ========= ========= =========
Income before income taxes................. $ 50.0 $ 24.4 $ 44.1 $ 35.9 $ 34.2
========= ========= ========= ========= =========
Policyholders' liabilities................. $ 1,332.2 $ 1,493.0 $ 1,416.1 $ 1,601.7 $ 1,797.2
Separate account liabilities............... 4,598.1 3,469.8 4,002.6 2,851.4 1,928.1
Assets..................................... 6,285.8 5,266.4 5,757.9 4,747.2 3,981.7
Other Products:
Premiums................................... $ 8.2 $ 5.8 $ 16.6 $ 18.2 $ 21.0
Investment-type product fees............... 0.9 0.9 1.5 0.9 2.1
Net investment income and net realized
gains on investments..................... 38.9 30.9 59.9 74.6 85.4
Other income............................... 32.4 23.5 53.1 52.2 42.0
--------- --------- --------- --------- ---------
Total revenues........................... $ 80.4 $ 61.1 $ 131.1 $ 145.9 $ 150.5
========= ========= ========= ========= =========
Income before income taxes................. $ 13.4 $ 5.8 $ 18.3 $ 8.1 $ 8.9
========= ========= ========= ========= =========
Policyholders' liabilities................. $ 480.0 $ 321.9 $ 513.4 $ 542.4 $ 694.8
Separate account liabilities............... 565.1 630.3 547.7 625.6 613.3
Assets..................................... 1,209.8 1,327.1 1,234.2 1,417.1 1,713.3
</TABLE>
- ---------------
(1) Prior to 1996, the Company, as a mutual life insurance company, prepared
its financial statements in conformity with accounting practices prescribed
or permitted by the New York State Insurance Department (the "New York
Insurance Department"), which accounting practices were considered to be
GAAP for mutual life insurance companies. As of January 1, 1996, the
Company adopted Financial Accounting Standards Board (FASB) Interpretation
No. 40, Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises, and Statement of Financial Accounting
Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Policies. Interpretation No. 40 and SFAS No. 120
require mutual life insurance companies to adopt all applicable
authoritative GAAP pronouncements in their general purpose financial
statements. See Note 5 to the Consolidated Financial State-
16
<PAGE> 18
ments. Accordingly, the financial information presented in the Summary
Financial Information for periods prior to 1996 has been derived from
financial information of the Company which has been retroactively restated
to reflect the adoption of all applicable authoritative GAAP
pronouncements. All such applicable pronouncements were adopted as of the
effective date originally specified in each such pronouncement. However, if
the effective date of a pronouncement was subsequent to the earliest
financial information presented herein, the Company applied the accounting
alternative available during such prior periods which was most consistent
with the subsequent pronouncement. The following sets forth the significant
accounting pronouncements with effective dates subsequent to the earliest
financial information presented herein, the effective dates of their
adoption by the Company and, if applicable, a description of the accounting
followed by the Company for periods presented herein prior to the effective
date of such pronouncements.
- SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was adopted
on a retroactive basis for the year ended December 31, 1993 and subsequent
years. For periods prior to the adoption of SFAS No. 114, the Company
established a policy to record impairment losses for troubled loans based
on discounted cash flows. The policy was substantially consistent with SFAS
No. 114 except that impairment losses were reflected as permanent
reductions in the cost basis of such loans. There was no material effect on
the Company's financial statements as a result of the adoption of SFAS No.
114.
- SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, was adopted on a retroactive basis as of December 31, 1993 and
subsequent years.
- SFAS No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises
for Certain Long-Duration Participating Contracts, was adopted on a
retroactive basis for the year ended December 31, 1992 and subsequent
years.
- SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was adopted for the year ended
December 31, 1994 and subsequent years. For periods prior to the adoption
of SFAS No. 121, the Company had no material real estate that it intended
to dispose of, and writedowns on impaired real estate were established if
the undiscounted cash flows were less than the carrying value. In such
cases, the asset was written down to the discounted cash flow amount.
Accordingly, there was no material effect on the Company's financial
statements as a result of the adoption of SFAS No. 121.
(2) Includes writedowns for impairment and net changes in valuation allowances
on real estate, mortgage loans and investment securities aggregating $5.5
million and $45.2 million for the six-month periods ended June 30, 1998 and
1997, respectively, and $76.0 million, $20.1 million, $54.3 million, $49.3
million and $8.0 million for the years ended December 31, 1997, 1996, 1995,
1994 and 1993, respectively.
(3) The Group Pension Transaction occurred on December 31, 1993. See
"Business -- The Group Pension Transaction".
(4) Other operating costs and expenses for the year ended December 31, 1996
include: (i) approximately $27.6 million relating to settlements of, and
reserves for, various legal disputes including lawsuits against the Company
alleging market conduct improprieties (see Note 19 to the Consolidated
Financial Statements), (ii) $5.1 million of legal expenses relating to the
aforementioned legal disputes and lawsuits and (iii) approximately $14.0
million relating to special termination benefits paid to certain employees
under an early retirement program offered by the Company in April of 1996
(see Note 8 to the Consolidated Financial Statements).
(5) As a mutual life insurance company, the Company is subject to the add-on
(surplus) tax imposed on mutual life insurance companies under Section 809
of the Internal Revenue Code of 1986 (the "Code"). Section 809 requires
(and the surplus tax results from) the disallow-
17
<PAGE> 19
ance of a portion of a mutual life insurance company's policyholder
dividends as a deduction from taxable income. The income tax expense
(benefit) amounts include $1.9 million, $4.4 million, $(5.8) million, $12.8
million, $0.0 million, $23.0 million and $0.3 million of surplus tax for
the six months ended June 30, 1998 and 1997 and the years ended December
31, 1997, 1996, 1995, 1994 and 1993, respectively. See "Pro Forma Condensed
Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
(6) During 1997, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in general purpose financial
statements. All periods presented herein reflect the adoption of SFAS No.
130. For all periods presented, other comprehensive income consists only of
the change in unrealized gains and losses on the Company's fixed maturity
and equity securities and is presented net of the effect of such unrealized
gains (losses) attributable to deferred acquisition costs and deferred
Federal income taxes. See Note 12 to the Consolidated Financial Statements.
(7) Includes liabilities transferred in connection with the Group Pension
Transaction pursuant to indemnity reinsurance of $167.2 million, $191.6
million, $173.9 million, $204.4 million, $276.9 million, $1,090.9 million
and $6,360.1 million as of June 30, 1998 and 1997 and December 31, 1997,
1996, 1995, 1994 and 1993, respectively (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 11 to
the Consolidated Financial Statements).
(8) Amounts presented do not include real estate and mortgage loan assets
transferred to AEGON (as defined below) in the Group Pension Transaction
(see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 11 to the Consolidated Financial
Statements).
(9) Statutory data have been derived from the Annual and Quarterly Statements
of MONY and MLOA, as filed with insurance regulatory authorities.
(10) In accordance with accounting practices prescribed or permitted by the New
York Insurance Department statutory capital and surplus includes $187.3
million, $72.3 million, $187.3 million, $72.3 million, $72.3 million and
$72.3 million relating to the Company's outstanding surplus notes at June
30, 1998 and 1997 and December 31, 1997, 1996, 1995 and 1994, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 17 to
the Consolidated Financial Statements.
(11) During 1997, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in their annual and interim financial statements.
The segment data presented herein reflect the adoption of SFAS No. 131 on a
retroactive basis beginning with the year ended December 31, 1995. Excluded
from the Company's operating segments are revenues, expenses, assets and
liabilities relating to contracts issued by the Company with respect to its
employee benefit plans, as well as any nonrecurring or unusual items. Such
amounts constitute reconciling items in accordance with SFAS No. 131.
Accordingly, see Note 6 to the Consolidated Financial Statements for a
reconciliation of amounts reported for the Company's operating segments to
such amounts reported in the Company's consolidated financial statements.
(12) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,890.9 million, $2,086.3 million, $1,991.0 million,
$2,158.1 million, and $2,315.1 million as of June 30, 1998 and 1997, and
December 31, 1997, 1996, and 1995, respectively (see "Management's
18
<PAGE> 20
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 11 to the Consolidated Financial Statements).
(13) Includes separate account liabilities transferred in the Group Pension
Transaction of $3,761.2 million, $3,397.2 million, $3,614.0 million,
$3,358.3 million, and $3,495.4 million as of June 30, 1998 and 1997, and
December 31, 1997, 1996 and 1995, respectively (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 11 to the Consolidated Financial Statements).
(14) Includes assets transferred in the Group Pension Transaction of $5,720.5
million, $5,538.5 million, $5,714.9 million, $5,627.6 million, and $5,992.8
million as of June 30, 1998 and 1997, and December 31, 1997, 1996 and 1995,
respectively (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 to the Consolidated
Financial Statements).
(15) Includes international agents of 134, 75, 96, 75, 53, 30 and 27 as of June
30, 1998 and 1997 and December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
For certain unaudited summary information with respect to the Company's
results of operations for the three- and nine-month periods ended September 30,
1998 and 1997, and balance sheet data as of September 30, 1998, see "Recent
Developments".
19
<PAGE> 21
SUMMARY PRO FORMA DATA
The summary pro forma data presented below are derived from the pro forma
consolidated financial information and notes thereto included herein. The pro
forma data give effect to the Demutualization and the Offerings (collectively,
the "Transaction") and the establishment of the Closed Block as if the
Transaction and the establishment of the Closed Block had occurred as of June
30, 1998 for purposes of the pro forma consolidated balance sheet data and
January 1, 1997 for purposes of the pro forma consolidated income statement
data. Such pro forma consolidated financial information has been prepared based
on the Plan and certain assumptions described under "Pro Forma Condensed
Consolidated Financial Information". The pro forma data presented below assume,
among other things, that (i) the Closed Block liabilities exceed the Closed
Block assets by $1,152.8 million, (ii) 11,250,000 shares of Common Stock are
issued in the Offerings at an initial public offering price of $22.50 per share,
which is the mid-point of the offering price range stated on the cover of this
Prospectus, (iii) a total of 35.7 million shares of Common Stock are allocated
to policyholders under the Plan, (iv) 1.7 million shares of Common Stock are
allocated but not issued to policyholders who, under the Plan, receive payments
in the form of cash or Policy Credits rather than in shares of Common Stock at a
per share price equal to the assumed initial public offering price of $22.50 per
share, (v) the Warrants are not exercised, (vi) a Federal income tax rate of 35%
is used to show the income tax effects of the pro forma adjustments, (vii) the
Underwriters' over-allotment options are not exercised and (viii) the
Convertible Preferred Stock is not issued. The pro forma data does not purport
to represent what the Company's consolidated financial position or consolidated
results of operations would actually have been if the Transaction and the
establishment of the Closed Block had in fact occurred on such dates or to
project the Company's results of operations or financial position for any future
period. The pro forma data set forth below should be read in conjunction with
the information set forth under, or referred to in, "Pro Forma Condensed
Consolidated Financial Information".
<TABLE>
<CAPTION>
($ IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
----------------
<S> <C>
As of and for the six months ended June 30, 1998:
Pro forma income before extraordinary item(1)(A).......... $ 130.0
Pro forma basic and diluted income before extraordinary
item per share......................................... $ 2.87
Pro forma equity(2)....................................... $1,630.5
Pro forma book value per share............................ $ 36.03
For the year ended December 31, 1997:
Pro forma income before extraordinary item(1)............. $ 123.3
Pro forma basic and diluted income before extraordinary
item per share......................................... $ 2.72
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OWNERSHIP
--------------- --------------------
(IN MILLIONS)
<S> <C> <C>
Share Data:
Shares allocated to Eligible Policyholders............. 35.7
Less: estimated shares allocated to Eligible
Policyholders who receive cash or Policy Credits..... 1.7
----
Shares distributed to Eligible Policyholders........... 34.0 75.1%
Shares issued in the Offerings......................... 11.3 24.9
---- -----
Total outstanding shares of Common Stock..... 45.3 100.0%
==== =====
</TABLE>
- ---------------
(1) Includes the following:
(A) Elimination of the mutual company add-on (surplus) tax for the six
months ended June 30, 1998 and the year ended December 31, 1997,
which is applicable only to
20
<PAGE> 22
mutual life insurance companies. The add-on (surplus) tax will not
be applicable after MONY converts, in the Demutualization, to a
stock life insurance company.
(B) Adjustment to reflect interest expense on the MONY Notes as if the
MONY Notes were issued, outstanding and accruing interest since
January 1, 1997.
(C) Income tax effects of the pro forma adjustment to reflect interest
expense on the MONY Notes as if the MONY Notes were issued,
outstanding and accruing interest since January 1, 1997.
(2) Assumes estimated net proceeds from the Offerings of $234.9 million and the
payment of $18.3 million to certain policyholders who would receive cash in
lieu of Common Stock pursuant to the Plan, $20.0 million to fund Policy
Credits provided to certain Eligible Policyholders and estimated additional
nonrecurring after-tax expenses of $15.0 million related to the
Demutualization.
21
<PAGE> 23
RISK FACTORS
Prospective purchasers of the Common Stock should consider carefully the
factors set forth below as well as the other information contained in this
Prospectus.
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
Following the Plan Effective Date, the Holding Company will be a holding
company which will conduct no operating activities and whose sole assets will be
a portion of the net proceeds of the Offerings, the purchase price received for
the Warrants and all of the outstanding capital stock of MONY. As a holding
company, its ability to meet its cash requirements (including interest on the
Holding Company Subordinated Notes, if issued) 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 interest and
pay cash dividends. In addition, the Arizona insurance laws contain similar
restrictions on the ability of 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. Also, no dividend can be paid on
the Common Stock unless all dividends on any preferred stock to be issued in the
future have been duly paid or provided for. MONY's inability to pay dividends to
the Holding Company in the future in an amount sufficient for the Holding
Company to pay dividends to its stockholders would have a material adverse
effect on the Holding Company and the market value of the Common Stock. See
"Dividends", "Use of Proceeds", "Business -- Regulation -- Shareholder Dividend
Restrictions", "Certain Provisions of the Investment" and "Description of
Capital Stock".
In addition, the amount of earnings on MONY's participating policies that
may inure to the benefit of the Holding Company and its stockholders is subject
to limitations under the Plan and the New York Insurance Law. The aggregate
after-tax amount the participating policies included in the Closed Block may
contribute to MONY's statutory operating results over the period the Closed
Block remains in effect is limited to the excess of Closed Block liabilities
over Closed Block assets (excluding participating policies outside the Closed
Block) at the Plan Effective Date determined on the basis of statutory
accounting practices. With respect to participating policies issued after the
Plan Effective Date, MONY will be subject to statutory restrictions that limit
the amount of statutory profits on these policies (measured before dividends to
policyholders) that can inure to the benefit of the Holding Company and its
stockholders.
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
22
<PAGE> 24
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. If such payments are
not made, the Holding Company may not be able to meet its cash requirements,
including principal and interest payments on the Holding Company Subordinated
Notes, if issued, and dividends on any preferred stock to be issued in the
future and the Common Stock. If the Holding Company fails to pay principal or
interest on the Holding Company Subordinated Notes, it will be in default
thereunder, allowing the holders of the Holding Company Subordinated Notes to
exercise all remedies available to them. Any such default would have a material
adverse effect on the Company's financial position and results of operations.
From time to time, the National Association of Insurance Commissioners (the
"NAIC") and various state insurance regulators have considered, and may in the
future consider, proposals to further restrict dividend payments that may be
made by an insurance company without regulatory approval. No assurance can be
given that there will not be any further regulatory action restricting the
ability of the Company's insurance subsidiaries to pay dividends. Inability to
pay dividends to the Holding Company in an amount sufficient to enable the
Holding Company to meet its cash requirements (including dividend payments on
the Common Stock) could be materially adverse to holders of Common Stock.
DECLINE AND EXPIRATION OF PAYMENTS AND INCOME RELATED TO THE GROUP PENSION
TRANSACTION
On December 31, 1993 (the "Group Pension Transaction Date"), the Company
entered into an agreement (the "AEGON Agreement") with AEGON USA, Inc. ("AEGON")
under which the Company transferred a substantial portion of its group pension
business to AEGON's wholly-owned subsidiary, AUSA Life Insurance Company, Inc.
("AUSA"). The transaction (hereafter referred to as the "Group Pension
Transaction") was legally structured as a sale. However, for accounting
purposes, the Company continues to record the assets and liabilities comprising
the transferred business, as well as the related profits therefrom, in its
financial statements because, pursuant to the terms of the AEGON Agreement, the
Company retained substantially all the risks and rewards of the transferred
business. See "Business -- The Group Pension Transaction", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements.
In connection with the Group Pension Transaction at December 31, 1993, the
Company made a $200.0 million capital investment in AEGON by purchasing $150.0
million face amount of "Series A Notes" and $50.0 million face amount of "Series
B Notes" (hereinafter referred to as the "AEGON 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 and Series B Notes mature on December 31, 2002.
Pursuant to the AEGON 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, as defined in the AEGON Agreement, from the existing
deposits on contracts in force and transferred to AEGON on the Group Pension
Transaction Date (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 AEGON 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.
23
<PAGE> 25
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 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 an offset against the principal payment due to the Company upon
maturity of the Series A Notes. The Series A Notes have been allocated to the
Closed Block.
The Group Pension Profits have represented a significant portion of the
Company's net income. For the six-month periods ended June 30, 1998 and 1997 and
the years ended December 31, 1997, 1996 and 1995, AUSA reported earnings to the
Company pursuant to the application of the Earnings Formula of $23.5 million,
$24.3 million, $55.7 million, $66.7 million and $70.2 million, respectively, and
the Company recorded Group Pension Profits of $22.7 million, $28.2 million,
$60.0 million, $59.5 million and $61.7 million, respectively. The Group Pension
Profits represented 11.4%, 35.7%, 32.0%, 59.2% and 99.8% of income before income
taxes and extraordinary item for such periods, 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 revenue and net income in each
succeeding year and, particularly, subsequent to December 31, 2002, to replace
the Group Pension Profits.
Any future losses reported on commercial mortgage loans, real estate and
fixed maturity securities which were transferred to AUSA in connection with the
Group Pension Transaction will adversely affect Group Pension Profits reported
in the future and may have a material adverse effect on the financial condition
and results of operations reported by the Company in the future. Such assets are
subject to substantial risks, including those described in "-- Risk of Further
Losses on Real Estate; Risk with Respect to Commercial Mortgage Loans" and
"-- Other Investment Portfolio Risks; Fluctuation of Results; Writedowns".
See "Business -- The Group Pension Transaction", "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 11 to
the Consolidated Financial Statements.
RISK OF FURTHER LOSSES ON REAL ESTATE; RISK WITH RESPECT TO COMMERCIAL MORTGAGE
LOANS
REAL ESTATE
At June 30, 1998 and December 31, 1997, 7.4% ($791.6 million) and 10.6%
($1,117.1 million), respectively, of the Company's total invested assets
consisted of real estate. (Amounts in this section do not include invested
assets transferred in the Group Pension Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements).
The carrying value of real estate classified as held for investment is
generally adjusted for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
impairment writedowns are recorded as realized investment losses and,
accordingly, are reflected in the Company's results of operations. For the six
months
24
<PAGE> 26
ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995, such
impairment writedowns aggregated $0.0 million, $0.0 million, $3.8 million and
$0.0 million, respectively. At June 30, 1998 and December 31, 1997, 1996 and
1995, the carrying value of real estate held for investment was $452.5 million,
$495.9 million, $1,070.4 million and $1,179.8 million, or 4.2%, 4.7%, 10.2% and
11.0% of invested assets at such dates, respectively. The aforementioned
carrying values are net of cumulative impairments (including impairment
writedowns recorded upon foreclosures of mortgage loans on real estate) of $55.8
million, $61.7 million, $206.1 million and $246.4 million, respectively,
relating to management's best estimate of impairment losses at such dates.
However, there can be no assurance that additional provisions for impairment
writedowns with respect to real estate held for investment will not need to be
made. Any such writedowns may have a material adverse effect on the Company's
financial position and results of operations.
In accordance with its ongoing strategy to strengthen the Company's
financial position, management expects to continue to selectively sell 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.
Increases in such valuation allowances are recorded as realized investment
losses and, accordingly, are reflected in the Company's results of operations.
Real estate classified as to be disposed of may also be net of impairment
adjustments recorded prior to the time such real estate was designated for sale
or at the time of foreclosure if acquired in satisfaction of debt. At June 30,
1998 and December 31, 1997, 1996 and 1995, the carrying value of real estate to
be disposed of was $339.1 million, $621.2 million, $434.8 million and $717.4
million, or 3.2%, 5.9%, 4.2% and 6.7% of invested assets at such dates,
respectively. The aforementioned carrying values are net of valuation allowances
of $45.2 million, $82.7 million, $46.0 million and $49.1 million, respectively.
In addition, the carrying value of real estate to be disposed of at such date is
net of $113.9 million, $182.3 million, $120.1 million and $136.7 million of
impairment adjustments, respectively. For the six months ended June 30, 1998 and
the years ended December 31, 1997, 1996 and 1995, such increases in valuation
allowances aggregated $1.4 million, $63.8 million, $16.8 million and $39.5
million, respectively. Because carrying values are adjusted to reflect such
valuation allowances, management expects the net proceeds from sales of real
estate will not be materially different from the carrying value of such real
estate on a GAAP basis. However, there can be no assurance that increases in
valuation allowances will not be required in the future or that future sales of
real estate will not be made at amounts below recorded GAAP carrying value which
may have a material adverse effect on the Company's financial position and
results of operations.
In addition, as a result of differences between accounting practices
prescribed or permitted by the New York Insurance Department ("SAP") and GAAP,
the carrying value of real estate on a SAP basis exceeds the carrying value of
such investments on a GAAP basis. (See Note 20 to the Consolidated Financial
Statements). Accordingly, management expects to incur losses on a SAP basis as a
result of anticipated real estate sales, which losses could materially affect
the Company's statutory-basis surplus and net income. The GAAP carrying value of
real estate to be disposed of was $339.1 million at June 30, 1998 (or 3.2% of
invested assets), which amount is net of impairment adjustments and valuation
allowances aggregating approximately $113.9 million and $45.2 million,
respectively. There can be no assurance as to whether, when or for what amounts
any real estate that is classified to be disposed of will actually be disposed
of. For the six-month period ended June 30, 1998 and the years ended December
31, 1997, 1996 and 1995 the GAAP carrying value of real estate sold was
approximately $317.0 million, $346.3 million, $414.1 million and $273.2 million,
respectively. The SAP carrying value of such real estate sold was $428.5
million, $395.0 million, $449.1 million and $299.3 million, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Real Estate Sales", "Investments -- Equity Real
Estate -- Real Estate Sales", "-- Invest-
25
<PAGE> 27
ment Impairments and Valuation Allowances" and Note 20 to the Consolidated
Financial Statements.
COMMERCIAL MORTGAGE LOANS
At June 30, 1998 and December 31, 1997, 8.3% ($892.1 million) and 8.7%
($914.9 million), respectively, of the Company's total invested assets consisted
of commercial mortgage loans. (Amounts in this section do not include invested
assets transferred in the Group Pension Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements). Commercial mortgage loans are
stated at their unpaid principal balances, net of valuation allowances for
impairment. The Company provides valuation allowances for commercial mortgage
loans when it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Increases in such
valuation allowances are recorded as realized investment losses and,
accordingly, are reflected in the Company's results of operations. For the six
months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
such increases (decreases) in valuation allowances aggregated $(0.2) million,
$0.4 million, $(4.2) million and $3.1 million, respectively. The carrying value
of commercial mortgage loans at June 30, 1998 was $892.1 million, which amount
is net of $72.3 million, representing management's best estimate of cumulative
impairment losses at such date. However, there can be no assurance that
additional provisions for impairment writedowns with respect to the Company's
commercial mortgage loans will not need to be made. Any such writedowns may have
a material adverse effect on the Company's financial position and results of
operations.
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. At June 30, 1998, the carrying value of
problem, potential problem and restructured loans was $11.9 million, $81.1
million and $218.6 million, respectively, net of valuation allowances of $2.3
million, $15.1 million and $40.2 million, respectively.
OTHER INVESTMENT PORTFOLIO RISKS; FLUCTUATION OF RESULTS; WRITEDOWNS
The Company's investment portfolio consists primarily of fixed maturity
securities, equity securities, limited partnership interests, money market
investments, commercial mortgage loans, agricultural mortgage loans and real
estate. The fair value of these and the Company's other invested assets
fluctuates depending on general economic and market conditions. In addition, the
Company is also subject to credit risk relating to the uncertainty associated
with the continued ability of debtors to make timely payments pursuant to the
contractual terms underlying such investments.
With respect to the Company's investments in fixed maturity securities and
commercial and agricultural mortgage loans, the market value of such investments
generally increases or decreases in an inverse relationship with fluctuations in
interest rates, and the Company's net investment income increases or decreases
in direct relationship with interest rate changes.
At June 30, 1998 and December 31, 1997, 58.5% ($6,282.4 million) and 56.9%
($5,950.1 million), respectively, of the Company's total invested assets
consisted of fixed maturity securities. (Amounts in this section do not include
invested assets transferred in the Group Pension Transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements). Fixed maturity securities
whose
26
<PAGE> 28
value is deemed other than temporarily impaired are written down to fair value.
Such writedowns are recorded as realized investment losses and, accordingly, are
reflected in the Company's results of operations and the cost basis of the
respective assets are permanently adjusted to reflect such impairment. For the
six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and
1995, such writedowns aggregated $2.7 million, $6.1 million, $3.0 million and
$2.3 million, respectively. At June 30, 1998, the carrying value of fixed
maturity securities was net of $10.0 million of cumulative adjustments to the
cost basis from writedowns representing management's best estimate of impairment
losses at such date. In addition, the carrying value of fixed maturity
securities at June 30, 1998 included approximately $2,938.4 million of private
fixed maturities, which have a less liquid market than public fixed maturity
securities. There can be no assurance that additional writedowns for impairment
with respect to the Company's fixed maturity securities will not need to be
made. Any such writedowns may have a material adverse effect on the Company's
financial position and results of operations.
Mortgage backed securities ("MBSs"), including collateralized mortgage
obligations ("CMOs") and pass-through securities, represented approximately
10.7% ($673.1 million) of the Company's fixed maturity securities as of June 30,
1998. Such securities are subject to prepayment risks that vary with, among
other things, interest rates. During periods of declining interest rates, MBSs
generally prepay faster as the underlying mortgages are prepaid and refinanced
by the borrowers in order to take advantage of the lower rates. MBSs that have
an amortized cost that is greater than par (i.e., purchased at a premium) may
incur a reduction in yield or a loss as a result of such prepayments. In
addition, during such periods, the Company will generally be unable to reinvest
the proceeds of any such prepayment at comparable yields. Conversely, during
periods of rising interest rates, prepayments are generally slow. MBSs that have
an amortized value that is less than par (i.e., purchased at a discount) may
incur a decrease in yield or a loss as a result of slower prepayments.
At June 30, 1998 and December 31, 1997, the Company had investments in
approximately 43 and 36 different limited partnerships which represented 1.6%
($166.9 million) and 1.4% ($146.4 million), respectively, of the Company's total
invested assets. Investment results for this portfolio are dependent upon, among
other things, general market conditions for initial and secondary offerings of
common stock. For the six months ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995, investment income from investments in limited
partnership interests was approximately $18.9 million, $49.0 million, $50.5
million and $42.3 million, respectively, representing 5.3%, 6.7%, 6.7% and 5.8%,
respectively, of the net investment income for such periods. For the same time
periods, the Company achieved total returns on its investments in limited
partnership interests of 35.0%, 37.5%, 51.1% and 33.9%, respectively. There can
be no assurance that the recent level of investment returns achieved on limited
partnership investments can be sustained in the future, and the failure to do so
could have a material adverse effect on the Company's financial position and
results of operations.
The risk of fluctuations in market value of substantially all of the
Company's separate account assets is borne by the separate account contract
holders. Certain of the Company's policy charges for administering such separate
account assets, however, are set as a percentage of market value of such assets.
Accordingly, fluctuations in the market value of separate account assets may
result in fluctuations in the Company's revenue from policy charges.
The Company may, from time to time, for business, regulatory or other
reasons, elect or be required to sell certain of its general account invested
assets at a time when their fair values are less than their carrying values,
resulting in realized losses on investments, which would reduce net income. See
"Investments".
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INTEREST RATE RISK
The Company's life insurance and fixed annuity business is subject to
several inherent risks arising from movements in interest rates. Interest rate
changes can cause compression of the Company's net spread between interest
earned on investments and interest credited in dividend calculations or on
customer deposits, thereby adversely affecting the Company's results of
operations. Rapid changes in interest rates may result in, among other things,
increased asset calls, mortgage prepayments or policy withdrawals and
reinvestment at significantly lower yields, which could adversely affect
earnings. Interest rate changes can also produce an unanticipated increase in
transfers to separate account (variable) options or withdrawals of the Company's
fixed annuity products which may force the Company to sell investment assets at
a loss in order to fund such transfers or withdrawals.
The Company will experience spread compression when it is unable or chooses
not to maintain its target margin between investment earnings and its crediting
rates. When interest rates rise, the Company may not be able to replace the
assets in its investment portfolio with higher yielding assets that will be
necessary to fund the higher crediting rates necessary to keep its life
insurance and fixed annuities products competitive. As a result, the Company may
experience either a decrease in sales and an increase in transfers to separate
account (variable) options or withdrawals if it chooses to maintain its spread
by not raising its crediting rates, or spread compression if it does increase
its crediting rates. Conversely, when interest rates fall, the Company would
have to reinvest the cash received from its investments (i.e., interest and
payments of principal upon maturity or redemption) in the lower yielding
instruments then available. If the Company were unable (e.g., due to guaranteed
minimum or fixed crediting rates or limitations on the frequency of crediting
rate resets) or chose not to reduce the life insurance dividends or reduce the
crediting rates on its fixed annuities products or acquire relatively higher
risk investments yielding higher rates of return, spread compression would
occur.
At June 30, 1998, the Company has approximately $6.4 billion in cash values
on life insurance policies in which life insurance policyholders have rights to
policy loans. For such contracts, the Company has much the same interest rate
risks as with surrenders. In addition, policies with below market fixed policy
loan interest rates can create further compression of spreads until the dividend
interest rate can be adjusted to take into account the change in policy loan
utilization.
An increase in interest rates could make investments in fixed maturity
securities, including the Company's fixed rate products, more attractive to
potential policyholders, and hence make certain of the Company's variable
products, including but not limited to its variable annuities, less attractive.
If, as a result of interest rate increases, the Company were unable or
chose not to raise its crediting rates to keep them competitive, the Company may
experience withdrawals. If the Company lacked sufficient liquidity, the Company
might have to sell investment securities to fund associated payments. Because
the value of such securities would likely have decreased in response to the
increase in interest rates, the Company would realize a loss on the sales.
Although certain of the Company's products contain market value adjustment
features which transfer an approximation of such loss to the customer if the
selected time horizon for the fixed return investment is terminated prior to
maturity, there can be no assurance that the Company would be fully insulated
from realizing any losses on sales of its securities. In addition, regardless of
whether the Company realizes an investment loss, the withdrawals would produce a
decrease in invested assets, with an adverse effect on future earnings
therefrom. Finally, premature withdrawals may also cause the Company to
accelerate amortization of deferred policy acquisition costs which would
otherwise be amortized over a longer period, thereby adversely affecting the
Company's results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Because all of the Company's fixed maturities and equity securities are
classified as available for sale, changes in the market or fair value of the
Company's fixed maturities and equity securities are reflected in the Company's
financial statements. Similar treatment is not available for liabilities. If
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interest rates rise, this will cause GAAP equity and total comprehensive income
to be adversely affected. In addition, should such assets be sold for less than
their carrying value, comprehensive income may be materially adversely affected.
The Company attempts to mitigate the negative impact of interest rate
changes through asset/liability management, including purchasing non-callable
bonds where practical and investing in private placement bonds, mortgage loans
and mortgage-backed securities which provide prepayment protection. There can be
no assurance that management will be able to manage successfully the negative
impact of interest rate changes.
RISK OF CHALLENGE TO THE NEW YORK SUPERINTENDENT'S ORDER
After a public hearing, the New York Superintendent will determine whether
the Plan meets the standards of applicable New York law, including, among other
things, whether the Plan is fair and equitable to the policyholders of MONY. The
order approving the Plan by the New York Superintendent is not expected to
address the fairness of the Plan to purchasers of Common Stock in the Offerings.
The public hearing with respect to the Plan was held on October 19, 1998, and
the Plan was approved by MONY's policyholders pursuant to a policyholder vote on
November 2, 1998 (of all MONY's policyholders entitled to vote on the Plan 30.2%
voted and 91.9% of these votes were cast in favor of the Plan). In connection
with the public hearing with respect to the Plan, certain written objections to
the Plan were submitted to the New York Superintendent, alleging, inter alia,
that the Plan was not fair and equitable to MONY's policyholders, and requesting
that the New York Superintendent require various modifications to the Plan and
delay the Offerings. The Company believes such objections are wholly without
merit. The New York Superintendent's order approving the Plan was issued on
November , 1998.
Section 7312 provides that any action challenging the validity of or
arising out of acts taken or proposed to be taken under the demutualization
statute in connection with the Demutualization must be commenced within one year
after a copy of the Plan, with the New York Superintendent's approval endorsed
thereon, is filed in the office of the New York Superintendent or six months
from the Plan Effective Date, whichever is later, or if the Plan is withdrawn,
within six months of such withdrawal. (Although Section 326 of the New York
Insurance Law provides that orders of the New York Superintendent are subject to
judicial review in a proceeding under Article 78 of the New York Civil Practice
Law and Rules, the law is not clear as to whether a lawsuit challenging an order
of the New York Superintendent under Section 7312 would have to be commenced
within 4 months after the order became final and binding, as is generally the
case for an Article 78 proceeding, or within the time period specified in
Section 7312.) The Company cannot predict whether any action challenging the
Plan or the approval thereof will be commenced or what aspects of the Plan, if
any, such an action might challenge. The existence of such a challenge could
adversely affect the market price of the Common Stock.
In the event that the order of the New York Superintendent is challenged, a
successful challenge could result in monetary damages, a modification of the
Plan or the New York Superintendent's approval of the Plan being set aside. In
order to challenge successfully the New York Superintendent's approval of the
Plan, the petitioner would have to sustain the burden of showing that such
approval was arbitrary and capricious or an abuse of discretion, made in
violation of lawful procedures, affected by error of law or not supported by
substantial evidence. In addition, Section 7312 provides that the insurer may
require the challenging party to give security for the insurer's reasonable
expenses, including attorney's fees, which may be incurred or for which the
insurer may become liable, to which security the insurer shall have recourse in
such amount as the court shall determine upon the termination of the action.
A successful challenge would likely result in substantial uncertainty
relating to the terms and effectiveness of the Plan, and a substantial period of
time might be required to reach a final determination. Such an outcome would be
materially adverse to purchasers of Common Stock in the
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Offerings and would have a material adverse effect on the Company's financial
position and results of operations and the market price of the Common Stock.
RISKS WITH RESPECT TO SALES PRACTICE LITIGATION
In late 1995 and during 1996 a number of purported class actions were
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies during the period 1980 through 1995.
Although the claims asserted in each case are not identical, they seek
substantially the same relief under essentially the same theories of recovery
(i.e., breach of contract, fraud, negligent misrepresentation, negligent
supervision and training, breach of fiduciary duty, unjust enrichment and
violation of state insurance and/or deceptive business practice laws).
Plaintiffs in these cases (including the Goshen case discussed below) seek
primarily equitable relief (e.g., reformation, specific performance, mandatory
injunctive relief prohibiting the Company from canceling policies for failure to
make required premium payments, imposition of a constructive trust and creation
of a claims resolution facility to adjudicate any individual issues remaining
after resolution of all class-wide issues) as opposed to compensatory damages,
although they also seek compensatory damages in unspecified amounts. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance), has denied any wrongdoing, and has asserted numerous
affirmative defenses. With respect to one of these cases, Goshen v. The Mutual
Life Insurance Company of New York and MONY Life Insurance Company of America
(the "Goshen case"), on October 21, 1997 the New York State Supreme Court
granted the Company's motion for summary judgment and dismissed all claims filed
in the Goshen case against the Company. The order of the New York State Supreme
Court has been appealed by plaintiffs. There can be no assurance that the
present or any future litigation relating to pricing and sales practices will
not have a material adverse effect on the Company. See "Business -- Legal
Proceedings".
EXPIRATION OF SURRENDER PENALTIES WITH RESPECT TO CERTAIN ANNUITIES
The Company typically imposes surrender charges on annuities sold by it to
enable the Company to recover unamortized policy acquisition costs in the event
that the annuity is surrendered before policy acquisition costs are fully
amortized and to discourage contract surrenders, which could require the Company
to dispose of assets prematurely at a loss. As surrender penalties expire it is
likely that surrenders of single premium deferred annuities ("SPDAs") and
flexible payment variable annuities ("FPVAs") will increase. This could have a
material adverse effect on the Company's financial position and results of
operations.
RISKS RELATED TO THE CLOSED BLOCK; ASSETS OF CLOSED BLOCK AVAILABLE SOLELY TO
POLICYHOLDERS
The Plan requires that MONY establish and operate a Closed Block for the
benefit of the Closed Block Business, which is designed to give reasonable
assurance with respect to policies included therein that, after the Plan
Effective Date, assets will be available to maintain current payable dividend
scales if the experience underlying such dividend scales continues. For so long
as there are policyholders whose policies are in the Closed Block, the Closed
Block will continue to be in effect until the date on which none of the policies
in the Closed Block remains in force. The duration of the Closed Block is
currently expected to be in excess of 90 years. The amount of assets allocated
to the Closed Block is expected to produce cash flows which, together with
anticipated revenues from the Closed Block Business, are reasonably expected to
be sufficient to support the Closed Block Business, including, but not limited
to, provisions for payment of claims and surrender benefits, certain expenses
and taxes and to provide for the continuation of current payable dividend
scales, if 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 owners of policies included in the Closed
Block until such time as the Closed Block is
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no longer in effect, and will not be available to be distributed as dividends to
the Holding Company. To the extent that over time cash flows from the assets
allocated to the Closed Block and other experience relating to the Closed Block
Business are, in the aggregate, more favorable than assumed in setting up the
Closed Block, total dividends paid to 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 and will
not be available to stockholders of the Holding Company. Conversely, to the
extent that over time such cash flows and other experience are, in the
aggregate, less favorable than assumed in setting up the Closed Block, total
dividends paid to 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. If the investment,
mortality, persistency or other experience of the Closed Block were
substantially worse than that of the Company's principal competitors, management
might, for competitive reasons, use MONY's general funds to maintain competitive
dividend levels. In the event that the assets allocated to the Closed Block, the
cash flows therefrom, and the revenues from the policies included therein prove
to be insufficient to pay the benefits guaranteed under the terms of the
policies within the Closed Block, MONY will be required to make such payments
from its general funds. 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- The
Group Pension Transaction". State and local taxes paid on premiums, state
guaranty fund assessments and Federal income taxes in respect of the Closed
Block Business will be charged to the Closed Block in accordance with the
procedures set forth in the Plan. However, expenses (including investment
management expenses) of operating and administering the Closed Block, other than
certain real estate operating expenses, real estate taxes and asset acquisition
and disposition costs, will not be charged to the Closed Block, and the cost of
increases in such expense will be borne by MONY. As a result of such exclusion,
operating costs and expenses outside of the Closed Block are disproportionate to
the business outside of the Closed Block. See "The
Demutualization -- Establishment and Operation of the Closed Block".
RISKS ASSOCIATED WITH CERTAIN ECONOMIC AND MARKET FACTORS
The Company's results of operations are affected by certain economic and
market factors, including the level of volatility in the markets in which the
Company invests and the overall investment returns provided thereby. In
particular, significant growth in the retirement-oriented investment market and
uncommonly strong stock and bond market appreciation have been material factors
in the growth of the Company's assets and its ability to generate sales in
recent years. There can be no assurance, however, that these economic and market
trends will continue. Adverse economic conditions and other factors, including a
protracted and/or precipitous decline in the stock market and other economic
factors that affect the popularity of the Company's products and services, may
negatively impact the Company's business, financial position and results of
operations.
RISK OF VARIATIONS IN CLAIMS EXPERIENCE
An insurance company's earnings significantly depend upon the claims paid
under its insurance contracts and will vary from period to period depending upon
the amount of claims incurred in the relevant periods. Therefore, there is
limited predictability of claims experience within any given month or year. As a
result, it is anticipated that the Company's financial results (and,
accordingly, the trading price of the Common Stock) may vary from period to
period and that such variations may be material in any given period. The Company
uses certain assumptions in pricing its products. There can be no assurance that
actual experience will match the assumptions made for pricing
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purposes and, to the extent that they differ, the Company's operating results
could be materially adversely affected.
RISKS RELATED TO REGULATORY MATTERS
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on the authorization of
lines of business, underwriting limitations, the setting of premium rates, the
establishment of standards of solvency, the licensing of insurers and agents,
concentration of investments, levels of reserves, the payment of dividends,
transactions with affiliates, changes of control and the approval of policy
forms. Such regulation is concerned primarily with the protection of
policyholders. State regulatory oversight and various proposals at the federal
level (including the proposed adoption of a federal regulatory framework for
insurance companies) may in the future adversely affect the Company's ability to
sustain adequate returns in certain lines of business. In recent years, the
state insurance regulatory framework has come under increased federal scrutiny,
and certain state legislatures have considered or enacted laws that alter and,
in many cases, increase state authority to regulate insurance companies and
insurance holding company systems. Further, the NAIC and state insurance
regulators are re-examining existing laws and regulations, and as a condition to
accreditation have required the adoption of certain model laws which
specifically focus on insurance company investments, issues relating to the
solvency of insurance companies, risk-based capital guidelines, interpretations
of existing laws, the development of new laws, and the definition of
extraordinary dividends. See "Business -- Regulation". It is impossible to
predict the future impact of potential state and federal regulations on the
Company's operations, and there can be no assurance that future
insurance-related laws and regulations, or the interpretation thereof, will not
have a material adverse effect on the operations of the Company's business or on
the Company's financial position or results of operations.
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities or a downgrade by the private
agencies referred to below. As of June 30, 1998, MONY and MLOA were in
compliance with state requirements with respect to statutory surplus. However,
there can be no assurance that the Company's insurance company subsidiaries will
maintain such levels of surplus. In particular, the Company expects to realize
losses on a SAP basis in connection with future sales of the Company's real
estate which could materially affect the Company's statutory surplus. See
"Investments -- Equity Real Estate -- Real Estate Sales".
The NAIC has adopted a system for assessing the adequacy of statutory
capital for life and health insurers. This system, known as Risk Based Capital
("RBC"), is in addition to the states' fixed dollar minimum capital and other
requirements. This system is based on risk-based formulas that apply prescribed
factors to the various risk elements in an insurer's business to report a
minimum capital requirement proportional to the amount of risk assumed by the
insurer. As of June 30, 1998, based on computations made by the Company in
accordance with the prescribed formulas, MONY and MLOA exceeded the minimum RBC
requirements. However, there can be no assurance that capital requirements
applicable to the Company's businesses will not increase or that the Company
will be able to meet minimum RBC requirements in the future. See "Business --
Regulation -- Risk-Based Capital Requirements".
Insurance regulators have given greater emphasis in recent years to the
investigation of allegations of improper life insurance pricing and sales
practices by life and annuity insurers, including churning and misleading sales
presentations by insurance agents. State insurance
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regulatory authorities also regularly make inquiries, hold investigations and
administer market conduct examinations with respect to insurers' compliance with
applicable insurance laws and regulations. There can be no assurance that any
non-compliance with such applicable laws and regulations would not have a
material adverse effect on the Company. The Company is currently engaged in
certain class action and individual litigation relating to its sales practices
in connection with the sale of whole life and universal life insurance policies.
See "Business -- Legal Proceedings". In addition, the NAIC has adopted a model
law and regulation which would standardize the form and content of any
illustrations provided to prospective purchasers of individual life insurance
products. The model law has been enacted in a number of states, and is currently
under consideration in a number of other states. Management expects that similar
legislation will eventually be enacted in additional states in which the Company
sells individual life insurance products. There can be no assurance as to
whether this reform will have a material adverse impact on sales of such
products by the industry as a whole or by the Company.
State guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these jurisdictions
can be assessed for policyholder losses incurred by insolvent insurance
companies. These arrangements provide certain levels of protection to
policyholders from losses under insurance policies issued by impaired or
insolvent insurance companies. Although MONY and MLOA have established reserves
that they consider adequate for assessments in respect to insurance companies
that are currently subject to insolvency proceedings, the amount and timing of
any future assessments on MONY and MLOA under these laws cannot be reasonably
estimated and are beyond the control of MONY and MLOA. While most of these laws
provide that an assessment may be excused or deferred if it would threaten an
insurer's solvency and further provide for annual limits on such assessments,
there can be no assurance that the reserves established by MONY and MLOA for
assessments are adequate and, consequently, the Company's financial performance
could be adversely affected by such guaranty association assessments.
In March 1998, the NAIC voted to adopt its Codification of Statutory
Accounting Principles project (referred to hereafter as "codification").
Codification is a modified form of statutory accounting principles that will
result in changes to the current NAIC Accounting Practices and Procedures Manual
applicable to insurance enterprises. Although adoption of codification by all
states is not a certainty, the NAIC has recommended that all states enact
codification as soon as practicable with an effective date of January 1, 2001.
It is currently anticipated that codification will become an NAIC state
accreditation requirement starting in 2002. In addition, the American Institute
of Certified Public Accountants and the NAIC have agreed to continue to allow
the use of certain permitted accounting practices when codification becomes
effective in 2001. Any accounting differences from codification principles,
however, must be disclosed and quantified in the footnotes to the audited
financial statements. Therefore, codification will likely result in changes to
what are currently considered prescribed statutory insurance accounting
practices.
Certain of the Company's businesses are subject to other governmental
regulation, including regulation pursuant to federal and state securities laws.
Changes to these laws and regulations could have a material adverse effect on
the operations of the Company's business or on the Company's financial position
or results of operations.
See "Business -- Regulation".
RISKS OF COMPETITION
The Company believes that competition in the Company's lines of business is
based on service, product features, price, commission structure, perceived
financial strength, claims-paying ratings and name recognition. The Company
competes with a large number of other insurers as well as non-insurance
financial services companies, such as banks, broker-dealers and mutual funds,
many of which have greater financial resources, offer alternative products or
more competitive pricing
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and, with respect to other insurers, have higher ratings than the Company.
Competition exists for individual consumers and agents and other distributors of
insurance products. National banks, with their pre-existing customer bases for
financial services products, may pose increasing competition in the future to
insurers who sell annuities, including the Company, as a result of the United
States Supreme Court's 1994 decision in NationsBank of North Carolina v.
Variable Annuity Life Insurance Company, which permits national banks to sell
annuity products of life insurance companies in certain circumstances.
The Company must attract and retain productive agents to sell its insurance
and annuity products. Strong competition exists among insurance companies for
agents with demonstrated ability. Management believes that key bases of
competition among insurance companies for agents with demonstrated ability
include a company's financial position and the services provided to, and
relationships developed with, these agents in addition to compensation and
product structure. Changes arising from the Demutualization, as well as the
realignment of the career agency sales force and the transition to new products,
may affect the Company's ability to retain productive distributors of its
individual insurance and annuity products. Sales of individual insurance and
annuity products and the Company's financial position and results of operations
could be materially adversely affected if such changes occur.
In addition, the Company recently adopted a plan to restructure its career
agency sales force. See "Business -- Marketing and Distribution". There can be
no assurance that such restructuring will be successful or that the career
agency sales force will be receptive to the new structure. If the restructuring
is not successful, or if the career agency sales force is not receptive to the
new structure, the Company's financial position and results of operations could
be materially adversely affected.
In addition, several proposals to repeal or modify the Glass-Steagall Act
of 1933, as amended, and the Bank Holding Company Act of 1956, as amended, have
been made by members of Congress and the Clinton Administration. Currently, the
Bank Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals have yet been enacted, and it is not possible
to predict whether any of these proposals will be enacted or, if enacted, their
potential effect on the Company.
See "Business -- Competition".
RISKS WITH RESPECT TO RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive position
of insurance companies. Ratings are important to maintaining public confidence
in MONY and its ability to market its products. Rating organizations continually
review the financial performance and condition of insurers, including MONY. Any
lowering of MONY's ratings could have a material adverse effect on MONY's
ability to market its products and retain its current policyholders. These
consequences could, depending upon the extent thereof, have a material adverse
effect on MONY's liquidity and, under certain circumstances, net income. MONY is
currently rated "A-" by A.M. Best and MONY's insurance claims-paying ability is
rated "A3" by Moody's, "A+" by Duff & Phelps and "A+" by S&P. Moody's, on
January 6, 1998, and Duff & Phelps, on August 4, 1998, each announced that it
had changed its respective outlook on MONY's rating from stable to positive.
The foregoing ratings reflect each rating agency's current opinion of
MONY's claims-paying ability, financial strength, operating performance and
ability to meet its obligations to policyholders and are not evaluations
directed toward the protection of investors in the Common Stock. Such factors
are of concern to policyholders, agents and intermediaries. Such ratings should
not be relied upon when making a decision to purchase shares of Common Stock
offered hereby.
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YEAR 2000
The Year 2000 issue is the result of the widespread use of computer
programs being written using two digits (rather than four) to define the
applicable year. Such programming was a common industry practice designed to
avoid the significant costs associated with additional mainframe capacity
necessary to accommodate a four digit year field. As a result, any of the
Company's computer systems that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a major system failure or miscalculations. The Company has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" issue and has developed and implemented a plan to
resolve the issue. The Company currently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems.
However, if such modifications and conversions are not completed on a timely
basis, the Year 2000 problem may have a material impact on the operations of the
Company. Further, even if the Company timely completes such modifications and
conversions, there can be no assurance that the failure by vendors or other
third parties to solve the Year 2000 problem will not have a material impact on
the operations of the Company. The Company estimates the total cost to resolve
its Year 2000 problem to be approximately $18 million, of which $8.9 million has
been incurred through June 30, 1998; however, there can be no assurance that the
actual cost incurred will not be materially higher than such estimate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000".
RISKS OF POTENTIAL ADOPTION OF NEW FEDERAL INCOME TAX LEGISLATION
Current Federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Taxes, if any, are payable on the accumulated
tax-deferred earnings when earnings are actually paid. Congress has, from time
to time, considered possible legislation that would eliminate the deferral of
taxation on the accretion of value within certain annuities and life insurance
products. The 1994 United States Supreme Court ruling in NationsBank of North
Carolina v. Variable Annuity Life Insurance Company that annuities are not
insurance for purposes of the National Bank Act may cause Congress to consider
legislation that would eliminate such tax deferral at least for certain
annuities. Other possible legislation, including a simplified "flat tax" income
structure with an exemption from taxation for investment income, could also
adversely affect purchases of life insurance if such legislation were to be
enacted. There can be no assurance as to whether such legislation will be
enacted or, if enacted, whether such legislation would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
Recently, the Federal income tax rate on capital gains was reduced. Certain
of the Company's accumulation products that feature tax-deferral of earnings
might consequently be deemed to be relatively less attractive than before in
comparison with alternative accumulation products that feature long-term capital
gains treatment, particularly if the tax rates on ordinary income that are
ultimately applied to such tax-deferred earnings are substantially in excess of
the reduced rate on long-term capital gains.
RISKS WITH RESPECT TO ANTI-TAKEOVER EFFECTS OF STATUTES, AMENDED AND RESTATED
CERTIFICATE AND THE BY-LAWS; PREFERRED SHARE PURCHASE RIGHTS
Under the New York Insurance Law, for a period of five years following the
Plan Effective Date, no person may acquire beneficial ownership of 5% or more of
the outstanding shares of Common Stock without the prior approval of the New
York Superintendent. The Investors have received a conditional waiver of this
rule from the New York Superintendent in connection with the potential exercise
of the Warrants prior to the end of such five-year period. After the Plan
Effective Date, the Holding Company will be the parent holding company of MONY,
a New York insurance company subsidiary and MLOA, an Arizona insurance company
subsidiary. As a result, New York Insurance
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Law and Arizona Insurance Law will prohibit any person from acquiring control of
the Holding Company, and thus indirect control of its wholly-owned subsidiaries,
without the prior approval of the New York Superintendent and the Director of
Insurance of Arizona (the "Arizona Director of Insurance"). Control will be
presumed to exist where any person, directly or indirectly, owns, controls,
holds the power to vote, or holds proxies representing 10% or more of the
outstanding voting stock of the Holding Company, unless the New York
Superintendent or the Arizona Director of Insurance, upon application,
determines otherwise. Persons who do not acquire beneficial ownership of more
than 10% of the outstanding shares of Common Stock may be deemed to have
acquired such control, if the appropriate regulators determine that such
persons, directly or indirectly, exercise a controlling influence over the
management or policies of the insurer. Any person seeking to acquire a
controlling interest of the Holding Company would therefore face regulatory
obstacles which may delay, defer or prevent an acquisition that stockholders
might consider to be in their best interests.
The Holding Company, through certain provisions of its Amended and Restated
Certificate of Incorporation (the "Amended and Restated Certificate") and its
By-laws, as amended (the "By-laws"), has also created obstacles which may delay,
defer or prevent a takeover attempt. Such provisions may adversely affect
prevailing market prices for the Common Stock. These provisions, among other
things, (i) divide the Board of Directors of the Holding Company (the "Holding
Company Board") into three classes, which will serve for staggered three-year
terms, (ii) provide that a director of the Holding Company may be removed only
for cause and only by the affirmative vote of the holders of a majority of the
outstanding securities eligible to vote on such matters, (iii) provide that only
the Holding Company Board, its Chairman, or the President of the Holding Company
may call special meetings of the stockholders and (iv) eliminate the ability of
the stockholders to take any action without a meeting. The By-laws also
establish certain advance notice procedures for nomination of candidates for
election as directors and for stockholder proposals to be considered at
stockholders' meetings. Furthermore, the standstill provisions set forth in the
Investment Agreement may also have anti-takeover effects.
In addition, on the Board Adoption Date, the Holding Company Board
authorized the Holding Company to enter into a Rights Agreement (the "Rights
Agreement") pursuant to which a preferred stock purchase right (collectively,
the "Rights") will be attached to each share of Common Stock and will become
exercisable under certain specified circumstances involving the acquisition of
or tender offer for 15% or more of the issued and outstanding shares of Common
Stock. The issuance of the Rights will have certain anti-takeover effects by
causing substantial dilution to a person or group that attempts to acquire the
Holding Company on terms not approved by the Holding Company Board. See "Certain
Provisions of the Amended and Restated Certificate of Incorporation and the
By-laws of the Holding Company", "Description of Capital Stock -- Preferred
Stock" and "-- Preferred Share Purchase Rights" and "Certain Provisions of the
Investment -- Standstill Agreement".
RISK OF POTENTIAL DILUTION
The Investors hold Warrants which may be exercised, in whole or in part, at
any time on or after the Demutualization Date and on or before the tenth
anniversary of the Demutualization Date for up to an aggregate number of shares
of Common Stock that represents 7% of the Common Stock on a fully-diluted basis
on the Demutualization Date, subject to adjustment. Any exercise of the Warrants
would have a dilutive effect on other stockholders' ownership interests,
including, among other things, voting power. Earnings per share would also be
diluted. See "Certain Provisions of the Investment" and "Description of Capital
Stock".
RISKS WITH RESPECT TO SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the shares of Common Stock distributed in the
Demutualization will be eligible for immediate resale in the public market
without restriction as set forth later in this
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<PAGE> 38
Prospectus under the heading "Shares Eligible for Future Sale". Moreover, in
accordance with the Plan and subject to the approval of the New York
Superintendent, the Holding Company will for a limited period commencing on the
nine-month anniversary of the Plan Effective Date and continuing for three
months thereafter (unless extended by the Holding Company) provide for the
public sale, at market prices and without brokerage commissions or similar fees,
of all shares of Common Stock of any Eligible Policyholder who receives a number
of shares of Common Stock under the Plan that is equal to or less than a number
of shares to be determined by the MONY Board at least 60 days prior to the
nine-month anniversary of the Plan Effective Date (which number shall not be
less than 25 nor more than 99). As of the Board Adoption Date, MONY had
approximately 840,000 policyholders, most of whom, if their policies remain in
force on the Plan Effective Date and if not paid cash or provided Policy
Credits, will receive a number of shares of Common Stock in the Demutualization
which will make them eligible to sell such shares through the commission-free
sales program (as described in "The Demutualization -- Commission-Free
Programs"). No prediction can be made as to the effect, if any, such future
sales of shares, or the availability of shares for such future sales, will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception such sales could occur,
could adversely affect prevailing market prices for all the Common Stock. The
Investors have also been granted registration rights with respect to (i) the
Warrants and (ii) all shares of Common Stock issuable upon the exercise of any
Warrant (collectively, the "Registrable Securities"). Any sales pursuant to such
registration rights may adversely affect the prevailing market prices for all
the Common Stock. See "The Demutualization -- Allocation and Payment of
Consideration to Eligible Policyholders", "Certain Provisions of the
Investment -- Standstill Agreement" and "-- Registration Rights" and "Shares
Eligible for Future Sale".
NO PRIOR MARKET FOR COMMON STOCK
Prior to the distribution of Common Stock in the Demutualization and the
Offerings, there has been no public market for the Common Stock. The initial
public offering price of the Common Stock in the Offerings will be determined
through negotiations between the Holding Company and the representatives of the
Underwriters, and may not be indicative of the market price for the Common Stock
after the Offerings. Although the Common Stock has been approved for listing,
subject to notice of issuance, on the NYSE, there can be no assurance that an
active trading market for the Common Stock will develop or be sustained. There
can be no assurance that purchasers of shares of Common Stock in the Offerings
will be able to resell the shares of Common Stock at or above the initial
offering price. See "Underwriting".
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THE DEMUTUALIZATION
The following summary discussion of the Plan does not purport to be
complete and is qualified in its entirety by reference to the complete text of
the Plan. A copy of the Plan is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
PURPOSE
The principal purpose of the Demutualization is to enable MONY to obtain
equity capital through the Holding Company from sources unavailable to it as a
mutual life insurance company. Management believes that the additional equity
capital will enhance MONY's financial strength and will strengthen MONY's
ability to maintain its marketplace franchise while maximizing financial
flexibility and future growth and providing additional value to its
policyholders.
SUMMARY OF PLAN
The MONY Board adopted the Plan on August 14, 1998 and adopted certain
clarifying and technical amendments thereto on September 9, 1998. The Plan will
become effective on the Plan Effective Date. In connection with the
effectiveness of the Plan, among other things: MONY will by operation of Section
7312 of the New York Insurance Law become a stock life insurance company; MONY
will become a wholly-owned subsidiary of the Holding Company; the Holding
Company will contribute cash to MONY to fund the distribution of Policy Credits;
all policyholders' membership interests will be extinguished and Eligible
Policyholders will be entitled to receive, in exchange therefor, shares of
Common Stock or, in certain circumstances, cash or Policy Credits and
Participating Policyholders will receive additional shares of Common Stock or,
in certain circumstances, cash or Policy Credits; the Closed Block will be
established and operated by MONY; and shares of Common Stock will be offered to
the public in the Offerings.
APPROVAL OF THE PLAN; PLAN EFFECTIVE DATE
Pursuant to Section 7312, the Plan was approved (i) on November 2, 1998 by
persons who owned policies on the Board Adoption Date (of all MONY policyholders
entitled to vote on the Plan, 30.2% voted and 91.9% of these votes were cast in
favor of the Plan) and (ii) on November , 1998 by the New York Superintendent
after a public hearing. After the satisfaction of conditions including receipt
of any required governmental consents and approvals and certain other conditions
specified in the Plan, the Plan will become effective on the Plan Effective
Date, which will be the earlier of the date on which the closing of the
Offerings occurs and a date chosen by the MONY Board. Notwithstanding that the
Plan will become effective on the Plan Effective Date, actions challenging the
validity of, or actions taken in connection with, the Plan may be brought for a
substantial period of time after the Plan Effective Date. See "Risk
Factors -- Risk of Challenge to the New York Superintendent's Order".
ALLOCATION AND PAYMENT OF CONSIDERATION TO ELIGIBLE POLICYHOLDERS
First, shares of Common Stock will be allocated among Eligible
Policyholders. It is currently anticipated that each Eligible Policyholder will
be allocated a fixed number of shares of Common Stock equal to 7 shares, with
the aggregate number of shares of Common Stock comprising the fixed component
currently anticipated to be approximately 5.4 million shares or 15% of the
aggregate number of shares of Common Stock allocated to Eligible Policyholders.
In addition, Participating Policyholders will be allocated a variable number of
additional shares of Common Stock (representing in the aggregate the remaining
approximately 85% of the shares of Common Stock allocated to Eligible
Policyholders) based upon formulas which take into account, among other things,
each such participating policy's estimated contribution to MONY's surplus.
Estimated contributions will be based generally on the mortality, morbidity,
expense, tax, persistency and investment experience of the relevant product
class. The aggregate number of shares comprising the variable component is
currently anticipated to be approximately 30.3 million shares of Common Stock.
Following the Demutualization Date, it is currently anticipated that Eligible
Policyholders will
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own, in the aggregate, approximately 34.0 million shares of Common Stock (it is
currently anticipated that 1.7 million shares of Common Stock are allocated but
not issued to Eligible Policyholders who will receive payments in the form of
cash or Policy Credits rather than shares of Common Stock), which will represent
approximately 75.1% of the aggregate number of shares of Common Stock currently
anticipated to be outstanding upon the consummation of the Offerings.
Second, shares of Common Stock or other consideration described below will
be paid to Eligible Policyholders. Each Eligible Policyholder will receive, in
book entry form (unless otherwise requested), a number of shares of Common Stock
equal to the fixed component plus, provided that such Eligible Policyholder is
also a Participating Policyholder, a number of shares of Common Stock equal to
the variable component allocated to such Eligible Policyholder, except that,
under certain circumstances, Policy Credits will be credited or cash will be
paid in lieu of Common Stock. The amount paid as cash or value credited as
Policy Credits to an Eligible Policyholder will equal the number of shares
allocated to such Eligible Policyholder multiplied by (i) the initial public
offering price for the shares in the Offerings or, in the case of Policy Credits
and payment of cash to Eligible Policyholders who are required to receive cash
under the Plan, a greater amount as may be determined pursuant to a formula that
takes into account the market price of the Common Stock following the Offerings,
or (ii) if the Offerings do not occur within 120 days of the Plan Effective
Date, 70% of the book value per share of the Common Stock on the Plan Effective
Date. Policy Credits, in the form of dividends, increases in fund values,
accumulation values or accumulation account values or extensions of coverages,
will be credited to Eligible Policyholders having certain tax-qualified
policies. If the MONY Board so determines, cash will be paid to Eligible
Policyholders who are not required under the Plan to receive Policy Credits, who
are allocated in the aggregate 75 or fewer shares of Common Stock (the "Cash
Election Number") and who have affirmatively indicated a preference to receive
cash instead of Common Stock, except that the total amount of cash to be
distributed to Eligible Policyholders pursuant to any such determination by the
MONY Board to distribute cash will not exceed 25% of the proceeds of the
Offerings (net of underwriting commissions and expenses related thereto) or such
lower aggregate amount established by the MONY Board prior to the
Demutualization Date (the "Aggregate Cash Amount"). In the event that the
aggregate number of shares of Common Stock allocated to Eligible Policyholders
who elect to receive cash in lieu of stock corresponds to an amount of cash, as
provided in the Plan, that exceeds the Aggregate Cash Amount, then the MONY
Board, subject to the approval of the New York Superintendent, will reduce the
Cash Election Number (such number being the "Reset Cash Election Number") to
accommodate the Aggregate Cash Amount. In the event the MONY Board so reduces
the Cash Election Number, no pro rata distributions of cash will be made, with
the result that Eligible Policyholders who elect to receive cash and are
allocated a number of shares equal to or less than the Reset Cash Election
Number will receive cash, and Eligible Policyholders who elect to receive cash
but are allocated a number of shares greater than the Reset Cash Election Number
will receive stock. Cash will also be paid to Eligible Policyholders with
mailing addresses located outside both the United States and Canada. The right
of Eligible Policyholders to receive consideration pursuant to the Plan arises
on the Plan Effective Date, and distributions thereof will be made as soon as
reasonably practicable thereafter. See "Use of Proceeds" and "Pro Forma
Condensed Consolidated Financial Information".
COMMISSION-FREE PROGRAMS
Under the Plan, the Holding Company will establish, subject to the approval
of the New York Superintendent, a commission-free sales program for Eligible
Policyholders who receive a number of shares of Common Stock under the Plan that
is equal to or less than a number of shares to be determined by the MONY Board
at least 60 days prior to the nine-month anniversary of the Plan Effective Date
(which number shall not be less than 25 nor more than 99) to sell all of their
shares. The program will involve agency transactions effected on a periodic
basis on the NYSE, and will not involve purchases or sales by MONY or its
affiliates for their own accounts. The commission-free sales program will
commence on the nine-month anniversary of the Plan Effective Date and shall
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<PAGE> 41
continue for three months, unless extended by the Holding Company. Under the
Plan, the Holding Company also shall establish, subject to the approval of the
New York Superintendent, a commission-free purchase program for Eligible
Policyholders who receive 99 or fewer shares of Common Stock under the Plan,
enabling such Eligible Policyholders to purchase, commission-free, such number
of shares as is necessary to bring their total respective number of shares of
Common Stock to 100. As of the Board Adoption Date, MONY had approximately
840,000 policyholders, most of whom, if their policies remain in force on the
Plan Effective Date and if not paid cash or provided Policy Credits, will
receive a number of shares of Common Stock in the Demutualization which will
make them eligible to sell such shares, or purchase additional shares through
the commission-free programs. See "Shares Eligible for Future Sale".
ESTABLISHMENT AND OPERATION OF THE CLOSED BLOCK
The Closed Block is a mechanism described in Section 7312 of the New York
Insurance Law, the statute governing the Demutualization. Under the Plan, MONY
will establish and operate the Closed Block as a closed block of participating
business for the benefit, for dividend purposes only, of the policies included
therein. The Closed Block Business will contain those classes of individual
participating MONY policies in respect of which MONY had a current payable
dividend scale (with certain exceptions specified in the Plan) and which are (a)
in force on the Plan Effective Date, or (b) issued and delivered after the Plan
Effective Date pursuant, in each case, to an application, complete on its face,
that is received prior to the Plan Effective Date at MONY's administrative
offices, provided that all underwriting in connection with any policy referred
to in this clause (b) is completed within 60 days of the Plan Effective Date and
such policy is issued as applied for without material change (upon receipt of
premium payment in accordance with MONY's customary business practice) and
delivered in accordance with the terms of the application. The Closed Block
Business will also contain policies within the classes of participating MONY
policies referred to above that are in force on the Plan Effective Date as
extended term insurance pursuant to non-forfeiture provisions in such policies.
A policy may be within a class for which there was a currently payable dividend
scale, even though no dividend was paid in that year on that policy. The Closed
Block will continue in effect until no more policies included therein are in
force. The duration of the Closed Block is expected to be in excess of 90 years.
Subsequent to the Plan Effective Date certain of the contracts offered by the
Company will be substantially the same, in all material respects, as certain of
the contracts included in the Closed Block, except that such contracts will be
outside of the Closed Block.
MONY will allocate to the Closed Block an amount of assets expected to
produce cash flows which, together with anticipated revenues from the Closed
Block Business, are reasonably expected to be sufficient to support the Closed
Block Business, including, but not limited to, provisions for payment of claims
and surrender benefits, certain expenses and taxes, and for 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 owners of policies
included in the Closed Block and will not revert to the benefit of the
shareholders of MONY. However, the financial results of the Closed Block will
affect the results of continuing operations of MONY in the manner described in
Note 1 of Notes to Pro Forma Condensed Consolidated Financial Information.
To the extent that over time cash flows from the assets allocated to the
Closed Block and other experience relating to the Closed Block Business are, in
the aggregate, more favorable than assumed in setting up the Closed Block, total
dividends paid to 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 over time such cash flows and other experience are, in the aggregate, less
favorable than assumed in setting up the Closed Block, total dividends paid to
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
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scales had been continued. If the investment, mortality, persistency or other
experience of the Closed Block were substantially worse than that of the
Company's principal competitors, management might, for competitive reasons, use
MONY's general funds to maintain competitive dividend levels. In the event that
the assets allocated to the Closed Block, the cash flows therefrom and the
revenues from the policies included therein prove to be insufficient to pay the
benefits guaranteed under the terms of the policies within the Closed Block,
MONY will be required to make such payments from its general funds. 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Group Pension Transaction".
Since the Closed Block will be funded to provide for payment of guaranteed
benefits on such policies and, in addition, for continuation of dividends paid
under current payable dividend scales, 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.
Insurance cash flows (including, but not limited to, premiums, policy
benefits and annuity considerations) and investment cash flows from operations
of the Closed Block will be credited or charged to the Closed Block as provided
in the Plan. State and local taxes paid on premiums, state guaranty fund
assessments and Federal income taxes in respect of the Closed Block Business
will be charged to the Closed Block in accordance with the procedures set forth
in the Plan. However, expenses (including investment management expenses) of
operating and administering the Closed Block, other than certain real estate
operating expenses, real estate taxes and asset acquisition and disposition
costs, will not be charged to the Closed Block. At the same time, assets which
otherwise would have been allocated to the Closed Block had such operating
expenses been chargeable to the Closed Block, will remain outside of the Closed
Block and operating results outside the Closed Block will include the investment
results of such assets. Since such expenses will not be charged to the Closed
Block, the cost of increases in such expenses will be borne by, and the benefit
of decreases in such expenses will inure to, MONY and ultimately the Holding
Company.
The Plan prohibits the reallocation or transfer of assets between the
Closed Block and any other portion of MONY's general account, any of its
separate accounts or to any affiliate of MONY without the New York
Superintendent's approval. Other transactions between the Closed Block and any
other portion of MONY's general account, any of its separate accounts or any
affiliate of MONY are subject to regulation by the New York Superintendent as
affiliate transactions. The assets to be allocated to the Closed Block will be
available to satisfy the claims of MONY's creditors in the same priority in
liquidation as the other assets in MONY's general account.
CLOSED BLOCK ASSETS AND LIABILITIES
The Plan provides for the allocation of specifically identified general
account assets to the Closed Block on the Plan Effective Date, as well as policy
loans, accrued interest and due and deferred premiums in respect of the policies
included in the Closed Block. This allocation excluded from the Closed Block
equity real estate, securities with an NAIC designation below 3 (for a
description of NAIC securities designations, see "Investments -- Fixed
Maturities"), certain mortgage loans and certain other specified investments.
The Plan further provides a procedure for allocating to the Closed Block a
portion of new assets acquired in connection with MONY's individual life
business during the period from December 31, 1997 through the Plan Effective
Date. See Note 4 to the Pro Forma Condensed Consolidated Financial Information
for a summary of the type and amount of assets that would have been allocated to
the Closed Block on a pro forma basis if the Transaction and the establishment
of the Closed Block had occurred as of June 30, 1998.
New investments for the Closed Block acquired on and after January 1, 1998
will consist of cash and short-term securities having an NAIC designation of 1
or a comparable rating by a nationally recognized rating agency, fixed maturity
securities having an NAIC designation of 1, 2 or 3
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and commercial and agricultural mortgage loans having an average debt service
coverage ratio of at least 1.20. No new investments will be made in equity real
estate, mortgage loans or obligations rated below the NAIC categories described
above, except to safeguard the value in existing investments allocated to the
Closed Block or to honor existing commitments. The Closed Block reinvestment
policies may not be changed without the New York Superintendent's prior
approval.
Had the Closed Block been established as of June 30, 1998, the liabilities
associated with the Closed Block would have aggregated approximately $7,234.4
million, including $6,618.9 million of reserves for future policy benefits,
$295.9 million of policyholders' account balances and $159.6 million of other
policyholder liabilities. The carrying value of the assets to be allocated to
the Closed Block at the Plan Effective Date will be less than the carrying
amount of the Closed Block liabilities at such date because, in addition to such
assets, the net cash flows from the Closed Block Business subsequent to the Plan
Effective Date will be used to fund the Closed Block liabilities. Accordingly,
in determining the amount of assets to be allocated to the Closed Block on the
Plan Effective Date, management has made certain estimates and assumptions
regarding the expected cash flows from the Closed Block Business subsequent to
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. See Note 1 to
the Pro Forma Condensed Consolidated Financial Information for a discussion of
how future contributions from the Closed Block will affect future results of
operations.
OTHER INDIVIDUAL PARTICIPATING POLICIES
Under the Plan, MONY is subject to special requirements relating to the
distribution of dividends with respect to certain classes of individual
participating policies that are in force on the Plan Effective Date and are not
included in the Closed Block. These classes of participating policies consist of
module ordinary life insurance policies including Legal Professional Life, fixed
account riders to the participating individual variable annuity contracts,
medical insurance policies and disability income policies. With respect to such
policies, MONY will distribute dividends as set forth in the Plan.
FEDERAL TAX CONSEQUENCES
The following discussion is based on relevant portions of the Code, the
Treasury regulations promulgated thereunder, published revenue rulings and
judicial decisions in effect as of the date of this Prospectus. There can be no
assurance that future changes in applicable law or administrative and judicial
interpretations thereof, which changes may have retroactive effect, will not
adversely affect the tax consequences discussed herein or that there will not be
differences of opinion as to the interpretation of applicable law. The following
discussion is for general information only, addresses only Federal income tax
consequences and does not attempt to address all the possible tax consequences
which may apply to any given taxpayer.
MONY has received an opinion of Chadbourne & Parke LLP, independent tax
counsel, regarding the Federal income tax consequences of the Demutualization.
The opinion provides as follows:
Eligible Policyholders will not recognize any gain for Federal income tax
purposes as a result of (i) the surrender of their policyholders' membership
interests pursuant to the Plan or (ii) the receipt of Common Stock pursuant to
the Plan, except that an Eligible Policyholder will generally recognize gain to
the extent of any cash received in the Plan. Moreover, Eligible Policyholders
will not recognize gain on the receipt of Policy Credits. The payment of
consideration in the form of Policy Credits in accordance with the Plan will not
(i) cause disqualification of the tax attributes or status accorded to those (1)
individual life insurance policies or individual annuity contracts that have
been issued pursuant to plans qualified under Section 401(a) or 403(a) of the
Code, or (2) individual retirement annuities within the meaning of Section 408
of the Code or tax deferred annuities
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qualified under Section 403(b) of the Code (including those issued to employees
of organizations described in Section 501(c)(3) of the Code), to which such
Policy Credits have been credited, or (ii) result in penalties for the holders
of those plans, policies and contracts referred to in the preceding clause (i).
The Demutualization of the Company pursuant to the Plan, including without
limitation the receipt of MONY common stock by the Holding Company and the
extinguishment of the policyholders' membership interests, will not result in
the recognition of any gain for Federal income tax purposes by either the
Company or the Holding Company; and insurance policies issued or purchased
before the Plan Effective Date will not be deemed re-issued, issued in exchange
for existing policies or purchased as a result of the Demutualization.
The affiliated group of which MONY was the common parent immediately before
the Demutualization will remain in existence, the Holding Company will become
the new common parent of such group and MONY will continue to be an eligible
corporation for purposes of its inclusion in the group.
The opinion of Chadbourne & Parke LLP is based on the accuracy of certain
representations and undertakings by MONY. Management believes, based on the
opinion MONY has obtained from such tax counsel, that MONY will not realize any
significant income for Federal income tax purposes as a result of the
Demutualization, and MONY's Federal income tax attributes, including its basis
and holding period in its assets, any net operating loss or capital loss
carryforwards and tax accounting methods, will not be significantly affected by
the Demutualization. In this regard, based on the number of shares of the
Holding Company contemplated to be issued in the Demutualization and in the
Offerings and issuable upon exercise of the Warrants, tax counsel has concluded
that it is unlikely that MONY will undergo an "ownership change" which might
limit MONY's ability to use net operating loss and tax credit carryforwards.
USE OF PROCEEDS
The net proceeds to the Holding Company from the Offerings are estimated to
be $234.9 million (or $270.5 million if the Underwriters' over-allotment options
are exercised in full) after deducting the underwriting discount and estimated
expenses of the Offerings. The $234.9 million estimated net proceeds of the
Offerings will be: (i) first, contributed to MONY in the amount of $100 million
to be used for general operations of MONY or, in the absence of sufficient net
proceeds in excess of $100 million, to provide for the amounts required for any
of the purposes stated in clauses (ii), (iii) or (iv) hereof; (ii) then,
contributed to MONY in an amount sufficient to enable MONY to fund all of the
Policy Credits required to be credited to Eligible Policyholders pursuant to the
Plan; (iii) then, retained by the Holding Company in an amount sufficient to
enable the Holding Company 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); (iv) then, contributed to MONY in
an amount sufficient to enable MONY to satisfy the undertaking of MONY to pay
the expenses of the Demutualization as required by the New York Insurance Law;
(v) then, retained by the Holding Company in an amount not to exceed $10 million
to provide working capital for the Holding Company; (vi) then, retained by the
Holding Company in an amount not to exceed $30 million to pay dividends on the
stock of the Holding Company; (vii) then, retained by the Holding Company in an
amount not to exceed 25% of the proceeds of the Offerings (net of underwriting
commissions and expenses related thereto) to pay cash to Eligible Policyholders
who are to receive cash pursuant to an expression of a preference to receive
cash; and (viii) then, to the extent that such net proceeds exceed the aggregate
of the amounts identified in clauses (i), (ii), (iii), (iv), (v), (vi) and
(vii), and, to the extent that the amount retained by the Holding Company
pursuant to each of clauses (iii), (vi) and (vii) is not used for the purpose
stated in each such clause, promptly contributed to MONY to be used for general
operations of MONY.
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DIVIDENDS
The Holding Company Board has adopted a resolution expressing its intention
to declare a quarterly cash dividend of $0.10 per share on the Common Stock
commencing in the first quarter of 1999. The declaration of dividends will be
reviewed periodically by the Holding Company Board in light of the Company's
earnings, financial condition and capital requirements, and such dividend may be
adjusted or eliminated at the discretion of the Holding Company Board on the
basis of these or other considerations.
As a holding company, the Holding Company's ability to meet its cash
requirements and pay dividends on the Common Stock will depend in large part
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.
See "Risk Factors -- Holding Company Structure; Restrictions on Dividends" and
"Business -- Regulation -- Shareholder Dividend Restrictions".
44
<PAGE> 46
CAPITALIZATION
The following table sets forth at June 30, 1998: (i) the unaudited
historical consolidated capitalization of the Company, (ii) such capitalization
on a pro forma basis to reflect the transactions consummated in connection with
the Demutualization, as if the Demutualization had occurred as of June 30, 1998,
and (iii) the pro forma capitalization of the Company described in clause (ii)
as adjusted to reflect the sale of 11,250,000 shares of Common Stock in the
Offerings at an assumed initial public offering price of $22.50 per share, which
is the mid-point of the offering price range stated on the cover of this
Prospectus, as if such sale had occurred as of June 30, 1998, and the
application of the net proceeds therefrom as described in "Use of Proceeds"
(after deducting the underwriting discount and estimated offering expenses
payable by the Company). Since management does not currently expect to require
the purchase of the Convertible Preferred Stock, the following table does not
reflect the issuance of the Convertible Preferred Stock. See "Certain Provisions
of the Investment -- General" and "Description of Capital Stock -- Preferred
Stock -- Convertible Preferred Stock". This table should be read in conjunction
with the audited Consolidated Financial Statements and the Unaudited Interim
Condensed Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Information of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE AS ADJUSTED FOR
HISTORICAL DEMUTUALIZATION THE OFFERINGS
---------- --------------- ---------------
($ IN MILLIONS)
<S> <C> <C> <C>
DEBT:(1)
Short-term debt.................................. $ -- $ -- $ --
Long-term debt................................... 418.9 418.9 418.9
-------- -------- --------
Total debt............................. 418.9 418.9 418.9
EQUITY:
Common Stock, $0.01 par value; 400 million shares
authorized; 1,000 shares issued and outstanding
historical; 45.3 million shares issued and
outstanding pro forma as adjusted.............. 0.4 0.5
Preferred Stock, $0.01 par value; 100 million --
shares authorized; no shares issued and
outstanding.................................... -- --
Capital in excess of par......................... -- 1,267.2 1,502.0
Retained earnings(2)............................. 1,320.9 -- --
Accumulated and other comprehensive income....... 128.0 128.0 128.0
-------- -------- --------
Total equity..................................... 1,448.9 1,395.6 1,630.5
-------- -------- --------
TOTAL CAPITALIZATION............................. $1,867.8 $1,814.5 $2,049.4
======== ======== ========
</TABLE>
- ---------------
(1) Historical amounts are comprised of $110.5 million, $115.0 million, $186.6
million and $6.8 million relating to the Company's 11.25% Surplus Notes, the
MONY Notes, mortgages on certain real estate properties owned by the Company
and a debt obligation associated with a sale-leaseback arrangement entered
into by the Company. See Note 17 to the Consolidated Financial Statements
for a detailed description of each of the aforementioned obligations.
(2) Pro forma retained earnings amounts reflected above are net of $15.0
million, which represents management's best estimate of the remaining
after-tax amount of direct Demutualization expenses (excluding costs
incurred in connection with the Offerings) expected to be incurred
subsequent to June 30, 1998 through the Plan Effective Date, which would
have been incurred as of June 30, 1998 if the Demutualization had occurred
on such date.
45
<PAGE> 47
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
for the Company. The selected consolidated financial information for each of the
years in the three-year period ended December 31, 1997 and at December 31, 1997
and 1996 has been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, included elsewhere herein
and should be read in conjunction with and is qualified by reference to such
statements and related notes. The consolidated financial information at December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 has
been derived from unaudited consolidated financial information not included
elsewhere herein which, in the opinion of management, presents fairly such
consolidated financial information in conformity with GAAP. The selected
consolidated financial information for the six-month periods ended June 30, 1998
and 1997, and at June 30, 1998, has been derived from unaudited interim
condensed consolidated financial statements included herein. The selected
consolidated financial information at June 30, 1997 has been derived from
unaudited interim condensed consolidated financial statements not included
elsewhere herein. In the opinion of the Company's management, all unaudited
interim condensed consolidated financial information presented in the table
below reflects all adjustments (consisting of normal, recurring accruals)
necessary for a fair statement of the Company's consolidated financial position
and results of operations for such periods. The results of operations for the
six months ended June 30, 1998 are not necessarily indicative of the results to
be expected for the full year. This summary financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Company's consolidated financial statements and
the notes thereto and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS
ENDED
JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(1)
Revenues:
Premiums............................ $ 353.8 $ 411.9 $ 838.6 $ 859.8 $ 875.9 $ 890.6 $ 919.6
Universal life and investment-type
product policy fees............... 74.3 54.4 127.3 100.9 80.8 69.8 75.1
Net investment income............... 357.7 359.6 733.0 751.6 728.8 666.9 953.7
Net realized gains (losses) on
investments(2).................... 157.6 42.6 72.1 75.9 16.2 (8.8) 18.2
Group Pension Profits(3)............ 22.7 28.2 60.0 59.5 61.7 90.4 0.0
Other income........................ 78.4 58.8 145.4 117.3 96.2 107.6 72.4
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................... 1,044.5 955.5 1,976.4 1,965.0 1,859.6 1,816.5 2,039.0
Benefits and expenses:
Benefits to policyholders........... 379.7 423.9 840.1 872.2 883.6 866.5 895.4
Interest credited to policyholders'
account balances.................. 61.2 70.8 139.4 156.1 175.3 180.0 388.0
Amortization of deferred policy
acquisition costs................. 70.8 68.4 181.2 158.2 132.6 138.9 110.9
Dividends to policyholders.......... 108.4 117.8 224.3 231.4 222.5 211.1 221.1
Other operating costs and
expenses.......................... 224.5 196.1 403.7 446.6(4) 383.8 355.0 378.0
--------- --------- --------- --------- --------- --------- ---------
Total benefits and expenses....... 844.6 877.0 1,788.7 1,864.5 1,797.8 1,751.5 1,993.4
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS
ENDED
JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary item.................. 199.9 78.5 187.7 100.5 61.8 65.0 45.6
Income tax expense(5)................. 71.8 32.0 57.3 44.0 21.4 42.9 13.2
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item...... 128.1 46.5 130.4 56.5 40.4 22.1 32.4
Extraordinary item -- demutualization
expenses, net....................... 9.7 2.4 13.3 0.0 0.0 0.0 0.0
--------- --------- --------- --------- --------- --------- ---------
Net income............................ 118.4 44.1 117.1 56.5 40.4 22.1 32.4
========= ========= ========= ========= ========= ========= =========
Other comprehensive income (loss),
net(6).............................. 9.9 (17.3) 33.0 (59.9) 191.5 (216.4) 141.6
--------- --------- --------- --------- --------- --------- ---------
Comprehensive income (loss),
net............................. $ 128.3 $ 26.8 $ 150.1 $ (3.4) $ 231.9 $ (194.3) $ 174.0
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA:(1)
General:
General account assets.............. $12,753.6 $12,286.2 $12,493.3 $12,344.2 $12,531.9 $12,310.9 $12,397.1
Separate account assets............. 6,127.5 4,873.0 5,403.1 4,171.7 3,153.5 2,355.8 2,001.4
Assets transferred in Group Pension
Transaction....................... 5,720.5 5,538.5 5,714.9 5,627.6 5,992.8 5,660.1 6,457.3
Total assets...................... 24,601.6 22,697.7 23,611.3 22,143.5 21,678.2 20,326.8 20,855.8
Short-term debt..................... -- 41.5 0.0 153.0 157.8 0.7 2.3
Long-term debt...................... 418.9 273.4 423.6 269.7 420.6 504.0 458.5
Policyholders' liabilities.......... 10,042.2 10,068.7 10,060.7 10,070.6 10,199.7 10,250.7 10,271.9
Separate account liabilities........ 6,115.5 4,862.1 5,392.4 4,162.1 3,144.2 2,348.4 1,994.9
Liabilities transferred in Group
Pension Transaction(7)............ 5,682.3 5,518.6 5,638.7 5,544.1 5,855.7 5,608.0 6,386.7
Total liabilities................. 23,152.7 21,500.4 22,290.7 20,973.0 20,504.3 19,384.8 19,719.4
Equity.............................. 1,448.9 1,197.3 1,320.6 1,170.5 1,173.9 942.0 1,136.4
Real Estate and Mortgage Loans:(8)
Real estate, to be disposed of...... $ 339.1 $ 578.6 $ 621.2 $ 434.8 $ 717.4 $ 611.3 $ 0.0
Real estate held for investment..... 452.5 649.7 495.9 1,070.4 1,179.8 1,527.5 2,024.5
--------- --------- --------- --------- --------- --------- ---------
Subtotal.......................... 791.6 1,228.3 1,117.1 1,505.2 1,897.2 2,138.8 2,024.5
Mortgage loans on real estate....... 1,478.8 1,550.1 1,430.1 1,582.3 1,771.1 1,916.8 2,298.6
--------- --------- --------- --------- --------- --------- ---------
Total real estate and mortgage
loans on real estate............ $ 2,270.4 $ 2,778.4 $ 2,547.2 $ 3,087.5 $ 3,668.3 $ 4,055.6 $ 4,323.1
========= ========= ========= ========= ========= ========= =========
STATUTORY DATA:(9)
Capital and surplus (10)............ $ 849.8 $ 719.6 $ 835.4 $ 703.5 $ 689.0 $ 680.1 $ 600.2
Asset valuation reserve ("AVR")..... 332.9 318.5 348.6 317.7 285.3 244.0 238.2
--------- --------- --------- --------- --------- --------- ---------
Capital and surplus plus AVR...... $ 1,182.7 $ 1,038.1 $ 1,184.0 $ 1,021.2 $ 974.3 $ 924.1 $ 838.4
========= ========= ========= ========= ========= ========= =========
Net income.......................... $ 13.3 $ 43.3 $ 88.5 $ 62.7 $ 58.0 $ 87.5 $ 118.7
========= ========= ========= ========= ========= ========= =========
OTHER DATA:
Employee count...................... 2,324 2,281 2,312 2,078 2,329 2,498 2,811
Agent count(15)..................... 2,352 1,835 2,216 2,092 2,094 2,146 2,174
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED AS OF AND FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SEGMENT DATA:(1)(11)
Protection Products:
Premiums.......................................... $ 343.8 $ 403.4 $ 817.0 $ 837.4 $ 845.1
Universal life policy fees........................ 41.8 30.3 74.9 63.4 53.9
Net investment income and net realized gains on
investments..................................... 397.0 304.7 611.9 605.3 501.5
Group Pension Profits(3).......................... 22.7 28.2 60.0 59.5 61.7
Other income...................................... 8.5 9.2 34.9 28.2 23.3
--------- --------- --------- --------- ---------
Total revenues.................................. $ 813.8 $ 775.8 $ 1,598.7 $ 1,593.8 $ 1,485.5
========= ========= ========= ========= =========
Income before income taxes........................ $ 136.7 $ 48.3 $ 129.0 $ 101.2 $ 28.7
========= ========= ========= ========= =========
Policyholders' liabilities(12).................... $10,102.9 $10,317.7 $10,105.7 $ 9,996.2 $ 9,936.3
Separate account liabilities(13).................. 3,967.8 3,455.9 3,720.1 3,393.0 3,500.1
Assets(14)........................................ 16,218.3 15,291.9 15,776.5 15,158.5 15,213.2
Accumulation Products:
Premiums.......................................... $ 1.8 $ 2.8 $ 5.0 $ 4.2 $ 9.8
Investment-type product fees...................... 31.6 23.2 50.9 36.6 24.8
Net investment income and net realized gains on
investments..................................... 77.8 65.3 131.4 144.0 153.3
Other income...................................... 34.6 23.4 52.1 32.2 26.0
--------- --------- --------- --------- ---------
Total revenues.................................. $ 145.8 $ 114.7 $ 239.4 $ 217.0 $ 213.9
========= ========= ========= ========= =========
Income before income taxes........................ $ 50.0 $ 24.4 $ 44.1 $ 35.9 $ 34.2
========= ========= ========= ========= =========
Policyholders' liabilities........................ $ 1,332.2 $ 1,493.0 $ 1,416.1 $ 1,601.7 $ 1,797.2
Separate account liabilities...................... 4,598.1 3,469.8 4,002.6 2,851.4 1,928.1
Assets............................................ 6,285.8 5,266.4 5,757.9 4,747.2 3,981.7
Other Products:
Premiums.......................................... $ 8.2 $ 5.8 $ 16.6 $ 18.2 $ 21.0
Investment-type product fees...................... 0.9 0.9 1.5 0.9 2.1
Net investment income and net realized gains on
investments..................................... 38.9 30.9 59.9 74.6 85.4
Other income...................................... 32.4 23.5 53.1 52.2 42.0
--------- --------- --------- --------- ---------
Total revenues.................................. $ 80.4 $ 61.1 $ 131.1 $ 145.9 $ 150.5
========= ========= ========= ========= =========
Income before income taxes........................ $ 13.4 $ 5.8 $ 18.3 $ 8.1 $ 8.9
========= ========= ========= ========= =========
Policyholders' liabilities........................ $ 480.0 $ 321.9 $ 513.4 $ 542.4 $ 694.8
Separate account liabilities...................... 565.1 630.3 547.7 625.6 613.3
Assets............................................ 1,209.8 1,327.1 1,234.2 1,417.1 1,713.3
</TABLE>
- ---------------
(1) Prior to 1996, the Company, as a mutual life insurance company, prepared
its financial statements in conformity with accounting practices prescribed
or permitted by the New York Insurance Department, which accounting
practices were considered to be GAAP for mutual life insurance companies.
As of January 1, 1996, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises, and
Statement of Financial Accounting Standards ("SFAS") No. 120, Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Policies.
Interpretation No. 40 and SFAS No. 120 require mutual life insurance
companies to adopt all applicable authoritative GAAP pronouncements in
their general purpose financial statements.
48
<PAGE> 50
See Note 5 to the Consolidated Financial Statements. Accordingly, the
financial information presented in the Selected Consolidated Financial
Information for periods prior to 1996 has been derived from financial
information of the Company which has been retroactively restated to reflect
the adoption of all applicable authoritative GAAP pronouncements. All such
applicable pronouncements were adopted as of the effective date originally
specified in each such pronouncement. However, if the effective date of a
pronouncement was subsequent to the earliest financial information
presented herein, the Company applied the accounting alternative available
during such prior periods which was most consistent with the subsequent
pronouncement. The following sets forth the significant accounting
pronouncements with effective dates subsequent to the earliest financial
information presented herein, the effective dates of their adoption by the
Company and, if applicable, a description of the accounting followed by the
Company for periods presented herein prior to the effective date of such
pronouncements.
- SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was
adopted on a retroactive basis for the year ended December 31, 1993 and
subsequent years. For periods prior to the adoption of SFAS No. 114, the
Company established a policy to record impairment losses for troubled
loans based on discounted cash flows. The policy was substantially
consistent with SFAS No. 114 except that impairment losses were reflected
as permanent reductions in the cost basis of such loans. There was no
material effect on the Company's financial statements as a result of the
adoption of SFAS No. 114.
- SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, was adopted on a retroactive basis as of December 31, 1993 and
subsequent years.
- SFAS No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises for Certain Long-Duration Participating Contracts, was adopted
on a retroactive basis for the year ended December 31, 1992 and subsequent
years.
- SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was adopted for the year ended
December 31, 1994 and subsequent years. For periods prior to the adoption
of SFAS No. 121, the Company had no material real estate that it intended
to dispose of, and writedowns on impaired real estate were established if
the undiscounted cash flows were less than the carrying value. In such
cases, the asset was written down to the discounted cash flow amount.
Accordingly, there was no material effect on the Company's financial
statements as a result of the adoption of SFAS No. 121.
(2) Includes writedowns for impairment and net changes in valuation allowances
on real estate, mortgage loans and investment securities aggregating $5.5
million and $45.2 million for the six-month periods ended June 30, 1998 and
1997, respectively, and $76.0 million, $20.1 million, $54.3 million, $49.3
million and $8.0 million for the years ended December 31, 1997, 1996, 1995,
1994 and 1993, respectively.
(3) The Group Pension Transaction occurred on December 31, 1993. See
"Business -- The Group Pension Transaction".
(4) Other operating costs and expenses for the year ended December 31, 1996
include: (i) approximately $27.6 million relating to settlements of, and
reserves for, various legal disputes including lawsuits against the Company
alleging market conduct improprieties (see Note 19 to the consolidated
financial statements), (ii) $5.1 million of legal expenses relating to the
aforementioned legal disputes and lawsuits and (iii) approximately $14.0
million relating to special termination benefits paid to certain employees
under an early retirement program offered by the Company in April of 1996
(see Note 8 to the Consolidated Financial Statements).
(5) As a mutual life insurance company, the Company is subject to the add-on
(surplus) tax imposed on mutual life insurance companies under Section 809
of the Code. Section 809 requires (and the surplus tax results from) the
disallowance of a portion of a mutual life insurance company's policyholder
dividends as a deduction from taxable income. The income
49
<PAGE> 51
tax expense (benefit) amounts include $1.9 million, $4.4 million, $(5.8)
million, $12.8 million, $0.0 million, $23.0 million and $0.3 million of
surplus tax for the six months ended June 30, 1998 and 1997 and the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. See "Pro
Forma Condensed Consolidated Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
(6) During 1997, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in general purpose financial
statements. All periods presented herein reflect the adoption of SFAS No.
130. For all periods presented, other comprehensive income consists only of
the change in unrealized gains and losses on the Company's fixed maturity
and equity securities and is presented net of the effect of such unrealized
gains (losses) attributable to deferred acquisition costs and deferred
Federal income taxes. See Note 12 to the Consolidated Financial Statements.
(7) Includes liabilities transferred in connection with the Group Pension
Transaction pursuant to indemnity reinsurance of $167.2 million, $191.6
million, $173.9 million, $204.4 million, $276.9 million, $1,090.9 million
and $6,360.1 million as of June 30, 1998 and 1997 and December 31, 1997,
1996, 1995, 1994 and 1993, respectively (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 11 to
the Consolidated Financial Statements).
(8) Amounts presented do not include real estate and mortgage loan assets
transferred to AEGON in the Group Pension Transaction (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 11 to the Consolidated Financial Statements).
(9) Statutory data have been derived from the Annual and Quarterly Statements
of MONY and MLOA, as filed with insurance regulatory authorities.
(10) In accordance with accounting practices prescribed or permitted by the New
York Insurance Department statutory capital and surplus includes $187.3
million, $72.3 million, $187.3 million, $72.3 million, $72.3 million and
$72.3 million relating to the Company's outstanding surplus notes at June
30, 1998 and 1997 and December 31, 1997, 1996, 1995 and 1994, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 17 to
the Consolidated Financial Statements.
(11) During 1997, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in their annual and interim financial statements.
The segment data presented herein reflect the adoption of SFAS No. 131 on a
retroactive basis beginning with the year ended December 31, 1995. Excluded
from the Company's operating segments are revenues, expenses, assets and
liabilities relating to contracts issued by the Company with respect to its
employee benefit plans, as well as any nonrecurring or unusual items. Such
amounts constitute reconciling items in accordance with SFAS No. 131.
Accordingly, see Note 6 to the Consolidated Financial Statements for a
reconciliation of amounts reported for the Company's operating segments to
such amounts reported in the Company's consolidated financial statements.
(12) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,890.9 million, $2,086.3 million, $1,991.0 million,
$2,158.1 million, and $2,315.1 million as of June 30, 1998 and 1997, and
December 31, 1997, 1996, and 1995, respectively (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 11 to the Consolidated Financial Statements).
(13) Includes separate account liabilities transferred in the Group Pension
Transaction of $3,761.2 million, $3,397.2 million, $3,614.0 million,
$3,358.3 million, and $3,495.4 million as of June 30,
50
<PAGE> 52
1998 and 1997, and December 31, 1997, 1996, and 1995, respectively (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 to the Consolidated Financial Statements).
(14) Includes assets transferred in the Group Pension Transaction of $5,720.5
million, $5,538.5 million, $5,714.9 million, $5,627.5 million and $5,992.8
million as of June 30, 1998 and 1997, and December 31, 1997, 1996, and
1995, respectively (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 to the Consolidated
Financial Statements).
(15) Includes international agents of 134, 75, 96, 75, 53, 30 and 27 as of June
30, 1998 and 1997 and December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
For certain unaudited summary information with respect to the Company's
results of operations for the three- and nine-month periods ended September 30,
1998 and 1997, and balance sheet data as of September 30, 1998, see "Recent
Developments".
51
<PAGE> 53
RECENT DEVELOPMENTS
Set forth below is certain unaudited summary information with respect to
the Company's results of operations for the three- and nine-month periods ended
September 30, 1998 and 1997, and balance sheet data as of September 30, 1998.
The results of operations for the three- and nine-month periods ended September
30, 1998 are not necessarily indicative of the results to be achieved for the
full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Total revenues.................................... $463.4 $473.4 $1,507.9 $1,428.9
Total benefits and expenses....................... 402.7 418.8 1,247.3 1,295.8
------ ------ -------- --------
Income before federal income tax expense 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 of tax............ 44.2 28.7 54.1 11.4
------ ------ -------- --------
Comprehensive income............................ $ 79.6 $ 72.1 $ 207.9 $ 98.9
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
---------------
($ IN MILLIONS)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
General account assets...................................... $12,682.5
Separate account assets..................................... 5,501.3
Assets transferred in Group Pension Transaction............. 5,721.9
---------
Total assets...................................... $23,905.7
=========
Long-term debt.............................................. $ 373.7
Policyholder liabilities.................................... 10,061.2
Separate account liabilities................................ 5,490.8
Liabilities transferred in Group Pension Transaction........ 5,649.7
Other liabilities........................................... 801.8
---------
Total liabilities................................. 22,377.2
Retained earnings........................................... 1,356.3
Accumulated other comprehensive income...................... 172.2
---------
Total equity................................................ 1,528.5
Total liabilities and equity................................ $23,905.7
=========
</TABLE>
52
<PAGE> 54
The following summarizes the significant changes in revenues and expenses
reported by the Company during the three- and nine-month periods ended September
30, 1998, as compared to the corresponding period in the prior year:
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO 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
for the corresponding period in the prior year. The Company's provision for
income tax expense for the three-month periods 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. In addition, included
in income for the three-month periods ended September 30, 1998 and 1997 were net
realized gains on investments of $12.0 million and $14.4 million, respectively.
Net realized gains on investments during the three-month period ended September
30, 1998 included gains of approximately $23.5 million from sales of real
estate, gains of approximately $6.5 million on sales of fixed maturity
securities, losses of approximately $10.1 million on sales of common stock, and
approximately $9.9 million of other than temporary impairment charges, which
primarily related to investments in foreign and emerging market government debt
securities.
Consolidated revenues were $463.4 million for the three months ended
September 30, 1998, a decrease of $10.0 million or 2.1%, as compared to $473.4
million reported for the comparable period in the prior year. The decrease in
revenues primarily resulted from:
(i) a decrease in premiums of approximately $30.7 million, which
primarily consisted of a decrease of $18.9 million relating to the
transfer of the Company's disability income insurance business
pursuant to the DI Transaction (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations"), lower
new traditional life premiums of $3.3 million, lower single
premiums of $3.0 million due to a reduction in the Company's
dividend scale (substantially all single premiums result from
policyholders electing to buy additional insurance coverage with
dividends received on existing policies), and lower renewal
traditional life premiums of $4.5 million,
(ii) lower Group Pension Profits of approximately $4.6 million
primarily resulting from the release, in the comparable prior
period, of mortgage loan reserves, OFFSET IN PART BY
(iii) an increase in investment income of approximately $13.0 million,
which primarily consists of higher investment income from fixed
maturities and investments in limited partnership interests,
offset by lower investment income from investments in real
estate, and
(iv) higher fees of $5.2 million earned by the Company's mutual fund
management operations.
Consolidated benefits and expenses were $402.7 million for the three months
ended September 30, 1998, a decrease of $16.1 million or 3.8%, as compared to
$418.8 million reported in the comparable period in the prior year. The decrease
in benefits and expenses primarily resulted from:
(i) a decrease in benefits to policyholders of approximately $21.0
million, which primarily consisted of a decrease of $13.0 million
relating to the transfer of the Company's disability income
insurance business pursuant to the DI Transaction (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations"),
53
<PAGE> 55
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 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,
(ii) lower dividends of approximately $3.4 million due to a reduction,
in the fourth quarter of 1997, in the interest component of the
dividend scales on all dividend paying policies, OFFSET IN PART BY
(iii) an increase in other operating costs and expenses of approximately
$7.2 million, which consisted primarily of higher costs associated
with addressing the Year 2000 issue, restructuring of the
Company's career agency sales force and other strategic
initiatives, higher sub-advisory fees and other expenses incurred
by the Company's mutual fund management operations, higher
commissions and other expenses incurred by the Company's
broker-dealer operations, higher interest expense relating to the
MONY Notes issued on December 30, 1997, and a decrease in the fair
value of the Company's liability under its non-qualified pension
plan.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO 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 for the
corresponding period in the prior year. The Company's provision for federal
income taxes for the nine-month periods ended September 30, 1998 and 1997
(including the tax effect of demutualization expenses) was approximately $90.3
million and $40.6 million. The aforementioned federal income tax expense
included no provision for surplus tax for the period ended September 30, 1998
and a net credit of approximately $4.4 million for the period ended September
30, 1997, which related to a revised estimate of the amount of surplus tax
payable for 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. In addition, included in income for
the nine-month periods ended September 30, 1998 and 1997 were net realized gains
on investments of $169.6 million and $57.0 million, respectively.
Consolidated revenues were $1,507.9 million for the nine months ended
September 30, 1998, an increase of $79.0 million or 5.5%, as compared to
$1,428.9 million reported in the comparable period in the prior year. The
increase in revenues primarily resulted from:
(i) an increase of approximately $20.9 million in investment-type
product policy fees,
(ii) an increase in net investment income of approximately $11.1
million, which primarily consisted of lower depreciation expense
on investments in real estate due to sales and additions to real
estate to be disposed of, higher income from investments in
limited partnership interests, higher investment expenses, and
lower reinvestment rates during the period,
(iii) higher realized gains on investments of approximately $112.6
million, which primarily consisted of lower valuation allowances
on real estate to be disposed of approximately $42.7 million,
higher realized gains on sales of real estate of approximately
$92.4 million, higher gains on dispositions of bonds of
approximately $12.5 million, higher mortgage prepayment and other
gains of $9.6 million, lower gains on sales of common stock of
$23.9 million, higher charges of approximately $10.7 million for
other than temporary impairment of investments primarily related
to foreign and
54
<PAGE> 56
emerging market government debt securities, and higher mortgage
loan valuation allowances of approximately $10.4 million,
(iv) higher fees of $16.0 million earned by the Company's mutual fund
management operations,
(v) higher commissions of $8.7 million earned by the Company's
broker-dealer operations, OFFSET IN PART BY
(vi) a decrease in premiums of approximately $84.5 million, which
primarily consisted of a decrease of $55.5 million relating to the
transfer of the Company's disability income insurance business
pursuant to the DI Transaction (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations"), 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 scale, and lower renewal traditional life premiums of
$15.5 million, and
(vii) lower Group Pension Profits of approximately $10.1 million
primarily resulting from higher valuation allowances in 1998 for
impaired mortgages and the release of mortgage loan reserves in
the comparable prior period.
Consolidated benefits and expenses were $1,247.3 million for the nine
months ended September 30, 1998, a decrease of $48.5 million or 3.7%, as
compared to $1,295.8 million reported in the comparable period in the prior
year. The decrease in benefits and expenses primarily resulted from:
(i) a decrease in benefits to policyholders of approximately $65.2
million, which primarily consisted of a decrease of $50.9 million
relating to the transfer of the Company's disability income
insurance business pursuant to the DI Transaction (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations"), 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,
(ii) lower dividends of approximately $12.8 million due to a reduction
in the fourth quarter of 1997 in the interest component of the
dividend scales on all policies, OFFSET IN PART BY
(iii) an increase in other operating costs and expenses of
approximately $34.4 million, which primarily consisted of Year
2000 costs, costs incurred in restructuring the Company's career
agency sales force and other strategic initiatives, higher sub-
advisory fees and other expenses incurred by the Company's
mutual fund management operations, higher commissions and other
expenses incurred by the Company's broker-dealer operations,
higher interest expense primarily relating to the MONY Notes
issued on December 30, 1997, and a decrease relating to a
reduction in the fair value of the Company's liability under its
non-qualified pension plan.
55
<PAGE> 57
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The pro forma condensed consolidated financial information (the "Pro Forma
Information") presented below gives effect to (i) the Transaction and (ii) the
establishment of the Closed Block as if the Transaction and the establishment of
the Closed Block had occurred as of June 30, 1998 for purposes of the pro forma
condensed consolidated balance sheet and as of January 1, 1997 for purposes of
the pro forma condensed consolidated statements of income and comprehensive
income. The Pro Forma Information has been prepared based on the Plan and
certain assumptions set forth below. See "The Demutualization".
The basic assumptions used in the Pro Forma Information are as follows: (i)
the pro forma Closed Block liabilities exceed the pro forma Closed Block assets
at June 30, 1998 by $1,152.8 million, (ii) 11,250,000 shares of Common Stock are
issued in the Offerings at an initial public offering price of $22.50 per share,
which is the mid-point of the offering price range stated on the cover of this
Prospectus, (iii) a total of 35.7 million shares of Common Stock are allocated
to policyholders under the Plan, (iv) 1.7 million shares of Common Stock are
allocated but not issued to policyholders who, under the Plan, receive payments
in the form of cash or Policy Credits rather than in shares of Common Stock at a
per share price equal to the assumed initial public offering price of $22.50 per
share, (v) the Warrants are not exercised, (vi) a Federal income tax rate of 35%
is used to show the income tax effects of the pro forma adjustments, (vii) the
Underwriters' over-allotment options are not exercised and (viii) the
Convertible Preferred Stock is not issued.
The Pro Forma Information reflects estimated gross and net proceeds of the
Offerings of $253.1 million and $234.9 million, respectively. Of these estimated
net proceeds, it is assumed that (i) $18.3 million will be used to pay cash to
Eligible Policyholders pursuant to the terms of the Plan, including the amount
used to pay cash pursuant to an expression of a preference to receive cash in
lieu of Common Stock, which amount will not exceed 25% of the net proceeds of
the Offerings, (ii) the Holding Company will contribute to MONY cash in the
amount of $20.0 million to fund the Policy Credits to be credited to Eligible
Policyholders, (iii) $156.6 million will be contributed by the Holding Company
to MONY as a capital contribution (which includes $38.0 million for
reimbursement of the after-tax cost of nonrecurring expenses directly
attributable to the Demutualization) and (iv) the remainder of $40.0 million
will be retained by the Holding Company to pay expenses of, and provide working
capital for, the Holding Company, as well as to pay dividends on the stock of
the Holding Company and for other general corporate purposes. See "Use of
Proceeds".
The Demutualization will be accounted for using the historical carrying
liabilities of the Company.
The Pro Forma Information is based on available information and on
assumptions management believes are reasonable and that reflect the effects of
the Transaction and the establishment of the Closed Block. The Pro Forma
Information is provided for informational purposes only and should not be
construed to be indicative of the Company's consolidated financial position or
its consolidated results of operations had the Transaction and the establishment
of the Closed Block been consummated on the dates assumed, and does not in any
way represent a projection or forecast of the Company's consolidated financial
position or consolidated results of operations for any future date or period.
The Pro Forma Information should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus and with the information set forth under "The Demutualization",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Capital Stock".
56
<PAGE> 58
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------------------
ESTABLISHMENT
OF THE CLOSED TRANSACTION
HISTORICAL BLOCK(1) ADJUSTMENTS(2) PRO FORMA
---------- ------------- -------------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS:
Investments:
Securities available-for-sale at fair value
Fixed maturities.............................. $ 6,282.4 $(3,397.7) $ $ 2,884.7
Equity securities............................. 378.1 378.1
Mortgage loans on real estate................... 1,478.8 (525.1) 953.7
Policy loans.................................... 1,252.6 (1,197.3) 55.3
Real estate to be disposed of................... 339.1 339.1
Real estate held for investment................. 452.5 452.5
Other invested assets........................... 57.0 (0.5) 56.5
--------- --------- --------- ---------
Total investments......................... 10,240.5 (5,120.6) 5,119.9
Cash and cash equivalents......................... 492.4 (120.8) $ (18.3)A 573.2
(15.0)B
234.9 C
Accrued investment income......................... 192.3 (120.7) 71.6
Amounts due from reinsurers....................... 579.8 (127.2) 452.6
Premiums receivable............................... 19.2 (15.9) 3.3
Deferred policy acquisition costs................. 990.0 (576.1) 413.9
Other assets...................................... 239.4 (0.3) 239.1
Assets transferred in Group Pension
Transaction..................................... 5,720.5 5,720.5
Separate account assets........................... 6,127.5 6,127.5
Closed Block assets............................... 6,081.6 6,081.6
--------- --------- --------- ---------
Total assets.............................. $24,601.6 $ -- $ 201.6 $24,803.2
========= ========= ========= =========
LIABILITIES:
Future policy benefits............................ $ 7,543.0 $(6,618.9) $ 20.0 A $ 944.1
Policyholders' account balances................... 2,249.1 (295.9) 1,953.2
Other policyholder liabilities.................... 250.1 (159.6) 90.5
Amounts due to reinsurers......................... 96.4 (96.0) 0.4
Accounts payable and other liabilities............ 634.7 (54.4) 580.3
Short-term debt................................... 0.0 --
Long-term debt.................................... 418.9 418.9
Current federal income taxes payable.............. 145.9 (9.6) 136.3
Deferred federal income taxes..................... 16.8 16.8
Liabilities transferred in Group Pension
Transaction..................................... 5,682.3 5,682.3
Separate account liabilities...................... 6,115.5 6,115.5
Closed Block liabilities.......................... 7,234.4 7,234.4
--------- --------- --------- ---------
Total liabilities......................... 23,152.7 -- 20.0 23,172.7
EQUITY:
Common Stock, $0.01 par value; 400 million shares
authorized; 1,000 shares issued and outstanding
historical; 45.3 million shares issued and
outstanding pro forma........................... 0.1 C 0.5
0.4 D
Preferred Stock, $0.01 par value; 100 million
shares authorized; no shares issued and
outstanding.....................................
Capital in excess of par.......................... 234.8 C 1,502.0
1,267.2 D
Retained earnings................................. 1,320.9 (38.3)A
(15.0)B
(1,267.6)D
Accumulated other comprehensive income............ 128.0 128.0
--------- --------- --------- ---------
Total equity.............................. 1,448.9 -- 181.6 1,630.5
--------- --------- --------- ---------
Total liabilities and equity.............. $24,601.6 $ -- $ 201.6 $24,803.2
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this Pro Forma
Condensed Consolidated Balance Sheet.
57
<PAGE> 59
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------
ESTABLISHMENT
OF THE TRANSACTION
HISTORICAL CLOSED BLOCK(1) ADJUSTMENTS(3) PRO FORMA
---------- --------------- -------------- ---------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Premiums................................ $ 353.8 $(299.6) $ $ 54.2
Universal life and investment-type
product policy fees................... 74.3 -- 74.3
Net investment income................... 357.7 (184.0) 173.7
Net realized gains on investments....... 157.6 (7.5) 150.1
Group Pension Profits................... 22.7 -- 22.7
Other income............................ 78.4 (0.8) 77.6
Contribution from the Closed Block...... 26.6 26.6
-------- ------- ------ ------
Total revenues................ 1,044.5 (465.3) 579.2
BENEFITS AND EXPENSES:
Benefits to policyholders............... 379.7 (309.7) 70.0
Interest credited to policyholders'
account balances...................... 61.2 (3.7) 57.5
Amortization of deferred policy
acquisition costs..................... 70.8 (40.8) 30.0
Dividends to policyholders.............. 108.4 (106.9) 1.5
Other operating costs and expenses...... 224.5 (4.2) 220.3
-------- ------- ------ ------
Total benefits and expenses... 844.6 (465.3) 379.3
-------- ------- ------ ------
Income before income taxes and
extraordinary item.................... 199.9 -- 199.9
Income tax expense...................... 71.8 -- (1.9) C 69.9
-------- ------- ------ ------
Income before extraordinary item........ 128.1 -- 1.9 130.0
Other comprehensive income, net......... 9.9 -- 9.9
-------- ------- ------ ------
Comprehensive income before
extraordinary item.......... $ 138.0 $ -- $ 1.9 $139.9
======== ======= ====== ======
Shares used in the calculation of basic
and diluted income before
extraordinary item per share (Note
3(D))................................. 45.3
======
Basic and diluted income before
extraordinary item per share..........
$ 2.87
======
</TABLE>
The accompanying notes are an integral part of this Pro Forma
Condensed Consolidated Statement of Income and Comprehensive Income.
58
<PAGE> 60
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
ESTABLISHMENT OF
THE CLOSED TRANSACTION
HISTORICAL BLOCK(1) ADJUSTMENTS(3) PRO FORMA
---------- ---------------- -------------- ---------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Premiums............................. $ 838.6 $(670.2) $ $168.4
Universal life and investment-type
product policy fees................ 127.3 -- 127.3
Net investment income................ 733.0 (375.0) 358.0
Net realized gains on investments.... 72.1 (7.2) 64.9
Group Pension Profits................ 60.0 -- 60.0
Other income......................... 145.4 -- 145.4
Contribution from the Closed Block... -- 71.4 71.4
-------- ------- ------ ------
Total revenues............. 1,976.4 (981.0) 995.4
BENEFITS AND EXPENSES:
Benefits to policyholders............ 840.1 (672.8) 167.3
Interest credited to policyholders'
account balances................... 139.4 -- 139.4
Amortization of deferred policy
acquisition costs.................. 181.2 (81.5) 99.7
Dividends to policyholders........... 224.3 (221.3) 3.0
Other operating costs and expenses... 403.7 (5.4) 10.9A 409.2
-------- ------- ------ ------
Total benefits and
expenses................. 1,788.7 (981.0) 10.9 818.6
-------- ------- ------ ------
Income before income taxes and
extraordinary item................. 187.7 -- (10.9) 176.8
Income tax expense................... 57.3 -- (3.8) 53.5
-------- ------- ------ ------
Income before extraordinary item..... 130.4 -- (7.1) 123.3
Other comprehensive income, net...... 33.0 -- 33.0
-------- ------- ------ ------
Comprehensive income before
extraordinary item....... $ 163.4 $ -- $ (7.1) $156.3
======== ======= ====== ======
Shares used in the calculation of
basic and diluted income before
extraordinary item per share (Note
3(D)):............................. 45.3
======
Basic and diluted income before
extraordinary item per share....... $ 2.72
======
</TABLE>
The accompanying notes are an integral part of this Pro Forma
Condensed Consolidated Statement of Income and Comprehensive Income.
59
<PAGE> 61
- ---------------
(1) The Plan provides for the establishment of the Closed Block. See "The
Demutualization -- Establishment and Operation of the Closed Block".
- The establishment of the Company's Closed Block, including the policy
liabilities and the assets included therein, is subject to the review and
approval of the New York Insurance Department. For purposes of making such
determination the Company formed a pro forma Closed Block at January 1,
1998, as required by the New York Insurance Law. In this regard, the Company
established bookkeeping records to specifically segregate the assets and
liabilities in the pro forma Closed Block, as if the Closed Block had been
formed on January 1, 1998. The pro forma Closed Block (including the amount
and type of both the assets and liabilities to be included therein) was
reviewed by the New York Insurance Department. The Company will account for
the activity on the assets and liabilities in the pro forma Closed Block
subsequent to January 1, 1998 through to the Plan Effective Date, as well as
assets and liabilities on any new business written after January 1, 1998
which, pursuant to the Plan, is required to be included in the Closed Block.
At the Plan Effective Date the Closed Block will actually be formed and will
include the assets and liabilities included in the pro forma Closed Block
established on January 1, 1998 adjusted for the aforementioned activity,
including the assets and liabilities on new business written after January
1, 1998 (hereafter collectively referred to as the "Activity"). The Closed
Block amounts in the Pro Forma Condensed Consolidated Balance Sheet at June
30, 1998 (which gives effect to the Transaction and the establishment of the
Closed Block as if the Transaction and the establishment of the Closed Block
had occurred as of June 30, 1998) represent the actual assets and
liabilities in the pro forma Closed Block as of January 1, 1998, adjusted to
reflect the Activity referred to above from such date through June 30, 1998.
The Closed Block amounts in the Pro Forma Condensed Consolidated Statement
of Income and Comprehensive Income for the Six Months Ended June 30, 1998
(which gives effect to the Transaction and the establishment of the Closed
Block as if the Transaction and the establishment of the Closed Block had
occurred as of January 1, 1997) represent the Activity during such six-month
period, adjusted to exclude (i) revenues and benefits relating to new
business written during such six-month period, and (ii) revenues and
benefits during such six-month period from new business written during the
year ended December 31, 1997. Such adjustments were necessary because after
the Plan Effective Date, which for purposes of pro forma income statement
data was assumed to have occurred as of January 1, 1997, new business will
be written on policies and contracts which will be outside of the Closed
Block. See "The Demutualization -- Establishment and Operation of the Closed
Block".
The Closed Block amounts in the Pro Forma Condensed Consolidated Statement
of Income and Comprehensive Income for the year ended December 31, 1997
(which gives effect to the Transaction and the establishment of the Closed
Block as if the Transaction and the establishment of the Closed Block had
occurred as of January 1, 1997) were determined as follows: (i) premiums and
substantially all benefits and expenses relating to the policies to be
included in the Closed Block were derived from the actual records of the
Company for the year then ended (such amounts were adjusted to exclude
revenues and benefits relating to new business written during the year ended
December 31, 1997 because after the Plan Effective Date, which for purposes
of pro forma income statement data was assumed to have occurred as of
January 1, 1997, new business will be written on policies and contracts
which will be outside of the Closed Block) and (ii) investment income and
realized gains for the year then ended were allocated to the Closed Block.
The pro forma amount of investment income and realized gains allocated to
the Closed Block for the year ended December 31, 1997 was determined as
follows: (a) liabilities relating to the various policy types included in
the Closed Block as of January 1, 1997 were derived from the actual records
of the Company, (b) the amount of Closed Block invested assets was imputed
to be equal to an amount such that the percentage of Closed Block invested
assets to Closed Block liabilities at January 1, 1997 was equal to such
percentage at January 1, 1998, (c) the composition of Closed Block invested
assets at
60
<PAGE> 62
January 1, 1997 was assumed to be consistent with that as of January 1, 1998,
(d) the average amounts of invested assets by type held during the year ended
December 31, 1997 were calculated, (e) the actual yields (investment income
and realized gains) during the year ended December 31, 1997 for each such
asset type was applied to the aforementioned average amounts to determine the
aggregate investment income and realized gains allocated to the Closed Block
for the year then ended.
- - Assets and liabilities allocated to the Closed Block on the pro forma
condensed consolidated balance sheet are reflected at their June 30, 1998
carrying values. The Closed Block will not be formed until the Plan Effective
Date and, accordingly, the actual assets and liabilities ultimately allocated
to the Closed Block and the carrying values thereof will not be known until
such date. However, the allocation of assets and liabilities to the Closed
Block as of the Plan Effective Date is not expected to differ materially from
the allocation reflected in the pro forma condensed consolidated balance
sheet. See "The Demutualization -- Closed Block Assets and Liabilities". The
methodology for determining the amount of assets required to fund the Closed
Block and the liabilities to be included in the Closed Block is prescribed by
the New York Insurance Department. The methodology used considers historical
information about the policies to be included in the Closed Block together
with management's assumptions that underlie the current dividend scales of
such policies (e.g. mortality rates, asset yield rates and policy lapse
rates).
- - The Contribution from the Closed Block, as further described below, reflected
in the pro forma condensed consolidated statements of income and comprehensive
income is not necessarily indicative of the Closed Block's contribution had
the Closed Block been established as of January 1, 1997 or of the expected
contribution for any future period and is based on the assumption that the
actual contribution from the Closed Block equals the expected contribution
from the Closed Block for the six month period ended June 30, 1998 and the
year ended December 31, 1997.
- - The Closed Block is designed to give reasonable assurance to owners of
policies included in the Closed Block that assets will be available to support
such policies, including maintaining dividend scales in effect at the time of
the Demutualization, if the experience underlying such dividend scales
continues and for appropriate adjustments in such scales if the experience
changes. The assets, including the revenues therefrom, allocated to the Closed
Block will inure solely to the benefit of the owners of policies included in
the Closed Block.
- - The Company will allocate to the Closed Block an amount of assets at the Plan
Effective Date that are expected to produce cash flows which, together with
anticipated cash flows from the Closed Block Business subsequent to the Plan
Effective Date, are reasonably expected to be sufficient to fund the Closed
Block liabilities. In determining the amount of assets to be allocated to the
Closed Block on the Plan Effective Date, management has made certain estimates
and assumptions regarding the expected cash flows from the Closed Block assets
and the Closed Block Business subsequent to the Plan Effective Date, 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
61
<PAGE> 63
on Closed Block policies, certain expenses (including taxes) funded in the
Closed Block and dividends on Closed Block policies based on current payable
dividend scales. To the extent that the actual cash flows, subsequent to the
Plan Effective Date, from the assets allocated to the Closed Block and the
Closed Block Business are, in the aggregate, more favorable than assumed in
establishing the Closed Block, total dividends paid to the Closed Block
policyholders in future years will be greater than the total dividends that
would have been paid to such policyholders if the current payable dividend
scales had been continued. Conversely, to the extent that the actual cash
flows, subsequent to the Plan Effective Date, from the assets allocated to
the Closed Block and the Closed Block Business are, in the aggregate, less
favorable than assumed in establishing the Closed Block, total dividends
paid to the Closed Block policyholders in future years will be less than the
total dividends that would have been paid to such policyholders if the
current payable dividend scales had been continued. Accordingly, the
recognition of the aforementioned estimated future post-tax contribution
expected to emerge from the operation of the Closed Block is not affected by
the aggregate actual experience of the Closed Block assets and the Closed
Block Business subsequent to the Plan Effective Date, except in the unlikely
event that the Closed Block assets and the actual experience of the Closed
Block Business subsequent to the Plan Effective Date are not sufficient to
pay the guaranteed benefits on the Closed Block policies, in which case the
Company will be required to fund any such deficiency from its general
account assets outside of the Closed Block. 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- The Group Pension Transaction". Since
the Closed Block will be funded to provide for payment of guaranteed
benefits on such policies and, in addition, for continuation of dividends
paid under current payable dividend scales, 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.
- 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 statement of financial position separately under
the captions "Closed Block assets" and "Closed Block liabilities",
respectively.
- The pre-tax contribution from the Closed Block includes only those revenues,
benefit payments, dividends, premium taxes, state guaranty fund assessments
and investment expenses considered in funding the Closed Block. However,
many expenses associated with operating the Closed Block and administering
the policies included therein will be excluded from and, accordingly, not
funded in the Closed Block. These expenses will be reported in the Company's
statement of operations, outside of the contribution from the Closed Block,
consistent with how they are funded. Such expenses will be reported in the
separate line items to which they apply based on the nature of such
expenses. Management expects that such expenses will be
62
<PAGE> 64
included and reported as Other Operating Costs and Expenses in the Company's
statement of operations, unless any individual expense item is considered to
be significant, in which case such item or items will be reported separately
in the Company's statement of operations. Federal income taxes applicable to
the Closed Block, which will be funded in the Closed Block, will be
reflected as a component of federal income tax expense in the Company's
statement of operations.
(2) 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 allocated approximately 0.8
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 allocated approximately 0.9 million shares of
Common Stock at a per share price equal to the assumed initial
public offering price of $22.50 per share.
(B) Represents $15.0 million for the estimated after-tax cost of
additional nonrecurring expenses related to the Demutualization
assumed to be incurred as of the date of the pro forma condensed
consolidated balance sheet. Such expenses will be reported as
extraordinary expenses.
(C) Represents the proceeds of $253.1 million from the sale of
11,250,000 shares of Common Stock in the Offerings, less estimated
Common Stock issue costs of $18.2 million. Issue costs include
estimated amounts for underwriting discounts and expenses.
(D) Represents the reclassification of retained earnings to reflect
MONY's conversion to a stock life insurance company and the
distribution of 34.0 million shares of Common Stock to Eligible
Policyholders.
(3) The following represents the pro forma effects of the Transaction on the pro
forma condensed consolidated statements of income and comprehensive income:
(A) Represents an adjustment to reflect interest expense on the MONY
Notes and amortization of related debt issuance costs as if the MONY
Notes were issued, outstanding and accruing interest since January
1, 1997.
(B) Represents the income tax effects of the pro forma adjustment to
reflect interest expense on the MONY Notes and amortization of
related debt issuance costs as if the MONY Notes were issued,
outstanding and accruing interest since January 1, 1997.
(C) Represents the elimination of the add-on (surplus) tax applicable to
mutual life insurance companies. The adjustment reflects the
elimination of the current estimate of the add-on (surplus) tax
provision, net of the credit to revise the estimate of the provision
of the prior year. The Company will no longer be subject to the
add-on (surplus) tax after conversion to a stock life insurance
company.
(D) The number of shares (in millions) used in the calculation of basic
and diluted net income per common share follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Shares allocated to Eligible Policyholders........ 35.7
Less: estimated shares allocated to Eligible
Policyholders who receive cash or Policy
Credits......................................... 1.7
----
Shares distributed to Eligible Policyholders...... 34.0
----
Shares issued in the Offerings.................... 11.3
----
Total outstanding shares of Common Stock
before exercise of Warrants........... 45.3
====
</TABLE>
63
<PAGE> 65
(E) The pro forma condensed consolidated statements of income and
comprehensive income do not reflect certain nonrecurring expenses
of $38.0 million net of tax directly attributable to the
Demutualization. Such expenses will be reported as extraordinary
expenses. Approximately $9.7 million and $13.3 million of such
expenses were incurred and recognized as extraordinary expenses in
the Company's consolidated statements of income and comprehensive
income for the six month period ended June 30, 1998 and the year
ended December 31, 1997, respectively.
(4) Presented below is certain summarized financial information with respect to
the pro forma assets and liabilities allocated to the Closed Block as of
June 30, 1998, as well as the related pro forma revenues, expenses and
contribution from the Closed Block for the six months ended June 30, 1998
and the year ended December 31, 1997 ($ in millions):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
ASSETS:
Fixed maturities available for sale at estimated fair
value..................................................... $3,397.7
Mortgage loans on real estate............................... 525.1
Policy loans................................................ 1,197.3
Other invested assets....................................... 0.5
--------
Total investments................................. 5,120.6
Cash and cash equivalents................................... 120.8
Accrued investment income................................... 120.7
Amounts due from reinsurers................................. 127.2
Premiums receivable......................................... 15.9
Deferred policy acquisition costs........................... 576.1
Other assets................................................ 0.3
--------
Total Closed Block assets......................... $6,081.6
========
LIABILITIES:
Future policy benefits...................................... $6,618.9
Policyholders' account balances............................. 295.9
Other policyholder liabilities.............................. 159.6
Amounts due to reinsurers................................... 96.0
Accounts payable and other liabilities...................... 54.4
Current federal income taxes payable........................ 9.6
--------
Total Closed Block liabilities.................... $7,234.4
========
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1998 1997
------------- -------------
<S> <C> <C>
REVENUES:
Premiums........................................ 299.6 670.2
Net investment income........................... 184.0 375.0
Net realized gains on investments............... 7.5 7.2
Other income.................................... 0.8
------ -------
Total revenues........................ 491.9 1,052.4
BENEFITS AND EXPENSES:
Benefits to policyholders....................... 309.7 672.8
Interest credit to policyholders' account
balances...................................... 3.7
Amortization of deferred policy acquisition
costs......................................... 40.8 81.5
Dividends to policyholders...................... 106.9 221.3
Other operating costs and expenses.............. 4.2 5.4
------ -------
Total benefits and expenses........... 465.3 981.0
------ -------
Contribution from Closed Block.................. $ 26.6 $ 71.4
====== =======
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity securities allocated to the Closed Block at June 30,
1998 are as follows ($ in millions):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
TYPE COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
US Treasuries/Other Agencies.................. $ 48.1 $ 0.9 $0.0 $ 49.0
CMOs:
- -Government Agency............................ 219.3 3.4 0.0 222.7
- -Non Agency Backed............................ 54.3 1.6 0.0 55.9
Other Mortgage/Asset Backed:
- -Government Agency............................ 24.4 0.1 0.1 24.4
- -Non Agency Backed............................ 155.0 5.6 0.0 160.6
Utilities..................................... 449.4 23.9 1.0 472.3
Corporate Bonds............................... 2,321.5 98.1 6.8 2,412.8
-------- ------ ---- --------
Totals.............................. $3,272.0 $133.6 $7.9 $3,397.7
======== ====== ==== ========
</TABLE>
The amortized cost and estimated fair value, by contractual maturity dates
(excluding scheduled sinking funds), of fixed maturity securities allocated to
the Closed Block as of June 30, 1998 are as follows ($ in millions):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 35.8 $ 36.1
Due after one year through five years....................... 782.7 795.5
Due after five years through ten years...................... 1,438.3 1,507.5
Due after ten years......................................... 562.2 595.0
-------- --------
Subtotal.......................................... 2,819.0 2,934.1
Mortgage Backed Securities.................................. 453.0 463.6
-------- --------
Total............................................. $3,272.0 $3,397.7
======== ========
</TABLE>
65
<PAGE> 67
The following table sets forth the carrying value of mortgage loans
allocated to the Closed Block as of June 30, 1998 by contractual maturity ($ in
millions):
<TABLE>
<CAPTION>
CARRYING % OF
VALUE TOTAL
-------- -----
<S> <C> <C>
1 year or less.............................................. $ 59.4 11.3%
Over 1 year but less than or equal to 2 years............... 44.4 8.5
Over 2 years but less than or equal to 3 years.............. 51.0 9.7
Over 3 years but less than or equal to 4 years.............. 55.0 10.5
Over 4 years but less than or equal to 5 years.............. 41.9 8.0
Over 5 years but less than or equal to 6 years.............. 27.8 5.3
Over 6 years but less than or equal to 7 years.............. 22.8 4.3
Over 7 years but less than or equal to 8 years.............. 30.1 5.7
Over 8 years but less than or equal to 9 years.............. 30.0 5.7
Over 9 years but less than or equal to 10 years............. 17.5 3.3
Over 10 years............................................... 145.2 27.7
------ -----
Total............................................. $525.1 100.0%
====== =====
</TABLE>
66
<PAGE> 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses the consolidated financial condition and
results of operations of the Company for the periods indicated. This discussion
should be read in conjunction with the "Selected Consolidated Financial
Information", the "Pro Forma Condensed Consolidated Financial Information", the
Consolidated Financial Statements and related footnotes, the Unaudited Interim
Condensed Consolidated Financial Statements and other financial information
included elsewhere in this Prospectus.
HISTORICAL OVERVIEW
During the 1980s, the Company, under its previous management team, adopted
a strategy designed to diversify the Company's operations and asset mix in
response to growing support for the deregulation of the financial services
industry and competition from savings products offered by banks, savings and
loan associations, mutual funds, life insurance companies and other financial
institutions. As a result of this strategy, the Company (i) acquired businesses
offering fund management and mortgage banking services, (ii) began to offer
interest-sensitive life insurance and annuity products and (iii) increased its
investment in commercial mortgage loans, real estate and below investment grade
fixed maturity securities to maximize investment income and support its
interest-sensitive products and other lines of business.
In response to higher interest rates in the 1980s many life insurance
companies, including the Company, invested funds in higher yielding but higher
risk assets to fund the crediting rates on their insurance products at levels
which were necessary for them to compete effectively with rates on investment
products offered by other financial institutions. At the time, investments in
commercial mortgages, real estate and below investment grade fixed maturity
securities consistently generated returns which outperformed other investments
available to insurance companies. As a result, many companies in the life
insurance industry, including the Company, increased their exposure to such
assets during the 1980s. At its peak in 1990, the Company's exposure to such
assets was approximately 50.0% of general account assets as determined in
accordance with SAP. However, by the late 1980s, prompted by the repeal of tax
laws favorable to real estate development with the passage of the Tax Reform Act
of 1986, the savings and loan crisis, and overcapacity in the real estate
markets across the country, commercial mortgage loan and real estate investments
began to experience financial pressure and become increasingly illiquid. As a
result, the market values of such assets began to decline. In addition, in the
early 1990s several highly publicized failures of financial institutions
highlighted their exposures to below investment grade fixed maturity securities
resulting in regulatory actions requiring the divestiture of such securities
which led to a significant decrease in the market value of such securities. Due
to the Company's high exposure to such assets as determined in accordance with
SAP, its financial condition began to deteriorate and the Company's financial
strength ratings were downgraded in the 1989-1990 period.
During 1989, the Company's current management team was assembled and the
Company adopted a new strategy designed to strengthen its financial position.
Under this strategy, the Company focused on: (i) its core businesses of
individual protection products, annuities, mutual funds and investment
securities and (ii) its key markets of small business owners and higher income
individuals, particularly family builders and pre-retirees. Significant specific
actions taken by the Company's current management team since 1989 have included:
- Repositioning the Company's product mix and upgrading the Company's sales
force
- Focusing on building its accumulation business, including variable
annuities
- Improving the quality of its career agency sales force and
increasing the number of MDRT qualifiers
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<PAGE> 69
- Reinsuring its group life and health insurance business during
1989-1990 and ceasing to write any new group life and health
insurance business
- Transferring a significant portion of its GIC business to a third
party reinsurer in 1991 and ceasing the production of any new GIC
business
- Transferring a substantial portion of its group pension business and
operations in 1993 (see "Business -- The Group Pension Transaction")
and ceasing the production of any new group pension business
- Transferring all of its disability income insurance business to a
third party reinsurer under an indemnity reinsurance contract in
1997 and ceasing to write new disability insurance business
- Disposing of the Company's non-core businesses
- Disposing of North American Mortgage Company, its mortgage banking
subsidiary, in 1989
- Disposing of Financial Services Corporation, its wholesale
securities brokerage subsidiary, in 1989
- Disposing of Unified Management Corporation, its mutual fund,
transfer agent and clearing broker dealer subsidiary, in 1989
- Disposing of Evaluation Associates, Incorporated, its investment
management performance tracking and consulting subsidiary, in 1991
- Disposing of MONY Reinsurance Corporation, its property and casualty
reinsurance subsidiary, in 1991
- Repositioning the Company's investment portfolio
- Reducing the Company's exposure to commercial mortgage loans by (i)
discontinuing new commercial mortgage loan investments through 1995,
followed by a more selective program involving the investment of new
funds in this asset class, (ii) aggressively foreclosing on
commercial mortgage loans and selling such loans and (iii)
encouraging prepayments, paydowns and repayments in the commercial
mortgage loan portfolio. As a result, the Company's exposure to
commercial mortgage loans was reduced from a carrying value at
December 31, 1992 of approximately $3,576.5 million, or 27.2% of
total investments, to $892.1 million at June 30, 1998, or 8.3% of
total invested assets.
- Upgrading the management of the Company's equity real estate
portfolio to improve the portfolio's cash flow and marketability
- Implementing and executing a plan for the orderly disposal of a
substantial portion of the Company's equity real estate assets,
which resulted in aggregate sales proceeds of $1,620.4 million from
January 1, 1995 through June 30, 1998. As a result, the Company's
exposure to real estate was reduced from a carrying value at
December 31, 1992 of approximately $1,828.5 million, or 13.9% of
total invested assets, to $791.6 million at June 30, 1998, or 7.4%
of total invested assets
- Reducing the Company's exposure to below investment grade securities
by selectively disposing of such securities and investing
substantially all new funds in investment grade fixed maturity
securities. As a result, the Company's exposure to below investment
grade securities was reduced from a carrying value at December 31,
1992 of approximately $1,023.4 million, or 7.8% of total invested
assets, to $369.3 million at June 30, 1998, or 3.4% of total
invested assets
- Taking significant cost reduction actions
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<PAGE> 70
- Reducing the rate of growth of operating expenses by, among other
things, (i) reducing the number of employees through early
retirement programs and attrition, (ii) disposing of certain
businesses and (iii) reducing certain costs incurred in connection
with operating the career agency sales force
- Raising additional statutory capital
- Issuing $125.0 million aggregate principal amount of the 11.25%
Surplus Notes in 1994
- Consummating the Investment on December 30, 1997
As a result of these actions, consolidated equity increased from
approximately $962.5 million at December 31, 1992 to $1,448.9 million at June
30, 1998.
RECENT ACTIONS
On August 14, 1998, the MONY Board adopted the Plan and on September 9,
1998, the MONY Board amended the Plan to incorporate certain clarifying and
technical changes. In accordance with the Plan, among other things the following
will occur: (i) MONY will convert from a mutual life insurance company to a
stock life insurance company and become a wholly owned subsidiary of the Holding
Company, (ii) all policyholders' membership interests will be extinguished and
in exchange therefor Eligible Policyholders will receive shares of Common Stock
or, in certain circumstances, cash or Policy Credits and Participating
Policyholders will receive additional shares of Common Stock or, in certain
circumstances, cash or Policy Credits, (iii) the Closed Block will be created,
and assets will be 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 and (iv) shares of Common Stock will be offered to the
public in the Offerings. Payments to Eligible Policyholders and Participating
Policyholders described in clause (ii) above will generally be made in the form
of Common Stock unless the Eligible Policyholder resides outside of the United
States or Canada, or is allocated a number of shares of Common Stock equal to or
less than a number to be designated by the MONY Board and such Eligible
Policyholder has affirmatively indicated a preference under the Plan to receive
cash, in which case the distribution may be in the form of cash, or is the owner
of certain tax qualified policies, in which case the distribution will be in the
form of Policy Credits. For a more detailed description of the Plan generally,
see "The Demutualization", and for a more detailed description of the
distribution to Eligible Policyholders specifically, see "The Demutualization --
Allocation and Payment of Consideration to Eligible Policyholders". The public
hearing with respect to the Plan was held on October 19, 1998, and the Plan was
approved by MONY's policyholders pursuant to a policyholder vote on November 2,
1998 (of all MONY's policyholders entitled to vote on the Plan 30.2% voted and
91.9% of these votes were cast in favor of the Plan). In connection with the
public hearing, certain written objections to the Plan were submitted to the New
York Superintendent. The New York Superintendent's order approving the Plan was
issued on November , 1998. See "Risk Factors -- Risk of Challenge to the New
York Superintendent's Order".
In connection with the transactions contemplated under the Plan, on
December 30, 1997, the Investors entered into the Investment Agreement, pursuant
to which the Investors purchased the MONY Notes and Warrants. The MONY Notes
bear interest at the stated rate of 9.50% and mature on December 30, 2012. In
addition, under the terms of the Investment Agreement, the Investors have
agreed, on the Company's request made within 90 days after the Demutualization
Date and subject to certain conditions precedent, to purchase an aggregate of
one million shares of Convertible Preferred Stock for a total purchase price of
$100.0 million. If the Offerings are consummated, management will not require
the purchase of the Convertible Preferred Stock. See the Notes to the
Consolidated Financial Statements and "Certain Provisions of the Investment".
In 1996, due to improving market conditions, the need to maintain a
diversified investment portfolio and advantageous yields, the Company started to
originate new commercial mortgage loans. New commercial mortgage loan
originations aggregated $93.8 million, $79.9 million and $54.3
69
<PAGE> 71
million for the six-month period ended June 30, 1998 and the years ended
December 31, 1997 and 1996, respectively.
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. See "Business -- Reinsurance". As a result of this
transaction, the Company recorded a pre-tax loss for the year ended December 31,
1997 of approximately $9.1 million which represented the excess of the amount
paid for the indemnity reinsurance and deferred acquisition costs relating to
such business (which were reflected on the Company's books at the date of the
transaction) over the carrying value of the liabilities transferred. In
addition, the indemnity reinsurance purchased pursuant to the DI Transaction
replaced a previously existing reinsurance contract which had been accounted for
as a financing rather than reinsurance. The assets held on deposit under the
replaced contract, which had a fair value in excess of the carrying value of the
deposit on MONY's books at the date of the transaction, were used to partially
fund the cost of the aforementioned indemnity agreement. As a result thereof,
the Company recorded a gain of $19.4 million which is separate from the DI
Transaction and reported in "Other Income". Also, concurrent with the DI
Transaction, the Company entered into a distribution agreement with Provident
Life and Accident Insurance Company so that it could continue to distribute,
through the Company's career agency sales force, disability insurance products
to its customers. The impact on the Company's historical consolidated operating
results for the years ended December 31, 1997, 1996 and 1995 from the Company's
disability income insurance business was not material.
OUTLOOK
Management believes that the actions it has taken, as discussed above, in
conjunction with the net proceeds from the Offerings will help support the
Company's ratings with respect to its claims-paying ability and financial
strength. Ratings have become an increasingly important factor in establishing
the competitive position of insurance companies and maintaining public
confidence in insurance companies and their ability to market their products.
Although there can be no assurance, management believes that the Company's
ratings should be positively affected if it achieves improvements in operating
results, reduces its exposure to higher risk assets and realizes further cost
reductions. In this regard, management believes that future GAAP earnings will
be positively affected by the Company's continuing program for the sale of real
estate, which the Company expects will result in increased investment income as
a result of being able to invest the proceeds from real estate sales in higher
yielding investments and lower depreciation charges. In addition, with a
stronger capital base and enhanced ratings, management expects the Company to be
able to increase sales by: (i) pursuing new product development, (ii)
implementing state-of-the-art agency support and customer services programs,
(iii) strengthening its marketplace visibility and brand name and (iv) expanding
its current distribution sources. However, there can be no assurance that sales
will increase.
FACTORS AFFECTING PROFITABILITY
The Company derives its revenues principally from: (i) premiums on
participating individual life insurance, (ii) insurance, administrative and
surrender charges on universal life and annuity products, (iii) asset management
fees from separate account and mutual fund products, (iv) net investment income
on general account assets, (v) the Group Pension Profits and (vi) commissions
from securities and insurance brokerage operations. See "-- The Group Pension
Transaction --
70
<PAGE> 72
Decline and Expiration of Payments and Income Related to the Group Pension
Transaction". The Company's expenses consist of insurance benefits provided to
policyholders, interest credited on policyholders' account balances, dividends
to policyholders, the cost of selling and servicing the various products sold by
the Company, including commissions to sales representatives (net of any
deferrals), and general business expenses.
The Company's profitability depends in large part upon (i) the amount of
its assets, (ii) the adequacy of its product pricing (which is primarily a
function of competitive conditions, management's ability to assess and manage
trends in mortality and morbidity experience as compared to the level of benefit
payments, and its ability to maintain expenses within pricing assumptions),
(iii) the maintenance of the Company's target spreads between credited rates on
policyholder account balances and the rate of earnings on its investments, (iv)
the persistency of its policies (which affects the ability of the Company to
recover the costs incurred to sell a policy) and (v) its ability to manage the
market and credit risks associated with its invested assets. External factors,
such as legislation and regulation of the insurance marketplace and products,
may also affect the Company's profitability.
THE GROUP PENSION TRANSACTION
DECLINE AND EXPIRATION OF PAYMENTS AND INCOME RELATED TO THE GROUP PENSION
TRANSACTION
On the Group Pension Transaction Date, the Company entered into the AEGON
Agreement under which the Company effected the Group Pension Transaction.
Pursuant to the Group Pension Transaction, the Company transferred a substantial
portion of its group pension business, including its full service group pension
contracts, consisting primarily of tax-deferred annuity, 401(k) and managed
funds lines of business, to 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 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 indemnity reinsurance, however, the AEGON Agreement
contemplated that the transfer would be restructured in the form of assumption
reinsurance as soon as practicable following the consent of contractholders to
the assumption of their contracts. Substantially all of the contractholders
consented to the assumption of their contracts by AUSA.
In addition, pursuant to the AEGON 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 the Series B Notes. The Series A
Notes pay interest at 6.44 percent per annum and the Series B Notes pay interest
at 6.24 percent per annum. Both the Series A Notes and the Series B Notes mature
on December 31, 2002. MONY's investment in the Series A Notes was intended to
provide AEGON with the funding necessary to capitalize AUSA.
The Company entered into the Group Pension Transaction due to downgrades of
its financial strength ratings resulting from the deterioration of its financial
position during the period from 1989 through the early 1990s. The Company's
group pension business was considered to be particularly sensitive to heightened
withdrawal and surrender activity due to requirements of many pension fund
advisors that insurance carriers have a minimum financial strength rating
consistent with a "AA" claims-paying ability rating from S&P. In light of the
downgrades and certain highly publicized failures of life insurance companies in
the 1990s resulting from abnormally high withdrawal and surrender activity,
management became concerned with respect to the Company's ability to sustain
71
<PAGE> 73
inordinate amounts of such activity and entered into the Group Pension
Transaction to preserve the value of such business. The transaction allowed the
Company to: (i) place the transferred Group Pension Business in a higher rated
entity which significantly diminished the risk of adverse persistency with
respect to such business, and (ii) retain all the profits resulting from the
$6.4 billion of transferred 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. 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. See Note 11 to the
Consolidated Financial Statements.
Pursuant to the Agreement, MONY receives from AUSA, (i) the Group Pension
Payments on an annual basis through December 31, 2002 equal to all of the
earnings from the Existing Deposits, (ii) the Final Value Payment at December
31, 2002 based on the remaining fair value of the Existing Deposits, and (iii)
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 in accordance with the Earnings Formula which
represents a basis of accounting that 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 in
accordance with GAAP. 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 Agreement) as an offset against the
principal payment due to the Company upon maturity of the Series A Notes. The
Series A Notes have been allocated to the Closed Block.
The Group Pension Profits have represented a significant portion of the
Company's net income. For the six-month periods ended June 30, 1998 and 1997 and
the years ended December 31, 1997, 1996 and 1995, AUSA reported earnings to the
Company pursuant to the application of the Earnings Formula of $23.5 million,
$24.3 million, $55.7 million, $66.7 million, and $70.2 million, respectively,
and the Company recorded Group Pension Profits of $22.7 million, $28.2 million,
$60.0 million,
72
<PAGE> 74
$59.5 million and $61.7 million, respectively. The Group Pension Profits
represented 11.4%, 35.7%, 32.0%, 59.2% and 99.8% of income before income taxes
and extraordinary item for such periods, 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.
In addition to the Group Pension Profits, the Company earned $6.4 million,
$11.3 million, $17.7 million, $23.0 million and $17.4 million, respectively, of
interest income on the AEGON Notes during the aforementioned periods, which is
reflected in net investment income. Pursuant to the terms of the Group Pension
Transaction, from 1994 through 1996, the Company reinvested an aggregate of
$169.0 million of the aforementioned profits and interest in additional Series A
Notes with a face amount equal to the amount reinvested. The additional Series A
Notes bore interest at 1.0% above the two-year U.S. Treasury rate in effect at
the time of their issuance. All of the additional Series A Notes were redeemed
at face value by AEGON during 1997. At December 31, 1997, the remaining Series A
Notes held by the Company consisted of the original $150.0 million face amount
Series A Notes it acquired on December 31, 1993.
For the definitions of certain terms used in the foregoing discussion of
the Group Pension Transaction, see "Risk Factors -- Decline and Expiration of
Payments and Income Related to the Group Pension Transaction" and "Glossary".
The following sets forth certain summarized financial information relating
to the Group Pension Transaction as of and for the periods indicated, including
information regarding: (i) the general account assets transferred to support the
Existing Deposits in the Group Pension Transaction,
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<PAGE> 75
(ii) the transferred separate account assets and liabilities and (iii) the
components of revenue and expense comprising the Group Pension Profits:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ---------------------
1998 1997 1996
--------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C>
ASSETS
General Account
Fixed Maturities:
Available for sale at estimated fair value
(amortized cost $1,493.7, $1,585.4 and $1,568.1,
respectively)....................................... $ 1,548.1 $ 1,645.0 $ 1,629.2
Mortgage loans on real estate......................... 288.7 347.9 527.9
Real estate held for investment....................... 53.2 50.4 55.3
Cash and cash equivalents............................. 41.9 24.5 23.3
Accrued investment income............................. 27.4 33.1 33.6
--------- --------- ---------
Total general account assets..................... 1,959.3 2,100.9 2,269.3
Separate account assets.................................. 3,761.2 3,614.0 3,358.3
--------- --------- ---------
Total assets..................................... $ 5,720.5 $ 5,714.9 $ 5,627.6
========= ========= =========
LIABILITIES:
General Account(1)
Policyholders' account balances....................... $ 1,890.9 $ 1,991.0 $ 2,158.1
Other liabilities..................................... 30.2 33.7 27.7
--------- --------- ---------
Total general account liabilities................ 1,921.1 2,024.7 2,185.8
Separate account liabilities(2).......................... 3,761.2 3,614.0 3,358.3
--------- --------- ---------
Total liabilities................................ $ 5,682.3 $ 5,638.7 $ 5,544.1
========= ========= =========
</TABLE>
- ---------------
(1) Includes general account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $133.2
million, $142.8 million and $175.2 million as of June 30, 1998 and December
31, 1997 and 1996, respectively.
(2) Includes separate account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $34.0
million, $31.1 million and $29.2 million as of June 30, 1998 and December
31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
-------------- ---------------------------------
1998 1997 1997 1996 1995
----- ----- ------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product policy fees......................... $11.1 $11.0 $23.7 $ 24.7 $ 25.0
Net investment income....................... 80.6 85.9 169.3 192.4 215.9
Net realized gains (losses) on
investments............................... (2.4) 2.2 7.1 (7.4) (8.2)
----- ----- ----- ------ ------
Total revenues............................ 89.3 99.1 200.1 209.7 232.7
Benefits and Expenses:
Interest credited to policyholders' account
balances.................................. 55.7 59.8 117.3 125.9 141.2
Other operating costs and expenses.......... 10.9 11.1 22.8 24.3 29.8
----- ----- ----- ------ ------
Total benefits and expenses............... 66.6 70.9 140.1 150.2 171.0
Group Pension Profits....................... $22.7 $28.2 $60.0 $ 59.5 $ 61.7
===== ===== ===== ====== ======
</TABLE>
74
<PAGE> 76
TOTAL FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF AS OF
AS OF DECEMBER 31, DECEMBER 31,
JUNE 30, 1998 1997 1996
---------------- ----------------- ----------------
NAIC RATING AGENCY CARRYING % OF CARRYING % OF CARRYING % OF
RATING EQUIVALENT DESIGNATION VALUE TOTAL VALUE TOTAL VALUE TOTAL
- ------ --------------------------------------- -------- ----- -------- ------ -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A............................... $ 963.1 62.2% $ 998.9 60.7% $ 948.7 58.3%
2 Baa.................................... 504.3 32.6 510.9 31.1 497.2 30.5
3 Ba..................................... 55.5 3.6 74.0 4.5 98.3 6.0
4 B...................................... 25.2 1.6 18.4 1.1 42.7 2.6
5 Caa and lower.......................... 0.0 0.0 42.8 2.6 42.3 2.6
6 In or near default..................... 0.0 0.0 0.0 0.0 0.0 0.0
-------- ----- -------- ------ -------- -----
Subtotal........................................ $1,548.1 100.0% $1,645.0 100.0% $1,629.2 100.0%
Redeemable Preferred Stock...................... 0.0 0.0 0 0.0 -- 0.0
-------- ----- -------- ------ -------- -----
Total Fixed Maturities.......................... $1,548.1 100.0% $1,645.0 100.0% $1,629.2 100.0%
======== ===== ======== ====== ======== =====
</TABLE>
ANALYSIS OF MORTGAGE LOAN CREDIT QUALITY(1)
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ------------------
1998 1997 1996
-------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Total commercial mortgages.................................. $288.7 $347.9 $527.9
====== ====== ======
Problem commercial mortgages(2)............................. $ 1.3 $ 8.1 $ 19.3
Potential problem commercial mortgages...................... 0.0 0.0 9.4
Restructured commercial mortgages........................... 65.6 88.5 107.2
------ ------ ------
Total problem, potential problem and restructured commercial
mortgages................................................. $ 66.9 $ 96.6 $135.9
====== ====== ======
Total problem, potential problem and restructured commercial
mortgages as a percent of total commercial mortgages...... 23.2% 27.8% 25.7%
====== ====== ======
Valuation allowances:
Problem loans............................................. $ 0.0 $ 0.0 $ 1.9
Potential problem loans................................... 0.0 0.0 0.7
Restructured loans........................................ 7.5 5.8 7.2
------ ------ ------
Total valuation allowances.................................. $ 7.5 $ 5.8 $ 9.8
====== ====== ======
Total valuation allowances as a percent of problem,
potential problem and restructured commercial mortgages at
carrying value before valuation allowances................ 10.1% 5.7% 6.7%
====== ====== ======
</TABLE>
- ---------------
(1) See "Investments" for definitions of problem, potential problem, and
restructured mortgages.
(2) Problem commercial mortgages included delinquent mortgage loans of $1.3
million, $0.0 million, and $0.0 million at June 30, 1998 and December 31,
1997 and 1996, respectively, and mortgage loans in foreclosure of $0.0
million, $8.2 million, and $19.3 million at such dates, respectively.
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<PAGE> 77
RESULTS OF OPERATIONS
The following table presents summary consolidated financial information for
the Company for the six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
----------------- ------------------------------
1998 1997 1997 1996 1995
-------- ------ -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums.................................. $ 353.8 $411.9 $ 838.6 $ 859.8 $ 875.9
Universal life and investment-type product
policy fees............................ 74.3 54.4 127.3 100.9 80.8
Net investment income..................... 357.7 359.6 733.0 751.6 728.8
Net realized gains on investments......... 157.6 42.6 72.1 75.9 16.2
Group Pension Profits..................... 22.7 28.2 60.0 59.5 61.7
Other income.............................. 78.4 58.8 145.4 117.3 96.2
-------- ------ -------- -------- --------
Total revenues.................... 1,044.5 955.5 1,976.4 1,965.0 1,859.6
Benefits and expenses:
Benefits to policyholders................. 379.7 423.9 840.1 872.2 883.6
Interest credited to policyholders'
account balances....................... 61.2 70.8 139.4 156.1 175.3
Amortization of deferred policy
acquisition costs...................... 70.8 68.4 181.2 158.2 132.6
Dividends to policyholders................ 108.4 117.8 224.3 231.4 222.5
Other operating costs and expenses........ 224.5 196.1 403.7 446.6 383.8
-------- ------ -------- -------- --------
Total benefits and expenses....... 844.6 877.0 1,788.7 1,864.5 1,797.8
Income before income taxes and extraordinary
item...................................... 199.9 78.5 187.7 100.5 61.8
Income tax expense.......................... 71.8 32.0 57.3 44.0 21.4
-------- ------ -------- -------- --------
Income before extraordinary item............ 128.1 46.5 130.4 56.5 40.4
Extraordinary item -- demutualization
expenses, net............................. 9.7 2.4 13.3 0.0 0.0
-------- ------ -------- -------- --------
Net income.................................. 118.4 44.1 117.1 56.5 40.4
Other comprehensive income (loss), net...... 9.9 (17.3) 33.0 (59.9) 191.5
======== ====== ======== ======== ========
Comprehensive income, net................... $ 128.3 $ 26.8 $ 150.1 $ (3.4) $ 231.9
======== ====== ======== ======== ========
</TABLE>
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED JUNE
30, 1997
The Company reported consolidated pre-tax earnings (before extraordinary
items) of $199.9 million ($128.1 million after-tax) for the six-month period
ended June 30, 1998, an increase of $121.4 million or 154.6% ($81.6 million or
175.5% after-tax), as compared to consolidated pre-tax earnings (before
extraordinary items) of $78.5 million ($46.5 million after-tax) reported in the
comparable period ended June 30, 1997.
Consolidated revenues were $1,044.5 million for the six month period ended
June 30, 1998, an increase of $89.0 million or 9.3% from $955.5 million reported
in the comparable period ended June 30, 1997. The increase in revenues primarily
resulted from increases in universal life and investment-type product policy
fees, net realized capital gains, and other income of $19.9 million,
76
<PAGE> 78
$115.0 million and $19.6 million, respectively, offset by decreases in premiums,
net investment income, and Group Pension Profits of $58.1 million, $1.9 million
and $5.5 million, respectively.
Total benefits and expenses were $844.6 million for the six-month period
ended June 30, 1998, a decrease of $32.4 million or 3.7% from $877.0 million
reported for the comparable period ended June 30, 1997. The decrease resulted
from lower benefits to policyholders, interest credited to policyholders'
account balances, and dividends to policyholders of $44.2 million, $9.6 million,
and $9.4 million, respectively, offset by an increase in amortization of
deferred policy acquisition costs and other operating costs and expenses of $2.4
million and $28.4 million, respectively.
Premium revenue was $353.8 million for the six-month period ended June 30,
1998, a decrease of $58.1 million, or 14.1%, from $411.9 million reported in the
comparable period ended June 30, 1997. Approximately $36.6 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 and renewal premiums of $7.6
million and $9.7 million, respectively, as well as lower single premiums of $5.6
million due to lower dividends.
Universal life and investment-type product policy fees were $74.3 million
for the six-month period ended June 30, 1998, an increase of $19.9 million, or
36.5%, from $54.4 million reported in the comparable period ended June 30, 1997.
This increase was primarily the result of higher fees relating to the Company's
FPVA and variable universal life ("VUL") business of $8.4 million and $9.1
million, respectively. For the six-month period ended June 30, 1998, the Company
reported total fees from its FPVA and VUL business of $31.2 million and $16.6
million, respectively, as compared to $22.8 million and $7.5 million,
respectively, reported for the comparable period ended June 30, 1997. The
variance in the FPVA fees is primarily a result of an increase in the account
value. The average FPVA account value for the six-month period ended June 30,
1998 was $4.3 billion, as compared to $3.1 billion for the comparable period
ended June 30, 1997. The increase in VUL fees is primarily due to higher cost of
insurance charges of approximately $4.5 million consistent with the in force
growth of such business.
Net investment income was $357.7 million for the first six months of 1998,
a decrease of $1.9 million, or 0.5%, from $359.6 million reported for the first
six months of 1997. Lower interest rates in 1998 resulted in lower investment
income of approximately $9.9 million, while an increase in the Company's average
total invested assets during the first half of 1998 of approximately $67.4
million, as compared to the first half of 1997, resulted in an offsetting
increase to investment income of approximately $7.8 million. From June 30, 1997
to June 30, 1998, the Company's average investment in fixed maturity securities
(before unrealized gains or losses) increased by approximately $546.6 million,
while its average investment in mortgage loans and real estate decreased by
approximately $111.7 million and $412.4 million, respectively. At June 30, 1998,
fixed maturity securities, mortgage loans and real estate represented
approximately 58.5%, 13.8% and 7.4%, respectively, of total invested assets, as
compared to 52.5%, 15.0% and 11.9%, respectively, at June 30, 1997. The yield on
the Company's invested assets before and after realized gains/(losses) on
investments was 6.9% and 9.9%, respectively, for the first half of 1998, as
compared to 7.0% and 7.8%, respectively, for the first half of 1997. See
"Investments".
Net realized gains on investments were $157.6 million for the first half of
1998, an increase of $115.0 million, or 270.0%, from $42.6 million for the first
half of 1997. The increase is due to higher gains on sales of real estate and
partnership equities, lower provisions for real estate losses, and higher gains
on prepayments and sales of fixed maturity securities offset by lower gains on
sales of equity securities and lower releases for provisions for mortgage
losses. Provisions for valuation allowances on real estate to be disposed of
aggregated $1.4 million for the first half of 1998, as compared to $45.2 million
for the first half of 1997, primarily as a result of additional properties put
up for sale in the first half of 1997 that had carrying values in excess of
their fair values less costs to sell; realized gains on sales of real estate and
partnership equities totaled $122.6 million in the first half of 1998, as
compared to $48.1 million in the first half of 1997; realized gains on sales of
common
77
<PAGE> 79
stock were $18.5 million in the first half of 1998, as compared to $25.9 million
in the first half of 1997; realized gains on the sales/prepayments of fixed
maturities were $14.9 million in the first half of 1998, as compared to $6.5
million in the first half of 1997; and gains on releases of mortgage valuation
reserves totaled $0.8 million in the first half of 1998, as compared to $13.1
million in the first half of 1997.
Group Pension Profits were $22.7 million for the six-month period ended
June 30, 1998, a decrease of $5.5 million, or 19.5%, from $28.2 million reported
in the comparable period ended June 30, 1997. Group Pension Profits during the
six-month period ended June 30, 1998 consisted of $23.5 million of Group Pension
Payments offset by an increase of $0.8 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 $24.3 million of Group Pension
Payments and $3.9 million relating to a decrease in the aforementioned valuation
allowances. Group Pension Payments during the six-month period ended June 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
six-month period ended June 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 $78.4 million for the six-month period ended June 30, 1998, an
increase of $19.6 million, or 33.3%, as compared to $58.8 million reported in
the comparable prior year period. The increase was primarily the result of
higher commissions earned by the Company's broker-dealer operations of $9.1
million and higher fees earned by the Company's mutual fund management
operations of $11.6 million. During the six-month period ended June 30, 1998,
the Company's broker-dealer operations reported commission earnings of $24.2
million, as compared to $15.1 million reported in the comparable prior year
period. Also, during the six-month period ended June 30, 1998, the Company's
mutual fund management operations reported $29.5 million in fees from advisory,
underwriting and distribution services, as compared to $17.9 million reported in
the comparable prior year period.
Benefits to policyholders were $379.7 million for the six-month period
ended June 30, 1998, a decrease of $44.2 million, or 10.4%, as compared to
$423.9 million reported in the comparable prior year period. The decrease
primarily resulted from the transfer of the Company's disability income
insurance business pursuant to the DI Transaction during the fourth quarter of
1997. During the six months ended June 30, 1997, the Company reported benefits
of approximately $36.7 million relating to its disability income insurance
business.
Interest credited to policyholder account balances was $61.2 million for
the six-month period ended June 30, 1998, a decrease of $9.6 million, or 13.6%,
as compared to $70.8 million reported in the comparable prior year period. The
decrease primarily resulted from lower interest crediting across substantially
all product lines.
Amortization of deferred policy acquisition costs ("DAC") results from the
capitalization of commissions and other costs of acquiring new contracts and the
amortization of these costs over the estimated life of the contracts based on
the present value of estimated gross profits or margins from such business.
Amortization of deferred policy acquisition costs was $70.8 million for the
six-month period ended June 30, 1998, an increase of $2.4 million, or 3.5%, as
compared to $68.4 million reported in the comparable prior year period. The
increase is primarily the result of: (i) higher amortization of approximately
$4.1 million relating to the Company's FPVA product line, (ii) a decrease in
amortization of approximately $3.0 million relating to the VUL product line
which
78
<PAGE> 80
experienced $4.6 million of higher death claims as compared to the comparable
prior year period, and (iii) higher amortization of approximately $2.4 million
in the traditional whole life business due to gains from real estate sales. The
increase in amortization relating to FPVAs resulted from higher management fees
due to an increase in separate account value. The increase in account value
during the first six months of 1998 of $581.9 million resulted from new sales
and other deposits of $346.5 million and market appreciation of $466.9 million,
offset by approximately $231.5 million in withdrawals and surrenders.
Other operating costs and expenses were $224.5 million for the six-month
period ended June 30, 1998, an increase of $28.4 million, or 14.5%, as compared
to $196.1 million reported in the comparable prior year period. The increase
primarily consists of: (i) higher sub-advisory fees, commission expense and
other cost of sales for Enterprise Capital Management, Inc. ("ECM"), the
subsidiary through which the Company conducts its proprietary retail mutual fund
operations, of $5.6 million and higher commission expense of $9.1 million from
MONY Securities Corp., (ii) approximately $5.3 million of higher interest
expense as a result of the issuance of the MONY Notes on December 31, 1997 and
(iii) costs incurred in connection with the Year 2000 issue of approximately
$4.4 million.
Dividends to policyholders of $108.4 million for the six-month period ended
June 30, 1998 decreased $9.4 million, or 8.0% from $117.8 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,
which was partially offset by an increase in life insurance reserves.
The Company's provision for Federal income taxes for the six-month period
ended June 30, 1998, including the tax effect of demutualization expenses, of
approximately $70.8 million included surplus tax of $1.9 million, compared to a
surplus tax expense of $4.4 million reported in the comparable prior year
period. The Company's effective tax rate before the surplus tax and
extraordinary item was 35.0% for the six month periods ended June 30, 1998 and
1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company reported consolidated pre-tax earnings (before extraordinary
items) of $187.7 million ($130.4 million after-tax) for the year ended December
31, 1997, an increase of $87.2 million or 86.8% ($73.9 million or 130.8%
after-tax), as compared to consolidated pre-tax earnings (before extraordinary
items) of $100.5 million ($56.5 million after-tax) for the year ended December
31, 1996.
Consolidated revenues were $1,976.4 million for 1997, an increase of $11.4
million, or 0.6% from $1,965.0 million reported for 1996. The increase in
revenues primarily resulted from increases in universal life and investment-type
product policy fees and other income of $26.4 million and $28.1 million,
respectively, offset by decreases in premiums, net investment income and net
realized gains on investments of $21.2 million, $18.6 million, and $3.8 million,
respectively.
Total benefits and expenses were $1,788.7 million for 1997, a decrease of
$75.8 million or 4.1% from $1,864.5 million reported for 1996. The decrease
resulted from lower benefits to policyholders, interest credited to
policyholders' account balances, dividends to policyholders and other operating
costs and expenses of $32.1 million, $16.7 million, $7.1 million and $42.9
million, respectively, offset by an increase in amortization of deferred policy
acquisition costs of $23.0 million.
Premium revenue was $838.6 million for 1997, a decrease of $21.2 million,
or 2.5%, from $859.8 million reported for 1996. The decrease was primarily the
result of lower new and renewal premiums of $4.3 million and $23.5 million,
respectively, offset by higher sales of single premium individual life insurance
of approximately $6.6 million. Management believes that the decrease was
consistent with trends in the industry, particularly the continuing shift by
consumers from traditional protection products to asset accumulation and
retirement income products. Management also
79
<PAGE> 81
believes that the decrease was reflective of the then current interest rate
environment wherein declining long-term rates have caused traditional protection
products to be comparatively less competitive with variable products.
Universal life and investment-type product policy fees were $127.3 million
for 1997, an increase of $26.4 million, or 26.2%, from $100.9 million reported
for 1996. This increase was primarily the result of higher fees relating to the
Company's FPVA and VUL business of $14.8 million and $8.9 million, respectively,
as a result of an increase in the aggregate account values of such products. For
the year ended December 31, 1997, the Company reported total fees from its FPVA
and VUL business of $50.0 million and $17.8 million, respectively, as compared
to $35.2 million and $8.9 million reported for the year ended December 31, 1996.
FPVA account value increased $1,167.5 million during 1997 to $4,314.1 million as
compared to $3,146.6 million in 1996. The increase in account value in 1997
resulted from new sales and other deposits of $712.7 million and market
appreciation of $738.9 million, offset by approximately $284.1 million in
withdrawals and surrenders. VUL account value increased $65.1 million during
1997 to $106.4 million as compared to $41.3 million in 1996. The increase in
account value in 1997 resulted from new sales and other deposits of $68.3
million and market appreciation of $14.2 million, offset by approximately $17.4
million in withdrawals and surrenders.
Net investment income was $733.0 million for 1997, a decrease of $18.6
million, or 2.5%, from $751.6 million reported for 1996. Lower interest rates in
1997 resulted in lower investment income of approximately $10.4 million, while a
decrease in the Company's average total invested assets during 1997 of
approximately $107.9 million, as compared to 1996, resulted in a further
decrease in investment income of approximately $7.8 million. The effect of
investing new money of approximately $2.0 billion (including the proceeds from
prepayments, sales and maturities of its invested assets, as well as net cash
flow from operating activities), in conjunction with a change in the mix of
invested assets, reduced the total yield on invested assets by approximately 10
basis points in 1997. Average total invested assets in 1997 decreased, as
compared to 1996, primarily as a result of the retirement of the Company's
Eurobond debt issuances at their scheduled maturity dates (see Note 17 to the
Consolidated Financial Statements). During 1997, the Company's average
investment in fixed maturity securities (before unrealized gains or losses)
increased by approximately $459.3 million, while its average investment in
mortgage loans and real estate decreased by approximately $170.5 million and
$390.1 million, respectively. At December 31, 1997, fixed maturity securities,
mortgage loans and real estate represented approximately 56.9%, 13.6% and 10.7%
of total invested assets, as compared to 52.2%, 15.1 % and 14.4% at December 31,
1996. The yield on the Company's invested assets before and after realized gains
(losses) on investments was 7.1% and 7.8%, respectively, for 1997, as compared
to 7.2% and 7.9%, respectively, for 1996. See "Investments".
Net realized gains on investments were $72.1 million for 1997, a decrease
of $3.8 million, or 5.0%, from $75.9 million reported for 1996. The decrease was
due to higher provisions for losses and lower gains on sales of certain
partnership interests offset by higher gains on sales of real estate and common
stock. Provisions for valuation allowances on real estate to be disposed of
aggregated $63.8 million for 1997, as compared to $16.8 million in 1996,
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; realized
gains on sales of real estate were $87.6 million in 1997, as compared to $42.8
million in 1996; realized gains on sales of common stock were $39.7 million in
1997, as compared to $31.4 million in 1996; and gains on sales of certain
partnership interests totaled $1.3 million in 1997, as compared to $10.5 million
in 1996.
Group Pension Profits were $60.0 million for 1997, an increase of $0.5
million, or approximately 0.8%, as compared to $59.5 million reported in 1996.
Group Pension Profits in 1997 consisted of $55.7 million of Group Pension
Payments and $4.3 million 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
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<PAGE> 82
business transferred in the Group Pension Transaction. In 1996, Group Pension
Profits consisted of $66.7 million of Group Pension Payments offset by $(7.2)
million relating to an increase in the aforementioned valuation allowances.
Group Pension Payments in 1997 decreased from that recorded in 1996 primarily
because of the continuing run-off of the Existing Deposits. The decrease in
valuation allowances in 1997 resulted primarily from the decrease in mortgage
loan assets supporting the transferred business due to prepayments of such
loans.
Other income was $145.4 million for 1997, an increase of $28.1 million, or
24.0%, as compared to $117.3 million reported in 1996. The increase was
primarily the result of higher commissions earned by the Company's broker-dealer
operations of $3.5 million, higher fees earned by the Company's mutual fund
management operations of $17.2 million and a gain of $19.4 million relating to
certain assets which had appreciated in value and were transferred to partially
fund the cost of the indemnity reinsurance purchased in connection with the DI
Transaction in 1997. These assets had previously been held on deposit by a third
party reinsurance company under a financial reinsurance arrangement which was
replaced with the aforementioned indemnity reinsurance. Offsetting such
increases was miscellaneous non-recurring income of approximately $8.1 million
recorded in Other Income in 1996 and lower earnings of approximately $2.7
million relating to an aviation reinsurance pool in which the Company
participates. During 1997, the Company's broker-dealer operations reported
commission earnings of $32.2 million, as compared to $28.7 million reported in
1996. Also, during 1997, the Company's mutual fund management operations
reported $42.3 million in fees from advisory, underwriting and distribution
services, as compared to $25.1 million reported in 1996, as assets under
management increased to approximately $5.4 billion from $3.5 billion at December
31, 1997 and 1996, respectively.
Benefits to policyholders were $840.1 million for 1997, a decrease of $32.1
million, or 3.7%, from $872.2 million reported for 1996. The decrease primarily
resulted from favorable mortality in almost all product lines and the DI
Transaction. Favorable mortality contributed approximately $15.6 million of the
decrease, while the DI Transaction caused a decrease in benefits of
approximately $21.6 million. The decrease in benefits caused by the DI
Transaction resulted from the difference between the amount of reserves ceded
(which approximated $367.5 million) and the cost of such reinsurance (which
approximated $345.9 million). However, after the writeoff of associated deferred
policy acquisition costs of approximately $30.7 million, the DI Transaction
resulted in a pre-tax loss of approximately $9.1 million.
Interest credited to policyholders' account balances was $139.4 million for
1997, a decrease of $16.7 million, or 10.7%, from $156.1 million reported for
1996. The decrease was comprised of lower interest crediting of $9.5 million and
$11.9 million on the Company's SPDAs and retained group pension business, offset
by $4.9 million of higher interest crediting on universal life business. The
year to year change in interest credited primarily resulted from the change in
average account balances for the aforementioned products. The average account
balances for such products were $636.5 million, $220.4 million and $496.6
million for 1997, respectively, and $788.0 million, $292.7 million and $470.3
million for 1996, respectively.
Amortization of DAC was $181.2 million for 1997, an increase of $23.0
million, or 14.5%, from $158.2 million reported for 1996. The increase was
primarily the result of: (i) charging off approximately $30.7 million of
deferred policy acquisition costs relating to the DI Transaction, (ii) higher
amortization of approximately $11.6 million relating to the Company's FPVA
product line and (iii) a decrease in amortization of approximately $21.5 million
relating to the Company's traditional life business which resulted from revised
projections of the present value of the ultimate profits expected from such
business to reflect actual results to date. The increase in amortization
relating to FPVAs resulted from higher profits due to an increase in account
value of approximately $1,167.5 million during 1997 to $4,314.1 million, as
compared to $3,146.6 million in 1996. The increase in account value in 1997
resulted from new sales and other deposits of $712.7 million and market
appreciation of $738.9 million, offset by approximately $284.1 million in
withdrawals and surrenders.
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<PAGE> 83
Other operating costs and expenses were $403.7 million for 1997, a decrease
of $42.9 million, or 9.6%, from $446.6 million reported for 1996. The decrease
consists primarily of: (i) lower interest expense in 1997, as compared to 1996,
of approximately $16.2 million as a result of the maturity of the Company's
Eurobond debt (see Note 17 to the Consolidated Financial Statements), (ii) lower
costs incurred of approximately $27.6 million in 1997, as compared to 1996, in
connection with settlements of, and reserves for, various legal disputes,
including lawsuits against the Company alleging market conduct improprieties
(see Note 19 to the Consolidated Financial Statements), (iii) nonrecurring
charges in 1996 of approximately $14.0 million relating to special termination
benefits granted to certain employees under an early retirement program offered
by the Company in April 1996 (see Note 8 to the Consolidated Financial
Statements), (iv) costs incurred of approximately $2.7 million for severance
benefits granted to certain employees in connection with the DI Transaction and
(v) higher commissions and sub-advisor fees of approximately $7.0 million and
higher operating expenses of approximately $8.5 million incurred by the
Company's broker-dealer and mutual fund management operations.
Dividends to policyholders of $224.3 million in 1997 decreased $7.1
million, or 3.1%, from $231.4 million reported in 1996. The decrease primarily
resulted from a reduction in the interest component of the dividend scales on
all policies during 1997 by amounts ranging from 15 to 50 basis points, which
was partially offset by an increase in life insurance reserves.
The Company's provision for federal income taxes in 1997, including the tax
effect of demutualization expenses, of $53.8 million included a benefit relating
to the surplus tax of $5.8 million, compared to surplus tax expense incurred of
$12.8 million in 1996. The Company's effective tax rate before the surplus tax
and extraordinary item was 33.6% in 1997, as compared to approximately 31% in
1996.
The Company is subject to the surplus tax (add-on tax) imposed on mutual
life insurance companies under Section 809 of the Code. Section 809 requires
(and the surplus tax results from) the disallowance of a portion of a mutual
life insurance company's policyholder dividends as a deduction from taxable
income. As a stock company, the Company will no longer be subject to the surplus
tax.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company reported consolidated pre-tax earnings of $100.5 million ($56.5
million after tax) for the year ended December 31, 1996, an increase of $38.7
million or 62.6% ($16.1 million or 39.9% after tax), as compared to consolidated
pre-tax earnings of $61.8 million ($40.4 million after tax) for the year ended
December 31, 1995.
Consolidated revenues were $1,965.0 million for 1996, an increase of $105.4
million, or 5.7%, from $1,859.6 million reported for 1995. The increase in
revenues primarily resulted from increases in net realized investment gains,
universal life and investment-type product policy fees, net investment income
and other income of $59.7 million, $20.1 million, $22.8 million and $21.1
million, respectively, offset by decreases in premiums of $16.1 million and
Group Pension Profits of $2.2 million.
Total benefits and expenses were $1,864.5 million for 1996, an increase of
$66.7 million, or 3.7%, from $1,797.8 million reported for 1995. The increase
was primarily attributable to increases in amortization of policy acquisition
costs, other operating costs and expenses and dividends to policyholders of
$25.6 million, $62.8 million and $8.9 million, respectively, offset by decreases
in benefits to policyholders and interest credited to policyholders' account
balances of $11.4 million and $19.2 million, respectively.
Premium revenue was $859.8 million for 1996, a decrease of $16.1 million,
or 1.8%, from $875.9 million reported for 1995. The decrease was primarily the
result of lower premiums on traditional life insurance of $7.2 million in
addition to lower premiums of $5.6 million relating to the
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<PAGE> 84
sales of individual immediate annuities. Management believes that the decrease
was consistent with trends in the industry, particularly the continuing shift by
consumers from traditional protection products to asset accumulation and
retirement income products. Management also believes that the decrease was
reflective of the then current interest rate environment wherein declining
long-term rates have caused traditional protection products to be comparatively
less competitive with variable products.
Universal life and investment-type product policy fees were $100.9 million
for 1996, an increase of $20.1 million, or 24.9%, from $80.8 million reported
for 1995. This increase was primarily the result of higher fees relating to the
Company's FPVA and VUL business of $12.4 million and $6.9 million, respectively,
as a result of an increase in the aggregate account values of such products.
FPVA account value increased $929.4 million during 1996 to $3,146.6 million as
compared to $2,217.2 million in 1995. The increase in account value in 1996
resulted from new sales and other deposits of $668.4 million and market
appreciation of $448.6 million, offset by approximately $187.6 million in
withdrawals and surrenders. VUL account value increased $30.5 million during
1996 to $41.3 million as compared to $10.8 million in 1995. The increase in
account value in 1996 resulted from new sales and other deposits of $35.7
million and market appreciation of $4.7 million, offset by approximately $9.9
million in withdrawals and surrenders.
Net investment income was $751.6 million for 1996, an increase of $22.8
million, or 3.1%, from $728.8 million reported for 1995. From 1995 to 1996, the
Company's investment results benefited from the strong performance of the
Company's equity partnership investments, while being constrained by slightly
declining interest rates. Invested assets produced a yield (including realized
capital gains) of 7.9% in 1996, compared with 7.1% in 1995.
Net realized gains on investments were $75.9 million for 1996, an increase
of $59.7 million, or 368.5%, from $16.2 million reported for 1995. The increase
was primarily due to higher realized gains on sales of equity securities and
real estate and lower provisions for losses on real estate classified as to be
disposed of. Realized gains on sales of equity securities in 1996 totaled $30.0
million as compared to $9.2 million in 1995, realized gains on sales of real
estate in 1996 totaled $42.8 million as compared to $28.3 million in 1995 and
provisions for valuation allowances on real estate to be disposed of aggregated
$16.8 million in 1996 as compared to $39.5 million in 1995. In addition, the
Company recorded realized gains on sales and prepayments of fixed maturity
securities in 1996 of $6.2 million, a decrease of approximately $12.8 million
from that reported in 1995, which decrease was largely offset by a reduction in
mortgage loan valuation allowances in 1996 of approximately $4.0 million, as
compared to an increase in the amount of such allowances of approximately $4.0
million recorded in 1995.
Group Pension Profits were $59.5 million for 1996, a decrease of $2.2
million, or approximately 3.6%, as compared to $61.7 million reported in 1995.
Group Pension Profits in 1996 consisted of $66.7 million of Group Pension
Payments and ($7.2) million 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 1995, Group Pension Profits consisted of $70.2 million in Group
Pension Payments offset by $(8.5) million relating to an increase in the
aforementioned valuation allowances. Group Pension Payments in 1996 decreased
from that recorded in 1995 primarily because of the continuing run-off of the
Existing Deposits. The increase in valuation allowances in 1996 was due to one
loan in the portfolio.
Other income was $117.3 million for 1996, an increase of $21.1 million, or
21.9%, from $96.2 million reported for 1995. The increase in other income was
principally the result of higher commissions earned in the Company's
broker-dealer operations and higher advisory fees in its mutual fund management
operations.
Benefits to policyholders were $872.2 million for 1996, a decrease of $11.4
million, or 1.3%, from $883.6 million reported for 1995. The decrease primarily
consisted of approximately $3.5 mil-
83
<PAGE> 85
lion relating to favorable mortality in almost all product lines and lower
surrenders on traditional life insurance products and a decrease of
approximately $6.1 million in sales of immediate annuities.
Interest credited to policyholders' account balances was $156.1 million for
1996, a decrease of $19.2 million, or 10.9%, from $175.3 million reported for
1995. The decrease in interest credited was primarily the result of a decrease
in policyholders' account balances which the Company believes reflected consumer
preferences for separate account participation products.
Amortization of DAC was $158.2 million for 1996, an increase of $25.6
million, or 19.3%, from $132.6 million reported for 1995. The increase was
primarily the result of higher profitability across all major product lines.
Amortization of deferred expenses attributable to traditional participating
whole life policies increased by $9.5 million due to improved profitability
resulting from higher realized gains in 1996, while higher profitability on the
Company's universal life products resulting from better mortality experience, as
compared to the prior year, caused amortization to increase by $11.6 million. In
addition, the Company's continuing growth in the flexible payment variable
annuities fund base resulted in an increase in advisory fees which contributed
approximately $12.7 million to the increase in policy acquisition cost
amortization. These increases were partially offset by a $2.4 million decrease
in amortization relating to term business, as a result of lower business
production as compared to the prior year.
Other operating costs and expenses were $446.6 million for 1996, an
increase of $62.8 million, or 16.4%, from $383.8 million reported for 1995,
largely as a result of: (i) costs incurred of approximately $27.6 million
relating to settlements of, and reserves for, various legal disputes, including
lawsuits against the Company alleging market conduct improprieties (see Note 19
to the Consolidated Financial Statements), (ii) $5.1 million of legal expenses
relating to the aforementioned legal disputes and lawsuits and (iii)
approximately $14.0 million of expense associated with special termination
benefits paid to certain employees under an early retirement program offered by
the Company in April of 1996 (see Note 8 to the Consolidated Financial
Statements). Other factors contributing to the increase in other operating costs
and expenses during 1996 included higher commissions in the Company's
broker-dealer operations and higher advisory fees in its mutual fund management
operations.
Dividends to policyholders of $231.4 million in 1996 were slightly higher
than the $222.5 million level of 1995. During 1996, the Company maintained the
dividend scale from the preceding year and the increase resulted from an
increase in life insurance reserves during 1996.
The Company's provision for federal income taxes of $44.0 million for 1996
included surplus tax of $12.8 million, as compared to the 1995 provision for
federal income taxes of $21.4 million which included $0.0 relating to surplus
tax. The Company did not incur any surplus tax in 1995 as the differential
earnings rate was zero.
The Company is subject to the add-on (surplus) tax imposed on mutual life
insurance companies under Section 809 of the Code. Section 809 requires (and the
surplus tax results from) the disallowance of a portion of a mutual life
insurance company's policyholder dividends as a deduction from taxable income.
As a stock company, the Company will no longer be subject to the surplus tax.
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 Group Pension Transaction, as well as the
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<PAGE> 86
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 will include, following the Demutualization, 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. 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. For a reconciliation of the amounts reported in the
segments with the amounts reported in the consolidated financial statements, see
Note 6 to the Consolidated Financial Statements.
85
<PAGE> 87
The following table presents certain summary financial data for the Company
by operating segment as of the dates and for the periods indicated.
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX
MONTHS ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------
1998 1997 1997 1996 1995
--------- --------- ----------- ----------- -----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES(1):
Protection Products(2)..... $ 813.8 $ 775.8 $ 1,598.7 $ 1,593.8 $ 1,485.5
Accumulation Products...... 145.8 114.6 239.4 217.0 213.9
Other Products............. 80.4 61.1 131.1 145.9 150.5
--------- --------- --------- --------- ---------
$ 1,040.0 $ 951.5 $ 1,969.2 $ 1,956.7 $ 1,849.9
========= ========= ========= ========= =========
TOTAL BENEFITS AND
EXPENSES(1):
Protection Products........ $ 677.1 $ 727.4 $ 1,469.7 $ 1,492.6 $ 1,456.8
Accumulation Products...... 95.8 90.3 195.3 181.1 179.7
Other Products............. 67.0 55.3 112.8 137.8 141.6
--------- --------- --------- --------- ---------
$ 839.9 $ 873.0 $ 1,777.8 $ 1,811.5 $ 1,778.1
========= ========= ========= ========= =========
INCOME BEFORE INCOME
TAXES(1):
Protection Products(2)..... $ 136.7 $ 48.3 $ 129.0 $ 101.2 $ 28.7
Accumulation Products...... 50.0 24.3 44.1 35.9 34.2
Other Products............. 13.4 5.8 18.3 8.1 8.9
--------- --------- --------- --------- ---------
$ 200.1 $ 78.4 $ 191.4 $ 145.2 $ 71.8
========= ========= ========= ========= =========
ASSETS(1):
Protection Products(3)..... $16,218.3 $15,291.9 $15,776.5 $15,158.5 $15,213.2
Accumulation Products...... 6,285.8 5,266.4 5,757.9 4,747.2 3,981.7
Other Products............. 1,209.8 1,327.1 1,234.2 1,417.1 1,713.3
--------- --------- --------- --------- ---------
$23,713.9 $21,885.4 $22,768.6 $21,322.8 $20,908.2
========= ========= ========= ========= =========
POLICYHOLDER
LIABILITIES(1)(4):
Protection Products(5)..... $10,102.9 $10,317.7 $10,105.7 $ 9,996.2 $ 9,936.3
Accumulation Products...... 1,332.2 1,493.0 1,416.1 1,601.7 1,797.2
Other Products............. 480.0 321.9 513.4 542.4 694.8
--------- --------- --------- --------- ---------
$11,915.1 $12,132.6 $12,035.2 $12,140.3 $12,428.3
========= ========= ========= ========= =========
SEPARATE ACCOUNT
LIABILITIES(1)(6):
Protection Products(7)..... $ 3,967.8 $ 3,455.9 $ 3,720.1 $ 3,393.0 $ 3,500.1
Accumulation Products...... 4,598.1 3,469.8 4,002.6 2,851.4 1,928.1
Other Products............. 565.1 630.3 547.7 625.6 613.3
--------- --------- --------- --------- ---------
$ 9,131.0 $ 7,556.0 $ 8,270.4 $ 6,870.0 $ 6,041.5
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Excluded from the Company's operating segments are revenues, benefits and
expenses, assets and liabilities relating to contracts issued by the Company
with respect to its employee benefit plans, as well as any nonrecurring or
unusual items. Such amounts constitute reconciling items in accordance with
SFAS No. 131. Accordingly, see Note 6 to the Consolidated Financial
Statements and Notes to the Unaudited Interim Condensed Consolidated
Financial Statements for a reconciliation of amounts reported for the
Company's operating segments to such amounts reported in the Company's
consolidated financial statements.
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<PAGE> 88
(2) Includes Group Pension Profits of $22.7 million, $28.2 million, $60.0
million, $59.5 million and $61.7 million for the six-month periods ended
June 30, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. See "-- The Group Pension Transaction" and "Risk
Factors -- Decline and Expiration of Payments and Income Related to the
Group Pension Transaction".
(3) Includes assets transferred in the Group Pension Transaction of $5,720.5
million, $5,538.5 million, $5,714.9 million, $5,627.9 million, and $5,992.8
million as of June 30, 1998 and 1997, and December 31, 1997, 1996, and 1995,
respectively (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 to the Consolidated
Financial Statements).
(4) Includes interest credited to policyholders' account balances.
(5) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,890.9 million, $2,086.3 million, $1,991.0 million,
$2,158.1 million, and $2,315.1 million as of June 30, 1998 and 1997, and
December 31, 1997, 1996, and 1995, respectively (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 11 to the Consolidated Financial Statements).
(6) Each segment includes separate account assets in an amount not less than the
corresponding liability reported.
(7) Includes separate account liabilities transferred in the Group Pension
Transaction of $3,761.2 million, $3,397.2 million, $3,614.0 million,
$3,358.3 million, and $3,495.4 million as of June 30, 1998 and 1997, and
December 31, 1997 1996, and 1995, respectively (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 11
to the Consolidated Financial Statements).
Assets have been allocated to the segments in amounts sufficient to support
the associated liabilities of each segment and maintain a separately calculated
RBC level for each segment equal to that of the Company's RBC level. Allocations
of net investment income and net realized gains on investments were based on the
amount of assets allocated to each segment. Other costs and operating expenses
were allocated to each of the segments based on; (i) a review of the nature of
such costs, (ii) cost allocations utilizing time studies and (iii) cost
estimates included in the Company's product pricing. Substantially all non-cash
transactions and impaired real estate (including real estate acquired in
satisfaction of debt) have been allocated to the Protection Products segment.
87
<PAGE> 89
Set forth below is a discussion of the operating results of the Company by
segment for the periods indicated.
PROTECTION PRODUCTS SEGMENT
The following table presents certain summary financial data relating to the
Company's Protection Products segment for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
------------------ ------------------------------------
1998 1997 1997 1996 1995
------- ------- -------- ------------ --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Premiums............................ $343.8 $403.4 $ 817.0 $ 837.4 $ 845.1
Universal life policy fees.......... 41.8 30.3 74.9 63.4 53.9
Net investment income and net
realized gains on investments..... 397.0 304.7 611.9 605.3 501.5
Group Pension Profits............... 22.7 28.2 60.0 59.5 61.7
Other income........................ 8.5 9.2 34.9 28.2 23.3
------ ------ -------- -------- --------
813.8 775.8 1,598.7 1,593.8 1,485.5
BENEFITS AND EXPENSES:
Benefits to policyholders........... 349.8 398.0 776.8 815.0 818.5
Interest credited to policyholders'
account balances.................. 27.0 28.3 57.5 48.2 49.4
Amortization of deferred policy
acquisition costs................. 55.4 55.8 146.8 135.0 118.7
Other operating costs and
expenses.......................... 138.1 129.4 267.6 267.1 252.0
Dividends to policyholders.......... 106.8 115.9 221.0 227.3 218.2
------ ------ -------- -------- --------
677.1 727.4 1,469.7 1,492.6 1,456.8
Income before income taxes.......... $136.7 $ 48.3 $ 129.0 $ 101.2 $ 28.7
====== ====== ======== ======== ========
</TABLE>
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED JUNE
30, 1997 -- PROTECTION PRODUCTS SEGMENT
Premium revenue was $343.8 million for the six-month period ended June 30,
1998, a decrease of $59.6 million, or 14.8%, from $403.4 million reported in the
comparable period ended June 30, 1997. Approximately $36.6 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 and renewal premiums of $7.6
million and $9.7 million, respectively, as well as lower single premiums of $5.6
million due to lower dividends.
Universal life and investment-type product policy fees were $41.8 million
for the six-month period ended June 30, 1998, an increase of $11.5 million, or
38.0%, from $30.3 million reported in the comparable period ended June 30, 1997.
This increase was primarily the result of higher fees relating to the Company's
VUL business of $9.1 million. For the six-month period ended June 30, 1998, the
Company reported total fees from its VUL business of $16.6 million, as compared
to $7.5 million reported for the comparable period ended June 30, 1997. The
increase in VUL fees is primarily due to higher cost of insurance charges of
approximately $4.5 million and higher and administrative charges of $4.2 million
consistent with the in force growth of such business.
Net investment income and net realized gains on investments were $397.0
million for the six-month period ended June 30, 1998, an increase of $92.3
million, or 30.3%, from $304.7 million reported in the comparable period ended
June 30, 1997. The increase was primarily due to higher gains from sales of real
estate, which was partially offset by a decrease in yield on investment of new
money.
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<PAGE> 90
Group Pension Profits were $22.7 million for the six-month period ended
June 30, 1998, a decrease of $5.5 million, or 19.5%, from $28.2 million reported
in the comparable period ended June 30, 1997. Group Pension Profits during the
six-month period ended June 30, 1998 consisted of $23.5 million of Group Pension
Payments offset by an increase of $0.8 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 $24.3 million of Group Pension
Payments and $3.9 million relating to a decrease in the aforementioned valuation
allowances. Group Pension Payments during the six-month period ended June 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
six-month period ended June 30, 1997 resulted primarily from the paydown of
certain mortgage loans.
Other income was $8.5 million for the six-month period ended June 30, 1998,
a decrease of $0.7 million, or 7.6%, as compared to $9.2 million reported in the
comparable prior year period. The decrease was primarily the result of lower
expense allowances under the Company's reinsurance programs.
Benefits to policyholders were $349.8 million for the six-month period
ended June 30, 1998, a decrease of $48.2 million, or 12.1%, as compared to
$398.0 million reported in the comparable prior year period. The decrease
primarily resulted from the transfer of the Company's disability income
insurance business pursuant to the DI Transaction during the fourth quarter of
1997. During the six months ended June 30, 1997, the Company reported benefits
of approximately $36.7 million relating to its disability income insurance
business. Also contributing to the decrease was a $12.0 million decrease in
reserves relating to the Company's traditional whole life business which is
consistent with the decrease in the amount of such in force business.
Interest credited to policyholder account balances was $27.0 million for
the six-month period ended June 30, 1998, a decrease of $1.3 million, or 4.6%,
as compared to $28.3 million reported in the comparable prior year period. The
decrease primarily resulted from lower interest crediting across substantially
all product lines.
Amortization of DAC costs was $55.4 million for the six-month period ended
June 30, 1998, a decrease of $0.4 million, or 0.7%, as compared to $55.8 million
reported in the comparable prior year period. The decrease is primarily the
result of: (i) a decrease in amortization of approximately $3.0 million relating
to the VUL product line which experienced $4.6 million of higher death claims as
compared to the comparable prior year period and (ii) higher amortization of
approximately $2.4 million in the traditional whole life business due to gains
from real estate sales.
Other operating costs and expenses were $138.1 million for the six-month
period ended June 30, 1998, an increase of $8.7 million, or 6.7%, as compared to
$129.4 million reported in the comparable prior year period. The increase
primarily consists of higher costs incurred in connection with certain strategic
initiatives, including resolving the Year 2000 issue.
Dividends to policyholders of $106.8 million for the six-month period ended
June 30, 1998 decreased $9.1 million, or 7.9% from $115.9 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,
which was partially offset by an increase in life insurance reserves.
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<PAGE> 91
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996 -- PROTECTION PRODUCTS SEGMENT
Premium revenue was $817.0 million for 1997, a decrease of $20.4 million,
or 2.4%, from $837.4 million reported for 1996. The decrease was primarily the
result of lower new and renewal premiums, offset by higher sales of single
premium individual life insurance.
Universal life policy fees were $74.9 million for 1997, an increase of
$11.5 million, or 18.1%, from $63.4 million reported for 1996. This increase was
primarily the result of an increase in fees relating to the Company's VUL
business of $8.9 million. For the year ended December 31, 1997, the Company
reported total fees from VUL business of $17.8 million, as compared to $8.9
million reported for the year ended December 31, 1996. VUL account value
increased $65.1 million during 1997 to $106.4 million, as compared to $41.3
million in 1996. The increase in account value in 1997 resulted from new sales
and other deposits of $68.3 million and market appreciation of $14.2 million,
offset by approximately $17.4 million in withdrawals and surrenders.
Net investment income and net realized gains on investments were $611.9
million for the year ended December 31, 1997, a $6.6 million increase from
$605.3 million for 1996. The increase was primarily due to higher average
invested assets of approximately $300.0 million offset by slightly lower yields
(including net realized gains on investments) for 1997 of 7.8%, as compared to
7.9% for 1996.
Group Pension Profits were $60.0 million for 1997, an increase of $0.5
million, or approximately 0.8%, as compared to $59.5 million reported in 1996.
Group Pension Profits in 1997 consisted of $55.7 million of Group Pension
Payments and $4.3 million relating to adjustments required to reflect the
earnings from such payments in accordance with GAAP. Such adjustments primarily
related to changes in the valuation allowances established to recognize
impairment of assets supporting the business transferred in the Group Pension
Transaction. In 1996, Group Pension Profits consisted of $66.7 million of Group
Pension Payments, offset by $(7.2) million relating to an increase in the
aforementioned valuation allowances. Group Pension Payments in 1997 decreased
from that recorded in 1996 primarily because of the continuing run-off of the
Existing Deposits. The decrease in valuation allowances in 1997 resulted
primarily from the decrease in mortgage loan assets supporting the transferred
business due to prepayments of such loans.
Other income was $34.9 million for 1997, an increase of $6.7 million, or
23.8%, as compared to $28.2 million reported in 1996. The increase was primarily
the result of a gain of $19.4 million on assets held on deposit under a
financial reinsurance contract which was replaced with an indemnity reinsurance
contract during 1997, offset by a decrease of $8.1 million relating to
miscellaneous non-recurring income recorded in Other Income in 1996 and $4.6
million of other miscellaneous items.
Benefits to policyholders were $776.8 million for 1997, a decrease of $38.2
million, or 4.7%, from $815.0 million reported for 1996. The decrease primarily
resulted from favorable mortality in almost all product lines and the DI
Transaction. Favorable mortality contributed approximately $15.6 million of the
decrease, while the DI transaction caused a decrease in benefits of
approximately $21.6 million. The decrease in benefits caused by the DI
Transaction resulted from the difference between the amount of reserves ceded
(which approximated $367.5 million) and the cost of such reinsurance (which
approximated $345.9 million). However, after the writeoff of associated deferred
policy acquisition costs of approximately $30.7 million, the DI Transaction
resulted in a loss of approximately $9.1 million.
Interest credited to policyholders' account balances was $57.5 million for
1997, an increase of $9.3 million, or 19.3%, from $48.2 million reported for
1996. The increase was primarily comprised of $4.9 million of higher interest
crediting on universal life business. The average interest crediting rates in
1997 on the Company's universal life business was approximately 6.3% in 1997, as
compared to 6.0% in 1996. The average account balances for such products were
$496.6 million for 1997 and $470.3 million for 1996, respectively.
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<PAGE> 92
Amortization of DAC was $146.8 million for 1997, an increase of $11.8
million, or 8.7%, from $135.0 million reported for 1996. The increase was
primarily the result of charging off approximately $30.7 million of deferred
policy acquisition costs relating to the DI Transaction, offset by a decrease in
amortization of approximately $21.5 million relating to traditional life
business which resulted from revised projections of the ultimate profits
expected from such business based on actual results to date.
Other operating costs and expenses were $267.6 million for 1997, an
increase of $0.5 million, or 0.2%, from $267.1 million reported for 1996.
Dividends to policyholders of $221.0 million in 1997 decreased $6.3
million, or 2.8%, from $227.3 million reported in 1996. The decrease primarily
resulted from a reduction in the interest component of the dividend scales in
1997 on all policies by amounts ranging from 15 to 50 basis points, which was
partially offset by an increase in life insurance reserves.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 --
PROTECTION PRODUCTS SEGMENT
Premium revenue was $837.4 million for 1996, a decrease of $7.7 million, or
0.9%, from $845.1 million reported for 1995. The decrease was primarily the
result of lower individual life insurance premiums of approximately $7.2
million. Management believes that the decrease was consistent with trends in the
industry, particularly the continuing shift by consumers from traditional life
insurance policies to variable life insurance products and also was reflective
of the then current interest rate environment, wherein declining long-term rates
caused traditional protection products to be comparatively less competitive than
variable products.
Universal life policy fees were $63.4 million for 1996, an increase of $9.5
million, or 17.6%, from $53.9 million reported for 1995. The increase was
primarily the result of increased fees of $6.8 million and $2.3 million relating
to the Company's variable universal life and universal life insurance products,
respectively, which grew as a result of new sales and increases in the value of
assets underlying such products. Fees earned on separate account products, which
are a percentage of separate account asset values, benefited from the strong
stock market returns experienced during this period.
Net investment income and net realized gains on investments were $605.3
million for 1996, an increase of $103.8 million, or 20.7%, from $501.5 million
reported for 1995. The increase primarily resulted from higher gains realized on
sales of real estate and equity securities during 1996 as compared to 1995 and
additional investment income reflecting an increase in the segment's general
account invested assets of approximately $218.3 million.
Group Pension Profits were $59.5 million for 1996, a decrease of $2.2
million, or approximately 3.6%, as compared to $61.7 million reported in 1995.
Group Pension Profits in 1996 consisted of $66.7 million of Group Pension
Payments and $(7.2) million 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 1995, Group Pension Profits consisted of $70.2 million in Group
Pension Payments offset by $(8.5) million relating to an increase in the
aforementioned valuation allowances. Group Pension Payments in 1996 decreased
from that recorded in 1995 primarily because of the continuing run-off of the
Existing Deposits. The increase in valuation allowances in 1996 was due to one
loan in the portfolio.
Other income was $28.2 million for 1996, an increase of $4.9 million, or
21.0%, from $23.3 million reported for 1995. The increase was primarily the
result of an increase from the prior year of approximately $5.2 million relating
to interest income received in connection with a federal income tax refund.
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<PAGE> 93
Benefits to policyholders were $815.0 million for 1996, a decrease of $3.5
million, or 0.4%, from $818.5 million reported for 1995, primarily as a result
of favorable mortality in almost all product lines and lower surrenders on
traditional products.
Interest credited to policyholders' account balances was $48.2 million for
1996, a decrease of $1.2 million, or 2.4%, from $49.4 million reported for 1995.
The decrease in interest credited was primarily the result of a decrease in
policyholders' account balances relating to group universal life business.
Amortization of DAC was $135.0 million for 1996, an increase of $16.3
million, or 13.7%, from $118.7 million reported for 1995. The increase was
primarily attributable to higher gross margins on traditional and universal life
products resulting from favorable mortality and higher investment yields.
Other operating costs and expenses were $267.1 million for 1996, an
increase of $15.1 million, or 6.0%, from $252.0 million reported for 1995. The
increase was primarily related to expenses incurred for the operation,
management and enhancement of the Company's information systems.
Dividends to policyholders were $227.3 million for 1996, an increase of
$9.1 million, or 4.2%, from $218.2 million reported for 1995. During 1996, the
Company maintained the dividend scale from the preceding year and the increase
resulted from an increase in life insurance reserves during 1996.
ACCUMULATION PRODUCTS SEGMENT
The following table presents certain summary financial data relating to the
Company's Accumulation Products segment for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
------------------ --------------------------
1998 1997 1997 1996 1995
------- ------- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Premiums................................... $ 1.8 $ 2.8 $ 5.0 $ 4.2 $ 9.8
Investment-type product fees............... 31.6 23.2 50.9 36.6 24.8
Net investment income and net realized
gains on investments..................... 77.8 65.3 131.4 144.0 153.3
Other income............................... 34.6 23.4 52.1 32.2 26.0
------ ------ ------ ------ ------
145.8 114.7 239.4 217.0 213.9
BENEFITS AND EXPENSES:
Benefits to policyholders.................. 8.9 11.3 21.2 17.9 24.0
Interest credited to policyholders' account
balances................................. 27.9 35.3 71.4 84.9 92.3
Amortization of deferred policy acquisition
costs.................................... 15.4 12.6 34.4 23.2 13.9
Other operating costs and expenses......... 42.7 30.0 66.3 52.8 47.2
Dividends to policyholders................. 0.9 1.1 2.0 2.3 2.3
------ ------ ------ ------ ------
95.8 90.3 195.3 181.1 179.7
Income before income taxes................. $ 50.0 $ 24.4 $ 44.1 $ 35.9 $ 34.2
====== ====== ====== ====== ======
</TABLE>
92
<PAGE> 94
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED
JUNE 30, 1997 -- ACCUMULATION PRODUCTS SEGMENT
Premium revenue was $1.8 million for the six-month period ended June 30,
1998, a decrease of $1.0 million, or 33.3%, from $2.8 million reported in the
comparable period ended June 30, 1997. The decrease was entirely attributable to
lower sales of immediate annuities.
Investment-type product policy fees were $31.6 million for the six-month
period ended June 30, 1998, an increase of $8.4 million, or 36.2%, from $23.2
million reported in the comparable period ended June 30, 1997. This increase
resulted from higher fees from the Company's FPVA business. For the six-month
period ended June 30, 1998, the Company reported total fees from its FPVA of
$31.2 million, as compared to $22.8 million reported for the comparable period
ended June 30, 1997. The variance in the FPVA fees is primarily a result of an
increase in the account value. The average FPVA account value for the six-month
period ended June 30, 1998 was $4.3 billion, as compared to $3.1 billion for the
comparable period ended June 30, 1997.
Net investment income and net realized gains on investments were $77.8
million for the six-month period ended June 30, 1998, an increase of $12.5
million, or 19.1%, from $65.3 million reported in the comparable period ended
June 30, 1997. The increase was due to higher gains from the sales of real
estate offset by lower average invested assets.
Other income was $34.6 million for the six-month period ended June 30,
1998, an increase of $11.2 million, or 47.9%, as compared to $23.4 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 $11.6 million. During the six-month period ended June 30, 1998, the Company's
mutual fund management operations reported $29.5 million in fees from advisory,
underwriting and distribution services, as compared to $17.9 million reported in
the comparable prior year period.
Benefits to policyholders were $8.9 million for the six-month period ended
June 30, 1998, a decrease of $2.4 million, or 21.2%, as compared to $11.3
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 $27.9 million for
the six-month period ended June 30, 1998, a decrease of $7.4 million, or 20.9%,
as compared to $35.3 million reported in the comparable prior year period. The
decrease primarily resulted from lower interest crediting on all accumulation
products consistent with the decrease in such corresponding liabilities.
Amortization of DAC was $15.4 million for the six-month period ended June
30, 1998, an increase of $2.8 million, or 22.2%, as compared to $12.6 million
reported in the comparable prior year period. The increase is primarily the
result of higher amortization of approximately $4.1 million relating to the
Company's FPVA product line. The increase in amortization relating to FPVAs
resulted from higher management fees due to an increase in separate account
value. The increase in account value during the first six months of 1998 of
$581.9 million resulted from new sales and other deposits of $346.5 million and
market appreciation of $466.9 million, offset by approximately $231.5 million in
withdrawals and surrenders.
Other operating costs and expenses were $42.7 million for the six-month
period ended June 30, 1998, an increase of $12.7 million, or 42.3%, as compared
to $30.0 million reported in the comparable prior year period. The increase
primarily consists of higher sub-advisory fees, commission expense and other
cost of sales of ECM of approximately $5.6 million.
Dividends to policyholders of $0.9 million for the six-month period ended
June 30, 1998 decreased $0.2 million, or 18.2%, from $1.1 million reported in
the comparable prior year period. The
93
<PAGE> 95
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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 --
ACCUMULATION PRODUCTS SEGMENT
Premium revenue was $5.0 million for 1997, an increase of $0.8 million, or
19.0% from $4.2 million reported for 1996. The increase primarily resulted from
$0.8 million in higher sales of immediate annuities to $5.0 million for 1997, as
compared to $4.2 million for 1996.
Investment-type product fees were $50.9 million for 1997, an increase of
$14.3 million, or 39.1%, from $36.6 million reported for 1996. This increase was
primarily the result of an increase in fees relating to the Company's FPVA
business of $14.8 million. For the year ended December 31, 1997, the Company
reported total fees in its FPVA business of $50.0 million, as compared to $35.2
million reported for the year ended December 31, 1996. FPVA account value
increased $1,167.5 million during 1997 to $4,314.1 million, as compared to
$3,146.6 million in 1996. The increase in account value in 1997 resulted from
new sales and other deposits of $712.7 million and market appreciation of $738.9
million, offset by approximately $284.1 million in withdrawals and surrenders.
Net investment income and net realized gains on investments aggregated
$131.4 million for 1997, a decrease of $12.6 million, or 8.75%, from $144.0
million reported for 1996. The decrease is primarily related to lower average
invested assets during 1997 of approximately $180.0 million, as compared to
1996. Average total invested assets in 1997 decreased, as compared to 1996,
primarily as a result of a decline in SPDA's in force. During 1997, SPDA account
value decreased $156.8 million to $558.1 million, as compared to $714.9 million
in 1996. The decrease in account value in 1997 resulted from new sales and other
deposits of $4.0 million and interest on the account value of $34.1 million,
offset by approximately $194.9 million in withdrawals and surrenders.
Other income was $52.1 million for 1997, an increase of $19.9 million, or
61.8%, as compared to $32.2 million reported in 1996. The increase was primarily
the result of higher fees earned by the Company's mutual fund management
operations of $16.1 million. During 1997, the Company's mutual fund management
operations reported $40.2 million in fees from advisory, underwriting and
distribution services as compared to $24.1 million reported in 1996 as assets
under management increased to approximately $5.4 billion from $3.5 billion at
December 31, 1997 and 1996, respectively.
Benefits to policyholders were $21.2 million for 1997, an increase of $3.3
million, or 18.4%, from $17.9 million reported for 1996. The increase primarily
resulted from higher transfers to supplementary contracts with life
contingencies from immediate annuities of approximately $2.9 million.
Interest credited to policyholders' account balances was $71.4 million for
1997, a decrease of $13.5 million, or 15.9%, from $84.9 million reported for
1996. The decrease was primarily due to lower interest crediting of
approximately $9.5 million relating to the Company's SPDA business which
resulted from a decrease in SPDA account value of approximately $156.8 million
during 1997 to $558.1 million, as compared to $714.9 million at the end of 1996.
The decrease in account value was due to higher withdrawals in 1997, as compared
to 1996, which management believes reflected consumer preferences for separate
account products. Average interest crediting rates on the Company SPDA's were
approximately 5.5% in both 1997 and 1996, respectively.
Amortization of DAC was $34.4 million for 1997, an increase of $11.2
million, or 48.3%, from $23.2 million reported for 1996. This increase primarily
consisted of higher amortization of $11.6 million, as compared to the prior
year, relating to the Company's FPVA product line which resulted from higher
profits due to an increase account value of approximately $1,167.5 million
during 1997 to $4,314.1 million, as compared to $3,146.6 million in 1996. The
increase in account value in 1997 resulted from new sales and other deposits of
$712.7 million and market appreciation of $738.9 million, offset by
approximately $284.1 million in withdrawals and surrenders.
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<PAGE> 96
Other operating costs and expenses were $66.3 million for 1997, an increase
of $13.5 million, or 25.6%, from $52.8 million reported for 1996. The increase
consisted primarily of higher sub-advisor fees and commissions of approximately
$5.1 million and higher operating expenses of approximately $5.9 million
incurred by the Company's mutual fund management operations.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 --
ACCUMULATION PRODUCTS SEGMENT
Premium revenue was $4.2 million for 1996, a decrease of $5.6 million, or
57.1%, from $9.8 million reported for 1995, as a result of lower sales of
immediate annuities.
Investment-type product policy fees were $36.6 million for 1996, an
increase of $11.8 million, or 47.6%, from $24.8 million reported for 1995. The
increase was primarily a result of increased fees relating to the Company's
FPVAs. The increase in fees from FPVAs resulted from an increase of $929.4
million in the account value of such products in 1996 to $3,146.6 million as
compared to $2,217.2 million in 1995. The increase in account value resulted
from new sales and other deposits in 1996 of $668.4 million and market
appreciation of $448.5 million, offset by approximately $187.5 million in
withdrawals and surrenders.
Net investment income and net realized gains on investments were $144.0
million for 1996, a decrease of $9.3 million, or 6.1%, from $153.3 million
reported for 1995. The decrease was primarily a result of a decline in SPDA
business in force. Average general account assets decreased by approximately
$133.0 million from 1995 to 1996, reflecting consumer preferences for separate
account products.
Other income was $32.2 million for 1996, an increase of $6.2 million, or
23.9%, from $26.0 million reported for 1995. The increase was primarily a result
of higher asset management fees of approximately $10.4 million earned by the
Company's mutual fund management operation, partially offset by a decrease in
transfers from individual annuities to supplementary contracts with life
contingencies of $1.8 million to $5.4 million as compared to $7.2 million in
1995. During 1996, assets under management by the Company's mutual fund
management operation increased $1,170.0 million to $3,482.0 million as compared
to $2,312.0 million for 1995.
Benefits to policyholders were $17.9 million for 1996, a decrease of $6.1
million, or 25.4%, from $24.0 million reported for 1995, as a result of the
decrease in sales of immediate annuities. Premiums from sales of immediate
annuities are recognized in income in the period due with a corresponding
increase in reserves.
Interest credited to policyholders' account balances was $84.9 million for
1996, a decrease of $7.4 million, or 8.0%, from $92.3 million reported for 1995,
as a result of the decrease in account value associated with the Company's SPDAs
reflecting consumer preferences for separate account products.
Amortization of DAC was $23.2 million for 1996, an increase of $9.3
million, or 66.9%, from $13.9 million reported for 1995, primarily due to a
$12.7 million increase in the amortization of deferred policy acquisition costs
associated with the Company's FPVAs and a $3.0 million decrease in amortization
of deferred policy acquisition costs associated with the Company's SPDAs. The
increase in amortization relating to the Company's FPVAs resulted from an
increase in fees earned and the maintenance of assumptions regarding the
ultimate profitability from such business. Similarly, the decrease in
amortization of deferred policy acquisition costs relating to the Company's
SPDAs resulted from a decrease in earnings from such business.
Other operating costs and expenses were $52.8 million for 1996, an increase
of $5.6 million, or 11.9%, from $47.2 million reported for 1995, primarily as a
result of higher sub-advisory fees paid to third party mutual fund providers.
95
<PAGE> 97
OTHER PRODUCTS SEGMENT
The following table presents certain summary financial data relating to the
Company's Other Products segment for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
-------------- --------------------------
1998 1997 1997 1996 1995
----- ----- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Premiums..................................... $ 8.2 $ 5.8 $ 16.6 $ 18.2 $ 21.0
Investment-type product policy fees.......... 0.9 0.9 1.5 0.9 2.1
Net investment income and net realized gains
on investments............................. 38.9 30.9 59.9 74.6 85.4
Other income................................. 32.4 23.5 53.1 52.2 42.0
----- ----- ------ ------ ------
80.4 61.1 131.1 145.9 150.5
BENEFITS AND EXPENSES:
Benefits to policyholders.................... 16.3 10.6 35.0 31.7 32.9
Interest credited to policyholders' account
balances................................... 6.3 7.1 10.4 22.4 32.0
Other operating costs and expenses........... 43.7 36.8 66.2 81.9 74.7
Dividends to policyholders................... 0.7 0.8 1.2 1.8 2.0
----- ----- ------ ------ ------
67.0 55.3 112.8 137.8 141.6
Income before income taxes................... $13.4 $ 5.8 $ 18.3 $ 8.1 $ 8.9
===== ===== ====== ====== ======
</TABLE>
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED
JUNE 30, 1997 -- OTHER PRODUCTS SEGMENT
Premium revenue was $8.2 million for the six-month period ended June 30,
1998, an increase of $2.4 million, or 41.4%, from $5.8 million reported in the
comparable period ended June 30, 1997. The increase primarily relates to higher
annuitization of pension contracts during the period.
Universal life and investment-type product policy fees were $0.9 million
for the six-month periods ended June 30, 1998 and 1997. There was no significant
variance from period to period in such fees.
Net investment income and net realized gains on investments were $38.9
million for the six-month period ended June 30, 1998, an increase of $8.0
million, or 25.9%, from $30.9 million reported in the comparable period ended
June 30, 1997. The increase was due to higher gains from the sale of real estate
offset by lower average invested assets.
Other income was $32.4 million for the six-month period ended June 30,
1998, an increase of $8.9 million, or 37.9%, as compared to $23.5 million
reported in the comparable prior year period. The increase was primarily the
result of higher commissions earned by the Company's broker-dealer operations of
$9.1 million. During the six-month period ended June 30, 1998, the Company's
broker-dealer operations reported commission earnings of $24.2 million, as
compared to $15.1 million reported in the comparable prior year period.
Benefits to policyholders were $16.3 million for the six-month period ended
June 30, 1998, an increase of $5.7 million, or 53.8%, as compared to $10.6
million reported in the comparable prior year period. The increase primarily
resulted from higher death claims, disability and health benefits related to the
Company's group insurance business.
Interest credited to policyholder account balances was $6.3 million for the
six-month period ended June 30, 1998, a decrease of $0.8 million, or 11.3%, as
compared to $7.1 million reported in
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<PAGE> 98
the comparable prior year period. The decrease primarily resulted from lower
interest crediting across all product lines.
Other operating costs and expenses were $43.7 million for the six-month
period ended June 30, 1998, an increase of $6.9 million, or 18.8%, as compared
to $36.8 million reported in the comparable prior year period. The increase
primarily consists of higher commission expenses of $9.1 million from MONY
Securities Corp.
Dividends to policyholders of $0.7 million in 1997 decreased $0.1 million,
or 12.5% from $0.8 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 --
OTHER PRODUCTS SEGMENT
Premium revenue was $16.6 million for 1997, a decrease of $1.5 million, or
8.3%, from $18.1 million reported for 1996. The decrease was primarily due to
lower assumed premiums resulting from the termination of the Company's
participation in a reinsurance pool covering group health business.
Investment-type product policy fees were $1.5 million for 1997, an increase
of $0.5 million, or 50.0%, from $1.0 million reported for 1996. The increase
primarily resulted from higher surrender charges on group annuities relating to
the retained group pension business.
Net investment income and net realized gains on investments were $59.9
million for 1997, a decrease of $14.7 million, or 19.7%, from $74.6 million
reported for 1996. The decrease primarily consisted of $6.9 million relating to
a decline in the segment's assets due to the runoff of the Company's group
pension business, as well as approximately $14.2 million relating to the
retirement of the Company's Eurobond debt issuances at their scheduled maturity
dates (see Note 17 to the Consolidated Financial Statements), offset by higher
realized gains of approximately $6.3 million recorded by the Company's non-life
subsidiaries. The Company issued the Eurobonds and invested the proceeds
therefrom through its wholly owned subsidiary, MONY Funding, Inc., which is
reported in the Other Products Segment.
Other income was $53.1 million for 1997, an increase of $0.9 million, or
1.7%, as compared to $52.2 million reported in 1996. The increase primarily
related to higher commission revenue reported by the Company's broker-dealer
operations of approximately $3.5 million, offset by lower revenues of
approximately $2.7 million relating to an aviation reinsurance pool in which the
Company participates. During 1997, the Company's broker-dealer operations
reported commission revenue of $32.2 million, as compared to $28.7 million in
1996.
Benefits to policyholders were $35.0 million for 1997, an increase of $3.3
million, or 10.4%, from $31.7 million reported for 1996. The increase primarily
resulted from $6.0 million of reserve strengthening on the Company's retained
group pension business, offset by lower claims of approximately $2.3 million
reported by the aforementioned aviation reinsurance pool.
Interest credited to policyholders' account balances was $10.4 million for
1997, a decrease of $12.0 million, or 53.6%, from $22.4 million reported for
1996. The decrease was primarily related to lower average account balances on
the Company's retained group pension business. The average account balance on
such business was $220.4 million and $292.7 million for 1997 and 1996,
respectively.
Other operating costs and expenses were $66.2 million for 1997, a decrease
of $15.7 million, or 19.2%, from $81.9 million reported for 1996. The decrease
primarily relates to lower interest expense of approximately $16.2 million as a
result of the maturity of the Company's Eurobond debt
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<PAGE> 99
(see Note 17 to the Consolidated Financial Statements), offset by higher
commission expense of approximately $2.1 million incurred by the Company's
broker-dealer operations.
Dividends to policyholders of $1.2 million in 1997 decreased $0.6 million,
or 33.3%, from $1.8 million reported in 1996. The decrease reflects lower
interest rates and a decrease in the number of policies that pay dividends.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 --
OTHER PRODUCTS SEGMENT
Premium revenue was $18.2 million for 1996, a decrease of $2.8 million, or
14.2%, from $21.0 million reported for 1995, primarily as a result of a decline
in the election of annuity pay-out options related to the retained group pension
business.
Investment-type product policy fees were $0.9 million for 1996, a decrease
of $1.2 million, or 52.4%, from $2.1 million reported for 1995, due to the
continued run-off of the Company's retained group pension business.
Net investment income and net realized gains on investments were $74.6
million for 1996, a decrease of $10.8 million, or 12.6%, from $85.4 million
reported for 1995, primarily as a result of the declining asset base associated
with the Company's retained group pension business.
Other income was $52.2 million for 1996, an increase of $10.2 million, or
24.3%, from $42.0 million reported for 1995. The increase resulted principally
from a $9.5 million increase in commissions earned by the Company's
broker-dealer operation, which were $28.7 million in 1996, compared to $19.2
million in 1995.
Benefits to policyholders were $31.7 million for 1996, a decrease of $1.2
million or 3.7% from $32.9 million reported for 1995.
Interest credited to policyholders' account balances was $22.4 million for
1996, a decrease of $9.6 million, or 30.0%, from $32.0 million reported for
1995. The decrease primarily related to the continuing run-off of the Company's
retained group pension business.
Other operating costs and expenses were $81.9 million for 1996, an increase
of $7.2 million, or 9.6%, from $74.7 million reported for 1995, primarily as a
result of an approximately $8.5 million increase in commission expense from the
Company's broker-dealer operation resulting from increased production.
EXTRAORDINARY CHARGE FOR DEMUTUALIZATION; HOLDING COMPANY EXPENSES
The $13.3 million and $9.7 million reflected as after-tax demutualization
expenses on the Company's consolidated statements of income for the year ended
December 31, 1997 and the six months ended June 30, 1998, respectively, were
direct nonrecurring costs specifically related to the Demutualization. Costs
incurred include primarily the fees of financial, legal, actuarial and
accounting advisors to the Company and to the New York Insurance Department, as
well as printing and postage for communication with policyholders. Management
expects significant amounts of Demutualization expenses will continue to be
incurred through the Plan Effective Date. See "Pro Forma Condensed Consolidated
Financial Information".
After the Plan Effective Date, the Holding Company will be subject to
certain additional expenses as a public company, including the cost of providing
stockholder services, which expenses are not reflected in Pro Forma Condensed
Consolidated Financial Information.
CLOSED BLOCK
The Plan provides for the establishment of the Closed Block. The Company
will allocate to the Closed Block an amount of assets expected to produce cash
flows which, together with anticipated
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revenues from 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. For a discussion of the potential effects of the Closed Block on the
Company's consolidated financial position and results of continuing operations,
and an illustration of the presentation of the Closed Block after the Plan
Effective Date in the Company's consolidated financial statements, see "The
Demutualization -- Closed Block Assets and Liabilities" and "Pro Forma Condensed
Consolidated Financial Information".
The assets, including the revenue therefrom, allocated to the Closed Block
will inure solely to the benefit of the Closed Block Business. In the event that
the assets allocated to the Closed Block, the cash flows therefrom and the
revenues from the policies included therein, prove to be insufficient to pay
benefits guaranteed under the terms of the policies within the Closed Block, the
Company will be required to make such payment from general account assets
outside the Closed Block. To the extent that over time cash flows from the
assets allocated to the Closed Block and other experience related to 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 over time such cash
flows and other experience 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.
Although the assets allocated to the Closed Block will inure solely to the
benefit of the Closed Block Business, the excess of Closed Block liabilities
over Closed Block assets at the Plan Effective Date measured on a GAAP basis
will represent the expected future post-tax contribution from the Closed Block
which may inure to the benefit of shareholders of the Holding Company and be
recognized in income over the period the policies and the contracts in the
Closed Block remain in-force. The contribution to operating income of the
Company from the Closed Block is reported as a single line item in the statement
of operations. Accordingly, premiums, investment income, realized gains (losses)
on investments, policyholder benefits and dividends attributable to the Closed
Block, less certain expenses including amortization of deferred policy
acquisition costs, are reported as a net number under the caption "Contribution
from the Closed Block". This results in material reductions in the
aforementioned line items reported in the statement of operations while having
no effect on net income. Also, all assets allocated to the Closed Block are
grouped together and reported in the Company's balance sheet separately under
the caption "Closed Block Assets". Similarly, all liabilities attributable to
the Closed Block are combined and reported separately under the caption "Closed
Block Liabilities". See "The Demutualization -- Closed Block Assets and
Liabilities" and "Pro Forma Condensed Consolidated Financial Information".
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
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<PAGE> 101
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 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. See
"Business -- Regulation -- Shareholder Dividend Restrictions".
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
MONY'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 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.
100
<PAGE> 102
The events most likely to cause an adjustment in the Company's investment
policies are: (i) a significant change in its product mix, (ii) a significant
change in the outlook for either the economy in general or for interest rates in
particular and (iii) a significant reevaluation of the prospective risks and
returns of various asset classes.
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at June 30, 1998 and December 31, 1997 and 1996.
WITHDRAWAL CHARACTERISTICS OF
ANNUITY RESERVES AND DEPOSIT LIABILITIES
<TABLE>
<CAPTION>
AMOUNT AT AMOUNT AT
AMOUNT AT PERCENT DECEMBER 31, PERCENT DECEMBER 31, PERCENT
JUNE 30, 1998 OF TOTAL 1997 OF TOTAL 1996 OF TOTAL
------------- -------- ------------ -------- ------------ --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Not subject to discretionary
withdrawal provisions............ $ 932.9 11.8% $ 944.2 12.6% $1,180.7 17.9%
Subject to discretionary
withdrawal -- with market value
adjustment or at carrying value
less surrender charge............ 5,738.3 72.4 5,236.4 70.1 4,062.9 61.5
-------- ----- -------- ----- -------- -----
Subtotal........................... 6,671.2 84.2 6,180.6 82.7 5,243.6 79.4
Subject to discretionary
withdrawal -- without adjustment
at carrying value................ 1,257.6 15.8 1,295.3 17.3 1,366.9 20.6
-------- ----- -------- ----- -------- -----
Total annuity reserves and deposit
liabilities (gross).............. 7,928.8 100.0% 7,475.9 100.0% 6,610.5 100.0%
-------- ===== -------- ===== -------- =====
Less reinsurance................... 133.6 145.7 178.2
-------- -------- --------
Total annuity reserves and deposit
liabilities (net)................ $7,795.2 $7,330.2 $6,432.3
======== ======== ========
</TABLE>
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
SURRENDERS AND WITHDRAWALS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------ --------------------------------
1998 1997 1996 1995
------------ -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
PRODUCT LINE:
Traditional life................................ $162.0 $326.2 $321.1 $339.7
Variable and universal life..................... 16.3 29.5 27.3 22.8
Annuities....................................... 271.7 461.2 393.7 381.1
------ ------ ------ ------
Total................................. $450.0 $816.9 $742.1 $743.6
====== ====== ====== ======
</TABLE>
The Company's principal sources of liquidity to meet cash outflows are its
portfolio of liquid assets and its net operating cash flow. During 1997, the
Company reported net cash flow from operations of $69.1 million, as compared to
$334.8 million in 1996 and $318.7 million in 1995. The decrease in net cash flow
from operations of $265.7 million in 1997, as compared to that reported for
1996, resulted primarily from a $149.5 million payment made in 1997 representing
a portion of the assets transferred in the DI Transaction and higher federal
income tax payments in 1997 of approximately $101.0 million, as compared to
1996. The Company's liquid assets include substantial
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<PAGE> 103
U.S. Treasury holdings, short-term money market investments and marketable
long-term fixed maturity securities. Management believes that the Company's
sources of liquidity are adequate to meet its anticipated needs. As of December
31, 1997, the Company had readily marketable fixed maturity securities with a
carrying value of $5,957.1 million, which were comprised of $3,209.4 million
public and $2,747.7 million private fixed maturity securities. At that date,
approximately 94.9% of the Company's fixed maturity securities were designated
in NAIC rating categories 1 and 2 (considered investment grade, with a rating of
"Baa" or higher by Moody's or "BBB" or higher by S&P). In addition, at December
31, 1997 the Company had cash and cash equivalents of $313.4 million.
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
since 1982.
At June 30, 1998, MONY had commitments to issue $33.1 million of fixed rate
agricultural loans with periodic interest rate reset dates. The initial interest
rates on such loans range from 7.20% to 7.85%. MONY also had commitments
outstanding to purchase $18.8 million of private fixed maturity securities as of
June 30, 1998 with interest rates ranging from 6.86% to 7.80%. In addition, at
that date MONY had no outstanding commitments to issue any fixed rate commercial
mortgage loans.
Of the $914.9 million of currently outstanding commercial mortgage loans in
the Company's investment portfolio at December 31, 1997, $220.1 million, $79.6
million and $86.5 million are scheduled to mature in 1998, 1999 and 2000,
respectively. See "Investments -- Mortgage Loans -- Commercial Mortgage Loans".
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 12.5%. Maturities range
from June 2000 to March 2020. For the years ended December 31, 1997, 1996 and
1995, interest expense on such mortgage loans aggregated $12.3 million, $12.9
million, and $13.9 million, 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 December 31, 1997 and 1996, the outstanding balance of the
obligation including accrued interest was $41.3 million and $40.1 million,
respectively. Interest expense on the obligation of $3.0 million, $2.9 million,
and $2.8 million is reflected in Other Operating Costs and Expenses on the
Company's statements of income for the years ended December 31, 1997, 1996 and
1995, respectively.
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<PAGE> 104
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 December 31, 1997, aggregate maturities of long-term debt based on
required principal payments for 1998 and the succeeding four years are $2.2
million, $13.8 million, $89.1 million, $81.5 million and $0.7 million,
respectively, and $256.7 million thereafter.
Aggregate contractual debt service payments on the Company's debt at June
30, 1998, for the remainder of 1998 and the succeeding four years are $12.3
million, $35.9 million, $123.5 million, $112.2 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".
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 ("AVR") and other adjustments) that a life insurance company
should have for regulatory purposes, taking into consideration the risk
characteristics of such company's investments and products. A life insurance
company's RBC ratio will vary over time depending upon many factors, including
its earnings, the nature, mix and credit quality of its investment portfolio and
the nature and volume of the products that it sells. See "Business --
Regulation -- Risk-Based Capital Requirements".
While the RBC guidelines are intended to be a regulatory tool only, and are
not intended as a means to rank insurers generally, comparisons of RBC ratios of
life insurers have become generally available. The adjusted RBC capital ratios
of all the Company's insurance subsidiaries at June 30, 1998 and December 31,
1997 were in excess of the minimum required RBC.
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 its fair value, less associated selling costs.
(See Note 5 to the Consolidated Financial Statements). Increases in such
valuation allowances are recorded as realized investment losses and,
accordingly, are reflected in the Company's results of operations. Real estate
classified as to be disposed of may also be net of impairment adjustments
recorded prior to the time such real estate was designated for sale or at the
time of foreclosure, if acquired in satisfaction of debt. At June 30, 1998 and
December 31, 1997, 1996 and 1995, the carrying value of real estate to be
disposed of was $339.1 million, $621.2 million, $434.8 million and $717.4
million, respectively, or
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<PAGE> 105
3.2%, 5.9%, 4.2% and 6.7% of invested assets at such dates, respectively. The
aforementioned carrying values are net of valuation allowances of $45.2 million,
$82.7 million, $46.0 million and $49.1 million, respectively. In addition, the
carrying value of real estate to be disposed of at such dates is net of $113.9
million, $182.3 million, $120.1 million and $136.7 million of impairment
adjustments, respectively. For the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995, such increases in valuation allowances
aggregated $1.4 million, $63.8 million, $16.8 million and $39.5 million,
respectively. Because the carrying value of real estate to be disposed of is
adjusted to reflect the aforementioned valuation allowances, management expects
that the net proceeds from sales of real estate will not be materially different
from the carrying value of such real estate on a GAAP basis. However, there can
be no assurance that increases in valuation allowances will not be required in
the future or that future sales of real estate will not be made at amounts below
recorded GAAP carrying value which may have a material effect on the Company's
financial position and results of operations.
In addition, as a result of differences between accounting practices
prescribed or permitted by the New York Insurance Department ("SAP") and GAAP,
the carrying value of real estate on a SAP basis exceeds the carrying value of
such investments on a GAAP basis. Accordingly, management expects to incur
losses on a SAP basis as a result of anticipated real estate sales, which losses
could materially affect the Company's statutory-basis surplus and net income.
Although there can be no assurance, the Company believes that any such impact on
statutory surplus will be partially offset by the release of the statutory
investment reserves established by the Company and expected future statutory net
income. The Company will monitor the results of its real estate sales strategy
and its ongoing effect on statutory surplus. The GAAP carrying value of real
estate to be disposed of was $339.1 million at June 30, 1998 (or 3.2% of
invested assets), which amount is net of impairment adjustments and valuation
allowances aggregating approximately $113.9 million and $45.2 million,
respectively. There can be no assurance as to whether, when or for what amounts
any real estate that is classified to be disposed of will actually be disposed
of. For the six-month period ended June 30, 1998 and the years ended December
31, 1997, 1996 and 1995 the GAAP carrying value of real estate sold was
approximately $317.0 million, $346.3 million, $414.1 million and $273.2 million,
respectively. For the six-month period ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995, the SAP carrying value of real estate sold was
approximately $428.5 million, $395.0 million, $449.1 million and $299.3 million,
respectively. See "Risk Factors -- Risk of Further Losses on Real Estate; Risk
with Respect to Commercial Mortgage Loans", "Investments -- Equity Real
Estate -- Real Estate Sales", "-- Investment Impairments and Valuation
Allowances" and Note 20 to the Consolidated Financial Statements.
104
<PAGE> 106
The following table sets forth certain data concerning the Company's real
estate sales during the periods indicated.
REAL ESTATE SALES
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
-------------- --------------------------
1998 1997 1996 1995
-------------- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Sales proceeds................................. $428.1 $433.9 $456.9 $301.5
====== ====== ====== ======
Carrying value before impairment adjustments
and valuation allowances..................... $431.2 $462.3 $519.2 $373.7
Impairment adjustments......................... (74.3) (88.9) (85.2) (87.4)
Valuation allowances........................... (39.9) (27.1) (19.9) (13.1)
------ ------ ------ ------
Carrying value after impairment adjustments and
valuation allowances......................... $317.0 $346.3 $414.1 $273.2
====== ====== ====== ======
Gain (loss).................................... $111.1 $ 87.6 $ 42.8 $ 28.3
====== ====== ====== ======
</TABLE>
YEAR 2000
The Year 2000 issue is the result of the widespread use of computer
programs being written using two digits (rather than four) to define the
applicable year. Such programming was a common industry practice designed to
avoid the significant costs associated with additional mainframe capacity
necessary to accommodate a four digit year field. As a result, any of the
Company's computer systems that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a major system failure or miscalculations. The Company has conducted a
comprehensive review of its computer systems to identify the systems that could
be affected by the "Year 2000" problem and has developed and implemented a plan
to resolve the issue. The Company currently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems.
However, if such modifications and conversions are not completed on a timely
basis, the Year 2000 problem may have a material impact on the operations of the
Company. Further, even if the Company completes such modifications and
conversions on a timely basis, there can be no assurance that the failure by
vendors or other third parties to solve the Year 2000 problem will not have a
material impact on the operations of the Company. The Company estimates the
total cost to resolve its Year 2000 problem to be approximately $18.0 million,
of which $8.9 million has been incurred through June 30, 1998; however, there
can be no assurance that the actual cost incurred will not be materially higher
than such estimate.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
its consolidated results of operations except insofar as inflation affects
interest rates. See "Risk Factors -- Interest Rate Risk".
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<PAGE> 107
BUSINESS
GENERAL
The Company, which is one of the oldest and largest mutual life insurance
companies in the United States, provides a wide range of life insurance, annuity
and investment products primarily to higher income individuals, particularly
family builders, pre-retirees and small business owners. The Company distributes
its products through a career agency sales force in the United States which
consisted of 2,218 agents at June 30, 1998. The Company 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 and currently insures or provides other
financial services to more than 1.0 million people. Chartered in 1842, MONY was
the first mutual life insurance company in the United States to sell an
insurance policy and the first to pay a dividend to policyholders.
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 in the "Other Products" segment. In its
Protection Products segment, the Company offers a wide range of life insurance
products, including whole life, term life, universal life, variable universal
life, last survivor life and group universal life. 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. 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 Company had total consolidated assets and equity at June 30, 1998 of
approximately $24.6 billion and $1.4 billion, respectively. Of the Company's
total consolidated assets at such date, approximately $12.8 billion represented
assets held in the Company's general account, approximately $5.7 billion
represented assets transferred pursuant to the Group Pension Transaction (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 to the Consolidated Financial Statements) and
approximately $6.1 billion were held in the Company's separate accounts, for
which the Company does not generally bear investment risk.
Consolidated revenues reported by the Company for the six-month period
ended June 30, 1998 and the year ended December 31, 1997 were $1,044.5 million
and $1,976.4 million, respectively. Revenues reported for such periods by the
Company's Protection Products, Accumulation Products and Other Products segments
(which amounts are presented before unallocated amounts and non-recurring
items -- see Note 6 to the Consolidated Financial Statements and Note 5 to the
Unaudited Interim Condensed Consolidated Financial Statements) were $813.8
million, $145.8 million and $80.4 million, respectively, for the six-month
period ended June 30, 1998 and $1,598.7 million, $239.4 million and $131.1
million, respectively, for the year ended December 31, 1997.
Consolidated income before income taxes and extraordinary item reported by
the Company for the six-month period ended June 30, 1998 and the year ended
December 31, 1997 was $199.9 million and $187.7 million, respectively.
Consolidated pre-tax earnings reported by the Company's aforementioned operating
segments for such periods (which amounts are presented before unallocated
amounts and pre-tax non-recurring items -- see Note 6 to the Consolidated
Financial Statements and Note 5 to the Unaudited Interim Condensed Consolidated
Financial Statements) were $136.7 million, $50.5 million and $13.4 million,
respectively, for the six-month period ended
106
<PAGE> 108
June 30, 1998 and $129.0 million, $44.1 million and $18.3 million, respectively,
for the year ended December 31, 1997.
The following chart sets forth the Company's life insurance and annuities
in force for the periods indicated.
LIFE INSURANCE AND ANNUITIES IN FORCE
<TABLE>
<CAPTION>
AS OF
JUNE 30, AS OF DECEMBER 31,
--------- ---------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PROTECTION PRODUCTS:
Traditional life:(1)
Number of policies
(in thousands)....... 982.2 1,006.3 1,060.8 1,116.5 1,163.6 1,205.1
GAAP life reserves...... $ 6,709.4 $ 6,651.4 $ 6,491.7 $ 6,313.3 $ 6,144.2 $ 5,953.6
Face amounts............ $59,966.0 $60,640.1 $62,319.8 $63,635.1 $64,122.3 $63,155.4
Universal life:
Number of policies
(in thousands)....... 60.2 60.8 61.3 63.0 59.2 55.1
GAAP account values..... $ 528.7 $ 507.6 $ 492.0 $ 459.5 $ 413.7 $ 379.0
Face amounts............ $ 8,435.3 $ 8,858.0 $ 8,603.8 $ 8,603.9 $ 7,818.2 $ 7,255.6
Variable universal life:
Number of policies
(in thousands)....... 25.0 21.0 12.1 4.1 -- --
GAAP account values..... $ 196.1 $ 106.4 $ 41.3 $ 10.7 $ -- $ --
Face amounts............ $ 6,000.8 $ 4,515.7 $ 2,508.1 $ 857.8 $ -- $ --
Group universal life:
Number of policies
(in thousands)....... 56.0 57.5 50.6 49.2 40.6 25.8
GAAP account values..... $ 61.4 $ 60.4 $ 54.8 $ 51.6 $ 45.7 $ 37.0
Face amounts............ $ 2,046.1 $ 2,143.3 $ 1,890.6 $ 1,821.4 $ 1,552.4 $ 1,043.2
ACCUMULATION PRODUCTS:
Variable annuities:
Number of contracts
(in thousands)....... 112.5 107.2 92.5 75.3 59.6 43.8
Account values.......... $ 4,896.0 $ 4,314.1 $ 3,146.6 $ 2,217.2 $ 1,370.6 $ 1,013.2
Fixed annuities:
Number of contracts
(in thousands)....... 16.0 17.9 22.3 26.8 31.8 35.4
Account values.......... $ 1,025.6 $ 1,103.8 $ 1,311.8 $ 1,508.1 $ 1,689.9 $ 1,795.0
ENTERPRISE GROUP OF FUNDS
Number of retail mutual
fund shareholders
(in thousands).......... 190.2 133.2 79.6 60.1 51.9 45.9
</TABLE>
- ---------------
(1) Consists of whole life and term life contracts.
STRATEGY
The Company's business strategy to achieve earnings growth, improve its
return on equity and increase shareholder value is focused on: (i) continuing to
improve the quality of and increase the
107
<PAGE> 109
earnings on its invested assets, (ii) emphasizing the core operating
fundamentals of its protection business, (iii) continuing the growth of its
accumulation business and (iv) expanding the size of and improving upon the
productivity of its career agency sales force. The Company believes that by
focusing its expansion efforts on the career agency system, it will be more
successful at marketing value-added protection and accumulation products to its
core customer base which is typically comprised of small business owners and
higher income individuals, particularly family builders and pre-retirees.
Management further believes that by providing a range of protection and
accumulation products, the Company can respond to changes in the insurance
marketplace that may arise from changes in interest rates or volatility in the
general level of the stock market. In addition, the Company intends to seek
opportunities through selective mergers, acquisitions and strategic alliances.
CONTINUING TO IMPROVE THE QUALITY OF AND INCREASE THE EARNINGS ON INVESTED
ASSETS
Since December 31, 1992, the Company has decreased its exposure to equity
real estate from $1,828.5 million (13.9% of total invested assets) to $791.6
million (7.4% of total invested assets) at June 30, 1998. Similarly, the Company
has decreased its exposure to commercial mortgage loans from $3,576.5 million
(27.2% of total invested assets) at December 31, 1992 to $892.1 million (8.3% of
total invested assets) at June 30, 1998. In 1995, the Company accelerated its
real estate disposition program to take advantage of favorable conditions in the
real estate market, and between January 1, 1995 and June 30, 1998 the Company
sold $1,350.6 million of real estate assets. Additionally, the Company has
targeted approximately $102.8 million of additional real estate assets for sale
through the balance of 1998. See "Investments -- Equity Real Estate -- Real
Estate Sales". At June 30, 1998, the carrying value of the Company's real estate
to be disposed of was $339.1 million. See "Risk Factors -- Risk of Further
Losses on Real Estate; Risk with Respect to Commercial Mortgage Loans". In
addition, the Company has decreased its exposure to below investment grade
securities by selectively disposing of such securities and investing
substantially all new funds in investment grade fixed maturity securities.
The effect of such actions has been to significantly improve the credit
quality of the Company's total assets and increase the earnings thereon.
Although there can be no assurance, management believes that the Company's
ratings should be positively affected if it achieves improvements in operating
results, reduces its exposure to higher risk assets and realizes further cost
reductions. In this regard, management believes that future GAAP earnings will
be positively affected by the Company's continuing program for the sale of real
estate, which the Company expects will result in increased investment income as
a result of being able to invest the proceeds from real estate sales in higher
yielding investments and incurring lower depreciation charges. The Company also
expects to make selective investments in the commercial mortgage market. See
"Investments -- Mortgage Loans and -- Equity Real Estate".
EMPHASIZING THE CORE OPERATING FUNDAMENTALS OF PROTECTION BUSINESS
The Company believes that the operating performance of its protection
business is significantly impacted by five basic elements: (i) mortality, (ii)
persistency, (iii) operating expenses, (iv) investment yield and (v) sales. The
Company believes that improvement with respect to each of these five basic
elements is important for increasing shareholder value.
The Company believes its conservative risk selection practices and its
disciplined field underwriting have resulted in the Company realizing favorable
mortality experience for the last several years. The Company fully underwrites
each application and has limited group underwriting or guaranteed issue
business. See "-- Marketing and Distribution" and "-- Pricing and Underwriting".
The Company has achieved improving persistency levels on its life insurance
products in recent years despite ratings pressures and competitive industry
conditions during the early 1990s. See "-- Protection Products". This has
resulted in high levels of renewal premiums and, as a result, a
108
<PAGE> 110
larger revenue base over which to amortize acquisition costs. A significant
portion of the Company's sales are to existing customers. The Company believes
that the close customer relationships formed by its career agents help
contribute to its improved persistency.
Furthermore, the Company has actively managed its cost structure, reducing
the rate of growth of operating expenses by, among other things: (i) reducing
the number of employees through early retirement programs and otherwise, (ii)
disposing of certain businesses and (iii) reducing costs incurred in connection
with operating the career agency sales force. The Company expects to continue in
its efforts to reduce general expenses following the Demutualization. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Management believes that the Company's investment yield has benefited by
its efforts to improve the quality of and increase the earnings on invested
assets as described above.
Finally, management believes that sales are largely driven by the
performance of its managerial agency and career agency sales force. In order to
increase the productivity of its career agents the Company has recently adopted
a plan to restructure its career agency sales force. See "-- Marketing and
Distribution".
CONTINUING THE GROWTH OF ACCUMULATION BUSINESS
Over the past several years, the Company has sought to take advantage of
demographic trends in the U.S. economy by continuing the growth of its asset
accumulation business. Since December 31, 1993 the Company has increased its
annuity assets under management from approximately $927.0 million to
approximately $4,309.5 million at June 30, 1998 and, through The Enterprise
Group of Funds, its retail mutual fund assets under management have increased
from $485.9 million to $2,457.0 million during this time period. Many of the
Company's proprietary funds have performed well versus standard industry
measures. See "-- Accumulation Products".
EXPANDING THE SIZE OF AND IMPROVING UPON THE PRODUCTIVITY OF CAREER AGENCY
SALES FORCE
The Company is committed to the career agency distribution system.
Management believes that distribution through the Company's career agency sales
force is a competitive advantage over other large life insurance companies which
do not have such a career agency sales force and for whom it would be difficult
and expensive to create one. The career agency sales force allows the Company to
establish closer relationships with customers than is typical of insurers using
third party brokers, thereby enhancing the Company's ability to evaluate and
respond to customer needs and underwriting risks. Management also believes that
the career agency sales force is essential to the Company's emphasis on its core
protection and accumulation products. Management further believes that
maintaining a balance between protection and accumulation products is important
to the career agency sales force as it allows the career agency sales force to
respond to changes in the insurance marketplace that may arise from changes in
interest rates or volatility in the general level of the stock market.
In early 1998, in order to increase the productivity and size of its career
agency sales force, the Company adopted a plan to "tier" its agents and agencies
and to provide focused marketing, recruiting and training support tailored to
meet the particular needs of each "tier". By restructuring its agencies into
tiers, the Company is able to segment its career agency sales force into groups
according to experience and productivity levels and to assign agency managers to
tiers based on their skill sets and the particular needs and goals of such
tiers. In January of 1998, the Company revised its compensation structure to
provide a salary plus incentive compensation system for all of its agency
managers and sales managers designed to more closely align the interests of the
managers with those of the Company. The Company believes that these actions will
improve the recruitment, retention and productivity of the Company's career
agency sales force. See "-- Marketing and Distribution".
109
<PAGE> 111
SEEKING OPPORTUNITIES THROUGH SELECTIVE MERGERS, ACQUISITIONS AND STRATEGIC
ALLIANCES
Management believes that making selective acquisitions and engaging in
selective joint ventures in the Company's core businesses could more fully
utilize the Company's career agency sales force and administrative capacity to
obtain improved economies of scale and a lower overall cost structure. The
Company believes that the Demutualization and the Offerings will enhance the
Company's ability to pursue selective acquisitions. The Company is not currently
engaged in discussions concerning any material transaction; however, the Company
is in discussions to acquire a life insurance company, which acquisition would
not be material.
PROTECTION PRODUCTS
The Company offers a diverse portfolio of protection products consisting of
traditional life insurance, universal life insurance and variable universal life
insurance.
The Company's traditional protection products consist of whole life
insurance products and term insurance products. The whole life insurance
products vary in their level and duration of premiums and guaranteed cash
values, providing flexibility to the Company's marketplace of individuals and
small businesses with varying needs. The Company's term insurance products
include annual renewable term insurance, term insurance providing coverage for a
limited number of years and term insurance featuring a level premium for a
variable number of years.
The Company also offers several universal life insurance products.
Universal life insurance permits customers to vary the amount and frequency of
periodic cash premiums they pay, depending upon the needs of the customer and
the availability of value within the policy necessary to maintain the policy.
The Company's universal life insurance products vary as to the initial premium
required and the resulting degree of flexibility in future policy years.
The Company also offers variable universal life insurance. This is a
universal life insurance type of product that features the ability of the
policyholder to allocate premiums among sub-accounts of the Company's separate
accounts, allowing a choice among a wide variety of investment objectives. These
sub-accounts have the same investment objectives and investment advisors as the
sub-accounts that support the Company's variable annuities. See
" -- Accumulation Products".
Several of the Company's protection products are designed to particularly
meet the needs of clients for estate planning vehicles. Survivorship life
products insure several lives and provide for the payment of death benefits upon
the death of the last surviving insured. A variety of policy riders are
available for the Company's protection products. These riders are designed to
provide additional benefits or flexibility at the option of the policyholder.
They include riders that waive premium payments upon disability, pay higher
benefits in the event of accidental death, allow the purchase of additional
coverage without evidence of insurability and permit the addition of term
insurance to whole life insurance products.
The Company also offers protection products designed for marketing to
employees in their work sites. This program is designed to offer employers the
opportunity to provide employees a means of purchasing life insurance through
payroll deduction.
110
<PAGE> 112
The following table presents Protection Products segment sales of life
insurance and life insurance account values or reserves for the periods
indicated.
PROTECTION PRODUCTS SEGMENT -- SALES AND ACCOUNT VALUE OR RESERVES
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SALES:
Traditional life(1)........... $ 8.1 $ 24.7 $ 33.0 $ 41.5 $ 57.8 $ 64.2
Universal life................ 3.4 8.7 9.3 21.4 19.8 10.7
Variable universal life....... 27.7 39.2 29.0 13.5 -- --
Group universal life.......... 1.0 4.4 3.8 5.5 3.8 2.6
Disability income
insurance(2)............... -- 4.9 5.6 7.2 7.3 8.0
-------- -------- -------- -------- -------- --------
Total................. $ 40.2 $ 81.9 $ 80.7 $ 89.1 $ 88.7 $ 85.5
======== ======== ======== ======== ======== ========
ACCOUNT VALUE OR RESERVES:
Traditional life(1)........... $6,709.4 $6,651.4 $6,491.7 $6,313.3 $6,144.2 $5,953.6
Universal life................ 528.7 507.6 492.0 459.5 413.7 379.0
Variable universal life....... 196.1 106.4 41.3 10.7 -- --
Group universal life.......... 61.4 60.4 54.8 51.6 45.7 37.0
Disability income
insurance(2)............... 386.0 376.2 345.2 316.3 265.7 235.0
-------- -------- -------- -------- -------- --------
Total................. $7,881.6 $7,702.0 $7,425.0 $7,151.4 $6,869.3 $6,604.6
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Consists of whole life and term life policies.
(2) No longer offered; at December 31, 1997 all existing in force disability
income insurance has been reinsured.
The following table sets forth the Company's protection products segment's
direct premiums on a statutory basis for the periods indicated.
111
<PAGE> 113
PROTECTION PRODUCTS SEGMENT -- DIRECT PREMIUMS BY PRODUCT
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------ ----------------------------------------------
1998 1997 1996 1995 1994 1993
------------ -------- ------ -------- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
LIFE INSURANCE:
TRADITIONAL LIFE:(1)
First year & single.............. $ 72.0 $ 169.3 $169.2 $ 166.6 $177.7 $195.2
Renewal.......................... 264.5 594.4 616.3 630.1 643.7 645.6
------ -------- ------ -------- ------ ------
Total.................... $336.5 $ 763.7 $785.5 $ 796.7 $821.4 $840.8
====== ======== ====== ======== ====== ======
UNIVERSAL LIFE:
First year & single.............. $ 5.0 $ 13.4 $ 17.5 $ 43.8 $ 30.7 $ 20.3
Renewal.......................... 34.2 67.5 65.0 55.6 53.8 51.1
------ -------- ------ -------- ------ ------
Total.................... $ 39.2 $ 80.9 $ 82.5 $ 99.4 $ 84.5 $ 71.4
====== ======== ====== ======== ====== ======
VARIABLE UNIVERSAL LIFE:
First year & single.............. $ 75.6 $ 47.9 $ 32.4 $ 12.3 $ -- $ --
Renewal.......................... 18.6 18.3 3.3 -- -- --
------ -------- ------ -------- ------ ------
Total.................... $ 94.2 $ 66.2 $ 35.7 $ 12.3 $ -- $ --
====== ======== ====== ======== ====== ======
GROUP UNIVERSAL LIFE:
First year & single.............. $ 2.6 $ 5.1 $ 5.1 $ 6.9 $ 4.8 $ 3.3
Renewal.......................... 6.3 11.1 10.2 8.4 5.9 5.8
------ -------- ------ -------- ------ ------
Total.................... $ 8.9 $ 16.2 $ 15.3 $ 15.3 $ 10.7 $ 9.1
====== ======== ====== ======== ====== ======
DISABILITY INCOME INSURANCE:(2)
First year & single.............. $ 3.0 $ 4.9 $ 5.6 $ 7.5 $ 6.9 $ 8.1
Renewal.......................... 36.4 73.2 72.6 69.8 67.0 64.7
------ -------- ------ -------- ------ ------
Total.................... $ 39.4 $ 78.1 $ 78.2 $ 77.3 $ 73.9 $ 72.8
====== ======== ====== ======== ====== ======
TOTAL LIFE AND DISABILITY
INCOME INSURANCE....... $518.2 $1,005.1 $997.2 $1,001.0 $990.5 $994.1
====== ======== ====== ======== ====== ======
</TABLE>
- ---------------
(1) Consists of whole life and term life premiums.
(2) No longer offered; at December 31, 1997 all existing in force disability
income insurance has been reinsured.
Effective December 31, 1997, the Company ceased writing new disability
insurance business. In conjunction therewith, the Company transferred all of its
existing in force disability income insurance business to a third party
reinsurer under an indemnity reinsurance contract. The transfer was accomplished
through a novation of its existing disability income reinsurance coverage and a
concurrent amendment to such existing reinsurance contract. In connection with
the transaction, the Company entered into an agreement with an unrelated
insurance company to distribute its disability insurance products through the
Company's career agency sales force.
The Company has achieved improving persistency levels on its life insurance
products in recent years despite ratings pressures and competitive industry
conditions during the early 1990s. The Company believes that its career agents
help contribute to its persistency. The following table
112
<PAGE> 114
illustrates lapse rates on individual life insurance products for MONY and for
stock and mutual life insurance companies for the five-year period 1993-1997.
INDIVIDUAL LIFE INSURANCE LAPSE RATES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mutual Life Companies*................................. 6.8% 7.2% 7.2% 7.3% 7.9%
Stock Life Companies*.................................. 8.3 8.4 9.3 8.7 10.8
Total Life Industry*......................... 7.8 8.0 8.6 8.3 9.8
MONY................................................... 7.0% 8.0% 8.8% 9.1% 9.3%
</TABLE>
- ---------------
* Source A.M. Best Individual Life Lapse Rates (median values). Lapse rates
based on face amounts.
ACCUMULATION PRODUCTS
The Company's accumulation products focus on the savings and retirement
needs of the growing number of individuals who are preparing for retirement or
have already retired. The Company offers a wide variety of accumulation
products, such as fixed annuities, single premium deferred annuities, immediate
annuities, flexible payment variable annuities and proprietary retail mutual
funds. The Company's annuity and mutual fund products offer numerous investment
alternatives to meet the customer's individual investment objectives. As of June
30, 1998, the Company had $5.9 billion of assets under management with respect
to its annuity products and, additionally, $2.5 billion of assets under
management with respect to its proprietary retail mutual funds.
By offering both fixed and variable annuities in its Accumulation Products
segment, the Company believes it has the ability to grow profitably in a variety
of market environments. The Company believes that periods of rising interest
rates, which tend to cause lower sales growth in its variable annuities
business, make its fixed annuity products more attractive to consumers.
Conversely, in periods of declining interest rates, which tend to cause lower
sales growth in its fixed annuities business, the Company believes its variable
annuities are more attractive to customers. The Company further believes that
the sale of its proprietary retail mutual funds complements the sale of its
variable annuities. The Company conducts its proprietary retail mutual funds
operations through its subsidiary, ECM. ECM is the registered investment advisor
of The Enterprise Group of Funds, a group of mutual funds that provides
investors with a broad range of investment alternatives through 13 separate
investment portfolios. In addition, Enterprise Accumulation Trust, for which ECM
is also the registered investment advisor, is the principal funding vehicle for
the Company's variable annuities and variable universal life insurance products.
Enterprise Accumulation Trust provides investors with a broad range of
investment alternatives through five separate investment portfolios. The Company
earns investment management fees on the assets managed in connection with both
its variable annuities and its proprietary retail mutual funds. In addition to
investment management fees, the Company also earns insurance fees in connection
with its annuities.
Sales of annuities and proprietary retail mutual funds were approximately
$728.6 million and $751.6 million, respectively, in 1997. Of such sales of
annuities, $712.7 million relates to variable annuities and $15.9 million
relates to fixed annuities.
113
<PAGE> 115
The following table sets forth the total account value and sales of the
principal products offered by the Company in its Accumulation Products segment.
ACCUMULATION PRODUCTS SEGMENT --
ASSETS UNDER MANAGEMENT AND SALES
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS UNDER MANAGEMENT
Individual variable
annuities(1)............... $4,896.0 $4,314.1 $3,146.6 $2,217.2 $1,370.6 $1,013.2
Individual fixed
annuities(1)............... 1,025.6 1,103.8 1,311.8 1,508.1 1,689.9 1,795.0
Proprietary mutual funds..... 2,457.0 1,716.7 952.1 679.6 493.9 485.9
-------- -------- -------- -------- -------- --------
$8,378.6 $7,134.6 $5,410.5 $4,404.9 $3,554.4 $3,294.1
======== ======== ======== ======== ======== ========
SALES BY PRODUCT
Individual variable
annuities.................. $ 346.5 $ 712.7 $ 668.4 $ 495.3 $ 405.8 $ 463.4
Individual fixed annuities... 5.0 15.9 14.8 25.4 27.3 29.8
Proprietary retail mutual
funds...................... 655.8 751.6 347.0 207.2 150.3 181.5
</TABLE>
- ---------------
(1) Represents account values for annuities.
The Company's fixed annuity products include a single premium deferred
annuity contract. This is a tax-deferred annuity contract with a one-time
premium payment with a resulting cash accumulation over time and the option to
receive a lump sum distribution or various payout options over the life of the
annuitant. The Company also offers a single payment immediate annuity contract
which provides for a single premium payment that is immediately annuitized to
provide the annuitant with a guaranteed level income for life or for a minimum
number of years.
Variable annuity contractholders and variable universal life insurance
policyholders have a range of investment accounts in which to place the assets
held under their contracts, including accounts with interest rates guaranteed by
the Company. More than 85% of the aggregate amount held under these contracts
and policies is presently in investment accounts not guaranteed by the Company.
Since early 1992, the Company has emphasized the sale of its separate
account variable annuities over its general account annuities. The Company
believes that it benefits from a shift towards separate account variable annuity
products, as this reduces the Company's investment risks (by shifting such risks
to the separate account contractholder) and capital requirements because the
assets are held in the Company's separate accounts, while enabling the Company
to earn fee income from the management of assets held in the separate accounts.
The selection of separate accounts also permits contractholders to choose more
aggressive or conservative investment strategies without affecting the
composition and quality of assets in the Company's general account. The growth
of the Company's individual variable annuity account value has been considerable
for the past several years, which the Company attributes to favorable
demographic trends, strong sales, market appreciation and low levels of
surrenders. In addition, the Company believes there will be a continuation in
the trend among U.S. employers away from defined benefit plans (under which the
employer makes the investment decisions) toward employee-directed, defined
contribution retirement and savings plans (which allow employees to choose from
a variety
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of investment options), which will benefit its accumulation business. The
following table illustrates the growth in individual variable annuity account
value from the beginning to the end of each period presented and the principal
factors which caused the increase in account value for such period.
ACCUMULATION PRODUCTS SEGMENT --
INDIVIDUAL VARIABLE ANNUITY ACCOUNT VALUE
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- -------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ACCOUNT VALUE
Beginning total account
value...................... $4,314.1 $3,146.6 $2,217.2 $1,370.6 $1,013.2 $ 523.5
Sales and other deposits..... 346.5 712.7 668.4 495.3 405.8 463.4
Market appreciation.......... 466.9 738.9 448.5 471.2 22.7 67.7
Surrenders and withdrawals... (231.5) (284.1) (187.5) (119.9) (71.1) (41.4)
-------- -------- -------- -------- -------- --------
Ending total
account value.... 4,896.0 $4,314.1 $3,146.6 $2,217.2 $1,370.6 $1,013.2
======== ======== ======== ======== ======== ========
</TABLE>
The following table illustrates the performance of the principal
sub-accounts available in respect of the Company's variable annuities and the
current rankings assigned to such sub-accounts by Morningstar, Inc.
("Morningstar"). The historical performance of these funds is not an indication
of future performance.
PERFORMANCE OF VARIABLE ANNUITY SUB-ACCOUNTS
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------
ONE-YEAR FIVE-YEAR OVERALL
ANNUALIZED ANNUALIZED MORNINGSTAR
SUB-ACCOUNT TYPE OF SUB-ACCOUNT NET ASSETS RETURN(1) RETURN(1) RANKING
- ----------- ------------------- --------------- ---------- ---------- -----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ENTERPRISE ACCUMULATION TRUST
Equity........................ Growth $ 621.6 23.14% 21.30% 4 Stars
Small Company Value........... Small Value 458.1 34.19% 17.42% 3 Stars
Managed....................... Flexible 3,048.6 22.44% 21.85% 4 Stars
International Growth(2)....... Foreign Stock 91.4 12.38% N/A 3 Stars
High-Yield Bond(2)............ High-Yield Bond 89.8 5.76% N/A 4 Stars
--------
Total Enterprise
Accumulation
Trust............... $4,309.5
========
</TABLE>
115
<PAGE> 117
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------
ONE-YEAR FIVE-YEAR OVERALL
ANNUALIZED ANNUALIZED MORNINGSTAR
SUB-ACCOUNT TYPE OF SUB-ACCOUNT NET ASSETS RETURN(1) RETURN(1) RANKING
- ----------- ------------------- --------------- ---------- ---------- -----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
MONY SERIES FUND, INC.
Money Market.................. Money Market $ 160 5.2% 4.3% N/A
Intermediate Term Bond........ Bond 50 8.6% 6.0% 3 Stars
Long Term Bond................ Bond 86 17.0% 8.7% 2 Stars
Equity Income................. Income 19 22.9% 19.2% N/A
Equity Growth................. Growth 2 24.8% 20.6% N/A
Diversified................... Balanced 2 23.2% 16.8% N/A
Government Securities......... Government Bond 30 7.2% 4.9% 3 Stars
--------
Total MONY Series Fund, Inc... 349
OTHER SUB-ACCOUNTS.............. 68
--------
Total................. $ 417
========
</TABLE>
- ---------------
(1) Prior to insurance and expense charges to contractholders.
(2) Commenced operations on November 18, 1994.
N/A not available
Morningstar is an independent provider of financial information concerning
mutual fund performance. According to Morningstar, a fund's 10 year return
accounts for 50% of its overall rating score, its five year return accounts for
30% and its three year return accounts for 20%. If only five years of history
are available, the five year period is weighted 60% and the three year period is
weighted 40%. If only three years of data are available, the three years are
used alone. Funds scoring in the top 10% of their investment category receive 5
stars; funds scoring in the next 22.5% receive 4 stars; the next 35% receive 3
stars; those in the next 22.5% receive 2 stars and the bottom 10% receive 1
star.
Approximately 85% of the Company's career agents were licensed through MONY
Securities Corp. at June 30, 1998 to sell variable annuities (with 74% having
National Association of Securities Dealers, Inc. ("NASD") Series 6 licenses and
26% having NASD Series 7 licenses).
The Company offers a variety of proprietary retail mutual funds to retail
customers. ECM's wholly-owned subsidiary, Enterprise Fund Distributors, Inc.,
acts as the broker-dealer in distributing shares in the Enterprise Group of
Funds through MONY Securities Corp. and third-party broker-dealer firms. ECM
recently made available Enterprise Accumulation Trust as a funding vehicle for
variable product offerings of third-party insurance companies, initially
concentrating on small and mid-size insurance companies.
As of June 30, 1998, ECM had $6.8 billion in assets under management, of
which $2.5 billion related to the proprietary retail mutual funds and $4.3
billion related to the Enterprise Accumulation Trust. The Company earns
management fees on both of these categories of assets.
ECM offers an opportunity for individual retail investors to have access to
the advice and expertise of leading institutional money managers, which is
generally not available to those individual retail investors. In an opinion
survey of financial advisors conducted by DALBAR, a Boston-based mutual fund
market research and publishing firm, in 1997, the Enterprise Group of Funds was
one of three companies ranked number one on the basis of "General Opinion" out
of the 19 "small" mutual fund complexes ranked. For purposes of the survey,
"small" mutual fund complexes are companies with asset size of approximately
$8.0 billion or less or which offer fewer than 10 funds with distinct investment
objectives.
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<PAGE> 118
The following table, in addition to indicating the performance of the 13
portfolios of the Enterprise Group of Funds, also indicates the institutional
money manager for each portfolio. These money managers are compensated through
sub-advisory fees. The historical performance of the portfolios is not an
indicator of future performance.
ENTERPRISE GROUP OF FUNDS PERFORMANCE
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------------
ONE-YEAR
TYPE OF ANNUALIZED
FUND CLASS* FUND FUND MANAGER NET ASSETS RETURN
- -------------------------- ------ -------- ----------------------------------- --------------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Growth A Equity Montag & Caldwell, Inc. $ 659 31.03%
B Equity 306 30.33%
C Equity 79 30.22%
Y Equity 62 31.54%
Growth and Income A Equity Retirement System Investors Inc. 11 NA
B Equity 13 NA
C Equity 3 NA
Y Equity 18 22.17%
Equity A Equity OpCap Advisors 5 21.63%
B Equity 5 21.21%
C Equity 1 21.08%
Equity Income A Equity 1740 Advisers, Inc. 111 16.80%
B Equity 29 16.14%
C Equity 4 16.18%
Y Equity 0 NA
Capital Appreciation A Equity Provident Investment Counsel, Inc. 124 30.22%
B Equity 11 29.49%
C Equity 0 29.47%
Y Equity 0 NA
Small Company Growth A Equity William D. Witter, Inc. 8 NA
B Equity 6 NA
C Equity 2 NA
Y Equity 11 2.00%
Small Company Value A Equity Gabelli Asset Management Company 77 28.92%
B Equity 51 28.27%
C Equity 9 28.18%
Y Equity 0 29.47%
International Growth A Equity Brinson Partners, Inc. 43 4.92%
B Equity 14 4.31%
C Equity 2 4.28%
Y Equity 13 5.38%
Government Securities A Income TCW Funds Management, Inc. 68 8.90%
B Income 17 8.41%
C Income 1 8.31%
Y Income 8 NA
High-Yield Bond A Income Caywood-Scholl Capital Management 73 11.78%
B Income 30 11.20%
C Income 4 11.15%
Y Income 1 NA
Tax-Exempt Income A Income MBIA Capital Management, Inc. 24 7.36%
B Income 3 6.84%
C Income 0 6.67%
Managed A Flexible OpCap Advisors 189 19.56%
B Flexible 154 18.92%
C Flexible 10 18.92%
Y Flexible 98 20.18%
Money Market A Money
Market Enterprise Capital Management, Inc. 87 4.93%
B Money
Market 7 4.64%
C Money
Market 3 4.64%
Y Money
Market 3 NA
Total................................................ $2,457.0
========
<CAPTION>
AS OF JUNE 30, 1998
------------------------
FIVE-YEAR OVERALL
ANNUALIZED MORNINGSTAR
FUND RETURN RATING
- -------------------------- ---------- -----------
<S> <C> <C>
Growth 27.26% 4 Stars
NA 5 Stars
NA NA
NA NA
Growth and Income NA NA
NA NA
NA NA
22.04% 4 Stars
Equity NA NA
NA NA
NA NA
Equity Income 17.87% 3 Stars
NA 3 Stars
NA NA
NA NA
Capital Appreciation 16.60% 3 Stars
NA 2 Stars
NA NA
NA NA
Small Company Growth NA NA
NA NA
NA NA
21.11% 2 Stars
Small Company Value NA 3 Stars
NA 4 Stars
NA NA
NA 4 Stars
International Growth 12.70% 3 Stars
NA 4 Stars
NA NA
NA NA
Government Securities 6.26% 3 Stars
NA 3 Stars
NA NA
NA NA
High-Yield Bond 10.41% 4 Stars
NA 4 Stars
NA NA
NA NA
Tax-Exempt Income 5.06% 2 Stars
NA 2 Stars
NA NA
Managed NA 3 Stars
NA 3 Stars
NA NA
NA NA
Money Market
4.24% NA
NA NA
NA NA
NA NA
</TABLE>
- ---------------
* These designations represent different classes within each fund based upon fee
and expense computations.
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<PAGE> 119
OTHER PRODUCTS
BROKER-DEALER OPERATIONS
In its broker-dealer operations, in addition to selling the Company's
proprietary investment products, the Company facilitates transactions for its
accumulation customers by providing access to other non-proprietary investment
products (including stocks, bonds, limited partnership interests, tax-exempt
unit investment trusts and other investment securities).
MONY Securities Corp. ("MSC") is a registered securities broker-dealer and
investment advisor and a member of the NASD. MSC is a wholly-owned subsidiary of
MONY. MSC performs brokerage and other investment services relating to a wide
range of securities, including mutual funds, stocks, bonds, limited partnership
interests (primarily in real estate, oil and gas and equipment leasing) and
tax-exempt unit investment trusts. For the years ended December 31, 1997, 1996
and 1995, 40%, 30% and 24%, respectively, based on brokerage commissions, of the
investment products sold by MSC are shares in mutual funds in the Enterprise
Group of Funds. MSC's products and services are distributed through registered
representatives who belong to MONY's career agency sales force. MSC transacts
business in all 50 of the United States, the District of Columbia and Puerto
Rico. In 1995, DALBAR conducted a consumer survey, which ranked the level of
customer satisfaction with various financial services firms that such customers
do business with on a regular basis. In the category of managing day-to-day
investments, MSC was ranked in the top 10 of all banks, brokerage and fund
companies.
The following table shows, for the periods indicated, sales of the
Company's proprietary mutual funds and other investment products.
INVESTMENT PRODUCT SALES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Enterprise Group of Funds................................... $ 751.6 $347.0 $207.2
Other investment products................................... 296.0 360.0 240.0
-------- ------ ------
Total............................................. $1,047.6 $707.0 $447.2
======== ====== ======
</TABLE>
INSURANCE BROKERAGE OPERATIONS
In its insurance brokerage operation, the Company provides its 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. MONY's insurance brokerage subsidiary is
licensed as an insurance broker in Delaware and most other states.
RUN-OFF BUSINESSES
The Run-Off Businesses include certain lines of business no longer written
by the Company. 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.
MARKETING AND DISTRIBUTION
The Company's marketing strategy focuses on small business owners and
higher income individuals, particularly family builders and pre-retirees. The
Company believes this strategy capitalizes on the Company's key strengths,
namely its wide range of individual protection and accumulation products and its
career agency sales force. Based on commissions, the Company derived nearly 74%
of its sales from such key markets for the year ended December 31, 1997.
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<PAGE> 120
The Company believes that its managerial agency system and career agency
sales force is a competitive advantage in the marketplace. Distribution through
career agents allows the Company to establish closer relationships with
customers than is typical of insurers using third party brokers, thereby
enhancing the ability of the Company to evaluate customer needs and underwriting
risks.
The Company's career agency sales force consisted of approximately 2,218
field agents at June 30, 1998. The career agency sales force generates most
(approximately 90% in 1997 by premium) of the Company's new individual insurance
and annuity sales and is also the primary distribution system for the Company's
sale of mutual funds and other investment products to individuals. The sales
force is organized as a managerial agency system under which 49 agency managers
as of June 30, 1998 supervise the marketing and sales activities of agents in
defined marketing territories in the United States and Europe. The agency
managers are all employees of the Company, while the career agents are all
independent contractors and not employees of the Company. The contract with each
career agent requires the agent to submit to MONY or MLOA applications for
policies of insurance issued by MONY or MLOA. MONY and MLOA's compensation
arrangements with career agents contain incentives for the career agents to
solicit applications for products issued by MONY and MLOA and for products
issued by insurance companies, not affiliated with the Company, made available
by the Company's insurance brokerage operations, MONY Brokerage, Inc. Those
incentives include counting first year commissions (weighted in the case of
products made available by MONY Brokerage, Inc.) for the purposes of expense
reimbursement programs, sales awards and certain other benefits. In addition,
MONY Brokerage, Inc. makes available products issued by other insurance
companies that neither MONY nor MLOA issues.
In 1998, the Company had 513 agents in the MDRT, an industry designation
based on sales which result in annual first-year commissions of $53,000 or more,
up from 460 in 1996. The Company believes that its rate of growth in MDRT
members from 1995 to 1997 was among the highest in the life insurance industry
and that the percentage of its career agents who are MDRT members is among the
highest in the industry.
The Company believes that the two most significant challenges of operating
a career agency system are ensuring that the interests of the agency management
organization are aligned with the interests of the Company and providing a
cost-effective and appropriate level of marketing, training and recruiting
support to each of the Company's career agents and agency managers. To address
these challenges, over the last several years the Company has made several
changes in its compensation structure for its agency management organization,
which changes culminated in January of 1998 when the Company revised its
compensation structure to provide a salary plus incentive compensation system
for all of its agency managers and sales managers designed to more closely align
the interests of the managers with those of the Company.
To further address the challenges of operating a career agency sales force,
the Company has initiated several programs directed at targeted efforts in
recruiting, marketing and training of its career agents. As a result of its new
recruiting program, the Company hired 928 new agents in 1997, the highest annual
number of new agents for the Company since 1990. The Company has recently begun
targeted marketing programs to assist the agency sales force in specialized
areas such as selling to professional athletes and seminar selling, which the
Company believes will result in increased premium production. In the area of
training, the Company redesigned its training programs directed at new agents in
order to provide them with increased knowledge and skills.
In early 1998, in order to increase the productivity and size of its career
agency sales force, the Company adopted a plan to "tier" its agents and agencies
and to provide focused marketing, recruiting and training support tailored to
meet the particular needs of each "tier". By restructuring its agencies into
tiers, the Company is able to segment its career agency sales force into groups
according to experience and productivity levels and to assign agency managers to
tiers based on their skill sets and the particular needs and goals of such
tiers. For example, separate tiers are being established for new agents with
little or no experience in the industry, experienced agents
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<PAGE> 121
who are producing at superior levels and one or more groups of agents with
experience or production levels falling between those two levels. The Company
began the tiering process on a selective basis in June 1998 and intends to
expand the process throughout the remainder of 1998.
The Company believes that this tiering system is unique in the life
insurance industry and will give the Company a competitive advantage in the
marketplace. For example, by having certain managers responsible solely for
recruiting and providing necessary support systems for new recruits, the Company
believes that it will be able to increase the number and quality of new agents
recruited each year. The Company believes that the tiering system will also
allow the Company to attract and retain already established and successful
agents by providing an environment in which such agents can compete favorably
with other producer groups, such as third-party brokers or general agents.
Additionally, the Company believes that the tiering system will enable the
Company to attract and retain other agents by providing marketing and training
support that is responsive to such agents' career development needs.
In addition to sales by the career agents, the Company's mutual funds are
also sold through third-party broker-dealers. The Company markets to these
third-party broker-dealers through 16 wholesalers. The Company expects to
increase the number of these specialized sales agents in the future.
PRICING AND UNDERWRITING
Insurance underwriting involves a determination of the type and amount of
risk which an insurer is willing to accept. The Company underwrites each
application. The Company's underwriters evaluate policy applications on the
basis of information provided by the applicant and others. The Company follows
detailed and uniform underwriting practices and procedures designed to properly
assess and quantify risks before issuing coverage to qualified applicants. The
Company's insurance underwriting standards attempt to produce mortality results
consistent with the assumptions used in product pricing while also allowing
competitive risk selection. Factors considered by the Company in setting
premiums and charges for products include assumptions which are considered
prudent by management as to future investment returns, expenses, persistency,
mortality and taxes, where appropriate. The long-term profitability of the
Company's products is affected by the degree to which future experience deviates
from these assumptions.
In underwriting business, the Company uses its automated underwriting
system, which it believes to be technologically superior to the systems of many
of its competitors. The Company's Field Application Submit Transaction (FAST)
system allows agents to submit policy applications electronically. The Company's
Consolidated Life Underwriting Expert System (CLUES) automatically requests and
processes data necessary to underwrite life insurance applications, including
blood test results and motor vehicle records. The Company's Total Online
Production System (TOPS), which contains the Company's policyholder database,
handles policy billing and administrative services. The Company's agencies each
have computers connected to this integrated system, enabling agents in the field
to automatically submit applications and access policyholder data.
The Company believes that its underwriting staff is highly experienced and
qualified. Of the Company's 30 Home Office Underwriting professionals, eight
have over 20 years of industry experience and seven others have at least 10
years of industry experience.
REINSURANCE
MONY utilizes a variety of indemnity reinsurance agreements with insurers
to control its loss exposure. Generally, these agreements are structured either
on an automatic basis, where risks meeting prescribed criteria are automatically
covered, or on a facultative basis, where the reinsurer must agree to accept the
specific reinsurance risk before it becomes liable. The amount of each risk
retained by MONY depends on its evaluation of the specific risk, subject, in
certain circumstances,
120
<PAGE> 122
to maximum limits based on characteristics of coverages. Under the terms of the
reinsurance agreements, the reinsurer will be liable to reimburse MONY for the
ceded amount in the event the claim is paid. However, MONY remains contingently
liable for all benefits payable even if the reinsurer fails to meet its
obligations to MONY.
Life insurance business is ceded on a yearly renewable term basis under
various reinsurance contracts. The Company's general practice is to retain no
more than $4.0 million of risk on any one person for individual products and
$6.0 million for last survivor products. The total amount of reinsured life
insurance in force on this basis was $7.4 billion, $7.5 billion and $8.0 billion
at December 31, 1997, 1996 and 1995, respectively.
The Company also has in place certain "surplus relief" reinsurance
contracts. Surplus relief reinsurance contracts are indemnity reinsurance
agreements whereby the Company transfers a certain percentage of its risk with
respect to specified business lines to another reinsurer to increase statutory
surplus through the receipt of an initial reinsurance allowance provided by the
reinsurers. Although these agreements do not qualify to be accounted for as
reinsurance under GAAP, the Company's agreements qualify for reinsurance
accounting under SAP and have specifically been approved by the New York State
Insurance Department. Future statutory earnings will be reduced as amounts are
credited to reinsurers based on the experience of the reinsured business. At
June 30, 1998, the Company's combined statutory surplus included $69.7 million
relating to surplus relief reinsurance, or 8.2% of the Company's statutory
surplus at that date. The ability of the Company to maintain surplus relief
reinsurance at current levels may be important to its ability to maintain its
statutory surplus position. The ability of MONY to pay dividends to the Holding
Company may be affected by a reduction in its statutory earnings caused by any
reduction in the outstanding level of surplus relief reinsurance. See
"-- Regulation -- Shareholder Dividend Restrictions".
As of December 31, 1997 the Company's outstanding individual disability
income insurance business is reinsured on an indemnity basis. See "-- Protection
Products".
The following table presents the Company's principal reinsurers and the
percentage of total reinsurance recoverable reported in the Company's
consolidated financial statements at December 31, 1997 under the captions
"Amounts Due From Reinsurers" (which amounted to $574.5 million) and "Assets
transferred in the Group Pension Transaction" (which amounted to $194.5 million)
that was due from each reinsurer.
<TABLE>
<S> <C>
REINSURERS:
Centre Life Reinsurance, Ltd................................ 47.8%
AUSA Life Insurance Company, Inc............................ 25.3
Life Reassurance Corporation of America..................... 12.0
Reinsurance Group of America................................ 2.6
All Other................................................... 12.3
-----
100.0%
=====
</TABLE>
THE GROUP PENSION TRANSACTION
On December 31, 1993, the Company entered into the AEGON Agreement with
AEGON under which the Company transferred a substantial portion of its group
pension business, including its full service group pension contracts, consisting
primarily of tax-deferred annuity, 401(k) and managed funds lines of business,
to AUSA, a wholly owned subsidiary of AEGON. The Company also transferred to
AUSA the corporate infrastructure supporting the group pension business,
including data processing systems, facilities and regional offices. In
connection with the Group Pension 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
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<PAGE> 123
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 $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 AEGON 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.
Under the terms of the AEGON Agreement, MONY agreed to not compete with
AEGON for new group pension business similar to that transferred in the Group
Pension Transaction, during the three-year period following the Group Pension
Transaction Date. However, MONY retained certain group pension business not
transferred in the transaction, which consists of (i) annuities purchased by
pension plan participants from MONY after retirement ("purchased annuities"),
(ii) deposit administration contracts and (iii) MONY's remaining GIC business.
Total general account reserves at December 31, 1997 for such non-transferred
business were $190.9 million, $151.6 million and $56.3 million, respectively.
AEGON's group pension business, including the business transferred by MONY
is serviced by AUSA and Diversified Investment Advisors Inc., a registered
investment advisor and subsidiary of AEGON formed in connection with the Group
Pension Transaction ("Diversified"). MONY officers formerly responsible for the
management of MONY's group pension operations became officers of Diversified at
the time of the Group Pension Transaction and continue to manage the transferred
group pension operations. Substantially all of the Company's 450 employees in
its group pension operations became employees of Diversified at such time and
continue to administer and service the transferred business, as well as MONY's
retained group pension business, under an administrative services agreement. In
addition, in connection with the Group Pension Transaction, the Company's career
agency sales force was authorized to continue to market and distribute group
pension business through the transferred operations on behalf of AEGON and its
affiliates.
The Group Pension Transaction was legally structured as a sale. However,
for accounting purposes, the Company continues to record the assets and
liabilities comprising the transferred business, as well as the related profits
therefrom, in its financial statements because, pursuant to the terms of the
AEGON Agreement, the Company retained substantially all the risks and rewards of
the transferred business.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- The Group Pension Transaction -- Decline and Expiration
of Payments and Income Related to the Group Pension Transaction" for a
discussion of the consideration received in connection with the Group Pension
Transaction.
COMPETITION
The Company believes that competition in the Company's lines of business is
based on service, product features, price, commission structure, perceived
financial strength, claims-paying ratings and name recognition. The Company
competes with a large number of other insurers as well as non-insurance
financial services companies, such as banks, broker-dealers and mutual funds,
many of which have greater financial resources, offer alternative products or
more competitive pricing and, with respect to other insurers, have higher
ratings than the Company. Competition exists for individual consumers, employer
groups and agents and other distributors of insurance products. National banks,
with their pre-existing customer bases for financial services products, may pose
increasing competition in the future to insurers who sell annuities, including
the Company, as a result of the United States Supreme Court's 1994 decision in
NationsBank of North Carolina v.
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<PAGE> 124
Variable Annuity Life Insurance Company, which permits national banks to sell
annuity products of life insurance companies in certain circumstances.
The Company must attract and retain productive agents to sell its insurance
and annuity products. Strong competition exists among insurance companies for
agents with demonstrated ability. Management believes that key bases of
competition among insurance companies for agents with demonstrated ability
include the services provided to, and relationships developed with, these agents
in addition to compensation and product structure. Changes arising from the
Demutualization, as well as the realignment of the career agency sales force and
the transition to new products, may affect the Company's ability to retain
productive distributors of its individual insurance and annuity products. Sales
of individual insurance and annuity products and the Company's financial
position and results of operations could be materially adversely affected if
such changes occur.
In addition, several proposals to repeal or modify the Glass-Steagall Act
of 1933, as amended, and the Bank Holding Company Act of 1956, as amended, have
been made by members of Congress and the Clinton Administration. Currently, the
Bank Holding Company Act restricts banks from being affiliated with insurance
companies. None of these proposals has yet been enacted, and it is not possible
to predict whether any of these proposals will be enacted or, if enacted, their
potential effect on the Company.
The investment management and securities brokerage businesses, having
relatively few barriers to entry, continually attract new entrants. The Company
competes with other providers of investment products and services primarily on
the basis of the range of investment products offered, the investment
performance of such products and the quality of service provided to clients.
In addition, the Company recently adopted a plan to restructure its career
agency sales force. See "-- Marketing and Distribution". There can be no
assurance that such restructuring will be successful or that the career agency
sales force will be receptive to the new structure. If the restructuring is not
successful, or if the career agency sales force is not receptive to the new
structure, the Company's financial position and results of operations could be
materially adversely affected.
INTERNATIONAL BUSINESS
MONY, through its subsidiaries, MONY Life Insurance Company of the
Americas, Ltd. and MONY Bank & Trust Company of the Americas, Ltd. has
established a pilot program to explore marketing its products internationally.
Initially, MONY is focusing primarily on Latin America, and secondarily on
Europe. To service these markets, MONY is offering a portfolio of offshore
financial products, including life insurance, annuities, mutual funds and trust
services.
RATINGS
Ratings with respect to claims-paying ability and financial strength have
become an increasingly important factor in establishing the competitive position
of insurance companies. Ratings are important to maintaining public confidence
in MONY and its ability to market its products. Rating organizations continually
review the financial performance and condition of insurers, including MONY. Any
lowering of MONY's ratings could have a material adverse effect on MONY's
ability to market its products and retain its current policyholders. These
consequences could, depending upon the extent thereof, have a material adverse
effect on MONY's liquidity and, under certain circumstances, net income. MONY
currently is rated "A-" by A.M. Best and MONY's insurance claims-paying ability
is rated "A3" by Moody's, "A+" by Duff & Phelps and "A+" by S&P. Moody's, on
January 6, 1998, and Duff & Phelps, on August 4, 1998, each announced that it
had changed its respective outlook on MONY's rating from stable to positive.
A.M. Best's ratings for insurance companies currently range from "A++" to "F",
and some companies are not rated. A.M. Best publications indicate that "A-"
ratings are assigned to those companies that in A.M. Best's opinion have
achieved excellent overall performance when compared to the standards
established by A.M.
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Best. "A" and "A-" companies are considered to have a strong ability to meet
their obligations to policyholders over a long period of time. The
Demutualization and the Offerings are part of management's strategy to enhance
the Company's capital base and its access to capital in order to improve
ratings.
Moody's ratings for insurance companies currently range from "Aaa" to "C",
S&P's ratings for insurance companies range from "AAA" to "CCC-", and Duff &
Phelps' ratings for insurance companies range from "AAA" to "CCC-". In
evaluating a company's financial and operating performance, Moody's, S&P and
Duff & Phelps review its profitability, leverage and liquidity as well as its
book of business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its policy reserves and
the experience and competence of its management.
The foregoing ratings reflect each rating agency's current opinion of
MONY's claims-paying ability, financial strength, operating performance and
ability to meet its obligations to policyholders and are not evaluations
directed toward the protection of investors in the Common Stock. Such factors
are of concern to policyholders, agents and intermediaries. Such ratings should
not be relied upon when making a decision to purchase shares of the Common Stock
offered hereby.
Management believes the investment by the Investors, together with the
portion of the net proceeds of the Offerings contributed to MONY, will help
support MONY's ratings. In addition, management believes MONY's ratings should
be positively affected if it achieves improvements in operating results, reduces
its exposure to higher risk assets and realizes further cost reductions.
However, there can be no assurance as to whether or when such positive effect on
ratings will take place.
REGULATION
GENERAL REGULATION AT THE STATE LEVEL
MONY is licensed to transact its insurance business in, and is subject to
regulation and supervision by, all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam and the U.S. Virgin Islands. MLOA is licensed
and regulated in all states other than New York.
The laws of the various states establish state insurance departments with
broad administrative powers to approve policy forms and, for certain lines of
insurance, rate, grant and revoke licenses to transact business, regulate trade
practices, license agents, require statutory financial statements and prescribe
the type and amount of investments permitted. In addition, the New York
Insurance Department restricts certain agency expenses. The aforementioned
regulation by the state insurance departments is for the benefit of
Policyholders, not stockholders.
The Holding Company is not regulated as an insurance company but will, as
the direct or indirect owner of the capital stock of MONY and MLOA, be subject
to the insurance holding company acts of the states in which MONY and MLOA are
domiciled (or deemed to be commercially domiciled). Most states have enacted
legislation that requires each insurance holding company and each insurance
company in an insurance holding company system to register with the insurance
regulatory authority of the insurance company's state of domicile and, annually,
to furnish financial and other information concerning the operations of
companies within the holding company system that may materially affect the
operations, management or financial condition of the insurers within such
system. The Holding Company is subject to the insurance holding company laws in
New York and Arizona. Under such laws, all transactions within an insurance
holding company system affecting insurers must be fair and equitable and each
insurer's policyholder surplus following any such transaction must be both
reasonable in relation to its outstanding liabilities and adequate for its
needs. The New York and Arizona insurance holding company laws also require
prior notice or regulatory approval of the change of control of an insurer or
its holding company and of material intercorporate transfers of assets or other
material transactions within the holding company
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structure. Generally, under such laws, a state insurance authority must approve
in advance the direct or indirect acquisition of 10% or more of the voting
securities of an insurance company domiciled in its state. Under the New York
Insurance Law, for a period of five years following the Plan Effective Date, no
person may acquire beneficial ownership of 5% or more of the outstanding shares
of Common Stock without the prior approval of the New York Superintendent. The
Investors have received a conditional waiver of this rule from the New York
Superintendent in connection with the potential exercise of the Warrants prior
to the end of such five-year period. See "Restrictions on Acquisitions of
Securities of the Holding Company".
In recent years, a number of life and annuity insurers have been the
subject of regulatory proceedings and litigation relating to alleged improper
life insurance pricing and sales practices. Some of these insurers have incurred
or paid substantial amounts in connection with the resolution of such matters.
See "-- Legal Proceedings". In addition, state insurance regulatory authorities
regularly make inquiries, hold investigations and administer market conduct
examinations with respect to insurers' compliance with applicable insurance laws
and regulations.
MONY and MLOA continuously monitor sales, marketing and advertising
practices and related activities of their agents and personnel and provide
continuing education and training in an effort to ensure compliance with
applicable insurance laws and regulations. There can be no assurance that any
non-compliance with such applicable laws and regulations would not have a
material adverse effect on the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the states in
which they do business, and their business and accounts are subject to
examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurer's financial condition, adherence to statutory
accounting practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or the restructuring of insurance companies.
Insurance company subsidiaries of the Holding Company would be subject to such
state insurance laws; however, the Holding Company would generally be subject to
federal bankruptcy laws.
The NAIC has established a program of accrediting state insurance
departments. NAIC accreditation permits accredited states to conduct periodic
examinations of insurance companies domiciled in such states. NAIC-accredited
states will not accept reports of examination of insurance companies from
unaccredited states except under limited circumstances. As a direct result,
insurers domiciled in unaccredited states may be subject to financial
examination by accredited states in which they are licensed, in addition to any
examinations conducted by their domiciliary states. The accreditation of the New
York Insurance Department, MONY's principal insurance regulator, has been
suspended as a result of the New York legislature's failure to adopt certain
model NAIC laws. MONY believes that the suspension of the NAIC accreditation of
the New York Insurance Department, even if continued, will not have a
significant impact upon its ability to conduct its insurance businesses.
MONY's variable life insurance products and variable annuity products are
considered securities within the meaning of the federal securities laws and are,
therefore, subject to regulation thereunder, as well as under state insurance
laws. In addition, MONY and its subsidiaries are generally subject to federal
and state laws and regulations which affect the conduct of their business.
STATUTORY EXAMINATION
As part of their routine regulatory oversight process, state insurance
departments conduct periodic detailed examinations of the books, records and
accounts of insurance companies domiciled in their states. Such examinations are
generally conducted in cooperation with the departments of two or three other
states under guidelines promulgated by NAIC.
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The New York Insurance Department recently completed an examination of MONY
for each of the five years in the period ended December 31, 1996, and the
Arizona State Insurance Department recently completed an examination of MLOA,
for each of the three years in the period ended December 31, 1996. The New York
report noted certain technical violations of New York Insurance law regarding
advertising and the crediting of interest (with respect to which the Company
does not believe there will be any material consequences), but the examination
did not reveal any material financial reporting items. With regard to the
Arizona examination of MLOA, the report noted that certain reinsurance
agreements were either not in writing or not submitted to the Arizona Department
for approval, that MLOA does not settle its federal income tax liability to MONY
in a timely fashion and does not maintain current appraisals on its limited real
estate portfolio (with respect to which the Company does not believe there will
be any material consequences), but it did not reveal any material financial
condition or operating items.
SHAREHOLDER DIVIDEND RESTRICTIONS
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. The applicable statute gives the New York Superintendent broad
discretion to disapprove dividend requests based upon a determination of whether
MONY's financial condition would support the payment of dividends. The New York
Insurance Department has established informal guidelines for the New York
Superintendent's determinations, which focus upon, 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, interest and pay cash
dividends (including interest on the Holding Company Subordinated Notes, if
issued). In addition, the Arizona insurance laws contain restrictions on the
abilities of MLOA to pay dividends to MONY. MONY's inability to pay dividends to
the Holding Company in the future in an amount sufficient for the Holding
Company to pay dividends to its stockholders would have a material adverse
effect on the Holding Company and the market value of the Common Stock. See
"Risk Factors -- Holding Company Structure; Restrictions on Dividends" and
"Dividends".
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. Such payments 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. If such payments are
not made, the Holding Company may not be able to meet its cash requirements,
including principal and interest payments on the Holding Company Subordinated
Notes and dividends on the Convertible Preferred Stock, if issued, or any other
preferred stock to be issued in the future and the Common Stock.
NAIC IRIS RATIOS
The NAIC has developed a set of financial relationships or "tests" known as
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies which may require special attention or action
by insurance regulatory authorities. Insurance companies submit data annually to
the NAIC, which in turn analyzes the data by utilizing, in the case of life
insurance companies, 12 ratios, each with defined "usual ranges". Generally, an
insurance company will become subject to regulatory scrutiny if it falls outside
the usual ranges of four or more
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of the ratios, and regulators may then act, if the company has insufficient
capital, to constrain such company's underwriting capacity. Neither MONY nor
MLOA is currently subject to regulatory scrutiny based on its IRIS ratios.
POLICY AND CONTRACT RESERVE SUFFICIENCY ANALYSIS
Under the New York Insurance Law and the laws of several other states, the
Company is required to conduct an annual analysis of reserve sufficiency
including all life and health insurance reserves and interest-sensitive single
premium life and annuity reserves. A qualified actuary must submit an opinion
which states that the reserves when considered in light of the assets held with
respect to such reserves make good and sufficient provision for the associated
contractual obligations and related expenses of the insurance company. If such
an opinion cannot be provided, the insurance company must set up additional
reserves by transferring funds from surplus. MONY and MLOA have provided a
current opinion, without qualification, to applicable state regulators with
respect to such reserves.
STATUTORY INVESTMENT VALUATION RESERVES
SAP require a life insurance company to maintain both an AVR and interest
maintenance reserve ("IMR") to absorb both realized and unrealized gains and
losses on a portion of its investments. AVR establishes statutory reserves for
fixed maturity securities, equity securities, mortgage loans, equity real
estate, and other invested assets. AVR is designed to capture all realized and
unrealized gains and losses on such assets, other than those resulting from
changes in interest rates. The level of AVR is based on both the type of
investment and its rating. In addition, the reserves required for similar
investments, for example, fixed maturity securities, differ according to the
ratings of the investments, which are based upon ratings established
periodically by the NAIC Securities Valuation Office. IMR applies to all types
of fixed maturity investments, including bonds, preferred stocks, mortgage
backed securities and mortgage loans. IMR is designed to capture the net gains
which are realized upon the sale of such investments and which result from
changes in the overall level of interest rates. Such captured net realized gains
are then amortized into income over the remaining period to the stated maturity
of the investment sold. Any increase in AVR and IMR causes a reduction in MONY's
statutory capital and surplus which, in turn, reduces funds available for
stockholder dividends.
RISK-BASED CAPITAL REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a model law to implement RBC requirements for life insurance companies.
The requirements are designed to monitor capital adequacy and to raise the level
of protection that statutory surplus provides for policyholders. The model law
measures four major areas of risk facing life insurers: (i) the risk of loss
from asset defaults and asset value fluctuation; (ii) the risk of loss from
adverse mortality and morbidity experience; (iii) the risk of loss from
mismatching of asset and liability cash flow due to changing interest rates and
(iv) business risks. Insurers having less statutory surplus than required by the
RBC model formula will be subject to varying degrees of regulatory action
depending on the level of capital inadequacy.
The RBC formula provides a mechanism for the calculation of an insurance
company's Authorized Control Level RBC and its total adjusted capital. The model
law sets forth the points at which a superintendent of insurance is authorized
and expected to take regulatory action. The first level is known as the Company
Action Level RBC, which is set at twice the Authorized Control Level RBC. The
second level is the Regulatory Action Level RBC, set at 1.5 times the Authorized
Control Level RBC. The third is the Authorized Control Level RBC, and the fourth
is the Mandatory Control Level RBC, set at 70% of the Authorized Control Level
RBC.
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If an insurance company's adjusted capital is higher than the Regulatory
Action Level but below the Company Action Level, the insurance company must
submit to its superintendent of insurance a comprehensive financial plan. If an
insurance company's adjusted capital is higher than the Authorized Control level
but lower than the Regulatory Action Level, the superintendent of insurance
shall perform such examination or analysis as he or she deems necessary of the
insurer's business and operations and issue any appropriate corrective orders to
address the insurance company's financial problems. If an insurer's adjusted
capital is higher than the Mandatory Control Level but lower than the Authorized
Control Level, the superintendent may place the insurer under regulatory
control. If the insurance company's adjusted capital falls below the Mandatory
Control Level, the superintendent will be required to place the insurer under
regulatory control. The adjusted RBC capital ratios of all the Company's
insurance subsidiaries at June 30, 1998 and December 31, 1997 were in excess of
the Company Action Levels.
REGULATION OF INVESTMENTS
MONY and MLOA are subject to state laws and regulations that require
diversification of their investment portfolios and limit the amount of
investments in certain investment categories such as below investment grade
fixed income securities, equity real estate and equity investments. Failure to
comply with these laws and regulations would cause investments exceeding
regulatory limitations to be treated as non-admitted assets for purposes of
measuring surplus, and, in some instances, would require divestiture of such
non-qualifying investments. As of June 30, 1998, MONY's and MLOA's investments
complied with all such regulations.
ASSESSMENTS AGAINST INSURERS
Insurance guaranty association laws exist in all states, the District of
Columbia and Puerto Rico. Insurers doing business in any of these jurisdictions
can be assessed for policyholder losses incurred by insolvent insurance
companies. These arrangements provide certain levels of protection to
policyholders from losses under insurance policies (and certificates issued
under group insurance policies issued by life insurance companies) issued by
insurance companies that become impaired or insolvent. Typically, assessments
are levied (up to prescribed limits) on member insurers on a basis which is
related to the member insurer's proportionate share of the business written by
all member insurers in the appropriate state.
While the amount and timing of any future assessment on MONY and MLOA under
these laws cannot be reasonably estimated and are beyond the control of MONY and
MLOA, MONY and MLOA have established reserves which they consider adequate for
assessments in respect to insurance companies that are currently subject to
insolvency proceedings. Recent regulatory actions against certain large life
insurers encountering financial difficulty have prompted the various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed loss. Most of these laws do provide, however, that an assessment may
be excused or deferred if it would threaten an insurer's solvency and further
provide for annual limits on such assessments. A large part of the assessments
paid by MONY and MLOA pursuant to these laws may be used as credits for a
portion of MONY's and MLOA's premium taxes. The Company believes the total
assessments will not be material to its operating results or financial position.
For the years ended December 31, 1997, 1996 and 1995, the Company paid
approximately $3.3 million, $3.7 million and $8.1 million, respectively, in
assessments pursuant to state insurance guaranty association laws.
GENERAL REGULATION AT FEDERAL LEVEL
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on the business in
a variety of ways. Current and proposed federal measures that may significantly
affect the insurance business include limitations on antitrust immunity, minimum
solvency requirements and the removal of barriers restricting banks from
engaging in the insurance and mutual fund business.
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SECURITIES LAWS
The Company, certain of its subsidiaries and certain policies and contracts
offered by such subsidiaries are subject to various levels of regulation under
the federal securities laws administered by the Commission and under certain
state securities laws. Certain separate accounts and a variety of mutual funds
and other pooled investment vehicles are registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). Certain annuity
contracts and insurance policies issued by subsidiaries are registered under the
Securities Act, and certain other subsidiaries of the Company are registered as
broker-dealers under the Exchange Act.
MONY and certain of its subsidiaries are investment advisors registered
under the Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"). Certain investment companies managed by such subsidiaries are registered
with the Commission under the Investment Company Act and the shares of certain
of these entities are qualified for sale in certain states in the United States
and the District of Columbia. Certain subsidiaries of the Company are also
subject to the Commission's net capital rules.
All aspects of MONY's subsidiaries' investment advisory activities are
subject to various federal and state laws and regulations in jurisdictions in
which they conduct business. These laws and regulations are primarily intended
to benefit investment advisory clients and investment company shareholders and
generally grant supervisory agencies broad administrative powers, including the
power to limit or restrict the carrying on of business for failure to comply
with such laws and regulations. In such event, the possible sanctions which may
be imposed include the suspension of individual employees, limitations on the
activities in which the investment advisor may engage, suspension or revocation
of the investment advisor's registration as an advisor, censure and fines.
MONY and its subsidiaries may also be subject to similar laws and
regulations in the states and foreign countries in which they provide investment
advisory services, offer the products described above or conduct other
securities related activities.
ERISA CONSIDERATIONS
On December 13, 1993, the United States Supreme Court issued its opinion in
John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank
holding that certain assets in excess of amounts necessary to satisfy guaranteed
obligations held by John Hancock in its general account under a participating
group annuity contract are "plan assets" and therefore subject to certain
fiduciary obligations under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), which specifies that fiduciaries must perform their duties
solely in the interest of ERISA plan participants and beneficiaries. The Court
limited the imposition of ERISA fiduciary obligations in these instances to
assets in an insurer's general account that were not reserved to pay benefits of
guaranteed benefit policies (i.e., benefits whose value would not fluctuate in
accordance with the insurer's investment experience). On December 22, 1997 the
Secretary of Labor issued proposed regulations, providing guidance for the
purpose of determining, in cases where an insurer issues one or more policies
backed by the insurer's general account to or for the benefit of an employee
benefit plan, the extent to which assets of the insurer constitute plan assets
for purposes of ERISA and the Code. Final regulations will be issued after a
notice and comment period. The regulations will apply only with respect to a
policy issued by an insurer on or before December 31, 1998. In the case of such
a policy, the regulations will generally take effect at the end of the 18-month
period following the date such regulations become final. Generally, no person
will be liable under ERISA or the Code for conduct occurring prior to the end of
such 18-month period, where the basis of a claim is that insurance company
general account assets constitute plan assets. Insurers issuing new policies
after December 31, 1998, that are not guaranteed benefit policies will be
subject to fiduciary obligations under ERISA.
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The regulations should indicate the requirements that must be met in order
to satisfy ERISA's fiduciary standards. A review of the Company's procedures
with respect to its general account contracts will be required to ensure
compliance with the regulations.
POTENTIAL TAX LEGISLATION
Congress has, from time to time, considered possible legislation that would
eliminate the deferral of taxation on the accretion of value within certain
annuities and life insurance products. The 1994 United States Supreme Court
ruling in NationsBank of North Carolina v. Variable Annuity Life Insurance
Company that annuities are not insurance for purposes of the National Bank Act
may cause Congress to consider legislation that would eliminate such tax
deferral at least for certain annuities. Other possible legislation, including a
simplified "flat tax" income tax structure with an exemption from taxation for
investment income, could also adversely affect purchases of annuities and life
insurance if such legislation were to be enacted. There can be no assurance as
to whether legislation will be enacted which would contain provisions with
possible adverse effects on the Company's annuity and life insurance products.
ENVIRONMENTAL CONSIDERATIONS
As owners and operators of real property, MONY and certain of its
subsidiaries are subject to extensive federal, state and local environmental
laws and regulations. Inherent in such ownership and operation is also the risk
that there may be potential environmental liabilities and costs in connection
with any required remediation of such properties. In addition, MONY and certain
of its subsidiaries hold equity stakes in companies that could potentially be
subject to environmental liabilities. MONY assesses the business and properties
and its level of involvement in the operation and management of such companies.
MONY routinely conducts environmental assessments for real estate being acquired
for investment and before taking title through foreclosure to real property
collateralizing mortgages held by MONY. While there can be no assurance that
unexpected environmental liabilities will not arise, based on these
environmental assessments and compliance with MONY's internal procedures,
management believes that any costs associated with compliance with environmental
laws and regulations or any remediation of such properties would not have a
material adverse effect on the Company's financial position or results of
operations.
LEGAL PROCEEDINGS
In late 1995 and during 1996 a number of purported class actions were
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies from the early 1980s through the mid
1990s. Although the claims asserted in each case are not identical, they seek
substantially the same relief under essentially the same theories of recovery
(i.e., breach of contract, fraud, negligent misrepresentation, negligent
supervision and training, breach of fiduciary duty, unjust enrichment and
violation of state insurance and/or deceptive business practice laws).
Plaintiffs in these cases (including the Goshen case discussed below) seek
primarily equitable relief (e.g., reformation, specific performance, mandatory
injunctive relief prohibiting the Company from canceling policies for failure to
make required premium payments, imposition of a constructive trust and creation
of a claims resolution facility to adjudicate any individual issues remaining
after resolution of all class-wide issues) as opposed to compensatory damages,
although they also seek compensatory damages in unspecified amounts. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance), has denied any wrongdoing and has asserted numerous
affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified the Goshen
case, being the first of the aforementioned class actions filed, as a nationwide
class consisting of all persons or entities who have, or at the time of the
policy's termination had, an ownership interest in a whole or universal life
insurance policy issued by the Company and sold on an alleged "vanishing
premium"
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basis during the period January 1, 1982 to December 31, 1995. On March 27, 1997,
the Company filed a motion to dismiss or, alternatively, for summary judgment on
all counts of the complaint. All of the other putative class actions have been
consolidated and transferred by the Judicial Panel on Multidistrict Litigation
to the United States District Court for the District of Massachusetts, or are
being voluntarily held in abeyance pending the outcome of the Goshen case. 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 the Company's
motion for summary judgment and dismissed all claims filed in the Goshen case
against the Company 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 the Company.
In addition to the foregoing, from time to time the Company is a party to
litigation and arbitration proceedings in the ordinary course of its business,
none of which is expected to have a material adverse effect on the Company.
PROPERTIES
The Company leases its headquarters building which is located at 1740
Broadway, New York, New York and consists of approximately 225,000 square feet.
The Company also leases facilities in Syracuse, New York, for use in its
insurance operations, which consist of approximately 600,000 square feet in the
aggregate. The Company also leases all 98 of its agency and subsidiary offices,
which consist of approximately 609,000 square feet in the aggregate. The Company
believes that such properties are suitable and adequate for its current and
anticipated business operations.
EMPLOYEES
As of June 30, 1998, the Company had approximately 2,324 employees. No
employees are covered by a collective bargaining agreement. The Company is
represented by approximately 2,352 full time career agents, at June 30, 1998,
who are all independent contractors and are not employees of the Company. The
Company believes that its employee and agent relations are satisfactory.
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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 elsewhere herein, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to the Consolidated Financial Statements.
GENERAL
The Company's investment operations are managed by its investment area,
which reports directly to the Chief Investment Officer of the Company. The
investment area, in consultation with the product actuaries, is responsible for
determining, within specified risk tolerances and investment guidelines, the
general asset allocation, duration and other characteristics of the Company's
investment portfolio.
The primary investment objective of the Company is to maximize after-tax
returns consistent with acceptable risk parameters (including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations). The Company is exposed to two primary sources of investment risk:
credit risk, relating to the uncertainty associated with the continued ability
of a given obligor to make timely payments of principal and interest, and
interest rate risk, relating to the market price and/or cash flow variability
associated with changes in market yield curves. The Company manages credit risk
through industry and issuer diversification and asset allocation. The Company
manages interest rate risk as part of its asset/liability management strategies,
product design, such as the use of market value adjustment features and
surrender charges and proactive monitoring and management of certain
non-guaranteed elements of the Company's products (such as the resetting of
credited interest rates for policies that permit such adjustments). A key aspect
in managing interest rate exposure are the analyses performed by the Company to
assess the adequacy of its projected asset cash flows relative to its projected
liability cash flows. These analyses, many of which are required pursuant to
Regulation 126 of the New York Insurance Department, involve evaluating the
potential gain or loss for over 95% of the Company's in force business under
various increasing and decreasing interest rate environments, including inverted
yield curves. For purposes of these analyses the Company has developed models of
its in force business which reflect product characteristics such as cost of
insurance rates, surrender charges, market value adjustments, dividends, cash
values, etc. The models include assumptions, based on current and anticipated
experience, regarding lapse and mortality rates and interest crediting
strategies. In addition, these models include asset cash flow projections
reflecting coupon payments, sinking fund payments, principal payments, defaults,
bond calls, and mortgage prepayments.
Generally, these cash flow analyses are based on projections of cash flows
using ten different interest rate scenarios over ten or more years. First a
baseline interest rate is selected based on current rates. Then from the
selected baseline rate the ten scenarios are: (i) level, (ii) an immediate
increase of 3% and then level, (iii) an immediate decrease of 3% and then level,
(iv) a uniform increase over ten years of one half a percent per year and then
level, (v) a uniform decrease over ten years of one half a percent per year and
then level, (vi) a uniform increase of one percent per year over five years
followed by a uniform decrease of one percent per year over the next five years
and then level, (vii) a uniform decrease of one percent per year over five years
followed by a uniform increase of one percent per year over the next five years
and then level and (viii) a decrease of 2% and then level. In addition, two of
the scenarios are run with an inverted yield curve.
Since most of its in force liabilities result from participating whole life
insurance and separate account products, the Company does not focus on more
precise liability duration measures because management believes that the
scenario testing employed is sufficient to adequately assess interest rate risk.
The Company uses hedging instruments on only a limited basis because management
believes that there is limited general account risk exposure from recurring cash
flows and limitations
132
<PAGE> 134
contained in product designs. The Company's strategy for the management of
investment risk also includes the continuing selective sale of real estate. See
"-- Equity Real Estate -- Real Estate Sales".
The Company had total consolidated assets at June 30, 1998 of approximately
$24.6 billion. Of the Company's total consolidated assets at such date,
approximately $12.8 billion represented assets held in the Company's general
account, approximately $5.7 billion represented assets transferred pursuant to
the Group Pension Transaction (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 11 to the Consolidated
Financial Statements) and approximately $6.1 billion were held in the Company's
separate accounts, for which the Company does not generally bear investment
risk.
Separate account assets are managed in accordance with the prescribed
investment strategy that applies to the specific separate account. Separate
accounts are established in conformity with insurance laws and are generally not
chargeable with liabilities that arise from any other business of the Company.
Separate account assets are subject to general account claims only to the extent
that the value of such assets exceeds the separate account liabilities.
Investments held in separate accounts and liabilities of the separate accounts
are reported separately as assets and liabilities. Substantially all separate
account assets are reported at estimated fair value. Investment income and gains
or losses on the investments of separate accounts accrue directly to
contractholders and, accordingly, are not reflected in the Company's
consolidated statements of income and cash flows. Fees charged to the separate
accounts by the Company (including mortality charges, policy administration fees
and surrender charges) are reflected in the Company's revenues.
General account assets are managed to support all of the Company's life
insurance and annuity lines of business. With respect to the general account,
the Company seeks to protect policyholders' benefits through asset/liability
matching, emphasizing safety of principal, maintaining sufficient liquidity and
avoiding undue asset concentrations through diversification. At the same time,
the Company seeks to produce an investment return that supports competitive
product pricing and which contributes to achieving the required risk adjusted
return on surplus. The Company's general account consists of a diversified
portfolio of investments. Although all the assets of the general account support
all the Company's liabilities, the Company has developed separate investment
portfolios for specific classes of product liabilities within the general
account. The investment area works closely with the business lines to develop
investment guidelines, including duration targets, asset allocation,
asset/liability mismatch tolerances and return objectives, for each product line
in order to achieve each such product line's individual risk and return
objectives.
133
<PAGE> 135
The following table summarizes the invested assets held in the general
account of the Company at the dates indicated.
INVESTED ASSETS
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------ ----------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
--------- ----- --------- ----- --------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities............ $ 6,282.4 58.5% $ 5,950.1 56.9% $ 5,460.8 52.2%
Equity securities........... 378.1 3.5 337.8 3.2 305.2 2.9
Mortgage loans on real
estate.................... 1,478.8 13.8 1,430.1 13.7 1,582.3 15.1
Policy loans................ 1,252.6 11.7 1,247.2 11.9 1,231.3 11.8
Real estate to be disposed
of........................ 339.1 3.2 621.2 5.9 434.8 4.2
Real estate held for
investment................ 452.5 4.2 495.9 4.7 1,070.4 10.2
Other invested assets....... 57.0 0.5 68.6 0.7 65.8 0.6
Cash and cash equivalents... 492.4 4.6 313.4 3.0 315.4 3.0
--------- ----- --------- ----- --------- -----
Total invested
assets.......... $10,732.9 100.0% $10,464.3 100.0% $10,466.0 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
The yield on general account invested assets (including net realized gains
and losses on investments) was 9.9%, 7.8% and 7.9% for the six-month period
ended June 30, 1998 and the years ended December 31, 1997 and 1996,
respectively.
134
<PAGE> 136
The following table illustrates the yields on average assets for each of
the components of the Company's investment portfolio for the six-month period
ended June 30, 1998 and the years ended December 31, 1997 and 1996.
INVESTMENT RESULTS BY ASSET CATEGORY
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- --------- -------- --------- -------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES:
Investment income...... 7.4% $ 219.9 7.6% $ 422.5 7.7% $ 392.4
Net realized gains
(losses)............. 0.4 12.3 0.1 7.3 0.1 6.2
Total........ 7.8% $ 232.2 7.7% $ 429.8 7.8% $ 398.6
---- --------- ---- --------- ---- ---------
Ending assets.......... 6,070.5 5,764.4 5,373.8
EQUITY SECURITIES:(2)
Investment income...... 11.6% $ 20.8 16.6% $ 53.5 19.0% $ 54.5
Net realized gains
(losses)............. 10.0 17.9 11.1 35.8 10.5 30.0
Total........ 21.6% $ 38.7 27.7% $ 89.3 29.5% $ 84.5
---- --------- ---- --------- ---- ---------
Ending assets.......... 378.1 337.8 305.2
MORTGAGE LOANS:
Investment income...... 8.7% $ 63.1 9.1% $ 137.1 9.5% $ 159.2
Net realized gains
(losses)............. 0.6 4.6 0.7 10.4 0.5 8.4
Total........ 9.3% $ 67.7 9.8% $ 147.5 10.0% $ 167.6
---- --------- ---- --------- ---- ---------
Ending assets.......... 1,478.8 1,430.1 1,582.3
REAL ESTATE:(3)
Investment income...... 5.4% $ 25.7 4.3% $ 56.2 4.9% $ 84.1
Net realized gains
(losses)............. 21.0 100.1 1.5 20.1 1.2 20.8
Total........ 26.4% $ 125.8 5.8% $ 76.3 6.1% $ 104.9
---- --------- ---- --------- ---- ---------
Ending assets.......... 791.6 1,117.1 1,505.2
POLICY LOANS:
Investment income...... 6.3% $ 39.6 6.6% $ 82.2 6.5% $ 80.2
Net realized gains
(losses)............. 0.0 0.0 0.0 0.0 0.0 0.0
Total........ 6.3% $ 39.6 6.6% $ 82.2 6.5% $ 80.2
---- --------- ---- --------- ---- ---------
Ending assets.......... 1,252.6 1,247.2 1,231.3
CASH & CASH
EQUIVALENTS:
Investment income...... 3.4% $ 6.9 5.8% $ 18.2 6.0% $ 22.4
Net realized gains
(losses)............. 0.0 0.0 0.0 0.0 0.0 0.0
Total........ 3.4% $ 6.9 5.8% $ 18.2 6.0% $ 22.4
---- --------- ---- --------- ---- ---------
Ending assets.......... 492.4 313.4 315.4
</TABLE>
135
<PAGE> 137
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------- ---------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- --------- -------- --------- -------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OTHER INVESTED ASSETS:
Investment income(4)... 0.0% $ 0.0 1.3% $ 0.9 5.1% $ 3.4
Net realized gains
(losses)............. 72.3 22.7 (2.2) (1.5) 15.6 10.5
Total........ 72.3% $ 22.7 (0.9)% $ (0.6) 20.7% $ 13.9
---- --------- ---- --------- ---- ---------
Ending assets.......... 57.0 68.6 65.8
TOTAL BEFORE INVESTMENT
EXPENSES:
Investment income(5)... 7.3% $ 376.0 7.5% $ 770.6 7.6% $ 796.2
Net realized gains
(losses)............. 3.0 157.6 0.7 72.1 0.7 75.9
Total........ 10.3% $ 533.6 8.2% $ 842.7 8.3% $ 872.1
---- --------- ---- --------- ---- ---------
Ending assets.......... 10,521.0 10,278.6 10,379.0
Investment expenses net
of offeree
income(6)............ (0.4)% $ (18.3) (0.4)% $ (37.6) 0.4% $ (44.6)
TOTAL AFTER INVESTMENT
EXPENSES:
Investment income(6)... 6.9% $ 357.7 7.1% $ 733.0 7.2% $ 751.6
Net realized gains
(losses)............. 3.0 157.6 0.7 72.1 0.7 75.9
Total........ 9.9% $ 515.3 7.8% $ 805.1 7.9% $ 827.5
---- --------- ---- --------- ---- ---------
Ending assets.......... 10.521.0 10,278.6 10,379.0
Net unrealized gains
(losses) on fixed
maturities........... 211.9 185.7 87.0
--------- --------- ---------
Total
invested
assets..... $10,732.9 $10,464.3 $10,466.0
========= ========= =========
</TABLE>
- ---------------
(1) Yields are based on annual average asset carrying values, excluding
unrealized gains (losses) in the fixed maturity asset category.
(2) Including net unrealized gains and losses in the determination of the total
yield on equity securities for the six-month period ended June 30, 1998 and
the years ended December 31, 1997 and 1996 would have resulted in a total
yield of 24.2%, 28.0% and 34.4%, respectively, which would have resulted in
a total return on invested assets of 10.0%, 7.8% and 8.0% for the
aforementioned periods, respectively.
(3) Equity real estate income is shown net of operating expenses, depreciation
and minority interest.
(4) Excludes amounts referred to in (6) below.
(5) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $18.2
million, $49.6 million and $83.0 million for the six months ended June 30,
1998 and the years ended December 31, 1997 and 1996, respectively. In
addition, real estate investment income is shown net of depreciation of
$14.1 million, $45.1 million and $48.3 million for the aforementioned
periods, respectively.
(6) Includes mortgage servicing fee and other miscellaneous fee income of
approximately $1.8 million, $3.3 million and $3.5 million for the six months
ended June 30, 1998 and the year ended December 31, 1997 and 1996,
respectively.
136
<PAGE> 138
FIXED MATURITIES
Fixed maturities consist of publicly traded debt securities, privately
placed debt securities and small amounts of redeemable preferred stock, and
represented 58.5%, 56.9% and 52.2% of total invested assets at June 30, 1998,
December 31, 1997 and December 31, 1996, respectively.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC Designations". The NAIC Designations
closely mirror the Nationally Recognized Securities Rating Organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade ("Baa" or higher by Moody's, or "BBB" or higher by S&P) by such
rating organizations. NAIC Designations 3 through 6 are referred to as below
investment grade ("Ba" or lower by Moody's, or "BB" or lower by S&P).
The following tables present the Company's private, public and total fixed
maturities by NAIC designation and the equivalent ratings of the Nationally
Recognized Securities Rating Organizations as of June 30, 1998 and December 31,
1997 and 1996, as well as the percentage, based on fair value, that each
designation comprises.
PUBLIC FIXED MATURITIES BY CREDIT QUALITY
($ IN MILLIONS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
------ ---------------------- --------- ----- ---------- --------- ----- ---------- --------- ----- ----------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A.............. $2,314.3 71.4% $2,388.4 $2,251.2 72.1% $2,313.9 $1,806.6 73.5% $1,823.8
2 Baa................... 785.9 24.5 818.0 781.1 25.3 812.1 596.8 24.3 602.9
3 Ba.................... 131.3 3.9 131.5 69.8 2.2 71.6 53.6 2.2 54.3
4 B..................... 4.0 0.1 3.8 10.8 0.3 9.6 0 0.0 0
5 Caa and lower......... 0.0 0.0 0.0 0.0 0.0 0.0 0 0.0 0
6 In or near default.... 0.0 0.0 0.0 0.0 0.0 0.0 0 0.0 0
-------- ----- -------- -------- ----- -------- -------- ----- --------
Subtotal.............. 3,235.5 99.9 3,341.7 3,112.9 99.9 3,207.2 2,457.0 100.0 2,481.0
Redeemable Preferred
Stock................. 2.5 0.1 2.3 2.5 0.1 2.2 1.2 0.0 0.7
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total Public Fixed
Maturities............ $3,238.0 100.0% $3,344.0 $3,115.4 100.0% $3,209.4 $2,458.2 100.0% $2,481.7
======== ===== ======== ======== ===== ======== ======== ===== ========
</TABLE>
PRIVATE FIXED MATURITIES BY CREDIT QUALITY
($ IN MILLIONS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
------ ---------------------- --------- ----- ---------- --------- ----- ---------- --------- ----- ----------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A............. $ 981.5 35.1% $1,033.2 $1,059.4 40.5% $1,110.0 $1,074.7 37.2% $1,107.6
2 Baa.................. 1,606.1 56.4 1,656.8 1,369.2 51.4 1,408.3 1,547.3 52.9 1,576.0
3 Ba................... 197.9 6.9 202.0 170.4 6.3 173.0 236.1 7.9 235.9
4 B.................... 17.5 0.6 16.9 27.5 1.0 26.8 36.9 1.4 39.8
5 Caa and lower........ 0.0 0.0 0.0 6.4 0.2 6.7 3.1 0.1 2.8
6 In or near default... 8.1 0.3 8.1 10.7 0.4 10.7 16.4 0.5 16.0
-------- ----- -------- -------- ----- -------- -------- ----- --------
Subtotal............. 2,811.1 99.3 2,917.0 2,643.6 99.8 2,735.5 2,914.5 100.0 2,978.1
Redeemable Preferred
Stock................ 21.4 0.7 21.4 5.4 0.2 5.2 1.0 0.0 1.0
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total Private Fixed
Maturities........... $2,832.5 100.0% $2,938.4 $2,649.0 100.0% $2,740.7 $2,915.5 100.0% $2,979.1
======== ===== ======== ======== ===== ======== ======== ===== ========
</TABLE>
137
<PAGE> 139
TOTAL FIXED MATURITIES BY CREDIT QUALITY
($ IN MILLIONS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
NAIC RATING AGENCY AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING EQUIVALENT DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
------ ---------------------- --------- ----- ---------- --------- ----- ---------- --------- ----- ----------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Aaa/Aa/A.............. $3,295.8 54.5% $3,421.6 $3,310.6 57.6% $3,423.9 $2,881.3 53.7% $2,931.4
2 Baa................... 2,392.0 39.4 2,474.8 2,150.3 37.3 2,220.4 2,144.1 39.9 2,178.9
3 Ba.................... 329.2 5.3 333.5 240.2 4.1 244.6 289.7 5.3 290.2
4 B..................... 21.5 0.3 20.7 38.3 0.6 36.4 36.9 0.7 39.8
5 Caa and lower......... 0.0 0.0 0.0 6.4 0.1 6.7 3.1 0.1 2.8
6 In or near default.... 8.1 0.1 8.1 10.7 0.2 10.7 16.4 0.3 16.0
-------- ----- -------- -------- ----- -------- -------- ----- --------
Subtotal.............. 6,046.6 99.6 6,258.7 5,756.5 99.9 5,942.7 5,371.5 100.0 5,459.1
Redeemable Preferred
Stock................. 23.9 0.4 23.7 7.9 0.1 7.4 2.2 0.0 1.7
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total Fixed
Maturities............ $6,070.5 100.0% $6,282.4 $5,764.4 100.0% $5,950.1 $5,373.7 100.0% $5,460.8
======== ===== ======== ======== ===== ======== ======== ===== ========
</TABLE>
The Company utilizes its investments in privately placed fixed maturities
to enhance the overall value of the portfolio, increase diversification and
obtain higher yields than are possible with comparable quality public market
securities. These privately placed securities are also used to enhance cash flow
as a result of sinking fund payments. Generally, private placements provide the
Company with broader access to management information, strengthened negotiated
protective covenants, call protection features and, where applicable, a higher
level of collateral. They are, however, generally not freely tradable because of
restrictions imposed by federal and state securities laws and illiquid trading
markets.
At June 30, 1998, the percentage, based on estimated fair value, of total
public and private placement fixed maturities that were investment grade (NAIC
Designation 1 or 2) was 94.1% compared to 94.4% for December 31, 1997. The fixed
maturities portfolio was comprised, based on estimated fair value, of 53.2% in
public fixed maturities and 46.8% in private fixed maturities at June 30, 1998
and 53.9% in public fixed maturities and 46.1% in private fixed maturities at
December 31, 1997.
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 fair value of problem fixed maturities was $28.1 million, $30.2
million and $30.9 million at June 30, 1998 and December 31, 1997 and 1996,
respectively. For the six-month period ended June 30, 1998 and the years ended
December 31, 1997, 1996 and 1995 $0.8 million, $1.1 million, $5.1 million and
$6.5 million of interest income was not accrued on problem fixed maturities.
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 fair value of potential problem fixed maturities was $64.6 million,
$86.2 million and $51.2 million at June 30, 1998, December 31, 1997 and 1996,
respectively.
The Company defines restructured securities in the fixed maturity category
as securities where a concession has been granted to the borrower related to the
borrower's financial difficulties that
138
<PAGE> 140
the Company would not have otherwise considered. The Company restructures
certain securities in instances where a determination was made that greater
economic value will be realized under the new terms than through liquidation or
other disposition. The terms of the restructure generally involve some or all of
the following characteristics: a reduction in the interest rate, an extension of
the maturity date and a partial forgiveness of principal and/or interest. The
fair value of restructured fixed maturities was $0.0 million, $0.0 million and
$6.5 million at June 30, 1998, December 31, 1997 and 1996, respectively.
The following table sets forth the total carrying values of the Company's
fixed maturity portfolio, as well as its problem, potential problem and
restructured fixed maturities.
PROBLEM, POTENTIAL PROBLEM AND
RESTRUCTURED FIXED MATURITIES AT FAIR VALUE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- --------------------
1998 1997 1996
-------------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Total fixed maturities (public and private)............ $6,282.4 $5,950.1 $5,460.8
======== ======== ========
Problem fixed maturities............................... $ 28.1 30.2 $ 30.9
Potential problem fixed maturities..................... 64.6 86.2 51.2
Restructured fixed maturities.......................... 0.0 0.0 6.5
-------- -------- --------
Total problem, potential problem & restructured fixed
maturities........................................... $ 92.7 $ 116.4 $ 88.6
======== ======== ========
Total problem, potential problem & restructured fixed
maturities as a percent of total fixed maturities.... 1.5% 2.0% 1.6%
======== ======== ========
</TABLE>
The Company believes that its long-term fixed maturities portfolio is well
diversified among industry types. The following tables set forth the fair value
of the Company's fixed maturities by industry category, as well as the
percentage of the total portfolio that each industry category comprises as of
June 30, 1998 and December 31, 1997 and 1996. The tables also show by industry
category the relative amounts of publicly traded and privately placed
securities.
139
<PAGE> 141
FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
PUBLICLY TRADED PRIVATELY PLACED TOTAL
--------------------- --------------------- ---------------------
FAIR FAIR FAIR
INDUSTRY CLASS VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
- -------------- -------- ---------- -------- ---------- -------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Other Manufacturing......... $ 304.6 9.1% $ 551.7 18.8% $ 856.3 13.5%
Public Utilities............ 507.8 15.2 288.1 9.8 795.9 12.7
Consumer Goods & Services... 286.1 8.5 452.7 15.4 738.8 11.8
Non-Government -- Asset/
Mortgage Backed........... 347.0 10.5 291.4 9.9 638.4 10.2
Financial Services.......... 229.8 6.9 374.9 12.8 604.7 9.6
Transportation/Aerospace.... 274.6 8.2 231.7 7.9 506.3 8.1
Energy...................... 234.9 7.0 246.7 8.4 481.6 7.7
Mortgage Backed-Government &
Agency(1)................. 448.1 13.4 4.2 0.1 452.3 7.2
Nat Res/Manuf (non-
energy)................... 112.7 3.4 243.5 8.3 356.2 5.7
Bank Holding Companies...... 225.2 6.7 31.7 1.1 256.9 4.1
Banks....................... 158.1 4.7 36.9 1.3 195.0 3.1
Government & Agency......... 130.4 3.9 3.1 0.1 133.5 2.1
Media/Adver/Printing........ 35.1 1.0 84.7 2.9 119.8 1.9
Other....................... 47.3 1.4 42.5 1.4 89.8 1.4
Cable Television............ -- 0.0 33.2 1.1 33.2 0.5
Redeemable Preferred Stock.. 2.3 0.1 21.4 0.7 23.7 0.4
-------- ----- -------- ----- -------- -----
Total............. $3,344.0 100.0% $2,938.4 100.0% $6,282.4 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
140
<PAGE> 142
FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PUBLICLY TRADED PRIVATELY PLACED TOTAL
---------------------- ---------------------- ----------------------
FAIR FAIR FAIR
INDUSTRY CLASS VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
- -------------- ----- ---------- ----- ---------- ----- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Other Manufacturing.... $ 315.3 9.9% $ 489.6 17.9% $ 804.9 13.5%
Public Utilities....... 464.2 14.5 283.3 10.3 747.5 12.6
Consumer Goods &
Services............. 254.4 7.9 357.0 13.0 611.4 10.3
Non-Government --
Asset/Mortgage
Backed............... 326.5 10.2 281.9 10.3 608.4 10.2
Financial Services..... 249.7 7.8 334.6 12.2 584.3 9.8
Transportation/
Aerospace............ 258.3 8.0 275.7 10.1 534.0 9.0
Energy................. 238.6 7.4 267.2 9.7 505.8 8.5
Mortgage Backed-
Government &
Agency(1)............ 469.9 14.6 4.4 0.2 474.3 8.0
Nat Res/Manuf (non-
energy).............. 77.1 2.4 214.6 7.8 291.7 4.9
Bank Holding
Companies............ 208.4 6.5 31.7 1.2 240.1 4.0
Banks.................. 149.6 4.7 38.4 1.4 188.0 3.2
Government & Agency.... 129.5 4.0 4.1 0.1 133.6 2.2
Media/Adver/Printing... 33.3 1.0 81.1 3.0 114.4 1.9
Other.................. 32.4 1.0 43.6 1.6 76.0 1.3
Cable Television....... -- 0.0 28.3 1.0 28.3 0.5
Preferred Stock........ 2.2 0.1 5.2 0.2 7.4 0.1
-------- ----- -------- ----- -------- -----
Total........ $3,209.4 100.0% $2,740.7 100.0% $5,950.1 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
141
<PAGE> 143
FIXED MATURITIES PORTFOLIO BY INDUSTRY AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
PUBLICLY TRADED PRIVATELY PLACED TOTAL
---------------------- ---------------------- ----------------------
FAIR FAIR FAIR
INDUSTRY CLASS VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
- -------------- ----- ---------- ----- ---------- ----- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Financial Services..... $ 210.1 8.5% $ 531.6 17.9% $ 741.7 13.7%
Public Utilities....... 352.9 14.2 297.5 10.0 650.4 11.9
Other Manufacturing.... 178.9 7.2 471.0 15.8 649.9 11.9
Consumer Goods &
Services............. 183.9 7.4 363.8 12.2 547.7 10.0
Non-Government --
Asset/Mortgage
Backed............... 279.9 11.3 224.8 7.6 504.7 9.2
Energy................. 164.3 6.6 283.4 9.5 447.7 8.2
Mortgage Backed-
Government &
Agency(1)............ 437.6 17.6 8.9 0.3 446.5 8.2
Transportation/
Aerospace............ 84.4 3.4 278.2 9.3 362.6 6.6
Nat Res/Manuf (non-
energy).............. 49.5 2.0 256.5 8.6 306.0 5.6
Government & Agency.... 207.6 8.4 5.2 0.2 212.8 3.9
Banks.................. 130.9 5.3 69.5 2.3 200.4 3.7
Bank Holding
Companies............ 144.0 5.8 6.5 0.2 150.5 2.8
Media/Adver/Printing... 22.2 0.9 105.7 3.6 127.9 2.3
Other.................. 34.8 1.4 36.2 1.2 71.0 1.3
Cable Television....... -- 0.0 39.3 1.3 39.3 0.7
Redeemable Preferred
Stock................ 0.7 0.0 1.0 0.0 1.7 0.0
-------- ----- -------- ----- -------- -----
Total........ $2,481.7 100.0% $2,979.1 100.0% $5,460.8 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Mortgage-Backed-Government & Agency industry are bonds collateralized by
mortgages backed by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Mortgage Corp., or Canadian
Housing Authority.
At June 30, 1998, the Company's largest unaffiliated single concentration
of fixed maturities consists of $194.8 million of face amount of AEGON Notes
purchased in connection with the Group Pension Transaction. These AEGON Notes
represent approximately 1.8% of total invested assets at June 30, 1998 (see
"Business -- The Group Pension Transaction"). No other individual non-
government issuer represents more than 0.6% of invested assets.
The Company held approximately $1,090.7 million, $1,082.7 million and
$951.1 million of mortgage-backed and asset-backed securities as of June 30,
1998 and December 31, 1997 and 1996, respectively. Of such amounts, $452.3
million, $474.3 million and $446.5 million or 41.5%, 43.8% and 46.9%,
respectively, represented agency-issued pass-through and collateralized mortgage
obligations ("CMOs") secured by the Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Government National Mortgage Association
and Canadian Housing Authority collateral. The balance of such amounts were
comprised of other types of mortgage-backed and asset-backed securities. The
Company believes that its active monitoring of its portfolio of mortgage-backed
securities and the limited extent of its holdings of more volatile types of
mortgage-backed securities mitigate the Company's exposure to losses from
prepayment risk associated with interest rate fluctuations for this portfolio.
At June 30, 1998 and December 31, 1997
142
<PAGE> 144
and 1996 92.0%, 93.2% and 97.5%, respectively, of the Company's mortgage-backed
and asset-backed securities were assigned an NAIC Designation 1. In addition,
the Company believes that it holds a relatively low percentage of CMOs compared
to other life insurance companies.
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated.
MORTGAGE AND ASSET-BACKED SECURITIES
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- -------- ------
($ IN MILLIONS)
<S> <C> <C> <C>
CMOs..................................................... $ 537.9 $ 522.0 $481.0
Pass-through securities.................................. 54.6 106.4 96.6
Commercial MBSs.......................................... 80.6 122.1 100.0
Asset-backed securities.................................. 417.6 332.2 273.5
-------- -------- ------
Total MBS's and asset-backed securities........ $1,090.7 $1,082.7 $951.1
======== ======== ======
</TABLE>
CMOs are purchased to diversify the portfolio risk characteristics from
primarily corporate credit risk to a mix of credit and cash flow risk. The
majority of the CMOs in the Company's investment portfolio have relatively low
cash flow variability. In addition, approximately 76% of the CMOs in the
portfolio have minimal credit risk because the underlying collateral is backed
by the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association. These CMOs offer
greater liquidity and higher yields than corporate debt securities of similar
credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through
securities) are prepayment and extension risks arising from changes in market
interest rates. In declining interest rate environments, the mortgages
underlying the CMOs are prepaid more rapidly than anticipated, causing early
repayment of the CMOs. In rising interest rate environments, the underlying
mortgages are prepaid at a slower rate than anticipated, causing CMO principal
repayments to be extended. Although early CMO repayments may result in
acceleration of income from recognition of any unamortized discount, the
proceeds typically are reinvested at lower current yields, resulting in a net
reduction of future investment income.
The Company manages this prepayment and extension risk by investing in CMO
tranches that provide for greater stability of cash flows. The mix of CMO
tranches was as follows as of the dates indicated.
COLLATERALIZED MORTGAGE OBLIGATIONS BY TRANCHE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Planned Amortization Class................................ $361.8 $268.1 $252.9
Sequential................................................ 159.2 234.8 207.6
Target Amortization Class................................. 16.9 19.1 20.5
------ ------ ------
Total CMO's..................................... $537.9 $522.0 $481.0
====== ====== ======
</TABLE>
The Planned Amortization Class ("PAC") tranche is structured to provide
more certain cash flows to the investor and therefore is subject to less
prepayment and extension risk than other CMO tranches. In general, the Company's
PACs are structured to provide average life stability for increases and
decreases in interest rates of 100 to 200 basis points. PACs derive their
stability from
143
<PAGE> 145
two factors: (i) early repayments are applied first to other tranches to
preserve the PACs' originally scheduled cash flows as much as possible and (ii)
cash flows applicable to other tranches are applied first to the PAC if the
PACs' actual cash flows are received later than originally anticipated.
The prepayment and extension risk associated with a sequential tranche can
vary as interest rates fluctuate, since this tranche is not supported by other
tranches. The Target Amortization Class tranche has protection similar to PACs
in decreasing interest rate environments, but has minimal protection in
increasing rate environments.
The majority of the securities contained in the Company's CMO portfolio are
traded in the open market. As such, the Company obtains market prices from
outside vendors. Any security price not received from such vendors is obtained
from the originating broker or internally calculated.
Asset-backed securities ("ABS") are purchased both to diversify the overall
credit risks of the fixed maturity portfolio and to provide attractive returns.
The ABS portfolio is diversified both by type of asset and by issuer. The
largest asset class exposure in the ABS portfolio is to credit card receivables.
These are comprised of pools of both general purpose credit card receivables
such as Visa and Mastercard and private label credit card receivable pools.
Excluding the exposures to home equity loans (which represented 3.9%, 6.9% and
8.5%, of the ABS portfolio as of June 30, 1998 and December 31, 1997 and 1996,
respectively), the ABS portfolio is in general insensitive to changes in
interest rates. As of June 30, 1998 and December 31, 1997 and 1996,
respectively, the ABS portfolio did not contain any pools of assets outside of
the United States.
The following table presents the types of ABS held by the Company as of the
dates indicated.
ASSET-BACKED SECURITIES BY TYPE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Credit cards.............................................. $149.4 $150.1 $124.0
Automobile receivables.................................... 47.9 48.6 43.3
Collateralized bond obligations/Collateralized loan
obligations............................................. 47.2 26.3 0.0
Franchisee receivables.................................... 31.8 19.5 20.8
Home equity............................................... 16.1 22.8 23.2
Lease receivables......................................... 28.6 13.4 15.8
Miscellaneous............................................. 96.6 51.5 46.4
------ ------ ------
Total ABS....................................... $417.6 $332.2 $273.5
====== ====== ======
</TABLE>
144
<PAGE> 146
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of June
30, 1998 and December 31, 1997 and 1996 are as follows:
FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
----------------------- ----------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ---------- --------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or
less................. $ 124.4 $ 125.1 $ 58.6 $ 58.5 $ 178.5 $ 180.2
Due after one year
through five years... 1,411.7 1,438.6 1,250.3 1,273.0 990.0 1,014.7
Due after five years
through ten years.... 2,344.3 2,441.6 2,412.3 2,499.7 2,471.5 2,500.0
Due after ten years.... 1,130.1 1,186.4 989.4 1,036.2 789.9 814.7
-------- -------- -------- -------- -------- --------
Subtotal............. 5,010.5 5,191.7 4,710.6 4,867.4 4,429.9 4,509.6
Mortgage-backed and
other asset-backed
securities........... 1,060.0 1,090.7 1,053.8 1,082.7 943.9 951.2
-------- -------- -------- -------- -------- --------
Total........ $6,070.5 $6,282.4 $5,764.4 $5,950.1 $5,373.8 $5,460.8
======== ======== ======== ======== ======== ========
</TABLE>
MORTGAGE LOANS
Mortgage loans comprise 13.8%, 13.7% and 15.1% of total invested assets at
June 30, 1998 and December 31, 1997 and 1996, respectively. Mortgage loans
consist of commercial, agricultural and residential loans. As of June 30, 1998
and December 31, 1997 and 1996, commercial mortgage loans comprised $892.1
million, $914.9 million and $1,057.9 million or 60.3%, 64.0% and 66.9% of total
mortgage loan investments, respectively. Agricultural loans comprised $584.5
million, $512.7 million and $521.1 million or 39.5%, 35.8% and 32.9% of total
mortgage loans, and residential mortgages comprised $2.2 million, $2.5 million
and $3.3 million or 0.2%, 0.2% and 0.2% of total mortgage loan investments at
the dates indicated.
In 1992, the Company discontinued making new commercial mortgage loans,
except to honor outstanding commitments or safeguard the values of existing
investments. In 1996, due to improving market conditions, the need to maintain a
diversified investment portfolio and advantageous yields, the Company started to
originate new commercial mortgage loans. New commercial mortgage loan
originations aggregated $93.8 million, $79.9 million and $54.3 million for the
six months ended June 30, 1998 and the years ended December 31, 1997 and 1996,
respectively.
145
<PAGE> 147
COMMERCIAL MORTGAGE LOANS
Following is a summary of the Company's commercial mortgage loans by
geographic area and property type as of June 30, 1998 and December 31, 1997 and
1996.
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY TYPE
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREA PROPERTY TYPE
- --------------------------------------------------------- --------------------------------------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL TYPE OF LOANS VALUE TOTAL
------ -------- --------------- ----- ---- -------- --------------- -----
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Southeast............ 33 $323.5 36.2% Office.............. 64 $582.3 65.3%
Northeast............ 41 309.9 34.7 Retail.............. 23 119.0 13.4
West................. 15 122.2 13.7 Industrial.......... 14 59.1 6.6
Mountain............. 9 71.2 8.0 Mixed Use........... 10 43.0 4.8
Midwest.............. 11 44.3 5.0 Apartments.......... 5 34.0 3.8
Southwest............ 12 21.0 2.4 Hotel............... 2 29.5 3.3
Other............... 3 25.2 2.8
--- ------ ----- --- ------ -----
Total....... 121 $892.1 100.0% Total............... 121 $892.1 100.0%
=== ====== ===== === ====== =====
</TABLE>
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREA PROPERTY TYPE
- --------------------------------------------------------- --------------------------------------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL TYPE OF LOANS VALUE TOTAL
------ -------- --------------- ----- ---- -------- --------------- -----
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast............ 53 $367.8 40.2% Office.............. 70 $597.7 65.3%
Southeast............ 33 323.0 35.3 Retail.............. 29 144.1 15.7
West................. 14 110.5 12.1 Industrial.......... 13 53.6 5.9
Mountain............. 9 54.9 6.0 Apartments.......... 9 51.1 5.6
Midwest.............. 11 41.4 4.5 Other............... 3 26.0 2.9
Southwest............ 12 17.3 1.9 Mixed Use........... 7 25.5 2.8
Hotel............... 1 16.9 1.8
--- ------ ----- --- ------ -----
Total....... 132 $914.9 100.0% Total............... 132 $914.9 100.0%
=== ====== ===== === ====== =====
</TABLE>
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREA PROPERTY TYPE
- --------------------------------------------------------- ---------------------------------------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL TYPE OF LOANS VALUE TOTAL
------ -------- --------------- ----- ---- -------- --------------- -----
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Southeast............ 45 $ 380.5 36.0% Office............... 78 $ 652.7 61.7%
Northeast............ 56 377.6 35.7 Retail............... 41 212.6 20.1
West................. 21 183.4 17.3 Industrial........... 19 67.7 6.4
Mountain............. 12 52.1 4.9 Apartments........... 10 46.4 4.4
Midwest.............. 11 43.2 4.1 Other................ 4 29.3 2.7
Southwest............ 14 21.1 2.0 Hotel................ 3 28.5 2.7
Mixed Use............ 4 20.7 2.0
--- -------- ----- --- -------- -----
Total....... 159 $1,057.9 100.0% Total................ 159 $1,057.9 100.0%
=== ======== ===== === ======== =====
</TABLE>
146
<PAGE> 148
Below is a summary of the changes in the commercial mortgage portfolio for
the six-month period ended June 30, 1998 and the years ended December 31, 1997
and 1996.
COMMERCIAL MORTGAGE LOAN ASSET FLOWS
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE SIX MONTHS THE YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
----------------- --------------------
1998 1997 1996
----------------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Beginning balance.................................... $914.9 $1,057.9 $1,227.1
Plus: New loan originations......................... 93.8 79.9 54.3
Other additions............................... 9.7 14.4 8.9
Less: Scheduled principal payments.................. 64.7 111.7 115.7
Prepayments................................... 57.4 108.3 87.6
Mortgages foreclosed.......................... 0.0 13.7 28.8
Other......................................... 4.2 3.6 0.3
------ -------- --------
Ending balance....................................... $892.1 $ 914.9 $1,057.9
====== ======== ========
</TABLE>
The total number of commercial mortgage loans outstanding at June 30, 1998
and December 31, 1997 and 1996 was 121, 132 and 159, respectively, with an
average loan size of $7.4 million, $6.9 million and $6.7 million, respectively.
The largest amount loaned on any single property at such dates aggregated $46.2
million, $46.2 million and $45.9 million, respectively, and represented less
than 0.5%, 0.5% and 0.5% of general account invested assets, respectively. At
such dates, amounts loaned on 6, 5 and 7 properties were $20 million or greater,
representing in the aggregate 25.3%, 22.4% and 25.5%, respectively, of the total
carrying value of the commercial mortgage loan portfolio at such dates. Total
mortgage loans to the five largest borrowers accounted in the aggregate for
approximately 34.8%, 32.4% and 30.5% of the total carrying value of the
commercial mortgage loan portfolio at June 30, 1998 and December 31, 1997 and
1996, respectively, and less than 2.9%, 2.9% and 3.2%, respectively, of total
invested assets at such dates. All such loans were performing.
The Company's commercial mortgage loan portfolio is managed by a group of
experienced real estate professionals. These professionals monitor the
performance of the loan collateral, physically inspect properties, collect
financial information from borrowers and keep in close contact with borrowers
and the local broker communities to assess the market conditions and evaluate
the impact of such conditions on property cash flows. The Company's real estate
professionals identify problem and potential problem mortgage assets and develop
workout strategies to deal with borrowers' financial weakness, whether by
foreclosing on properties to prevent a deterioration in collateral value, or by
restructuring mortgages with temporary cash flow difficulties.
Of the $106.2 million, $195.5 million and $276.3 million, respectively, in
maturing loans during the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996, 11.8%, 13.9% and 12.9%, respectively, were
refinanced, 44.7%, 48.1% and 40.4%, respectively, were paid off, 0.0%, 6.9% and
7.4%, respectively, were foreclosed, and 0.0%, 5.1% and 7.3%, respectively, were
restructured. Of the $892.1 million of outstanding commercial mortgage loans in
the Company's investment portfolio at June 30, 1998, $153.8 million, $60.5
million and $84.6 million are scheduled to mature in 1998, 1999 and 2000,
respectively.
147
<PAGE> 149
The following table presents the disposition of maturities during the
six-month period ended June 30, 1998 and the years ended December 31, 1997 and
1996.
DISPOSITIONS OF SCHEDULED MATURITIES OF COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------
1998 1997 1996
------------------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Repayment.............................................. $ 47.4 $ 94.0 $111.5
Extension(1)........................................... 23.9 43.6 56.5
Refinance at market.................................... 12.5 27.1 35.8
Foreclosure............................................ 0.0 13.4 20.5
Restructure below market............................... 0.0 10.0 20.1
In process of negotiation.............................. 22.2 4.7 4.9
Borrower extension(2).................................. 0.0 1.6 27.0
Principal write-off.................................... 0.2 1.1 0.0
------ ------ ------
Total........................................ $106.2 $195.5 $276.3
====== ====== ======
</TABLE>
- ---------------
(1) Consists of loans which have had their maturity date extended for a period
of less than one year.
(2) Consists of loans which have had their maturity date extended pursuant to
the borrower's option as provided by the loan documents.
The following table presents the Company's commercial mortgage loan
maturity profile for the periods indicated.
COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------- -----------------------------------
1998 1997 1996
---------------- ---------------- ----------------
($ IN MILLIONS)
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
1 year or less.................................. $176.5 19.8% $220.1 24.0% $ 195.5 18.4%
Over 1 year but less than or equal to 2 years... 75.4 8.5 79.6 8.7 187.6 17.7
Over 2 years but less than or equal to 3
years......................................... 81.2 9.1 86.5 9.5 78.8 7.5
Over 3 years but less than or equal to 4
years......................................... 80.5 9.0 62.0 6.8 108.9 10.3
Over 4 years but less than or equal to 5
years......................................... 74.7 8.4 98.4 10.8 62.2 5.9
Over 5 years but less than or equal to 6
years......................................... 44.2 5.0 62.3 6.8 65.7 6.2
Over 6 years but less than or equal to 7
years......................................... 46.8 5.2 47.9 5.2 97.6 9.3
Over 7 years but less than or equal to 8
years......................................... 47.7 5.3 25.9 2.8 48.2 4.5
Over 8 years but less than or equal to 9
years......................................... 30.1 3.4 44.6 4.9 33.5 3.2
Over 9 years but less than or equal to 10
years......................................... 31.6 3.5 33.6 3.7 39.1 3.7
Over 10 years................................... 203.4 22.8 154.0 16.8 140.8 13.3
------ ----- ------ ----- -------- -----
Total.................................. $892.1 100.0% $914.9 100.0% $1,057.9 100.0%
====== ===== ====== ===== ======== =====
</TABLE>
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
148
<PAGE> 150
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 carrying value of commercial mortgage loans at June 30, 1998 was $892.1
million, which amount is net of valuation allowances aggregating $72.3 million
which represents management's best estimate of cumulative impairments at such
date. However, there can be no assurance that increases in valuation allowances
will not be necessary. Any such increases may have a material adverse effect on
the Company's financial position and results of operations.
At June 30, 1998, the carrying value of problem, potential problem and
restructured loans was $11.9 million, $81.1 million and $218.6 million,
respectively, net of valuation allowances of $2.3 million, $15.1 million and
$40.2 million, respectively.
Gross interest income on restructured commercial mortgage loan balances
that would have been recorded in accordance with the loans' original terms was
approximately $12.1 million, $25.0 million and $24.3 million at June 30, 1998,
December 31, 1997 and 1996, respectively. As a result of the restructurings, the
gross interest income recognized in net income at June 30, 1998, December 31,
1997 and 1996, respectively, was $8.4 million, $18.6 million and $18.1 million.
The following table presents the carrying amounts of problem, potential
problem and restructured commercial mortgages relative to the carrying value of
all commercial mortgages as of the dates indicated. The table also presents the
valuation allowances and writedowns recorded by the Company relative to
commercial mortgages defined as problem, potential problem and restructured as
of each of the aforementioned dates.
149
<PAGE> 151
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED COMMERCIAL
MORTGAGES AT CARRYING VALUE
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31,
JUNE 30, ------------------
1998 1997 1996
-------- ------ --------
($ IN MILLIONS)
<S> <C> <C> <C>
Total commercial mortgages.................................. $892.1 $914.9 $1,057.9
====== ====== ========
Problem commercial mortgages(1)............................. $ 11.9 $ 11.3 $ 16.3
Potential problem commercial mortgages...................... 81.1 74.7 95.6
Restructured commercial mortgages........................... 218.6 225.6 228.7
------ ------ --------
Total problem, potential problem & restructured commercial
mortgages................................................. $311.6 $311.6 $ 340.6
====== ====== ========
Total problem, potential problem and restructured commercial
mortgages as a percent of total commercial mortgages...... 34.9% 34.1% 32.2%
====== ====== ========
Valuation allowances/writedowns(2):
Problem loans............................................. $ 2.3 $ 2.1 $ 3.0
Potential problem loans................................... 15.1 15.8 33.0
Restructured loans........................................ 40.2 40.9 32.6
------ ------ --------
Total valuation allowances/writedowns(2).................... $ 57.6 $ 58.8 $ 68.6
====== ====== ========
Total valuation allowances as a percent of problem,
potential problem and restructured commercial mortgages at
carrying value before valuation allowances and
writedowns................................................ 15.6% 15.9% 16.8%
====== ====== ========
</TABLE>
- ---------------
(1) Problem commercial mortgages included delinquent mortgage loans of $7.0
million, $0.0 million and $4.5 million at June 30, 1998 and December 31,
1997 and 1996, respectively, and mortgage loans in foreclosure of $4.9
million, $11.3 million and $11.8 million at such dates, respectively.
(2) Includes impairment writedowns recorded prior to the adoption of SFAS No.
114, Accounting by Creditors for Impairment of a Loan, of $27.3 million,
$27.4 million, and $29.9 million at June 30, 1998 and December 31, 1997 and
1996, respectively (see Note 1 to Selected Consolidated Financial
Information).
In addition to valuation allowances and impairment writedowns recorded on
specific commercial mortgage loans classified as problem, potential problem, and
restructured mortgage loans, the Company records a non-specific estimate of
expected losses on all other such mortgage loans based on its historical loss
experience for such investments. As of June 30, 1998 and December 31, 1997 and
1996, such reserves were $14.7 million, $17.2 million, and $21.9 million,
respectively.
150
<PAGE> 152
The following tables present the distribution of problem, potential problem
and restructured commercial mortgages by property type and by state as of June
30, 1998 and December 31, 1997 and 1996.
PROBLEM COMMERCIAL MORTGAGES BY PROPERTY TYPE AND BY STATE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
AS OF JUNE 30, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF NUMBER CARRYING % OF
OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL
-------- -------- ----- -------- -------- ----- -------- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTY TYPE:
Retail................. 1 $ 7.0 58.8% 0 $ 0.0 0.0% 1 $ 3.5 21.1%
Office................. 1 4.9 41.2 1 4.9 43.4 2 6.0 36.9
Apartments............. 0 0.0 0.0 1 6.4 56.6 1 1.0 6.3
Mixed use.............. 0 0.0 0.0 0 0.0 0.0 1 5.8 35.7
---- ----- ----- ---- ----- ----- ---- ----- -----
Total.................. 2 $11.9 100.0% 2 $11.3 100.0% 5 $16.3 100.0%
==== ===== ===== ==== ===== ===== ==== ===== =====
STATE:
New York............... 1 $ 7.0 58.8% 0 $ 0.0 0.0% 1 $ 5.8 35.7%
Ohio................... 1 4.9 41.2 1 4.9 43.4 0 0.0 0.0
Massachusetts.......... 0 0.0 0.0 1 6.4 56.6 0 0.0 0.0
California............. 0 0.0 0.0 0 0.0 0.0 1 5.8 35.7
Vermont................ 0 0.0 0.0 0 0.0 0.0 1 3.5 21.1
Louisiana.............. 0 0.0 0.0 0 0.0 0.0 1 1.0 6.3
Montana................ 0 0.0 0.0 0 0.0 0.0 1 0.2 1.2
---- ----- ----- ---- ----- ----- ---- ----- -----
Total.................. 2 $11.9 100.0% 2 $11.3 100.0% 5 $16.3 100.0%
==== ===== ===== ==== ===== ===== ==== ===== =====
</TABLE>
POTENTIAL PROBLEM COMMERCIAL MORTGAGES
BY PROPERTY TYPE AND BY STATE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
AS OF JUNE 30, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF NUMBER CARRYING % OF
OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL
-------- -------- ----- -------- -------- ----- -------- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTY TYPE:
Office................. 4 $63.3 78.1% 6 $65.8 88.1% 8 $81.1 84.8%
Retail................. 3 17.8 21.9 2 8.9 11.9 2 14.5 15.2
---- ----- ----- ---- ----- ----- ---- ----- -----
Total.................. 7 $81.1 100.0% 8 $74.7 100.0% 10 $95.6 100.0%
==== ===== ===== ==== ===== ===== ==== ===== =====
STATE:
New York............... 4 $35.4 43.7% 4 $31.2 41.9% 4 $31.8 33.3%
District of Columbia... 1 33.5 41.3 1 33.5 44.8 2 42.8 44.7
New Jersey............. 1 8.2 10.1 1 8.2 10.9 1 8.1 8.5
Wisconsin.............. 1 4.0 4.9 0 0.0 0.0 0 0.0 0.0
Florida................ 0 0.0 0.0 1 1.1 1.5 1 1.2 1.3
Vermont................ 0 0.0 0.0 1 0.7 0.9 0 0.0 0.0
Massachusetts.......... 0 0.0 0.0 0 0.0 0.0 1 6.4 6.7
California............. 0 0.0 0.0 0 0.0 0.0 1 5.3 5.5
---- ----- ----- ---- ----- ----- ---- ----- -----
Total.................. 7 $81.1 100.0% 8 $74.7 100.0% 10 $95.6 100.0%
==== ===== ===== ==== ===== ===== ==== ===== =====
</TABLE>
151
<PAGE> 153
RESTRUCTURED COMMERCIAL MORTGAGES
BY PROPERTY TYPE AND BY STATE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
AS OF JUNE 30, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF NUMBER CARRYING % OF
OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL
-------- -------- ----- -------- -------- ----- -------- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROPERTY TYPE:
Office................. 19 $169.8 77.7% 19 $174.2 77.2% 19 $173.7 76.0%
Retail................. 5 28.1 12.9 6 29.2 13.0 7 30.6 13.4
Apartments............. 1 11.2 5.1 1 11.2 4.9 2 13.3 5.8
Industrial............. 1 9.5 4.3 1 9.5 4.2 1 9.5 4.1
Mixed use.............. 0 0.0 0.0 1 1.5 0.7 1 1.6 0.7
---- ------ ----- ---- ------ ----- ---- ------ -----
Total.................. 26 $218.6 100.0% 28 $225.6 100.0% 30 $228.7 100.0%
==== ====== ===== ==== ====== ===== ==== ====== =====
STATE:
New York............... 11 $100.3 45.9% 12 $101.7 45.1% 12 $101.9 44.6%
Maryland............... 2 37.5 17.2 2 37.5 16.6 3 42.1 18.4
District of Columbia... 3 21.6 9.9 3 21.8 9.7 2 15.5 6.8
Alabama................ 1 11.2 5.2 1 11.2 4.9 1 11.1 4.8
California............. 1 9.5 4.3 1 9.5 4.2 1 9.5 4.1
Texas.................. 3 9.2 4.2 3 9.2 4.1 3 9.6 4.2
Arizona................ 1 7.7 3.5 1 7.7 3.4 1 7.7 3.4
Colorado............... 1 7.2 3.3 1 7.4 3.3 1 7.6 3.3
Florida................ 1 7.1 3.2 1 7.1 3.2 1 7.1 3.1
South Carolina......... 1 6.4 2.9 1 6.4 2.8 1 6.4 2.8
Louisiana.............. 1 0.9 0.4 1 0.9 0.4 2 2.9 1.3
Connecticut............ 0 0.0 0.0 1 5.2 2.3 0 0.0 0.0
Ohio................... 0 0.0 0.0 0 0.0 0.0 1 6.1 2.7
Georgia................ 0 0.0 0.0 0 0.0 0.0 1 1.2 0.5
---- ------ ----- ---- ------ ----- ---- ------ -----
Total.................. 26 $218.6 100.0% 28 $225.6 100.0% 30 $228.7 100.0%
==== ====== ===== ==== ====== ===== ==== ====== =====
</TABLE>
AGRICULTURAL MORTGAGE LOANS
The carrying value of the Company's agricultural mortgage loans was $584.5
million, $512.7 million and $521.1 million at June 30, 1998 and December 31,
1997 and 1996, respectively, representing 39.5%, 35.8% and 32.9% of total
mortgage assets and 5.5%, 4.9% and 5.1% of general account invested assets at
such dates, respectively. The agricultural mortgage portfolio is diversified
both geographically and by type of product. The security for these loans
includes row crops, permanent plantings, dairies, ranches and timber tracts. Due
to strong agricultural markets and advantageous yields, the Company expects to
continue to invest in agricultural mortgage investments. Less than 0.8%, 0.5%
and 0.8% of total agricultural loans outstanding at June 30, 1998 and December
31, 1997 and 1996, respectively, were delinquent or in process of foreclosure.
Following is a summary of agricultural mortgage loans by state which were held
by the Company at the dates indicated.
152
<PAGE> 154
AGRICULTURAL MORTGAGE LOANS BY STATE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
AS OF JUNE 30, 1998 1997 1996
--------------------------- --------------------------- ---------------------------
NUMBER CARRYING % OF NUMBER CARRYING % OF NUMBER CARRYING % OF
OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL OF LOANS VALUE TOTAL
-------- -------- ----- -------- -------- ----- -------- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE:
California............. 130 $109.5 18.7% 122 $ 96.1 18.7% 119 $ 91.6 17.6%
Washington............. 194 81.6 14.0 185 67.9 13.2 200 76.0 14.6
Idaho.................. 126 60.3 10.3 118 55.6 10.9 100 69.4 13.3
Texas.................. 107 59.4 10.2 104 52.2 10.2 113 52.4 10.1
Oregon................. 114 55.6 9.5 104 38.6 7.5 86 37.7 7.2
Georgia................ 57 38.2 6.5 54 35.1 6.8 56 30.9 5.9
Missouri............... 124 38.2 6.5 120 31.4 6.1 127 30.5 5.8
Arizona................ 47 31.6 5.4 47 29.6 5.8 50 33.9 6.5
Montana................ 52 25.8 4.4 54 26.1 5.1 55 26.5 5.1
Colorado............... 40 14.1 2.4 43 15.8 3.1 42 17.0 3.3
Florida................ 24 12.6 2.2 30 15.3 3.0 34 17.0 3.3
New Mexico............. 17 11.6 2.0 17 12.0 2.3 18 11.0 2.1
Arkansas............... 19 8.6 1.5 -- -- -- -- -- --
Mississippi............ 9 7.3 1.3 6 5.4 1.1 2 0.2 0.0
Illinois............... 16 4.8 0.8 15 4.1 0.8 20 5.0 1.0
All others (no other
state more than
0.8%)................ 87 25.3 4.3 105 27.5 5.4 109 22.0 4.2
----- ------ ----- ----- ------ ----- ----- ------ -----
Total......... 1,163 $584.5 100.0% 1,124 $512.7 100.0% 1,131 $521.1 100.0%
===== ====== ===== ===== ====== ===== ===== ====== =====
</TABLE>
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES. The
Company defines problem, potential problem and restructured agricultural
mortgages in the same manner as it does for commercial mortgages. The following
table presents the carrying amounts of problem, potential problem and
restructured agricultural mortgages relative to the carrying value of all
agricultural mortgages as of the dates indicated. The table also presents the
valuation allowances established by the Company relative to agricultural
mortgages defined as problem, potential problem and restructured as of each of
the aforementioned dates indicated.
153
<PAGE> 155
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL
MORTGAGES AT CARRYING VALUE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Total agricultural mortgages.............................. $584.5 $512.7 $521.1
====== ====== ======
Problem agricultural mortgages(1)......................... $ 4.2 $ 2.1 $ 4.0
Potential problem agricultural mortgages.................. 2.2 2.6 2.2
Restructured agricultural mortgages....................... 11.3 17.2 19.6
------ ------ ------
Total problem, potential problem & restructured
agricultural mortgages.................................. $ 17.7 $ 21.9 $ 25.8
====== ====== ======
Total problem, potential problem and restructured
agricultural mortgages as a percent of total
agricultural mortgages.................................. 3.0% 4.3% 5.0%
====== ====== ======
Valuation allowances/writedowns:
Problem loans........................................... $ 0.0 $ 0.9 $ 0.5
Potential problem loans................................. 0.1 0.1 0.1
Restructured loans...................................... 0.4 0.4 0.6
------ ------ ------
Total valuation allowances/writedowns..................... $ 0.5 $ 1.4 $ 1.2
====== ====== ======
Total valuation allowances as a percent of problem,
potential problem and restructured agricultural
mortgages at carrying value before valuation allowances
and writedowns.......................................... 2.7% 6.0% 4.4%
====== ====== ======
</TABLE>
- ---------------
(1) Problem agricultural mortgages included delinquent mortgage loans of $4.2
million, $1.2 million, and $0.6 million at June 30, 1998 and December 31,
1997 and 1996, respectively, and mortgage loans in the process of
foreclosure of $0.0 million, $0.9 million, and $3.4 million at such dates,
respectively.
In addition to valuation allowances and impairment writedowns recorded on
specific agricultural mortgage loans classified as problem, potential problem,
and restructured mortgage loans, the Company records a non-specific estimate of
expected losses on all other agricultural mortgage loans based on its historical
loss experience for such investments. As of June 30, 1998 and December 31, 1997
and 1996, such reserves were $5.7 million, $5.0 million, and $5.0 million,
respectively.
As illustrated in the table above, at June 30, 1998 and December 31, 1997
and 1996 problem agricultural mortgage loans totaled $4.2 million, $2.1 million
and $4.0 million or 0.7%, 0.4% and 0.8 % of the total carrying value of
agricultural mortgages at such dates, respectively. Potential problems (not
currently in a delinquent status, but with collateral impairment) totaled $2.2
million, $2.6 million and $2.2 million or 0.4%, 0.5% and 0.4% of the total
carrying value of agricultural mortgages at such dates, respectively, and
restructured mortgages totaled $11.3 million, $17.2 million and $19.6 million or
1.9%, 3.4% and 3.8% of the total carrying value of agricultural mortgages at
such dates, respectively. Total problem, potential problem and restructured
mortgages were $17.7 million, $21.9 million and $25.8 million at June 30, 1998,
December 31, 1997 and 1996, respectively, or 3.0%, 4.3% and 5.0% of the total
carrying value of agricultural mortgages at such dates, respectively. Total
specific asset valuation allowances of $0.5 million as of June 30, 1998 for
agricultural mortgages were 2.7% of the carrying value before valuation
allowances and writedowns of these total problem agricultural mortgages of $18.2
million.
MONY has, from time to time, pooled certain of its agricultural mortgage
loans and sold beneficial interests in each of the individual agricultural
mortgage loans in such pools (referred to as "participation interests") to third
parties. Under such arrangements, MONY retains a specified
154
<PAGE> 156
equity interest in the loans in such pools and sells the remaining participation
interest. MONY is responsible for servicing the individual agricultural mortgage
loans in each pool, for which it receives a servicing fee from the third party
participants. As of June 30, 1998, the aggregate amount of agricultural mortgage
loans in such pools being serviced by MONY was approximately $199.7 million.
EQUITY REAL ESTATE
The Company holds real estate as part of its general account investment
portfolio. The Company has adopted a policy of not investing new funds in equity
real estate except to safeguard values in existing investments or to honor
outstanding commitments. As of June 30, 1998 and December 31, 1997 and 1996, the
carrying value of the Company's real estate investments was $791.6 million,
$1,117.1 million and $1,505.2 million, respectively, or 7.4%, 10.6% and 14.4%,
respectively, of general account invested assets. The Company owns real estate,
interests in real estate joint ventures (both majority owned and minority
owned), and real estate acquired upon foreclosure of commercial and agricultural
mortgage loans. The following table presents the carrying value of the Company's
equity real estate investments by such classifications.
EQUITY REAL ESTATE
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- --------------------
TYPE 1998 1997 1996
---- -------------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Real estate............................................ $290.2 $ 449.9 $ 621.9
Joint ventures......................................... 309.6 341.1 357.6
------ -------- --------
Subtotal..................................... 599.8 791.0 979.5
Foreclosed............................................. 191.8 326.1 525.7
------ -------- --------
Total........................................ $791.6 $1,117.1 $1,505.2
====== ======== ========
</TABLE>
Equity real estate is categorized as either "Real estate held for
investment" or "Real Estate to be disposed of". Real estate to be disposed of
consists of properties for which the Company has commenced marketing efforts.
The carrying value of real estate held for investment totaled $452.5 million,
$495.9 million and $1,070.4 million as of June 30, 1998 and December 31, 1997
and 1996, respectively. The carrying value of real estate to be disposed of
aggregated $339.1 million, $621.2 million and $434.8 million as of June 30, 1998
and December 31, 1997 and 1996, respectively.
The following tables present information concerning the geographic and
property type breakdown of the equity real estate portfolio as of June 30, 1998.
155
<PAGE> 157
EQUITY REAL ESTATE BY
REGION AND PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
- -------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO BY REGION
- ------------------------------------------------------- TOTAL PORTFOLIO BY TYPE
- ------------------------------------------------------- ------------------------------------------------------
CARRYING NUMBER CARRYING
NUMBER VALUE PERCENTAGE OF LOANS VALUE PERCENTAGE
------ -------- ---------- -------- -------- ----------
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mountain............. 19 $334.1 42.2% Hotel............. 7 $303.2 38.3%
Southeast............ 24 156.5 19.8 Office............ 42 287.7 36.4
Midwest.............. 26 119.0 15.0 Retail............ 20 141.1 17.8
Northeast............ 9 82.0 10.4 Industrial........ 5 36.2 4.6
West................. 13.. 59.3 7.5 Other............. 10 21.4 2.7
Southwest............ 8 40.7 5.1 Agriculture....... 13 1.7 0.2
Apartments........ 2 0.3 0.0
-- ------ ----- -- ------ -----
Total....... 99 $791.6 100.0% Total............. 99 $791.6 100.0%
== ====== ===== == ====== =====
</TABLE>
EQUITY REAL ESTATE BY
REGION AND PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO BY REGION TOTAL PORTFOLIO BY TYPE
- ------------------------------------------------------- -----------------------------------------------------
CARRYING CARRYING
NUMBER VALUE PERCENTAGE NUMBER VALUE PERCENTAGE
------ -------- ---------- ------ -------- ----------
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mountain............. 24 $ 389.4 34.9% Office........... 66 $ 494.8 44.3%
Southeast............ 34 234.7 21.0 Hotel............ 9 328.0 29.4
Midwest.............. 32 164.1 14.7 Retail........... 26 188.0 16.8
Northeast............ 15 123.2 11.0 Industrial....... 8 57.8 5.2
Southwest............ 27 118.8 10.6 Apartments....... 15 30.5 2.7
West................. 18.. 86.9 7.8 Other............ 10 15.7 1.4
Agriculture...... 16 2.3 0.2
--- -------- ----- --- -------- -----
Total....... 150 $1,117.1 100.0% Total............ 150 $1,117.1 100.0%
=== ======== ===== === ======== =====
</TABLE>
EQUITY REAL ESTATE BY
REGION AND PROPERTY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO BY REGION TOTAL PORTFOLIO BY TYPE
- ------------------------------------------------------- -----------------------------------------------------
CARRYING CARRYING
NUMBER VALUE PERCENTAGE NUMBER VALUE PERCENTAGE
------ -------- ---------- ------ -------- ----------
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mountain............. 29 $ 425.8 28.3% Office........... 96 $ 734.0 48.8%
Southeast............ 40 293.4 19.5 Hotel............ 12 351.8 23.4
West................. 37 249.4 16.6 Retail........... 29 223.4 14.8
Midwest.............. 53 241.0 16.0 Industrial....... 15 100.5 6.6
Southwest............ 37 164.3 10.9 Apartments....... 15 50.6 3.4
Northeast............ 20 131.3 8.7 Other............ 22 40.5 2.7
Agriculture...... 27 4.4 0.3
--- -------- ----- --- -------- -----
Total....... 216 $1,505.2 100.0% Total............ 216 $1,505.2 100.0%
=== ======== ===== === ======== =====
</TABLE>
Equity real estate is evenly distributed across geographic regions of the
country with a slightly larger concentration in the mountain and southeast
region of the United States at June 30, 1998. By property type, there is a
concentration in hotels which represented approximately 38.3% of the equity real
estate portfolio at June 30, 1998. The Company's largest equity real estate
holding at
156
<PAGE> 158
June 30, 1998 consisted of three related hotel properties located in Arizona
with an aggregate carrying value of approximately $274.0 million and
representing less than approximately 2.6% of general account invested assets.
The ten largest real estate properties as of June 30, 1998 comprise 50.0% of
total real estate assets and less than 3.7% of total invested assets.
The Company closely monitors property net operating income on a cash basis,
along with occupancy levels of the Company's commercial real estate properties
owned for more than one year, which comprise a significant portion (91.3% at
June 30, 1998) of the Company's equity real estate portfolio. During 1997, the
net operating income for these properties increased for the sixth consecutive
year.
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.
(See Note 5 to the Consolidated Financial Statements). Increases in such
valuation allowances are recorded as realized investment losses and,
accordingly, are reflected in the Company's results of operations. Real estate
classified as to be disposed of may also be net of impairment adjustments
recorded prior to the time such real estate was designated for sale or at the
time of foreclosure if acquired in satisfaction of debt. At June 30, 1998 and
December 31, 1997, 1996 and 1995, the carrying value of real estate to be
disposed of was $339.1 million, $621.2 million, $434.8 million and $717.4
million, or 3.2%, 5.9%, 4.2% and 6.7% of invested assets at such dates,
respectively. The aforementioned carrying values are net of valuation allowances
of $45.2 million, $82.7 million, $46.0 million and $49.1 million, respectively.
In addition, the carrying value of real estate to be disposed of at such dates
is net of $113.9 million, $182.3 million, $120.1 million and $136.7 million of
impairment adjustments, respectively. For the six months ended June 30, 1998 and
the years ended December 31, 1997, 1996 and 1995, such increases in valuation
allowances aggregated $1.4 million, $63.8 million, $16.8 million and $39.5
million, respectively. Because the carrying value of real estate to be disposed
of is adjusted to reflect the aforementioned valuation allowances, management
expects that the net proceeds from sales of real estate will not be materially
different from the carrying value of such real estate on a GAAP basis. However,
there can be no assurance that increases in valuation allowances will not be
required in the future or that future sales of real estate will not be made at
amounts below recorded GAAP carrying value which may have a material effect on
the Company's financial position and results of operations.
In addition, as a result of differences between SAP and GAAP, the carrying
value of real estate on a SAP basis exceeds the carrying value of such
investments on a GAAP basis. Accordingly, management expects to incur losses on
a SAP basis as a result of anticipated real estate sales, which losses could
materially affect the Company's statutory-basis surplus and net income. Although
there can be no assurance, the Company believes that any such impact on
statutory surplus will be partially offset by the release of the statutory
investment reserves established by the Company and expected future statutory net
income. The Company will monitor the results of its real estate sales strategy
and its ongoing effect on statutory surplus. The GAAP carrying value of real
estate to be disposed of was $339.1 million at June 30, 1998 (or 3.2% of general
account invested assets), which amount is net of impairment adjustments and
valuation allowances aggregating approximately $113.9 million and $45.2 million,
respectively. There can be no assurance as to whether, when or for what amounts
any real estate that is classified to be disposed of will actually be disposed
of. For the six-month period ended June 30, 1998 and the years ended December
31, 1997, 1996 and 1995 the GAAP carrying value of real estate sold was
approximately $317.0 million, $346.3 million, $414.1 million and $273.2 million,
respectively. For the six-month period ended
157
<PAGE> 159
June 30, 1998 and the years ended December 31, 1997, 1996 and 1995, the SAP
carrying value of real estate sold was approximately $428.5 million, $395.0
million, $449.1 million and $299.3 million, respectively. See "Risk
Factors -- Risk of Further Losses on Real Estate; Risk with Respect to
Commercial Mortgage Loans", "-- Investment Impairments and Valuation Allowances"
and Note 20 to the Consolidated Financial Statements.
The following table analyzes the Company's real estate sales (both
commercial and agricultural) on a GAAP basis during the periods indicated.
REAL ESTATE SALES
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------ --------------------------------
1998 1997 1996 1995
------------ -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Sales proceeds.................................. $428.1 $433.9 $456.9 $301.5
Carrying value before impairment adjustments and
valuation allowance........................... 431.2 462.3 519.2 373.7
Impairment adjustments.......................... (74.3) (88.9) (85.2) (87.4)
Valuation allowances............................ (39.9) (27.1) (19.9) (13.1)
------ ------ ------ ------
Carrying value at date of sale.................. $317.0 $346.3 $414.1 $273.2
====== ====== ====== ======
Gain (loss)..................................... $111.1 $ 87.6 $ 42.8 $ 28.3
====== ====== ====== ======
</TABLE>
The Company sold 49 commercial real estate properties and one agricultural
real estate property during the first six months of 1998, 60 commercial real
estate properties and two agricultural real estate properties in 1997, 40
commercial real estate properties and five agricultural real estate properties
in 1996 and 43 commercial real estate properties and four agricultural real
estate properties in 1995.
Most of the proceeds from real estate sales have been invested in
investment grade public 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.
REMIC TRANSACTION
On September 28, 1995, the Company created a real estate mortgage
investment conduit ("REMIC") in compliance with Sections 860A through 860G of
the Code. The REMIC issued to third party investors two classes of notes, each
in the aggregate principal amount of approximately $43.4 million, for a total of
$86.8 million. The collateral for the notes consisted of a segregated pool of 85
conventional, primarily fixed rate commercial and multi-family mortgage loans
that the Company transferred to the REMIC for the purposes of this transaction.
The aggregate principal balance of the mortgages transferred to the REMIC was
approximately $434 million. The Class A-1 notes bore interest at a rate equal to
the monthly London Interbank Offered Rate ("LIBOR") plus 25 basis points and
matured one year after their original issue date; and the Class A-2 notes bore
interest at a rate equal to monthly LIBOR plus 31.5 basis points and matured two
years after their original issue date. Both notes were subject to a maximum
annual interest rate of 14%. In 1996, the Class A-1 notes in the amount of $43.4
million were repaid and the Class A-2 notes were repaid in September 1997.
EQUITY SECURITIES
The Company's equity securities primarily consist of investments in common
stocks and limited partnership interests. The Company's investments in common
stocks are classified as available for sale and are reported at estimated fair
value. Unrealized gains and losses on common stocks are reported as a separate
component of other comprehensive income, net of deferred income taxes
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and an adjustment for the effect on DAC that would have occurred if such gains
and losses had been realized. The Company's investments in limited partnership
interests, all of which represent an ownership interest between 3% and 50%, are
accounted for in accordance with the equity method of accounting. See Note 5 to
the Consolidated Financial Statements.
Substantially all the common stocks owned by the Company are publicly
traded on national securities exchanges. The Company's investments in equity
securities represented 3.5%, 3.2% and 2.9% of invested assets at June 30, 1998
and December 31, 1997 and 1996, respectively. The Company achieved a total
return on its investments in equity securities of 24.2%, 28.0%, 34.4% and 30.5%
for the six-month period ended June 30, 1998 and the years ended December 31,
1997, 1996 and 1995, respectively. The Company defines total return as the
percentage obtained by dividing the summation of realized and unrealized gains
and losses and dividends by the average market value of the portfolio during the
period. Proceeds on the sale of common stocks totaled $93.9 million, $234.1
million, $164.7 million and $58.6 million which resulted in net realized gains
of $18.5 million, $39.7 million, $31.4 million and $11.9 million for the
six-month period ended June 30, 1998 and the years ended December 31, 1997, 1996
and 1995, respectively.
The following table presents the carrying values of the Company's
investments in common stocks and limited partnership interests at the dates
indicated. Included in common stocks at June 30, 1998 and December 31, 1997 and
1996 are $0.8 million, $0.8 million and $6.3 million, respectively, of
non-marketable private equity securities.
INVESTMENTS IN EQUITY SECURITIES
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- --------------------------
1998 1997 1996 1995
-------------- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Common stocks................................... $211.2 $191.4 $170.9 151.3
Limited partnership interests................... 166.9 146.4 134.3 115.7
------ ------ ------ ------
Total................................. $378.1 $337.8 $305.2 $267.0
====== ====== ====== ======
</TABLE>
The following table presents the Company's total return on its investment
in equity securities for the six-month period ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995.
RETURN ON INVESTMENTS IN EQUITY SECURITIES
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------ --------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stocks.......................................... 15.9% 20.5% 21.5% 27.0%
==== ==== ==== ====
Limited partnership interests.......................... 35.0% 37.5% 51.1% 33.9%
==== ==== ==== ====
Total........................................ 24.2% 28.0% 34.4% 30.5%
==== ==== ==== ====
</TABLE>
At June 30, 1998 and December 31, 1997 the Company had investments in
approximately 43 and 36 different limited partnerships which represented 1.6%
($166.9 million) and 1.4% ($146.4 million), respectively, of the Company's
general account invested assets. Investment results for the portfolio are
dependent upon, among other things, general market conditions for initial and
secondary offerings of common stock. For the six months ended June 30, 1998 and
the years ended December 31, 1997, 1996 and 1995 investment income from
investments in limited partnership interests was approximately $18.9 million,
$49.0 million, $50.5 million and $42.3 million, respectively, representing 5.3%,
6.7%, 6.7% and 5.8%, respectively, of the net investment income for such
periods. For the same time periods, the Company achieved total returns on its
investments in limited
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partnership interests of 35.0%, 37.5%, 51.1% and 33.9%, respectively. There can
be no assurance that the recent level of investment returns achieved on limited
partnership investments can be sustained in the future, and the failure to do so
could have a material adverse effect on the Company's financial position and
results of operations.
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES
The cumulative asset specific impairment adjustments and provisions for
valuation allowances that were recorded as of the end of each period are shown
in the table below and are reflected in the corresponding asset values discussed
above.
CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities.......................................... $ 10.0 $ 7.3 $ 23.1
Equity securities......................................... 14.9 17.8 13.8
Mortgages................................................. 27.3 27.4 29.9
Real estate(1)............................................ 169.7 244.0 326.2
Other..................................................... 0.0 0.0 0.0
------ ------ ------
Total........................................... $221.9 $296.5 $393.0
====== ====== ======
</TABLE>
- ---------------
(1) Includes $62.9 million, $110.0 million and $191.6 million at June 30, 1998,
and December 31, 1997 and 1996, respectively, relating to impairments taken
upon foreclosure of mortgage loans.
CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities.......................................... $ 0.0 $ 0.0 $ 0.0
Equity securities......................................... 0.0 0.0 0.0
Mortgages................................................. 51.2 54.9 67.0
Real estate............................................... 45.2 82.7 46.0
Other..................................................... 0.0 3.5 2.9
------ ------ ------
Total........................................... $ 96.4 $141.1 $115.9
====== ====== ======
</TABLE>
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS
FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------- ------------------
1998 1997 1996
-------------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities.......................................... $ 10.0 $ 7.3 $ 23.1
Equity securities......................................... 14.9 17.8 13.8
Mortgages................................................. 78.5 82.3 96.9
Real estate............................................... 214.9 326.7 372.2
Other..................................................... 0.0 3.5 2.9
------ ------ ------
Total........................................... $318.3 $437.6 $508.9
====== ====== ======
</TABLE>
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<PAGE> 162
All of the Company's fixed maturity and equity securities are classified as
available for sale and, accordingly, are marked to market, with unrealized gains
and losses excluded from earnings and reported as a separate component of
equity. Securities whose value is deemed other than temporarily impaired are
written down to fair value. The writedowns are recorded as realized losses and
included in earnings. The cost basis of such securities is adjusted to fair
value. The new cost basis is not changed for subsequent recoveries in value. For
the six month period ended June 30, 1998 and the years ended December 31, 1997,
1996 and 1995 such writedowns aggregated $3.3 million, $10.2 million, $4.5
million and $6.7 million, respectively.
At June 30, 1998 and December 31, 1997, 8.3% ($892.1 million) and 8.7%
($914.9 million), respectively, of the Company's general account invested assets
consisted of commercial mortgage loans. Commercial mortgage loans are stated at
their unpaid principal balances, net of valuation allowances for impairment. The
Company provides valuation allowances for commercial mortgage loans when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Increases in such valuation
allowances are recorded as realized investment losses and, accordingly, are
reflected in the Company's results of operations. For the six months ended June
30, 1998 and the years ended December 31, 1997, 1996 and 1995, such increases
(decreases) in valuation allowances aggregated $(0.2) million, $0.4 million,
($4.2) million and $3.1 million, respectively. The carrying value of commercial
mortgage loans at June 30, 1998 was $892.1 million, which amount is net of $72.3
million representing management's best estimate of cumulative impairment losses
at such date. However, there can be no assurance that additional provisions for
impairment adjustments with respect to the real estate held for investment will
not need to be made. Any such adjustments may have a material adverse effect on
the Company's financial position and results of operations.
The carrying value of real estate held for investment is generally adjusted
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Such impairment adjustments
are recorded as realized investment losses and, accordingly, are reflected in
the Company's results of operations. For the six months ended June 30, 1998 and
the years ended December 31, 1997, 1996 and 1995, such impairment adjustments
aggregated $0.0 million, $0.0 million, $3.8 million and $0.0 million,
respectively. At June 30, 1998 and December 31, 1997 and 1996, the carrying
value of real estate held for investment was $452.5 million, $495.9 million and
$1,070.4 million, or 4.2%, 4.7% and 10.2% of invested assets at such dates,
respectively. The aforementioned carrying values are net of cumulative
impairments of $55.8 million, $61.7 million and $206.1 million, respectively,
and net of accumulated depreciation of $226.2 million, $239.3 million and $427.5
million, respectively. However, there can be no assurance that additional
provisions for impairment adjustments with respect to real estate held for
investment will not need to be made. Any such adjustments may have a material
adverse effect on the Company's financial position and results of operations.
The carrying value of real estate to be disposed of at June 30, 1998,
December 31, 1997 and 1996 was $339.1 million, $621.2 million and $434.8
million, net of impairment adjustments of $113.9 million, $182.3 million and
$120.1 million, valuation allowances of $45.2 million, $82.7 million and $46.0
million, and accumulated depreciation of $122.1 million, $255.1 million and
$90.3 million, respectively. Once management identifies a real estate property
to be sold and commences a plan for marketing the property, the property is
classified as to be disposed of and a valuation allowance is established and
periodically revised, if necessary, to adjust the carrying value of the property
to reflect the lower of its current carrying value or the fair value, less
associated selling costs (See Note 5 to the Consolidated Financial Statements).
Increases in such valuation allowances are recorded as realized investment
losses and, accordingly, are reflected in the Company's results of operations.
For the six months ended June 30, 1998 and the years ended December 31, 1997,
1996 and 1995, such increases in valuation allowances aggregated $1.4 million,
$63.8 million, $16.8 million and $39.5 million, respectively. See "-- Equity
Real Estate -- Real Estate Sales".
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<PAGE> 163
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Holding Company
and MONY upon completion of the Offerings and their respective ages and
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael I. Roth...................... 52 Chairman of the Board, Chief Executive Officer and
Director
Samuel J. Foti....................... 46 President, Chief Operating Officer and Director
Richard Daddario..................... 51 Executive Vice President and Chief Financial
Officer
Kenneth M. Levine.................... 52 Executive Vice President, Chief Investment Officer
and Director
Thomas J. Conklin.................... 52 Senior Vice President and Secretary
Richard E. Connors................... 46 Senior Vice President of MONY
Phillip A. Eisenberg................. 55 Senior Vice President and Chief Actuary of MONY
Stephen J. Hall...................... 51 Senior Vice President of MONY
Richard E. Mulroy, Jr. .............. 53 Senior Vice President and General Counsel
Victor Ugolyn........................ 50 Senior Vice President of MONY
Francis J. Waldron................... 54 Senior Vice President of MONY
Claude M. Ballard, Jr.(1)............ 69 Director
Tom H. Barrett....................... 68 Director
David L. Call........................ 66 Director
G. Robert Durham..................... 69 Director
James B. Farley...................... 68 Director
Robert Holland, Jr. ................. 58 Director
James L. Johnson..................... 71 Director
Robert R. Kiley...................... 63 Director
John R. Meyer........................ 70 Director
Jane C. Pfeiffer..................... 66 Director
Thomas C. Theobald................... 61 Director
</TABLE>
- ---------------
(1) Mr. Ballard is serving as the representative of the Investors pursuant to
the Investment Agreement. See "Certain Provisions of the Investment -- Board
Representation".
The Holding Company Board currently consists of 14 directors, divided into
three classes. The initial term of the first class will expire at the annual
meeting of stockholders to be held in 1999, the initial term of the second class
will expire at the annual meeting of stockholders in 2000 and the initial term
of the third class will expire at the annual meeting of stockholders in 2001.
Messrs. Ballard, Durham, Johnson, Levine and Meyer are members of the first
class, Messrs. Barrett, Call, Farley, Foti and Mrs. Pfeiffer are members of the
second class and Messrs. Holland, Kiley, Roth and Theobald are members of the
third class. At each annual meeting of stockholders, directors will be elected
for a three-year term to succeed the directors whose terms are then to expire.
See "Certain Provisions of the Amended and Restated Certificate of Incorporation
and the By-laws of the Holding Company".
The Holding Company Board has an Audit Committee composed of Messrs.
Barrett, Durham, Farley, Kiley, Meyer and Theobald, none of whom is an officer
or employee of the Holding Company. The Audit Committee recommends to the
Holding Company Board the selection of independent certified public accountants
to audit annually the books and records of the Holding Company, reviews the
activities and the reports of the independent certified public accountants and
reports the
162
<PAGE> 164
results of such review to the Holding Company's Board. The Audit Committee also
considers the adequacy of the Holding Company's internal controls and internal
auditing methods and procedures.
The Holding Company has a Human Resources Committee composed of Messrs.
Durham, Farley, Holland, Johnson and Meyer, none of whom is an officer or
employee of the Holding Company, which, as authorized by the Holding Company
Board, makes determinations with respect to non-cash compensation to officers,
directors and employees of the Holding Company, including with respect to awards
pursuant to the Holding Company's benefit plans.
The Holding Company has a Public Affairs Committee composed of Messrs.
Call, Holland, Kiley, Theobald and Mrs. Pfeiffer, none of whom is an officer or
employee of the Holding Company, which, as authorized by the Holding Company
Board, reviews policies, programs and practices that are consistent with the
Holding Company's social obligations to its employees, society and especially
the communities of its major locations.
Pursuant to the Investment Agreement, the Investors have been granted Board
representation rights. The Holding Company and MONY have agreed to use their
best efforts to cause one of the persons proposed by the Investors and selected
by MONY or the Holding Company, as the case may be, to be elected to its Board.
Claude M. Ballard, Jr., is currently the Board member designated by the
Investors pursuant to these representation rights.
The Investors have agreed to not propose any person who (i) at the time of
such proposal is either a member of the board of directors or board of trustees
or a senior officer of an entity engaged in the Life Insurance Business (as
defined in the Investment Agreement), or (ii) is not qualified to serve as a
trustee or director pursuant to the By-laws of MONY or the Holding Company, as
the case may be. The Investors' Board representation rights granted by the
Investment Agreement will terminate at such time when the Investors and their
subsidiaries and affiliates in the aggregate no longer own an aggregate amount
of Warrants and Convertible Preferred Stock representing the right to acquire
Common Stock and/or Common Stock equal to at least 5% of the voting power of the
Common Stock on an as exercised and as converted basis.
Officers of the Holding Company are elected annually and serve until their
retirement, resignation, death or removal.
DIRECTORS AND EXECUTIVE OFFICERS. Set forth below is a description of the
business positions during at least the past five years for the directors of the
Holding Company, the executive officers of the Holding Company and MONY and the
trustees of MONY. Except for Messrs. Roth, Foti and Levine who have been
directors of the Holding Company since it was incorporated, each of the
directors has been a director of the Holding Company since August 5, 1998.
Michael I. Roth is Chairman of the Board and Chief Executive Officer of the
Holding Company. He is Chairman of the Board (since July 1993) and Chief
Executive Officer (since January 1993) of MONY and has been a Trustee since May
1991. Mr. Roth is also a director of the following subsidiaries of MONY: MONY
Life Insurance Company of America (since July 1991), 1740 Advisers, Inc. (since
December 1992) and MONY CS, Inc. (since December 1989). He has also served as
MONY's President and Chief Executive Officer (from January 1993 to July 1993),
President and Chief Operating Officer (from January 1991 to January 1993) and
Executive Vice President and Chief Financial Officer (from March 1989 to January
1991). Mr. Roth has been with MONY for 9 years. Mr. Roth also served on the
board of directors of the American Council of Life Insurance and serves on the
boards of directors of the Life Insurance Council of New York, Insurance
Marketplace Standards Association, Enterprise Foundation (a charitable
foundation not affiliated with the Enterprise Group of Funds which develops
housing), Life Office Management Association, Metropolitan Development
Association of Syracuse and Central New York, Enterprise Group of Funds, Inc.,
Enterprise Accumulation Trust, Pitney Bowes, Inc. and Promus Hotel Corporation.
Samuel J. Foti is President and Chief Operating Officer of the Holding
Company. He is President and Chief Operating Officer (since February 1994) of
MONY and has been a Trustee since
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<PAGE> 165
January 1993. Mr. Foti is also a director of the following subsidiaries of MONY:
MONY Life Insurance Company of America (since October 1989), MONY Brokerage,
Inc. (since January 1990), MONY International Holdings, Inc. (since October
1994), MONY Life Insurance Company of the Americas, Ltd., (since December 1994)
and MONY Bank & Trust Company of the Americas, Ltd. (since December 1994). He
has also served as MONY's Executive Vice President (from January 1991 to
February 1994) and Senior Vice President (from April 1989 to January 1991). Mr.
Foti has been with MONY for 10 years. Mr. Foti also serves on the board of
directors of the Life Insurance Marketing and Research Association, where he
served as Chairman from October 1996 through October 1997, Enterprise Group of
Funds, Inc., Enterprise Accumulation Trust and The American College.
Richard Daddario is Executive Vice President and Chief Financial Officer of
the Holding Company. He is Executive Vice President and Chief Financial Officer
(since April 1994) of MONY. Mr. Daddario is also a director of the following
subsidiaries of MONY: MONY Life Insurance Company of America (since October
1989), MONY Brokerage, Inc. (since June 1997) and MONY Life Insurance Company of
the Americas, Ltd. (since December 1997). He has also served as MONY's Chief
Financial Officer (from January 1991 to present) and Senior Vice President (from
July 1989 to April 1994). Mr. Daddario has been with MONY for 9 years.
Kenneth M. Levine is Executive Vice President and Chief Investment Officer
of the Holding Company. He is Executive Vice President (since February 1990) and
Chief Investment Officer (since January 1991) of MONY and has been a Trustee
since May 1994. Mr. Levine is also a director of the following subsidiaries of
MONY: MONY Life Insurance Company of America (since July 1991), 1740 Advisers,
Inc. (since December 1989), MONY Funding, Inc. (since October 1991), MONY Realty
Partners, Inc. (since October 1991) and 1740 Ventures, Inc. (since October
1991). He has also served as MONY's Senior Vice President -- Pensions (from
January 1988 to February 1990). Prior to that time, Mr. Levine held various
management positions within MONY. Mr. Levine has been with MONY for 25 years.
Thomas J. Conklin is Senior Vice President and Secretary of the Holding
Company. He is Senior Vice President and Secretary of MONY (since March 1989).
Mr. Conklin was Vice President and Corporate Secretary of MONY (from January
1988 to February 1989) and prior to that time held several positions with MONY.
Mr. Conklin has been with MONY for 13 years.
Richard E. Connors is Senior Vice President of MONY (since February 1994).
Mr. Connors is also a director of the following subsidiaries of MONY: MONY Life
Insurance Company of America (since June 1994) and MONY Brokerage, Inc. (since
May 1994). He has also served as MONY's Regional Vice President -- Western
Region (from June 1991 to February 1994), Vice President -- Small Business
Marketing (from January 1990 to June 1991) and Vice President -- Manpower
Development (from March 1988 to January 1990). Mr. Connors has been with MONY
for 10 years.
Phillip A. Eisenberg is Senior Vice President and Chief Actuary of MONY
(since April 1993). Mr. Eisenberg is also a director of the following subsidiary
of MONY: MONY Life Insurance Company of America (since June 1997). He has also
served as MONY's Vice President -- Individual Financial Affairs (from January
1989 to March 1993). Prior to that time, Mr. Eisenberg held various positions
within MONY. Mr. Eisenberg has been with MONY for 34 years.
Stephen J. Hall is Senior Vice President of MONY (since February 1994). Mr.
Hall is also a director of the following subsidiaries of MONY: MONY Life
Insurance Company of America (since July 1991) and MONY Brokerage, Inc. (since
October 1991). He has also served as MONY's Vice President & Chief Marketing
Officer (from November 1990 to February 1994) and prior to that time was manager
of MONY's Boise, Idaho insurance agency. Mr. Hall has been with MONY for 24
years.
Richard E. Mulroy, Jr. is Senior Vice President and General Counsel of the
Holding Company. He is Senior Vice President and General Counsel of MONY (since
April 1992). He has also served as Vice President and Deputy General Counsel
(from 1987 to April 1992). Prior to that time,
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<PAGE> 166
Mr. Mulroy served as legal counsel in the Law Department of MONY. Mr. Mulroy has
been with MONY for 26 years.
Victor Ugolyn is Senior Vice President of MONY (since May 1991). He is also
Chairman and Chief Executive Officer of Enterprise Capital Management, Inc.
(since May 1991); Enterprise Group of Funds, Inc. (since May 1991); Enterprise
Accumulation Trust (since September 1994); and Enterprise Fund Distributors,
Inc.; Chairman of MONY Securities Corp. (since May 1991); and Chairman and
President of Enterprise International Group of Funds (since October 1994). Mr.
Ugolyn is also a Director of the following subsidiaries or affiliates of MONY:
Enterprise Capital Management, Inc. (since May 1991); Enterprise Group of Funds,
Inc. (since May 1991), Enterprise Accumulation Trust (since September 1994),
Enterprise Fund Distributors, Inc. (since May 1991), MONY Securities Corp.
(since May 1991), MONY Life Insurance Company of the Americas, Ltd. (since
October 1994), MONY Bank & Trust Company of the Americas, Ltd. (since December
1994) and Enterprise International Group of Funds (since October 1994). Mr.
Ugolyn has been with MONY for 8 years.
Francis J. Waldron is Senior Vice President -- International Operations and
Development of MONY (since February 1994). He has also served as a Regional Vice
President (from January 1991-February 1994). Prior to that time, Mr. Waldron
held several positions with MONY. Mr. Waldron is also a director and President
of the following subsidiaries of MONY: MONY International Holdings, Inc. (since
October 1994), MONY Life Insurance Company of the Americas, Ltd. (since December
1994), MONY Bank & Trust Company of the Americas, Ltd. (since December 1994) and
a director of MONY International Life Insurance Co. Seguros de Vida S.A. (since
September 1995). Mr. Waldron has been with MONY for 30 years.
Claude M. Ballard, Jr. has been a director of the Holding Company since
August 5, 1998. Mr. Ballard has been a Trustee of MONY since July 1990. Mr.
Ballard has been a Limited Partner and Consultant at The Goldman Sachs Group,
L.P. since 1988, General Partner from 1981 to 1988 and Chairman of Merit Equity
Partners, Inc., a property acquisition and management company, since July 1989.
He serves on the board of directors of Bedford Property Investors, Inc. (a real
estate investment trust), CBL & Associates Properties, Inc. (a real estate
investment trust), Taubman Centers, Inc. (a real estate investment trust) and
Horizon Hotels, Ltd. The Investors and Goldman Sachs, one of the representatives
of the Underwriters, are affiliates of The Goldman Sachs Group, L.P. Mr. Ballard
currently is the Board member designated by the Investors pursuant to the
Investment Agreement. See "Certain Provisions of the Investment -- Board
Representation".
Tom H. Barrett has been a director of the Holding Company since August 5,
1998. Mr. Barrett has been a Trustee of MONY since July 1990. Mr. Barrett is a
Partner in American Industrial Partners, a private investment partnership since
1992. Mr. Barrett retired from The Goodyear Tire & Rubber Company in December
1993, after serving as Chairman of the Board, President and Chief Executive
Officer of The Goodyear Tire & Rubber Company from April 1989 to July 1991 and
President and Chief Executive Officer from December 1988 to April 1989. He
serves on the board of directors of Air Products and Chemicals, Inc., A.O. Smith
Corporation and Rubbermaid, Incorporated.
David L. Call has been a director of the Holding Company since August 5,
1998. Mr. Call has been a Trustee of MONY since January 1993. Mr. Call is Ronald
P. Lynch Dean Emeritus, Cornell University, College of Agriculture and Life
Sciences since 1995. Prior to that time, Mr. Call was Dean of the College of
Agriculture and Life Sciences. He serves on the board of directors of Seneca
Foods Corporation.
G. Robert Durham has been a director of the Holding Company since August 5,
1998. Mr. Durham has been a Trustee of MONY since June 1988. Mr. Durham retired
from Walter Industries, Inc., a home building and financing, natural resources
and industrial manufacturing company, in May 1996, after serving as Chairman of
the Board and Chief Executive Officer from June 1991 to May 1996. Prior to that
time, Mr. Durham held various executive management
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<PAGE> 167
positions with Phelps Dodge Corporation, a mining company, serving as President,
Chairman of the Board and Chief Executive Officer until his retirement in June
1989. He serves on the board of directors of The FINOVA Group, Inc., Amphenol
Corporation and Homestake Mining Company.
James B. Farley has been a director of the Holding Company since August 5,
1998. Mr. Farley has been a Trustee of MONY since October 1988. Mr. Farley
retired from MONY in January 1994, after serving as Chairman of the Board from
January 1993 to July 1993. Prior to that time, Mr. Farley held the position of
Chairman of the Board and Chief Executive Officer from January 1991 to January
1993, Chairman of the Board, Chief Executive Officer and President from April
1989 to January 1991, and President and Chief Operating Officer from October
1988 to April 1989 with MONY. He was Senior Chairman from 1985 to 1988 of Booz,
Allen & Hamilton, a consulting firm. Mr. Farley serves on the board of directors
of Ashland, Inc. and Harrah's Entertainment, Inc.
Robert Holland, Jr. has been a director of the Holding Company since August
5, 1998. Mr. Holland has been a Trustee of MONY since May 1990. Mr. Holland is
the owner and Chief Executive Officer of WorkPlace Integrators, an office
furniture manufacturing company, since December 1996. Prior to that time, Mr.
Holland was the President and Chief Executive Officer of Ben & Jerry's Homemade,
Inc., an ice cream company, from February 1995 to October 1996, Chairman of the
Board of Gilreath Manufacturing Company, a plastic injection molding
manufacturing company, from 1990 to 1991 and Vice President of Business
Development from 1988 to 1990. Mr. Holland serves on the board of directors of
AC Nielsen Corporation, Frontier Corporation, Henry Ford Health System, Olin
Corporation and Tricon Global Restaurants, Inc. and on the Advisory Board of
Boardroom Consultants.
James L. Johnson has been a director of the Holding Company since August 5,
1998. Mr. Johnson has been a Trustee of MONY since October 1986. Mr. Johnson is
Chairman Emeritus of GTE Corporation, a telecommunications company, having
served as Chairman and Chief Executive Officer from April 1988 to May 1992.
Prior to that time, Mr. Johnson held various executive management positions with
GTE Corporation. Mr. Johnson serves on the board of directors of CellStar
Corporation, The FINOVA Group, Inc., GTE Corporation, Harte-Hanks
Communications, Inc., Valero Energy Corp. and Walter Industries, Inc.
Robert R. Kiley has been a director of the Holding Company since August 5,
1998. Mr. Kiley has been a Trustee of MONY since November 1995. Mr. Kiley is the
President and Chief Executive Officer of the New York City Partnership and
Chamber of Commerce, Inc. since May 1995. Mr. Kiley is a Principal of Kohlberg &
Co. since April 1994. Prior to that time, Mr. Kiley was President and Chief
Executive Officer of Fischback Corp., an electrical and mechanical contracting
company, from January 1991 to October 1994 and Chairman and Chief Executive
Officer of the Metropolitan Transportation Authority of New York from November
1983 to December 1990. Mr. Kiley serves on the board of directors of the New
York City Partnership and Chamber of Commerce, Inc.
John R. Meyer has been a director of the Holding Company since August 5,
1998. Mr. Meyer has been a Trustee of MONY since December 1972. Mr. Meyer is
Professor Emeritus, Harvard University since January 1997. Prior to that time,
Mr. Meyer was a Professor at Harvard University from July 1973 to January 1997.
Mr. Meyer serves on the board of directors of AC Nielsen Corporation, Union
Pacific Corporation and Union Pacific Railroad Company.
Jane C. Pfeiffer has been a director of the Holding Company since August 5,
1998. Mrs. Pfeiffer has been a Trustee of MONY since November 1988. Mrs.
Pfeiffer is an independent management consultant. Mrs. Pfeiffer serves on the
board of directors of Ashland, Inc., International Paper Company and J.C. Penney
Company, Inc. She is a trustee of the University of Notre Dame and a member of
The Council on Foreign Relations.
Thomas C. Theobald has been a director of the Holding Company since August
5, 1998. Mr. Theobald has been a Trustee of MONY since May 1990. Mr. Theobald is
managing director, William Blair Capital Partners, L.L.C., an investment firm,
since September 1994. Prior to that time,
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<PAGE> 168
Mr. Theobald was Chairman of the Board of Continental Bank from August 1987 to
August 1994. Mr. Theobald serves on the board of directors of Anixter
International, Inc., U.S. Timberlands Company, L.P., Xerox Corp., LaSalle
Partners, LaSalle US Realty Income and Growth Fund and Stein Roe & Farnham
Mutual Funds.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Holding Company or an affiliate
of the Holding Company receives an annual retainer fee of $27,500 and each such
director also receives a meeting fee of $1,200 for each meeting of the Holding
Company Board. Additionally, each such director receives an annual retainer fee
of $3,500 per committee on which such director serves as a member and each such
member receives a meeting fee of $1,000 for each meeting of a committee. The
Chairperson of a committee receives an additional annual retainer fee of $1,500.
RESTRICTED STOCK
As part of the Plan, the Holding Company Board may grant restricted stock
to nonemployee directors of the Holding Company each year; provided, however,
that the Holding Company Board may not grant restricted stock prior to the first
anniversary of the Plan Effective Date, and the Holding Company Board must have
the approval of the New York Superintendent before issuing Restricted Stock
prior to the fifth anniversary of the Plan Effective Date. The Holding Company
Board shall have discretion in determining the number of shares subject to each
grant of restricted stock, provided that the fair market value (valued on the
date of grant) of all shares granted to each nonemployee director during any
calendar year does not exceed the lesser of (i) one-half of the directors' fees
earned by such nonemployee director for the immediately preceding calendar year
and (ii) $15,000, rounded upward to the nearest whole share. Grants of
restricted stock shall be in lieu of cash payment of directors' fees equal in
amount to the fair market value of the restricted stock granted. Each grant of
restricted stock shall vest, based on the continued service of the grantee on
the Holding Company Board, in three approximately equal installments on each of
the first three anniversaries of the date of grant thereof. In the event of the
termination of service on the Holding Company Board of a grantee by reason of
disability or death, any restricted stock previously granted to such grantee
will continue to vest as if the grantee's service had not terminated. In the
event of the termination of service on the Holding Company Board of a grantee
for any reason other than disability or death, any unvested restricted stock
will be forfeited.
DIRECTOR RETIREMENT POLICY
The Holding Company Board will continue for its members the retirement
policy adopted by MONY for its Board of Trustees. Pursuant to that policy,
directors serve until the attainment of age 70. The only exception to this
policy is for directors who were elected as Trustees of MONY prior to May 1,
1989, Messrs. Johnson and Meyer, who are scheduled to retire on the first day of
the month following the attainment of age 73. In addition, in order to maintain
the continued guidance, leadership and expertise of the members of the Holding
Company Board during the initial period after the Demutualization, directors
scheduled to retire in 1999 or 2000 will be able to serve an additional two
years.
EXECUTIVE COMPENSATION
Since the formation of the Holding Company, none of its officers or other
personnel has received any compensation from the Holding Company. All
compensation has been paid by MONY. It is expected that after the
Demutualization the executive officers of the Holding Company will continue to
be paid only by MONY, with an allocation of their compensation to be made for
services rendered to the Holding Company. The Holding Company will pay the
amount of such allocation to MONY pursuant to a cost allocation agreement.
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<PAGE> 169
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the four other most highly
compensated executive officers of MONY for services rendered during the fiscal
year ended December 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
- ------------------------------------------------------------------ ------------
(b) (e) (f) (g)
(a) (c) (d) OTHER ANNUAL LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION(1) PAYOUTS(2) COMPENSATION(3)
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------ ---- ------- ------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael I. Roth, ..... 1997 775,000 760,000 177,188 1,089,167 104,497
Chairman of the Board
and Chief Executive
Officer
Samuel J. Foti, ...... 1997 585,000 475,000 122,073 695,833 71,926
President and Chief
Operating Officer
Kenneth M. Levine, ... 1997 400,000 330,000 85,746 640,000 47,731
Executive Vice
President and Chief
Investment Officer
Richard Daddario, .... 1997 325,000 225,000 42,173 421,666 41,158
Executive Vice
President and Chief
Financial Officer
Stephen J. Hall, ..... 1997 330,000 250,000 32,718 161,333 38,985
Senior Vice President
of MONY
</TABLE>
- ---------------
(1) Includes payments to Messrs. Roth, Foti, Levine, Daddario and Hall,
respectively, of (i) interest with respect to awards made for the 1992-1994
and 1993-1995 performance cycles under MONY's Equity Share Plan in the
amounts of $79,039, $52,334, $51,255, $31,616 and $9,295, and (ii)
automobile allowances (including tax costs related to such allowances) in
the amounts of $61,605, $55,649, $33,701, $9,894 and $22,923.
(2) Includes payments of awards under MONY's Equity Share Plan to Messrs. Roth,
Foti, Levine, Daddario and Hall, respectively, of (i) $297,500, $175,000,
$140,000, $105,000 and $45,500 with respect to the 1994-1996 performance
cycle, (ii) $416,667, $270,833, $250,000, $166,666 and $83,333 with respect
to the 1993-1995 performance cycle, and (iii) $375,000, $250,000, $250,000,
$150,000 and $32,500 with respect to the 1992-1994 performance cycle.
(3) Includes payments to Messrs. Roth, Foti, Levine, Daddario and Hall,
respectively, of (i) the part of premium paid by the Company for split
dollar life insurance in the amounts of $29,497, $22,676, $12,731, $15,408
and $11,485, (ii) contributions to the Company's tax-qualified plans in the
amounts of $5,392, $5,392, $8,000, $6,050 and $8,000, and (iii)
contributions to the Company's non-qualified plan in the amounts of $69,608,
$43,858, $27,000, $19,700 and $19,500.
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<PAGE> 170
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE BASED PLANS
(a) (b) (c) ----------------------------------
NUMBER OF PERFORMANCE OR OTHER (d) (e) (f)
SHARES, UNITS OR PERIOD UNTIL MATURA- THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS(#) TION OR PAYOUT ($) ($) ($)
---- ----------------- -------------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Michael I. Roth............ 7,500 1997-1999 225,000 750,000 1,875,000
Samuel J. Foti............. 5,000 1997-1999 150,000 500,000 1,250,000
Kenneth M. Levine.......... 2,500 1997-1999 75,000 250,000 625,000
Richard Daddario........... 2,500 1997-1999 75,000 250,000 625,000
Stephen J. Hall............ 1,500 1997-1999 45,000 150,000 375,000
</TABLE>
RETIREMENT PLAN INFORMATION
The following table shows the estimated annual retirement benefits payable
at normal retirement age (generally age 65) to a person retiring with the
indicated final average pay and years of credited service on a straight life
annuity basis, under the Retirement Income Security Plan for Employees of The
Mutual Life Insurance Company of New York (the "Retirement Plan"), as
supplemented by the Excess Benefit Plan for MONY Employees (the "Excess Plan"),
each as described below:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS OF RETIREMENT
WITH INDICATED YEARS OF CREDITED SERVICE(1)
--------------------------------------------------------------------
YEARS OF CREDITED SERVICE
--------------------------------------------------------------------
FINAL AVERAGE PAY 10 15 20 25 30 35
----------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$350,000............. $ 48,720 $ 73,080 $ 97,440 $121,800 $146,160 $170,520
$700,000............. $101,220 $151,830 $202,440 $253,050 $303,660 $354,270
$1,050,000........... $153,720 $230,580 $307,440 $253,050 $461,160 $538,020
$1,400,000........... $206,220 $309,330 $412,440 $515,550 $618,660 $721,770
$1,750,000........... $258,720 $388,080 $517,440 $646,800 $776,160 $905,520
</TABLE>
- ---------------
(1) Estimated retirement benefit described above does not include the value of
the executive's "employer contribution account".
The annual retirement benefit under the Retirement Plan and the Excess Plan
is generally equal to the product of (a) (i) a percentage of an executive's
"final average pay" in excess of his or her "covered compensation" (i.e., the
average of the social security taxable wage base for the 35 years up to the date
the executive attains social security retirement age), plus (ii) a percentage
(depending upon the executive's social security retirement age) of the
executive's "final average pay" not in excess of his or her "covered
compensation", and (b) the executive's years of credited service up to 35.
"Final average pay" is defined as the highest average annual "compensation" of
an executive for any 36 consecutive months in the 120 months of service prior to
the executive's retirement. "Compensation" used to determine the retirement
benefit under the Retirement Plan and the Excess Plan consists of the salary
paid to an executive, including incentive compensation and salary deferrals to
section 125 and section 401(k) plans, but excluding expense and tuition
reimbursement, deferred compensation under MONY's Deferred Compensation Plan for
Key Employees, amounts payable under the Equity Share Plan, fringe benefits,
group life insurance premiums, moving expenses, prizes, hiring and referral
bonuses, and disability payments. Such "compensation" is generally the same as
the compensation reflected in columns (c) and (d) of the Summary Compensation
Table. The Excess Plan is designed to provide benefits which eligible employees
would have received under the Retirement Plan but for limits applicable under
the Retirement Plan. The estimated "final average pay" of Messrs. Roth, Foti,
Levine, Daddario and Hall under the Retirement Plan and the Excess Plan as of
December 31, 1997 (assuming retirement as
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<PAGE> 171
of such date) is $1,433,333, $915,000, $703,333, $510,000 and $605,000,
respectively, and the estimated years of credited service under the Retirement
Plan and the Excess Plan as of such date for each of such Named Executive
Officers is 9, 9, 25, 8 and 22 years, respectively.
MONY EQUITY SHARE PLAN
Under MONY's Equity Share Plan, MONY makes awards of equity share units to
the Named Executive Officers and other designated officers of MONY relative to
MONY's peer companies. The awards are subject to a three-year performance cycle.
In connection with the award of the equity share units, MONY establishes a
schedule which assigns a value to an equity share unit depending on the relative
earnings of MONY during the performance cycle. As soon as practicable after the
end of each performance cycle, the value of an equity share unit is determined
based on such cumulative earnings. The aggregate value of the equity share units
awarded to each executive with respect to a performance cycle is paid in three
annual installments. The first of such payments is made immediately after the
determination of the value of the equity share units. The second and third
installments are paid, with interest, in the two succeeding years. In the event
of a change of control of MONY (as defined below under "Employment and Change in
Control Agreements"), each executive will receive a lump sum payment equal to
the value of all outstanding equity share units (with the value of any equity
share units for any uncompleted performance cycle determined as if MONY had
achieved targeted performance for such cycle).
HOLDING COMPANY STOCK INCENTIVE PLAN
On August 14, 1998, the Holding Company adopted and MONY, as sole
stockholder of the Holding Company, approved, the Holding Company 1998 Stock
Incentive Plan (the "Stock Plan"). The Human Resources Committee of the Holding
Company Board (the "Committee") will be responsible for administering the Stock
Plan. Under the Stock Plan, the Committee may from time to time grant stock
options to officers, key employees and agents of the Holding Company and its
subsidiaries. Under the Stock Plan, the Committee must consist of two or more
members, each of whom may be, to the extent deemed necessary by the Holding
Company Board, a "nonemployee director" within the meaning of Rule 16b-3, as
promulgated pursuant to the Exchange Act.
The maximum number of shares of the Common Stock that may be issued under
the Stock Plan is 5% of the total outstanding shares on the date of the
Offerings. The shares to be issued under the Stock Plan may be unissued shares
or treasury shares. Upon the occurrence of certain events that affect the
Holding Company's capitalization, appropriate adjustments will be made in the
number and kind of shares that may be issued under the Stock Plan in the future
and in the number and kind of shares and price per share under all outstanding
grants made before the event. If any grant is for any reason cancelled,
terminated or otherwise settled without the issuance of some or all of the
shares of Common Stock subject to the grant, such shares will be available for
future grants. The Committee may not grant any stock options prior to the first
anniversary of the date of the Offerings. Any grant of a stock option after the
first anniversary and prior to the fifth anniversary of the Offerings shall be
subject to the advance approval of the New York State Superintendent of
Insurance.
The Holding Company Board may terminate, suspend or amend (subject, in some
cases, to the approval by the Holding Company's stockholders and, until the
fifth anniversary of the Offerings, approval by the New York Superintendent) the
Stock Plan at any time, but such termination, suspension or amendment may not
adversely affect any stock options then outstanding under the Stock Plan without
the consent of the recipients thereof. Unless terminated by action of the
Holding Company Board, the Stock Plan will continue in effect until the tenth
anniversary of the date of the Holding Company Board's adoption thereof, but
stock options granted prior to such date shall continue in effect until they
expire in accordance with their terms.
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<PAGE> 172
The Committee may grant nonqualified stock options and stock options
qualifying as incentive stock options under the Code. The exercise price per
share of Common Stock subject to either a nonqualified stock option or an
incentive stock option will be not less than the fair market value (as defined
in the Stock Plan) of such share on the date of grant of such option. To
exercise an option, the grantee may pay the exercise price in cash or, if
permitted by the Committee, by delivering on the date of exercise other shares
of Common Stock having an aggregate fair market value equal to the exercise
price of the option.
Each option will generally become exercisable on a cumulative basis in
three approximately equal installments on each of the first three anniversaries
of the date of grant thereof. The term of each option will be fixed by the
Committee but may not be more than ten years from its date of grant.
In the event of the termination of service of a grantee by reason of
disability or death, any option previously granted to such grantee will continue
to vest as if the grantee's service had not terminated. Any vested options may
thereafter be exercised in full for a period of three years (or such shorter
period as the Committee shall determine at the time of grant) or, if earlier,
the expiration of the term of the options. In the event of the termination of
service of a grantee for cause (as defined in the Stock Plan), any outstanding
options granted to such grantee will be forfeited. In general, in the event of
the termination of service of a grantee for any reason other than disability,
death or for cause, any options granted to such grantee exercisable at the date
of termination will remain exercisable for a period of 30 days (or, if earlier,
the expiration of the term of the options).
MONY'S ANNUAL INCENTIVE COMPENSATION PLAN
All senior and corporate officers and selected key employees of MONY are
eligible to participate in MONY's Annual Incentive Compensation Plan (the
"Annual Incentive Plan"). Under the Annual Incentive Plan, performance
objectives are established at the beginning of each calendar year for each
sector and area of MONY as well as for each individual who is eligible to
participate in the Annual Incentive Plan. Actual performance results at the end
of each calendar year for each sector and area are used to establish a bonus
pool for each sector and area, the size of which is determined by an area's or a
sector's actual performance and the aggregate salaries of its participants. Each
participant's individual performance with respect to such participant's
individual performance objective is rated by an appropriate supervisor and an
award from the bonus pool is determined from such ratings, with final approval
made by senior management. Awards for certain senior officers are submitted to a
committee of the MONY Board comprised of outside directors for approval in
accordance with established policy. Cash payment is made to participants as soon
as practicable after individual performance ratings have been determined and
payment amounts approved. Individual awards range from 0% to 125% of base salary
for full vice presidents and higher ranking officers and from 0% to 75% of base
salary for functional vice presidents. In addition, a discretionary fund equal
to 10% of all participants' base salaries is established and the Chairman of the
MONY Board, at his discretion, administers this fund to provide participants
with appropriate bonuses that would not otherwise be awarded under the Annual
Incentive Plan.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
MONY has entered into employment agreements (the "Employment Agreements")
with each of Messrs. Roth, Foti, Levine, Daddario and Hall. The current terms of
the Employment Agreements are effective through December 31, 1998, and will be
automatically extended for successive one-year terms unless MONY gives notice to
the executive (within the period specified in the Employment Agreements) that it
will not renew the Employment Agreement for another term.
The Employment Agreements provide that the current base compensation of
each executive will be adjusted in accordance with MONY's regular administrative
practices generally applicable to its senior executives. Under the Employment
Agreements, each executive will participate in MONY's Annual Incentive
Compensation Plan and Equity Share Plan, will be entitled to participate in
other
171
<PAGE> 173
incentive compensation plans and any employee benefits plans and programs
generally available to senior executives of MONY, and will be entitled to
perquisites and fringe benefits generally available to officers of their
respective ranks at MONY.
The Employment Agreements prohibit the executives from engaging in or
advising, either directly or indirectly, any business which is substantially
competitive with any business then actively conducted by MONY during the term of
their employment and for a six-month period following termination. The
executives are also prohibited from soliciting, either directly or indirectly,
any person employed by MONY for one year following the termination of their
employment, and are prohibited from divulging confidential information relating
to MONY.
The Employment Agreements provide that MONY will have the right at any time
to terminate any executive's employment, and that any executive will have the
right at any time to terminate his employment with MONY. Under the Employment
Agreements, MONY will provide an executive with the following benefits in the
event of termination by MONY other than for cause (as defined in the Employment
Agreements) or by the executive for good reason (as defined in the Employment
Agreements): (i) a lump-sum payment in an amount equal to (a) two times the
executive's annual base compensation in effect on the date of termination, in
the case of Messrs. Roth, Foti, and Levine, or (b) one time the executive's
annual base compensation in effect on the date of termination, in the case of
Messrs. Daddario and Hall, reduced in all cases by any severance payments made
to the executive under any other employment contract or severance arrangement
with MONY; (ii) any incentive compensation earned with respect to the calendar
year immediately preceding the termination date but not yet paid, and incentive
compensation with respect to the calendar year in which the termination date
occurs, in each case in an amount determined by the Chief Executive Officer (or,
in the case of the Chief Executive Officer, by the Holding Company Board) which
will be not less than 50% of the executive's base compensation; (iii) at the
discretion of the Chief Executive Officer, the value of the perquisites to which
the executive is entitled immediately before the termination date and such other
items as the Chief Executive Officer (or, in the case of the Chief Executive
Officer, the Holding Company Board) will determine; and (iv) title to any
MONY-furnished automobile. In addition, MONY will keep in effect, for the life
of the executive whose employment is terminated other than for cause or for good
reason, the split-dollar life insurance policy maintained for the executive
immediately prior to termination, with MONY and the executive retaining their
respective obligations to pay premiums in accordance with the terms of the
policy.
MONY has also entered into change in control employment agreements
(collectively, the "Change in Control Agreements") with each of Messrs. Roth,
Foti, Levine, Daddario and Hall and other executive officers of MONY, the
provisions of which become effective if and when there is a Change in Control
(as defined below) of MONY. The current terms of the Change in Control
Agreements are effective through December 31, 2000, and will be automatically
renewed for successive one-year terms unless MONY gives notice to the executive
(within the period specified in the Change in Control Agreements) that it will
not extend the expiration date. If a Change in Control occurs, the expiration
date is automatically extended to the third anniversary of the last day of the
month in which the Change in Control occurred.
The Change in Control Agreements provide that the executives will continue
to receive base compensation at a rate not less than the rate in effect
immediately prior to the Change in Control, and that base compensation will be
increased in accordance with the regular administrative practices in effect
immediately prior to the Change in Control. The agreements further provide that
the executives will be entitled to perquisites and fringe benefits equal to
those attached to their positions immediately prior to the Change in Control,
will continue to be full participants in all incentive compensation plans and
all employee benefit plans and programs for senior executives in effect
immediately prior to the Change in Control, and will be entitled to participate
in any other incentive compensation plans and employee benefit plans and
programs generally available to senior executives of MONY.
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<PAGE> 174
The Change in Control Agreements provide that MONY will have the right at
any time to terminate the executive's employment, and that the executive will
have the right at any time to terminate his employment with MONY. Under the
Change in Control Agreements, MONY will provide the executive with the following
benefits in the event of termination by MONY other than for cause (as defined in
the Change in Control Agreements) or by the executive for good reason (as
defined in the Change in Control Agreements): (i) a lump-sum payment in an
amount equal to three times the sum of (A) the executive's annual base
compensation in effect on the date of termination and (B) the executive's
average annual bonus over the preceding three fiscal years, such sum being
reduced by any severance payments made to the executive under any other
employment contract or severance arrangement with MONY; (ii) any incentive
compensation payments awarded for a year prior to the year in which the
termination date occurs but not paid as of the termination date; (iii) a
specified pro rata portion of the bonus under MONY's Annual Incentive
Compensation Plan that would have been earned for the year in which the
termination date occurs; (iv) all amounts payable as of the termination date in
accordance with the terms of MONY's Equity Share Plan (including all awards
under any uncompleted three-year cycle thereunder); (v) in addition to all other
amounts otherwise payable to the executive under the Retirement Income Security
Plan and the Investment Plan Supplement, an amount equal to the aggregate
present value of the retirement benefits that would have been payable to the
executive under MONY's Retirement Income Security Plan, Investment Plan
Supplement and Excess Benefit Plan, had his employment not been terminated; (vi)
an amount equal to the aggregate present value of the additional costs that
would have been incurred by MONY for medical and dental benefits, retiree
medical benefits, and spouse or survivor's income benefits if the executive's
employment had not been terminated; and (vii) continued coverage under various
disability and life insurance programs.
In the event of the death or disability (as defined in the Change in
Control Agreements) of the executive, the Change in Control Agreements provide
that the executive (or his representative) will be entitled to receive (i)
amounts owed to the executive through his effective date of termination, and
(ii) a specified pro rata portion of all awards under MONY's Equity Share Plan
and Annual Incentive Compensation Plan.
The Change in Control Agreements also provide that, to the extent any
payments to the executives would be subject to "golden parachute" excise taxes
under Section 4999 of the Code, the executives will receive "gross-up" payments
in order to make them whole with respect to such taxes and any related interest
and penalties.
For purposes of the Change in Control Agreements, a "Change in Control" is
defined generally to include an acquisition of 20% or more of the voting stock
of the Holding Company, a change in the majority of the members of the Holding
Company Board that is not supported by two-thirds of the incumbent directors,
approval by the shareholders of a merger or reorganization in which the Holding
Company shareholders do not own at least 80% of the resulting entity, a sale of
all or substantially all of the assets of the Holding Company or MONY, a
dissolution of the Holding Company or MONY or adoption by the Holding Company
Board of a resolution to the effect that any person has acquired effecting
control of the Holding Company or MONY. The Demutualization will not constitute
a Change in Control under the Change in Control Agreements.
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<PAGE> 175
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by: (i) each person who the Holding Company believes
will own beneficially more than 5% of the outstanding shares of Common Stock
following the Offerings, (ii) each director, (iii) each of the executive
officers and (iv) all directors and executive officers as a group. The number of
shares of Common Stock beneficially owned by each director and all directors and
executive officers as a group is based upon the number of shares each director
and executive officer and certain persons and entities affiliated with each
director and executive officer are estimated to receive as Eligible
Policyholders under the Plan. Except as noted below, each stockholder listed
below will have sole investment and voting power with respect to the shares
beneficially held by it.
Certain officers, directors and employees of MONY and of certain of its
affiliates are also Eligible Policyholders and will, consequently, receive
compensation as policyholders pursuant to the Plan. None of the executive
officers and directors of the Holding Company or MONY is expected to receive
more than 1/100 of one percent of the shares of Common Stock to be outstanding
after the Offerings, and, as a group, the executive officers and directors of
the Holding Company and MONY are expected to receive in the aggregate less than
1/200 of one percent of the shares of Common Stock to be outstanding after the
Offerings. Under the Plan, the officers, directors and employees (including
their family members and spouses) of MONY are restricted from acquiring any
securities of MONY or the Holding Company until the fifth anniversary of the
Plan Effective Date, except under limited circumstances, which include, with
respect to the officers and employees of MONY, the acquisition of Common Stock
through their participation in the Company's stock incentive plan, and with
respect to non-employee directors of MONY, the acquisition of Common Stock
through the Company's restricted stock plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE BENEFICIALLY PERCENT
NAME OWNED OF CLASS(1)
---- ------------------ -----------
<S> <C> <C>
The Goldman Sachs Group, L.P.(2)............................ 3,405,914 7.0
Michael I. Roth............................................. * *
Samuel J. Foti.............................................. * *
Richard Daddario............................................ * *
Kenneth M. Levine........................................... * *
Thomas J. Conklin........................................... * *
Richard E. Connors.......................................... * *
Phillip A. Eisenberg........................................ * *
Stephen J. Hall............................................. * *
Richard E. Mulroy, Jr. ..................................... * *
Victor Ugolyn............................................... * *
Francis J. Waldron.......................................... * *
Claude M. Ballard, Jr.(3)................................... * *
Tom H. Barrett.............................................. * *
David L. Call............................................... * *
G. Robert Durham............................................ * *
James B. Farley............................................. * *
Robert Holland, Jr. ........................................ * *
James L. Johnson............................................ * *
Robert R. Kiley............................................. * *
John R. Meyer............................................... * *
Jane C. Pfeiffer............................................ * *
</TABLE>
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<PAGE> 176
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE BENEFICIALLY PERCENT
NAME OWNED OF CLASS(1)
---- ------------------ -----------
<S> <C> <C>
Thomas C. Theobald.......................................... * *
All directors and executive officers as a group (26
persons).................................................. ** **
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1/100 of one percent of the
Common Stock outstanding immediately after the Offerings.
** Indicates beneficial ownership of less than 2/100 of one percent of the
Common Stock outstanding immediately after the Offerings.
(1) Based on 45,250,000 shares of Common Stock estimated to be outstanding after
the Offerings prior to the exercise of the Warrants. See "Pro Forma
Condensed Consolidated Financial Information".
(2) Represents the aggregate number of shares issuable upon exercise of the
Warrants, which are owned by certain investment funds affiliated with The
Goldman Sachs Group, L.P. Consists of 1,151,849 shares beneficially owned by
GS Mezzanine Partners, L.P.; 2,145,078 shares beneficially owned by GS
Mezzanine Partners Offshore, L.P.; 35,627 shares beneficially owned by
Bridge Street Fund 1997, L.P.; and 73,360 shares beneficially owned by Stone
Street Fund 1997, L.P. The Goldman Sachs Group, L.P. disclaims beneficial
ownership of the shares owned by such investment funds to the extent
attributable to equity interests therein held by persons other than The
Goldman Sachs Group, L.P. and its affiliates. Each of such funds shares
voting and investment power with certain of its respective affiliates. The
address of The Goldman Sachs Group, L.P. is 85 Broad Street, New York, New
York 10004.
(3) Mr. Ballard is a Limited Partner of The Goldman Sachs Group, L.P. Mr.
Ballard disclaims beneficial ownership of the shares owned by The Goldman
Sachs Group, L.P., except to the extent of his pecuniary interest therein.
See note 2 above.
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CERTAIN PROVISIONS OF THE INVESTMENT
The following summary of the Investment Agreement and the Registration
Rights Agreement does not purport to be complete and is qualified in its
entirety by reference to the complete text of such agreements. Copies of the
Investment Agreement and the Registration Rights Agreement are filed as exhibits
to the Registration Statement of which this Prospectus forms a part.
GENERAL
In anticipation of the adoption of the Plan by the MONY Board and the
approval of the Demutualization, and in order to enhance the competitive
position and increase the surplus of the Company during the period prior to the
consummation thereof, MONY and the Holding Company entered into the Investment
Agreement on December 30, 1997. Pursuant to the terms and conditions set forth
in the Investment Agreement, the Investors (i) purchased the MONY Notes and the
Warrants and (ii) have agreed to purchase, subject to certain conditions
precedent, after the Demutualization Date, upon MONY's request made within 90
days after the Demutualization Date, the Convertible Preferred Stock. The
Investment Agreement may be terminated by either the Investors or MONY in
certain circumstances specified in the Investment Agreement. If the Investment
Agreement is terminated prior to the issuance of either the Convertible
Preferred Stock or the Holding Company Subordinated Notes, then such securities
will not be issued, but the MONY Notes and Warrants will remain outstanding.
The MONY Notes were sold in an aggregate principal amount of $115,000,000
at an aggregate purchase price of $115,000,000. The MONY Notes bear interest at
9 1/2% per annum, payable semi-annually, and are scheduled to mature on December
30, 2012. MONY has no right to redeem the MONY Notes prior to maturity. The MONY
Notes constitute debt obligations of the type generally referred to as "surplus
notes" and were issued in accordance with Section 1307 of the New York Insurance
Law (together with any successor provision and as may be hereafter amended from
time to time, "Section 1307"). Pursuant to Section 1307, the MONY Notes are not
part of the legal liabilities of MONY nor are they a basis of any set-off
against MONY. Any payment of interest on or repayment of principal of the MONY
Notes may be made only with the prior approval of the New York Superintendent
and only out of MONY's "free and divisible surplus" and will reduce MONY's
surplus.
The Warrants were sold at an aggregate purchase price of $10,000,000 and
permit the holders thereof to purchase from the Holding Company in the aggregate
7% of the fully diluted Common Stock at the Demutualization Date (giving effect
to the issuance of the shares in the Offerings, the issuance of the shares of
Common Stock issuable upon exercise of the Warrants and the issuance of shares
upon the exercise, conversion or exchange of any other options, warrants and
convertible and exchangeable securities then outstanding) at a specified
exercise price. See "Description of Capital Stock -- Warrants". The Investors
are affiliates of Goldman Sachs, one of the representatives of the Underwriters.
At any time from and after the Demutualization Date, the Investors,
together with such of their subsidiaries or affiliates as may then hold MONY
Notes, may elect to exchange MONY Notes for Holding Company Subordinated Notes.
Any such election and exchange shall be made in whole or in part with respect to
the entire aggregate principal amount of MONY Notes held by the Investors and
their subsidiaries and affiliates, provided that no such election and exchange
shall be made for less than (x) $50 million in aggregate principal amount of
such MONY Notes or (y) the balance of such MONY Notes then held by the Investors
and their subsidiaries and affiliates, if less than $50 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
If the Demutualization Date has occurred on or prior to June 30, 1999, if
the Holding Company requests within 90 days after the Demutualization Date, the
Holding Company may require the Investors to purchase from the Holding Company
an aggregate of 1,000,000 shares of Convertible Preferred Stock for a total
purchase price of $100,000,000, subject to satisfaction of certain
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conditions precedent specified in the Investment Agreement. If the Offerings are
consummated, management will not require the purchase of the Convertible
Preferred Stock.
DETERMINATION OF NON-CONTROL
The New York Superintendent issued a determination pursuant to Section
1501(c) of the New York Insurance Law, dated December 29, 1997, that the
Investors would not control MONY as a result of the transactions contemplated by
the Investment Agreement, subject to certain notice and approval requirements,
and certain commitments by the Investors. The Investors have agreed to the
following notice and approval requirements: (i) the Investors and their
affiliates will notify the New York Superintendent before exercising the
Warrants, converting the Convertible Preferred Stock, or selling any of the
Warrants, Convertible Preferred Stock, or MONY Notes; (ii) the Investors and
their affiliates must notify the New York Superintendent before the sale of any
securities of MONY, the Holding Company or any of their affiliates (the
"Companies") acquired pursuant to the Investment Agreement; (iii) the notice and
non-disapproval requirements of Section 1505(c) and (d) of the New York
Insurance Law (relating to transactions within a holding company system) apply
to transactions between the Investors and the Companies, except transactions in
the ordinary course of the Investors' business other than transactions involving
investment management or investment advisory services performed by the Investors
for or on behalf of the Companies, to which (along with certain other
transactions) the notice requirements of Section 1505(d) of the New York
Insurance Law will apply; and (iv) the Investors will provide to the New York
Superintendent quarterly and annual reports of transactions between the
Investors and the Companies. The Investors have also made commitments to the New
York Superintendent as follows: (i) every transaction between the Investors and
the Companies will comply with the standards of the New York Insurance Law
related to transactions within a holding company system; (ii) the Investors will
be subject to New York Insurance Law requirements regarding examinations by the
New York Superintendent and violations and penalties in the context of holding
company systems; (iii) the Investors will not acquire, directly or indirectly,
any security issued by the Companies except pursuant to the Investment Agreement
or in the ordinary course of their business; (iv) the Investors will not
exercise the rights of security holders to vote (except for certain major
corporate transactions), propose directors in opposition to management, solicit
proxies, call special meetings, or dispose or threaten to dispose of securities
as a condition for corporate action or non-action by the Companies; (v) the
Investors may have one representative (with certain restrictions on activities)
on the boards of MONY, the Holding Company, or a key subsidiary thereof as long
as such boards have at least 13 members; and (vi) the Investors will not
otherwise cause, or attempt to cause, the direction of the management or
policies of, or otherwise exercise control over, the Companies. The
determination of non-control will remain in effect until revoked by the New York
Superintendent in accordance with the New York Insurance Law, at the request of
the Investors or upon the initiative of the New York Superintendent, or the
Investors own less than 2% of the equity securities of the Holding Company.
STANDSTILL AGREEMENT
In the Investment Agreement, the Investors have agreed that, for a period
from the Demutualization Date until the earlier of the fifth anniversary of the
Demutualization Date or June 30, 2004 (such period, the "Standstill Period"),
subject to certain exceptions specified in the Investment Agreement, the
Investors will not, and will cause their subsidiaries and any affiliates that
own Warrants, Convertible Preferred Stock or Common Stock that was acquired upon
exercise of Warrants or conversion of Convertible Preferred Stock not to,
directly or indirectly, acquire, offer to acquire or agree to acquire any
outstanding Common Stock other than pursuant to the Warrants and the conversion
of the Convertible Preferred Stock or from an Investor or a subsidiary or
affiliate of an Investor without the prior written approval of MONY. The
foregoing provisions will terminate when the Investors and their subsidiaries
and affiliates that acquire Warrants, Convertible Preferred Stock or Common
Stock upon exercise of Warrants or conversion of Convertible Preferred Stock own
an aggregate number of shares of Common
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Stock acquired upon exercise of Warrants or conversion of Convertible Preferred
Stock plus the number of shares of Common Stock issuable upon exercise of
Warrants and conversion of Convertible Preferred Stock that is held by the
Investors and their subsidiaries and affiliates that is less than 5% of the
fully diluted Common Stock. The Holding Company has agreed that, so long as the
Investors, their subsidiaries and affiliates are subject to the provisions
described in this paragraph, it will not take any action (including, without
limitation, adoption of a shareholder rights plan) that would have the effect of
imposing more stringent requirements on the Investors, their subsidiaries and
affiliates than those contained in the Investment Agreement.
On the Board Adoption Date, the Holding Company Board authorized the
Holding Company to enter into a rights plan. Such rights plan does not impose
more stringent requirements on the Investors, their subsidiaries or affiliates
than those contained in the Investment Agreement. See "Description of Capital
Stock -- Preferred Share Purchase Rights".
VOTING OF COMMON STOCK
The Investors have agreed that, subject to certain exceptions provided in
the Investment Agreement, during the Standstill Period the Investors will, and
will cause their subsidiaries and affiliates that acquire Common Stock upon
exercise of Warrants or conversion of Convertible Preferred Stock to, vote all
shares of Common Stock acquired upon exercise of Warrants or conversion of
Convertible Preferred Stock owned by them either, at the option of the Holding
Company, in accordance with the recommendation of the Holding Company Board or
in the same proportion as the holders of Common Stock who are not affiliated
with either the Holding Company or the Investors with respect to all matters
properly presented for a vote of the holders of the Common Stock. The foregoing
requirement will not apply if the Investors and their subsidiaries and
affiliates may acquire Common Stock without regard to the restrictions contained
in the Investment Agreement described above or with respect to certain specified
matters, including those that relate to: (i) any merger, consolidation or other
business combination involving, or sale, lease, transfer or other disposition of
substantially all the assets of, the Holding Company, MONY or any Significant
Subsidiary (as defined in the Investment Agreement); (ii) the approval of any
amendment to the Holding Company's certificate of incorporation or By-laws;
(iii) any matter that could result in any decrease in the percentage of the
voting power represented by the aggregate voting power of all Common Stock and
Common Stock issuable upon exercise of Warrants or conversion of Convertible
Preferred Stock then owned by the Investors and their subsidiaries and
affiliates; and (iv) any other matter (other than the election of directors)
that in the good faith judgment of the Investors could adversely affect their
interests as significant stockholders of the Holding Company.
The foregoing provisions shall terminate when the Investors and their
subsidiaries and affiliates that acquire Warrants, Convertible Preferred Stock
or Common Stock upon exercise of Warrants or conversion of Convertible Preferred
Stock own an aggregate number of shares of Common Stock acquired upon exercise
of Warrants or conversion of Convertible Preferred Stock plus the number of
shares of Common Stock issuable upon exercise of Warrants and conversion of
Convertible Preferred Stock that is held by the Investors and their subsidiaries
and affiliates that is less than 5% of the fully diluted Common Stock.
LIMITATION ON SALES OF HOLDING COMPANY COMMON STOCK, WARRANTS AND
CONVERTIBLE PREFERRED STOCK
The Investors have agreed that until the termination of the Standstill
Period, they will not, and will cause their subsidiaries and affiliates that own
Warrants, Convertible Preferred Stock or Common Stock that was acquired upon
exercise of Warrants or conversion of Convertible Preferred Stock not to, sell,
transfer or otherwise dispose of any Warrants, Convertible Preferred Stock or
Common Stock that was acquired upon exercise of Warrants or conversion of
Convertible Preferred Stock in a negotiated transaction (which for these
purposes does not include an open market sale other than as a result of an offer
to sell securities having aggregate voting rights of more than 3% of
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the voting rights on an as converted basis at any one time): (i) to any Person
that is engaged in the Life Insurance Business if, to the knowledge of the
transferor, after giving effect to such transaction such Person would own an
aggregate number of shares of Common Stock plus the number of shares of Common
Stock issuable upon exercise of Warrants and conversion of Convertible Preferred
Stock that is held by such Person that is equal to 3% or more of the fully
diluted Common Stock at the time of such transaction without the prior written
consent of the Holding Company, or (ii) to any Person if, to the knowledge of
the transferor, after giving effect to such transaction such Person would own an
aggregate number of shares of Common Stock plus the number of shares of Common
Stock issuable upon exercise of Warrants and conversion of Convertible Preferred
Stock that is held by such Person that is equal to 5% or more of the fully
diluted Common Stock at the time of such transaction without the prior written
consent of the Company. The foregoing restriction will not apply to: (i) any
transfers between or among the Investors, their subsidiaries and affiliates, or
(ii) any widely distributed public underwritten offering. The foregoing
provisions will terminate when the Investors and their subsidiaries and
affiliates that acquire Warrants, Convertible Preferred Stock or Common Stock
upon exercise of Warrants or conversion of Convertible Preferred Stock own an
aggregate number of shares of Common Stock acquired upon exercise of Warrants or
conversion of Convertible Preferred Stock plus the number of shares of Common
Stock issuable upon exercise of Warrants and conversion of Convertible Preferred
Stock that is held by Investors and their subsidiaries and affiliates that is
less than 5% of the fully diluted Common Stock.
BOARD REPRESENTATION
Pursuant to the Investment Agreement, the Investors have been granted Board
representation rights. MONY (prior to the Demutualization Date) and the Holding
Company (subsequent to the Demutualization Date) have agreed to use their best
efforts to cause one of the persons proposed by the Investors to be elected to
the MONY Board or the Holding Company Board, as applicable. Claude M. Ballard,
Jr., is currently the Board member designated by the Investors pursuant to these
representation rights.
The Investors have agreed to not propose any person who: (i) at the time of
such proposal is either a member of the board of directors or board of trustees
or a senior officer of an entity engaged in the Life Insurance Business (as
defined in the Investment Agreement), or (ii) is not qualified to serve as a
trustee or director pursuant to the By-laws of MONY or the Holding Company, as
the case may be. The Investors' Board representation rights granted by the
Investment Agreement will terminate at such time when the Investors and their
subsidiaries and affiliates in the aggregate no longer own an aggregate amount
of Warrants and Convertible Preferred Stock representing the right to acquire
Common Stock and/or Common Stock equal to at least 5% of the voting power of the
Common Stock on an as exercised or as converted basis.
REGISTRATION RIGHTS
Pursuant to the Investment Agreement the Holding Company has entered into a
registration rights agreement granting to the Investors and their subsidiaries
or affiliates certain rights to registration under the Securities Act with
respect to the Warrants and all shares of Common Stock issuable upon exercise
thereof and upon conversion of the Convertible Preferred Stock (the
"Registration Rights Agreement"). Subject to certain limitations, the
Registration Rights Agreement provides that the Investors and their subsidiaries
and affiliates have the right to make three demand registration requests
("Demand Registrations") of the Holding Company and can make an unlimited number
of requests for piggyback registrations (each, a "Piggyback Registration"). A
Piggyback Registration will not relieve the Holding Company of its obligations
to effect Demand Registrations. The Holding Company has agreed to pay all
expenses with respect to any Demand Registration or Piggyback Registration other
than any underwriting discounts and commissions and any transfer taxes, if any,
attributable to the sale by an Investor or any of their subsidiaries or
affiliates of any securities so registered.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Amended and Restated Certificate authorizes the Holding Company to
issue 500 million shares of capital stock, of which 400 million shares are
designated as Common Stock, and 100 million shares are designated as Preferred
Stock having a par value of $0.01 per share ("Preferred Stock"), of which one
million shares are designated as Convertible Preferred Stock and 200,000 shares
are designated as Series A Junior Participating Preferred Stock.
COMMON STOCK
Upon issuance of shares of Common Stock in accordance with the Offerings
and the Plan, all such shares will be fully paid and non-assessable. First
Chicago Trust Company of New York is the transfer agent and registrar for the
Common Stock.
DIVIDENDS
Subject to the rights of any holders of Preferred Stock, each holder of
Common Stock is entitled to receive dividends out of funds legally available
therefor when, as and if declared by the Holding Company Board. Dividends may be
paid in cash, property or shares of the Holding Company's capital stock.
Initially, the sole source of funds which may be available for the payment of
dividends by the Holding Company will be $30 million of the net proceeds from
the Offerings plus the $10.0 million purchase price received for the Warrants.
See "Risk Factors -- Holding Company Structure; Restrictions on Dividends",
"Dividends", "Business -- Regulation -- Shareholder Dividend Restrictions" and
"-- Preferred Stock -- Convertible Preferred Stock".
VOTING RIGHTS
The holders of Common Stock will possess exclusive voting rights in the
Holding Company, except to the extent that the Holding Company Board shall have
designated voting power with respect to any Preferred Stock issued. Each holder
of Common Stock is entitled, on each matter submitted for a vote of holders of
Common Stock, to one vote for each share of such stock registered in such
holder's name on the books of the Holding Company. Except as otherwise required
by law and subject to the rights of any holders of Preferred Stock, the presence
in person or by proxy of the holders of record of a majority of the shares
entitled to vote at a meeting of stockholders constitutes a quorum for the
transaction of business at that meeting. Actions requiring approval of
stockholders will generally require approval by a majority vote at a meeting at
which a quorum is present, except that at each stockholder meeting for the
election of directors, provided a quorum is present, directors will be elected
by a plurality of votes validly cast in the election. Stockholders will not have
any right to cumulate votes in the election of directors.
LIQUIDATION RIGHTS
In the event of liquidation, dissolution or winding-up of the Holding
Company, the holders of the Common Stock will be entitled to share ratably in
the distribution of all assets of the Holding Company remaining after payment of
all of the Holding Company's debts and liabilities and of all sums to which
holders of any Preferred Stock may be entitled.
PREEMPTIVE RIGHTS
Holders of the Common Stock will not generally be entitled to preemptive
rights with respect to any shares of capital stock which may be issued by the
Holding Company.
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PREFERRED STOCK
Currently, there are no shares of Preferred Stock issued or outstanding.
The Preferred Stock may be issued by the Holding Company Board in one or more
series and may have such voting rights, if any, designations, preferences and
relative, participating, optional and other special rights and such
qualifications, limitations and restrictions, as the Holding Company Board (or a
duly authorized committee thereof) may fix by resolution or resolutions.
Moreover, the Holding Company Board may issue such Preferred Stock, from time to
time, in transactions without the approval of the stockholders of the Holding
Company, and the preferences, designations, voting and other rights of any such
shares of Preferred Stock may materially limit or qualify the rights of the
outstanding shares of Common Stock. See "Certain Provisions of the Amended and
Restated Certificate and the By-laws of the Holding Company -- Issuance of
Common and Preferred Stock".
The holders of Preferred Stock issued by the Holding Company may be given
the right to vote for the election of directors generally or to elect a
specified number or percentage of the members of the Holding Company Board. The
number of directors that may be elected by the holders of any class or series of
Preferred Stock having the right to elect directors may be in addition to the
number of directors fixed by or pursuant to the Amended and Restated
Certificate.
One of the effects of undesignated Preferred Stock may be to enable the
Holding Company Board to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Holding Company
Board's authority described above may adversely affect the rights of the holders
of Common Stock. For example, Preferred Stock issued by the Company may rank
prior to the Common Stock as to dividend rights, liquidation preference or both,
may have full or limited voting rights and may be convertible into shares of
Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock at a premium or may otherwise adversely
affect the market price of the Common Stock.
CONVERTIBLE PREFERRED STOCK
The following summary of the Convertible Preferred Stock and of the
agreements relating thereto does not purport to be complete and is qualified in
its entirety by reference to the Amended and Restated Certificate of
Incorporation of the Holding Company, a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
If the Plan Effective Date has occurred on or prior to June 30, 1999, if
the Holding Company requests within 90 days after the Plan Effective Date, the
Holding Company may require the Investors to purchase the Convertible Preferred
Stock, subject to the satisfaction of certain conditions precedent. If the
Offerings are consummated, management will not require the purchase of the
Convertible Preferred Stock.
If issued, the Convertible Preferred Stock will constitute a series of
Preferred Stock and will rank on a parity with other currently outstanding
shares of Preferred Stock and will rank senior to the Common Stock with respect
to the payment of dividends and, to the extent of the liquidation value per
share of Convertible Preferred Stock plus accrued and unpaid dividends, upon
liquidation. The following is a summary of the principal terms of the
Convertible Preferred Stock, if issued.
CONVERSION
The Convertible Preferred Stock will be convertible at the option of the
holder at any time after the date of original issuance of the Convertible
Preferred Stock into Common Stock at an initial conversion price equal to the
initial exercise price of the Warrants, unless previously redeemed. The
conversion price will be subject to the same anti-dilution adjustments as the
exercise price of the Warrants, as well as a one-time adjustment. This one-time
adjustment provides that if on the third
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anniversary of the original issuance of the Convertible Preferred Stock, the
conversion price is greater than 70% of the then book value per share of the
Common Stock determined in accordance with GAAP on such date, the conversion
price will be reset at such time so that the conversion price will be equal to
70% of such book value per share. After the resetting of the conversion price,
if any, the conversion price will continue to be subject to the same
anti-dilution adjustments.
DIVIDENDS
Cumulative dividends on the Convertible Preferred Stock will be payable
quarterly in cash at a rate equal to the ten-year Treasury Rate in effect on the
date of issuance. If dividends have not been paid or declared in full on the
Convertible Preferred Stock for all prior periods and the current period and set
apart for payment, or if there is an existing default in the Holding Company's
mandatory redemption obligation, no dividends may be declared or paid or set
apart for payment on, nor may any distribution be made to holders of, any class
of stock ranking junior to the Convertible Preferred Stock, including, without
limitation, the Common Stock (other than dividends or distributions made in
shares of stock ranking junior to the Convertible Preferred Stock) and no
dividends on shares of stock ranking on a parity with the Convertible Preferred
Stock may be paid or set apart for payment except ratably according to unpaid
dividends and required redemptions.
If: (i) at any time the equivalent of six quarterly dividends payable on
the Convertible Preferred Stock are accrued and unpaid, or (ii) the Holding
Company fails to make any payment upon mandatory redemption of the Convertible
Preferred Stock (each of (i) and (ii) being a "Triggering Event") the dividend
rate on the Convertible Preferred Stock shall automatically increase by 100
basis points for the period from and including the date of the occurrence of
such Triggering Event. The increased dividend rate will be payable until: (i)
all dividends, accrued and unpaid, have been paid or declared and funds have
been set aside to provide for payment in full, or (ii) the Holding Company has
fulfilled its mandatory redemption obligation, as the case may be.
REDEMPTION
The Convertible Preferred Stock will be subject to mandatory redemption on
the earlier of (i) the tenth anniversary of the date of issuance of the
Convertible Preferred Stock or (ii) December 31, 2013, at a price equal to $100
per share plus accumulated and unpaid dividends to the redemption date (the
"Mandatory Redemption Price"). The Mandatory Redemption Price is payable in
cash, or at the option of the Company, in a number of newly issued, fully paid
and non-assessable shares of the Common Stock the market value of which equals
110% of the Mandatory Redemption Price.
The Holding Company may redeem the Convertible Preferred Stock at its
option, in whole or in part, at any time after the third anniversary of the
issuance of the Convertible Preferred Stock, upon not less than 30 or more than
60 days' notice, at a price equal to $100 per share plus accumulated and unpaid
dividends to the redemption date, if the Closing Price of the Common Stock
exceeds 200% of the then applicable conversion price of the Convertible
Preferred Stock for a period of at least 20 consecutive Trading Days ending
within 10 days of the date on which notice of such redemption is given.
LIQUIDATION RIGHTS
The holders of the Convertible Preferred Stock will be entitled to receive
a liquidation preference out of the assets of the Holding Company, after all its
creditors have been paid and before any distribution is made to the holders of
any junior stock (including Common Stock) of the Holding Company, in an amount
per share equal to $100 per share plus all accrued and unpaid dividends thereon
to the date of distribution.
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VOTING RIGHTS
Except as indicated below or otherwise required by law, the holders of
Convertible Preferred Stock will not be entitled to vote for the election of
directors or on any other matters on which stockholders are generally entitled
to vote. Upon the occurrence of a Triggering Event, the number of directors of
the Holding Company will be increased by two and, subject to obtaining any
necessary regulatory approvals, which the Holding Company has agreed to use its
best efforts to obtain as soon as practicable after the occurrence of a
Triggering Event, the holders of all outstanding shares of Convertible Preferred
Stock, voting separately as a class, will be entitled to elect the additional
two directors. The two additional directors shall serve until all dividends
accrued and unpaid have been paid or declared and funds set aside to provide for
payment in full or the Holding Company fulfills its mandatory redemption
obligation, as the case may be.
In addition, without the vote or consent of the holders of at least a
majority of the shares of Convertible Preferred Stock then outstanding, the
Holding Company may not (a) create or issue or increase the authorized number of
shares of any class or series of stock ranking prior to the Convertible
Preferred Stock either as to dividends or upon liquidation, dissolution or
winding up, or any security convertible into or exercisable or exchangeable for
such stock, or (b) amend, alter or repeal any of the provisions of the Amended
and Restated Certificate of Incorporation of the Company so as to affect
adversely any right, preference, privilege or voting power of the Convertible
Preferred Stock or the holders thereof; provided, however, that any increase in
the amount of authorized Preferred Stock or the creation and issuance of any
other class of Preferred Stock, or any increase in the amount of authorized
shares of such class or of any other class of Preferred Stock, in each case
ranking on a parity with or junior to the Convertible Preferred Stock with
respect to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up, will not be deemed to affect adversely
such rights, preferences or voting powers.
WARRANTS
The Warrants may be exercised, in whole or in part, at any time on or after
the Demutualization Date and on or before the tenth anniversary of the
Demutualization Date for up to an aggregate number of fully paid and
nonassessable shares of Common Stock that collectively represents 7% of the
Common Stock on a fully-diluted basis on the Demutualization Date, subject to
adjustment.
The price payable for each share of the Common Stock issuable upon exercise
of Warrants initially is (a) in the event the Offerings occur prior to, on or
within five trading days after the Demutualization Date, 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 price, in which case the 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 or (b) in the event the Offerings do not occur prior to, on or
within five trading days after the Demutualization Date, the lesser of (i) the
average of the daily closing prices of the Common Stock for the first 20 trading
days following Demutualization and (ii) 70% of the book value per share of the
Common Stock as of the Demutualization, determined in accordance with GAAP. 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.
PREFERRED SHARE PURCHASE RIGHTS
On the Board Adoption Date, the Holding Company Board authorized the
Holding Company to enter into the Rights Agreement pursuant to which one Right
will be attached to each share of Common Stock of the Holding Company. The
Rights will be transferable only with Holding Company
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Common Stock, until they become exercisable at an exercise price to be
determined by the Holding Company Board prior to the time the Holding Company
enters into the Rights Agreement.
Generally, the Rights will become exercisable only if a person or group
(other than certain affiliates of the Holding Company) becomes the beneficial
owner of 15% or more of the issued and outstanding shares of Common Stock or
announces a tender offer, the consummation of which would result in ownership by
a person or group of 15% or more of the issued and outstanding shares of Common
Stock. The Rights Agreement provides that for this purpose the Investors and
their subsidiaries and affiliates individually or in the aggregate will not be
deemed to have acquired the requisite percentage of Common Stock as a result of
being the beneficial owner of any Warrants or Convertible Preferred Stock and/or
any securities that were acquired in a manner consistent with the standstill
provisions of the Investment Agreement. Each Right will entitle the holder,
until the tenth anniversary of the Rights Agreement, to buy one one-thousandth
of a share of Holding Company Series A Junior Participating Preferred Stock, at
an exercise price to be determined by the Holding Company Board prior to the
time the Holding Company enters into the Rights Agreement.
If a person or group (other than certain affiliates of the Holding Company)
becomes the beneficial owner of 15% or more of the issued and outstanding shares
of Holding Company Common Stock or if the Holding Company is the surviving
corporation in a merger following such an acquisition, each Right will entitle
its holder (other than such person or members of such group) to purchase, at the
Right's then current exercise price, shares of Common Stock having a market
value of twice the Right's exercise price. If the Holding Company is acquired in
a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group (other
than certain affiliates of the Holding Company) acquires 15% or more of the
issued and outstanding shares of Holding Company Common Stock, each right will
entitle its holder to purchase, at the Right's then current exercise price, a
number of the acquiring company's common shares having a then current market
value of twice the Rights' exercise price.
Following the acquisition by a person or group of beneficial ownership of
15% or more of the Holding Company Common Stock and prior to the acquisition by
such person or group of 50% or more of the Holding Company Common Stock, the
Board of Directors of the Holding Company may exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one share of Common Stock per Right.
Prior to the acquisition by a person or group of beneficial ownership of
15% or more of the Holding Company Common Stock, the Rights will be redeemable
in whole, not in part, for one cent per Right.
The Holding Company's transfer agent, First Chicago Trust Company of New
York, will be the Rights Agent under the Rights Agreement.
The issuance of the Rights to purchase shares of Holding Company Series A
Junior Participating Preferred Stock will have certain anti-takeover effects.
The Rights will cause substantial dilution to a person or group that attempts to
acquire the Holding Company on terms not approved by the Holding Company Board.
The Rights should not interfere with any merger or other business combination
approved by the Holding Company Board prior to the time that a person or group
has acquired beneficial ownership of 15% or more of the Holding Company Common
Stock, as the rights will be redeemable by the Holding Company at $0.01 per
Right prior to such time.
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of shares will be distributed to MONY's policyholders
in the Demutualization. See "The Demutualization -- Allocation and Payment of
Consideration to Eligible Policyholders". The Company has been advised by
counsel that the distribution of such shares will be exempt from registration
under the Securities Act by virtue of the exemption provided by Section 3(a)(10)
of the Securities Act, and those Eligible Policyholders who are not "affiliates"
of the Holding
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Company within the meaning of Rule 144 under the Securities Act will be able to
resell their shares in the public market without registration or compliance with
the time, volume, manner of sale and other limitations set forth in Rule 144.
Substantially all of the shares distributed to MONY's policyholders in the
Demutualization will be distributed to non-affiliates of the Holding Company
and, accordingly, will be freely transferable without limitations.
Pursuant to the Plan, policyholders will initially be issued shares of
Common Stock received in the Demutualization in book-entry form as
uncertificated shares. Under the Plan, the Holding Company shall establish,
subject to the approval of the New York Superintendent, a commission-free sales
program pursuant to which each Eligible Policyholder who receives a number of
shares of Common Stock under the Plan that is equal to or less than a number of
shares to be determined by the MONY Board at least 60 days prior to the
nine-month anniversary of the Plan Effective Date (which number shall not be
less than 25 nor more than 99) will be entitled to sell at market prices all,
but not less than all, of such shares received pursuant to the Plan without
paying brokerage commissions, mailing charges, registration fees or other
administrative or similar expenses. Such program will commence on the first
business day after the nine-month anniversary of the Effective Date and will
continue for three months thereafter unless extended by the Holding Company
Board. Under the Plan, the Holding Company will also establish, subject to the
approval of the New York Superintendent, a commission-free purchase program for
Eligible Policyholders who receive 99 or fewer shares of Common Stock under the
Plan, enabling such Eligible Policyholders to purchase, commission-free, such
number of shares as is necessary to bring their total respective number of
shares of Common Stock to 100.
As of the Board Adoption Date, MONY had approximately 840,000
policyholders, most of whom, if their policies remain in force on the Plan
Effective Date and if not paid cash or provided Policy Credits, will receive a
number of shares of Common Stock in the Demutualization which will make them
eligible to sell such shares through the commission-free sales program (as
described in "The Demutualization -- Commission-Free Programs"). No prediction
can be made as to the effect, if any, such future sales of shares, or the
availability of shares for such future sales, will have on the market price of
the Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock.
In addition, the Investors and their subsidiaries and affiliates have
certain registration rights with respect to the Warrants and the shares of
Common Stock issuable upon exercise thereof and upon conversion of Convertible
Preferred Stock. See "Certain Provisions of the Investment". Any sale of Common
Stock, Warrants or Convertible Preferred Stock by the Investors, including upon
the exercise of their registration rights, could adversely affect the market
price of the Common Stock. The Investors have also agreed with the Underwriters
not to dispose of any shares of Common Stock, Warrants or Convertible Preferred
Stock for a period of 180 days following the Offerings without the Underwriters'
consent. See "Underwriting".
RESTRICTIONS ON ACQUISITIONS OF SECURITIES OF THE HOLDING COMPANY
Section 7312 provides that, for a period of five years after the Plan
Effective Date, no person may, directly or indirectly, offer to acquire or
acquire in any manner, the beneficial ownership (defined as the power to vote or
dispose of, or to direct the voting or disposition of, a security) of 5% or more
of any class of voting security (which term includes the Common Stock) of the
Holding Company without the prior approval of the New York Superintendent. The
Investors have received a conditional waiver of this rule from the New York
Superintendent in connection with the potential exercise of the Warrants prior
to the end of such five-year period. Pursuant to Section 7312, voting securities
acquired in excess of the 5% threshold without such prior approval will be
deemed non-voting. See "Certain Provisions of the Investment -- Determination of
Non-Control".
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State insurance laws require regulatory approval of changes of control
(generally upon acquisitions of 10% or more of voting securities) of insurance
holding companies, such as the Holding Company. State insurance laws, including
the New York Insurance Law, require certain filings concerning changes in
ownership of insurance companies. Although the specific provisions vary,
insurance laws in states such as New York generally prohibit a person from
acquiring a controlling interest in an insurer incorporated in the state or in
any other person controlling such insurer unless the insurance regulatory
authority has approved either the proposed acquisition of control or a
disclaimer of control in accordance with the applicable regulations. The New
York Superintendent issued a determination pursuant to Section 1501(c) of the
New York Insurance Law, dated December 29, 1997, that the Investors would not
control MONY as a result of the transactions contemplated by the Investment
Agreement, subject to certain notice and approval requirements, and certain
commitments by the Investors, as set forth in "Certain Provisions of the
Investment -- Determination of Non-Control".
In addition, Section 203 of the Delaware General Corporation Law prohibits
an "interested stockholder" of a Delaware corporation from engaging in certain
business combinations with the corporation, including mergers or consolidations
or acquisitions of additional shares of the corporation, for a period of three
years following the time that the stockholder becomes an "interested
stockholder". An "interested stockholder" is defined to include persons owning
directly or indirectly 15% or more of the outstanding voting stock of a
corporation. The prohibitions under Section 203 are not applicable in certain
circumstances, including those in which (i) the business combination or the
transaction which results in the stockholder becoming an "interested
stockholder" is approved by the corporation's board of directors prior to the
time the stockholder becomes an "interested stockholder", (ii) the "interested
stockholder" upon consummation of such transaction owns at least 85% of the
voting stock of the corporation outstanding prior to such transaction or (iii)
the corporation has elected not to be governed by such prohibitions. The MONY
Board and the Holding Company Board have approved the Investors' acquisition of
Common Stock as part of their approval of the Investors' investment and,
accordingly, the prohibitions under Section 203 will not apply to any business
combination with the Investors.
CERTAIN PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND THE BY-LAWS OF THE HOLDING COMPANY
The following summary of the Amended and Restated Certificate and the
By-laws does not purport to be complete and is qualified in its entirety by
reference to the Amended and Restated Certificate and the By-laws, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
The following discussion is a summary of certain provisions of the Amended
and Restated Certificate and the By-laws relating to stockholder voting rights,
advance notice requirements and other provisions, some of which may be deemed to
have an "anti-takeover" effect. In addition to these provisions, the regulatory
restrictions on acquisitions of securities of the Holding Company may also deter
attempts to effect, or prevent the consummation of, a change in control of the
Holding Company. See "Restrictions on Acquisitions of Securities of the Holding
Company". Pursuant to the standstill provisions set forth in the Investment
Agreement, the Holding Company has agreed not to take (and to cause its
subsidiaries not to take) any action which has the effect of imposing more
stringent requirements on the Investors, their subsidiaries and affiliates than
those contained in the Investment Agreement. See "Certain Provisions of the
Investment -- Standstill Agreement". In addition, the Investors have agreed to
vote (and to cause their subsidiaries and affiliates to vote) the shares of
Common Stock acquired upon exercise of Warrants and conversion of Convertible
Preferred Stock, at the option of the Holding Company, in accordance with the
recommendation of the Holding Company Board or in the same proportion as the
holders of Common Stock who are not affiliated with either the Holding Company
or the Investors until the termination of the standstill provisions set forth in
the Investment Agreement. See "Certain
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Provisions of the Investment -- Standstill Agreement" and "-- Voting of Common
Stock". These and other provisions affect stockholder rights and should be given
careful attention.
ISSUANCE OF COMMON AND PREFERRED STOCK
The Holding Company believes that its ability to issue the authorized but
unissued shares of Common Stock and shares of Preferred Stock without
stockholder consent will provide the Holding Company with the flexibility
necessary to meet its future needs without experiencing the time delay of having
to seek stockholder approval. Subject to the various contractual restrictions
described herein (see "Certain Provisions of the Investment") and to the
provisions of the Plan, the unissued shares of Common Stock and Preferred Stock
will be issuable from time to time for any corporate purpose, including, without
limitation, stock splits, stock dividends, employee benefit and compensation
plans, acquisitions and public or private sales for cash as a means of raising
capital. It is possible that the Holding Company Board might use its authority
(subject to the restrictions referred to above) to issue Common Stock or
Preferred Stock in a way which could deter or impede the completion of a tender
offer or other attempt to gain control of the Holding Company which the Holding
Company Board does not approve. The Holding Company does not have any
predetermined plans or commitments to use its authority to effect any such
issuance, but reserves the right to take any action in the future which the
Holding Company Board deems to be in the best interests of the stockholders and
the Holding Company under the circumstances.
It is not possible to state the actual effect of any issuance of Preferred
Stock upon the rights of holders of Common Stock because the Holding Company
Board has not determined an issuance price or prices, terms or the rights of the
holders of Preferred Stock (except with respect to the terms of the shares of
Convertible Preferred Stock). However, such effects might include: (i)
restrictions on Common Stock dividends if Preferred Stock dividends have not
been paid; (ii) dilution of the voting power and equity interest of existing
holders of Common Stock to the extent that any Preferred Stock series has voting
rights or would acquire voting rights upon the occurrence of certain events
(such as the failure to pay dividends for a specified period) or that any
Preferred Stock series is convertible into Common Stock; and (iii) current
holders of Common Stock not being entitled to share in the Holding Company's
assets upon liquidation, dissolution or winding-up until satisfaction of any
liquidation preferences granted to any series of Preferred Stock. See
"Description of Capital Securities -- Preferred Stock -- Convertible Preferred
Stock".
BOARD OF DIRECTORS
The Amended and Restated Certificate and the By-laws provide that the
Holding Company Board will consist of not less than 5 nor more than 15 directors
(subject to the rights of the holders of any series of Preferred Stock), with
the exact number to be determined from time to time by the affirmative vote of a
majority of the entire Holding Company Board. The Holding Company Board is
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, one class to hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1999, another class to hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2000, and another class to hold
office initially for a term expiring at the annual meeting of stockholders to be
held in 2001, with the members of each class to hold office until their
successors are duly elected and qualified. The Company believes that a
classified board of directors will help to assure the continuity and stability
of the Holding Company Board and the business strategies and policies of the
Company as determined by the Holding Company Board.
The classified board provisions could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. In addition, the classified board provisions could delay
stockholders who do not like the policies of the Holding Company Board from
removing a majority of the Holding Company Board for two years.
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At any meeting of the Holding Company Board, a majority of the entire
Holding Company Board will constitute a quorum for the transaction of business,
and, subject to certain exceptions, at any meeting at which a quorum is present
the affirmative vote of a majority of the directors present will constitute the
act of the Holding Company Board.
Subject to the rights of the holders of any series of Preferred Stock, any
newly created directorship and any other vacancy occurring on the Holding
Company Board may be filled by a majority of the directors then in office
(regardless of whether such majority constitutes a quorum of directors) or by a
sole remaining director. The foregoing provisions could prevent a stockholder
from obtaining majority representation on the Holding Company Board by
permitting the Holding Company Board to enlarge the Holding Company Board and
fill the new directorships with its own nominees. A director so elected by the
Holding Company Board holds office until the next election of the class for
which such director has been chosen and until his successor is elected and
qualified.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, the Amended and Restated Certificate also provides that directors
may be removed only for cause and only by the affirmative vote of holders of a
majority of the outstanding voting power of the Company. The effect of these
provisions is to preclude a stockholder from removing incumbent directors
without cause and simultaneously gaining control of the Holding Company Board by
filling the vacancies created by such removal with its own nominees.
STOCKHOLDER ACTION
The Amended and Restated Certificate requires that, following the
consummation of the Offerings, any action required or permitted to be taken by
the stockholders may only be effected at a duly called annual or special
meeting.
LIMITATION ON CALL OF SPECIAL MEETINGS OF STOCKHOLDERS
Under the Delaware General Corporation Law, special meetings of
stockholders may be called by the Holding Company Board or by such other persons
as may be authorized by the Amended and Restated Certificate or the By-laws. In
the case of the Holding Company, the By-laws provide that special meetings may
be called only by the Chairman of the Board, the President or by the Secretary
pursuant to a written request signed by a majority of the members of the Holding
Company Board. Except as otherwise required by law or the Amended and Restated
Certificate, no business will be transacted at any special meeting of
stockholders other than the items of business stated in the notice.
ADVANCE NOTICE REQUIREMENTS
The By-laws establish advance notice procedures with regard to (i) the
nomination, other than by or at the direction of the Holding Company Board, of
candidates for election to the Holding Company Board (the "Nomination
Provision") and (ii) certain business to be brought before an annual meeting of
stockholders of the Holding Company (the "Business Provision").
The Nomination Provision, by requiring advance notice of nominations by
stockholders, affords the Holding Company Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Holding Company Board, to inform stockholders
about such qualifications.
The Business Provision, by requiring advance notice of business proposed to
be brought before an annual meeting, provides a more orderly procedure for
conducting annual meetings of stockholders and provides the Holding Company
Board with a meaningful opportunity prior to the meeting to inform stockholders,
to the extent deemed necessary or desirable by the Holding Company Board, of any
business proposed to be conducted at such meeting, together with any
recommendation of the Holding Company Board. The Business Provision does not
affect the right of stockholders to
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make stockholder proposals for inclusion in proxy statements for the Holding
Company's annual meetings of stockholders pursuant to the rules of the
Commission.
Although these By-law provisions do not give the Holding Company Board any
power to approve or disapprove of stockholder nominations for the election of
directors or of any other business desired by stockholders to be conducted at an
annual meeting of stockholders if the proper procedures are followed, these
By-law provisions may have the effect of precluding a nomination or precluding
the conducting of business at a particular annual meeting, and may make it
difficult for a third party to conduct a solicitation of proxies to elect its
own slate of directors or otherwise attempt to obtain control of the Holding
Company, even if such a solicitation or attempt might be beneficial to the
Holding Company and its stockholders.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND THE BY-LAWS
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws unless
such corporation's certificate of incorporation requires a greater percentage.
The Amended and Restated Certificate provides that any amendments to certain
provisions of the Amended and Restated Certificate and of the By-laws requires
the affirmative vote of the holders of at least 80% of the voting power of the
shares entitled to vote at an election of directors. Those provisions in the
Amended and Restated Certificate relate to the following matters: (i) division
of the Board of Directors into classes; (ii) the filling of vacancies on the
Board of Directors; (iii) the basis for the removal of directors; (iv) the size
of the Board of Directors; (v) limitations on action without a meeting; and (vi)
the right of the Board of Directors to amend the By-laws. Those provisions of
the By-laws relate to the following matters: (i) limitations on calling special
meetings; (ii) the size of the Board of Directors; (iii) advance notice of
stockholder proposals; (iv) stockholder nominations of directors; and (v) the
filling of vacancies on the Board of Directors. In addition, the Amended and
Restated Certificate grants the Board of Directors authority to amend the
By-laws.
LIMITATIONS ON DIRECTOR LIABILITY
The Holding Company's Amended and Restated Certificate contains a provision
that is designed to limit the directors' liability to the extent permitted by
the Delaware General Corporation Law and any amendments thereto. Specifically,
directors will not be held liable to the Holding Company or its stockholders for
an act or omission in such capacity as a director, except for liability as a
result of: (i) a breach of the duty of loyalty to the Holding Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of an
improper dividend or improper repurchase of the Holding Company's stock under
Section 174 of the Delaware General Corporation Law, or (iv) actions or
omissions pursuant to which the director received an improper personal benefit.
The principal effect of the limitation on liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of the Holding Company unless the stockholder can demonstrate one of
the specified bases for liability. This provision, however, does not eliminate
or limit director liability arising in connection with causes of action brought
under the federal securities laws. The Holding Company's Amended and Restated
Certificate does not eliminate its directors' duty of care. The inclusion of
this provision in the Holding Company's Amended and Restated Certificate may,
however, discourage or deter stockholders or management from bringing a lawsuit
against directors for a breach of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited the Holding Company and
its stockholders. This provision should not affect the availability of equitable
remedies such as injunction or rescission based upon a director's breach of the
duty of care.
The By-laws also provide that the Holding Company will indemnify its
directors and officers to the fullest extent permitted by Delaware law. The
Holding Company is generally required to
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indemnify its directors and officers for all judgments, fines, settlements,
legal fees and other expenses incurred in connection with pending or threatened
legal proceedings because of the director's or officer's position with the
Holding Company or another entity that the director or officer serves at the
Holding Company's request, subject to certain conditions, and to advance funds
to its directors and officers to enable them to defend against such proceedings.
To receive indemnification, the director of officer must have been successful in
the legal proceeding or acted in good faith and in what was reasonably believed
to be a lawful manner in the Holding Company's best interest.
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered hereby will be passed
upon for the Holding Company by Dewey Ballantine LLP, New York, New York, and
for the Underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of income and comprehensive income, changes
in equity, and cash flows for each of the three years in the period ended
December 31, 1997, and related supplemental schedules included in this
Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. Certain partners and other
professional personnel of the independent auditors, PricewaterhouseCoopers LLP,
hold insurance policies issued by MONY. PricewaterhouseCoopers LLP has notified
MONY that, consistent with its existing policy prohibiting its partners and
certain other professional personnel from owning common stock issued by any of
its clients, PricewaterhouseCoopers LLP will require that any of the Common
Stock issued to any partner or certain other professional personnel of
PricewaterhouseCoopers LLP be divested in accordance with such policy without
delay upon receipt.
A consulting actuary associated with PricewaterhouseCoopers LLP has
rendered an opinion, dated August 10, 1998, to the MONY Board that states (in
reliance upon the matters described in such opinion) that the arrangement for
establishment and operation of the Closed Block allocates assets to the Closed
Block which are expected to produce cash flows which, together with anticipated
revenues from the Closed Block Business, are reasonably sufficient to enable the
Closed Block to provide for the guaranteed benefits, certain expenses and taxes
associated with Closed Block policies, and to provide for the continuation of
the 1998 dividend scales if the experience underlying the calculation of these
assets continues. His opinion is included herein in Annex A in reliance upon his
qualification under the American Academy of Actuaries Qualification standards to
render the opinion set forth.
Phillip A. Eisenberg, F.S.A., M.A.A.A., MONY's Senior Vice President and
Chief Actuary, has rendered an opinion, dated August 14, 1998, to the MONY Board
that states (in reliance upon matters described in such opinion) that the
allocation of consideration to policyholders pursuant to the Plan is fair and
equitable to policyholders. His opinion is included herein in Annex A in
reliance upon his qualification under the American Academy of Actuaries
Qualification standards to render the opinion set forth.
The statements under the captions "Business -- Accumulation Products" and
"-- Other Products" concerning the results of opinion surveys by DALBAR have
been reviewed and approved by DALBAR and are included herein in reliance upon
such firm as experts on such matters.
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AVAILABLE INFORMATION
The MONY Group Inc., a Delaware corporation, has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-1
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations promulgated thereunder, with
respect to shares of Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. The
statements or descriptions herein concerning any agreement or other document
referred to herein are summaries only. Where such agreement or other document is
an exhibit to the Registration Statement, reference is made to such exhibit for
a full statement of the provisions thereof. For further information with respect
to the Holding Company and the shares of Common Stock offered hereby, reference
is made to the Registration Statement. Any interested party may inspect the
Registration Statement, without charge, at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Commission maintains a Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Upon completion of the offerings the Holding Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Commission. The Holding Company
intends to furnish holders of Common Stock with annual reports that include
audited annual consolidated financial statements and an opinion thereon
expressed by independent certified public accountants.
The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange. Periodic reports, proxy statements and
other information concerning the Holding Company will be available for
inspection at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
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GLOSSARY
The following Glossary includes definitions of certain general insurance
terms as well as terms relating specifically to the Company.
AEGON......................... AEGON USA, Inc.
AEGON NOTES................... The Series A Notes and Series B Notes issued by
AEGON at December 31, 1993.
A.M. BEST..................... A.M. Best Company, Inc. A.M. Best's financial
condition ratings are opinions of an insurance
company's financial strength, operating
performance and ability to meet its obligations
to policyowners. Such ratings are based upon a
comprehensive review of a company's financial
performance, which is supplemented by certain
data, including responses to A.M. Best's
questionnaires, quarterly NAIC filings, state
insurance department examination reports, loss
reserve reports, annual reports and reports
filed with state insurance departments. A.M.
Best undertakes a quantitative evaluation based
on profitability, leverage and liquidity and a
qualitative evaluation based upon the
composition of a company's book of business or
spread of risk, the amount, appropriateness and
soundness of reinsurance, the quality,
diversification and estimated market value of
its assets, the adequacy of its loss reserves
and policyowners' surplus and the experience
and competence of its management. A.M. Best
uses the following rating scale:
<TABLE>
<S> <C>
A++ and A+ Superior
A and A- Excellent
B++ and B+ Very Good
B and B- Adequate
C++ and C+ Fair
C and C- Marginal
D Very Vulnerable
E Under State Supervision
F In Liquidation
</TABLE>
ANNUITY....................... A contract that pays a periodic income benefit
for the life of a person (the annuitant), the
lives of two or more persons or a specified
period of time.
ASSET VALUATION RESERVE
(AVR)......................... A reserve which consists of two main
components: a "default component" to provide
for future credit-related losses on
fixed-income investments and an "equity
component" to provide for losses on all types
of equity investments, including real estate.
The AVR is required by statutory accounting
principles and is not included in financial
statements prepared in accordance with GAAP.
AUSA.......................... AUSA Life Insurance Company, Inc., a
wholly-owned subsidiary of AEGON.
BOARD ADOPTION DATE........... August 14, 1998, the date upon which the MONY
Board adopted the Plan.
G-1
<PAGE> 194
CAPITAL AND SURPLUS........... For statutory accounting purposes, consists of
capital stock, paid-in or contributed surplus,
special surplus funds and unassigned surplus.
CARRYING VALUE................ The amount of an item as included in the
financial statements.
CASH VALUE.................... The amount of cash available to a policyholder
on surrender of a life insurance policy.
CEDE, CEDING COMPANY.......... When a company reinsures all or a portion of
its risk with another, it "cedes" business and
is referred to as the "ceding company".
CLOSED BLOCK.................. A mechanism to preserve the reasonable dividend
expectations of individual participating
policyholders with traditional individual life
insurance policies where dividends are
currently being paid or are expected to be paid
under the current dividend scale (i.e., whole
life, term, retirement endowment, endowment and
last to die insurance policies), and individual
retirement annuity contracts and individual
flexible premium retirement annuity contracts,
provided that such policies and contracts
otherwise meet the requirements for Closed
Block Business.
CLOSED BLOCK BUSINESS......... Policies within the classes of policies
specified in the Plan (which policy classes
constitute all of the classes of individual
policies with a current payable dividend scale,
subject to certain exceptions specified in the
Plan), but only to the extent such policies are
either (a) in force on the Plan Effective Date
or (b) issued and delivered after the Plan
Effective Date pursuant, in each case, to an
application, complete on its face, that is
received prior to the Plan Effective Date at
MONY's administrative offices, provided that
all underwriting in connection with any policy
referred to in this clause (b) is completed
within 60 days of the Plan Effective Date and
such policy is issued as applied for without
material change (upon receipt of premium
payment in accordance with the Company's
customary business practice) and delivered in
accordance with the terms of the application.
"Closed Block Business" also includes any
policy within the classes of policies specified
in the Plan which is in force on the Plan
Effective Date as extended term insurance
pursuant to a non-forfeiture provision in such
policy.
CONVERTIBLE PREFERRED STOCK... The preferred stock of the Holding Company
which the Investors have agreed to purchase on
the Company's request. This preferred stock
will be convertible into shares of Common Stock
and will have a liquidation value of $100 per
share.
CREDITING RATE................ The interest rate credited on a life insurance
policy or annuity contract. This credit
interest rate may be a guaranteed fixed rate, a
variable rate or some combination of both.
DEFERRED POLICY ACQUISITION
COSTS......................... Commissions and other selling expenses which
vary with and are directly related to the
production of business. These
G-2
<PAGE> 195
acquisition costs are deferred and amortized to
achieve a matching of revenues and expenses
when reported in financial statements prepared
in conformity with GAAP.
DEFERRED ANNUITY.............. An annuity that: (i) can be paid either with a
single premium or a series of installments and
(ii) includes a schedule of periodic income
benefit to commence after an accumulation
period.
DEMUTUALIZATION............... The conversion of MONY from a mutual life
insurance company to a stock life insurance
company, together with other matters addressed
by, and pursuant to the terms of, the Plan.
DEMUTUALIZATION DATE.......... The date the plan of reorganization becomes
effective or, if later, the first date
following such effectiveness on which shares of
Common Stock are first issued to Eligible
Policyholders.
DIVIDEND SCALES............... The actuarial formulas used by life insurance
companies to determine amounts payable as
dividends on participating policies based on
experience factors relating, among other
things, to investment results, mortality, lapse
rates, expenses, premium taxes and policy loan
interest.
ELIGIBLE POLICYHOLDER......... Each policyholder who owns a policy that was in
force on the Board Adoption Date and which
remains in force on the Plan Effective Date.
EQUITY REAL ESTATE............ An investment asset category which combines
wholly-owned real estate and interests in real
estate joint ventures.
EXISTING DEPOSITS............. The existing deposits on contracts which were
in force and transferred to AEGON on the Group
Pension Transaction Date.
FINAL VALUE PAYMENT........... The payment MONY will receive at December 31,
2002 based on the remaining fair value of the
Existing Deposits.
FIRST CLOSING DATE............ December 30, 1997.
GENERAL ACCOUNT............... All of an insurer's assets other than those
allocated to a separate account. The insurer
bears the investment risk on the invested
assets of the general account.
GENERAL ACCOUNT INVESTED
ASSETS........................ The assets held in the General Account
associated with the continuing operations of
MONY and its insurance company affiliates and
which include fixed maturities, mortgages,
equity real estate, equity interests, policy
loans and cash and short-term investments.
GOLDMAN SACHS................. Goldman, Sachs & Co.
GROUP PENSION PAYMENTS........ The payments MONY receives on an annual basis
through December 31, 2002 representing the
profits from the business transferred to AEGON
as determined pursuant to the Earnings Formula
under the AEGON Agreement.
GROUP PENSION PROFITS......... The recorded GAAP earnings from the Group
Pension Payments.
G-3
<PAGE> 196
GROUP PENSION TRANSACTION..... The transaction in which the Company
transferred a substantial portion of its group
pension business to AUSA. The transaction was
legally structured as a sale. However, in
accordance with GAAP the transaction did not
constitute a sale because the Company retained
substantially all the risks and rewards
associated with the transferred assets and
liabilities relating to such business.
GROUP PENSION TRANSACTION
DATE.......................... December 31, 1993.
GUARANTEED INVESTMENT
CONTRACTS (GICS).............. Group annuity contracts sold to pension and
profit sharing plans and funding agreements
sold primarily to municipalities that guarantee
a stated interest rate for a specified period
of time.
HOLDING COMPANY SUBORDINATED
NOTES....................... Those notes the Holding Company will issue if
the Investors elect to exchange the MONY Notes.
IMMEDIATE ANNUITY............. An annuity that begins payment immediately
after issuance.
IN FORCE...................... Generally, policies and contracts written and
recorded on the books of an insurance carrier
which are unexpired as of a given date.
INTERCOMPANY SURPLUS NOTES.... One or more surplus notes in an aggregate
principal amount equal to the principal amount
of the Holding Company Subordinated Notes which
bear interest at 9.5% per annum.
INTEREST-SENSITIVE PRODUCT.... A life insurance policy or annuity contract
that provides an explicit guaranteed interest
rate subject to being reset by the insurer
after a specified period of time.
INVESTORS..................... GS Mezzanine Partners, L.P., GS Mezzanine
Partners Offshore, L. P., Stone Street Fund
1997, L. P., and Bridge Street Fund 1997, L. P.
LAPSE......................... Termination of a policy because of surrender,
failure to pay a premium or lack of sufficient
cash value to maintain in force status.
MONY BOARD.................... The Board of Trustees of MONY.
MONY NOTES.................... The 9.50% Surplus Notes due December 30, 2012
in an aggregate principal amount of $115.0
million issued on December 30, 1997, by MONY.
MOODY'S....................... Moody's Investors Service, Inc. Moody's
financial strength ratings are opinions of an
operating insurance company's ability to
discharge senior policyowner claims and
obligations pursuant to its insurance policies.
Moody's financial strength ratings are based on
information provided by the
G-4
<PAGE> 197
company and federal and state regulators.
Moody's uses the following rating scale:
<TABLE>
<S> <C>
Aaa Exceptional
Aa1, Aa2 and Aa3 Excellent
A1, A2 and A3 Good
Baa1, Baa2 and Baa3 Adequate
Ba1, Ba2 and Ba3 Questionable
B1, B2 and B3 Poor
Caa Very poor
Ca Extremely poor
C Lowest
</TABLE>
MORBIDITY..................... The relative rate of any health contingency due
to disease or physical impairment.
MORTALITY..................... The ratio of deaths to a specific population.
NAIC.......................... National Association of Insurance
Commissioners.
NAIC DESIGNATION.............. NAIC designation refers to any one of six
specific alpha-numeric categories used by the
Securities Valuation Office of the National
Association of Insurance Commissioners to
denote the credit quality of fixed maturity
securities. The definition of these NAIC
designation categories is as follows:
NAIC 1 is assigned to obligations exhibiting
the highest quality. Credit risk is at its
lowest and the issuer's credit profile is
stable.
NAIC 2 is assigned to obligations of high
quality. Credit risk is low but may increase in
the intermediate future and the issuer's credit
profile is reasonably stable.
NAIC 3 is assigned to obligations of medium
quality. Credit risk is intermediate and the
issuer's credit profile has elements of
instability. These obligations exhibit
speculative elements.
NAIC 4 is assigned to obligations of low
quality. Credit risk is high and the issuer's
credit profile is volatile. These obligations
are highly speculative, but currently the
issuer has the capacity to meet its
obligations.
NAIC 5 is applied to obligations of the lowest
credit quality which are not in or near
default. Credit risk is at its highest and
credit profile is highly volatile, but
currently the issuer has the capacity to meet
its obligations.
NAIC 6 is applied to obligations which are in
or near default.
NEW BUSINESS GROWTH PAYMENT... A contingent payment due to MONY from AEGON at
December 31, 2002 based on new business growth
subsequent to the Group Pension Transaction
Date.
NEW YORK SUPERINTENDENT....... The New York Superintendent of Insurance.
PARTICIPATING POLICY.......... A policy under which there is a right to
participate in the divisible surplus of the
Company to the extent dividends are
G-5
<PAGE> 198
apportioned thereon (including any such policy
that has continued as extended term insurance).
A MONY policy which by its terms is not
non-participating will be deemed to be a
participating policy.
PARTICIPATING POLICYHOLDER.... An Eligible Policyholder who is on the Board
Adoption Date the owner of one or more
participating policies which is then in force
and remains in force on the Plan Effective
Date.
PERSISTENCY................... Percentage of life insurance policies or
annuity contracts remaining in force between
measurement dates.
PLAN.......................... The plan of reorganization (including all
exhibits and schedules thereto), as it may be
amended from time to time, which was adopted by
the Board of Trustees of MONY, pursuant to
which the Company intends to demutualize.
PLAN EFFECTIVE DATE........... The effective date of the Demutualization.
POLICY........................ The written forms, endorsements, riders and
attachments that make up an insurance contract
between an insured and insurer. A policy
includes, among other things, the terms and
conditions of the coverage, the perils insured
or excluded, the limits of insurance provided,
the interests insured and the effective dates
of the coverage.
POLICY ACQUISITION COSTS...... Agents' and brokers' commissions, premium
taxes, underwriting and other direct expenses
associated with acquiring business.
POLICY CREDITS................ Additional values applied to a policy through
dividends, increases in fund values,
accumulation values or accumulation account
values or extensions of coverages.
PREMIUMS...................... Payments and considerations received during the
year on policies and contracts, other than
universal life and investment-type contracts,
issued or reinsured (assumed less ceded) by an
insurance company and accounted for as revenues
under GAAP.
REINSURANCE................... The acceptance by one or more insurers, called
reinsurers, of a portion of the risk
underwritten by another insurer who has
directly written the coverage.
RISK-BASED CAPITAL (RBC)
REQUIREMENTS................ Regulatory and rating agency targeted surplus
based on the relationship of statutory surplus,
with certain adjustments, to the sum of stated
percentages of each element of a specified list
of company risk exposures.
S & P......................... Standard & Poor's Ratings Group. S & P's
claims-paying ability ratings are opinions of
an operating insurance company's financial
ability to meet its obligations under its
insurance policies. S & P's claims-paying
ability ratings are based on current
information provided by the subject insurance
G-6
<PAGE> 199
company and other reliable sources. S & P uses
the following rating scale:
<TABLE>
<S> <C>
AAA Superior
AA+, AA and AA- Excellent financial
security
A+, A and A- Good financial security
BBB+, BBB and BBB- Adequate
BB+, Bb and BB- Financial security may
be adequate
B+, B and B- Vulnerable
CCC Extremely vulnerable
R Regulatory actions
BBBq, Bbq and Bq Qualified solvency
ratings
</TABLE>
SECTION 7312.................. Section 7312 of the New York Insurance Law.
SEPARATE ACCOUNTS............. Investment accounts maintained by an insurer to
which funds have been allocated for certain
policies under provisions of relevant state
insurance law. The investments in each separate
account are maintained separately from those in
other separate accounts and the general
account. The investment results of the separate
account assets are passed through directly to
the separate account contractholders, so that
an insurer derives management and other fees
from, but bears no investment risk on, these
assets, except the risk on certain products
that returns on separate account assets will
not meet the minimum rate guaranteed on these
products.
SERIES A NOTES................ The Series A Notes due December 31, 2002 which
were issued by AEGON and purchased by MONY as
part of the Group Pension Transaction.
SERIES B NOTES................ The Series B Notes due December 31, 2002 which
were issued by AEGON and purchased by MONY as
part of the Group Pension Transaction.
STATUTORY ACCOUNTING PRACTICES
(SAP)....................... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulator for purposes of financial
reporting to regulators.
STATUTORY SURPLUS............. The excess of statutory admitted assets over
statutory liabilities.
SURRENDERS AND WITHDRAWALS.... Surrenders of life insurance policies and
annuity contracts for their entire net cash
surrender values and withdrawals of a portion
of such values.
TERM LIFE INSURANCE........... Insurance protection during a certain number of
years but expiring without policy cash value if
the insured survives the stated period.
TRADITIONAL LIFE INSURANCE.... Those life insurance products consisting of
whole life insurance and term life insurance.
G-7
<PAGE> 200
UNDERWRITING.................. Process of examining, accepting or rejecting
insurance risks, and classifying those
accepted, in order to charge an appropriate
premium for each accepted risk.
UNIVERSAL LIFE INSURANCE...... Life insurance under which: (i) premiums are
generally flexible, (ii) the level of death
benefits may be adjusted and (iii) mortality,
expense and other charges may vary. This
insurance is sometimes referred to as unbundled
life insurance because its three basic elements
(investment earnings, cost of protection and
expense charges) are separately identified both
in the policy and in the annual report to the
policyholder.
VARIABLE ANNUITY.............. Annuity the value of which fluctuates in
accordance with the investment experience of a
separate account. At the time of the payment of
benefits to the annuitant, the annuitant can
generally elect from a number of payment
options which provide either fixed or variable
benefit payments.
VARIABLE LIFE INSURANCE....... Life insurance under which the benefits payable
upon death or surrender vary to reflect the
investment experience of a separate account
supporting such policies.
WARRANTS...................... Warrants which give the Investors the right to
purchase from the Holding Company in the
aggregate 7.0% of the fully diluted Common
Stock (after giving effect to the Offerings) at
the Demutualization Date.
WHOLE LIFE INSURANCE.......... Insurance that may be kept in force for a
person's entire life by paying one or more
premiums. The insurance policy pays a benefit
(contractual amount adjusted for items such as
policy loans and dividends, if any) at the
death of the insured. Whole life insurance also
builds up cash values.
G-8
<PAGE> 201
THE MUTUAL LIFE INSURANCE COMPANY
OF NEW YORK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent accountants' report............................. F-2
Consolidated balance sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated statements of income and comprehensive income
for the years ended December 31, 1997, 1996 and 1995...... F-4
Consolidated statements of changes in equity for the years
ended December 31, 1997, 1996 and 1995.................... F-5
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to consolidated financial statements.................. F-7
Supplemental Schedule to the Consolidated Financial
Statement:
Independent accountants' report............................. F-47
The MONY Group Inc. condensed balance sheet as of December
31, 1997.................................................. F-48
Notes to The MONY Group Inc. condensed balance sheet........ F-49
Unaudited interim condensed consolidated balance sheet as of
June 30, 1998............................................. F-51
Unaudited interim condensed consolidated statements of
income and comprehensive income for the six-month periods
ended June 30, 1998 and 1997.............................. F-52
Unaudited interim condensed consolidated statement of
changes in equity for the six-month period ended June 30,
1998...................................................... F-53
Unaudited interim condensed consolidated statements of cash
flows for the six-month periods ended June 30, 1998 and
1997...................................................... F-54
Notes to unaudited interim condensed consolidated financial
statements................................................ F-55
Supplemental Schedule to the Unaudited Interim Condensed
Consolidated Financial Statements:
The MONY Group Inc. unaudited condensed balance sheet as of
June 30, 1998............................................. F-64
The MONY Group Inc. unaudited condensed statement of income
for the six-month period ended June 30, 1998.............. F-65
The MONY Group Inc. unaudited condensed statement of cash
flows for the six-month period ended June 30, 1998........ F-66
Notes to The MONY Group Inc. unaudited condensed financial
statements................................................ F-67
</TABLE>
F-1
<PAGE> 202
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
The Mutual Life Insurance Company of New York
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and changes in equity and of cash
flows present fairly, in all material respects, the financial position of The
Mutual Life Insurance Company of New York and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 5 to the consolidated financial statements, the
Company adopted in 1996, Statements of Financial Accounting Standards No. 120
(SFAS 120) and Financial Accounting Standards Board Interpretation No. 40 (FIN
40) which required implementation of several accounting pronouncements not
previously adopted. The effects of adopting SFAS 120 and FIN 40 were
retroactively applied to the Company's previously issued financial statements,
consistent with the implementation guidance of those standards.
PricewaterhouseCoopers LLP
New York, New York
July 27, 1998 except for Note 2,
as to which the date is August 14, 1998.
F-2
<PAGE> 203
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities available-for-sale at fair
value.................................................. $ 5,950.1 $ 5,142.1
Fixed maturity securities held-to-maturity at amortized
cost................................................... -- 318.7
Equity securities available-for-sale at fair value........ 337.8 305.2
Mortgage loans on real estate (Note 14)................... 1,430.1 1,582.3
Policy loans.............................................. 1,247.2 1,231.3
Real estate to be disposed of (Note 14)................... 621.2 434.8
Real estate held for investment (Note 14)................. 495.9 1,070.4
Other invested assets..................................... 68.6 65.8
--------- ---------
10,150.9 10,150.6
--------- ---------
Cash and cash equivalents................................... 313.4 315.4
Accrued investment income................................... 182.8 162.7
Amounts due from reinsurers................................. 574.5 392.1
Premiums receivable......................................... 21.6 22.3
Deferred policy acquisition costs........................... 1,007.1 1,095.2
Other assets................................................ 243.0 205.9
Assets transferred in Group Pension Transaction (Note 11)... 5,714.9 5,627.6
Separate account assets..................................... 5,403.1 4,171.7
--------- ---------
Total assets...................................... $23,611.3 $22,143.5
========= =========
LIABILITIES AND EQUITY
Future policy benefits...................................... $ 7,469.4 $ 7,262.5
Policyholders' account balances............................. 2,352.8 2,552.1
Other policyholders' liabilities............................ 238.5 255.9
Amounts due to reinsurers................................... 104.3 110.6
Accounts payable and other liabilities...................... 539.0 487.2
Debt (Note 17):
Short-term............................................. -- 153.0
Long-term.............................................. 423.6 269.7
Current federal income taxes payable........................ 120.5 131.7
Deferred federal income taxes (Note 9)...................... 11.5 44.1
Liabilities transferred in Group Pension Transaction (Note
11)....................................................... 5,638.7 5,544.1
Separate account liabilities................................ 5,392.4 4,162.1
--------- ---------
Total liabilities................................. 22,290.7 20,973.0
Commitments and contingencies (Notes 10, 19, 21)
Retained earnings........................................... 1,202.5 1,085.4
Accumulated other comprehensive income...................... 118.1 85.1
--------- ---------
Total equity...................................... 1,320.6 1,170.5
--------- ---------
Total liabilities and equity...................... $23,611.3 $22,143.5
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 204
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Premiums.................................................. $ 838.6 $ 859.8 $ 875.9
Universal life and investment-type product policy fees.... 127.3 100.9 80.8
Net investment income (Note 12)........................... 733.0 751.6 728.8
Net realized gains on investments (Note 12)............... 72.1 75.9 16.2
Group Pension Profits (Note 11)........................... 60.0 59.5 61.7
Other income.............................................. 145.4 117.3 96.2
-------- -------- --------
1,976.4 1,965.0 1,859.6
-------- -------- --------
BENEFITS AND EXPENSES:
Benefits to policyholders................................. 840.1 872.2 883.6
Interest credited to policyholders' account balances...... 139.4 156.1 175.3
Amortization of deferred policy acquisition costs......... 181.2 158.2 132.6
Dividends to policyholders................................ 224.3 231.4 222.5
Other operating costs and expenses........................ 403.7 446.6 383.8
-------- -------- --------
1,788.7 1,864.5 1,797.8
-------- -------- --------
Income before income taxes and extraordinary item......... 187.7 100.5 61.8
Income tax expense........................................ 57.3 44.0 21.4
-------- -------- --------
Income before extraordinary item.......................... 130.4 56.5 40.4
Extraordinary item -- demutualization expenses, net (Note
5)...................................................... 13.3 0.0 0.0
-------- -------- --------
Net income................................................ 117.1 56.5 40.4
Other comprehensive income, net (Note 12)................. 33.0 (59.9) 191.5
-------- -------- --------
Comprehensive income...................................... $ 150.1 $ (3.4) $ 231.9
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 205
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
TOTAL EQUITY EARNINGS INCOME
------------ --------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, December 31, 1994........................... $ 942.0 $ 988.5 $(46.5)
Comprehensive income
Net income......................................... 40.4 40.4
Other comprehensive income:
Unrealized gains on investments, net of
unrealized losses, reclassification
adjustments, and taxes (Note 12).............. 191.5 191.5
-------- -------- ------
Comprehensive income................................. 231.9
--------
Balance, December 31, 1995........................... 1,173.9 1,028.9 145.0
Comprehensive income
Net income......................................... 56.5 56.5
Other comprehensive income:
Unrealized losses on investments, net of
unrealized gains, reclassification
adjustments, and taxes (Note 12).............. (59.9) (59.9)
-------- -------- ------
Comprehensive income................................. (3.4)
--------
Balance, December 31, 1996........................... 1,170.5 1,085.4 85.1
Comprehensive income
Net income......................................... 117.1 117.1
Other comprehensive income:
Unrealized gains on investments, net of
unrealized losses, reclassification
adjustments, and taxes (Note 12).............. 33.0 33.0
-------- -------- ------
Comprehensive income................................. 150.1
--------
Balance, December 31, 1997........................... $1,320.6 $1,202.5 $118.1
======== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 206
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (SEE NOTE 5):
Net income.................................................. $ 117.1 $ 56.5 $ 40.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest credited to policyholders' account balances...... 122.3 141.2 144.7
Universal life and investment-type product policy fee
income.................................................. (112.9) (98.4) (87.1)
Capitalization of deferred policy acquisition costs....... (141.0) (145.3) (154.3)
Amortization of deferred policy acquisition costs......... 181.2 158.2 132.6
Provision for depreciation and amortization............... 55.0 53.8 71.7
Provision for deferred federal income taxes............... (50.2) (32.6) (5.5)
Net realized gains on investments......................... (72.1) (75.9) (16.2)
Non-cash distributions from investments................... (31.1) (56.1) (39.2)
Change in other assets and accounts payable and other
liabilities............................................. (177.5) 57.0 124.5
Change in future policy benefits.......................... 206.9 191.7 193.5
Change in other policyholders' liabilities................ (17.4) 21.4 (1.1)
Change in current federal income taxes payable............ (11.2) 63.3 (85.3)
--------- --------- ---------
Net cash provided by operating activities................... 69.1 334.8 318.7
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayments of:
Fixed maturities.......................................... 952.0 690.1 823.2
Equity securities......................................... 246.7 170.7 71.0
Mortgage loans on real estate............................. 334.4 353.6 229.7
Real estate............................................... 430.8 442.4 303.1
Other invested assets..................................... 5.0 13.3 15.3
Acquisitions of investments:
Fixed maturities.......................................... (1,336.2) (1,200.8) (1,052.2)
Equity securities......................................... (211.5) (119.7) (92.2)
Mortgage loans on real estate............................. (183.1) (166.8) (141.1)
Real estate............................................... (52.7) (63.6) (79.3)
Other invested assets..................................... (1.7) (1.6) (1.6)
Policy loans, net......................................... (15.9) (12.7) 2.6
Other, net................................................ 10.1 0.1 (13.1)
Property & equipment, net................................. (35.8) (3.9) (3.0)
--------- --------- ---------
Net cash provided by investing activities................... 142.1 101.1 62.4
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt............................................ 115.0 0.0 76.3
Repayments of debt.......................................... (126.0) (174.1) (13.5)
Receipts from annuity and universal life policies credited
to policyholders' account balances........................ 1,226.4 1,204.9 1,066.9
Return of policyholders' account balances on annuity
policies and universal life policies...................... (1,435.2) (1,584.1) (1,350.0)
Other....................................................... 6.6 6.7 0.0
--------- --------- ---------
Net cash used in financing activities....................... (213.2) (546.6) (220.3)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (2.0) (110.7) 160.8
Cash and cash equivalents, beginning of year................ 315.4 426.1 265.3
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 313.4 $ 315.4 $ 426.1
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Income taxes................................................ $ 114.6 $ 13.6 $ 111.6
Interest.................................................... $ 20.8 $ 36.8 $ 36.1
</TABLE>
See accompanying notes to consolidated financial statements.
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
The Mutual Life Insurance Company of New York ("MONY" or the "Company") is
a New York domiciled mutual life insurance company primarily engaged in the
business of providing a wide range of life insurance, annuity, and investment
products to higher income individuals, particularly family builders,
pre-retirees and small business owners (see Note 6). The Company distributes its
products to such individuals primarily through its career agency sales force.
The Company 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. DEMUTUALIZATION:
On August 14, 1998 (the "Board Adoption Date"), the Board of Trustees of
MONY adopted, pursuant to the New York Insurance Law, a Plan of Reorganization
(as amended, the "Plan") pursuant to which MONY proposes to convert from a
mutual life insurance company to a stock life insurance company (such proposed
conversion, together with other matters addressed in the Plan, the
"Demutualization"). In connection with the effectiveness of the Plan, the
following will occur: (i) MONY will convert from a mutual life insurance company
to a stock life insurance company, which will be named MONY Life Insurance
Company, and will become a wholly owned subsidiary of The MONY Group Inc. (the
"Holding Company"), (ii) all policyholders' membership interests will be
extinguished and in exchange therefor policyholders who own a Policy (as defined
in the Plan) that was in force on the Board Adoption Date and which remains in
force on the effective date of the Demutualization (the "Plan Effective Date")
("Eligible Policyholders") will receive shares of common stock of the Holding
Company ("Common Stock") or, in certain circumstances, cash or policy credits in
the form of an increase in accumulation account value, dividend deposits or
dividend additions, additional death benefits or an extension of an expiry date
with respect to such policies (hereinafter, "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
("Participating Policyholders") will receive additional shares of common stock
or, in certain circumstances, cash or Policy Credits, (iii) a closed block (the
"Closed Block") of certain individual MONY participating policies in classes for
which MONY had a current payable dividend scale (such Policies constitute the
"Closed Block Business") will be created, and assets will be 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 and (iv)
shares of Common Stock may be registered under the Securities Act of 1933 and
offered to the public in an initial public offering if market conditions are
appropriate.
3. INVESTMENT AGREEMENT:
On December 30, 1997, affiliates of Goldman, Sachs & Co. (the "Investors"),
which is one of the underwriters for the Holding Company's initial public
offering, entered into an investment agreement with MONY (the "Investment
Agreement"), pursuant to which: (i) the Investors purchased, for $115.0 million
(the "Consideration"), Surplus Notes issued by MONY (the "MONY Notes") with an
aggregate principal amount equal to the Consideration (see Note 17), and (ii)
the Investors purchased, for $10.0 million, warrants (the "Warrants") to
purchase from the Holding Company (after giving effect to the initial public
offering) in the aggregate 7.0% of the fully diluted Common Stock as of the date
the Plan becomes effective or, if later, the first date following such
effectiveness on which shares of Common Stock are first issued to Eligible
Policyholders (the "Demutualization Date").
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price payable for each share of the Common Stock issuable upon
exercise of Warrants initially is (a) in the event the initial public offering
occurs prior to, on or within five trading days after the Demutualization Date,
the initial public offering price of the Common Stock, 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 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 or (b) in the event the initial public offering does not occur
prior to, on or within five trading days after the Demutualization Date, the
lesser of (i) the average of the daily closing prices of the Common Stock for
the first 20 trading days following Demutualization and (ii) 70% of the book
value per share of the Common Stock as of the Demutualization, determined in
accordance with generally accepted accounting principles ("GAAP"). 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.
In addition, under the terms of the Investment Agreement, the Investors
agreed, upon MONY's request, if made at any time up to 90 days after the
Demutualization Date and subject to certain conditions precedent, to purchase an
aggregate of 1.0 million shares of convertible preferred stock of the Holding
Company (the "Convertible Preferred Stock") for a total purchase price of $100.0
million. The Convertible Preferred Stock would be convertible, at the option of
the holder at any time, into Common Stock at a conversion price equal to the
initial exercise price of the Warrants and would be subject to certain
anti-dilution adjustments. The Convertible Preferred Stock would be mandatorily
redeemable on the earlier of (i) the tenth anniversary of the issuance date of
such stock or (ii) December 30, 2013, at a price equal to the liquidation
preference of such stock plus accumulated and unpaid dividends at the redemption
date (the "Redemption Price"). The Redemption Price would be payable in cash or
Common Stock. If the Holding Company elects to issue Common Stock in
satisfaction of the Redemption Price, the number of shares of Common Stock to be
issued would be determined by dividing a number that is equal to 110 percent of
the Redemption Price by the value of the Common Stock, which for this purpose
would be equal to the average of the closing price of the Common Stock for the
20 trading days immediately preceding the redemption date. In addition, under
certain circumstances the Holding Company, at its option, could redeem the
Convertible Preferred Stock after the third anniversary of the issuance of such
stock.
4. THE CLOSED BLOCK:
The Closed Block is a mechanism described in Section 7312 of the New York
Insurance Law. Under the Plan, the Company will establish and operate the Closed
Block as a closed block of participating business for the benefit, for dividend
purposes only, of the Policies included therein. The Company will allocate to
the Closed Block an amount of assets expected to produce cash flows which,
together with anticipated revenues from the Closed Block Business, are
reasonably expected to be sufficient to support the Closed Block Business,
including but not limited to, provision for payment of claims and surrender
benefits, certain expenses and taxes, and for continuation of current payable
dividend scales, assuming the experience underlying such dividend scales
continues, and for appropriate adjustments in such scales if the experience
changes. 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
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 gain 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 11. 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
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Block will be reported in the Company's balance sheet separately under the
captions "Closed Block assets" and "Closed Block liabilities", respectively.
The pre-tax Contribution from the Closed Block includes only those
revenues, benefit payments, dividends, premium taxes, state guaranty fund
assessments, and investment expenses considered in funding the Closed Block.
However, many expenses associated with operating the Closed Block and
administering the Policies included therein will be excluded from and,
accordingly, not funded in the Closed Block. These expenses will be reported in
the Company's statement of operations, outside of the Contribution from the
Closed Block, consistent with how they are funded. Such expenses will be
reported in the separate line items to which they apply based on the nature of
such expenses. Management expects that such expenses will be included and
reported as Other Operating Costs and Expenses in the Company's statement of
operations, unless any individual expense item is considered to be significant,
in which case such item or items will be reported separately in the Company's
statement of operations. Federal income taxes applicable to the Closed Block,
which will be funded in the Closed Block, will be reflected as a component of
federal income tax expense in the Company's statement of operations. Since many
expenses related to the Closed Block are funded outside the Closed Block,
operating costs and expenses outside the Closed Block may be disproportionate to
the level of business outside the Closed Block.
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with GAAP. Prior to 1996, the Company, as a mutual life insurance
company, prepared its financial statements in conformity with accounting
practices prescribed or permitted by the New York State Insurance Department
("SAP"), which accounting practices were considered to be GAAP for mutual life
insurance companies. As of January 1, 1996, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 40, Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises (the "Interpretation"), and Statement of Financial Accounting
Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long Duration Participating
Policies (the "Standard"). The Interpretation and the Standard require mutual
life insurance companies to adopt all applicable authoritative GAAP
pronouncements in their general purpose financial statements. Accordingly, the
initial effect of applying the Interpretation and the Standard has been reported
retroactively through the restatement of previously issued financial statements
presented herein for comparative purposes (see Note 20).
During 1997, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which were issued by the FASB in June of 1997. SFAS No. 130
established standards for reporting and display of comprehensive income and its
components in general purpose financial statements. SFAS No. 131 established
standards for the way that public business enterprises report information about
operating segments in their annual and interim financial statements. SFAS No.
131 also established standards for disclosures about an enterprise's products
and services, geographic areas, and major customers. All periods presented
herein reflect the provisions of both SFAS No. 130 and SFAS No. 131.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from
F-10
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
those estimates. The most significant estimates made in conjunction with the
preparation of the Company's financial statements include those used in
determining (i) deferred policy acquisition costs, (ii) the liability for future
policy benefits, and (iii) valuation allowances for mortgage loans and real
estate to be disposed of, and impairment writedowns for real estate held for
investment.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned life insurance and non-insurance subsidiaries, and
those partnerships in which the Company has a majority voting interest. All
significant intercompany accounts and transactions have been eliminated.
Minority interest related to partnerships that are consolidated, which is
included in Accounts Payable and Other Liabilities, amounted to $48.7 million
and $47.1 million at December 31, 1997 and 1996, respectively.
VALUATION OF INVESTMENTS AND REALIZED GAINS AND LOSSES
All of the Company's fixed maturity securities are classified as
available-for-sale and are reported at estimated fair value; except that, prior
to 1997, the Company's investment in the Series A Notes was classified as
held-to-maturity (see Note 11). The Company's equity securities are comprised of
investments in common stocks and limited partnership interests. The Company's
investments in common stocks are classified as available-for-sale and are
reported at estimated fair value. The Company's investments in limited
partnership interests, substantially all of which represent an ownership
interest between 3% and 50%, are accounted for in accordance with the equity
method of accounting. Unrealized gains and losses on fixed maturity securities
and common stocks are reported as a separate component of other comprehensive
income, net of deferred income taxes and an adjustment for the effect on
deferred policy acquisition costs that would have occurred if such gains and
losses had been realized. The cost of fixed maturity securities and common stock
is adjusted for impairments in value deemed to be other than temporary. These
adjustments are reflected as realized losses on investments. Realized gains and
losses on sales of investments are determined on the basis of specific
identification.
Mortgage loans on real estate are stated at their unpaid principal
balances, net of valuation allowances. Valuation allowances are established for
the excess of the carrying value of a mortgage loan over its estimated fair
value when the loan is considered to be impaired. Mortgage loans are considered
to be impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Estimated fair value is based on either
the present value of expected future cash flows discounted at the loan's
original effective interest rate, or the loan's observable market price (if
considered to be a practical expedient), or the fair value of the collateral if
the loan is collateral dependent and if foreclosure of the loan is considered
probable. The provision for loss is reported as a realized loss on investment.
Loans in foreclosure and loans considered to be impaired, other than
restructured loans, are placed on non-accrual status. Interest received on
non-accrual status mortgage loans is included in investment income in the period
received. Interest income on restructured mortgage loans is accrued at the
restructured loans' interest rate.
Real estate held for investment, as well as related improvements, are
generally stated at cost less depreciation. Depreciation is determined using the
straight-line method over the estimated useful life of the asset (which may
range from 5 to 40 years). Cost is adjusted for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. In performing the review for recoverability, management
estimates the future cash flows expected from real estate investments including
the proceeds on disposition. If the sum
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<PAGE> 212
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the expected undiscounted future cash flows is less than the carrying amount
of the real estate, an impairment loss is recognized. Impairment losses are
based on the estimated fair value of the real estate, which is generally
computed using the present value of expected future cash flows from the real
estate discounted at a rate commensurate with the underlying risks. Real estate
acquired in satisfaction of debt is recorded at estimated fair value at the date
of foreclosure. Real estate that management intends to sell is classified as "to
be disposed of". Real estate to be disposed of is reported at the lower of its
current carrying value or estimated fair value less estimated sales costs.
Changes in reported values relating to real estate to be disposed of and
impairments of real estate held for investment are reported as realized gains or
losses on investments.
Policy loans are carried at their unpaid principal balances.
Cash and cash equivalents include cash on hand, amounts due from banks and
highly liquid debt instruments with an original maturity of three months or
less.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS
Premiums from participating and non-participating traditional life, health
and annuity policies with life contingencies are recognized as premium income
when due. Benefits and expenses are matched with such income so as to result in
the recognition of profits over the life of the contracts. This match is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenue from these types of
products consist of amounts assessed during the period against policyholders'
account balances for policy administration charges, cost of insurance and
surrender charges. Policy benefits charged to expense include benefit claims
incurred in the period in excess of the related policyholders' account balance.
DEFERRED POLICY ACQUISITION COSTS ("DAC")
The costs of acquiring new business, principally commissions, underwriting,
agency, and policy issue expenses, all of which vary with and are primarily
related to the production of new business, are deferred.
For participating traditional life policies, DAC is amortized over the
expected life of the contracts (30 years) as a constant percentage based on the
present value of estimated gross margins expected to be realized over the life
of the contracts using the expected investment yield. At December 31, 1997, the
expected investment yield was 7.25 percent for the years from 1998 to 2002, and
7.40 percent for the years thereafter. Estimated gross margins include
anticipated premiums and investment results less claims and administrative
expenses, changes in the net level premium reserve and expected annual
policyholder dividends.
For universal life products and investment-type products, DAC is amortized
over the expected life of the contracts (ranging from 15 to 30 years) as a
constant percentage based on the present value of estimated gross profits
expected to be realized over the life of the contracts using the contract rate.
The contract rates range from 7.50 percent to 8.50 percent. Estimated gross
profits arise principally from investment results, mortality and expense margins
and surrender charges.
DAC is subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each accounting period. The effect on the
amortization of DAC of revisions in estimated experience is reflected in
earnings in the period such estimates are revised. In addition, the effect on
the DAC asset that would result from the realization of unrealized gains
(losses) is recognized through an offset to Other Comprehensive Income as of the
balance sheet date.
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUTURE POLICY BENEFITS AND POLICYHOLDERS' ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life
policies are calculated using a net level premium method on the basis of
actuarial assumptions equal to guaranteed mortality and dividend fund interest
rates. The liability for annual dividends represents the accrual of annual
dividends earned. Dividend fund interest assumptions range from 2.0 percent to
5.5 percent.
Policyholders' account balances for universal life and investment-type
contracts represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals. The weighted
average interest crediting rate for universal life products was approximately
6.1 percent, 5.9 percent, and 6.2 percent for the years ended December 31, 1997,
1996, and 1995, respectively. The weighted average interest crediting rate for
investment-type products was approximately 5.6 percent for each of the years
ended December 31, 1997, 1996, and 1995, respectively.
DIVIDENDS TO POLICYHOLDERS
Dividends to policyholders are determined annually by the Board of
Trustees. The aggregate amount of policyholders' dividends is related to actual
interest, mortality, morbidity and expense experience for the year, as well as
management's judgment as to the appropriate level of statutory surplus to be
retained by the Company.
PARTICIPATING BUSINESS
At December 31, 1997 and 1996, participating business represented
approximately 81.0% and 81.6% of the Company's life insurance in force, and
88.4% and 88.6% of the number of life insurance policies in force, respectively.
For each of the years ended December 31, 1997 and 1996, participating business
represented approximately 99.9% of life insurance premiums.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, which are reported in Other
Assets, are stated at cost less accumulated depreciation and amortization.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets which generally range from 3 to 40 years.
Amortization of leasehold improvements is determined using the straight-line
method over the lesser of the unexpired lease term or the estimated useful life
of the improvement.
Accumulated depreciation of property and equipment and amortization of
leasehold improvements was $58.5 million and $50.5 million at December 31, 1997
and 1996, respectively. Related depreciation and amortization expense was $8.8
million, $5.9 million and $6.1 million for the years ended December 31, 1997,
1996, and 1995, respectively.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its life
and non-life affiliates. Deferred income tax assets and liabilities are
recognized based on the difference between financial statement carrying amounts
and income tax bases of assets and liabilities using enacted income tax rates
and laws.
REINSURANCE
The Company has reinsured certain of its life insurance and investment
contracts with other insurance companies under various agreements. Amounts due
from reinsurers are estimated based on assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts.
Policy and contract liabilities are reported gross of reserve credits. Gains on
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reinsurance are deferred and amortized into income over the remaining life of
the underlying reinsured contracts.
In determining whether a reinsurance contract qualifies for reinsurance
accounting, SFAS No. 113 requires that there be a "reasonable possibility" that
the reinsurer may realize a "significant loss" from assuming insurance risk
under the contract. In making this assessment, the Company projects the results
of the policies reinsured under the contract under various scenarios and
assesses the probability of such results actually occurring. The projected
results represent the present value of all the cash flows under the reinsurance
contract. The Company generally defines a "reasonable possibility" as having a
probability of at least 10%. In assessing whether the projected results of the
reinsured business constitute a "significant loss", the Company considers: (i)
the ratio of the aggregate projected loss, discounted at an appropriate rate of
interest (the "aggregate projected loss"), to an estimate of the reinsurer's
investment in the contract, as hereafter defined, and (ii) the ratio of the
aggregate projected loss to an estimate of the total premiums to be received by
the reinsurer under the contract discounted at an appropriate rate of interest.
The reinsurer's investment in a reinsurance contract consists of amounts
paid to the ceding company at the inception of the contract (e.g. expense
allowances and the excess of liabilities assumed by the reinsurer over the
assets transferred to the reinsurer under the contract) plus the amount of
capital required to support such business consistent with prudent business
practices, regulatory requirements, and the reinsurer's credit rating. The
Company estimates the capital required to support such business based on what it
considers to be an appropriate level of risk-based capital in light of
regulatory requirements and prudent business practices.
SEPARATE ACCOUNTS
Separate accounts are established in conformity with insurance laws and are
generally not chargeable with liabilities that arise from any other business of
the Company. Separate account assets are subject to general account claims only
to the extent that the value of such assets exceeds the separate account
liabilities. Investments held in separate accounts and liabilities of the
separate accounts are reported separately as assets and liabilities.
Substantially all separate account assets are reported at estimated fair value.
Investment income and gains or losses on the investments of separate accounts
accrue directly to contractholders and, accordingly, are not reflected in the
Company's consolidated statements of income and cash flows. Fees charged to the
separate accounts by the Company (including mortality charges, policy
administration fees and surrender charges) are reflected in the Company's
revenues.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- NON-CASH TRANSACTIONS
For the years ended December 31, 1997, 1996, and 1995, respectively, real
estate of $14.4 million, $29.1 million, and $56.4 million was acquired in
satisfaction of debt. At December 31, 1997 and 1996, the Company owned real
estate acquired in satisfaction of debt of $326.1 million and $525.7 million,
respectively. Other non-cash transactions, which are reflected in the statement
of cash flows as a reconciling item from net income to net cash provided by
operating activities, consisted primarily of stock distributions from the
Company's partnership investments and payment-in-kind for interest due on
certain fixed maturity securities.
EXTRAORDINARY ITEM -- DEMUTUALIZATION EXPENSES
The accompanying consolidated statements of income and comprehensive income
reflect extraordinary charges of $13.3 million (net of taxes) for the year ended
December 31, 1997 relating to costs associated with the Demutualization.
Management estimates that approximately $21.4
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THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million (net of taxes) relating to costs associated with the Plan will be
incurred and expensed subsequent to December 31, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In January 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments". SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty fund and
other insurance-related assessments and when it may recognize an asset for a
portion or all of the assessment liability or paid assessment that can be
recovered through premium tax offsets or policy surcharges. SOP 97-3 is
effective for fiscal years beginning after December 15, 1998. Adoption of SOP
97-3 is not expected to have a material effect on the Company's financial
condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 revises
disclosures about pension and other postretirement benefit plans. However, it
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. Adoption of SFAS
No.132 will not have any effect on the Company's financial condition or results
of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance for
determining when an entity should capitalize or expense external and internal
costs of computer software developed or obtained for internal use. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. Adoption of SOP
98-1 is not expected to have a material effect on the Company's financial
condition or results of operations.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires all derivatives to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based on the hedge relationship that exists, if there
is one. Changes in the fair value of derivatives that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133, are
required to be reported in earnings. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a
material effect on the Company's financial condition or results of operations.
6. SEGMENT INFORMATION:
The Company's business activities consist of the following: protection
product operations, accumulation product operations, mutual fund operations,
securities broker-dealer operations, insurance brokerage operations, and certain
insurance lines of business no longer written by the Company (the "run-off
businesses"). These business activities represent the Company's operating
segments. Except as discussed below, these segments are managed separately
because they either provide different products or services, are subject to
different regulation, require different strategies, or have different technology
requirements.
Management considers the Company's mutual fund operations to be an integral
part of the products offered by the Company's accumulation products segment,
since substantially all the mutual funds sold by the Company are offered
through, and in conjunction with, the products marketed by the accumulation
products segment. Accordingly, for management purposes (including, performance
assessment and making decisions regarding the allocation of resources), the
Company aggregates its mutual fund operations with its accumulation products
segment.
F-15
<PAGE> 216
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO 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, as well as the Group Pension Profits (see Note 11), 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 (see Note 11).
Set forth in the table below is certain financial information with respect
to the Company's operating segments as of and for each of the years ended
December 31, 1997, 1996 and 1995, as well as amounts not allocated to the
segments. Except for various allocations discussed below, the accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates the performance of each
operating segment based on profit or loss from operations before income taxes
and nonrecurring items (e.g. items of an unusual or infrequent nature). The
Company does not allocate 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 RBC level (see Note 20). 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 (see Note 5).
Amounts reported as "unallocated amounts" in the table below primarily
relate to: (i) contracts issued by MONY relating to its employee benefit plans,
(ii) expenses incurred in 1996 and 1995 relating to settlements and reserves for
various lawsuits and legal disputes, including lawsuits against the Company
alleging market conduct improprieties (see Note 19), and (iii) expenses incurred
in 1996 in connection with special termination benefits paid to certain
employees under an early retirement program (see Note 8).
F-16
<PAGE> 217
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------------- ---------
($ IN MILLIONS)
<S> <C> <C> <C>
Premiums:
Protection Products................................ $ 817.0 $ 837.4 $ 845.1
Accumulation Products.............................. 5.0 4.2 9.8
Other Products..................................... 16.6 18.2 21.0
--------- --------- ---------
$ 838.6 $ 859.8 $ 875.9
========= ========= =========
Universal life and investment-type product policy
fees:
Protection Products................................ $ 74.9 $ 63.4 $ 53.9
Accumulation Products.............................. 50.9 36.6 24.8
Other Products..................................... 1.5 0.9 2.1
--------- --------- ---------
$ 127.3 $ 100.9 $ 80.8
========= ========= =========
Net investment income and net realized gains (losses)
on investments:
Protection Products................................ $ 611.9 $ 605.3 $ 501.5
Accumulation Products.............................. 131.4 144.0 153.3
Other Products..................................... 59.9 74.6 85.4
Unallocated amounts................................ 1.9 3.6 4.8
--------- --------- ---------
$ 805.1 $ 827.5 $ 745.0
========= ========= =========
Other income:
Protection Products(1)............................. $ 94.9 $ 87.7 $ 85.0
Accumulation Products.............................. 52.1 32.2 26.0
Other Products..................................... 53.1 52.2 42.0
Unallocated amounts................................ 5.3 4.7 4.9
--------- --------- ---------
$ 205.4 $ 176.8 $ 157.9
========= ========= =========
Amortization of deferred policy acquisition costs:
Protection Products................................ $ 146.8 $ 135.0 $ 118.7
Accumulation Products.............................. 34.4 23.2 13.9
Other Products..................................... 0.0 0.0 0.0
--------- --------- ---------
$ 181.2 $ 158.2 $ 132.6
========= ========= =========
Benefits to policyholders:(2)
Protection Products................................ $ 834.3 $ 863.2 $ 867.9
Accumulation Products.............................. 92.6 102.8 116.3
Other Products..................................... 45.4 54.1 65.0
Unallocated amounts................................ 7.2 8.2 9.7
--------- --------- ---------
$ 979.5 $ 1,028.3 $ 1,058.9
========= ========= =========
Other operating costs and expenses:
Protection Products................................ $ 267.6 $ 267.1 $ 252.0
Accumulation Products.............................. 66.3 52.8 47.2
Other Products..................................... 66.2 81.9 74.7
Unallocated amounts................................ 3.6 44.8 9.9
--------- --------- ---------
$ 403.7 $ 446.6 $ 383.8
========= ========= =========
</TABLE>
F-17
<PAGE> 218
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------------- ---------
($ IN MILLIONS)
<S> <C> <C> <C>
Income before income taxes:
Protection Products................................ $ 129.0 $ 101.2 $ 28.7
Accumulation Products.............................. 44.1 35.9 34.2
Other Products..................................... 18.3 8.1 8.9
Unallocated amounts................................ (3.7) (44.7) (10.0)
--------- --------- ---------
$ 187.7 $ 100.5 $ 61.8
========= ========= =========
Assets:
Protection Products(3)............................. $15,776.5 $15,158.5
Accumulation Products.............................. 5,757.9 4,747.2
Other Products..................................... 1,234.2 1,417.1
Unallocated amounts................................ 842.7 820.7
--------- ---------
$23,611.3 $22,143.5
========= =========
Deferred policy acquisition costs:
Protection Products................................ $ 874.1 $ 961.8
Accumulation Products.............................. 133.0 133.4
Other Products..................................... 0.0 0.0
--------- ---------
$ 1,007.1 $ 1,095.2
========= =========
Policyholders' liabilities:
Protection Products(4)............................. $10,105.7 $ 9,996.2
Accumulation Products.............................. 1,416.1 1,601.7
Other Products..................................... 513.4 542.4
Unallocated amounts................................ 16.5 88.3
--------- ---------
$12,051.7 $12,228.6
========= =========
Separate account liabilities:(5)
Protection Products(6)............................. $ 3,720.1 $ 3,393.0
Accumulation Products.............................. 4,002.6 2,851.4
Other Products..................................... 547.7 625.6
Unallocated amounts................................ 736.0 650.4
--------- ---------
$ 9,006.4 $ 7,520.4
========= =========
</TABLE>
- ---------------
(1) Includes Group Pension Profits of $60.0 million, $59.5 million and $61.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.
See Note 11.
(2) Includes interest credited to policyholders' account balances.
(3) Includes assets transferred in the Group Pension Transaction of $5,714.9
million and $5,627.6 million as of December 31, 1997 and 1996, respectively.
(4) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,991.0 million and $2,158.1 million as of December 31, 1997
and 1996, respectively.
(5) Each segment includes separate account assets in an amount not less than the
corresponding liability reported.
(6) Includes separate account liabilities transferred in the Group Pension
Transaction of $3,614.0 million and $3,358.3 million as of December 31, 1997
and 1996, respectively.
F-18
<PAGE> 219
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of the Company's revenues are derived in the United
States. Revenue derived from outside the United States is not material and
revenue derived from any single customer does not exceed 10 percent of total
consolidated revenues.
Following is a summary of revenues by product for the years ended December
31, 1997, 1996, and 1995 (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
PREMIUMS:
Individual life........................................ $742.4 $762.7 $771.0
Disability income insurance............................ 74.6 74.8 74.1
Group insurance........................................ 16.6 18.1 21.0
Other.................................................. 5.0 4.2 9.8
------ ------ ------
Total........................................ $838.6 $859.8 $875.9
====== ====== ======
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES:
Universal life......................................... $ 48.3 $ 45.1 $ 43.7
Variable universal life................................ 17.9 8.9 1.9
Group universal life................................... 8.7 9.4 8.3
Individual variable annuities.......................... 50.0 35.2 22.8
Individual fixed annuities............................. 2.4 2.3 4.1
------ ------ ------
Total........................................ $127.3 $100.9 $ 80.8
====== ====== ======
</TABLE>
7. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs deferred and amortized in 1997, 1996 and 1995 are
as follows (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year........................ $1,095.2 $1,047.1 $1,241.0
Costs deferred during the year.................... 141.0 145.3 154.3
Amortized to expense during the year.............. (181.2) (158.2) (132.6)
Effect on DAC from unrealized gains (losses) (see
Note 5)......................................... (47.9) 61.0 (215.6)
-------- -------- --------
Balance, end of year.............................. $1,007.1 $1,095.2 $1,047.1
======== ======== ========
</TABLE>
8. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS:
EMPLOYEE AND FIELD UNDERWRITER RETIREMENT PLANS
The Company has a qualified pension plan covering substantially all of its
salaried employees. The provisions of the plan provide both (a) defined benefit
accruals based on (i) years of service, (ii) the employee's final average annual
compensation and (iii) wage bases or benefits under Social Security and (b)
defined contribution accruals based on a Company matching contribution equal to
100% of the employee's elective deferrals under the incentive savings plan for
employees up to 3% of the employee's eligible compensation and an additional 2%
of eligible compensation for each active participant. The Company's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income taxes. No contributions were made in the current year or prior
year because the plan met the full funding requirements under Section 412 of the
Internal Revenue Code.
F-19
<PAGE> 220
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sponsors a non-qualified defined benefit pension plan,
which provides benefits in excess of Internal Revenue Service limits to certain
employees. The benefits are based on years of service and the employee's final
average annual compensation. Pension benefits are paid from the Company's
general account.
Components of net periodic pension cost for the qualified and non-qualified
plans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................... $ 15.5 $ 16.5 $ 15.1
Interest cost on projected benefit obligations......... 34.3 29.7 31.7
Special termination benefits........................... 14.0
Actual return on assets................................ (66.4) (41.2) (73.3)
Net amortization and deferrals......................... 22.1 (1.8) 35.2
------ ------ ------
Net periodic pension cost.............................. $ 5.5 $ 17.2 $ 8.7
====== ====== ======
</TABLE>
In April 1996, the Company offered special benefits to its employees who
elected by May 31, 1996, voluntary termination of employment (special
termination benefits). The special termination benefits represented benefits in
excess of that which would normally be due to employees electing to retire
early. These excess benefits were calculated based on grants of additional years
of service and age used in the benefit calculation. All of the special
termination benefits relating to the Company's qualified plan, which aggregated
$10.6 million, were paid from the Plan's assets. All the benefits paid relating
to the Company's non-qualified plan, which aggregated $3.4 million, were paid
directly from the Company's assets. As a result of the aforementioned early
retirement offer, the Company recorded a charge of $14.0 million in 1996 and
reflected this amount in Other Operating Costs and Expenses.
The funded status of the qualified pension plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
($ IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested.................................................... $304.4 $274.5
Non-vested................................................ 1.9 1.7
------ ------
Accumulated benefit obligation............................ 306.3 276.2
Effect of anticipated future compensation levels.......... 26.9 22.2
------ ------
Projected benefit obligation.............................. 333.2 298.4
Plan assets at fair value................................. 432.5 393.4
------ ------
Plan assets in excess of projected benefit obligation..... 99.3 95.0
Unrecognized prior service cost (benefit)................. 10.7 12.1
Unrecognized net gain from past experience................ 11.0 14.4
Unrecognized net asset at transition...................... (31.6) (39.4)
------ ------
Prepaid pension cost at December 31,...................... $ 89.4 $ 82.1
====== ======
</TABLE>
The assets of the qualified pension plan are primarily invested in MONY
Pooled Accounts which include common stock, real estate, private placement debt
securities and bonds. Benefits of $24.2
F-20
<PAGE> 221
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million, $30.7 million and $22.7 million were paid by this plan for the years
ended December 31, 1997, 1996, and 1995, respectively. The weighted average
assumed discount rate and the rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit obligations
at December 31, 1997 were 6.75% and 5.0%, respectively (7.5% and 5.0% in 1996,
respectively). The expected weighted average long-term rate of return on assets
for the retirement plan was 10% as of both January 1, 1997 and 1996.
The actuarial present value of obligations and the accrued pension expense
of the non-qualified pension plan are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
($ IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested.................................................... $ 88.2 $ 76.1
Non-vested................................................ 0.0 0.0
------ ------
Accumulated benefit obligation............................ 88.2 76.1
Effect of anticipated future compensation levels.......... 11.6 11.3
------ ------
Projected benefit obligation.............................. 99.8 87.4
Unrecognized prior service cost........................... 0.0 0.0
Unrecognized net gain from past experience................ (14.5) (8.9)
Unrecognized net obligation at transition................. (4.3) (4.8)
------ ------
Accrued pension cost at December 31....................... 81.0 73.7
Additional minimum liability.............................. 7.2 2.4
Intangible asset.......................................... (4.3) (2.4)
------ ------
Total accrued pension expense..................... $ 83.9 $ 73.7
====== ======
</TABLE>
The weighted average assumed discount rate and the rate of increase in
future compensation levels used in determining the actuarial present value of
projected benefit obligations at December 31, 1997 were approximately 6.75% and
5.0% (7.5% and 5.0% at December 31, 1996), respectively.
The Company also has a qualified money purchase pension plan covering
substantially all career field underwriters. Company contributions of 5% of
earnings plus an additional 2% of such earnings in excess of the social security
wage base are made each year. In addition, after-tax voluntary field underwriter
contributions of up to 10% of earnings are allowed. At December 31, 1997 and
1996, the fair value of plan assets was $211.0 million and $191.1 million,
respectively. For the years ended December 31, 1997, 1996, and 1995, the Company
contributed $3.3 million, $3.7 million and $4.7 million to the plan,
respectively, which amounts are reflected in Other Operating Costs and Expenses.
The Company has incentive savings plans in which substantially all
employees and career field underwriters are eligible to participate. The Company
matches field underwriter contributions up to 2% of eligible compensation and
may also make an additional profit sharing contribution for non-officer
employees.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for
retired employees and field underwriters. At December 31, 1997 and 1996, the
unamortized postretirement benefit
F-21
<PAGE> 222
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transition obligation was approximately $45.8 million and $48.9 million,
respectively. The Company amortizes this transition obligation over a period of
twenty years. The amount of transition obligation amortized approximated $3.1
million for each year in the three year period ended December 31, 1997.
Following is an analysis of the unfunded accumulated postretirement benefit
obligation as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
($ IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $ 82.4 $ 71.5
Active participants....................................... 18.7 21.9
------ ------
Accumulated postretirement benefit obligation............. 101.1 93.4
Unrecognized net loss..................................... (14.3) (6.9)
Unrecognized transition obligation........................ (45.8) (48.9)
------ ------
Net postretirement benefit liability...................... $ 41.0 $ 37.6
====== ======
</TABLE>
Net periodic postretirement benefit cost for 1997, 1996 and 1995,
respectively, included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................... $ 1.0 $ 1.8 $ 1.4
Interest cost.............................................. 6.7 6.4 6.1
Amortization of unrecognized transition obligation......... 3.1 3.1 3.1
Net amortization and deferral.............................. 0.0 0.4 (0.1)
----- ----- -----
Net periodic postretirement benefit cost................... $10.8 $11.7 $10.5
===== ===== =====
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 6.75% and 7.5% in 1997 and 1996, respectively, and the
health care cost trend rate was 11% graded to 6% by 2010.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, an increase in the assumed health care cost trend rates
of one percentage point in each year would increase the estimated postretirement
benefit obligation as of December 31, 1997 by $0.8 million and the estimated
service cost and interest cost components of net periodic postretirement benefit
cost for 1997 by $0.1 million.
F-22
<PAGE> 223
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FEDERAL INCOME TAXES:
The Company files a consolidated federal income tax return with its life
insurance company and non-life insurance company affiliates.
Federal income taxes have been calculated in accordance with the provisions
of the Internal Revenue Code of 1986, as amended. A summary of the Federal
income tax expense (benefit) is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
Federal income tax (benefit) expense:
Current................................................ $104.1 $76.6 $26.9
Deferred............................................... (46.8) (32.6) (5.5)
------ ----- -----
Total.................................................... $ 57.3 $44.0 $21.4
====== ===== =====
</TABLE>
Federal income taxes reported in the consolidated statements of income are
different from the amounts determined by multiplying the earnings before federal
income taxes by the statutory federal income tax rate of 35%. The sources of the
difference and the tax effects of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
Tax at statutory rate...................................... $65.7 $35.2 $21.7
Differential earnings amount............................... (5.8) 12.8 0.0
Dividends received deduction............................... (0.5) (0.5) (1.4)
Other...................................................... (2.1) (3.5) 1.1
----- ----- -----
Provision for income taxes................................. $57.3 $44.0 $21.4
===== ===== =====
</TABLE>
The Company's federal income tax returns for years through 1991 have been
examined by the Internal Revenue Service (IRS). No material adjustments were
proposed by the IRS as a result of these examinations. In the opinion of
management, adequate provision has been made for any additional taxes which may
become due with respect to open years.
F-23
<PAGE> 224
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax liabilities and assets at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
($ IN MILLIONS)
<S> <C> <C>
Deferred policy acquisition costs........................... $251.4 $291.0
Fixed maturities and equity securities(1)................... 86.7 72.4
Other (net)................................................. 6.4 4.8
------ ------
Total deferred tax liabilities.............................. 344.5 368.2
------ ------
Policyholder and separate account liabilities............... 120.9 103.4
Deposit funds............................................... 55.1 68.3
Accrued expenses............................................ 55.2 70.9
Deferred compensation and benefits.......................... 8.6 7.9
Policyholder dividends...................................... 39.1 41.6
Real estate and mortgages................................... 54.1 30.4
Minimum tax credit.......................................... 0.0 1.6
------ ------
Total deferred tax assets................................... 333.0 324.1
------ ------
Net deferred tax liability.................................. $ 11.5 $ 44.1
====== ======
</TABLE>
- ---------------
(1) Includes $20.9 million and $43.4 million at December 31, 1997 and 1996 of
deferred taxes relating to net unrealized gains on fixed maturity securities
in the AEGON Portfolio (see Note 11).
The Company is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that it will realize the
benefit of the deferred tax assets and, therefore, no such valuation allowance
has been established.
10. LEASES:
The Company has entered into various operating lease agreements for office
space, furniture and equipment. These leases have remaining non-cancelable lease
terms in excess of one year. Total rental expense for these operating leases
amounted to $14.5 million in 1997, $15.1 million in 1996 and $18.5 million in
1995. The future minimum rental obligations under these leases at December 31,
1997 are as follows ($ in millions):
<TABLE>
<S> <C>
1998........................................................ $ 8.5
1999........................................................ 8.5
2000........................................................ 8.3
2001........................................................ 7.5
2002........................................................ 8.0
Later years................................................. 90.5
------
$131.3
======
</TABLE>
11. 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
F-24
<PAGE> 225
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 percent per annum and the
Series B Notes pay interest at 6.24 percent per annum. Both the Series A Notes
and the Series B Notes mature on December 31, 2002. MONY's investment in the
Series A Notes was intended to provide AEGON with the funding necessary to
capitalize AUSA.
The Company entered into the Group Pension Transaction due to downgrades of
its financial strength ratings resulting from the deterioration of its financial
position during the period from 1989 through the early 1990s. The Company's
group pension business was considered to be particularly sensitive to heightened
withdrawal and surrender activity due to requirements of many pension fund
advisors that insurance carriers have a minimum financial strength rating
consistent with a "AA" claims-paying ability rating from Standard & Poor's. In
light of the downgrades and certain highly publicized failures of life insurance
companies in the 1990s resulting from abnormally high withdrawal and surrender
activity, management became concerned with respect to the Company's ability to
sustain inordinate amounts of such activity and entered into the Group Pension
Transaction to preserve the value of such business. The transaction allowed the
Company to: (i) place the transferred Group Pension Business in a higher rated
entity which significantly diminished the risk of adverse persistency with
respect to such business, and (ii) retain 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
F-25
<PAGE> 226
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 Agreement) as an offset against the principal
payment due to the Company upon maturity of the Series A Notes.
For the years ended December 31, 1997, 1996 and 1995, AUSA reported
earnings to the Company pursuant to the application of the Earnings Formula of
$55.7 million, $66.7 million, and $70.2 million, respectively, and the Company
recorded Group Pension Profits of $60.0 million, $59.5 million and $61.7
million, respectively. In addition, the Company earned $17.7 million, $23.0
million, and $17.4 million of interest income on the Notes during the
aforementioned years. From 1994 through 1996, the Company reinvested an
aggregate of $169 million of the aforementioned profits and interest in
additional Series A notes (the "Additional Notes") with a face amount equal to
the amount reinvested. The Additional Notes paid interest at 1% above the
two-year U.S. Treasury rate in effect at the time of their issuance. All of the
Additional Notes were redeemed at face value by AEGON during 1997. At December
31, 1997, the remaining Series A notes held by the Company consisted of the $150
million face amount of Series A Notes it acquired on December 31, 1993.
The following sets forth certain summarized financial information relating
to the Group Pension Transaction as of and for the periods indicated, including
information regarding: (i) the general account assets transferred to support the
Existing Deposits in the Group Pension Transaction (such assets hereafter
referred to as the "AEGON Portfolio"), (ii) the transferred separate account
F-26
<PAGE> 227
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities, and (iii) the components of revenue and expense
comprising the Group Pension Profits:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
-------- --------
($ IN MILLIONS)
<S> <C> <C>
ASSETS:
General Account
Fixed Maturities: Available for sale, at estimated fair
value (amortized cost $1,585.4 and $1,568.1,
respectively)........................................ $1,645.0 $1,629.2
Mortgage loans on real estate.......................... 347.9 527.9
Real estate held for investment........................ 50.4 55.3
Cash and cash equivalents.............................. 24.5 23.3
Accrued investment income.............................. 33.1 33.6
-------- --------
Total general account assets........................... 2,100.9 2,269.3
Separate account assets................................... 3,614.0 3,358.3
-------- --------
Total assets...................................... $5,714.9 $5,627.6
======== ========
LIABILITIES:
General Account(1)
Policyholders' account balances........................ $1,991.0 $2,158.1
Other liabilities...................................... 33.7 27.7
-------- --------
Total general account liabilities................. 2,024.7 2,185.8
Separate account liabilities(2)........................... 3,614.0 3,358.3
-------- --------
Total liabilities................................. $5,638.7 $5,544.1
======== ========
</TABLE>
- ---------------
(1) Includes general account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $142.8
million and $175.2 million as of December 31, 1997 and 1996, respectively.
(2) Includes separate account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $31.1 million
and $29.2 million as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Product policy fees.................................... $ 23.7 $ 24.7 $ 25.0
Net investment income.................................. 169.3 192.4 215.9
Net realized gains (losses) on investments............. 7.1 (7.4) (8.2)
------ ------ ------
Total revenues............................... 200.1 209.7 232.7
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances... 117.3 125.9 141.2
Other operating costs and expenses..................... 22.8 24.3 29.8
------ ------ ------
Total benefits and expenses.................. 140.1 150.2 171.0
Group Pension Profits........................ $ 60.0 $ 59.5 $ 61.7
====== ====== ======
</TABLE>
F-27
<PAGE> 228
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIXED MATURITY SECURITIES
At December 31, 1997 and 1996, there were no fixed maturity securities in
the AEGON Portfolio deemed to have other than temporary impairments in value. In
addition, there were no fixed maturity securities at such dates which have been
non-income producing for the preceding twelve months.
At December 31, 1997 and 1996, the carrying value of problem fixed
maturities (as hereafter defined -- see Note 13) held in the AEGON Portfolio was
$24.4 million and $25.1 million, respectively. In addition, at such dates the
carrying value of potential problem fixed maturities held in the AEGON Portfolio
was $7.4 million and $6.9 million, respectively. Also, none of the fixed
maturity securities held in the AEGON Portfolio at December 31, 1997 and 1996 or
prior thereto had been restructured.
The amortized cost and estimated fair value of fixed maturity securities
held in the AEGON Portfolio, by contractual maturity dates, (excluding scheduled
sinking funds), as of December 31, 1997 are as follows ($ in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 71.2 $ 71.7
Due after one year through five years....................... 756.2 782.0
Due after five years through ten years...................... 399.4 417.5
Due after ten years......................................... 43.4 47.5
-------- --------
Subtotal.................................................... 1,270.2 1,318.7
-------- --------
Mortgage and asset backed Securities........................ 315.2 326.3
-------- --------
Total............................................. $1,585.4 $1,645.0
======== ========
</TABLE>
Fixed maturity securities that are not due at a single maturity date have
been included in the preceding table in the year of final maturity. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income generated by the AEGON Portfolio for the
years ended December 31, 1997, 1996, 1995 and prior thereto. Following is a
summary for the AEGON Portfolio of the change in unrealized investment gains
(losses) (see Note 12):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Fixed maturities........................................ $(1.5) $(41.6) $107.4
===== ====== ======
</TABLE>
F-28
<PAGE> 229
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate in the AEGON Portfolio at December 31, 1997
and 1996 consist of the following ($ in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Commercial mortgage loans................................... $361.5 $550.1
Agricultural and other loans................................ 0.0 0.0
------ ------
Total loans................................................. 361.5 550.1
Less: valuation allowances............................. (13.6) (22.2)
------ ------
Mortgage loans, net of valuation allowance.................. $347.9 $527.9
====== ======
</TABLE>
An analysis of the valuation allowances with respect to the AEGON Portfolio
for 1997, 1996 and 1995 is as follows ($ in millions):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Balance, beginning of year................................. $22.2 $31.8 $27.3
Increase (decrease) in allowance........................... (5.1) (8.7) 5.3
Reduction due to pay downs and pay offs.................... (1.6) 0.0 0.0
Transfers to real estate................................... (1.9) (0.9) (0.8)
----- ----- -----
Balance, end of year....................................... $13.6 $22.2 $31.8
===== ===== =====
</TABLE>
Impaired mortgage loans along with related valuation allowances with
respect to the AEGON Portfolio at December 31, 1997 and 1996 are as follows ($
in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Investment in impaired mortgage loans (before valuation
allowances):
Loans that have valuation allowances.................. $56.0 $ 91.6 $ 63.5
Loans that do not have valuation allowances........... 41.1 45.6 59.9
----- ------ ------
Subtotal...................................... 97.1 137.2 123.4
Valuation allowances.................................... (5.8) (9.8) (13.0)
----- ------ ------
Impaired mortgage loans, net of valuation allowances.... $91.3 $127.4 $110.4
===== ====== ======
</TABLE>
Impaired mortgage loans that do not have valuation allowances are loans
where the net present value of the expected future cash flows related to the
loan or the fair value of the collateral equals or exceeds the recorded
investment in the loan. Such loans primarily consist of restructured loans.
During the years ended December 31, 1997, 1996, and 1995, the average
recorded investment in impaired mortgage loans with respect to the AEGON
Portfolio was approximately $109.3 million, $118.9 million, and $107.6 million,
respectively. For the years ended December 31, 1997, 1996, and 1995
approximately $6.5 million, $13.1 million, and $10.7 million, respectively, of
interest income on impaired loans with respect to the AEGON Portfolio was
earned.
F-29
<PAGE> 230
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the carrying values of mortgage loans which
were non-income producing for the twelve months preceding such dates with
respect to the AEGON Portfolio were $21.6 million and $0 million, respectively.
At December 31, 1997 and 1996 the AEGON Portfolio held restructured
mortgage loans of $88.5 million and $107.2 million, respectively. Interest
income of $6.6 million, $10.4 million, and $6.0 million was recognized on
restructured mortgage loans for the years ended December 31, 1997, 1996, and
1995, respectively. Gross interest income on these loans that would have been
recorded in accordance with the original terms of such loans amounted to
approximately $9.2 million, $11.1 million, and $6.8 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
The following table presents the maturity distribution of mortgage loans
held in the AEGON Portfolio as of December 31, 1997 ($ in millions).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
CARRYING % OF
VALUE TOTAL
-------- -----
<S> <C> <C>
Due in one year or less................................... $ 60.5 17.4%
Due after one year through five years..................... 210.9 60.6
Due after five years through ten years.................... 43.9 12.6
Due after ten years....................................... 32.6 9.4
------ -----
Total........................................... $347.9 100.0%
====== =====
</TABLE>
REAL ESTATE
The following table summarizes the real estate held in the AEGON Portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
------ ------
($ IN MILLIONS)
<S> <C> <C>
Real estate held for investment........................... $50.4 $55.3
Impairment writedowns..................................... 0.0 0.0
----- -----
Carrying value of real estate held for investment......... $50.4 $55.3
===== =====
</TABLE>
- ---------------
(1) Amounts presented as of December 31, 1997 and 1996 are net of $25.6 million
and $21.4 million, respectively, relating to impairments taken upon
foreclosure of mortgage loans. Losses recorded during the years ended
December 31, 1997, 1996 and 1995 related to impairments taken upon
foreclosure were $4.3 million, $16.8 million, and $4.0 million,
respectively.
Real estate is net of accumulated depreciation of $1.8 million, and $1.1
million at December 31, 1997, and 1996, respectively. Depreciation expense of
$1.4 million, $0.7 million, and $0.4 million, was recorded for the years ended
December 31, 1997, 1996, and 1995, respectively.
There was no real estate included in the AEGON Portfolio which was
non-income producing for the twelve months preceding December 31, 1997, 1996,
and 1995, respectively.
F-30
<PAGE> 231
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INVESTMENT INCOME, REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES),
AND COMPREHENSIVE INCOME:
Net investment income for the years ended December 31, 1997, 1996 and 1995
was derived from the following sources ($ in millions):
<TABLE>
<CAPTION>
NET INVESTMENT INCOME 1997 1996 1995
--------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities....................................... $422.5 $392.4 $379.1
Equity securities...................................... 53.5 54.5 40.5
Mortgage loans......................................... 137.1 159.2 169.7
Real estate............................................ 56.2 84.1 81.3
Policy loans........................................... 82.2 80.2 82.0
Other investments (including cash & short-terms)....... 22.4 29.3 24.7
------ ------ ------
Total investment income................................ 773.9 799.7 777.3
Investment expenses.................................... 40.9 48.1 48.5
------ ------ ------
Net investment income.................................. $733.0 $751.6 $728.8
====== ====== ======
</TABLE>
Net realized gains (losses) on investments for the years ended December 31,
1997, 1996 and 1995 are summarized as follows ($ in millions):
<TABLE>
<CAPTION>
NET REALIZED GAINS (LOSSES) ON INVESTMENTS 1997 1996 1995
------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Fixed maturities........................................... $ 7.3 $ 6.2 $19.0
Equity securities.......................................... 35.8 30.0 9.2
Mortgage loans............................................. 10.4 8.4 (1.8)
Real estate................................................ 20.1 20.8 (13.3)
Other invested assets...................................... (1.5) 10.5 3.1
----- ----- -----
Net realized gains on investments.......................... $72.1 $75.9 $16.2
===== ===== =====
</TABLE>
F-31
<PAGE> 232
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1997,
1996, and 1995. In addition, Accumulated Other Comprehensive Income at December
31, 1994 is comprised only of unrealized investment gains (losses). Following is
a summary of the change in unrealized investment gains (losses) net of related
deferred income taxes and adjustment for deferred policy acquisition costs (see
Note 5), which are reflected in Accumulated Other Comprehensive Income for the
periods presented:
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS 1997 1996 1995
-------------------------------------------------- ------ ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities..................................... $ 98.7 $(126.7) $ 386.1
Equity securities.................................... 0.6 13.8 16.5
Other equity investments............................. 0.8 1.0 0.9
------ ------- -------
Subtotal............................................. 100.1 (111.9) 403.5
AEGON Portfolio (See Note 11)........................ (1.5) (41.6) 107.4
------ ------- -------
Subtotal............................................. 98.6 (153.5) 510.9
Effect on unrealized gains (losses) on Investments
attributable to:
DAC............................................. (47.9) 61.0 (215.6)
Deferred federal income taxes................... (17.7) 32.6 (103.8)
------ ------- -------
Change in unrealized gains (losses) on investments,
net................................................ $ 33.0 $ (59.9) $ 191.5
====== ======= =======
</TABLE>
The following table sets forth the reclassification adjustments required
for the years ended December 31, 1997, 1996, and 1995 to avoid double-counting
in comprehensive income items that are included as part of net income for a
period that also had been part of other comprehensive income in earlier periods
($ in millions):
<TABLE>
<CAPTION>
RECLASSIFICATION ADJUSTMENTS 1997 1996 1995
---------------------------- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Unrealized gains (losses) on investments arising during
period.................................................... $ 50.6 $(44.8) $204.1
Reclassification adjustment for gains included in net
income.................................................... (17.6) (15.1) (12.6)
------ ------ ------
Unrealized gains (losses) on investments, net of
reclassification adjustments.............................. $ 33.0 $(59.9) $191.5
====== ====== ======
</TABLE>
Unrealized gains (losses) on investments reported in the above table for
the years ended December 31, 1997, 1996 and 1995 are net of income tax expense
(benefit) of $8.2 million, $(40.8) million, and $97.0 million, respectively, and
$(30.2) million, $75.5 million, and $(204.4) million, respectively, relating to
the effect of such unrealized gains (losses) on DAC.
Reclassification adjustments reported in the above table for the years
ended December 31, 1997, 1996 and 1995 are net of income tax expense (benefit)
of $9.5 million, $8.2 million and $6.8 million, respectively, and $(17.7)
million, $(14.5) million and $(11.2) million, respectively, relating to the
effect of such amounts on DAC.
F-32
<PAGE> 233
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INVESTMENTS:
FIXED MATURITY SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, gross unrealized gains and loss, and estimated fair
value of fixed maturity securities available for sale as of December 31, 1997
and December 31, 1996 are as follows ($ in millions):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------- --------------- ------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- ------ ------ ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury securities and
obligations of U.S. government
agencies...................... $ 131.4 $ 207.2 $ 2.3 $ 1.5 $ 0.1 $ 0.5 $ 133.6 $ 208.2
Collateralized Mortgage
Obligations:
Government Agency-Backed...... 398.9 379.5 6.6 2.7 0.3 4.6 405.2 377.6
Non-Agency Backed............. 112.4 101.0 4.4 2.7 0.0 0.3 116.8 103.4
Other asset-backed securities:
Government Agency-Backed...... 68.1 68.8 1.3 1.0 0.3 0.9 69.1 68.9
Non-Agency Backed............. 474.4 394.1 17.5 9.0 0.3 1.9 491.6 401.2
Foreign governments............. 0.0 4.5 0.0 0.1 0.0 0.0 0.0 4.6
Utilities....................... 719.1 635.5 30.6 19.8 2.2 4.9 747.5 650.4
Corporate bonds................. 3,852.2 3,262.4 141.4 91.8 14.7 28.1 3,978.9 3,326.1
-------- -------- ------ ------ ----- ----- -------- --------
Total bonds............ 5,756.5 5,053.0 204.1 128.6 17.9 41.2 5,942.7 5,140.4
Redeemable preferred stocks..... 7.9 2.1 0.1 0.0 0.6 0.4 7.4 1.7
-------- -------- ------ ------ ----- ----- -------- --------
Total.................. $5,764.4 $5,055.1 $204.2 $128.6 $18.5 $41.6 $5,950.1 $5,142.1
======== ======== ====== ====== ===== ===== ======== ========
</TABLE>
Fixed maturity securities held to maturity at December 31, 1996 consisted
only of the Series A Notes (see Note 11). The amortized cost, gross unrealized
loss and fair value of such securities at December 31, 1996 was $318.7 million,
$20.9 million, and $297.8 million, respectively. Effective January 1, 1997, the
Series A Notes were reclassified from held-to-maturity to available-for-sale
pursuant to SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 125 requires that
investments which can be contractually prepaid or otherwise settled in such a
way that the holder would not recover substantially all of its recorded
investment shall be measured like investments in debt securities classified as
available-for-sale or trading under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This provision of SFAS No. 125 is
effective for financial assets held on or acquired after January 1, 1997.
The carrying value of the Company's fixed maturity securities at December
31, 1997 and 1996 is net of adjustments for impairments in value deemed to be
other than temporary of $7.3 million and $23.1 million, respectively.
Included in the table above are $0.0 million and $6.1 million at December
31, 1997 and 1996, respectively of fixed maturity securities at estimated fair
value which have been non-income producing for the twelve months preceding such
dates.
The Company classifies fixed maturity securities which are, (i) in default
as to principal or interest payments, or (ii) are to be restructured pursuant to
commenced negotiations, or (iii) which went into bankruptcy subsequent to
acquisition, as "problem fixed maturity securities". At December 31, 1997 and
1996, the carrying value of problem fixed maturities held by the Company was
$30.2 million and $30.9 million, respectively. In addition, at December 31, 1997
and 1996, the Company held $0.0 million and $6.5 million of fixed maturity
securities which had been restructured.
F-33
<PAGE> 234
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross interest income that would have been recorded in accordance with the
original terms of restructured fixed maturity securities amounted to $0.0
million and $0.8 million for the years ended December 31, 1997 and 1996,
respectively. Gross interest income on these fixed maturity securities included
in net investment income aggregated $0.0 million and $1.0 million for the years
ended December 31, 1997 and 1996, respectively.
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates (excluding scheduled sinking funds) as of December
31, 1997, are as follows ($ in millions):
<TABLE>
<CAPTION>
1997
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less............................... $ 58.6 $ 58.5
Due after one year through five years................. 1,250.3 1,273.0
Due after five years through ten years................ 2,412.3 2,499.7
Due after ten years................................... 989.4 1,036.2
-------- --------
Subtotal.................................... 4,710.6 4,867.4
Mortgage- and asset-backed securities................. 1,053.8 1,082.7
-------- --------
$5,764.4 $5,950.1
======== ========
</TABLE>
Fixed maturity securities that are not due at a single maturity date have
been included in the preceding table in the year of final maturity. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Proceeds from sales of fixed maturity securities during 1997, 1996 and 1995
were $225.0 million, $197.3 million and $415.8 million, respectively. Gross
gains of $5.2 million, $4.1 million, and $10.9 million and gross losses of $2.6
million, $4.3 million, and $5.1 million were realized on these sales,
respectively.
EQUITY SECURITIES
The cost, gross unrealized gains and losses, and estimated fair value of
marketable and nonmarketable equity securities at December 31, 1997 and 1996 are
as follows ($ in millions):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- ------------- ------------ ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ----- ----- ----- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marketable equity securities.............. $165.3 $138.8 $30.2 $27.6 $ 4.9 $1.8 $190.6 $164.6
Nonmarketable equity securities........... 101.4 95.9 53.0 49.2 7.2 4.5 147.2 140.6
------ ------ ----- ----- ----- ---- ------ ------
$266.7 $234.7 $83.2 $76.8 $12.1 $6.3 $337.8 $305.2
====== ====== ===== ===== ===== ==== ====== ======
</TABLE>
Proceeds from sales of equity securities during 1997, 1996 and 1995 were
$234.1 million, $164.7 million and $58.6 million, respectively. Gross gains of
$44.4 million, $35.9 million, and $16.9 million and gross losses of $4.7
million, $4.5 million, and $5.0 million were realized on these sales,
respectively.
F-34
<PAGE> 235
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. MORTGAGE LOANS ON REAL ESTATE AND REAL ESTATE:
Mortgage loans on real estate at December 31, 1997 and 1996 consist of the
following ($ in millions):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial mortgage loans............................. $ 963.5 $1,118.6
Agricultural and other loans.......................... 521.5 530.7
-------- --------
Total loans........................................... 1,485.0 1,649.3
Less: valuation allowances.......................... 54.9 67.0
-------- --------
Mortgage loans, net of valuation allowances........... $1,430.1 $1,582.3
======== ========
</TABLE>
An analysis of the valuation allowances for 1997, 1996 and 1995 is as
follows ($ in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 67.0 $79.6 $ 88.7
Increase (decrease) in allowance................ 1.4 (4.2) 3.9
Reduction due to pay downs and pay offs......... (12.7) (0.6) (0.3)
Transfers to real estate........................ (0.8) (7.8) (12.7)
------ ----- ------
Balance, end of year............................ $ 54.9 $67.0 $ 79.6
====== ===== ======
</TABLE>
Impaired mortgage loans along with related valuation allowances were as
follows ($ in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Investment in impaired mortgage loans (before valuation
allowances):
Loans that have valuation allowances...................... $199.1 $247.0
Loans that do not have valuation allowances............... 167.1 159.5
------ ------
Subtotal.......................................... 366.2 406.5
Valuation allowances........................................ (32.8) (40.1)
------ ------
Impaired mortgage loans, net of valuation allowances........ $333.4 $366.4
====== ======
</TABLE>
Impaired mortgage loans that do not have valuation allowances are loans
where the net present value of the expected future cash flows related to the
loan or the fair value of the collateral equals or exceeds the recorded
investment in the loan. Such loans primarily consist of restructured loans or
loans on which impairment writedowns were taken prior to the adoption of SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan".
During 1997, the average recorded investment in impaired mortgage loans was
approximately $349.9 million ($396.7 million in 1996). During 1997, 1996, and
1995, the Company recognized $28.5 million, $33.3 million, and $36.5 million,
respectively, of interest income on impaired loans.
At December 31, 1997 and 1996, the carrying values of mortgage loans which
were non-income producing for the twelve months preceding such dates were $21.1
million and $15.7 million, respectively.
At December 31, 1997 and 1996, the Company had restructured mortgage loans
of $242.7 million and $248.3 million, respectively. Interest income of $20.3
million, $19.8 million, and $20.6 million was recognized on restructured
mortgage loans in 1997, 1996, and 1995, respectively. Gross
F-35
<PAGE> 236
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest income on these loans that would have been recorded in accordance with
the original terms of such loans amounted to approximately $26.7 million in
1997, $26.3 million in 1996, and $28.0 million in 1995.
The following table summarizes the Company's real estate at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
------ --------
($ IN MILLIONS)
<S> <C> <C>
Real estate to be disposed of(1)............................ $800.2 $ 480.8
Impairment writedowns....................................... (96.3) 0.0
Valuation allowance......................................... (82.7) (46.0)
------ --------
Carrying value of real estate to be disposed of............. $621.2 $ 434.8
====== ========
Real estate held for investment(2).......................... $533.6 $1,205.0
Impairment writedowns....................................... (37.7) (134.6)
------ --------
Carrying value of real estate held for investment........... $495.9 $1,070.4
====== ========
</TABLE>
- ---------------
(1) Amounts presented as of December 31, 1997 and 1996 are net of $75.0 million
and $120.1 million, respectively, relating to impairments taken upon
foreclosure of mortgage loans.
(2) Amounts presented as of December 31, 1997 and 1996 are net of $35.0 million
and $71.5 million, respectively, relating to impairments taken upon
foreclosure of mortgage loans.
An analysis of the valuation allowances relating to real estate classified
as to be disposed of for the years ended December 31, 1997, 1996 and 1995 is as
follows ($ in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year............................. $ 46.0 $ 49.1 $ 22.7
Increase due to transfers of properties to real estate
to be disposed of during the year.................... 66.1 11.6 29.9
Increases (decreases) in valuation allowances from the
end of the prior period on properties still held for
disposal............................................. (2.3) 5.2 9.6
Decreases as a result of sales......................... (27.1) (19.9) (13.1)
------ ------ ------
Balance, end of year................................... $ 82.7 $ 46.0 $ 49.1
====== ====== ======
</TABLE>
Real estate is net of accumulated depreciation of $494.4 million and $517.7
million for 1997 and 1996, respectively, and depreciation expense recorded was
$45.1 million, $48.3 million and $64.8 million for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the carrying value of real estate which was
non-income producing for the twelve months preceding such dates was $34.5
million and $38.7 million, respectively. Approximately 80.4% of such real estate
at December 31, 1997 consisted of land and the balance consisted of vacant
buildings.
The carrying value of impaired real estate as of December 31, 1997 and 1996
was $62.3 million and $62.7 million, respectively. The depreciated cost of such
real estate as of December 31, 1997 and 1996 was $196.4 million and $197.3
million before impairment writedowns of $134.0 million and $134.6 million,
respectively. The aforementioned impairments occurred primarily as a result of
low occupancy levels and other market related factors. Losses recorded during
1997, 1996, and 1995 related to impaired real estate aggregated $0.0 million,
$3.8 million, and $0.0 million, respectively,
F-36
<PAGE> 237
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and are included as a component of Net Realized Gains on Investments.
Substantially all impaired real estate is allocated to the Protection Products
segment.
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments
approximate their carrying amounts. The methods and assumptions utilized in
estimating the fair values of the Company's financial instruments are summarized
as follows:
FIXED MATURITIES AND EQUITY SECURITIES
The estimated fair values of fixed maturity securities are based upon
quoted market prices, where available. The fair values of fixed maturity
securities not actively traded and other non-publicly traded securities are
estimated using values obtained from independent pricing services or, in the
case of private placements, by discounting expected future cash flows using a
current market interest rate commensurate with the credit quality and term of
the investments. Equity securities primarily consist of investments in common
stocks and limited partnership interests. The fair values of the Company's
investment in common stocks are determined based on quoted market prices, where
available. The fair value of the Company's investments in limited partnership
interests are based on amounts reported by such partnerships to the Company.
MORTGAGE LOANS
The fair values of mortgage loans are estimated by discounting expected
future cash flows, using current interest rates for similar loans to borrowers
with similar credit risk. Loans with similar characteristics are aggregated for
purposes of the calculations. The fair value of mortgages in process of
foreclosure is the estimated fair value of the underlying collateral.
POLICY LOANS
Policy loans are an integral component of insurance contracts and have no
maturity dates. Management has determined that it is not practicable to estimate
the fair value of policy loans.
LONG-TERM DEBT
The fair value of long-term debt is determined based on contractual cash
flows discounted at market rates. The estimated fair values for non-recourse
mortgage debt are determined by discounting contractual cash flows at a rate
which takes into account the level of current market interest rates and
collateral risk.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
The estimated fair value of assets held in Separate Accounts is based on
quoted market prices. The fair value of liabilities related to Separate Accounts
is the amount payable on demand, which includes surrender charges.
INVESTMENT-TYPE CONTRACTS
The fair values of annuities are based on estimates of the value of
payments available upon full surrender. The fair values of the Company's
liabilities under guaranteed investment contracts are estimated by discounting
expected cash outflows using interest rates currently offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
F-37
<PAGE> 238
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. REINSURANCE:
Life insurance business is ceded on a yearly renewable term basis under
various reinsurance contracts. The Company's general practice is to retain no
more than $4.0 million of risk on any one person for individual products and
$6.0 million for last survivor products.
The Company has entered into coinsurance agreements with other insurers
related to a portion of its extended term insurance, guaranteed interest
contract and long-term disability claim liabilities and reinsures approximately
50% of its block of paid-up life insurance policies.
The following table summarizes the effect of reinsurance for the years
indicated:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Direct premiums (includes $78.1, $78.2, and $77.3 of
accident and health premiums for 1997, 1996, and
1995, respectively)................................ $871.0 $889.4 $906.4
------ ------ ------
Reinsurance Assumed.................................. 6.2 8.3 6.5
Reinsurance ceded (includes $(3.5), $(3.4), and
$(3.2) of accident and health premiums for 1997,
1996, and 1995, respectively)...................... (38.6) (37.9) (37.0)
------ ------ ------
Net premiums.................................... $838.6 $859.8 $875.9
====== ====== ======
Universal life and investment type product policy fee
income ceded....................................... $ 8.8 $ 8.5 $ 8.0
====== ====== ======
Policyholders' benefits ceded........................ $ 69.0 $ 44.6 $ 39.6
====== ====== ======
Interest credited to policyholders' account balances
ceded.............................................. $ 9.9 $ 14.5 $ 26.0
====== ====== ======
</TABLE>
The Company is contingently liable with respect to ceded insurance should
any reinsurer be unable to meet its obligations under these agreements. To limit
the possibility of such losses, the Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk.
Effective December 31, 1997, the Company transferred all of its existing in
force disability income insurance business to a third party reinsurer under an
indemnity reinsurance contract and ceased writing new disability income
insurance business. As a result of this transaction, the Company recorded a loss
before tax of approximately $9.1 million for the year ended December 31, 1997.
F-38
<PAGE> 239
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. DEBT:
Short- and long-term debt consists of the following ($ in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
SHORT-TERM DEBT:
Real Estate Mortgage Investment Conduit..................... $ 0 $ 33.1
Eurobonds................................................... 0 89.2
Real Estate Mortgage Encumbrances........................... 0 30.7
------ ------
$ 0 $153.0
====== ======
LONG-TERM DEBT:
Surplus Notes............................................... $219.6 $ 93.8
Real Estate Mortgage Encumbrances........................... 155.8 128.8
Other....................................................... 48.2 47.1
------ ------
$423.6 $269.7
====== ======
</TABLE>
REAL ESTATE MORTGAGE INVESTMENT CONDUIT
The Company had outstanding debt in the amount of $33.1 million at December
31, 1996 which represented the remaining outstanding floating rate notes that
were issued by a trust that qualified as a Real Estate Mortgage Investment
Conduit (REMIC) under Section 860 of the Internal Revenue Code. The notes were
collateralized by mortgage loans transferred by the Company in 1995 which had an
aggregate principal amount of $434.3 million. Proceeds from the assets of the
trust were the sole source of payment on the notes. The Company did not
guarantee these notes or the mortgage loans transferred to the trust. The notes
matured in September 1997. The Company accounted for this transaction by
consolidating the trust's mortgages and debt. For the years ended December 31,
1997, 1996, and 1995, the Company recorded interest expense of $0.8 million,
$3.3 million, and $1.3 million, respectively, related to the REMIC. The weighted
average interest rate on the notes for the years ended December 31, 1997, 1996,
and 1995 was 5.9%, 5.8%, and 6.1%, respectively.
SURPLUS NOTES
On December 31, 1997, the Company issued the MONY Notes in connection with
the Investment Agreement (see Note 3). The MONY Notes have a face amount of
$115.0 million, a coupon rate of interest of 9.5% per annum, and mature on
December 30, 2012. Interest on the MONY Notes is payable semi-annually and
principal is payable at maturity. Payment of interest on the MONY Notes may only
be made upon the prior approval of the New York State Superintendent of
Insurance.
On August 15, 1994, the Company issued Surplus Notes due August 15, 2024
with a face amount of $125 million. The notes were issued at a discount of
42.146% from the principal amount payable at maturity, resulting in net proceeds
after issuance expenses of approximately $70.0 million. The amount of such
original issue discount represents a yield of 11.25% per annum for the period
from August 15, 1994 until August 15, 1999. Interest on the notes will not
accrue until August 15, 1999; thereafter, interest on the notes 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.
Payment of interest on the notes may only be made upon the prior approval
of the New York State Superintendent of Insurance. The Company amortizes the
discount using the interest method.
F-39
<PAGE> 240
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 1997, 1996, and 1995, the Company recorded
interest expense of $10.8 million, $9.7 million, and $8.7 million, respectively,
related to these notes.
EUROBONDS
At their scheduled maturity date, April 7, 1997, the Company retired the
remaining $89.2 million principal amount of outstanding 8.125% Eurobonds it had
issued in 1987. Of the $125.0 million principal amount of such securities
originally issued, approximately $89.2 million remained outstanding for all of
1995, 1996 and through the date of their maturity.
At their scheduled maturity date, October 29, 1996, the Company retired the
remaining $126.0 million principal amount of outstanding 8.25% Eurobonds it had
issued in 1986. Of the $150.0 million principal amount of such securities
originally issued, approximately $126.0 million remained outstanding for all of
1995 and through the date of their maturity.
For the years ended December 31, 1997, 1996 and 1995 interest expense on
the Eurobonds outstanding aggregated $2.1 million, $18.3 million, and $21.0
million, respectively.
REAL ESTATE MORTGAGE ENCUMBRANCES
The Company has mortgage loans on certain of its real estate properties.
The interest rates on these loans range from 7.9% to 12.5%. Maturities range
from June 2000 to March 2020. For the years ended December 31, 1997, 1996 and
1995, interest expense on such mortgage loans aggregated $12.3 million, $12.9
million, and $13.9 million, respectively.
OTHER
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 December 31, 1997 and 1996, the outstanding balance of the
obligation including accrued interest was $41.3 million and $40.1 million,
respectively. Interest expense on the obligation of $3.0 million, $2.9 million,
and $2.8 million is reflected in Other Operating Costs and Expenses on the
statements of income for the years ended December 31, 1997, 1996 and 1995,
respectively.
In 1988, the Company financed one of its real estate properties under a
sales/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.
F-40
<PAGE> 241
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, aggregate maturities of long-term debt based on
required principal payments for 1998 and the succeeding four years are $2.2
million, $13.8 million, $89.1 million, $81.5 million, and $0.7 million,
respectively, and $256.7 million thereafter.
18. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK:
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
Pursuant to a securities lending agreement with a major financial
institution, the Company from time to time lends securities to approved
borrowers. At December 31, 1997, securities loaned by the Company under this
agreement had a carrying value of approximately $35.1 million. There were no
loaned securities as of December 31, 1996. The minimum collateral on securities
loaned is 102 percent of the market value of the loaned securities. Such
securities are marked to market on a daily basis and the collateral is
correspondingly increased or decreased.
CONCENTRATION OF CREDIT RISK:
At December 31, 1997 and 1996, the Company had no single investment or
series of investments with a single issuer (excluding U.S. Treasury securities
and obligations of U.S. government agencies) exceeding 1.9% and 3.7%,
respectively, of total cash and invested assets.
The Company's fixed maturity securities are diversified by industry type.
The industries that comprise 10% or more of the carrying value of the fixed
maturity securities at December 31, 1997 are Other Manufacturing of $804.9
million (13.5%), Public Utilities of $747.9 million (12.6%), Consumer Goods and
Services of $614.6 million (10.3%), Non-Government Asset/Mortgage-Backed of
$608.4 million (10.2%), and Government and Agencies of $607.9 million (10.2%).
At December 31, 1996, the industries that comprise 10% or more of the
carrying value of the Company's fixed maturity securities were Financial
Services of $742.4 million (13.7%), Government and Agencies of $659.4 million
(12.1%), Public Utilities of $651.1 million (11.9%), Other Manufacturing of
$649.9 million (11.9%), and Consumer Goods and Services of $547.6 million
(10.0%).
The Company holds below investment grade fixed maturity securities with a
carrying value of $304.3 million at December 31, 1997. These investments consist
mostly of privately issued bonds which are monitored by the Company through
extensive internal analysis of the financial condition of the issuers and which
generally include protective debt covenants. At December 31, 1996, the carrying
value of the Company's investments in below investment grade fixed maturity
securities amounted to $350.5 million.
The Company has significant investments in commercial and agricultural
mortgage loans and real estate (including joint ventures and partnerships). The
locations of property collateralizing mortgage loans and real estate investment
carrying values (in millions) at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION 1997 1996
- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Southeast................................... $ 616.3 24.2% $ 724.5 23.5%
Mountain.................................... 591.5 23.2 641.9 20.8
Northeast................................... 494.2 19.4 512.8 16.6
West........................................ 399.2 15.7 635.5 20.6
Midwest..................................... 253.7 10.0 333.6 10.8
Southwest................................... 192.3 7.5 239.2 7.7
-------- ----- -------- -----
$2,547.2 100.0% $3,087.5 100.0%
======== ===== ======== =====
</TABLE>
F-41
<PAGE> 242
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The states with the largest concentrations of mortgage loans and real
estate investments at December 31, 1997 are: Arizona, $345.0 million (13.5%);
New York, $290.7 million (11.4%); California, $270.6 million (10.6%); Florida,
$185.4 million (7.3%); Texas, $156.7 million (6.2%); Illinois, $131.9 million
(5.2%); Colorado, $119.5 million (4.7%); and Georgia, $117.3 million (4.6%).
As of December 31, 1997 and 1996, the real estate and mortgage loan
portfolio was also diversified as follows (in millions):
<TABLE>
<CAPTION>
PROPERTY TYPE: 1997 1996
- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Office buildings............................ $1,092.4 42.9% $1,360.8 44.1%
Agricultural................................ 515.0 20.2 521.8 16.9
Hotel....................................... 344.8 13.5 380.3 12.3
Retail...................................... 332.1 13.0 436.8 14.2
Industrial.................................. 111.4 4.4 168.4 5.4
Other....................................... 84.6 3.4 122.1 4.0
Apartment Buildings......................... 66.9 2.6 97.3 3.1
-------- ----- -------- -----
$2,547.2 100.0% $3,087.5 100.0%
======== ===== ======== =====
</TABLE>
19. COMMITMENTS AND CONTINGENCIES:
In late 1995 and during 1996, a number of purported class actions were
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies from the early 1980s 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). The
Company has answered the complaints in each action (except for one being
voluntarily held in abeyance), has denied any wrongdoing, and has asserted
numerous affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified the Goshen
case, being the first of the aforementioned class actions filed, as a nationwide
class consisting of all persons or entities who have, or at the time of the
policy's termination had, an ownership interest in a whole or universal life
insurance policy issued by the Company and sold on an alleged "vanishing
premium" basis during the period January 1, 1982 to December 31, 1995. On March
27, 1997, the Company filed a motion to dismiss or, alternatively, for summary
judgment on all counts of the complaint. All of the other putative class actions
have been consolidated and transferred by the Judicial Panel on Multidistrict
Litigation to the United States District Court for the District of
Massachusetts, or are being voluntarily held in abeyance pending the outcome of
the Goshen case. The Massachusetts District Court in the Multidistrict
Litigation has entered an order essentially holding all of the federal cases in
abeyance pending the action of the Goshen case.
On October 21, 1997, the New York State Supreme Court granted the Company's
motion for summary judgment and dismissed all claims filed in the Goshen case
against the Company on the merits. 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, the Company is involved in
various other legal actions and proceedings in connection with its businesses.
The claimants in certain of these actions and proceedings seek damages of
unspecified amounts. During 1996, the Company paid $12.6
F-42
<PAGE> 243
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million to settle a number of these claims in the state of Alabama and,
accordingly, recorded such amount in Other Operating Costs and Expenses for the
year then ended.
With respect to all of the other aforementioned pending litigation, the
Company recorded a provision, which is reflected in Other Operating Costs and
Expenses, of $0.0 million, $27.6 million, and $10.0 million during the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996 the total reserve for such litigation, which is reflected in Accounts
Payable and Other Liabilities, amounted to approximately $29.5 million. While
the outcome of such matters cannot be predicted with certainty, in the opinion
of management, any additional liability beyond that recorded in the consolidated
financial statements at December 31, 1997, resulting from the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
Insurance companies are subject to assessments, up to statutory limits, by
state guaranty funds for losses of policyholders of insolvent insurance
companies. In the opinion of management, such assessments will not have a
material adverse effect on the consolidated financial position and the results
of operations of the Company.
The Company maintains lines of credit with domestic banks totaling $100.0
million with scheduled renewal dates during 1998. The Company has not borrowed
against its credit lines since 1982.
At December 31, 1997, the Company had commitments to issue $31.0 million of
fixed rate agricultural loans with periodic interest rate reset dates. The
initial interest rates on such loans range from approximately 7.4% to 8.0%. In
addition, the Company had commitments to issue $36.4 million of fixed rate
commercial mortgage loans with interest rates ranging from 7.2% to 8.2%. The
Company also had commitments outstanding to purchase $41.0 million of private
fixed maturity securities as of December 31, 1997.
20. STATUTORY FINANCIAL INFORMATION AND REGULATORY RISK-BASED CAPITAL:
Financial statements of the Company prepared in accordance with SAP for
filing with the New York State Insurance Department (the "Department") differ
from financial statements of the Company prepared in accordance with GAAP. The
principal differences result from the following: (i) subsidiaries are generally
accounted for under the equity method of accounting under SAP, whereas
subsidiaries in which the Company has a majority voting interest are
consolidated under GAAP; (ii) acquisition costs are charged to operations as
incurred under SAP rather than being amortized over the expected life of the
contracts under GAAP; (iii) certain assets designated as "non-admitted assets"
are charged directly to statutory surplus under SAP but are reflected as assets
under GAAP; (iv) federal income taxes are provided only on taxable income for
which income taxes are currently payable under SAP, whereas under GAAP deferred
income taxes are recognized; (v) an interest maintenance reserve ("IMR") and
asset valuation reserve ("AVR") are computed based on specific statutory
requirements and recorded under SAP, whereas under GAAP, such reserves are not
recognized; (vi) surplus notes are reported in statutory surplus under SAP,
whereas under GAAP, such notes are recorded as a liability; (vii) premiums for
universal life and investment-type products are recognized as revenue when due
under SAP, whereas under GAAP, such amounts are recorded as deposits and not
included in the Company's revenues; (viii) future policy benefit reserves are
based on specific statutory requirements regarding mortality and interest,
without consideration of withdrawals, and are reported net of reinsurance under
SAP, whereas, under GAAP, such reserves are calculated using a net level premium
method based on actuarial assumptions equal to guaranteed mortality and dividend
fund interest rates and are reported gross of reinsurance; (ix) investments in
bonds and redeemable preferred stocks are
F-43
<PAGE> 244
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally carried at amortized cost under SAP, whereas under GAAP, such
investments are classified as "available for sale" and reported at estimated
fair value; (x) pension expense for the Company's qualified defined pension plan
is recognized when pension contributions are deductible for federal income tax
purposes, whereas under GAAP, such expense is recognized over the service period
for all eligible employees; (xi) postretirement benefits are recognized for
vested employees and current retirees under SAP, whereas under GAAP, such
expenses are recognized over the service period for all eligible employees;
(xii) methods used for calculating real estate and mortgage loan impairments,
valuation allowances, and real estate depreciation under GAAP are different from
those permitted under SAP; and (xiii) certain contracts with reinsurers are
accounted for as reinsurance under SAP, whereas under GAAP, such contracts are
accounted for as deposits ("financial reinsurance").
Set forth below are reconciliations of the Company's combined capital and
surplus and the net change in capital and surplus, determined in accordance with
SAP, with its equity and net income reported in accordance with GAAP as of and
for each year ended December 31, 1997, 1996, and 1995, respectively. The
reconciliations for 1995 also present the effect of restating previously
reported amounts as of and for the year ended December 31, 1995 for the adoption
of the Interpretation and the Standard (see Note 5).
F-44
<PAGE> 245
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Capital and surplus....................................... $ 835.4 $ 703.5 $ 689.0
AVR....................................................... 348.6 317.7 285.3
-------- -------- --------
Capital and surplus, and AVR.............................. 1,184.0 1,021.2 974.3
Adjustments:
Future policy benefits and policyholders' account
balances............................................. (386.5) (356.8) (346.9)
Deferred policy acquisition costs....................... 1,007.1 1,095.2 1,047.1
Valuation of investments:
Real estate.......................................... (343.9) (372.7) (384.7)
Mortgage loans....................................... (77.1) (91.2) (106.2)
Fixed maturity securities............................ 154.4 39.9 180.1
Other................................................ 12.0 12.7 42.5
Deferred federal income taxes........................... (6.6) (42.6) (110.4)
Reinsurance............................................. (108.7) (141.0) (146.3)
Surplus notes........................................... (219.7) (93.8) (84.1)
Pension and postretirement benefits..................... 71.3 66.2 70.3
Other, net.............................................. 34.3 33.4 38.2
-------- -------- --------
GAAP Equity............................................... $1,320.6 $1,170.5 $1,173.9
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Net change in capital and surplus......................... $ 131.9 $ 14.5 $ 8.9
Change in AVR............................................. 30.9 32.4 41.2
-------- -------- --------
Net change in capital and surplus, and AVR................ 162.8 46.9 50.1
Adjustments:
Future policy benefits and policyholders' account
balances............................................. (29.7) (9.9) (2.2)
Reinsurance............................................. 32.3 5.3 1.4
Deferred policy acquisition costs....................... (40.2) (12.9) 21.6
Valuation of investments
Real estate.......................................... 28.8 12.0 (35.2)
Mortgage loans....................................... 14.1 15.0 9.7
Fixed maturity securities............................ 8.6 (13.6) 7.9
Other................................................ 6.3 (2.0) (9.4)
Deferred federal income taxes........................... 53.4 35.3 5.0
Issuance of surplus notes............................... (115.0) -- --
Amortization of discount on surplus notes............... (10.8) (9.7) (8.7)
Pension and postretirement benefits..................... 5.1 (4.1) 0.4
Other, net.............................................. 1.4 (5.8) (0.2)
-------- -------- --------
Net income................................................ $ 117.1 $ 56.5 $ 40.4
======== ======== ========
</TABLE>
The difference between statutory basis "net income" and the "net change in
capital and surplus, and AVR" reflected in the reconciliation above primarily
relates to the AVR, unrealized gains (losses) on equity securities, reinsurance
gains, and certain contingency provisions which for statutory reporting purposes
are charged directly to surplus and are not reflected in statutory basis
F-45
<PAGE> 246
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income. The combined statutory net income reported by the Company for the
years ended December 31, 1997, 1996, and 1995 was $88.5 million, $62.7 million,
and $58.0 million, respectively.
In March 1998, the National Association of Insurance Commissioners ("NAIC")
voted to adopt its Codification of Statutory Accounting Principles project
(referred to hereafter as "codification"). Codification is a modified form of
statutory accounting principles that will result in changes to the current NAIC
Accounting Practices and Procedures Manual applicable to insurance enterprises.
Although adoption of codification by all states is not a certainty, the NAIC has
recommended that all states enact codification as soon as practicable with an
effective date of January 1, 2001. It is currently anticipated that codification
will become an NAIC state accreditation requirement starting in 2002. In
addition, the American Institute of Certified Public Accountants and the NAIC
have agreed to continue to allow the use of certain permitted accounting
practices when codification becomes effective in 2001. Any accounting
differences from codification principles, however, must be disclosed and
quantified in the footnotes to the audited financial statements. Therefore,
codification will likely result in changes to what are currently considered
prescribed statutory insurance accounting practices.
Each insurance company's state of domicile imposes minimum risk-based
capital requirements. The formulas for determining the amount of risk-based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of the Company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level risk-based
capital, as defined by the NAIC. Companies below specific trigger points or
ratios are classified within certain levels, each of which requires specified
corrective action. Each of the Company's insurance subsidiaries exceed the
minimum risk based capital requirements.
As part of their routine regulatory oversight, the Department recently
completed an examination of MONY for each of the five years in the period ended
December 31, 1996, and the Arizona State Insurance Department (the "Arizona
Department") recently completed an examination of MONY's wholly owned life
insurance subsidiary, MONY Life Insurance Company of America ("MLOA"), for each
of the three years in the period ended December 31, 1996. The reports did not
deal with any matter which will result in a material effect on the Company's
financial condition or results of operations.
21. YEAR 2000
The Year 2000 issue is the result of the widespread use of computer
programs written using two digits (rather than four) to define the applicable
year. Such programming was a common industry practice designed to avoid the
significant costs associated with additional mainframe capacity necessary to
accommodate a four digit year field. As a result, any of the Company's computer
systems that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a major systems
failure or miscalculations. The Company has conducted a comprehensive review of
its computer systems to identify the systems that could be affected by the Year
2000 issue and has developed and implemented a plan to resolve the issue. The
Company currently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
operational problems for the Company's computer systems. However, if such
modifications and conversions are not completed on a timely basis, the Year 2000
issue may have a material impact on the operations of the Company. Furthermore,
even if the Company completes such modifications and conversions on a timely
basis, there can be no assurance that the failure by vendors or other third
parties to solve the Year 2000 problem will not have a material impact on the
operations of the Company. The Company estimates the total cost to resolve its
Year 2000 problem to be approximately $18.0 million, of which approximately $4.0
million has been incurred through December 31, 1997.
F-46
<PAGE> 247
REPORT OF INDEPENDENT ACCOUNTANTS ON
CONSOLIDATED FINANCIAL STATEMENT SUPPLEMENTAL SCHEDULE
To the Board of Trustees of
The Mutual Life Insurance Company of New York
Our audits of the consolidated financial statements referred to in our
report dated July 27, 1998 except Note 2, as to which the date is August 14,
1998, appearing on page F-2 of this Prospectus also included an audit of the
information included in the consolidated financial statement supplemental
schedule listed in the Index to Consolidated Financial Statements on page F-1.
In our opinion, the consolidated financial statement supplemental schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
July 27, 1998, except for Note 1
to the supplemental schedule, as to
which the date is August 14, 1998.
F-47
<PAGE> 248
THE MONY GROUP INC.
CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Receivable from Parent...................................... $10,001,000
Cash and cash equivalents................................... --
-----------
Total assets...................................... $10,001,000
===========
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value, authorized 400 million
shares; 1,000 shares issued and outstanding............... 10
Capital in excess of par.................................... 10,000,990
Retained earnings........................................... --
-----------
Total stockholders' equity........................ 10,001,000
-----------
Total stockholders' equity.................................. $10,001,000
===========
</TABLE>
This condensed balance sheet of The MONY Group Inc. should be read in
conjunction with the accompanying notes hereto, and the consolidated financial
statements of The Mutual Life Insurance Company of New York and related notes
thereto presented elsewhere herein.
F-48
<PAGE> 249
THE MONY GROUP INC.
NOTES TO THE CONDENSED BALANCE SHEET
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. ORGANIZATION:
The MONY Group Inc. (the "Holding Company") was incorporated on June 24,
1997, under the laws of Delaware and is a wholly owned subsidiary of The Mutual
Life Insurance Company of New York ("MONY"), a New York mutual life insurance
company. The Company was organized for the purpose of becoming the parent
holding company of MONY pursuant to a Plan of Reorganization (as amended, the
"Plan") which was adopted by the Board of Trustees of MONY on August 14, 1998.
In accordance with the Plan MONY proposes to convert from a mutual life
insurance company to a stock life insurance company and become a wholly owned
subsidiary of the Holding Company.
The Company did not engage in any activity other than those incident to its
formation from June 24, 1997 to December 30, 1997. At December 30, 1997, the
Company issued warrants to the Investors, as described below, the proceeds from
which provided substantially all of its capitalization.
2. BASIS OF PRESENTATION:
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements have been prepared consistent
with, and should be read in conjunction with, MONY's Consolidated Financial
Statements and Notes thereto presented elsewhere in this registration statement.
3. INVESTMENT AGREEMENT:
On December 30, 1997, affiliates of Goldman, Sachs & Co. (the "Investors"),
which is one of the underwriters for the Holding Company's initial public
offering, entered into an investment agreement with MONY (the "Investment
Agreement"), pursuant to which: (i) the Investors purchased, for $115.0 million
(the "Consideration"), Surplus Notes issued by MONY (the "MONY Notes") with an
aggregate principal amount equal to the Consideration and (ii) the Investors
purchased, for $10.0 million, warrants (the "Warrants") to purchase from the
Holding Company (after giving effect to the initial public offering) in the
aggregate 7.0% of the fully diluted common stock of the Holding Company ("Common
Stock") as of the date the Plan becomes effective or, if later, the first date
following such effectiveness on which shares of Common Stock are first issued to
Eligible Policyholders (the "Demutualization Date").
The purchase price payable for each share of the Common Stock issuable upon
exercise of Warrants initially is (a) in the event the initial public offering
occurs prior to, on or within five trading days after the Demutualization Date,
the initial public offering price of the Common Stock, 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 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 or (b) in the event the initial public offering does not occur
prior to, on or within five trading days after the Demutualization Date, the
lesser of (i) the average of the daily closing prices of the Common Stock for
the first 20 trading days following Demutualization and (ii) 70% of the book
value per share of the Common Stock as of the Demutualization, determined in
accordance with generally accepted accounting principles ("GAAP"). The Warrants
contain standard anti-dilution provisions, providing for adjustment to the
exercise price in the event of, among other
F-49
<PAGE> 250
THE MONY GROUP INC.
NOTES TO THE CONDENSED BALANCE SHEET -- (CONTINUED)
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.
In addition, under the terms of the Investment Agreement, the Investors
agreed, upon MONY's request, if made at any time up to 90 days after the
Demutualization Date and subject to certain conditions precedent, to purchase an
aggregate of 1.0 million shares of convertible preferred stock of the Holding
Company (the "Convertible Preferred Stock") for a total purchase price of $100.0
million. The Convertible Preferred Stock would be convertible, at the option of
the holder at any time, into Common Stock at a conversion price equal to the
initial exercise price of the Warrants and would be subject to certain
anti-dilution adjustments. The Convertible Preferred Stock would be mandatorily
redeemable on the earlier of (i) the tenth anniversary of the issuance date of
such stock or (ii) December 30, 2013, at a price equal to the liquidation
preference of such stock plus accumulated and unpaid dividends at the redemption
date (the "Redemption Price"). The Redemption Price would be payable in cash or
Common Stock. If the Holding Company elects to issue Common Stock in
satisfaction of the Redemption Price, the number of shares of Common Stock to be
issued would be determined by dividing a number that is equal to 110 percent of
the Redemption Price by the value of the Common Stock, which for this purpose
would be equal to the average of the closing price of the Common Stock for the
20 trading days immediately preceding the redemption date. In addition, under
certain circumstances the Holding Company, at its option, could redeem the
Convertible Preferred Stock after the third anniversary of the issuance of such
stock.
4. DIVIDEND RESTRICTIONS:
Assuming the Plan becomes effective, the Holding Company's cash flows will
consist of dividends from subsidiaries, if declared and paid, principal and
interest payments with respect to 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,
dividends on the Convertible Preferred Stock, if issued, salaries and other
expenses. Assuming 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. Annual dividend payments on the Convertible Preferred Stock,
if issued, will be determined based on a rate equal to the ten-year Treasury
Rate in effect on the date of issuance of the Convertible Preferred Stock. As a
holding company, the Holding Company's ability to meet cash requirements and pay
dividends 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. Furthermore, 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 the
insurer warrants". In addition, the Arizona insurance laws contain similar
restrictions on the ability of MONY Life Insurance Company of America, MONY's
wholly owned subsidiary.
F-50
<PAGE> 251
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
ASSETS
Investments:
Securities available-for-sale at fair value
Fixed maturities....................................... $ 6,282.4
Equity securities...................................... 378.1
Mortgage loans on real estate............................. 1,478.8
Policy loans.............................................. 1,252.6
Real estate to be disposed of............................. 339.1
Real estate held for investment........................... 452.5
Other invested assets..................................... 57.0
---------
10,240.5
---------
Cash and cash equivalents................................... 492.4
Accrued investment income................................... 192.3
Amounts due from reinsurers................................. 579.8
Premiums receivables........................................ 19.2
Deferred policy acquisition costs........................... 990.0
Other assets................................................ 239.4
Assets transferred in Group Pension Transaction............. 5,720.5
Separate account assets..................................... 6,127.5
---------
Total assets...................................... $24,601.6
=========
LIABILITIES AND EQUITY
Future policy benefits...................................... $ 7,543.0
Policyholder account balances............................... 2,249.1
Other policyholder liabilities.............................. 250.1
Amounts due to reinsurers................................... 96.4
Accounts payable and other liabilities...................... 634.7
Long-term debt.............................................. 418.9
Current federal income taxes payable........................ 145.9
Deferred federal income taxes............................... 16.8
Liabilities transferred in Group Pension Transaction........ 5,682.3
Separate accounts liabilities............................... 6,115.5
---------
Total liabilities................................. 23,152.7
Commitments and contingencies
Retained earnings........................................... 1,320.9
Accumulated other comprehensive income...................... 128.0
---------
Total equity...................................... 1,448.9
---------
Total liabilities and equity...................... $24,601.6
=========
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements.
F-51
<PAGE> 252
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- ------
(IN MILLIONS)
<S> <C> <C>
REVENUES:
Premiums.................................................... $ 353.8 $411.9
Universal life and investment-type product policy fees...... 74.3 54.4
Net investment income....................................... 357.7 359.6
Net realized gains on investment............................ 157.6 42.6
Group Pension Profits....................................... 22.7 28.2
Other income................................................ 78.4 58.8
-------- ------
1,044.5 955.5
-------- ------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 379.7 423.9
Interest credited to policyholders' account balances........ 61.2 70.8
Amortization of deferred policy acquisition costs........... 70.8 68.4
Dividends to policyholders.................................. 108.4 117.8
Other operating costs and expenses.......................... 224.5 196.1
-------- ------
844.6 877.0
-------- ------
Income before income taxes and extraordinary item........... 199.9 78.5
Income tax expense.......................................... 71.8 32.0
-------- ------
Income before extraordinary item............................ 128.1 46.5
Extraordinary item -- demutualization expenses, net......... (9.7) (2.4)
-------- ------
Net income.................................................. 118.4 44.1
Other comprehensive income, net of tax...................... 9.9 (17.3)
-------- ------
Comprehensive income........................................ $ 128.3 $ 26.8
======== ======
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements.
F-52
<PAGE> 253
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
TOTAL EARNINGS INCOME
-------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, December 31, 1997............................ $1,320.6 $1,202.5 $118.1
Comprehensive income
Net income.......................................... 118.4 118.4
Other comprehensive income
Unrealized losses on investments, net of
unrealized gains, reclassification adjustments,
and taxes...................................... 9.9 9.9
-------- -------- ------
Comprehensive income.................................. 128.3
-------- -------- ------
Balance, June 30, 1998................................ $1,448.9 $1,320.9 $128.0
======== ======== ======
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements.
F-53
<PAGE> 254
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN MILLIONS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 91.6 $ 72.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayment of:
Fixed maturities.......................................... 533.9 644.1
Equity securities......................................... 100.5 174.4
Mortgage loans on real estate............................. 152.0 133.6
Real estate............................................... 424.9 281.0
Other invested assets..................................... 45.5 14.1
Acquisitions of investments:
Fixed maturities.......................................... (826.5) (632.0)
Equity securities......................................... (104.6) (147.2)
Mortgage loans on real estate............................. (171.9) (94.4)
Real estate............................................... (19.1) (22.5)
Other invested assets..................................... (0.4) (0.6)
Policy loans, net......................................... (5.4) (1.6)
Other, net................................................ 57.0 33.8
Property plant & equipment, net........................... (4.0) (9.2)
------- -------
Net cash provided by investing activities................... 181.9 373.5
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt.......................................... (1.8) (113.6)
Receipts from annuity and universal life policies credited
to policyholder account balances.......................... 655.3 605.2
Return of policyholder account balances on annuity policies
and universal life policies............................... (748.0) (712.5)
------- -------
Net cash used in financing activities....................... (94.5) (220.9)
------- -------
Net increase (decrease) in cash and cash equivalents........ 179.0 225.5
Cash and cash equivalents, beginning of year................ 313.4 315.4
------- -------
Cash and cash equivalents, end of year...................... $ 492.4 $ 540.9
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Income taxes................................................ $ 46.4 $ 55.5
Interest.................................................... $ 11.3 $ 14.6
</TABLE>
See accompanying notes to unaudited interim condensed consolidated financial
statements.
F-54
<PAGE> 255
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
The Mutual Life Insurance Company of New York, ("MONY" or the "Company") is
a New York domiciled mutual life insurance company 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 to
such individuals primarily through its career agency sales force. The Company
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. DEMUTUALIZATION:
On August 14, 1998 (the "Board Adoption Date"), the Board of Trustees of
MONY adopted, pursuant to the New York Insurance Law, a Plan of Reorganization
(as amended, the "Plan") pursuant to which MONY proposes to convert from a
mutual life insurance company to a stock life insurance company (such proposed
conversion, together with other matters addressed in the Plan, the
"Demutualization"). In connection with the effectiveness of the Plan, the
following will occur: (i) MONY will convert from a mutual life insurance company
to a stock life insurance company, which will be named MONY Life Insurance
Company, and will become a wholly owned subsidiary of The MONY Group Inc. (the
"Holding Company"), (ii) all policyholders' membership interests will be
extinguished and in exchange therefor policyholders who own a Policy (as defined
in the Plan) that was in force on the Board Adoption Date and which remains in
force on the effective date of the Demutualization (the "Plan Effective Date")
("Eligible Policyholders") will receive shares of common stock of the Holding
Company ("Common Stock") or, in certain circumstances, cash or policy credits in
the form of an increase in accumulation account value, dividend deposits or
dividend additions, additional death benefits or an extension of an expiry date
with respect to such policies (hereinafter, "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
("Participating Policyholders") will receive additional shares of Common Stock
or, in certain circumstances, cash or Policy Credits, (iii) a closed block (the
"Closed Block") of certain individual MONY participating policies in classes for
which MONY had a current payable dividend scale (such Policies constitute the
"Closed Block Business") will be created, and assets will be 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 and (iv)
shares of Common Stock may be registered under the Securities Act of 1933 and
offered to the public in an initial public offering if market conditions are
appropriate.
3. INVESTMENT AGREEMENT:
On December 30, 1997, affiliates of Goldman, Sachs & Co. (the "Investors"),
which is one of the underwriters for the Holding Company's initial public
offering, entered into an investment agreement with MONY (the "Investment
Agreement"), pursuant to which: (i) the Investors purchased, for $115.0 million
(the "Consideration"), Surplus Notes issued by MONY (the "MONY Notes") with an
aggregate principal amount equal to the Consideration and (ii) the Investors
purchased, for $10.0 million, warrants (the "Warrants") to purchase from the
Holding Company (after giving effect to the initial public offering) in the
aggregate 7.0% of the fully diluted Common Stock as of the date the Plan becomes
effective or, if later, the first date following such effectiveness on which
shares of Common Stock are first issued to Eligible Policyholders (the
"Demutualization Date").
F-55
<PAGE> 256
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
The purchase price payable for each share of the Common Stock issuable upon
exercise of Warrants initially is (a) in the event the initial public offering
occurs prior to, on or within five trading days after the Demutualization Date,
the initial public offering price of the Common Stock, 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 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 or (b) in the event the initial public offering does not occur
prior to, on or within five trading days after the Demutualization Date, the
lesser of (i) the average of the daily closing prices of the Common Stock for
the first 20 trading days following Demutualization and (ii) 70% of the book
value per share of the Common Stock as of the Demutualization, determined in
accordance with generally accepted accounting principles ("GAAP"). 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.
In addition, under the terms of the Investment Agreement, the Investors
agreed, upon MONY's request, if made at any time up to 90 days after the
Demutualization Date and subject to certain conditions precedent, to purchase an
aggregate of 1.0 million shares of convertible preferred stock of the Holding
Company (the "Convertible Preferred Stock") for a total purchase price of $100.0
million. The Convertible Preferred Stock would be convertible, at the option of
the holder at any time, into Common Stock at a conversion price equal to the
initial exercise price of the Warrants and would be subject to certain
anti-dilution adjustments. The Convertible Preferred Stock would be mandatorily
redeemable on the earlier of (i) the tenth anniversary of the issuance date of
such stock or (ii) December 30, 2013, at a price equal to the liquidation
preference of such stock plus accumulated and unpaid dividends at the redemption
date (the "Redemption Price"). The Redemption Price would be payable in cash or
Common Stock. If the Holding Company elects to issue Common Stock in
satisfaction of the Redemption Price, the number of shares of Common Stock to be
issued would be determined by dividing a number that is equal to 110 percent of
the Redemption Price by the value of the Common Stock, which for this purpose
would be equal to the average of the closing price of the Common Stock for the
20 trading days immediately preceding the redemption date. In addition, under
certain circumstances the Holding Company, at its option, could redeem the
Convertible Preferred Stock after the third anniversary of the issuance of such
stock.
4. THE CLOSED BLOCK:
The Closed Block is a mechanism described in Section 7312 of the New York
Insurance Law. Under the Plan, the Company will establish and operate the Closed
Block as a closed block of participating business for the benefit, for dividend
purposes only, of the Policies included therein. The Company will allocate to
the Closed Block an amount of assets expected to produce cash flows which,
together with anticipated revenues from the Closed Block Business, are
reasonably expected to be sufficient to support the Closed Block Business,
including but not limited to, provision for payment of claims and surrender
benefits, certain expenses and taxes, and for continuation of current payable
dividend scales, assuming the experience underlying such dividend scales
continues, and for appropriate adjustments in such scales if the experience
changes. 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
F-56
<PAGE> 257
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
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, 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 gain 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. 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
F-57
<PAGE> 258
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
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.
The pre-tax Contribution from the Closed Block includes only those
revenues, benefit payments, dividends, premium taxes, state guaranty fund
assessments, and investment expenses considered in funding the Closed Block.
However, many expenses associated with operating the Closed Block and
administering the Policies included therein will be excluded from and,
accordingly, not funded in the Closed Block. These expenses will be reported in
the Company's statement of operations, outside of the Contribution from the
Closed Block, consistent with how they are funded. Such expenses will be
reported in the separate line items to which they apply based on the nature of
such expenses. Management expects that such expenses will be included and
reported as Other Operating Costs and Expenses in the Company's statement of
operations, unless any individual expense item is considered to be significant,
in which case such item or items will be reported separately in the Company's
statement of operations. Federal income taxes applicable to the Closed Block,
which will be funded in the Closed Block, will be reflected as a component of
federal income tax expense in the Company's statement of operations. Since many
expenses related to the Closed Block are funded outside the Closed Block,
operating costs and expenses outside the Closed Block may be disproportionate to
the level of business outside the Closed Block.
F-58
<PAGE> 259
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
5. SEGMENT INFORMATION
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
1998 1997
----------- -----------
($ IN MILLIONS)
<S> <C> <C>
Premiums:
Protection Products....................................... $ 343.8 $ 403.4
Accumulation Products..................................... 1.8 2.7
Other Products............................................ 8.2 5.8
--------- ---------
$ 353.8 $ 411.9
========= =========
Universal life and investment-type product policy fees:
Protection Products....................................... $ 41.8 $ 30.3
Accumulation Products..................................... 31.6 23.2
Other Products............................................ 0.9 0.9
--------- ---------
$ 74.3 $ 54.4
========= =========
Net investment income and net realized gains (losses) on
investments:
Protection Products....................................... $ 397.0 $ 304.7
Accumulation Products..................................... 77.8 65.3
Other Products............................................ 38.9 30.9
Unallocated amounts....................................... 1.6 1.3
--------- ---------
$ 515.3 $ 402.2
========= =========
Other income:
Protection Products(1).................................... $ 31.2 $ 37.4
Accumulation Products..................................... 34.6 23.4
Other Products............................................ 32.4 23.5
Unallocated amounts....................................... 2.9 2.7
--------- ---------
$ 101.1 $ 87.0
========= =========
Amortization of deferred policy acquisition costs:
Protection Products....................................... $ 55.4 $ 55.8
Accumulation Products..................................... 15.4 12.6
Other Products............................................ 0.0 0.0
--------- ---------
$ 70.8 $ 68.4
========= =========
Benefits to policyholders:(2)
Protection Products....................................... $ 376.8 $ 426.3
Accumulation Products..................................... 36.8 46.6
Other Products............................................ 22.6 17.7
Unallocated amounts....................................... 4.7 4.1
--------- ---------
$ 440.9 $ 494.7
========= =========
</TABLE>
F-59
<PAGE> 260
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------
1998 1997
----------- -----------
($ IN MILLIONS)
<S> <C> <C>
Other operating costs and expenses:
Protection Products....................................... $ 138.1 $ 129.4
Accumulation Products..................................... 42.7 30.0
Other Products............................................ 43.7 36.7
Unallocated amounts....................................... 0.0 0.0
--------- ---------
$ 224.5 $ 196.1
========= =========
Income before income taxes:
Protection Products....................................... $ 136.7 $ 48.3
Accumulation Products..................................... 50.0 24.4
Other Products............................................ 13.4 5.8
Unallocated amounts....................................... (0.2) 0.0
--------- ---------
$ 199.9 $ 78.5
========= =========
Assets:
Protection Products(3).................................... $16,218.3 $15,291.9
Accumulation Products..................................... 6,285.8 5,266.4
Other Products............................................ 1,209.8 1,327.1
Unallocated amounts....................................... 887.7 812.3
--------- ---------
$24,601.6 $22,697.7
========= =========
Deferred policy acquisition costs:
Protection Products....................................... $ 853.7 $ 986.6
Accumulation Products..................................... 136.3 141.7
Other Products............................................ -- 0.0
--------- ---------
$ 990.0 $ 1,128.3
========= =========
Policyholders' liabilities:
Protection Products(4).................................... $10,102.9 $10,317.7
Accumulation Products..................................... 1,332.2 1,493.0
Other Products............................................ 480.0 321.9
Unallocated amounts....................................... 18.0 22.4
--------- ---------
$11,933.1 $12,155.0
========= =========
Separate account liabilities:(5)
Protection Products(6).................................... $ 3,967.8 $ 3,455.9
Accumulation Products..................................... 4,598.1 3,469.8
Other Products............................................ 565.1 630.3
Unallocated amounts....................................... 745.7 703.3
--------- ---------
$ 9,876.7 $ 8,259.3
========= =========
</TABLE>
- ---------------
(1) Includes Group Pension Profits of $22.7 million and $28.2 million for the
six-month periods ended June 30, 1998 and 1997, respectively.
(2) Includes interest credited to policyholders' account balances.
F-60
<PAGE> 261
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
(3) Includes assets transferred in the Group Pension Transaction of $5,720.5
million and $5,538.5 million as of June 30, 1998 and 1997, respectively.
(4) Includes policyholder liabilities transferred in the Group Pension
Transaction of $1,890.9 million and $2,086.3 million as of June 30, 1998 and
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 $3,761.2 million and $3,397.2 million as of June 30, 1998 and
1997, respectively.
Following is a summary of revenues by product for the six-month periods
ended June 30, 1998 and 1997, respectively ($ in millions).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
------ ------
<S> <C> <C>
PREMIUMS:
Individual Life............................................. $343.1 $366.0
Disability income insurance................................. 0.7 37.3
Group insurance............................................. 5.7 5.0
Other....................................................... 4.3 3.6
------ ------
Total............................................. $353.8 $411.9
====== ======
UNIVERSAL LIFE AND INVESTMENT-TYPE PRODUCT POLICY FEES:
Universal life.............................................. $ 20.1 18.8
Variable universal life..................................... 16.6 7.5
Group universal life........................................ 5.1 4.0
Individual variable annuities............................... 31.2 22.8
Individual fixed annuities.................................. 1.3 1.3
------ ------
Total............................................. $ 74.3 $ 54.4
====== ======
</TABLE>
6. THE GROUP PENSION TRANSACTION:
The following tables set forth certain summarized financial information
relating to the Group Pension Transaction as of and for the periods indicated,
including information regarding: (i) the general account assets transferred to
support the Existing Deposits in the Group Pension Transaction (hereafter
referred to as the "AEGON Portfolio"), (ii) the transferred separate account
assets
F-61
<PAGE> 262
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
and liabilities, and (iii) the components of revenue and expense comprising the
Group Pension Profits:
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1998
---------------
($ IN MILLIONS)
<S> <C>
ASSETS:
General Account Fixed Maturities:
Available for sale, at estimated fair value (amortized
cost $1,493.7)........................................ $1,548.1
Mortgage loans on real estate.......................... 288.7
Real estate held for investment........................ 53.2
Cash and cash equivalents.............................. 41.9
Other assets........................................... 27.4
--------
Total general account assets...................... 1,959.3
Separate account assets................................... 3,761.2
--------
Total assets...................................... $5,720.5
========
LIABILITIES:
General Account(1)
Policyholders' account balances........................ $1,890.9
Other liabilities...................................... 30.2
--------
Total general account liabilities................. 1,921.1
Separate account liabilities(2)........................... 3,761.2
--------
Total liabilities................................. $5,682.3
========
</TABLE>
- ---------------
(1) Includes general account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $133.2
million as of June 30, 1998.
(2) Includes separate account liabilities transferred in connection with the
Group Pension Transaction pursuant to indemnity reinsurance of $34.0 million
as of June 30, 1998.
<TABLE>
<CAPTION>
FOR THE SIX-MONTH
PERIOD
ENDED JUNE 30,
------------------
1998 1997
------- -------
($ IN MILLIONS)
<S> <C> <C>
REVENUES:
Product policy fees......................................... $11.1 $11.0
Net investment income....................................... 80.6 85.9
Net realized gains (losses) on investments.................. (2.4) 2.2
----- -----
Total revenues.................................... 89.3 99.1
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances........ 55.7 59.8
Other operating costs and expenses.......................... 10.9 11.1
----- -----
Total benefits and expenses....................... 66.6 70.9
Group Pension Profits....................................... $22.7 $28.2
===== =====
</TABLE>
F-62
<PAGE> 263
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
In late 1995 and during 1996, a number of purported class actions were
commenced in various state and federal courts against the Company alleging that
the Company engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies during the period 1980 through 1995.
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). The
Company has answered the complaints in each action (except for one being
voluntarily held in abeyance), has denied any wrongdoing, and has asserted
numerous affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified the Goshen
case, being the first of the aforementioned class actions filed, as a nationwide
class consisting of all persons or entities who have, or at the time of the
policy's termination had, an ownership interest in a whole or universal life
insurance policy issued by the Company and sold on an alleged "vanishing
premium" basis during the period January 1, 1982 to December 31, 1995. On March
27, 1997, the Company filed a motion to dismiss or, alternatively, for summary
judgment on all counts of the complaint. All of the other putative class actions
have been consolidated and transferred by the Judicial Panel on Multidistrict
Litigation to the United States District Court for the District of
Massachusetts, or are being voluntarily held in abeyance pending the outcome of
the Goshen case. The Massachusetts District Court in the Multidistrict
Litigation has entered an order essentially holding all of the federal cases in
abeyance pending the action of the Goshen case.
On October 21, 1997, the New York State Supreme Court granted the Company's
motion for summary judgment and dismissed all claims filed in the Goshen case
against the Company. 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, the Company is involved in
various other legal actions and proceedings in connection with its businesses.
The claimants in certain of these actions and proceedings seek damages of
unspecified amounts. In connection with such matters, the Company recorded a
provision of $10.0 million during the six-month period ended June 30, 1998.
At June 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 June 30, 1998,
resulting from the resolution of these matters will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
F-63
<PAGE> 264
THE MONY GROUP INC.
UNAUDITED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $10,142,100
-----------
Total assets...................................... 10,142,100
===========
LIABILITIES
Taxes payable............................................... $ 49,385
-----------
Total liabilities................................. 49,385
===========
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value, authorized 400 million
shares; 1,000 shares issued and outstanding............... 10
Capital in excess of par.................................... 10,000,990
Retained earnings........................................... 91,715
-----------
Total stockholders' equity........................ 10,092,715
-----------
Total liabilities and stockholders' equity.................. $10,142,100
===========
</TABLE>
These unaudited condensed financial statements of The MONY Group Inc. should be
read in conjunction with the accompanying notes hereto, and the consolidated
financial statements and the unaudited interim condensed consolidated financial
statements of The Mutual Life Insurance Company of New York and related notes
thereto presented elsewhere herein.
F-64
<PAGE> 265
THE MONY GROUP INC.
UNAUDITED CONDENSED STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
FOR THE PERIOD FROM JANUARY 1, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1998
<TABLE>
<S> <C>
REVENUES:
Investment income........................................... $141,100
--------
141,100
--------
EXPENSES:
Income tax expense.......................................... 49,385
--------
49,385
--------
Net income and other comprehensive income................... $ 91,715
========
</TABLE>
These unaudited condensed financial statements of The MONY Group Inc. should be
read in conjunction with the accompanying notes hereto, and the consolidated
financial statements and the unaudited interim condensed consolidated financial
statements of The Mutual Life Insurance Company of New York and related notes
thereto presented elsewhere herein.
F-65
<PAGE> 266
THE MONY GROUP INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998 (COMMENCEMENT OF OPERATIONS)
THROUGH JUNE 30, 1998
<TABLE>
<S> <C>
Net cash provided by operating activities.............. $ 141,100
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution and issuance of warrants............... 10,001,000
-----------
Net cash provided by financing activities.............. 10,001,000
-----------
Increase in cash and cash equivalents....................... 10,142,100
Cash and cash equivalents, beginning of year................ --
-----------
Cash and cash equivalents, end of year...................... $10,142,100
===========
</TABLE>
These unaudited condensed financial statements of The MONY Group Inc. should be
read in conjunction with the accompanying notes hereto, and the consolidated
financial statements and the unaudited interim condensed consolidated financial
statements of The Mutual Life Insurance Company of New York and related notes
thereto presented elsewhere herein.
F-66
<PAGE> 267
THE MONY GROUP INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. ORGANIZATION:
The MONY Group Inc. (the "Holding Company") was incorporated on June 24,
1997, under the laws of Delaware and is a wholly owned subsidiary of The Mutual
Life Insurance Company of New York ("MONY"), a New York mutual life insurance
company. The Company was organized for the purpose of becoming the parent
holding company of MONY pursuant to a Plan of Reorganization (as amended, the
"Plan") which was adopted by the Board of Trustees of MONY on August 14, 1998.
In accordance with the Plan MONY proposes to convert from a mutual life
insurance company to a stock life insurance company and become a wholly owned
subsidiary of the Holding Company.
The Company did not engage in any activity other than those incident to its
formation from June 24, 1997 to December 30, 1997. At December 30, 1997, the
Company issued warrants to the Investors, as described below, the proceeds from
which provided substantially all of its capitalization.
2. BASIS OF PRESENTATION:
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements have been prepared consistent
with, and should be read in conjunction with, MONY's Consolidated Financial
Statements and Notes thereto presented elsewhere in this registration statement.
3. INVESTMENT AGREEMENT:
On December 30, 1997, affiliates of Goldman, Sachs & Co. (the "Investors"),
which is one of the underwriters for the Holding Company's initial public
offering, entered into an investment agreement with MONY (the "Investment
Agreement"), pursuant to which: (i) the Investors purchased, for $115.0 million
(the "Consideration"), Surplus Notes issued by MONY (the "MONY Notes") with an
aggregate principal amount equal to the Consideration and (ii) the Investors
purchased, for $10.0 million, warrants (the "Warrants") to purchase from the
Holding Company (after giving effect to the initial public offering) in the
aggregate 7.0% of the fully diluted common stock of the Holding Company ("Common
Stock") as of the date the Plan becomes effective or, if later, the first date
following such effectiveness on which shares of Common Stock are first issued to
Eligible Policyholders (the "Demutualization Date").
The purchase price payable for each share of the Common Stock issuable upon
exercise of Warrants initially is (a) in the event the initial public offering
occurs prior to, on or within five trading days after the Demutualization Date,
the initial public offering price of the Common Stock, 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 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 or (b) in the event the initial public offering does not occur
prior to, on or within five trading days after the Demutualization Date, the
lesser of (i) the average of the daily closing prices of the Common Stock for
the first 20 trading days following Demutualization and (ii) 70% of the book
value per share of the Common Stock as of the Demutualization, determined in
accordance with generally accepted accounting principles ("GAAP"). The Warrants
contain standard anti-dilution provisions, providing for adjustment to the
exercise price in the event of, among other
F-67
<PAGE> 268
THE MONY GROUP INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In addition, under the terms of the Investment Agreement, the Investors
agreed, upon MONY's request, if made at any time up to 90 days after the
Demutualization Date and subject to certain conditions precedent, to purchase an
aggregate of 1.0 million shares of convertible preferred stock of the Holding
Company (the "Convertible Preferred Stock") for a total purchase price of $100.0
million. The Convertible Preferred Stock would be convertible, at the option of
the holder at any time, into Common Stock at a conversion price equal to the
initial exercise price of the Warrants and would be subject to certain
anti-dilution adjustments. The Convertible Preferred Stock would be mandatorily
redeemable on the earlier of (i) the tenth anniversary of the issuance date of
such stock or (ii) December 30, 2013, at a price equal to the liquidation
preference of such stock plus accumulated and unpaid dividends at the redemption
date (the "Redemption Price"). The Redemption Price would be payable in cash or
Common Stock. If the Holding Company elects to issue Common Stock in
satisfaction of the Redemption Price, the number of shares of Common Stock to be
issued would be determined by dividing a number that is equal to 110 percent of
the Redemption Price by the value of the Common Stock, which for this purpose
would be equal to the average of the closing price of the Common Stock for the
20 trading days immediately preceding the redemption date. In addition, under
certain circumstances the Holding Company, at its option, could redeem the
Convertible Preferred Stock after the third anniversary of the issuance of such
stock.
4. DIVIDEND RESTRICTIONS:
Assuming the Plan becomes effective, the Holding Company's cash flows will
consist of dividends from subsidiaries, if declared and paid, principal and
interest payments with respect to 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,
dividends on the Convertible Preferred Stock, if issued, salaries and other
expenses. Assuming 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. Annual dividend payments on the Convertible Preferred Stock,
if issued, will be determined based on a rate equal to the ten-year Treasury
Rate in effect on the date of issuance of the Convertible Preferred Stock. As a
holding company, the Holding Company's ability to meet cash requirements and pay
dividends 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. Furthermore, 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 the
insurer warrants". In addition, the Arizona insurance laws contain similar
restrictions on the ability of MONY Life Insurance Company of America, MONY's
wholly owned subsidiary.
F-68
<PAGE> 269
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Holding Company has agreed to sell to each of the U.S. Underwriters named below,
and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated and
Salomon Smith Barney Inc. are acting as representatives, has severally agreed to
purchase from the Holding Company, the respective number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Morgan Stanley & Co. Incorporated...........................
Salomon Smith Barney Inc. ..................................
---------
Total............................................. 9,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters and the International Underwriters (as hereinafter defined) are
committed to take and pay for all the shares offered hereby and in the
International Offering, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Holding Company has entered into an underwriting agreement (the
"International Underwriting Agreement") with the underwriters of the
International Offering (the "International Underwriters") providing for the
concurrent offer and sale of 1,750,000 shares of Common Stock in an
international offering outside the United States. The International Offering is
a firm commitment underwriting. The offering price and aggregate underwriting
discounts and commissions per share for the two offerings are identical. The
closing of the offering made hereby is a condition to the closing of the
International Offering, and vice versa, and each of the offerings is conditioned
upon the consummation of the Demutualization. The representatives of the
International Underwriters are Goldman Sachs International, Donaldson, Lufkin &
Jenrette International, Morgan Stanley & Co. International Limited and Salomon
Brothers International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of
U-1
<PAGE> 270
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the International
Offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the United
States or to any U.S. persons or (b) to any person who it believes intends to
reoffer, resell or deliver the shares in the United States or to any U.S.
persons and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Holding Company has granted the U.S. Underwriters an option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate of
1,425,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
9,500,000 shares of Common Stock offered. The Holding Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
262,500 additional shares of Common Stock.
The Holding Company and the Investors have agreed that, during the period
beginning on the date of the Underwriting Agreement and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell, or otherwise dispose of (other than pursuant to
employee stock option or purchase plans existing, or the conversion or exchange
of convertible or exchangeable securities, or the exercise of warrants
outstanding, on the date of this Prospectus) any shares of Common Stock or any
securities of the Holding Company that are substantially similar to the Common
Stock, including but not limited to any securities that are convertible into or
exercisable or exchangeable for, or represent the right to receive, Common Stock
or any such substantially similar securities, without the prior written consent
of the representatives, except for the shares of Common Stock offered in
connection with the concurrent U.S. Offering and International Offering. In
addition, the Investors have agreed that they will not sell, transfer, assign or
hypothecate the Warrants, or any Common Stock purchased upon exercise of the
Warrants, for 90 days following the effective date of the Offerings.
The representatives of the Underwriters have informed the Holding Company
that they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to the Offerings, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Holding Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Common Stock, in addition to prevailing
market conditions, will be the Company's historical performance, estimates of
the business potential and earnings prospects of the Company, an assessment of
the Company's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
In connection with the Offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock, and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase
U-2
<PAGE> 271
from the Holding Company in the Offerings. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the offerings for their
account may be reclaimed by the syndicate if such Common Stock is repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on the NYSE, in the over-the-counter market
or otherwise.
The Common Stock has been approved for listing, subject to notice of
issuance, on the NYSE under the symbol "MNY". In order to meet one of the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
holders.
Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to MONY and its subsidiaries
and/or the Holding Company and their respective affiliates, including without
limitation serving as the initial purchaser of the 11 1/4% Notes, for which such
Underwriters have received and will receive customary fees and commissions. In
addition, certain of the Underwriters distribute a number of the Company's
products for which they receive customary compensation. The Investors are
affiliates of Goldman Sachs, one of the representatives of the U.S.
Underwriters, and of Goldman Sachs International, one of the representatives of
the International Underwriters. Claude M. Ballard, Jr., a limited partner of The
Goldman Sachs Group, L.P., is a director of the Holding Company and is currently
the Board member designated by the Investors pursuant to the Board
representation rights granted to the Investors in the Investment Agreement. See
"Certain Provisions of the Investment -- Board Representation". The Investors,
Goldman Sachs and Goldman Sachs International are affiliates of The Goldman
Sachs Group, L.P. Donaldson, Lufkin & Jenrette Securities Corporation has acted
as MONY's financial advisor in connection with the Demutualization.
The Holding Company and MONY have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering to persons located in the United States.
In connection with the Offerings, Morgan Stanley & Co. Incorporated is
acting as an "independent underwriter" and the initial public offering price
will be no higher than the price recommended by Morgan Stanley & Co.
Incorporated. In its role as independent underwriter, Morgan Stanley & Co.
Incorporated has participated in due diligence investigations and in the
preparation of the Prospectus and the Registration Statement of which this
Prospectus forms a part.
U-3
<PAGE> 272
ANNEX A
ACTUARIAL
OPINIONS
A-1
<PAGE> 273
[PRICEWATERHOUSECOOPERS LETTERHEAD]
August 10, 1998
The Board of Trustees
The Mutual Life Insurance Company of New York
1740 Broadway
New York, NY 10019
Re: Plan of Reorganization of the Mutual Life Insurance Company of New York
(MONY), dated August 14, 1998
STATEMENT OF ACTUARIAL OPINION
QUALIFICATIONS
I, Jesse M. Schwartz, a Principal with the firm of PricewaterhouseCoopers
LLP (PwC) and a member of the American Academy of Actuaries, am qualified under
the Academy's Qualification Standards to render the opinion set forth herein.
MONY's Plan of Reorganization is carried out under Section 7312 of the New York
Insurance Law. This opinion is not a legal opinion regarding the Plan, and does
not address the overall fairness of the Plan. Rather, it reflects the
application of actuarial concepts and standards of practice to the requirements
set forth in Section 7312.
RELIANCE
I and other PwC staff acting under my direction received from MONY
extensive information concerning MONY's past and present financial experience
and the characteristics of its policies. We relied on the accuracy and
completeness of the data and assumptions supplied by MONY and did not
independently verify that information. Where possible, the information was
reviewed for general reasonableness and in certain circumstances the data was
reconfirmed with MONY.
Information concerning expected future cash flows from assets held by MONY
as of December 31, 1997, and eligible for allocation to the Closed Block was
provided under the direction of MONY's Executive Vice President and Chief
Investment Officer Kenneth M. Levine. I relied on Mr. Levine's representation
that these cash flows represent MONY's current estimate.
Information as to MONY's experience underlying it's 1998 dividend scale for
other than asset cash flows was provided under the general direction of MONY's
Senior Vice President and Chief Actuary Phillip A. Eisenberg, F.S.A., M.A.A.A. I
relied on the accuracy of the data provided by Mr. Eisenberg.
My opinion depends upon the substantial accuracy of the information
described above that was provided by MONY (the "MONY Data").
A-2
<PAGE> 274
Actuarial Opinion Page 2 08/10/98
- --------------------------------------------------------------------------------
PROCESS
PwC developed a financial model based upon MONY Data. Mathematical formulas
were applied to component parts of the model to determine the amount of assets
initially needed to fund the Closed Block. The methodology applied by PwC was
primarily a mechanical process and was based on assumptions and data provided by
management.
The PwC staff, under my direction, performed the calculations on which my
opinion is based.
OPINION
<TABLE>
<C> <S>
In my opinion:
1. The objective of the closed block as being for the exclusive
benefit of the policies included therein for policyholder
dividend purposes only as set forth in Article VIII of the
MONY Plan of Reorganization (the "Plan") is consistent with
Section 7312 of New York insurance law.
2. The operations of the Closed Block as set forth in Article
VIII of the Plan and described in the Closed Block
Memorandum, including the determination of the required
initial funding and the manner in which cash flows are
charged and credited to the Closed Block, are consistent
with the objectives of the closed block.
3. MONY's assets (Closed Block funding) set aside as of January
1, 1998 (including subsequent adjustments), to establish the
Closed Block, as set forth in Article VIII of the Plan
(including the Closed Block Memorandum, Exhibit F thereto),
are adequate because they are expected to produce cash flows
which, together with anticipated revenues from the Closed
Block Business, are reasonably sufficient to enable the
Closed Block to provide for the guaranteed benefits, certain
expenses and taxes associated with Closed Block policies,
and to provide for the continuation of the dividend scale in
effect for 1998 if the experience underlying such dividend
scale continues, and for appropriate adjustments in such
scale if the experience changes.
4. The Plan is consistent with the objective of the closed
block as it provides a vehicle for management to make
appropriate adjustments to future dividend scales, where
necessary, if the underlying experience changes from the
experience underlying such dividend scales.
</TABLE>
A-3
<PAGE> 275
Actuarial Opinion Page 3 08/10/98
- --------------------------------------------------------------------------------
DISCUSSION
- As to (1) above, my opinion as to consistency is based upon the
recognition that credits and charges to the closed block are only
derived from policies included in the closed block and interest
credited to the closed block is only derived from closed block
assets.
- As to (2) above, my opinion is based on my findings that those
matters are consistent with the objective of the Closed Block. I have
specifically taken into account that, other than with respect to
certain taxes and investment expenses, the funding of the Closed
Block does not provide for the future costs of servicing or
commissions payable on the policies included in it, and the Closed
Block Memorandum provides specifically that such expenses and
commissions shall not be charged to the Closed Block.
- As to (3) above, the Closed Block was funded as of January 1, 1998
(including a final adjustment for 1998 new business), based on a
calculation as of that date. The opinion in (3) above rests on that
calculation, which extends over the future life of all policies
assigned to the Closed Block.
- As to (4) above, the criteria set forth in Article VIII for modifying
the dividend scales if the experience changes are such that, if
followed, the Closed Block policyholders will be treated in a manner
consistent with the contribution principle for dividend
determination. The operation of the Closed Block as set forth Article
VIII is consistent with actuarial practice as described in Actuarial
Standard of Practice #15.
Very truly yours,
/s/ JESSE M. SCHWARTZ
Jesse M. Schwartz, F.S.A., M.A.A.A.
Principal
PricewaterhouseCoopers LLP
A-4
<PAGE> 276
[MUTUAL OF NEW YORK LOGO] Phillip A. Eisenberg, F.S.A., M.A.A.A.
Senior Vice President and
Chief Actuary The Mutual Life
Insurance
Company of New York
1740 Broadway
New York, NY 10019
212 708-2570
212 708-2118 Fax
August 14, 1998
The Board of Trustees
The Mutual Life Insurance Company of New York
1740 Broadway
New York, NY 10019
Re: Plan of Reorganization of The Mutual Life Insurance Company of New York
(MONY),
August 14, 1998
STATEMENT OF ACTUARIAL OPINION
QUALIFICATIONS
I, Phillip A. Eisenberg, MONY's Senior Vice President and Chief Actuary and
a member of the American Academy of Actuaries, am qualified under the Academy's
Qualification Standards to render the opinion set forth herein concerning how
MONY's Plan of Reorganization (the "Plan") is carried out under Section 7312 of
the New York Insurance Law. This opinion is not a legal opinion regarding the
Plan, but rather reflects the application of actuarial concepts and standards of
practice to the requirements set forth in Section 7312.
RELIANCE
In forming the opinion set forth in this memorandum, I relied upon
available MONY documentation of past and present practices and financial
results. For the individual life line of business, this information was very
extensive. Less information was available for the remaining lines of business.
The methodology applied to arrive at my opinion varied with the extent of
available data.
PricewaterhouseCoopers, LLP (PwC) was retained to develop a financial model
using the MONY data provided to it and applied assumptions and mathematical
formulas to the components of the model. I analyzed the results of PwC's work in
forming my opinion. In all cases, PwC activities were performed under my general
direction, and I or other MONY staff approved the methodology applied by PwC.
Information concerning future cash flows from assets held by MONY as of
December 31, 1997, and allocated to business which will receive share
distributions covered by the opinion was provided under the direction of
Executive Vice President and Chief Investment Officer, Kenneth M. Levine. I
relied on Mr. Levine's confirmation that this cash flow represents MONY's
current estimate.
A-5
<PAGE> 277
PROCESS
In all cases, I or other MONY staff reviewed the methodology applied by PwC
in making the calculations necessary for me to reach an opinion.
OPINION
In my opinion, the plan for allocation of policyholder consideration set
forth in Article VII of the Plan is fair and equitable to policyholders as
required by Section 7312 of the New York Insurance Law.
DISCUSSION
The distribution described in Article VII takes into account the estimated
past and future contributions to surplus. The distribution to each eligible
policyholder is based upon its relative contributions to surplus to total
contributions from all eligible policyholders.
Most of the consideration to be distributed to policyholders is allocated
on this basis. Under Section 7312 of the New York Insurance Law, there is no
specific guidance given for the allocation of consideration in a "Method 4"
reorganization, but policyholder contributions are specifically identified as an
acceptable approach to allocation of consideration under other methods of
reorganization within this section of the law. In addition, the contribution
method is recognized in the actuarial literature as an appropriate method. I
therefore find that the use of "actuarial contribution" as the principal basis
underlying the allocation of consideration is fair and equitable. I further find
that the "actuarial contribution" method has been implemented in a reasonable
manner. In particular, the delineation of classes of policyholders in the Plan
is consistent with MONY's past and present business practices.
The distribution also takes into account, to a lesser extent, the fact that
policyholders have intangible membership rights that are independent of their
actuarial contributions. Each Eligible Policyholder is, under the Plan,
allocated a fixed number of shares of common stock without regard to the
contribution of that policyholder or of the class or classes in which policies
held by the policyholder happen to reside. This element of the allocation is
consistent with overall concepts of equity. Under the Plan, the percentage of
the total consideration that is allocated in this manner is small relative to
that allocated in proportion to positive contributions, which is also equitable.
Very truly yours,
/s/PHILLIP A. EISENBERG SIGNATURE
Phillip A. Eisenberg, FSA, MAAA
Senior Vice President and Chief
Actuary
A-6
<PAGE> 278
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE HOLDING COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 22
The Demutualization........................ 38
Use of Proceeds............................ 43
Dividends.................................. 44
Capitalization............................. 45
Selected Consolidated Financial
Information.............................. 46
Recent Developments........................ 52
Pro Forma Condensed Consolidated Financial
Information.............................. 56
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 67
Business................................... 106
Investments................................ 132
Management................................. 162
Beneficial Ownership of Common Stock....... 174
Certain Provisions of the Investment....... 176
Description of Capital Stock............... 180
Shares Eligible for Future Sale............ 184
Restrictions on Acquisitions of Securities
of the Holding Company................... 185
Certain Provisions of the Amended and
Restated Certificate of Incorporation and
the By-Laws of the Holding Company....... 186
Validity of Common Stock................... 190
Experts.................................... 190
Available Information...................... 191
Glossary................................... G-1
Index to Financial Statements.............. F-1
Underwriting............................... U-1
Annex A -- Actuarial Opinions.............. A-1
</TABLE>
------------------------
THROUGH AND INCLUDING , 1998 (25 DAYS FROM THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
11,250,000 SHARES
THE MONY GROUP INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
-----------------------
[MONY LOGO]
-----------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 279
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
offering of Common Stock pursuant to this Registration Statement that will be
paid fully by the registrant. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the NASD filing fee and the
New York Stock Exchange listing.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 89,690
NASD filing fee............................................. 28,316
NYSE listing fee............................................ 245,600
Blue Sky fees and expenses.................................. 15,000
Printing, engraving and postage expenses.................... 400,000
Accounting fees and expenses................................ 1,200,000
Legal fees and expenses..................................... 400,000
Miscellaneous............................................... 21,394
----------
Total............................................. 2,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Directors and officers of the Holding Company may be indemnified against
liabilities, fines, penalties and claims imposed upon or asserted against them
as provided in the Delaware General Corporation Law and the Holding Company's
Amended and Restated Certificate. Such indemnification covers all costs and
expenses incurred by a director or officer. The Board of Directors, by a
majority vote of a quorum of disinterested directors or, under certain
circumstances, independent counsel appointed by the Board of Directors, must
determine that the director or officer seeking indemnification was not guilty of
willful misconduct or a knowing violation of the criminal law. In addition, the
Delaware General Corporation Law and the Holding Company's Amended and Restated
Certificate may under certain circumstances eliminate the liability of directors
and officers in a stockholder or derivative proceeding.
If the person involved is not a director or officer of the Holding Company,
the Board of Directors may cause the Holding Company to indemnify to the same
extent allowed for directors and officers of the Holding Company such person who
was or is a party to a proceeding, by reason of the fact that he is or was an
employee or agent of the Holding Company, or is or was serving at the request of
the Holding Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
The Holding Company has in force and effect a policy insuring the directors
and officers of the Holding Company against losses which they or any of them
shall become legally obligated to pay for by reason of any actual or alleged
error or misstatement or misleading statement or act or omission or neglect or
breach of duty by the directors and officers in the discharge of their duties,
individually or collectively, or any matter claimed against them solely by
reason of their being directors or officers, such coverage being limited by the
specific terms and provisions of the insurance policy.
Pursuant to the Underwriting Agreements, in the forms filed as exhibits to
the Registration Statement, any Underwriters under the Underwriting Agreements
will agree to indemnify the registrant's directors and officers and persons
controlling the registrant, within the meaning of the Securities Act, against
certain liabilities that might arise out of or are based upon certain
information furnished to the registrant by any such indemnifying party.
II-1
<PAGE> 280
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On the First Closing Date, MONY and the Holding Company sold to the
Investors the MONY Notes in an aggregate principal amount of $115 million for a
purchase price of $115 million and the Warrants to purchase from the Holding
Company in the aggregate 7% of the fully diluted Common Stock (after giving
effect to the Offerings) at the Demutualization Date. The price payable for each
share of the Common Stock issuable upon exercise of Warrants initially is (a) in
the event the Offerings occur prior to or within five trading days after the
Demutualization Date, 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 price,
in which case the 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 or (b) in the
event the Offerings do not occur prior to or within five trading days after the
Demutualization Date, the lesser of (i) the average of the daily closing prices
of the Common Stock for the first 20 trading days following Demutualization and
(ii) 70% of the book value per share of the Common Stock as of the
Demutualization, determined in accordance with GAAP. 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.
Exemption from registration under the Securities Act for such issuances was
claimed under Section 4(2) of the Securities Act. The factors supporting the
availability of the exemption provided by Section 4(2) include: (i) the
sophistication of the Investors (each of whom is an affiliate of Goldman, Sachs
& Co. and an experienced institutional investor), (ii) their access to material
information, (iii) the disclosure actually made to them by the Company and (iv)
the absence of any general solicitation or advertising.
The Holding Company will distribute to certain Eligible Policyholders
approximately 40 million shares of Common Stock in the Demutualization.
Exemption from registration under the Securities Act for such distribution will
be claimed under Section 3(a)(10) of the Securities Act based on the New York
Superintendent's approval of the Plan.
ITEM 16. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(a) List of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<S> <C>
1.1 Form of Underwriting Agreement (U.S. Version)**
1.2 Form of Underwriting Agreement (International Version)**
2.1 Plan of Demutualization, as amended**
3.1 Form of Amended and Restated Certificate of Incorporation of
the Holding Company**
3.2 Form of By-laws of the Holding Company, as amended**
4.1 Form of Certificate for the Common Stock, par value $0.01
per share**
4.2 Form of MONY Note**
4.3 Form of Warrant**
5.1 Opinion of Dewey Ballantine LLP**
10.1 Investment Agreement, dated as of December 30, 1997, among
MONY, the Holding Company and GS Mezzanine Partners, GS
Mezzanine Partners Offshore, L.P., Stone Street Fund 1997,
L.P. and Bridge Street Fund 1997, L.P.**
10.2 Registration Rights Agreement dated as of December 30, 1997,
by and among MONY, the Holding Company and the Investors**
</TABLE>
II-2
<PAGE> 281
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<S> <C>
10.3 Fiscal Agency Agreement dated as of December 30, 1997, by
and among MONY and Citibank, N.A.**
10.4 Amended and Restated Reinsurance Agreement, effective as of
January 1, 1994, between MONY and Life Reassurance
Corporation of America**
10.5 Portfolio Indemnity Reinsurance Agreement, effective as of
December 30, 1995, between MONY and The Guardian Life
Insurance Company of America, and all amendments thereto**
10.6 Amendment Eight to the Amended and Restated Portfolio
Indemnity Reinsurance Agreement, effective as of December
31, 1995, between MONY and The Guardian Life Insurance
Company of America**
10.7 Amendment Nine to the Amended and Restated Portfolio
Indemnity Reinsurance Agreement, dated as of December 31,
1995, between MONY and The Guardian Life Insurance Company
of America**
10.8 Amended and Restated Reinsurance Agreement (Amendment
Eleven), effective as of December 31, 1995, between MONY and
Lyndon Life Insurance Company**
10.9 Assignment and Novation Agreement, effective January 1,
1996, by and among MONY, Lyndon Life Insurance Company and
RGA Reinsurance Company**
10.10 Amendment Twelve to the Amended and Restated Reinsurance
Agreement, effective as of January 1, 1996, between MONY and
RGA Reinsurance Company**
10.11 Amendment Thirteen to the Amended and Restated Reinsurance
Agreement, effective as of January 1, 1996, between MONY and
RGA Reinsurance Company**
10.12 Agreement of Lease, dated as of December 17, 1990, between
1740 Broadway Associates L.P. and MONY, and all amendments
thereto**
10.13 Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.14 Second Amendment to Agreement of Lease, dated as of August
6, 1996, between 1740 Broadway Associates L.P. and MONY**
10.15 Third Amendment to Agreement of Lease, dated as of December
18, 1996, between 1740 Broadway Associates L.P. and MONY**
10.16 Fourth Amendment to Agreement of Lease, dated as of January
14, 1997, between 1740 Broadway Associates L.P. and MONY**
10.17 Fifth Amendment to Agreement of Lease, dated as of May 30,
1997, between 1740 Broadway Associates L.P. and MONY**
10.18 Letter Agreement, dated as of April 26, 1996, to accompany
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.19 Letter, dated as of December 18, 1996, amending Letter
Agreement, dated as of April 26, 1996, to accompany First
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.20 Letter, dated as of January 14, 1997, amending Letter
Agreement, dated as of April 26, 1996, to accompany
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.21 Agreement of Lease, dated as of December 21, 1988, between
Continental Towers and MONY, and all amendments thereto**
10.22 First Amendment to Agreement of Lease, dated as of January
14, 1994, between Continental Towers and MONY**
</TABLE>
II-3
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<S> <C>
10.23 Second Amendment to Agreement of Lease, dated as of October
15, 1997, between Continental Towers and MONY**
10.24 1998 Stock Incentive Plan**
10.25 Asset Transfer and Acquisition Agreement, dated as of
December 31, 1993, by and among MONY, AEGON USA, Inc. and
AUSA Life Insurance Company, Inc.**
10.26 Series A Note Purchase Agreement, dated as of December 31,
1993, by and between AEGON USA, Inc. and MONY**
10.27 Series B Note Purchase Agreement, dated as of December 31,
1993, by and between AEGON USA, Inc. and MONY**
10.28 Fiscal Agency Agreement, dated as of August 15, 1994,
between MONY and The Chase Manhattan Bank, N.A.**
10.29 Excess Benefit Plan for MONY Employees**
10.30 Form of MONY Deferred Compensation Plan Agreement for Key
Employees**
10.31 Form of MONY Deferred Compensation Plan Agreement for MONY
Trustees**
10.32 1988 Equity Share Plan**
10.33 Form of Equity Share Plan Deferred Compensation Agreement**
10.34 Split Dollar Life Insurance Plan**
10.35 Form of Employment Agreement applicable to Messrs. Roth,
Levine and Foti**
10.36 Form of Employment Agreement applicable to Messrs. Conklin,
Connors, Mulroy, Waldron, Hall and Daddario**
10.37 Form of Shareholder Rights Agreement**
10.38 Letter Agreement, dated June 25, 1997, between MONY and The
Chase Manhattan Bank**
10.39 Letter Agreement, dated June 19, 1997, between MONY and
Fleet Bank**
10.40 Letter Agreement, dated June 30, 1997, between MONY and
Citibank, N.A.**
10.41 Letter Agreement, dated June 30, 1997, between MONY and
Mellon Bank**
10.42 Letter Agreement, dated August 6, 1997, between MONY and
State Street Bank and Trust Company**
10.43 The MONY Group Inc. Annual Incentive Compensation Plan**
10.44 Form of Change in Control Employment Agreements**
21.1 Subsidiaries of the registrant**
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of Chadbourne & Parke LLP**
23.3 Consent of Dewey Ballantine LLP (included in Exhibit 5.1)**
23.4 Consent of DALBAR, Inc.**
23.5 Consent of Jesse M. Schwartz, F.S.A., M.A.A.A.**
23.6 Consent of Phillip A. Eisenberg, F.S.A., M.A.A.A.**
24.1 Powers of Attorney**
27.1 Financial Data Schedule**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
II-4
<PAGE> 283
(b) Financial Data Schedules.
The following consolidated financial statement schedule of the Company was
filed with the Commission by Amendment No. 1 to this Registration Statement:
Schedule II -- Condensed Financial Information of MONY Life Insurance
Company of America
All other schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable and therefore have
been omitted or the information has been included in the consolidated financial
statements.
ITEM 17. UNDERTAKINGS.
(a) Acceleration of Effectiveness.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of the counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) Stock Certificates.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(c) Information omitted from Form of Prospectus pursuant to Rule 430A.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 284
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The MONY Group
Inc. has duly caused this Amendment No. 3 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on November 9, 1998.
The MONY Group Inc.
By /s/ RICHARD E. MULROY, JR.
------------------------------------
Name: Richard E. Mulroy, Jr.
Title: Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed on November 9, 1998 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
* Chairman of the Board and Chief Executive Officer;
- ------------------------------------------------ Director (Principal Executive Officer)
Michael Isor Roth
* Executive Vice President and Chief Financial
- ------------------------------------------------ Officer (Principal Financial Officer)
Richard Daddario
* Vice President and Controller (Principal Accounting
- ------------------------------------------------ Officer)
Larry Cohen
* Director
- ------------------------------------------------
Claude Mark Ballard, Jr.
* Director
- ------------------------------------------------
Tom Hans Barrett
* Director
- ------------------------------------------------
David Lincoln Call
* Director
- ------------------------------------------------
Glenn Robert Durham
* Director
- ------------------------------------------------
James Bernard Farley
* President and Chief Operating Officer and Director
- ------------------------------------------------
Samuel Joseph Foti
</TABLE>
II-6
<PAGE> 285
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
* Director
- ------------------------------------------------
Robert Holland, Jr.
* Director
- ------------------------------------------------
James Lawrence Johnson
* Director
- ------------------------------------------------
Robert Raymond Kiley
* Executive Vice President and Chief Investment
- ------------------------------------------------ Officer and Director
Kenneth Marc Levine
* Director
- ------------------------------------------------
John Robert Meyer
* Director
- ------------------------------------------------
Jane Cahill Pfeiffer
* Director
- ------------------------------------------------
Thomas Charles Theobald
*By: /s/ RICHARD E. MULROY, JR.
------------------------------------------
(Richard E. Mulroy, Jr.
Attorney-in-Fact)
</TABLE>
II-7
<PAGE> 286
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
1.1 Form of Underwriting Agreement (U.S. Version)**
1.2 Form of Underwriting Agreement (International Version)**
2.1 Plan of Demutualization, as amended**
3.1 Form of Amended and Restated Certificate of Incorporation of
the Holding Company**
3.2 Form of By-laws of the Holding Company, as amended**
4.1 Form of Certificate for the Common Stock, par value $0.01
per share**
4.2 Form of MONY Note**
4.3 Form of Warrant**
5.1 Opinion of Dewey Ballantine LLP**
10.1 Investment Agreement, dated as of December 30, 1997, among
MONY, the Holding Company and GS Mezzanine Partners, GS
Mezzanine Partners Offshore, L.P., Stone Street Fund 1997,
L.P. and Bridge Street Fund 1997, L.P.**
10.2 Registration Rights Agreement dated as of December 30, 1997,
by and among MONY, the Holding Company and the Investors**
10.3 Fiscal Agency Agreement dated as of December 30, 1997, by
and among MONY and Citibank, N.A.**
10.4 Amended and Restated Reinsurance Agreement, effective as of
January 1, 1994, between MONY and Life Reassurance
Corporation of America**
10.5 Portfolio Indemnity Reinsurance Agreement, effective as of
December 30, 1995, between MONY and The Guardian Life
Insurance Company of America, and all amendments thereto**
10.6 Amendment Eight to the Amended and Restated Portfolio
Indemnity Reinsurance Agreement, effective as of December
31, 1995, between MONY and The Guardian Life Insurance
Company of America**
10.7 Amendment Nine to the Amended and Restated Portfolio
Indemnity Reinsurance Agreement, dated as of December 31,
1995, between MONY and The Guardian Life Insurance Company
of America**
10.8 Amended and Restated Reinsurance Agreement (Amendment
Eleven), effective as of December 31, 1995, between MONY and
Lyndon Life Insurance Company**
10.9 Assignment and Novation Agreement, effective January 1,
1996, by and among MONY, Lyndon Life Insurance Company and
RGA Reinsurance Company**
10.10 Amendment Twelve to the Amended and Restated Reinsurance
Agreement, effective as of January 1, 1996, between MONY and
RGA Reinsurance Company**
10.11 Amendment Thirteen to the Amended and Restated Reinsurance
Agreement, effective as of January 1, 1996, between MONY and
RGA Reinsurance Company**
10.12 Agreement of Lease, dated as of December 17, 1990, between
1740 Broadway Associates L.P. and MONY, and all amendments
thereto**
</TABLE>
E-1
<PAGE> 287
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
10.13 Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.14 Second Amendment to Agreement of Lease, dated as of August
6, 1996, between 1740 Broadway Associates L.P. and MONY**
10.15 Third Amendment to Agreement of Lease, dated as of December
18, 1996, between 1740 Broadway Associates L.P. and MONY**
10.16 Fourth Amendment to Agreement of Lease, dated as of January
14, 1997, between 1740 Broadway Associates L.P. and MONY**
10.17 Fifth Amendment to Agreement of Lease, dated as of May 30,
1997, between 1740 Broadway Associates L.P. and MONY**
10.18 Letter Agreement, dated as of April 26, 1996, to accompany
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.19 Letter, dated as of December 18, 1996, amending Letter
Agreement, dated as of April 26, 1996, to accompany First
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.20 Letter, dated as of January 14, 1997, amending Letter
Agreement, dated as of April 26, 1996, to accompany
Amendment to Agreement of Lease, dated as of April 26, 1996,
between 1740 Broadway Associates L.P. and MONY**
10.21 Agreement of Lease, dated as of December 21, 1988, between
Continental Towers and MONY, and all amendments thereto**
10.22 First Amendment to Agreement of Lease, dated as of January
14, 1994, between Continental Towers and MONY**
10.23 Second Amendment to Agreement of Lease, dated as of October
15, 1997, between Continental Towers and MONY**
10.24 1998 Stock Incentive Plan**
10.25 Asset Transfer and Acquisition Agreement, dated as of
December 31, 1993, by and among MONY, AEGON USA, Inc. and
AUSA Life Insurance Company, Inc.**
10.26 Series A Note Purchase Agreement, dated as of December 31,
1993, by and between AEGON USA, Inc. and MONY**
10.27 Series B Note Purchase Agreement, dated as of December 31,
1993, by and between AEGON USA, Inc. and MONY**
10.28 Fiscal Agency Agreement, dated as of August 15, 1994,
between MONY and The Chase Manhattan Bank, N.A.**
10.29 Excess Benefit Plan for MONY Employees**
10.30 Form of MONY Deferred Compensation Plan Agreement for Key
Employees**
10.31 Form of MONY Deferred Compensation Plan Agreement for MONY
Trustees**
10.32 1988 Equity Share Plan**
10.33 Form of Equity Share Plan Deferred Compensation Agreement**
10.34 Split Dollar Life Insurance Plan**
10.35 Form of Employment Agreement applicable to Messrs. Roth,
Levine and Foti**
</TABLE>
E-2
<PAGE> 288
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
10.36 Form of Employment Agreement applicable to Messrs. Conklin,
Connors, Mulroy, Waldron, Hall and Daddario**
10.37 Form of Shareholder Rights Agreement**
10.38 Letter Agreement, dated June 25, 1997, between MONY and The
Chase Manhattan Bank**
10.39 Letter Agreement, dated June 19, 1997, between MONY and
Fleet Bank**
10.40 Letter Agreement, dated June 30, 1997, between MONY and
Citibank, N.A.**
10.41 Letter Agreement, dated June 30, 1997, between MONY and
Mellon Bank**
10.42 Letter Agreement, dated August 6, 1997, between MONY and
State Street Bank and Trust Company**
10.43 The MONY Group Inc. Annual Incentive Compensation Plan**
10.44 Form of Change in Control Employment Agreements**
21.1 Subsidiaries of the registrant**
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of Chadbourne & Parke LLP**
23.3 Consent of Dewey Ballantine LLP (included in Exhibit 5.1)**
23.4 Consent of DALBAR, Inc.**
23.5 Consent of Jesse M. Schwartz, F.S.A., M.A.A.A.**
23.6 Consent of Phillip A. Eisenberg, F.S.A., M.A.A.A.**
24.1 Powers of Attorney**
27.1 Financial Data Schedule**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
E-3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated July 27, 1998, except for Note 2 to the consolidated financial
statements and Note 1 to the consolidated financial statement supplemental
schedule as to which the date is August 14, 1998, on our audits of the
consolidated financial statements and consolidated financial statement
supplemental schedule of The Mutual Life Insurance Company of New York. We also
consent to the references to our firm under the captions "Experts", "Summary
Financial Information" and "Selected Consolidated Financial Information."
PricewaterhouseCoopers LLP
New York, New York
November 9, 1998
