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PROSPECTUS
Dated May 1, 1999
Guaranteed Interest Account with Market Value Adjustment
under Flexible Payment Variable Annuity Contracts
Issued By
MONY Life Insurance Company of America
MONY Life Insurance Company of America issues the Guaranteed Interest Account
with Market Value Adjustment described in this prospectus. The Guaranteed
Interest Account with Market Value Adjustment is available only under certain
variable annuity contracts that we offer.
Among the many terms of the Guaranteed Interest Account with Market Value
Adjustment are:
- guaranteed interest to be credited for specific periods (referred to as
"Accumulation Periods")
- three (3), five (5), seven (7), and ten (10) year Accumulation Periods
are available.
- interest will be credited for the entire Accumulation Period on a daily
basis. Different rates apply to each Accumulation Period and are
determined by the Company from time to time in its sole discretion.
- A market value adjustment will be charged if part or all of the
Guaranteed Interest Account with Market Value Adjustment is surrendered
before the end of the Accumulation Period
THESE ARE ONLY SOME OF THE TERMS OF THE GUARANTEED INTEREST
ACCOUNT WITH MARKET VALUE ADJUSTMENT
PLEASE READ THE PROSPECTUS AND THE PROSPECTUS FOR THE CONTRACT CAREFULLY
FOR MORE COMPLETE DETAILS OF THE POLICY
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense. This prospectus comes with prospectuses for the variable
annuity contract, the MONY Series Fund, Inc., and the Enterprise Accumulation
Trust. You should read these prospectuses carefully and keep them for future
reference.
MONY Life Insurance Company of America
1740 Broadway
New York, New York 10019
1-800-487-6669
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
DESCRIPTION OF THE GUARANTEED INTEREST ACCOUNT WITH MARKET
VALUE ADJUSTMENT.......................................... 3
1. General............................................... 3
2. Allocations to the Guaranteed Interest Account with
Market Value Adjustment................................ 3
3. The Specified Interest Rate and the Accumulation
Periods................................................ 4
A. Specified Interest Rates........................... 4
B. Accumulation Periods............................... 4
4. Maturity of Accumulation Periods...................... 5
5. The Market Value Adjustment ("MVA")................... 5
A. General Information Regarding the MVA.............. 5
B. The MVA Factor..................................... 6
6. Contract Charges...................................... 6
7. Guaranteed Interest Account at Annuitization.......... 7
INVESTMENTS................................................. 7
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GUARANTEED
INTEREST ACCOUNT WITH MARKET VALUE ADJUSTMENT............. 7
RISK FACTORS................................................ 7
THE COMPANY................................................. 9
1. Business.............................................. 9
A. Organization....................................... 9
B. Description of Business............................ 9
C. Regulation......................................... 10
D. Competition........................................ 10
E. Employees.......................................... 11
2. Properties............................................ 11
3. Legal Proceedings..................................... 11
4. Financial Statements and Supplementary Data........... 12
5. Selected Financial Information........................ 13
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 15
7. Quantitative and Qualitative Disclosures about Market
Risk................................................... 36
8. Potential Tax Legislation............................. 36
9. Directors and Executive Officers...................... 37
10. Executive Compensation................................ 39
11. Exhibits, Financial Statements, Schedules and
Reports................................................ 39
Index to Financial Statements............................... F-1
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SUMMARY
This summary provides you with a brief overview of the more important
aspects of your variable annuity contract's Guaranteed Interest Account with
Market Value Adjustment. It is not intended to be complete. More detailed
information is contained in this prospectus on the pages following this Summary
and in your variable annuity contract. This summary and the entire prospectus
will describe only the Guaranteed Interest Account with Market Value adjustment.
Other parts of your variable annuity contract are described in that contract and
in the prospectus for MONY America Variable Account A which is included with
this prospectus. BEFORE PURCHASING THE VARIABLE CONTRACT AND ALLOCATING YOUR
PURCHASE PAYMENTS TO THE GUARANTEED INTEREST ACCOUNT WITH MARKET VALUE
ADJUSTMENT, WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY.
PURPOSE OF THE GUARANTEED INTEREST ACCOUNT WITH MARKET VALUE ADJUSTMENT
The Guaranteed Interest Account with Market Value Adjustment is designed to
provide you with an opportunity to receive a guaranteed fixed rate of interest.
You can choose the period of time over which the guaranteed fixed rate of
interest will be paid. That period of time is known as the Accumulation Period.
The Guaranteed Interest Account with Market Value Adjustment is also
designed to provide you with the opportunity to transfer part or all of the
Guaranteed Interest Account with market Value Adjustment to the subaccounts
available to you under the variable annuity contract. It is also designed to
provide you with the opportunity to surrender part or all of the Guaranteed
Interest Account with Market Value Adjustment before the end of the Accumulation
Period. If you ask us to transfer or surrender part of all of the Guaranteed
Interest Account, we will impose a charge, known as a market value adjustment.
PURCHASE PAYMENTS
The purchase payments you make for the contract are received by the
Company. Currently those purchase payments are not subject to taxes imposed by
the United States Government or any state or local government.
You may allocate your purchase payments to the Guaranteed Interest Account
with Market Value Adjustment.
THE ACCUMULATION PERIODS
There are 4 different Accumulation Periods currently available: a 3 year
Accumulation Period, a 5 year Accumulation Period, a 7 year Accumulation Period,
and a 10 year Accumulation Period. You may allocate initial or additional
purchase payments made under the contract to one or more Accumulation Periods at
the time you purchase the contract. You may also ask us to transfer Fund Values
from the subaccounts available under the contract to one or more of the
Accumulation Periods. There is no minimum allocation or transfer to an
Accumulation Period. (See "Allocations to the Guaranteed Interest Account" at
page 3.)
Each Accumulation Period will have a Maturity Date which will be 3, 5, 7,
or 10 years from the beginning of the month during which allocations are made
and Purchase Payments are received or Fund Values are transferred. Therefore the
Accumulation Period will end on the last day of a calendar month (the "Maturity
Date") during which the third, fifth, seventh or tenth anniversary of the
allocation to the Accumulation Period (as applicable) occurs. This means that
the Maturity Date for a 3, 5, 7, or 10 year Accumulation Period may be up to 30
days shorter than 3, 5, 7 or 10 years, respectively. For amounts which are
allocated to an Accumulation Period on, and as to which Purchase Payments are
received or transfers are effective on the first day of a calendar month will be
exactly 3, 5, 7, or 10 years, depending on the Accumulation Period selected.
(See "Specified Interest Rate and Accumulation Periods" at page 4.)
CREDITING OF INTEREST
The Company will credit amounts allocated to an Accumulation Period with
interest at a rate not less than 3.5%. This interest rate is known as the
Specified Interest Rate. It will be credited for the duration of the
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Accumulation Period. Specified Interest Rates for each Accumulation Period are
declared periodically in the sole discretion of the Company. (See "Specified
Interest Rates and Accumulation Periods" at page 4.)
At least 15 days and at most 45 days prior to the Maturity Date of an
Accumulation Period, Contract Owners having Fund Values allocated to such
Accumulation Periods will be notified of the impending Maturity Date. Contract
Owners will then have the option of directing the surrender, transfer, or
distribution of the Fund Value (during the Maturity Period) without application
of any MVA.
The Specified Interest Rate will be credited to amounts allocated to an
Accumulation Period, so long as such allocations are neither surrendered nor
transferred prior to the Maturity Date for the Allocation Period. The Specified
Interest Rate is credited daily, providing an annual effective yield. (See
"Specified Interest Rates and Accumulation Periods" at page 4.)
THE MARKET VALUE ADJUSTMENT
Amounts that are surrendered, transferred or otherwise distributed from an
Accumulation Period prior to the Maturity Date of that Accumulation Period, will
be subject to a Market Value Adjustment ("MVA"). The MVA is accomplished through
the use of a factor, which is known as the "MVA Factor". This factor is
discussed in detail in the section entitled "The Market Value Adjustment -- The
MVA Factor" at page 5.
OTHER PROVISIONS OF THE CONTRACT
This summary and this prospectus does not describe the other provisions of
the contract. Please refer to the prospectus for MONY America Variable Account A
and to the contract for the details of these provisions.
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 "Summary", "Risk Factors", "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.
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DETAILED DESCRIPTION OF THE GUARANTEED INTEREST ACCOUNT
WITH MARKET VALUE ADJUSTMENT
1. GENERAL
The Guaranteed Interest Account with Market Value Adjustment is an
allocation option available under certain variable annuity contracts issued by
the Company. Not all of the variable annuity contracts issued by the Company
offer the Guaranteed Interest Account with Market Value Adjustment, nor is the
Guaranteed Interest Account with Market Value Adjustment available in every
state jurisdiction. The variable annuity prospectuses describing variable
annuity contracts that offer the Guaranteed Interest Account with Market Value
Adjustment clearly disclose whether the Guaranteed Interest Account with Market
Value Adjustment is available as an allocation choice to the Owner. If the
Guaranteed Interest Account with Market Value Adjustment is available under a
variable annuity issued by the Company, the prospectus for the variable annuity
contract ("Contract") and this prospectus must be read carefully together in the
same manner that prospectuses for underlying mutual funds must be read with the
prospectus for the Contracts.
The guarantees associated with the Guaranteed Interest Account with Market
Value Adjustment are borne exclusively by the Company. The guarantees associated
with the Guaranteed Interest Account with Market Value Adjustment are legal
obligations of the Company. Fund Values allocated to the Guaranteed Interest
Account with Market Value Adjustment are held in the "General Account" of the
Company. Amounts allocated to the General Account of the Company are subject to
the liabilities arising from the business the Company conducts. The Company has
sole investment discretion over the investment of the assets of its General
Account. Contract Owners having allocated amounts to a particular Accumulation
Period of the Guaranteed Interest Account with Market Value Adjustment, however,
will have no claim against any particular assets of the Company.
The Guaranteed Interest Account with Market Value Adjustment provides for a
guaranteed interest rate (the "Specified Interest Rate"), to be credited as long
as any amount allocated to the Guaranteed Interest Account with Market Value
Adjustment is not distributed for any reason prior to the Maturity Date of the
particular accumulation period chosen by the Owner. Generally, a 3 year
Accumulation Period offers guaranteed interest at a Specified Interest Rate over
3 years, a 5 year Accumulation Period offers guaranteed interest at a Specified
Interest Rate over 5 years, and so on. Because every Accumulation will mature on
the last day of a calendar month, the Accumulation Period may terminate up to 30
days less than the 3, 5, 7, or 10 year Accumulation Period.
Although the Specified Interest Rate will continue to be credited as long
as Fund Values remain in an Accumulation Period of the Guaranteed Interest
Account with Market Value Adjustment prior to the Maturity Date, surrenders,
transfers (including transfers to the Loan Account as a result of a request by
the Contract Owner for a Loan), or distributions except upon the death of
Annuitant for any other reason will be subject to an MVA, as described below.
2. ALLOCATIONS TO THE GUARANTEED INTEREST ACCOUNT WITH MARKET VALUE ADJUSTMENT
There are three sources from which allocations to the Guaranteed Interest
Account with Market Value Adjustment may be made:
(1) an initial purchase payment made under a Contract may be wholly or
partially allocated to the Guaranteed Interest Account with Market
Value Adjustment;
(2) a subsequent or additional purchase payment made under a Contract may
be partially or wholly allocated to the Guaranteed Interest Account
with Market Value Adjustment; and
(3) amounts transferred from Subaccounts available under the Contract may
be wholly or partially allocated to the Guaranteed Interest Account
with Market Value Adjustment.
There is no minimum amount of any allocation of either Purchase Payments or
transfers of Fund Value to the Guaranteed Interest Account with Market Value
Adjustment. The Contract provides that the prior
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approval of the Company is required before it will accept a Purchase Payment
where, with that Payment, cumulative Purchase Payments made under any one or
more Contracts held by the Owner, less the amount of any prior partial
surrenders and their Surrender Charges, exceed $1,500,000. This limit applies to
the aggregate of Fund Values in the Guaranteed Interest Account with Market
Value Adjustment and in each of the Subaccounts of the Contract
3. THE SPECIFIED INTEREST RATE AND THE ACCUMULATION PERIODS
A. Specified Interest Rates
The Specified Interest Rate, at any given time, is the rate of interest
guaranteed by the Company to be credited to allocations made to the Accumulation
Period for the Guaranteed Interest Account with Market Value Adjustment chosen
by the Owner, so long as no portion of the allocation is distributed for any
reason prior to the Maturity Date. Different Specified Interest Rates may be
established for the 4 different Accumulation Periods which are currently
available: 3, 5, 7, and 10 years.
The Company declares Specified Interest Rates for each of the available
Accumulation Periods from time to time. Normally, new Specified Interest Rates
will be declared monthly; however, depending on interest rate fluctuations,
declarations of new Specified Interest Rates may occur more or less frequently.
The Company observes no specific method in the establishment of the Specified
Interest Rates, but generally will attempt to declare Specified Interest Rates
which are related to interest rates associated with fixed-income investments
available at the time and having durations and cash flow attributes compatible
with the Accumulation Periods then available for the Guaranteed Interest Account
with Market Value Adjustment. In addition, the establishment of Specified
Interest Rates may be influenced by other factors, including competitive
considerations, administrative costs and general economic trends. The Company
has no way of predicting what Specified Interest Rates may be declared in the
future and there is no guarantee that the Specified Interest Rate for any of the
Accumulation Periods will exceed the guaranteed minimum effective annual
interest rate of 3.5%.
The period of time during which a particular Specified Interest Rate is in
effect for new allocations to the then available Accumulation Periods is
referred to as the Investment Period. All allocations made to an Accumulation
Period during an Investment Period are credited with the Specified Interest Rate
in effect. An Investment Period ends only when a new Specified Interest Rate
relative to the Accumulation Period in question is declared. Subsequent
declarations of new Specified Interest Rates have no effect on allocations made
to Accumulation Periods during prior Investment Periods. All such prior
allocations will be credited with the Specified Interest Rate in effect when the
allocation was made for the duration of the Accumulation Period selected.
Information concerning the Specified Interest Rates in effect for the
various Accumulation Periods can be obtained by contacting an agent of the
Company who is also a registered representative of MONY Securities Corp. or by
calling the following toll free telephone number: 1-800-736-0136.
The Specified Interest Rate is credited to allocations made to an
Accumulation Period elected by the Owner on a daily basis, resulting in an
annual effective yield which is guaranteed by the Company, unless amounts are
surrendered or transferred from that Accumulation Period for any reason prior to
the Maturity Date. The Specified Interest Rate will be credited for the entire
Accumulation Period. If amounts are surrendered or transferred from the
Accumulation Period for any reason prior to the Maturity Date, an MVA will be
applied to the amount surrendered or transferred.
B. Accumulation Periods
For each Accumulation Period, the Specified Interest Rate in effect at the
time of the allocation to that Accumulation Period is guaranteed. An
Accumulation Period always expires on a Maturity Date which will be the last day
of a calendar month; therefore, the Specified Interest Rate may be credited for
up to 30 days less than the Accumulation Period.
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For example, if an allocation is made to a 10 year Accumulation period on
August 10, 1998 and the funds for a new Purchase Payment are received on that
day, the Specified Interest Rate for that Accumulation Period will be credited
beginning on that day until July 31, 2008; however, the Accumulation Period will
begin on August 1, 1998 and will end on July 31, 2008.
All Accumulation Periods for the 3, 5, 7, and 10 year Accumulation Periods,
respectively, will be determined in a manner consistent with the foregoing
example. Accumulation Periods will be exactly 3, 5, 7, or 10 years only when an
allocation to an Accumulation Period occurs (or the Purchase Payment is received
or the transfer of Fund Values from a Subaccount is effective) on the first day
of a calendar month.
4. MATURITY OF ACCUMULATION PERIODS
At least fifteen days and at most forty-five days prior to the end of an
Accumulation Period, the Company will send notice to the Contract Owner of the
impending Maturity Date (always the last day of a calendar month). The notice
will include the projected Fund Value held in the Accumulation Period on the
Maturity Date and will specify the various options Contract Owners may exercise
with respect to the Accumulation Period:
(1) During the thirty day period following the Maturity Date (the
"Maturity Period"), the Contract Owner may wholly or partially surrender
the Fund Value held in that Accumulation Period without an MVA; however,
surrender charges under the variable annuity Contract, if applicable, will
be assessed.
(2) During the thirty day period following the Maturity Date, the
Contract Owner may wholly or partially transfer the Fund Value held in that
Accumulation Period, without an MVA, to any Subaccount then available under
the Contract or may elect that the Fund Value held in that Accumulation
Period be held for an additional Accumulation Period of the same number of
years or for another Accumulation Period of a different number of years
which may at the time be available. A confirmation of any such transfer or
election will be sent immediately after the transfer or election is
processed.
(3) If the Contract Owner does not make an election within the
Maturity Period, the entire Fund Value held in the maturing Accumulation
Period will be transferred to an Accumulation Period of the same number of
years as the Accumulation Period which matured. However, if that period
would extend beyond the Annuity Starting Date of the Contract or if that
period is not then made available by the Company, the Fund Value held in
the maturing Accumulation Period will be automatically transferred to the
Money Market Subaccount at the end of the Maturity Period. A confirmation
will be sent immediately after the automatic transfer is executed.
During the thirty day period following the Maturity Date, and prior to any
of the transactions set forth in (1), (2), or (3) above, the Specified Value
held in the maturing Accumulation Period will continue to be credited with the
Specified Interest Rate in effect before the Maturity Date.
5. THE MARKET VALUE ADJUSTMENT ("MVA")
A. General Information Regarding the MVA
A surrender, transfer (including a transfer to the Loan Account as a result
of a request by the Owner for a Loan), or distribution of Specified Value of the
Guaranteed Interest Account with Market Value Adjustment held in an Accumulation
Period which are surrendered, transferred, or distributed for any reason prior
to the Maturity Date of that particular Accumulation Period, will be subject to
an MVA. The MVA is determined by the multiplication of an MVA Factor by the
Specified Value, or the portion of the Specified Value being surrendered,
transferred or distributed. The Specified Value is the amount of the allocation
of Purchase Payments and transfers of Fund Value to an Accumulation Period of
the Guaranteed Interest Account with Market Value Adjustment, plus interest
accrued at the Specified Interest Rate minus prior distributions. The MVA may
either increase or decrease the amount of the distribution.
The MVA is intended to approximate, without duplicating, the experience of
the Company when it liquidates assets in order to satisfy contractual
obligations. Such obligations arise when Contract Owners
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request surrenders (including transfers for the purpose of obtaining a Loan), or
distributions. When liquidating assets, the Company may realize either a gain or
a loss.
If prevailing interest rates are higher than the Specified Interest Rate in
effect at the time the Accumulation Period commences, the Company will realize a
loss when it liquidates assets in order to process a surrender, loan, or
transfer; therefore, application of the MVA under such circumstances will
decrease the amount of the distribution or loan.
Generally, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time the Accumulation Period commences, the
Company will realize a gain when it liquidates assets in order to process a
surrender, loan, or transfer; therefore, application of the MVA under such
circumstances will increase the amount of the distribution or loan.
The Company measures the relationship between prevailing interest rates and
the Specified Interest Rates it declares through the MVA Factor. The MVA Factor
is described more fully below.
B. The MVA Factor
The formula for determining the MVA Factor is:
(n-t)/12
[(1+a)/(1+b)] - 1
Where:
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a = the Specified Interest Rate for the Accumulation Period from
which the surrender, transfer or loan is to be taken;
b = the Specified Interest Rate declared at the time a surrender
or transfer is requested for an Accumulation Period equal to
the time remaining in the Accumulation Period from which the
surrender, transfer (including transfer to the Loan Account
as a result of a request by the Owner for a Loan), or
distribution is requested, plus 0.25%;
n = the Accumulation Period from which the surrender, transfer,
or distribution occurs in months; and
t = the number of elapsed months (or portion thereof) in the
Accumulation Period from which the surrender, transfer, or
distribution occurs.
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The MVA Factor shown above also accounts for some of the administrative and
processing expenses incurred when fixed-interest investments are liquidated.
This is represented in the addition of 0.25% in the MVA Factor.
The MVA Factor will either be greater, less than or equal to 0 and will be
multiplied by the Specified Value or that portion of the Specified Value being
surrendered, transferred, or distributed for any other reason. If the result is
greater than 0, a gain will be realized by the Contract Owner; if less than 0, a
loss will be realized. If the MVA Factor is exactly 0, no gain or loss will be
realized.
6. CONTRACT CHARGES
The Contracts under which the Guaranteed Interest Account with Market Value
Adjustment are made available have various fees and charges, some of which may
be assessed against allocations made to the Guaranteed Interest Account with
Market Value Adjustment.
Contingent deferred sales charges, if applicable, will be assessed against
full or partial surrenders from the Guaranteed Interest Account with Market
Value Adjustment. If any such surrender occurs prior to the Maturity Date for
any particular Accumulation Period elected by the Owner, the amount surrendered
will be subject to an MVA in addition to contingent deferred sales charges. The
variable annuity prospectus fully describes the contingent deferred sales
charges. Please refer to the variable annuity prospectus for complete details
regarding the contingent deferred sales charges under the Contracts.
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Mortality and expense risk charges which may be assessed under variable
annuity Contracts will not be assessed against any allocation to the Guaranteed
Interest Account with Market Value Adjustment. Such charges apply only to the
Fund Value allocated to the Subaccounts of the Variable Account.
7. GUARANTEED INTEREST ACCOUNT AT ANNUITIZATION
On the Annuity Starting Date, the Contract's Cash Value, including the
Specified Value of all Accumulation Periods of the Guaranteed Interest Account
with Market Value Adjustment, will be applied to provide an annuity or any other
option previously chosen by the Owner and permitted by the Company. If the Owner
elected Settlement Option 3 (Single Life Income) or 3A (Joint Life Income) the
Fund Value of the Contract will be applied. Therefore, if Settlement Options 3
or 3A were to be elected by the Owner, no surrender charge or MVA would be
applied to the Specified Value. However, if any other settlement option is
elected, or if no election is in effect on the Annuity Starting Date, a lump sum
payment will be deemed to have been elected and a MVA will apply.
INVESTMENTS
Amounts allocated to the Guaranteed Interest Account with Market Value
Adjustment are transferred to the Company's General Account. Amounts allocated
to the General Account of the Company are subject to the liabilities arising
from the business the Company conducts. This is unlike amounts allocated to the
Subaccounts of the Variable Account, which are not subject to the liabilities
arising from the business the Company conducts. The Company has sole investment
discretion over the investment of the assets of its General Account. Variable
annuity Contract Owners having allocated amounts to a particular Accumulation
Period of the Guaranteed Interest Account with Market Value Adjustment, however,
will have no claim against any particular assets of the Company. The Specified
Interest Rates declared by the Company for the various Accumulation Periods will
not necessarily correspond to the performance of any group of assets of the
General Account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GUARANTEED INTEREST
ACCOUNT WITH MARKET VALUE ADJUSTMENT
The Guaranteed Interest Account with Market Value Adjustment is available
only as an allocation option under the Contracts issued by the Company. The
appropriate variable annuity prospectus and statement of additional information
should be consulted for information regarding the distribution of the Contracts.
RISK FACTORS
Potential purchasers should carefully consider the factors described in
"Risk Factors" as well as the other information contained in this Prospectus
before allocating purchase payments or Fund Values to the Guaranteed Interest
Account with Market Value Adjustment offered hereby. Such "Risk Factors"
include:
(i) the risk of losses on real estate and commercial mortgage loans,
(ii) other risks relating to the Company's investment portfolio,
(iii) the risk that interest rate changes could make certain of the
Company's products less profitable to the Company or less
attractive to customers,
(iv) risks with respect to certain sales practice litigation,
(v) the risk of increased surrenders of certain annuities as the
surrender charges with respect to such annuities expire,
(vi) risks associated with certain economic and market factors,
(vii) the risk of variations in claims experience,
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(viii) risks related to certain insurance regulatory matters,
(ix) risks of competition,
(x) risks with respect to claims paying ability ratings and financial
strength ratings,
(xi) risks with respect to Year 2000 computer programming issues, and
(xii) 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.
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THE COMPANY
1. BUSINESS
A. Organization
MONY Life Insurance Company of America (the "Company") is a stock life
insurance company organized in the state of Arizona. The Company is currently
licensed to sell life insurance and annuities in 49 states (not including New
York), the District of Columbia, the U.S. Virgin Islands and Puerto Rico. The
Company is the corporate successor of VICO Credit Life Insurance Company,
incorporated in Arizona on March 6, 1969.
The Company is a wholly owned subsidiary of MONY Life Insurance Company
("MONY" or "MONY Life"). MONY was organized as a mutual life insurance company
under the laws of the State of New York in 1842. MONY converted to a stock life
insurance company in November 1998 through demutualization and assumed its
present name at that time. In addition, MONY became a wholly-owned subsidiary of
The MONY Group Inc. at that time. The principal offices of MONY and the Company
are at 1740 Broadway, New York, New York 10019. MONY Securities Corp., an
affiliate of the Company and MONY, is the principal underwriter for the
Contracts described in this Prospectus. The Company may purchase certain
administrative services from MONY under a services agreement, to enable the
Company to administer the Contracts.
At December 31, 1998, MONY had approximately $289.8 million invested in the
Company to support its insurance operations.
The Company offers a variety of forms of variable annuities, fixed
annuities, and variable universal life insurance and universal life insurance
policies on a non-participating basis. The Company is a registered investment
adviser providing investment management and administration services.
B. Description of Business
The Company offers variable annuities, fixed annuities, and variable
universal life insurance and universal life insurance policies. Recently, it
began to offer term life insurance as well. Its products are distributed largely
through the career agent field force of MONY. Together with MONY and its
affiliates MONY Securities Corp. and Enterprise Funds Distributors, Inc., the
Company is a part of an organization that also markets mutual funds and
investment management services.
The Company's universal life insurance policies are offered to individuals
to meet a variety of needs as well as to businesses desiring to provide payroll
deduction life insurance to their employees. The Company's universal life
insurance policies permit the policyowner to vary the amount and frequency of
periodic cash premiums they pay, depending upon the needs of the policyowner and
the availability of value within the policy necessary to keep the policy in
force by paying the various charges, including, without limitation, the cost of
insurance charges.
The Company's variable life and variable annuity products are also offered
to individuals and allow the customer to choose from among subaccounts pursuing
a wide variety of investment objectives which reflect the investment objectives
of the underlying mutual funds managed by premier mutual fund managers. These
products are attractive to customers seeking to meet a variety of objectives,
including life insurance protection and retirement accumulations, respectively.
The Company's survivorship life products insure several lives and provide
for the payment of death benefits upon the death of the last surviving insured.
The Company also offers a Corporate Sponsored Variable Universal Life
Insurance policy to corporations to meet needs which can be met by the death
benefit and cash value accumulation provisions of the policy.
The Company's recently introduced term life insurance product is a level
term life insurance policy. It is largely distributed through the career agent
field force of MONY.
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The Company also offers a variety of policy riders designed to provide
additional benefits or flexibility at the option of the policyowner. These
riders include riders that waive premium payments upon disability, pay higher
benefits in the event of accidental death, allow purchase of additional coverage
without evidence of insurability, and permit the addition of term insurance to
provide additional death benefit protection.
The Company's variable life insurance and variable annuity business has
grown substantially in recent years. In part, this growth is due to the
development of variable life insurance policies for both the individual as well
as the corporate sponsored life insurance markets. The Company also believes
that the growth of these products has been further enhanced by favorable
demographic trends, the growing tendency of Americans to supplement traditional
sources of retirement income with variable annuity products which provide the
purchaser with some ability to direct the investment strategy, and the
performance of the financial markets, particularly the U.S. stock markets, in
recent years.
C. Regulation
The Company, as with other insurance companies, is subject to extensive
regulation and supervision in the jurisdictions in which it does business. Such
regulations impose restrictions on the amount and type of investments insurance
companies may hold. These regulations also affect many other aspects of
insurance companies businesses, including licensing of insurers and their
products and agents, risk-based capital requirements and the type and amount of
required asset valuation reserve accounts. These regulations are primarily
intended to protect policyholders. The Company can not predict the effect that
any proposed or future legislation may have on the financial condition or
results of operations of 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.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once every
three to four years) 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 the National Association of Insurance Commissioners (NAIC). The
operations of the Company were examined by the Arizona Insurance Department for
each of the three years ended December 31, 1996. The report did not deal with
any matter which may reasonably be expected to result in a material effect on
the Company's financial condition or results of operations.
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", at page 11. 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.
The Company and MONY 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.
D. Competition
The Company believes that competition in the Company's lines of business is
based on price, product features, commission structure, perceived financial
strength, claims-paying ratings, service and name recogni-
10
<PAGE> 15
tion. 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 whom 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 with other distributors of insurance products.
National banks, with their preexisting customer bases for financial services
products, may pose increasing competition 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.
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 generally 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.
E. Employees
The Company has no employees. The Company has entered into a Services
Agreement with MONY, pursuant to which MONY provides the services necessary to
operate the business of the Company.
2. PROPERTIES
The Company's administrative offices are located at 1740 Broadway, New
York, New York 10019. MONY's principal executive offices are also located there.
MONY's administrative operations offices are located in Syracuse, New York, and
the administrative services, principally related to the underwriting, issuance,
and service of the Company's policies and policyholders, as well as the
administration of claims, is conducted from those offices. MONY leases these
offices.
3. 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 and MONY
alleging that the Company and MONY engaged in deceptive sales practices in
connection with the sale of whole and universal life insurance policies from the
early 1980s through the mid 1990s. Although the claims asserted in each case are
not identical, they seek substantially the same relief under essentially the
same theories of recovery (i.e., breach of contract, fraud, negligent
misrepresentation, negligent supervision and training, breach of fiduciary duty,
unjust enrichment and violation of state insurance and/or deceptive business
practice laws). Plaintiffs in these cases (including the Goshen case discussed
below) seek primarily equitable relief (e.g., reformation, specific performance,
mandatory injunctive relief prohibiting the Company and MONY 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 and MONY have 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 and MONY filed a motion to dismiss or, alternatively, for
summary judgment on all counts of the complaint. All of the other putative class
actions have been consolidated and transferred by the Judicial Panel on
Multidistrict Litigation to the United States District Court for the District of
Massachusetts, or are being voluntarily held in abeyance pending the outcome of
the Goshen case. The Massachusetts District Court in the Multidistrict
Litigation has entered an order essentially holding all of the federal cases in
abeyance pending the outcome of the Goshen case.
11
<PAGE> 16
On October 21, 1997, the New York State Supreme Court granted the motion
for summary judgment and dismissed all claims filed in the Goshen case against
the Company and MONY on the merits. On March 18, 1999 the order by the New York
State Supreme Court was affirmed by the New York State Appellate Division, First
Department. All actions before the United States District Court for the District
of Massachusetts are still pending. In addition, on or about February 25, 1999,
a purported class action was filed against MONY Life Insurance Company of
America in Kentucky state court covering policyholders who purchased individual
universal life insurance policies from MLOA after January 1, 1988 claiming
breach of contract and violations of the Kentucky Consumer Protection Act. On
March 26, 1999 MLOA removed that action to the United States District Court for
the Eastern District of Kentucky, requested the Judicial Panel on multidistrict
litigation to transfer the action to the multidistrict litigation in the
District of Massachusetts and sought a stay of further proceedings in the
Kentucky District Court pending a determination on multidistrict transfer. The
Company intends vigorously to defend that litigation. 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.
4. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included in a separate section
of this prospectus.
Semi-annual and annual reports are sent to contract owners of the variable
annuity and life insurance contracts issued through registered Separate Accounts
of the Company.
The financial statements of the Company included in this prospectus, other
than the unaudited interim condensed financial statements, have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included herein in
reliance upon the report of said firm given on the authority of said firm as
experts in accounting and auditing. PricewaterhouseCoopers LLP's office is
located at 1177 Avenue of the Americas, New York, New York 10036.
12
<PAGE> 17
5. SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for the
Company. The selected financial information for each of the years in the
three-year period ended December 31, 1998 and at December 31, 1998 and 1997 has
been derived from the Company's audited financial statements included elsewhere
herein. The financial information set forth below for all other periods has been
derived from unaudited financial information not included elsewhere herein
which, in the opinion of management, presents fairly such financial information
in conformity with GAAP. The selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Company's financial statements and the notes
thereto and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(2)
Revenues:
Universal life and investment-type product
policy fees............................... $ 122.0 $ 100.8 $ 80.8 $ 61.8 $ 51.2
Premiums..................................... 1.7 0.1 0.0 0.0 0.0
Net investment income........................ 94.6 99.1 102.0 104.9 95.9
Net realized gains (losses) on
investments(1)............................ 7.1 2.7 0.9 0.7 (9.5)
Other income................................. 7.6 5.5 4.8 7.6 6.1
-------- -------- -------- -------- --------
Total revenues............................ 233.0 208.2 188.5 175.0 143.7
Total benefits and expenses............... 211.1 195.4 175.4 155.4 134.2
-------- -------- -------- -------- --------
Income before income taxes..................... 21.9 12.8 13.1 19.6 9.5
Income tax expense............................. 7.7 4.5 4.6 7.2 2.7
-------- -------- -------- -------- --------
Net income..................................... $ 14.2 $ 8.3 $ 8.5 $ 12.4 $ 6.8
======== ======== ======== ======== ========
BALANCE SHEET DATA:(2)
Total assets................................... $5,889.4 $5,291.5 $4,234.9 $3,405.9 $2,572.5
Total liabilities.............................. 5,599.6 5,029.5 3,995.3 3,182.4 2,407.0
Shareholder's equity........................... 289.8 262.0 239.6 223.5 165.5
</TABLE>
- ---------------
(1) Includes writedowns for impairment and net changes in valuation allowances
on real estate, mortgage loans and investment securities aggregating $(0.1)
million, $(0.3) million, $0.4 million, $1.9 million and $5.5 million for
the years ended December 31, 1998, 1997, 1996, 1995, and 1994,
respectively.
(2) Prior to 1996, the Company, as the wholly owned stock insurance company
subsidiary of a mutual life insurance company (MONY Life), prepared its
financial statements in conformity with accounting practices prescribed or
permitted by the Arizona Insurance Department, which accounting practices
were considered to be GAAP for mutual life insurance companies and their
wholly owned stock life insurance company subsidiaries. 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 and their wholly owned
stock insurance company subsidiaries to adopt all applicable authoritative
GAAP pronouncements in their general purpose financial statements. See Note
2 to the Financial Statements. Accordingly, the financial information
presented in the Selected 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
13
<PAGE> 18
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,
MONY Life 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.
14
<PAGE> 19
6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses financial condition and results of
operations of the Company for the periods indicated. The discussion and analysis
of the Company's financial condition and results presented below should be read
in conjunction with the "Selected Financial Information" and the Financial
Statements and related footnotes and other financial information included
elsewhere herein.
MONY Life Insurance Company of America (the "Company") is a stock life
insurance company organized in the state of Arizona and is the corporate
successor of VICO Credit Life Insurance Company, incorporated in Arizona on
March 6, 1969. The Company is a wholly owned subsidiary of MONY Life Insurance
Company ("MONY Life"), a stock life insurance company domiciled in the state of
New York. MONY Life, formerly The Mutual Life Insurance Company of New York, is
a wholly owned subsidiary of The MONY Group Inc. (the "MONY Group"), a Delaware
Corporation organized to be the parent holding company of MONY Life.
The Company's primary business is to provide asset accumulation and life
insurance products to business owners, growing families, and pre-retirees. The
Company's insurance and financial products are marketed and distributed directly
to individuals primarily through MONY Life's career agency sales force. These
products are sold in 49 states (not including New York), the District of
Columbia, the U.S. Virgin Islands and Puerto Rico.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Universal life and investment-type product policy fees...... $122.0 $100.8 $ 80.8
Premiums.................................................... 1.7 0.1 0.0
Net investment income....................................... 94.6 99.1 102.0
Net realized gains on investments........................... 7.1 2.7 0.9
Other income................................................ 7.6 5.5 4.8
------ ------ ------
Total revenues.................................... 233.0 208.2 188.5
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 34.9 30.6 26.4
Interest credited to policyholders' account balances........ 65.1 72.5 73.0
Amortization of deferred policy acquisition costs........... 35.5 46.3 36.6
Other operating costs and expenses.......................... 75.6 46.0 39.4
------ ------ ------
Total benefits and expenses....................... 211.1 195.4 175.4
Income before income taxes.................................. 21.9 12.8 13.1
Income tax expense.......................................... 7.7 4.5 4.6
------ ------ ------
Net income.................................................. 14.2 8.3 8.5
Other comprehensive income (loss), net...................... 1.1 3.3 (5.8)
------ ------ ------
Comprehensive income........................................ $ 15.3 $ 11.6 $ 2.7
====== ====== ======
</TABLE>
15
<PAGE> 20
FACTORS AFFECTING PROFITABILITY
The Company derives its revenues principally from: (i) insurance,
administrative and surrender charges on universal life and annuity products,
(ii) asset management fees from separate account products, (iii) premiums on
non-participating term life insurance, and (iv) net investment income and
realized capital gains on general account assets. The Company's expenses consist
of insurance benefits provided to policyholders, interest credited on
policyholders' account balances, 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
policyholders' account balances and the rate of earnings on its investments,
(iv) the persistency of its policies (which affects the ability of the Company
to recover the costs incurred to sell a policy) and (v) its ability to manage
the market and credit risks associated with its invested assets. External
factors, such as legislation and regulation of the insurance marketplace and
products, may also affect the Company's profitability.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Universal life and investment-type product fees were $122.0 million for
1998, an increase of $21.2 million, or 21.0%, from $100.8 million reported for
1997. This increase was a result of an increase in fees relating to the
Company's flexible premium variable annuity ("FPVA") business of $11.9 million
and higher fees relating primarily to the Company's variable universal life
("VUL") and corporate sponsored variable universal life ("CSVUL") business of
$10.9 million. For the year ended December 31, 1998, the Company reported total
fees in its FPVA business of $56.0 million, as compared to $44.1 million
reported for the year ended December 31, 1997. FPVA account value increased
$404.2 million during 1998 to $4,176.1 million, as compared to $3,771.9 million
in 1997. The increase in account value in 1998 resulted from new sales and other
deposits of $529.3 million and market appreciation of $264.0 million, offset by
approximately $389.1 million in withdrawals and surrenders. The increase
relating to the Company's VUL and CSVUL business was $8.9 million and $2.0
million, respectively. The Company began offering CSVUL during the fourth
quarter of 1997. For 1998, the Company reported total fees from its VUL business
of $26.0 million, as compared to $17.1 million reported from 1997. The increase
in VUL fees is primarily due to higher charges for the cost of insurance,
administration, and loading of approximately $5.0 million, $0.7 million and $1.6
million, respectively.
Premium revenue was $1.7 million for 1998, an increase of $1.6 million from
$0.1 million reported for 1997. The increase was primarily the result of new
premiums relating to private label term business (term insurance sold through
alternate distribution channels), which the Company began offering during the
fourth quarter of 1997.
Net investment income was $94.6 million for 1998, a decrease of $4.5
million, or 4.5%, from $99.1 million reported for 1997. The decrease is
primarily related to a decrease in portfolio yields from 7.3% in 1997 to 7.1% in
1998 due to rollover of the portfolio at lower interest rates.
Net realized gains on investments were $7.1 million for 1998, an increase
of $4.4 million, or 163.0%, from $2.7 million reported for 1997. The increase is
primarily due to $2.7 million in gains on sales and prepayments of fixed
maturity securities, higher gains on sales of real estate of $1.1 million, and
higher gains on sales of farm mortgages of $0.5 million.
Other income was $7.6 million for 1998, an increase of $2.1 million, or
38.2%, as compared to $5.5 million reported for 1997. The increase is primarily
due to higher funds received on supplementary contracts.
16
<PAGE> 21
Benefits to policyholders were $34.9 million for 1998, an increase of $4.3
million, or 14.1%, from $30.6 million reported for 1997. The increase is
primarily due to higher death claims, net of reinsurance, and higher transfers
to supplementary contracts.
Interest credited to policyholders' account balances was $65.1 million for
1998, a decrease of $7.4 million, or 10.2%, from $72.5 million reported for
1997. The decrease was primarily due to lower interest crediting of
approximately $3.9 million relating to the Company's single premium deferred
annuity ("SPDA") business in conjunction with lower interest crediting on all
other products. During 1998, SPDA account value decreased $62.2 million to
$303.7 million at December 31, 1998 from $365.9 million at December 31, 1997.
The decrease in account value was due to continued withdrawals in 1998, as
compared to 1997, 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 1998 and 1997, respectively.
Amortization of deferred policy acquisition costs ("DAC") was $ 35.5
million for 1998, a decrease of $10.8 million, or 23.3%, from $46.3 million
reported for 1997. The decrease primarily consisted of lower amortization on
universal life ("UL") products due to revised estimate of mortality; VUL
decreased reflecting higher claims during 1998 as compared to 1997. Amortization
of DAC on the SPDA product line decreased due to lower profit margins as a
result of the declining fund balances and narrowing of interest spreads.
Other operating costs and expenses were $75.6 million for 1998 an increase
of $29.6 million or 64.3% from $46.0 million reported for 1997. The increase is
primarily due to higher intercompany allocation of expenses from MONY Life which
primarily reflects the Company's higher production relative to that of MONY Life
on a consolidated basis. In addition, other expenses increased in 1998 as
compared to the prior year, including costs incurred in connection with
regulatory compliance, guarantee assessments and other miscellaneous items.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Universal life and investment-type product fees were $100.8 million for
1997, an increase of $20.0 million, or 24.8%, from $80.8 million reported for
1996. This increase was primarily the result of an increase in fees relating to
the Company's FPVA business of $13.2 million. For the year ended December 31,
1997, the Company reported total fees in its FPVA business of $44.1 million, as
compared to $30.9 million reported for the year ended December 31, 1996. FPVA
account value increased $1,028.6 million during 1997 to $3,771.9 million, as
compared to $2,743.3 million in 1996. The increase in account value in 1997
resulted from new sales and other deposits of $624.5 million and market
appreciation of $647.2 million, offset by approximately $243.1 million in
withdrawals and surrenders. The increase relating to the Company's VUL and UL
business was $8.3 million and $2.1 million, respectively. For 1997, the Company
reported total fees from its VUL business of $17.1 million, as compared to $8.8
million reported from 1996. The increase in VUL fees is primarily due to higher
charges for the cost of insurance, administration, and loading of approximately
$4.2 million, $1.1 million and $2.0 million, respectively.
Premium revenue was $0.1 million for 1997, an increase of $0.1 million,
from $0.0 million reported for 1996. The increase was the result of new premiums
relating to private label term business (term insurance sold through alternate
distribution channels), which the Company began offering during the fourth
quarter of 1997.
Net investment income was $99.1 million for 1997, a decrease of $2.9
million, or 2.8%, from $102.0 million reported for 1996. The decrease is
primarily related to a decrease in the average portfolio balance of $42.3
million, with portfolio yields remaining constant for both years at
approximately 7.3%.
Net realized gains on investments were $2.7 million for 1997, an increase
of $1.8 million, or 200.0%, from $0.9 million reported for 1996. The increase is
primarily due to recoveries on mortgage allowances occurring in 1997.
Other income was $5.5 million for 1997, an increase of $0.7 million, or
14.6%, as compared to $4.8 million reported for 1996. The increase is primarily
due to higher funds received on supplementary contracts.
17
<PAGE> 22
Benefits to policyholders were $30.6 million for 1997, an increase of $4.2
million, or 15.9%, from $26.4 million reported for 1996. The increase is
primarily due to lower death claims, net of reinsurance, and higher transfers to
supplementary contracts.
Interest credited to policyholders' account balances was $72.5 million for
1997, a decrease of $0.5 million, or 0.7%, from $73.0 million reported for 1996.
The decrease was primarily due to lower interest crediting of approximately $5.4
million relating to the Company's SPDA business. During 1997, SPDA account value
decreased to $365.9 million at December 31, 1997 from $443.8 million at December
31, 1996. The decrease in account value was due to continued 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 1997, as compared to 5.7% in 1996.
This decrease was offset by an increase of $5.0 million of higher interest
crediting primarily on UL and VUL products.
Amortization of DAC was $46.3 million for 1997, an increase of $9.7
million, or 26.5%, from $36.6 million reported for 1996. This increase primarily
consisted of higher amortization of $10.8 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 $1,028.6 million
during 1997 to $3,771.9 million, as compared to $2,743.3 million in 1996. The
increase in account value in 1997 resulted from new sales and other deposits of
$624.5 million and market appreciation of $647.2 million, offset by
approximately $243.1 million in withdrawals and surrenders.
Other operating costs and expenses were $46.0 million for 1997, an increase
of $6.6 million, or 16.8%, from $39.4 million reported for 1996. The increase is
primarily due to higher intercompany allocation of expenses from MONY Life which
reflects the Company's higher production relative to that of MONY Life on a
consolidated basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash inflows are provided mainly from annuity considerations
and deposit funds, investment income and maturities and sales of invested assets
and term life insurance premiums. Cash outflows primarily relate to the
liabilities associated with its various life insurance and annuity products,
operating expenses and income taxes. The life insurance and annuity liabilities
relate to the Company's obligation to make benefit payments under its insurance
and annuity contracts, as well as the need to make payments in connection with
policy surrenders, withdrawals and loans. The Company develops an annual cash
flow projection which shows expected asset and liability cash flows on a monthly
basis. At the end of each quarter actual cash flows are compared to projections,
projections for the balance of the year are adjusted in light of the actual
results, if appropriate, and investment strategies are also changed, if
appropriate. The quarterly cash flow reports contain relevant information on all
of the following: new product sales and deposits versus projections, existing
liability cash flow versus projections and asset portfolio cash flow versus
projections. An interest rate projection is a part of the initial annual cash
flow projections for both assets and liabilities. Actual changes in interest
rates during the year and, to a lesser extent, changes in rate expectations will
impact the changes in projected asset and liability cash flows during the course
of the year. When the Company is formulating its cash flow projections it
considers, among other things, its expectations about sales of the Company's
products, its expectations concerning customer behavior in light of current and
expected economic conditions, its expectations concerning competitors and the
general outlook for the economy and interest rates.
The events most likely to cause an adjustment in the Company's investment
policies are: (i) a significant change in its product mix, (ii) a significant
change in the outlook for either the economy in general or for interest rates in
particular and (iii) a significant reevaluation of the prospective risks and
returns of various asset classes.
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at December 31, 1998 and 1997 ($ in millions).
18
<PAGE> 23
WITHDRAWAL CHARACTERISTICS OF
ANNUITY RESERVES AND DEPOSIT LIABILITIES
<TABLE>
<CAPTION>
AMOUNT AT AMOUNT AT
DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1998 OF TOTAL 1997 OF TOTAL
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal
provisions.................................... $ 67.9 1.5% $ 77.4 1.9%
Subject to discretionary withdrawal -- with
market value adjustment or at carrying value
less surrender charge......................... 3,938.6 87.8 3,589.3 86.6
-------- ----- -------- -----
Subtotal........................................ 4,006.5 89.3 3,666.7 88.5
Subject to discretionary withdrawal -- without
adjustment at carrying value.................. 479.9 10.7 479.4 11.5
-------- ----- -------- -----
Total annuity reserves and deposit liabilities
(gross and net of reinsurance)................ $4,486.4 100.0% $4,146.1 100.0%
======== ====== ======== ======
</TABLE>
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated ($ in
millions).
SURRENDERS AND WITHDRAWALS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PRODUCT LINE:
Variable and universal life................................. $ 28.3 $ 26.0 $ 23.2
Annuities................................................... 406.5 286.7 233.6
------ ------ ------
Total............................................. $434.8 $312.7 $256.8
====== ====== ======
</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 1998, the
Company reported net cash flow from operations of ($13.0) million, as compared
to ($37.9) million in 1997. The increase in net cash flow from operations
resulted primarily from lower taxes paid of $15.7 million and other
miscellaneous items. The decrease in net cash flow from operations of $38.0
million, as compared to that reported for 1996, resulted primarily from an
increase of taxes paid of $29.1 million and other miscellaneous items. The
Company's liquid assets include 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, 1998, the Company had readily marketable
fixed maturity securities with a carrying value of $1,044.2 million, which were
comprised of $586.4 million public and $457.8 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, 1998 the Company had cash and cash
equivalents of $133.4 million.
At December 31, 1998, the Company had commitments to issue $9.7 million of
fixed rate agricultural loans with periodic interest rate reset dates. The
initial interest rates on such loans range from 6.75% to 7.50%. The Company had
no commitments outstanding for private fixed maturity securities as of December
31, 1998. In addition, at that date the Company had no outstanding commitments
to issue any fixed rate commercial mortgage loans.
Of the $27.6 million of currently outstanding commercial mortgage loans in
the Company's investment portfolio at December 31, 1998, $9.2 million, $3.8
million and $5.6 million are scheduled to mature in 1999, 2000 and 2001,
respectively. See "Investments -- Mortgage Loans -- Commercial Mortgage Loans".
The National Association of Insurance Commissioners ("NAIC") established
Risk Based Capital ("RBC") requirements to help state regulators monitor and
safeguard life insurers' financial strength by
19
<PAGE> 24
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.
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 Company's adjusted RBC
capital ratio at December 31, 1998 and December 31, 1997 were in excess of the
minimum required RBC.
YEAR 2000
State of Readiness
The Company has a service agreement with MONY Life whereby MONY Life
provides services and equipment including computer and information systems to
the Company to conduct its business. See Note 3 to the Financial Statements.
In 1996, the Company in conjunction with MONY Life and affiliates
(hereafter collectively referred to as "MONY Life and its subsidiaries")
initiated a formal Year 2000 Project (the "Project") to resolve the Year 2000
issue. The scope of the Project was identified, and funding was established. In
early 1997, MONY Life and its subsidiaries retained Command Systems, Inc., and
Keane, Inc. to assist in bringing its computer and information systems into Year
2000 compliance. MONY Life and its subsidiaries' overall goal for information
technology ("IT") related items was to have business-critical hardware and
software compliant by December 31, 1998, with additional testing and enterprise
end-to-end testing occurring in 1999. MONY Life and its subsidiaries have also
retained a consulting firm to assist in the evaluation of Year 2000 issues
affecting its non-IT systems in facilities and equipment which may contain date
logic in embedded chips. MONY Life and its subsidiaries' overall goal is to have
these non-IT systems compliant by mid-1999.
The scope of the Project includes: ensuring the compliance of all
applications, operating systems and hardware on mainframe, PC and LAN platforms;
ensuring the compliance of voice and data network software and hardware;
addressing issues related to non-IT systems in buildings, facilities and
equipment which may contain date logic in embedded chips; and addressing the
compliance of key vendors and other third parties.
The phases of the Project are: (i) inventorying Year 2000 items and
assigning priorities; (ii) assessing the Year 2000 compliance of items; (iii)
remediating or replacing items that are determined not to be Year 2000
compliant; (iv) testing items for Year 2000 compliance; and (v) designing and
implementing Year 2000 contingency and business continuity plans. To determine
that all IT systems (whether internally developed or purchased) are Year 2000
compliant, each system is tested using a standard testing methodology which
includes unit testing, baseline testing, and future date testing. Future date
testing includes critical dates near the end of 1999 and into the year 2000,
including leap year testing.
The inventory and assessment phases of the Project were completed prior to
mid-1998. At December 31, 1998, all of MONY Life and its subsidiaries'
application systems had been remediated and current date tested. In addition,
approximately 94% of MONY Life and its subsidiaries' applications had been
future date tested, with future date testing for the remaining 6% scheduled for
completion by mid-1999. Newly implemented applications and new releases of
software packages will be tested in 1999 as part of the implementation process.
Approximately 87% of the operating systems, systems software, and hardware
for mainframe, PC and LAN platforms were deemed compliant based on information
supplied by vendors verbally, in writing, or on the vendor's Internet site.
Essentially all critical hardware and software was compliant and tested by
December 31, 1998. The remaining items will be resolved and tested in the first
quarter of 1999. Ongoing testing for Year 2000 compliance will take place in
1999 as applications, systems software and hardware is
20
<PAGE> 25
upgraded or replaced. Approximately 50% of critical non-IT systems had been
remediated as of December 31, 1998. Ongoing testing for Year 2000 compliance
will continue through 1999.
As part of the Project, significant service and information providers,
external vendors, suppliers, and other third parties (including
telecommunication, electrical, security, and HVAC systems), that are believed to
be critical to business operations after January 1, 2000, have been identified
and contacted. Procedures are being undertaken in an attempt to reasonably
ascertain their stage of Year 2000 readiness through questionnaires, compliance
letters, interviews, on-site visits, and other available means.
Costs
The estimated total cost of the Year 2000 Project for the Company is
approximately $2.0 million. Costs incurred on the Project during 1998, 1997 and
1996 were $1.4 million, $0.4 million, and $0.0 million, respectively,
aggregating $1.8 million through December 31, 1998. The Company's future cost of
completing the Year 2000 Project is estimated to be approximately $0.2 million,
which is being funded through operating cash flows. These amounts include costs
associated with the current development of contingency plans.
Risks
The Company believes that completed and planned modifications and
conversions of its internal systems and equipment will allow it to be Year 2000
compliant in a timely manner. There can be no assurance, however, that MONY Life
and its subsidiaries' internal systems or equipment or those external parties on
which the Company relies will be Year 2000 compliant in a timely manner or that
the Company's or external parties' contingency plans will mitigate the effects
of any noncompliance. Based upon currently available information and considering
the Company's Year 2000 Project status, management believes that the most
reasonably likely worst case scenario could result in short-term business
interruptions. However, failure by the Company and/or external parties to
complete Year 2000 readiness work in a timely manner could have a material
adverse effect on the Company's financial position and results of its
operations.
Contingency Plans
The Company has retained outside consultants to assist in the development
of Business Continuity Plans, which includes identification of third party
service providers, information systems, equipment, facilities, and other items
which are mission-critical to the operation of the business. In conjunction with
this effort, the Company is developing a Year 2000 Contingency Plan (the
"Contingency Plan") to address failures due to the Year 2000 problem of third
parties and other items, which are critical to the ongoing operation of the
business. The Contingency Plan includes the performance of alternate processing
as well as consideration for changing third party service providers, vendors,
and suppliers if necessary. The scheduled date for completion of the Contingency
Plan is mid-1999. The Company believes that due to the pervasive nature of
potential Year 2000 issues, the contingency planning process is an ongoing one
that will require further modifications as the Company obtains additional
information regarding the status of third party Year 2000 readiness.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations except insofar as inflation affects interest rates.
21
<PAGE> 26
INVESTMENTS
GENERAL
The Company's investment operations are managed by MONY Life's investment
area pursuant to an agreement between the Company and MONY Life dated January 1,
1982. The investment area reports directly to the Chief Investment Officer of
MONY Life. The investment area, in consultation with the product actuaries of
MONY Life 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 Company had total assets at December 31, 1998 of approximately $5.9
billion of which $1.8 billion represented assets held in the Company's general
account and $4.1 billion represented assets held in the Company's separate
accounts, for which the Company does not generally bear investment risk.
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
with respect to its general account assets: 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 the standard valuation laws of virtually
all states, 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, 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, subject to certain minimum rates, where applicable, 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 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 does not use hedging
instruments because management believes that there is limited general account
risk exposure from recurring cash flows and limitations contained in product
designs.
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
22
<PAGE> 27
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 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.
The following table summarizes the invested assets held in the general
account of the Company at the dates indicated ($ in millions).
INVESTED ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1998 1997
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Fixed maturities....................................... $1,044.2 76.6% $1,099.4 81.4%
Mortgage loans on real estate.......................... 120.1 8.8 132.5 9.8
Policy loans........................................... 52.1 3.8 45.9 3.4
Real estate to be disposed of.......................... 0.0 0.0 19.2 1.4
Real estate held for investment........................ 8.3 0.6 2.8 0.2
Other invested assets.................................. 4.7 0.4 5.1 0.4
Cash and cash equivalents.............................. 133.4 9.8 46.0 3.4
-------- ----- -------- -----
Total invested assets........................ $1,362.8 100.0% $1,350.9 100.0%
======== ===== ======== =====
</TABLE>
The yield on general account invested assets (including net realized gains
and losses on investments) was 7.6% and 7.5% for the years ended December 31,
1998 and 1997, respectively.
The following table illustrates the yields on average assets for each of
the components of the Company's investment portfolio for and the years ended
December 31, 1998, 1997 and 1996 ($ in millions).
INVESTMENT RESULTS BY ASSET CATEGORY
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------- --------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES:
Investment income................ 7.4% $ 77.2 7.4% $ 78.4 7.4% $ 76.7
Net realized gains (losses)...... 0.2 2.6 (0.1) (0.7) 0.0 0.1
Total............................ 7.6% $ 79.8 7.3% $ 77.7 7.4% $ 76.8
---- -------- ---- -------- ----- --------
Ending assets.................... $1,014.2 $1,074.2 $1,047.9
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------- --------------------
YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Investment income................ 8.7% $ 11.0 8.4% $ 12.1 9.1% $ 14.7
Net realized gains (losses)...... 1.1 1.4 1.7 2.4 0.4 0.7
Total............................ 9.8% 12.4 10.1% $ 14.5 9.5% $ 15.4
---- -------- ---- -------- ----- --------
Ending assets.................... $ 120.1 $ 132.5 $ 154.2
REAL ESTATE:(2)
Investment income................ 3.3% $ 0.5 6.6% $ 2.0 7.9% $ 3.7
Net realized gains (losses)...... 16.5 2.5 1.6 0.5 1.7 0.8
Total............................ 19.8% 3.0 8.2% 2.5 9.6% $ 4.5
---- -------- ---- -------- ----- --------
Ending assets.................... $ 8.3 $ 22.0 $ 38.9
POLICY LOANS:
Investment income................ 7.4% $ 3.6 8.0% $ 3.5 6.8% $ 2.7
Net realized gains (losses)...... 0.0 0.0 0.0 0.0 0.0 0.0
Total............................ 7.4% 3.6 8.0% 3.5 6.8% $ 2.7
---- -------- ---- -------- ----- --------
Ending assets.................... $ 52.1 $ 45.9 $ 41.5
CASH & CASH EQUIVALENTS:
Investment income................ 3.0% $ 2.7 7.1% $ 4.8 5.4% $ 5.8
Net realized gains (losses)...... 0.0 0.0 0.0 0.0 0.0 0.0
Total............................ 3.0% 2.7 7.1% 4.8 5.4% $ 5.8
---- -------- ---- -------- ----- --------
Ending assets.................... $ 133.4 $ 46.0 $ 90.2
OTHER INVESTED ASSETS:
Investment income(3)............. 6.1% $ 0.3 4.9% $ 0.3 4.5% $ 0.3
Net realized gains (losses)...... 12.2 0.6 8.2 0.5 (10.5) (0.7)
Total............................ 18.3% 0.9 13.1% 0.8 (6.0)% $ (0.4)
---- -------- ---- -------- ----- --------
Ending assets.................... $ 4.7 $ 5.1 $ 7.1
TOTAL BEFORE INVESTMENT EXPENSES:
Investment income(4)............. 7.2% $ 95.3 7.5% $ 101.1 7.4% $ 103.9
Net realized gains (losses)...... 0.5 7.1 0.2 2.7 0.1 0.9
Total............................ 7.7% 102.4 7.7% 103.8 7.5% $ 104.8
---- -------- ---- -------- ----- --------
Ending assets.................... $1,332.8 $1,325.7 $1,379.8
Investment expenses net of other
fee income(5).................. (0.1)% $ (0.7) (0.2)% $ (2.0) (0.1)% $ (1.9)
TOTAL AFTER INVESTMENT EXPENSES:
Investment income(5)............. 7.1% $ 94.6 7.3% $ 99.1 7.3% $ 102.0
Net realized gains (losses)...... 0.5 7.1 0.2 2.7 0.1 0.9
Total............................ 7.6% $ 101.7 7.5% $ 101.8 7.4% $ 102.9
---- -------- ---- -------- ----- --------
Ending assets.................... $1,332.8 $1,325.7 $1,379.8
Net unrealized gains (losses) on
fixed maturities............... $ 30.0 $ 25.2 $ 12.0
-------- -------- --------
Total invested assets............ $1,362.8 $1,350.9 $1,391.8
======== ======== ========
</TABLE>
- ---------------
(1) Yields are based on annual average asset carrying values, excluding
unrealized gains (losses) in the fixed maturity asset category.
(2) Equity real estate income is shown net of operating expenses and
depreciation.
24
<PAGE> 29
(3) Excludes amounts referred to in (5) below.
(4) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $1.6
million, $4.6 million and $5.1 million for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, real estate investment
income is shown net of depreciation of $0.6 million, $0.4 million and $0.8
million for the aforementioned periods, respectively.
(5) Includes mortgage servicing fee and other miscellaneous fee income of
approximately $2.3 million, $1.3 million and $1.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
FIXED MATURITIES
Fixed maturities consist of publicly traded debt securities and privately
placed debt securities and represented 76.6% and 81.4% of total invested assets
at December 31, 1998 and 1997, respectively.
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC Designations". The NAIC Designations
closely mirror the Nationally Recognized Securities Rating Organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade ("Baa" or higher by Moody's, or "BBB" or higher by S&P) by such
rating organizations. NAIC Designations 3 through 6 are referred to as below
investment grade ("Ba" or lower by Moody's, or "BB" or lower by S&P).
The following tables present the Company's private, public and total fixed
maturities by NAIC designation and the equivalent ratings of the Nationally
Recognized Securities Rating Organizations as of December 31, 1998 and 1997, as
well as the percentage, based on fair value, that each designation comprises ($
in millions).
PUBLIC FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
RATING AGENCY ------------------------------ ------------------------------
NAIC EQUIVALENT AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ------ -------------------- --------- ----- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1....................... Aaa/Aa/A $346.1 60.9% $357.3 $390.6 63.1% $400.2
2....................... Baa 203.1 35.8 210.0 203.2 32.9 208.5
3....................... Ba 19.2 3.3 19.1 21.0 3.4 21.3
4....................... B 0.0 0.0 0.0 4.5 0.6 4.0
5....................... Caa and lower 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
------ ----- ------ ------ ----- ------
Total public fixed
maturities $568.4 100.0% $586.4 $619.3 100.0% $634.0
====== ===== ====== ====== ===== ======
</TABLE>
PRIVATE FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
RATING AGENCY ------------------------------ ------------------------------
NAIC EQUIVALENT AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ------ -------------------- --------- ----- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1....................... Aaa/Aa/A $132.6 30.0% $137.2 $162.7 35.7% $166.3
2....................... Baa 277.3 62.8 287.4 238.5 52.7 245.1
3....................... Ba 29.3 5.8 26.7 45.6 9.9 46.1
4....................... B 3.0 0.6 2.7 7.5 1.6 7.3
5....................... Caa and lower 3.6 0.8 3.8 0.0 0.0 0.0
6....................... In or near default 0.0 0.0 0.0 0.6 0.1 0.6
------ ----- ------ ------ ----- ------
Total private fixed
maturities $445.8 100.0% $457.8 $454.9 100.0% $465.4
====== ===== ====== ====== ===== ======
</TABLE>
25
<PAGE> 30
TOTAL FIXED MATURITIES BY CREDIT QUALITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
RATING AGENCY ------------------------------ ------------------------------
NAIC EQUIVALENT AMORTIZED % OF ESTIMATED AMORTIZED % OF ESTIMATED
RATING DESIGNATION COST TOTAL FAIR VALUE COST TOTAL FAIR VALUE
- ------ -------------------- --------- ----- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1....................... Aaa/Aa/A $ 478.7 47.3% $ 494.5 $ 553.3 51.5% $ 566.5
2....................... Baa 480.4 47.6 497.4 441.7 41.3 453.6
3....................... Ba 48.5 4.4 45.8 66.6 6.1 67.4
4....................... B 3.0 0.3 2.7 12.0 1.0 11.3
5....................... Caa and lower 3.6 0.4 3.8 0.0 0.0 0.0
6....................... In or near default 0.0 0.0 0.0 0.6 0.1 0.6
-------- ----- -------- -------- ----- --------
Total fixed
maturities $1,014.2 100.0% $1,044.2 $1,074.2 100.0% $1,099.4
======== ===== ======== ======== ===== ========
</TABLE>
The Company utilizes its investments in privately placed fixed maturities
to 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 December 31, 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 94.9% compared to 92.8% for December 31, 1997. The
fixed maturities portfolio was comprised, based on estimated fair value, of
56.2% in public fixed maturities and 43.8% in private fixed maturities at
December 31, 1998 and 57.7% in public fixed maturities and 42.3% 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 which, (i) are in default as to principal or interest payments (ii)
are to be restructured pursuant to commenced negotiations (iii) went into
bankruptcy subsequent to acquisition or (iv) are deemed to have other than
temporary impairments to value. The fair value of problem fixed maturities was
$4.4 million and $4.6 million at December 31, 1998 and 1997, respectively. For
the years ended December 31, 1998, 1997 and 1996 $0.0 million, $0.1 million and
$1.3 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 $16.4 million and
$28.3 million at December 31, 1998 and 1997, 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 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 $2.7 million and $0.0 million at December 31, 1998 and 1997,
respectively.
26
<PAGE> 31
The following table sets forth the total carrying values of the Company's
fixed maturity portfolio, as well as its problem, potential problem and
restructured fixed maturities ($ in millions).
PROBLEM, POTENTIAL PROBLEM AND
RESTRUCTURED FIXED MATURITIES AT FAIR VALUE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Total fixed maturities (public and private)................. $1,044.2 $1,099.4
======== ========
Problem fixed maturities.................................... 4.4 4.6
Potential problem fixed maturities.......................... 16.4 28.3
Restructured fixed maturities............................... 2.7 0.0
-------- --------
Total problem, potential problem & restructured fixed
maturities................................................ $ 23.5 $ 32.9
======== ========
Total problem, potential problem & restructured fixed
maturities as a percent of total fixed maturities......... 2.3% 3.0%
======== ========
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of
December 31, 1998 and 1997 are as follows ($ in millions):
FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
----------------------- -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.......................... $ 90.0 $ 90.4 $ 23.2 $ 23.3
Due after one year through five years............ 306.8 315.5 374.3 380.6
Due after five years through ten years........... 284.7 299.2 343.0 353.8
Due after ten years.............................. 105.2 106.3 81.6 83.7
-------- -------- -------- --------
Subtotal......................................... 786.7 811.4 822.1 841.4
Mortgage-backed and other asset-backed
securities..................................... 227.5 232.8 252.1 258.0
-------- -------- -------- --------
Total.................................. $1,014.2 $1,044.2 $1,074.2 $1,099.4
======== ======== ======== ========
</TABLE>
The Company held approximately $232.8 million and $258.0 million of
mortgage-backed and asset-backed securities as of December 31, 1998 and 1997,
respectively. Of such amounts, $108.3 million and $126.0 million or 46.5% and
48.8%, respectively, represented agency-issued pass-through and collateralized
mortgage obligations ("CMOs") secured by the Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, Government National
Mortgage Association and Canadian Housing Authority collateral. The balance of
such amounts was comprised of other types of mortgage-backed and asset-backed
securities. The Company believes that its active monitoring of its portfolio of
mortgage-backed securities and the limited extent of its holdings of more
volatile types of mortgage-backed securities mitigate the Company's exposure to
losses from prepayment risk associated with interest rate fluctuations for this
portfolio. At December 31, 1998 and 1997, 91.2% and 94.1%, respectively, of the
Company's mortgage-backed and asset-backed securities were assigned a NAIC
Designation 1. In addition, the Company believes that it holds a relatively low
percentage of CMOs compared to other life insurance companies.
27
<PAGE> 32
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated ($ in millions).
MORTGAGE AND ASSET-BACKED SECURITIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
CMOs........................................................ $147.7 $168.3
Pass-through securities..................................... 0.1 0.2
Commercial MBSs............................................. 5.4 17.6
Asset-backed securities..................................... 79.6 71.9
------ ------
Total MBS's and asset-backed securities........... $232.8 $258.0
====== ======
</TABLE>
CMOs are purchased to diversify the portfolio risk characteristics from
primarily corporate credit risk to a mix of credit and cash flow risk. The
majority of the CMOs in the Company's investment portfolio have relatively low
cash flow variability. In addition, approximately 73.2% of the CMOs in the
portfolio have minimal credit risk because the underlying collateral is backed
by the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation, or the Government National Mortgage Association. These CMOs offer
greater liquidity and higher yields than corporate debt securities of similar
credit quality and expected average lives.
The principal risks inherent in holding CMOs (as well as pass-through
securities) are prepayment and extension risks arising from changes in market
interest rates. In declining interest rate environments, the mortgages
underlying the CMOs are prepaid more rapidly than anticipated, causing early
repayment of the CMOs. In rising interest rate environments, the underlying
mortgages are prepaid at a slower rate than anticipated, causing CMO principal
repayments to be extended. Although early CMO repayments may result in
acceleration of income from recognition of any unamortized discount, the
proceeds typically are reinvested at lower current yields, resulting in a net
reduction of future investment income.
The Company manages this prepayment and extension risk by investing in CMO
tranches that provide for greater stability of cash flows. The mix of CMO
tranches was as follows as of the dates indicated ($ in millions).
COLLATERALIZED MORTGAGE OBLIGATIONS BY TRANCHE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Planned Amortization Class.................................. $121.8 $131.5
Sequential.................................................. 25.9 36.8
------ ------
Total CMO's....................................... $147.7 $168.3
====== ======
</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 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.
28
<PAGE> 33
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 10.8% and 17.0%,
of the ABS portfolio as of December 31, 1998 and 1997, respectively), the ABS
portfolio is in general insensitive to changes in interest rates. As of December
31, 1998 and 1997, 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 ($ in millions).
ASSET-BACKED SECURITIES BY TYPE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Credit cards................................................ $42.1 $28.7
Automobile receivables...................................... 12.0 13.0
Home equity................................................. 8.6 12.2
Lease receivables........................................... 5.0 5.0
Miscellaneous............................................... 11.9 13.0
----- -----
Total ABS......................................... $79.6 $71.9
===== =====
</TABLE>
MORTGAGE LOANS
Mortgage loans comprise 8.8% and 9.8% of total invested assets at December
31, 1998 and 1997, respectively. Mortgage loans consist of commercial and
agricultural loans. As of December 31, 1998 and 1997, commercial mortgage loans
comprised $27.6 million and $34.0 million or 23.0% and 25.7% of total mortgage
loan investments, respectively. Agricultural loans comprised $92.5 million and
$98.5 million or 77.0% and 74.3% of total mortgage loan investments,
respectively.
In 1992, the Company discontinued making new commercial mortgage loans,
except to honor outstanding commitments or safeguard the values of existing
investments. In 1999, due to improving market conditions, the need to maintain a
diversified investment portfolio and advantageous yields, the Company will begin
to originate new commercial mortgage loans.
29
<PAGE> 34
Commercial Mortgage Loans
Following is a summary of the Company's commercial mortgage loans by
geographic area and property type as of December 31, 1998 and 1997 ($ in
millions).
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY TYPE
AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
- ----------------------------------------------------
NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL
- ------ -------- -------- -----
<S> <C> <C> <C>
Northeast............ 7 $13.9 50.3%
West................. 4 7.9 28.6
Southeast............ 2 3.0 10.9
Mountain............. 1 1.6 5.8
Midwest.............. 1 1.2 4.4
-- ----- -----
Total........... 15 $27.6 100.0%
== ===== =====
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
- ----------------------------------------------------
NUMBER CARRYING % OF
TYPE OF LOANS VALUE TOTAL
---- -------- -------- -----
<S> <C> <C> <C>
Office............... 7 $13.4 48.5%
Retail............... 3 4.6 16.7
Industrial........... 2 4.6 16.7
Other................ 2 3.6 13.0
Apartments........... 1 1.4 5.1
-- ----- -----
Total......... 15 $27.6 100.0%
== ===== =====
</TABLE>
COMMERCIAL MORTGAGE LOAN DISTRIBUTION BY GEOGRAPHIC AREA AND BY TYPE
AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
- ----------------------------------------------------
NUMBER CARRYING % OF
REGION OF LOANS VALUE TOTAL
- ------ -------- -------- -----
<S> <C> <C> <C>
Northeast............ 9 $18.1 53.2%
West................. 5 9.5 27.9
Southeast............ 2 3.0 8.9
Mountain............. 1 1.6 4.7
Midwest.............. 2 1.8 5.3
-- ----- -----
Total........... 19 $34.0 100.0%
== ===== =====
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
- ----------------------------------------------------
NUMBER CARRYING % OF
TYPE OF LOANS VALUE TOTAL
- ---- -------- -------- -----
<S> <C> <C> <C>
Office............... 9 $15.9 46.8%
Retail............... 3 4.6 13.5
Industrial........... 3 6.2 18.2
Other................ 2 4.0 11.8
Apartments........... 2 3.3 9.7
-- ----- -----
Total........... 19 $34.0 100.0%
== ===== =====
</TABLE>
The Company's commercial mortgage loan portfolio is managed by a group of
experienced real estate professionals. These professionals monitor the
performance of the loan collateral, physically inspect properties, collect
financial information from borrowers and keep in close contact with borrowers
and the local broker communities to assess the market conditions and evaluate
the impact of such conditions on property cash flows. The Company's real estate
professionals identify problem and potential problem mortgage assets and develop
workout strategies to deal with borrowers' financial weakness, whether by
foreclosing on properties to prevent a deterioration in collateral value, or by
restructuring mortgages with temporary cash flow difficulties.
30
<PAGE> 35
COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1998 1997
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C>
1 year or less................................... $ 9.2 33.3% $ 4.5 13.2%
Over 1 year but less than or equal to 2 years.... 3.8 13.8 9.6 28.2
Over 2 years but less than or equal to 3 years... 5.6 20.3 3.8 11.2
Over 3 years but less than or equal to 4 years... 0.0 0.0 3.6 10.6
Over 4 years but less than or equal to 5 years... 0.0 0.0 1.4 4.1
Over 5 years but less than or equal to 6 years... 0.0 0.0 1.9 5.6
Over 6 years but less than or equal to 7 years... 2.4 8.7 0.0 0.0
Over 7 years but less than or equal to 8 years... 3.2 11.6 2.4 7.1
Over 8 years but less than or equal to 9 years... 1.4 5.1 3.3 9.7
Over 9 years but less than or equal to 10
years.......................................... 0.0 0.0 1.4 4.1
Over 10 years.................................... 2.0 7.2 2.1 6.2
----- ----- ----- -----
Total.................................. $27.6 100.0% $34.0 100.0%
===== ===== ===== =====
</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 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 the 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 December 31, 1998 was
$27.6 million, which amount is net of valuation allowances aggregating $0.9
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 December 31, 1998, the carrying value of restructured loans was $13.5
million, net of valuation allowances of $0.5 million. There were no problem or
potential problem loans at December 31, 1998.
Gross interest income on restructured commercial mortgage loan balances
that would have been recorded in accordance with the loans' original terms was
approximately $1.4 million at December 31, 1998 and 1997. As a result of the
restructurings, the gross interest income recognized in net income at December
31, 1998 and 1997 was $1.0 million.
31
<PAGE> 36
The following table presents the carrying amounts of problem and
restructured commercial mortgages relative to the carrying value of all
commercial mortgages as of the dates indicated. The table also presents the
valuation allowances and writedowns recorded by the Company relative to
commercial mortgages defined as problem and restructured as of each of the
aforementioned dates ($ in millions).
PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING VALUE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Total commercial mortgages.................................. $27.6 $34.0
===== =====
Problem commercial mortgages(1)............................. 0.0 0.9
Restructured commercial mortgages........................... 13.5 13.5
----- -----
Total problem and restructured commercial mortgages......... $13.5 $14.4
===== =====
Valuation allowances/writedowns:
Problem loans............................................... $ 0.0 $ 0.2
Restructured loans.......................................... 0.5 0.7
----- -----
Total valuation allowances/writedowns....................... $ 0.5 $ 0.9
===== =====
Total valuation allowances/writedowns as a percent of
problem and restructured commercial mortgages at carrying
value before valuation allowances and writedowns.......... 3.6% 5.9%
===== =====
</TABLE>
- ---------------
(1) Problem commercial mortgages included mortgage loans in foreclosure of $0.0
million and $0.9 million at December 31, 1998 and 1997, respectively.
In addition to valuation allowances and impairment writedowns recorded on
specific commercial mortgage loans classified as 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 December 31, 1998 and 1997, such reserves were $0.4
million and $0.6 million, respectively.
Agricultural Mortgage Loans
The carrying value of the Company's agricultural mortgage loans was $92.5
million and $98.5 million at December 31, 1998 and 1997, respectively,
representing 77.0% and 74.3% of total mortgage assets. The agricultural mortgage
portfolio is diversified both geographically and by type of product. The
security for these loans includes row crops, permanent plantings, dairies,
ranches and timber tracts. Due to strong agricultural markets and advantageous
yields, the Company expects to continue to invest in agricultural mortgage
investments. Less than 0.0% and 0.8% of total agricultural loans outstanding at
December 31, 1998 and 1997, respectively, were delinquent or in process of
foreclosure.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES
The Company defines problem, potential problem and restructured
agricultural mortgages in the same manner as it does for commercial mortgages.
The following table presents the carrying amounts of problem, potential problem
and restructured agricultural mortgages relative to the carrying value of all
agricultural mortgages as of the dates indicated ($ in millions).
32
<PAGE> 37
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES AT CARRYING
VALUE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Total agricultural mortgages................................ $92.5 $98.5
===== =====
Problem agricultural mortgages(1)........................... 0.0 0.7
Potential problem agricultural mortgages.................... 0.4 0.5
Restructured agricultural mortgages......................... 0.8 0.0
----- -----
Total problem, potential problem & restructured agricultural
mortgages(2).............................................. $ 1.2 $ 1.2
===== =====
</TABLE>
- ---------------
(1) Problem agricultural mortgages included delinquent mortgage loans of $0.0
million and $0.7 million at December 31, 1998 and 1997, respectively, and
there were no mortgage loans in the process of foreclosure at such dates.
(2) As of December 31, 1998 and 1997, there were no valuation
allowances/writedowns relating to problem, potential problem and
restructured agricultural mortgages.
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 December 31, 1998 and 1997, such
reserves were $0.9 million and $1.0 million, respectively.
As illustrated in the table above, at December 31, 1998 and 1997 problem
agricultural mortgage loans totaled $0.0 million and $0.7 million or 0.0% and
0.7% of the total carrying value of agricultural mortgages at such dates,
respectively. Potential problem agricultural mortgages (not currently in a
delinquent status, but with collateral impairment) totaled $0.4 million and $0.5
million or 0.4% and 0.5% of the total carrying value of agricultural mortgages
at such dates, respectively, and restructured mortgages totaled $0.8 million and
$0.0 million or 0.9% and 0.0% of the total carrying value of agricultural
mortgages at such dates, respectively. Total problem, potential problem and
restructured mortgages was $1.2 million at December 31, 1998 and 1997 or 1.3%
and 1.2% of the total carrying value of agricultural mortgages at such dates,
respectively.
EQUITY REAL ESTATE
The Company holds real estate as part of its general account investment
portfolio. The Company has adopted a policy of not investing new funds in equity
real estate except to safeguard values in existing investments or to honor
outstanding commitments. As of December 31, 1998 and 1997, the carrying value of
the Company's real estate investments was $8.3 million and $22.0 million,
respectively, or 0.6% and 1.6%, respectively, of general account invested
assets. The Company owns real estate and real estate acquired upon foreclosure
of commercial and agricultural mortgage loans. The following table presents the
carrying value of the Company's equity real estate investments by such
classifications ($ in millions).
EQUITY REAL ESTATE
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
TYPE 1998 1997
- ---- ------ -------
<S> <C> <C>
Real estate................................................. $0.3 $ 0.3
Foreclosed.................................................. 8.0 21.7
---- -----
Total............................................. $8.3 $22.0
==== =====
</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 $8.3 million and
$2.8 million as of
33
<PAGE> 38
December 31, 1998 and 1997, respectively. The carrying value of real estate to
be disposed of aggregated $0.0 million and $19.2 million as of December 31, 1998
and 1997, respectively.
The Company closely monitors property net operating income on a cash basis,
along with occupancy levels of the Company's commercial real estate properties
owned for more than one year, which comprise a significant portion (94.5% at
December 31, 1998) of the Company's equity real estate portfolio.
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES
The cumulative asset specific impairment adjustments and provisions for
valuation allowances that were recorded as of the end of each period are shown
in the table below and are reflected in the corresponding asset values discussed
above ($ in millions).
CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1997
------ -------
<S> <C> <C>
Fixed maturities............................................ $0.5 $ 0.9
Real estate(1).............................................. 1.9 9.5
Other....................................................... 0.0 0.5
---- -----
Total............................................. $2.4 $10.9
==== =====
</TABLE>
- ---------------
(1) Includes $1.6 million and $9.5 million at December 31, 1998 and 1997,
respectively, relating to impairments taken upon foreclosure of mortgage
loans.
CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1997
------ -------
<S> <C> <C>
Mortgages................................................... $1.9 $ 2.5
Real estate................................................. 0.0 2.2
---- -----
Total............................................. $1.9 $ 4.7
==== =====
</TABLE>
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS
FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1998 1997
------ -------
<S> <C> <C>
Fixed maturities............................................ $0.5 $ 0.9
Mortgages................................................... 1.9 2.5
Real estate................................................. 1.9 11.7
Other....................................................... 0.0 0.5
---- -----
Total............................................. $4.3 $15.6
==== =====
</TABLE>
All of the Company's fixed maturity 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
accumulated other comprehensive income. 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 years ended December 31, 1998, 1997 and
1996 such writedowns aggregated $0.4 million, $0.9 million and $0.8 million,
respectively.
34
<PAGE> 39
At December 31, 1998, 2.0% ($27.6 million) and 2.5% ($34.0 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 years ended December 31, 1998, 1997
and 1996, such increases (decreases) in valuation allowances aggregated ($0.4)
million, ($0.3) million and ($0.4) million, respectively. The carrying value of
commercial mortgage loans at December 31, 1998 was $27.6 million, which amount
is net of $0.9 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. There were no impairment adjustments for
the years ended December 31, 1998, 1997 and 1996. At December 31, 1998 and 1997,
the carrying value of real estate held for investment was $8.3 million and $2.8
million, or 0.6% and 0.2% of invested assets at such dates, respectively. The
aforementioned carrying values are net of cumulative impairments of $1.9 million
and $0.6 million, respectively, and net of accumulated depreciation of $1.9
million and $0.2 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 December 31, 1998
and 1997 was $0.0 million and $19.2 million, net of impairment adjustments of
$0.0 million and $8.9 million, valuation allowances of $0.0 million and $2.2
million, and accumulated depreciation of $0.0 million and $2.6 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 2 to the 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 years ended December 31, 1998, 1997
and 1996, such increases (decreases) in valuation allowances aggregated ($0.1)
million, $1.0 million and ($0.1) million, respectively.
35
<PAGE> 40
7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had total assets at December 31, 1998 of approximately $5.9
billion of which $1.8 billion represented assets held in the Company's general
account and $4.1 billion represented assets held in the Company's separate
accounts, for which the Company does generally bear investment risk.
The Company's exposure to market risk in its general account relates to the
market price and/or cash flow variability associated with changes in market
interest rates. Set forth below is an overview of the Company's primary exposure
to market risk, and its objectives and strategies relating to such risk.
Following this is a more detailed discussion of: (i) the Company's exposure to
interest rate risk, (ii) liability characteristics of the Company's business,
and (iii) asset/liability management techniques used by the Company to manage
market risks:
OVERVIEW --
The Company's results of operations significantly depend on profit margins
between general account invested assets and interest credited on insurance and
annuity products. Changes in interest rates can potentially impact the Company's
profitability. Management believes the Company's liabilities should be supported
by a portfolio principally composed of fixed rate investments that can generate
predictable, steady rates of return. Although these assets are purchased for
long-term investment, the portfolio management strategy considers them available
for sale in response to changes in market interest rates, changes in prepayment
risk, changes in relative values of asset sectors and individual securities and
loans, changes in credit quality outlook and other relevant factors. The
objective of portfolio management is to maximize returns, taking into
consideration the aforementioned factors. The Company's asset/liability
management discipline includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change. As a result, the
Company's fixed maturity portfolio has modest exposure to call and prepayment
risk and the vast majority of mortgage loan investments are fixed rate mortgages
that carry yield maintenance and prepayment provisions.
INTEREST RATE RISK --
The Company's exposure to interest rate risk primarily relates to its
investments in fixed maturity securities and mortgage loans. The carrying value
of investments in fixed maturity securities and mortgage loans represents 85.4
percent at December 31, 1998, of the total carrying value of the Company's
invested assets at such date. Substantially all of the Company's fixed maturity
securities are U.S. dollar denominated securities. As part of its
asset/liability management discipline, quantitative analyses are conducted that
model the assets with interest rate risk assuming various changes in interest
rates (see "Investments -- General" for a more detailed discussion of these
analyses). The table below shows the Company's potential exposure, measured in
terms of fair value, to an immediate 100 basis point increase in interest rates
from levels prevailing at December 31, 1998. A 100 basis point fluctuation in
interest rates is a hypothetical interest rate scenario used to calibrate
potential risk and does not represent management's view of future market
changes. While these fair value measurements provide a representation of
interest rate sensitivity of fixed maturities and mortgage loans, they are based
on the Company's portfolio exposures at a particular point in time and may not
be representative of future market results. These exposures will change as a
result of ongoing portfolio activities in response to management's assessment of
changing market conditions and available investment opportunities.
36
<PAGE> 41
ASSETS WITH INTEREST RATE RISK -- FAIR VALUE
<TABLE>
<CAPTION>
AT
DECEMBER 31, +100 BASIS
1998 POINT CHANGE
------------ ------------
($ IN MILLIONS)
<S> <C> <C>
ASSETS
Fixed maturities............................................ $1,044.2 $ (33.8)
Mortgage loans.............................................. 124.9 (3.4)
-------- -------
Total..................................................... $1,169.1 $ (37.2)
======== =======
</TABLE>
POLICYHOLDERS' LIABILITY CHARACTERISTICS --
Policyholders' liabilities at December 31, 1998 consisted of future policy
benefits, policyholders' account balances, and other policyholders' liabilities
of $112.0 million, $1,187.1 million, $56.9 million, respectively. These
liabilities were backed, at such date, by approximately $1.8 billion of assets
(total assets excluding "Separate Account assets"), including invested assets of
approximately $1.4 billion. Ensuring that the expected cash flows generated by
the assets are sufficient, given the policyholder obligations, is an explicit
objective of the Company's asset/liability management strategy. Following is a
discussion of the Company's policyholders' policy and annuity liabilities at
December 31, 1998.
Future Policy Benefits
Products in this category contain significant actuarial (including
mortality and morbidity) pricing and cash flow risks. The cash flows associated
with these policy liabilities are not interest rate sensitive but do vary based
on the timing and amount of benefit payments. The primary risks associated with
these products are that the benefits will exceed expected actuarial pricing
and/or that the actual timing of the cash flows will differ from those
anticipated resulting in an investment return lower than that assumed in
pricing. Products comprising this category include single premium whole life,
yearly renewable term, level term policies, and supplementary contracts with
life contingencies. Future policy benefit liabilities on such business
aggregated approximate $112.8 million at December 31, 1998. The guaranteed rate
on single premium whole life business, which represents policyholder liabilities
of approximately $81.2 million at December 31, 1998, is 6.0%.
Policyholders' Account Balances and Other Policyholders' Liabilities
Products in this category credit interest to policyholders, subject to
market conditions and minimum guarantees. Interest crediting on the products in
this category may be reset periodically. Policyholders may surrender at book
value, but under the terms of certain of the products in this category may be
subject to surrender charges for an initial period. Product examples include,
single premium deferred annuities, universal life contracts, and the general
account portion of the Company's variable annuity products. In general, the
Company's investment strategy is designed to manage a portfolio of assets with
appropriate duration and convexity consistent with the characteristics and risk
elements of the products comprising the policyholders' account balance
liabilities. Liability durations are short to intermediate term for annuities
and intermediate term for life insurance products.
ASSET/LIABILITY MANAGEMENT TECHNIQUES --
Asset/liability management is integrated into many aspects of the Company's
operations, including investment decisions, product development and
determination of interest crediting rates. As part of the risk management
process, numerous scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. See
"Investments" -- "General". Key variables include policy terms and policyholder
behavior, such as persistency, under differing crediting rate strategies. See
"Life Insurance Liability Characteristics". On the basis of these analyses,
management believes there is no material risk to the Company with respect to
interest rate movements up or down 100 basis points from rate levels at December
31, 1998.
37
<PAGE> 42
8. 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.
9. DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of the Company are listed below. The business
address for all directors and officers of MONY Life Insurance Company of America
is 1740 Broadway, New York, New York 10019.
Current Officers and Directors of the Company are:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Michael I. Roth................ Director, Chairman and Chief Executive Officer
Samuel J. Foti................. Director, President and Chief Operating Officer
Richard E. Connors............. Director
Richard Daddario............... Director, Vice President and Controller
Phillip A. Eisenberg........... Director, Vice President and Actuary
Margaret G. Gale............... Director and Vice President
Stephen J. Hall................ Director
Charles P. Leone............... Director, Vice President and Chief Compliance Officer
Kenneth M. Levine.............. Director and Executive Vice President
David S. Waldman............... Secretary
David V. Weigel................ Treasurer
</TABLE>
No officer or director listed above receives any compensation from the
Company in addition to compensation paid by MONY.
Biographical information for each of the individuals listed in the above
table is set forth below.
DIRECTORS AND EXECUTIVE OFFICERS. Set forth below is a description of the
business positions during at least the past five years for the directors and the
executive officers of the Company.
Michael I. Roth is Director, Chairman of the Board and Chief Executive
Officer of the Company. He is Chairman and Chief Executive Officer of The MONY
Group Inc. and has been a Director since September 1997. He is Chairman of the
Board (since July 1993) and Chief Executive Officer (since January 1993) of MONY
and has been a Director since May 1991. Mr. Roth is also a director of the
following subsidiaries of MONY: 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 which
develops housing not affiliated with the Enterprise Group of Funds),
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 Director, President and Chief Operating Officer of the
Company. He is President and Chief Operating Officer of The MONY Group Inc. and
has been a Director since September 1997. He is
38
<PAGE> 43
President and Chief Operating Officer (since February 1994) of MONY and has been
a Director since January 1993. Mr. Foti is also a director of the following
subsidiaries of MONY: 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 Director, Vice President and Controller of the Company.
He is Executive Vice President and Chief Financial Officer of The MONY Group
Inc. 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 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 Director and Executive Vice President of the Company.
He is Executive Vice President and Chief Investment Officer of The MONY Group
Inc. since August 1998 and has been a Director since September 1997. He is
Executive Vice President (since February 1990) and Chief Investment Officer
(since January 1991) of MONY and has been a Director since May 1994. Mr. Levine
is also a director of the following subsidiaries of MONY: 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.
Richard E. Connors is Director of the Company. He is Senior Vice President
of MONY (since February 1994). Mr. Connors is also a director of the following
subsidiary of MONY: 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 Director, Vice President and Actuary of the
Company. He is Senior Vice President and Chief Actuary of MONY (since April
1993). 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.
Margaret G. Gale is Director and Vice President of the Company. She is Vice
President of MONY (since February 1991). She has also served as Vice
President -- Policyholder Services (from 1988 to 1991). Ms. Gale has been with
MONY for 20 years.
Stephen J. Hall is Director of the Company. He is Senior Vice President of
MONY (since February 1994). Mr. Hall is also a director of the following
subsidiary of MONY: 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.
Charles P. Leone is Director, Vice President and Chief Compliance Officer
of the Company. He is Vice President and Chief Corporate Compliance Officer of
MONY (since 1996). He has also served as Vice President of MONY (from 1987 to
1996). Mr. Leone has been with MONY for 35 years.
David S. Waldman is Secretary of the Company. He is Assistant Vice
President and Senior Counsel -- Operations (since 1992) of MONY. He has also
served as Assistant General Counsel of MONY (from 1986 to 1992). Mr. Waldman has
been with MONY for 16 years.
39
<PAGE> 44
David V. Weigel is Treasurer of the Company. He is Vice
President -- Treasurer of MONY (since 1994). He has also served as Assistant
Treasurer of MONY (from 1986 to 1994). Mr. Weigel has been with MONY for 25
years.
10. EXECUTIVE COMPENSATION
None of the directors, officers, or other personnel receives any
compensation from the Company. All compensation is being paid by MONY, with an
allocation of their compensation to be made for services rendered to the Company
pursuant to a cost allocation agreement.
11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Financial Statements:
Report of Independent Accountants
Balance sheets as of December 31, 1998 and 1997
Statements of income and comprehensive income for the years ended
December 31, 1998, 1997 and 1996
Statements of changes in shareholder's equity for the years ended
December 31, 1998, 1997 and 1996
Statements of cash flows for the years ended December 31, 1998, 1997,
and 1996
Notes to Financial Statements
40
<PAGE> 45
FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
With respect to MONY Life Insurance Company of America
Report of Independent Accountants......................... F-2
Balance sheets as of December 31, 1998 and 1997........... F-3
Statements of income and comprehensive income for the
years ended December 31, 1998,
1997 and 1996.......................................... F-4
Statements of changes in shareholder's equity for the
years ended December 31, 1998,
1997 and 1996.......................................... F-5
Statements of cash flows for the years ended December 31,
1998, 1997 and 1996.................................... F-6
Notes to financial statements............................. F-8
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
MONY Life Insurance Company of America
In our opinion, the accompanying balance sheets and the related statements
of income and comprehensive income, changes in shareholder's equity and cash
flows present fairly, in all material respects, the financial position of MONY
Life Insurance Company of America (the "Company") at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998, 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 2 to the financial statements, the Company adopted in
1996, Statements of Financial Accounting Standards No. 120 (SFAS 120) and
Statements of 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
February 15, 1999, except for Note 12(b),
as to which the date is March 22, 1999.
F-2
<PAGE> 47
MONY LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
($ IN MILLIONS)
<S> <C> <C>
ASSETS
INVESTMENTS:
Fixed maturity securities available-for-sale, at fair
value..................................................... $1,044.2 $1,099.4
Mortgage loans on real estate (Note 8)...................... 120.1 132.5
Policy loans................................................ 52.1 45.9
Real estate to be disposed of (Note 8)...................... 0.0 19.2
Real estate held for investment (Note 8).................... 8.3 2.8
Other invested assets....................................... 4.7 5.1
-------- --------
1,229.4 1,304.9
======== ========
Cash and cash equivalents................................... 133.4 46.0
Accrued investment income................................... 19.5 22.4
Amounts due from reinsurers................................. 24.4 13.0
Deferred policy acquisition costs........................... 318.6 281.6
Other assets................................................ 15.3 16.9
Separate account assets..................................... 4,148.8 3,606.7
-------- --------
Total assets...................................... $5,889.4 $5,291.5
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits...................................... $ 112.0 $ 106.1
Policyholders' account balances............................. 1,187.1 1,215.7
Other policyholders' liabilities............................ 56.9 41.2
Accounts payable and other liabilities...................... 67.9 34.5
Current federal income taxes payable........................ 13.2 17.8
Deferred federal income taxes (Note 5)...................... 13.7 7.5
Separate account liabilities................................ 4,148.8 3,606.7
-------- --------
Total liabilities................................. 5,599.6 5,029.5
Commitments and contingencies (Note 12)
Common stock $1.00 par value; 5,000,000 shares authorized,
2,500,000 issued and outstanding.......................... 2.5 2.5
Capital in excess of par.................................... 189.7 177.2
Retained earnings........................................... 89.6 75.4
Accumulated other comprehensive income...................... 8.0 6.9
-------- --------
Total shareholder's equity........................ 289.8 262.0
-------- --------
Total liabilities and shareholder's equity........ $5,889.4 $5,291.5
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 48
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Universal life and investment-type product policy fees...... $122.0 $100.8 $ 80.8
Premiums.................................................... 1.7 0.1 0.0
Net investment income (Note 6).............................. 94.6 99.1 102.0
Net realized gains on investments (Note 6).................. 7.1 2.7 0.9
Other income................................................ 7.6 5.5 4.8
------ ------ ------
233.0 208.2 188.5
------ ------ ------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 34.9 30.6 26.4
Interest credited to policyholders' account balances........ 65.1 72.5 73.0
Amortization of deferred policy acquisition costs........... 35.5 46.3 36.6
Other operating costs and expenses.......................... 75.6 46.0 39.4
------ ------ ------
211.1 195.4 175.4
------ ------ ------
Income before income taxes.................................. 21.9 12.8 13.1
Income tax expense.......................................... 7.7 4.5 4.6
------ ------ ------
Net income.................................................. 14.2 8.3 8.5
Other comprehensive income, net (Note 6).................... 1.1 3.3 (5.8)
------ ------ ------
Comprehensive income........................................ $ 15.3 $ 11.6 $ 2.7
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 49
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON IN EXCESS RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK OF PAR EARNINGS INCOME EQUITY
------ --------- -------- ------------- ---------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............. $2.5 $153.0 $ 58.6 $ 9.4 $223.5
Capital contribution................... 13.4 13.4
Comprehensive income
Net income........................... 8.5 8.5
Other comprehensive income:
Unrealized gains on investments,
net of unrealized losses,
reclassification adjustments,
and taxes (Note 6).............. (5.8) (5.8)
---- ------ ------ ----- ------
Comprehensive income................... 2.7
------
Balance, December 31, 1996............. 2.5 166.4 67.1 3.6 239.6
Capital contribution................... 10.8 10.8
Comprehensive income
Net income........................... 8.3 8.3
Other comprehensive income:
Unrealized losses on investments,
net of unrealized gains,
reclassification adjustments,
and taxes (Note 6).............. 3.3 3.3
---- ------ ------ ----- ------
Comprehensive income................... 11.6
------
Balance, December 31, 1997............. 2.5 177.2 75.4 6.9 262.0
Capital contribution................... 12.5 12.5
Comprehensive income
Net income........................... 14.2 14.2
Other comprehensive income:
Unrealized gains on investments,
net of unrealized losses,
reclassification adjustments,
and taxes (Note 6).............. 1.1 1.1
---- ------ ------ ----- ------
Comprehensive income................... 15.3
------
Balance, December 31, 1998............. $2.5 $189.7 $ 89.6 $ 8.0 $289.8
==== ====== ====== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 50
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (SEE NOTE 2):
Net income.................................................. $ 14.2 $ 8.3 $ 8.5
Adjustments to reconcile net income to net cash (used
in)/provided by operating activities:
Interest credited to policyholders' account balances...... 64.1 71.5 72.5
Universal life and investment-type product policy fee
income................................................. (107.0) (98.1) (85.3)
Capitalization of deferred policy acquisition costs....... (74.9) (73.8) (68.5)
Amortization of deferred policy acquisition costs......... 35.5 46.3 36.6
Provision for depreciation and amortization............... 1.0 0.4 1.4
Provision for deferred federal income taxes............... (1.1) (13.4) (10.6)
Net realized gains on investments......................... (7.1) (2.7) (0.9)
Change in other assets and accounts payable and other
liabilities............................................ 45.3 29.6 28.2
Change in future policy benefits.......................... 5.9 0.2 1.2
Change in other policyholders' liabilities................ 15.7 5.0 2.0
Change in current federal income taxes payable............ (4.6) (11.2) 15.0
------- ------- -------
Net cash (used in) provided by operating activities......... (13.0) (37.9) 0.1
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayments of:
Fixed maturities.......................................... 171.4 130.6 134.8
Equity securities......................................... 0.8 1.0 0.0
Mortgage loans on real estate............................. 37.6 37.7 53.2
Real estate............................................... 17.0 18.6 19.8
Other invested assets..................................... 0.6 1.5 0.0
Acquisitions of investments:
Fixed maturities.......................................... (109.2) (157.6) (163.8)
Equity securities......................................... (0.1) (0.1) 0.0
Mortgage loans on real estate............................. (24.3) (13.6) (38.7)
Real estate............................................... (0.6) (1.5) (3.4)
Other invested assets..................................... (0.3) (0.1) (0.3)
Policy loans, net......................................... (6.2) (4.4) (3.3)
Other..................................................... (0.5) 0.3 (0.9)
------- ------- -------
Net cash provided by (used in) investing activities......... $ 86.2 $ 12.4 $ (2.6)
------- ------- -------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 51
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from annuity and universal life policies credited
to policyholders' account balances........................ $ 811.8 $ 810.4 $ 753.5
Return of policyholders' account balances on annuity
policies and universal life policies...................... (797.6) (829.1) (786.0)
------- ------- -------
Net cash provided by (used in) financing activities......... 14.2 (18.7) (32.5)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 87.4 (44.2) (35.0)
Cash and cash equivalents, beginning of year................ 46.0 90.2 125.2
------- ------- -------
Cash and cash equivalents, end of year...................... $ 133.4 $ 46.0 $ 90.2
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes................................................ $ 13.4 $ 29.1 $ 0.0
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 52
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
MONY Life Insurance Company of America (the "Company"), an Arizona stock
life insurance company, is a wholly-owned subsidiary of MONY Life Insurance
Company of New York (MONY Life), a stock life insurance company. MONY Life is a
wholly owned subsidiary of The MONY Group, Inc. (the "MONY Group").
The Company's primary business is to provide asset accumulation and life
insurance products to business owners, growing families, and pre-retirees. The
Company's insurance and financial products are marketed and distributed directly
to individuals primarily through MONY Life's career agency sales force. These
products are sold throughout the United States (except New York) and Puerto
Rico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). Prior to 1996, the Company,
as a wholly-owned stock insurance subsidiary of a mutual life insurance company
(MONY Life), prepared its financial statements in conformity with accounting
practices prescribed or permitted by the Arizona State Insurance Department
("SAP"), which accounting practices were considered to be GAAP for mutual life
insurance companies and their wholly-owned stock insurance subsidiaries. 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 and their wholly-owned stock insurance subsidiaries 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 13).
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 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.
During 1997, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which was 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. All periods presented herein reflect
the provisions of SFAS No. 130.
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. Unrealized gains
and losses on fixed maturity securities 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 is
adjusted for impairments in value deemed to be other than temporary. These
F-8
<PAGE> 53
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenue from these types of
products consists 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.
Premiums from non-participating term life 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.
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.
F-9
<PAGE> 54
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 initial
locked-in contract rate. The contract rate for all products is 8 percent.
Estimated gross profits arise principally from investment results, mortality and
expense margins and surrender charges.
For non-participating term policies, DAC is amortized over the expected
life of the contracts (ranging from 5 to 20 years) based on the present value of
the estimated gross premiums.
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.
Policyholders' Account Balances and Future Policy Benefits
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
5.7%, 5.8%, and 5.8% for the years ended December 31, 1998, 1997, and 1996,
respectively. The weighted average interest crediting rate for investment-type
products was approximately 5.6% for each of the years ended December 31, 1998,
1997, and 1996, respectively.
GAAP reserves for non-participating term life policies are calculated using
a net level premium method on the basis of actuarial assumptions equal to
expected investment yields, mortality, terminations, and expenses applicable at
the time the insurance contracts are made, including a provision for the risk of
adverse deviation.
Federal Income Taxes
The Company files a consolidated federal income tax return with its parent,
MONY Life, along with MONY Life's other life and non-life subsidiaries. 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.
The method of allocation between the companies is subject to written
agreement, approved by the Board of Directors. The allocation of federal income
taxes will be based upon separate return calculations with current credit for
losses and other federal income tax credits provided to the life insurance
members of the affiliated group. Intercompany balances are settled annually in
the fourth quarter of the year in which the return is filed.
Reinsurance
The Company has reinsured certain of its life insurance and annuity
business with life contingencies with MONY Life and 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 reinsurance are deferred and
amortized into income over the remaining life of the underlying reinsured
contracts.
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
F-10
<PAGE> 55
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Statements of Cash Flows -- Non-cash Transactions
For the years ended December 31, 1998, 1997, and 1996, respectively, real
estate of $0.5 million, $0.0 million, and $0.0 million was acquired in
satisfaction of debt. At December 31, 1998 and 1997, the Company owned real
estate acquired in satisfaction of debt of $8.0 million and $21.7 million,
respectively.
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 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.
3. RELATED PARTY TRANSACTIONS:
MONY Life has guaranteed to certain states that the statutory surplus of
the Company will be maintained at amounts at least equal to the minimum surplus
for admission to those states.
At December 31, 1998 and 1997, approximately 23% and 26% of the Company's
investments in mortgages were held through joint participation with MONY Life,
respectively. In addition, 100% of the Company's real estate and joint venture
investments were held through joint participation with MONY Life at December 31,
1998 and 1997.
F-11
<PAGE> 56
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company and MONY Life are parties to an agreement whereby MONY Life
agrees to reimburse the Company to the extent that the Company's recognized loss
as a result of mortgage loan default or foreclosure or subsequent sale of the
underlying collateral exceeds 75 percent of the appraised value of the loan at
origination for each such mortgage loan. Pursuant to the agreement, the Company
received payments from MONY Life of $0.1 million in each of the years ending
December 31, 1998, 1997 and 1996.
The Company has a service agreement with MONY Life whereby MONY Life
provides personnel services, facilities, supplies and equipment to the Company
to conduct its business. The associated costs related to the service agreement
are allocated to the Company based on methods that management believes are
reasonable, including a review of the nature of such costs and time studies
analyzing the amount of employee compensation costs incurred by the Company. For
the years ended December 31, 1998, 1997, and 1996, the Company incurred expenses
of $63.6 million, $37.1 million and $32.3 million as a result of such
allocations. The allocated costs, however, are only partially reimbursable to
MONY Life by the Company. Accordingly, the Company recorded capital
contributions from MONY Life of $12.5 million, $10.8 million, and $13.4 million
during 1998, 1997 and 1996 respectively. At December 31, 1998 and 1997 the
Company had a payable to MONY Life in connection with this service agreement of
$9.0 million and $10.7 million, respectively, which is reflected in Accounts
Payable and Other Liabilities.
The Company has an investment advisory agreement with MONY Life whereby
MONY Life provides investment advisory services with respect to the investment
and management of the Company's investment portfolio. The amount of expenses
incurred by the Company related to this agreement was $0.9 million; $1.0 million
and $0.7 million for 1998, 1997 and 1996, respectively. In addition, the Company
recorded an intercompany payable of $88,401 and $81,414 at December 31, 1998 and
1997, respectively, related to this agreement which is included in Accounts
payable and other liabilities in the balance sheet.
In addition to the agreements discussed above, the Company has various
other service and investment advisory agreements with MONY Life and affiliates
of the Company. The amount of expenses incurred by the Company related to these
agreements was $2.0 million, $2.6 million and $2.6 million for 1998, 1997 and
1996, respectively. In addition, the Company recorded an intercompany
(receivable)/payable of $(0.2) million and $0.3 million at December 31, 1998 and
1997, respectively, related to these agreements.
4. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs deferred and amortized in 1998, 1997 and 1996 are
as follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year.................................. $281.6 $262.3 $219.4
Costs deferred during the year.............................. 75.0 73.8 68.5
Amortized to expense during the year........................ (35.5) (46.3) (36.6)
Effect on DAC from unrealized gains (losses) (see Note 2)... (2.5) (8.2) 11.0
------ ------ ------
Balance, end of year........................................ $318.6 $281.6 $262.3
====== ====== ======
</TABLE>
5. FEDERAL INCOME TAXES:
The Company files a consolidated federal income tax return with MONY Life
and MONY Life's other subsidiaries. Federal income taxes have been calculated in
accordance with the provisions of the Internal
F-12
<PAGE> 57
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Code of 1986, as amended. A summary of the Federal income tax expense
(benefit) is presented below ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current................................................... $ 8.8 $17.9 $15.2
Deferred.................................................. (1.1) (13.4) (10.6)
----- ----- -----
Total............................................. $ 7.7 $ 4.5 $ 4.6
===== ===== =====
</TABLE>
Federal income taxes reported in the statements of income may be 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 ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Tax at statutory rate....................................... $ 7.7 $ 4.5 $ 4.6
Dividends received deduction................................ (1.1) (1.2) (0.8)
Other....................................................... 1.1 1.2 0.8
----- ----- -----
Provision for income taxes.................................. $ 7.7 $ 4.5 $ 4.6
===== ===== =====
</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.
The components of deferred tax liabilities and assets at December 31, 1998
and 1997 are as follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Deferred policy acquisition costs........................... $ 91.8 $81.7
Fixed maturities............................................ 12.0 9.6
Other (net)................................................. 4.4 5.1
------ -----
Total deferred tax liabilities.............................. 108.2 96.4
------ -----
Policyholder and separate account liabilities............... 93.7 88.8
Real estate and mortgages................................... 0.8 0.1
------ -----
Total deferred tax assets................................... 94.5 88.9
------ -----
Net deferred tax liability.................................. $ 13.7 $ 7.5
====== =====
</TABLE>
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.
F-13
<PAGE> 58
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENT INCOME, REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES), AND
OTHER COMPREHENSIVE INCOME:
Net investment income for the years ended December 31, 1998, 1997 and 1996
was derived from the following sources ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Fixed maturities............................................ $77.2 $ 78.4 $ 76.7
Mortgage loans.............................................. 11.0 12.1 14.7
Real estate................................................. 0.5 2.0 3.7
Policy loans................................................ 3.6 3.5 2.7
Other investments (including cash & cash equivalents)....... 5.3 6.4 7.3
----- ------ ------
Total investment income..................................... 97.6 102.4 105.1
Investment expenses......................................... 3.0 3.3 3.1
----- ------ ------
Net investment income....................................... $94.6 $ 99.1 $102.0
===== ====== ======
</TABLE>
Net realized gains (losses) on investments for the years ended December 31,
1998, 1997 and 1996 are summarized as follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Fixed maturities............................................ $ 2.6 $ (0.7) $ 0.1
Mortgage loans.............................................. 1.4 2.4 0.7
Real estate................................................. 2.5 0.5 0.8
Other invested assets....................................... 0.6 0.5 (0.7)
----- ------ ------
Net realized gains on investments........................... $ 7.1 $ 2.7 $ 0.9
===== ====== ======
</TABLE>
The net change in unrealized investment gains (losses) represents the only
component of other comprehensive income for the years ended December 31, 1998,
1997, and 1996. 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 2), which are reflected in Accumulated Other
Comprehensive Income for the periods presented ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Fixed maturities............................................ $ 4.8 $13.2 $(20.4)
Other....................................................... (0.6) 0.1 0.5
----- ----- ------
Subtotal.................................................... 4.2 13.3 (19.9)
Effect on unrealized gains (losses) on investments
attributable to:
DAC....................................................... (2.5) (8.2) 11.0
Deferred federal income taxes............................. (0.6) (1.8) 3.1
----- ----- ------
Change in unrealized gains (losses) on investments, net..... $ 1.1 $ 3.3 $ (5.8)
===== ===== ======
</TABLE>
F-14
<PAGE> 59
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the reclassification adjustments required
for the years ended December 31, 1998, 1997, and 1996 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>
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
RECLASSIFICATION ADJUSTMENTS
Unrealized gains (losses) on investments arising during
period.................................................... $ 1.9 $ 3.3 $ (5.8)
Reclassification adjustment for gains included in net
income.................................................... (0.8) 0.0 0.0
----- ----- ------
Unrealized gains (losses) on investments, net of
reclassification adjustments.............................. $ 1.1 $ 3.3 $ (5.8)
===== ===== ======
</TABLE>
Unrealized gains (losses) on investments arising during the period reported
in the above table for the years ended December 31, 1998, 1997 and 1996 are net
of income tax expense (benefit) of $0.1 million, $1.8 million, and ($3.1)
million, respectively, and ($0.5) million, ($8.2) million, and $11.0 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, 1998, 1997 and 1996 are net of income tax expense (benefit)
of $0.5 million, $0.0 million and $0.0 million, respectively, and ($2.0)
million, $0.0 million and $0.0 million, respectively, relating to the effect of
such amounts on DAC.
7. INVESTMENTS:
Fixed Maturity Securities Available-For-Sale:
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity securities available for sale as of December 31, 1998
and December 31, 1997 are as follows ($ in millions):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------- ------------- ----------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- ----- ----- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury securities and obligations of
U.S government agencies................. $ 5.3 $ 5.9 $ 0.0 $ 0.0 $0.0 $0.0 $ 5.3 $ 5.9
Collateralized mortgage obligations:
Government agency-backed................ 106.3 123.7 1.9 2.2 0.0 0.1 108.2 125.8
Non-agency backed....................... 37.7 40.6 1.8 2.0 0.0 0.1 39.5 42.5
Other asset-backed securities:
Government agency-backed................ 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.2
Non-agency backed....................... 83.4 87.5 1.9 2.1 0.3 0.1 85.0 89.5
Utilities................................. 120.9 123.8 5.0 3.1 2.7 0.2 123.2 126.7
Corporate bonds........................... 645.8 676.5 23.2 18.0 0.8 1.7 668.2 692.8
Affiliates................................ 14.7 16.0 0.0 0.0 0.0 0.0 14.7 16.0
-------- -------- ----- ----- ---- ---- -------- --------
Total............................ $1,014.2 $1,074.2 $33.8 $27.4 $3.8 $2.2 $1,044.2 $1,099.4
======== ======== ===== ===== ==== ==== ======== ========
</TABLE>
The carrying value of the Company's fixed maturity securities at December
31, 1998 and 1997 is net of adjustments for impairments in value deemed to be
other than temporary of $0.5 million and $0.9 million, respectively.
At December 31, 1998 and 1997, there were no fixed maturity securities
which were non-income producing for the twelve months preceding such dates.
The Company classifies fixed maturity securities which, (i) are in default
as to principal or interest payments, (ii) are to be restructured pursuant to
commenced negotiations, (iii) went into bankruptcy subsequent to acquisition or
(iv) are deemed to have other than temporary impairments to value, as "problem
F-15
<PAGE> 60
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fixed maturity securities." At December 31, 1998 and 1997, the carrying value of
problem fixed maturities held by the Company was $4.4 million and $4.6 million,
respectively. In addition, at December 31, 1998, the Company held $2.7 million
of fixed maturity securities which had been restructured. There were no fixed
maturity securities which were restructured at December 31, 1997. Gross interest
income that would have been recorded in accordance with the original terms of
restructured fixed maturity securities amounted to $0.3 million for the year
ended December 31, 1998. Gross interest income on these fixed maturity
securities included in net investment income aggregated $0.5 million for the
year ended December 31, 1998.
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds) as of
December 31, 1998 are as follows ($ in millions):
<TABLE>
<CAPTION>
1998
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less..................................... $ 90.0 $ 90.4
Due after one year through five years....................... 306.8 315.5
Due after five years through ten years...................... 284.7 299.2
Due after ten years......................................... 105.2 106.3
-------- --------
Subtotal.......................................... 786.7 811.4
Mortgage- and asset-backed securities....................... 227.5 232.8
-------- --------
Total............................................. $1,014.2 $1,044.2
======== ========
</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 1998, 1997 and 1996
were $45.1 million, $31.3 million and $13.3 million, respectively. Gross gains
of $0.7 million, $0.5 million, and $0.2 million and gross losses of $0.1
million, $1.1 million, and $0.3 million were realized on these sales,
respectively.
8. MORTGAGE LOANS ON REAL ESTATE AND REAL ESTATE:
Mortgage loans on real estate at December 31, 1998 and 1997 consist of the
following ($ in millions):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Commercial mortgage loans................................... $ 28.5 $ 35.5
Agricultural and other loans................................ 93.5 99.5
------ ------
Total loans................................................. 122.0 135.0
Less: valuation allowances.................................. (1.9) (2.5)
------ ------
Mortgage loans, net of valuation allowances................. $120.1 $132.5
====== ======
</TABLE>
An analysis of the valuation allowances for 1998, 1997 and 1996 is as
follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 2.5 $ 4.6 $ 5.1
Increase (decrease) in allowance............................ (0.4) (0.3) (0.5)
Reduction due to pay downs and pay offs..................... 0.0 (1.8) 0.0
Transfers to real estate.................................... (0.2) 0.0 0.0
----- ----- -----
Balance, end of year........................................ $ 1.9 $ 2.5 $ 4.6
===== ===== =====
</TABLE>
F-16
<PAGE> 61
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Impaired mortgage loans along with related valuation allowances were as
follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Investment in impaired mortgage loans (before valuation
allowances):
Loans that have valuation allowances........................ $ 9.4 $ 9.9
Loans that do not have valuation allowances................. 5.8 6.5
----- -----
Subtotal.......................................... 15.2 16.4
Valuation allowances........................................ (0.5) (0.9)
----- -----
Impaired mortgage loans, net of valuation
allowances....................................... $14.7 $15.5
===== =====
</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 1998 and 1997, the average recorded investment in impaired mortgage
loans was approximately $15.1 million and $16.3 million, respectively. During
1998, 1997, and 1996, the Company recognized $1.1 million, $1.1 million, and
$1.4 million, respectively, of interest income on impaired loans.
At December 31, 1998 and 1997, there were no mortgage loans which were
non-income producing for the twelve months preceding such dates.
At December 31, 1998 and 1997, the Company had restructured mortgage loans
of $14.3 million and $13.5 million, respectively. Interest income of $1.0
million, $1.0 million, and $1.2 million was recognized on restructured mortgage
loans in 1998, 1997, and 1996, respectively. Gross interest income on these
loans that would have been recorded in accordance with the original terms of
such loans amounted to approximately $1.4 million in 1998, 1997 and 1996.
The following table summarizes the Company's real estate at December 31,
1998 and 1997 ($ in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Real estate to be disposed of(1)............................ $ -- $30.3
Impairment writedowns....................................... -- (8.9)
Valuation allowance......................................... -- (2.2)
----- -----
Carrying value of real estate to be disposed of............. $ -- $19.2
===== =====
Real estate held for investment(2).......................... $10.2 $ 3.3
Impairment writedowns....................................... (1.9) (0.5)
----- -----
Carrying value of real estate held for investment........... $ 8.3 $ 2.8
===== =====
</TABLE>
- ---------------
(1) Amounts presented as of December 31, 1998 and 1997 are net of $0.0 million
and $8.9 million, respectively, relating to impairments taken upon
foreclosure of mortgage loans.
(2) Amounts presented as of December 31, 1998 and 1997 are net of $1.6 million
and $0.6 million, respectively, relating to impairments taken upon
foreclosure of mortgage loans.
F-17
<PAGE> 62
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of the valuation allowances relating to real estate classified
as to be disposed of for the years ended December 31, 1998, 1997 and 1996 is as
follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 2.2 $ 2.2 $ 2.5
Increase (decrease) due to/from transfers of properties to
real estate to be disposed of during the year............. (0.3) 1.2 0.6
Increases (decreases) in valuation allowances from the end
of the prior period on properties still held for
disposal.................................................. 0.0 (0.2) (0.2)
Decreases as a result of sales.............................. (1.9) (1.0) (0.7)
----- ----- -----
Balance, end of year........................................ $ 0.0 $ 2.2 $ 2.2
===== ===== =====
</TABLE>
Real estate is net of accumulated depreciation of $1.9 million and $2.8
million for 1998 and 1997, respectively, and depreciation expense recorded was
$0.6 million, $0.4 million and $0.8 million for the years ended December 31,
1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, there was no real estate which was
non-income producing for the twelve months preceding such dates.
The carrying value of impaired real estate as of December 31, 1998 and 1997
was $8.3 million and $2.8 million, respectively. The depreciated cost of such
real estate as of December 31, 1998 and 1997 was $10.2 million and $3.3 million
before impairment writedowns of $1.9 million and $0.5 million, respectively. The
aforementioned impairments occurred primarily as a result of low occupancy
levels and other market related factors. There were no losses recorded during
1998, 1997, and 1996 related to impaired real estate.
9. 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
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.
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.
F-18
<PAGE> 63
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
10. 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 $0.5 million of risk on any one person for individual products and
$0.5 million for last survivor products.
The following table summarizes the effect of reinsurance for the years
indicated ($ in millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Direct premiums............................................. $ 2.5 $ 0.1 $ 0.0
Reinsurance ceded........................................... (0.8) 0.0 0.0
----- ----- -----
Net premiums........................................... $ 1.7 $ 0.1 $ 0.0
===== ===== =====
Universal life and investment type product policy fee income
ceded..................................................... $17.4 $16.1 $14.6
===== ===== =====
Policyholders' benefits ceded............................... $21.8 $12.1 $17.6
===== ===== =====
</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.
11. 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, 1998 and 1997, securities loaned by the Company under
this agreement had a carrying value of approximately $4.1 million and $0.1
million, respectively. 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, 1998 and 1997, the Company had no single investment or
series of investments with a single issuer, (excluding US Treasury securities
and obligations of U.S. government agencies) exceeding 1.5% 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, 1998 are Consumer Goods and Services of
$138.5 million (13.3%), Non-Government Asset/Mortgage-Backed of $124.5 million
F-19
<PAGE> 64
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11.9%), Public Utilities of $123.2 million (11.8%), Financial Services of
$119.8 million (11.5%), Other Manufacturing of $116.4 million (11.1%),
Government and Agencies of $113.6 million (10.9%), and Energy of $112.1 million
(10.7%).
At December 31, 1997 the industries that comprise 10% or more of the
carrying value Company's fixed maturity securities were Financial Services of
$136.1 million (12.4%), Non-Government Asset/Mortgage Backed of $132.0 million
(12.0%), Government and Agencies of $131.9 million (12.0%), Energy of $131.2
million (11.9%), Public Utilities of $126.7 million (11.5%), and Consumer Goods
and Services of $121.4 million (11.1%).
The Company holds below investment grade fixed maturity securities with a
carrying value of $52.3 million at December 31, 1998. 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, 1997, the carrying
value of the Company's investments in below investment grade fixed maturity
securities amounted to $79.2 million.
The Company has investments in commercial and agricultural mortgage loans
and real estate (including partnerships). The locations of property
collateralizing mortgage loans and real estate investment carrying values at
December 31, 1998 and 1997 are as follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
GEOGRAPHIC REGION
West.................................................... $ 54.9 42.7% $ 53.4 34.5%
Mountain................................................ 25.9 20.2 34.1 22.1
Southwest............................................... 14.6 11.4 16.2 10.5
Northeast............................................... 13.9 10.8 24.0 15.5
Midwest................................................. 13.2 10.3 14.5 9.4
Southeast............................................... 5.9 4.6 12.3 8.0
------ ----- ------ -----
Total.............................................. $128.4 100.0% $154.5 100.0%
====== ===== ====== =====
</TABLE>
The states with the largest concentrations of mortgage loans and real
estate investments at December 31, 1998 are: California, $31.3 million (24.4%);
Washington, $17.0 million (13.2%); New York, $13.9 million (10.8%); Texas, $9.7
million (7.6%); Idaho, $8.1 million (6.3%); Missouri, $7.4 million (5.8%); and
Oregon, $6.6 million (5.1%).
As of December 31, 1998 and 1997, the real estate and mortgage loan
portfolio was also diversified as follows ($ in millions):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C> <C> <C>
PROPERTY TYPE
Agricultural.............................................. $ 92.5 72.0% $ 98.5 63.7%
Office buildings.......................................... 14.9 11.6 23.1 15.0
Retail.................................................... 6.0 4.7 9.5 6.1
Hotel..................................................... 5.1 4.0 8.6 5.6
Industrial................................................ 4.6 3.6 7.2 4.7
Other..................................................... 3.9 3.0 4.3 2.8
Apartment Buildings....................................... 1.4 1.1 3.3 2.1
------ ----- ------ -----
Total................................................ $128.4 100.0% $154.5 100.0%
====== ===== ====== =====
</TABLE>
F-20
<PAGE> 65
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES:
(a) In late 1995 and thereafter, a number of purported class actions were
commenced in various state and federal courts against MONY Life and the Company
("the Companies") alleging that the Companies engaged in deceptive sales
practices in connection with the sale of whole and/or universal life insurance
policies in the 1980s and 1990s. Although the claims asserted in each case are
not identical, they seek substantially the same relief under essentially the
same theories of recovery (i.e., breach of contract, fraud, negligent
misrepresentation, negligent supervision and training, breach of fiduciary duty,
unjust enrichment and/or violation of state insurance and/or deceptive business
practice laws). Plaintiffs in these cases (including the Goshen case discussed
below) seek 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/or creation of a claims resolution facility to adjudicate any individual
issues remaining after resolution of all class-wide issues) as opposed to
compensatory damages, although they also seek compensatory damages in
unspecified amounts. The Company has answered the complaints in each action
(except for one recently filed action and another 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 Companies and sold on an alleged "vanishing
premium" basis during the period January 1, 1982 to December 31, 1995. On March
27, 1997, the Company filed a motion to dismiss or, alternatively, for summary
judgment on all counts of the complaint. All of the other putative class actions
(with one exception discussed below) have been consolidated and transferred by
the Judicial Panel on Multidistrict Litigation to the United States District
Court for the District of Massachusetts, or are being voluntarily held in
abeyance pending the outcome of the Goshen case. The Massachusetts District
Court in the Multidistrict Litigation has entered an order essentially holding
all of the federal cases in abeyance pending the outcome of the Goshen case. On
October 21, 1997, the New York State Supreme Court granted the Companies' motion
for summary judgment and dismissed all claims filed in the Goshen case against
the Companies' on the merits.
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.
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 financial position and the results of operations
of the Company.
At December 31, 1998, the Company had commitments to issue $9.7 million of
fixed rate agricultural loans with periodic interest rate reset dates. The
initial interest rates on such loans range from approximately 6.75% to 7.50%.
The Company had no private fixed maturity securities commitments outstanding as
of December 31, 1998. In addition, at that date the Company had no outstanding
commitments to issue any fixed rate commercial mortgage loans.
(b) The order, referred to above, by the New York State Supreme Court on
October 21, 1997 was affirmed by the New York State Appellate Division, First
Department on March 18, 1999. All actions before the United States District
Court for the District of Massachusetts are still pending. In addition, on or
about February 25, 1999, a purported class action was filed against the Company
in Kentucky State Court covering policyholders who purchased individual
universal life insurance policies from the Company after January 1, 1988
claiming breach of contract and violations of the Kentucky Consumer Protection
Act. On March 26, 1999, the Company removed that action to the United States
District Court for the Eastern District of Kentucky, requested the Judicial
Panel on the multidistrict litigation to transfer the action to the
multidistrict
F-21
<PAGE> 66
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
litigation in the District of Massachusetts and sought a stay of further
proceedings in the Kentucky District Court pending a determination on the
multidistrict transfer. The Company intends vigorously to defend that
litigation. Due to the early stage of this litigation no determination can be
made as to whether the Company will incur any loss with respect to this matter.
13. STATUTORY FINANCIAL INFORMATION AND REGULATORY RISK-BASED CAPITAL
DISCLOSURE:
Financial statements of the Company prepared in accordance with SAP for
filing with the Arizona 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) acquisition costs are
charged to operations as incurred under SAP rather than being amortized over the
expected life of the contracts under GAAP; (ii) certain assets designated as
"non-admitted assets" are charged directly to statutory surplus under SAP but
are reflected as assets under GAAP; (iii) 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; (iv) 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; (v) 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; (vi) 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 rates and are reported gross
of reinsurance; (vii) investments in bonds are generally carried at amortized
cost under SAP, whereas under GAAP, such investments are classified as
"available for sale" and reported at estimated fair value; and (viii) 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.
The Company is restricted as to the amounts it may pay as dividends to MONY
Life. Under the Arizona Insurance Law, the Arizona Superintendent has broad
discretion to determine whether the financial condition of a stock life
insurance company would support the payment of dividends to its shareholders.
Under the insurance laws of the State of Arizona, the Company's state of
domicile, dividends or distributions in a twelve-month period exceeding the
lesser of either 10 percent of an insurance company's surplus or 100% of net
income, excluding realized gains, for the previous calendar year are generally
considered extraordinary and require such approval. Insurance Department has
established informal guidelines for the Superintendent's determinations which
focus upon, among other things, the overall financial condition and
profitability of the insurer under SAP.
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, 1998, 1997, and 1996, respectively. The
reconciliations for 1996 also present the effect of restating previously
reported amounts as of and for the year ended December 31, 1996 for the adoption
of the Interpretation and the Standard (see Note 2).
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Capital and surplus......................................... $ 146.8 $ 133.2 $ 121.8
AVR......................................................... 15.0 16.3 17.9
-------- -------- --------
Capital and surplus, and AVR................................ 161.8 149.5 139.7
</TABLE>
F-22
<PAGE> 67
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C>
Adjustments:
Future policy benefits and policyholders' account
balances............................................... (226.3) (207.3) (173.2)
Deferred policy acquisition costs......................... 318.6 281.6 262.3
Valuation of investments:
Real estate............................................ 2.7 2.4 (0.5)
Mortgage loans......................................... (1.8) (2.3) (4.7)
Fixed maturity securities.............................. 29.5 24.7 12.0
Other.................................................. 5.4 4.0 3.6
Deferred federal income taxes............................. (13.7) (7.5) (13.3)
Other, net................................................ 13.6 16.9 13.7
-------- -------- --------
GAAP equity................................................. $ 289.8 $ 262.0 $ 239.6
======== ======== ========
Net change in capital and surplus........................... $ 13.6 $ 11.4 $ 6.2
Change in AVR............................................... (1.3) (1.6) 3.9
-------- -------- --------
Net change in capital and surplus, and AVR.................. 12.3 9.8 10.1
Adjustments:
Future policy benefits and policyholders' account
balances............................................... (19.0) (34.1) (25.7)
Deferred policy acquisition costs......................... 39.4 27.5 31.9
Valuation of investments
Real estate............................................ 0.3 2.9 1.5
Mortgage loans......................................... 0.5 2.4 0.4
Fixed maturity securities.............................. 0.0 (0.5) (1.8)
Other.................................................. 1.4 0.4 0.5
Deferred federal income taxes............................. 1.1 13.4 10.6
Other, net................................................ (21.8) (13.5) (19.0)
-------- -------- --------
Net income.................................................. $ 14.2 $ 8.3 $ 8.5
======== ======== ========
</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, non-admitted
assets, and certain contingency provisions. which for statutory reporting
purposes are charged directly to surplus and are not reflected in statutory
basis net income. Statutory net income reported by the Company for the years
ended December 31, 1998, 1997, and 1996 was $11.1 million, $9.7 million, and
$8.0 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 a 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
F-23
<PAGE> 68
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company exceeded the minimum risk based capital
requirements.
As part of their routine regulatory oversight, the Department recently
completed an examination of the Company for each of the three years in the
period ended December 31, 1996. The report did not cite any matters which will
result in a material effect on the Company's financial condition or results of
operations.
F-24
