<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-65423
MONY LIFE INSURANCE
COMPANY OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
ARIZONA 86-0222062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1740 BROADWAY
NEW YORK, NEW YORK 10019
(212) 708-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2000, there were 2,271 holders of the Registrant's
guaranteed interest account with market value adjustment contracts.
--------------------------------------------------------------------------------
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<PAGE> 2
MONY LIFE INSURANCE COMPANY OF AMERICA
INDEX TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Unaudited interim condensed balance sheets as of September
30, 2000 and December 31, 1999.............................. 2
Unaudited interim condensed statements of income and
comprehensive income for the three-month periods ended
September 30, 2000 and 1999................................. 3
Unaudited interim condensed statement of income and
comprehensive income for the nine-month periods ended
September 30, 2000 and 1999................................. 4
Unaudited interim condensed statement of changes in
shareholder's equity for the nine-month period ended
September 30, 2000.......................................... 5
Unaudited interim condensed statements of cash flows for the
nine-month periods ended September 30, 2000 and 1999........ 6
Notes to unaudited interim condensed financial statements... 7
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Investments................................................. 16
ITEM 3: Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
PART II.. OTHER INFORMATION
ITEM 1: Legal Proceedings........................................... II-1
ITEM 2: Changes in Securities....................................... II-1
ITEM 3: Defaults upon Senior Securities............................. II-1
ITEM 4: Submission of Matters to a Vote of Security Holders......... II-1
ITEM 5: Other Information........................................... II-2
ITEM 6: Exhibits and Reports on Form 8-K............................ II-2
SIGNATURES............................................................. S-1
</TABLE>
i
<PAGE> 3
FORWARD-LOOKING STATEMENTS
The management of MONY Life Insurance Company of America ("the Company")
has made in this report, and from time to time may make in its public filings
and press releases as well as in oral presentations and discussions,
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Forward-looking statements include, among
other things, discussions concerning the Company's potential exposure to market
risks, as well as statements expressing management's expectations, beliefs,
estimates, forecasts, projections and assumptions, as indicated by words such as
"believes," "estimates," "anticipates," "expects," "projects," "forecasts,"
"plans," "intends," "may," "could," "possible," "will," "should," "probably,"
"risk," "target," "goals," "objectives," or similar expressions. The Company
claims the protection afforded by the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and assumes
no duty to update any forward-looking statement. Forward-looking statements are
subject to risks and uncertainties. Actual results could differ materially from
those anticipated by forward-looking statements due to a number of important
factors including those discussed elsewhere in this report and in the Company's
and its parent company's other public filings, press releases, oral
presentations and discussions and the following; (i) losses with respect to the
Company's equity real estate, and the success of the Company's continuing
process of selectively selling its equity real estate; (ii) the success of the
recently implemented "tiering" of the career agency sales force of MONY Life
Insurance Company ("MONY Life"), and the ability to attract and retain
productive agents; (iii) the success of the restructuring of agent compensation;
(iv) the Company's ability to control operating expenses; (v) the outcome of
pending litigation; (vi) the performance of financial markets; (vii) the
intensity of competition for other financial institutions; (viii) the Company's
mortality, morbidity, persistency and claims experience; (ix) the Company's
ability to develop, distribute and administer competitive products and services
in a timely, cost-effective manner; (x) the Company's financial and claims
paying ratings; (xi) the effect of changes in laws and regulations affecting the
Company's businesses, including changes in tax laws affecting insurance and
annuity products; (xii) market risks related to interest rates, equity prices,
derivatives, foreign currency exchange and credit; and (xiii) the ability of the
Company to identify and consummate on successful terms any future acquisitions,
and to successfully integrate acquired businesses with minimal disruption.
1
<PAGE> 4
ITEM 1:
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair
value..................................................... $ 994.3 $1,048.8
Mortgage loans on real estate............................... 115.1 165.0
Policy loans................................................ 67.7 58.8
Real estate................................................. 7.5 6.9
Other invested assets....................................... 8.1 2.3
-------- --------
1,192.7 1,281.8
-------- --------
Cash and cash equivalents................................... 71.6 28.9
Accrued investment income................................... 21.4 20.4
Amounts due from reinsurers................................. 17.3 18.6
Deferred policy acquisition costs........................... 471.8 406.4
Current federal income taxes receivable..................... 12.8 2.3
Other assets................................................ 7.2 24.9
Separate account assets..................................... 4,252.6 4,387.2
-------- --------
Total assets...................................... $6,047.4 $6,170.5
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits...................................... $ 133.6 $ 123.4
Policyholders' account balances............................. $1,157.2 1,154.1
Other policyholders' liabilities............................ 57.7 54.0
Accounts payable and other liabilities...................... 38.0 79.5
Note payable to affiliate (Note 5).......................... 47.4 49.0
Deferred federal income taxes............................... 38.5 19.4
Separate account liabilities................................ 4,252.6 4,387.2
-------- --------
Total liabilities................................. $5,725.0 $5,866.6
======== ========
Commitments and contingencies (Note 4)
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.................................... 199.7 199.7
Retained earnings........................................... 126.3 109.0
Accumulated other comprehensive loss........................ (6.1) (7.3)
-------- --------
Total shareholder's equity........................ 322.4 303.9
-------- --------
Total liabilities and shareholder's equity........ $6,047.4 $6,170.5
======== ========
</TABLE>
See accompanying notes to unaudited interim condensed financial statements.
2
<PAGE> 5
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------ ------
($ IN MILLIONS)
<S> <C> <C>
REVENUES:
Universal life and investment-type product policy fees...... $44.2 $33.7
Premiums.................................................... 7.2 1.1
Net investment income....................................... 22.3 23.1
Net realized (losses)/gains on investments.................. (1.1) 0.0
Other income................................................ 2.2 1.3
----- -----
Total revenues.................................... 74.8 59.2
----- -----
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 18.7 12.0
Interest credited to policyholders' account balances........ 15.9 15.5
Amortization of deferred policy acquisition costs........... 8.9 12.3
Other operating costs and expenses.......................... 17.3 12.9
----- -----
Total benefits and expense........................ 60.8 52.7
----- -----
Income before income taxes.................................. 14.0 6.5
Income tax expense.......................................... 4.7 2.3
----- -----
Net income.................................................. 9.3 4.2
Other comprehensive income (loss), net...................... 2.5 (2.3)
----- -----
Comprehensive income........................................ $11.8 $ 1.9
===== =====
</TABLE>
See accompanying notes to unaudited interim condensed financial statements.
3
<PAGE> 6
UNAUDITED INTERIM CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------ ------
($ IN MILLIONS)
<S> <C> <C>
REVENUES:
Universal life and investment-type product policy fees...... $126.2 $105.0
Premiums.................................................... 19.5 3.4
Net investment income....................................... 69.3 71.4
Net realized (losses)/gains on investments.................. (2.9) 1.2
Other Income................................................ 9.7 4.4
------ ------
Total revenues.............................................. 221.8 185.4
------ ------
BENEFITS AND EXPENSES:
Benefits to policyholders................................... 51.0 32.0
Interest credited to policyholders' account balances........ 46.8 48.1
Amortization of deferred policy acquisition costs........... 37.0 32.3
Other operating costs and expenses.......................... 61.6 52.1
------ ------
Total benefited and expenses................................ 196.4 164.5
------ ------
Income before income taxes.................................. 25.4 20.9
Income tax expense.......................................... 8.1 7.3
------ ------
Net income.................................................. 17.3 13.6
Other comprehensive income (loss), net...................... 1.2 (11.8)
------ ------
Comprehensive income........................................ $ 18.5 $ 1.8
====== ======
</TABLE>
See accompanying notes to unaudited interim condensed financial statements.
4
<PAGE> 7
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENT
OF CHANGES IN SHAREHOLDER'S EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON IN EXCESS RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK OF PAR EARNINGS INCOME/(LOSS) EQUITY
------ --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999............... $2.5 $199.7 $109.0 $(7.3) $303.9
Comprehensive income:
Net income............................. 17.3 17.3
Other comprehensive income(1).......... 1.2 1.2
------
Comprehensive income................ 18.5
---- ------ ------ ----- ------
Balance, September 30, 2000.............. $2.5 $199.7 $126.3 $(6.1) $322.4
==== ====== ====== ===== ======
</TABLE>
---------------
(1) Represents unrealized losses on investments, net of unrealized gains,
reclassification adjustments, and taxes.
See accompanying notes to unaudited interim condensed financial statements.
5
<PAGE> 8
MONY LIFE INSURANCE COMPANY OF AMERICA
UNAUDITED INTERIM CONDENSED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
--------- -------
($ IN MILLIONS)
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES..................... $ (71.6) $ (45.6)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities or repayments of:
Fixed maturities.......................................... 151.7 209.9
Mortgage loans on real estate............................. 60.6 15.5
Real Estate............................................... 0.0 1.2
Other invested assets..................................... 0.0 3.8
Acquisitions of investments:
Fixed maturities.......................................... (100.7) (267.8)
Equity securities......................................... (0.3) 0.0
Mortgage loans on real estate............................. (10.6) (63.7)
Real estate............................................... (0.7) (0.3)
Other invested assets..................................... (0.9) (0.7)
Policy loans, net......................................... (9.0) (4.6)
Other, net................................................ 0.0 0.3
--------- -------
Net cash provided by/(used in) investing activities......... $ 90.1 $(106.4)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable to affiliate................................... -- 50.5
Repayment of note to affiliate.............................. (1.6) (1.0)
Receipts from annuity and universal life policies credited
to policyholders' account balances........................ 1,257.2 929.3
Return of policyholders' account balances on annuity and
universal life policies................................... (1,231.4) (912.2)
--------- -------
Net cash provided by financing activities................... 24.2 66.6
--------- -------
Net decrease in cash and cash equivalents................... 42.7 (85.4)
Cash and cash equivalents, beginning of year................ 28.9 133.4
--------- -------
Cash and cash equivalents, end of period.................... $ 71.6 $ 48.0
========= =======
</TABLE>
See accompanying notes to unaudited interim condensed financial statements.
6
<PAGE> 9
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED 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"), formerly The Mutual Life Insurance Company of
New York, which converted from a mutual life insurance company to a stock life
insurance company (the "Demutualization"). 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 in 49 states (not including New York), the District of
Columbia, the U.S. Virgin Islands and Puerto Rico.
2. BASIS OF PRESENTATION
The accompanying unaudited interim condensed financial statements are
prepared in conformity with generally accepted accounting principles ("GAAP")
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. In the opinion of
management, these statements include all adjustments which were normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These statements should be
read in conjunction with the financial statements of the Company for the year
ended December 31, 1999 in the Company's 1999 Annual Report on Form 10-K. The
results of operations for the three-month and nine-month periods ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full year.
3. FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at the
end of each successive interim period to reflect the current estimate of the
annual effective tax rate. In 2000, the effective tax rate was revised to
reflect higher dividends received deductions.
4. COMMITMENTS AND CONTINGENCIES
Since late 1995 a number of purported class actions have been commenced in
various state and federal courts against the Company alleging that the Company
engaged in deceptive sales practices in connection with the sale of whole and
universal life insurance policies 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 violation of state insurance and/or
deceptive business practice laws). Plaintiffs in these cases seek primarily
equitable relief (e.g., reformation, specific performance, mandatory injunctive
relief prohibiting the Company from canceling policies for failure to make
required premium payments, imposition of a constructive trust and creation of a
claims resolution facility to adjudicate any individual issues remaining after
resolution of all class-wide issues) as opposed to compensatory damages,
although they also seek compensatory damages in unspecified amounts. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance), has denied any wrongdoing and has asserted numerous
affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified one of those
cases, the Goshen v. The Mutual Life Insurance Company of New York and MONY Life
Insurance Company of America, (now known
7
<PAGE> 10
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
as DeFilippo, et al v. The Mutual Life Insurance Company of New York and MONY
Life Insurance Company), the first of the class actions filed, as a nationwide
class consisting of all persons or entities who have, or at the time of the
policy's termination had, an ownership interest in a whole or universal life
insurance policy issued by MONY and sold on an alleged "vanishing premium" basis
during the period January 1, 1982 to December 31, 1995. On March 27, 1997, MONY
filed a motion to dismiss or, alternatively, for summary judgment on all counts
of the complaint. All of the other putative class actions have been consolidated
and transferred by the Judicial Panel on Multidistrict Litigation to the United
States District Court for the District of Massachusetts, and/or are being held
in abeyance pending the outcome of the Goshen case.
On October 21, 1997, the New York State Supreme Court granted MONY's motion
for summary judgment and dismissed all claims filed in the Goshen case against
us. On December 20, 1999, the New York State Court of Appeals affirmed the
dismissal of all but one of the claims in the Goshen case (a claim under New
York's General Business Law), which has been remanded back to the New York State
Supreme Court for further proceedings consistent with the opinion. The New York
State Supreme Court has subsequently reaffirmed that, for purposes of the
remaining New York General Business Law claim, the class is now limited to New
York purchasers only (and plaintiffs have appealed this aspect of the ruling),
and has further held that the New York General Business Law claims of all class
members whose claims accrued prior to November 29, 1992 are barred by the
applicable statute of limitations. MONY intends to defend itself vigorously
against the sole remaining claim.
In addition to the matters discussed above, the Company is involved in
various other legal actions and proceedings in connection with its business. The
claimants in certain of these actions and proceedings seek damages of
unspecified amounts.
While the outcome of such matters cannot be predicted with certainty, in
the opinion of management, any liability resulting from the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations. There can be no assurance, however, that the
present litigation relating to sales practices will not have a material effect
on MONY.
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 September 30, 2000, the Company had commitments outstanding of $4.4
million for fixed rate agricultural loans with periodic interest rate reset
dates. The initial interest rates on the agricultural loans range from 7.9% to
8.3%. There was a fixed rate commercial mortgage commitment of $5.8 million
outstanding as of September 30, 2000. The interest rate on this commercial loan
is 8.0%. The Company had commitments outstanding to purchase $24.5 million of
private fixed maturity securities as of September 30, 2000 with interest rates
ranging from 7.6% to 9.1%.
5. NOTE PAYABLE TO AFFILIATE
On March 5, 1999, the Company borrowed $50.5 million from MONY Benefits
Management Corp. ("MBMC"), an affiliate, in exchange for a note payable in the
same amount. The note bears interest at 6.8% per annum and matures on March 5,
2014. Principal and interest are payable quarterly to MBMC. The carrying value
of the note as of September 30, 2000 is $47.4 million.
6. INTERCOMPANY REINSURANCE AGREEMENTS
The Company entered into a modified coinsurance agreement with U.S.
Financial Life Insurance Company ("USFL"), an affiliate, effective January 1,
1999, whereby the Company agrees to reinsure 90% of all level term life
insurance policies written by USFL after January 1, 1999. Under the agreement,
the Company will share in all premiums and benefits for such policies based on
the 90% quota share percentage,
8
<PAGE> 11
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
after consideration of existing reinsurance agreements previously in force on
this business. In addition, the Company will reimburse USFL for its quota share
of expense allowances, as defined in the agreement. In the third quarter of 2000
the treaty was amended to include new sales of universal life business written
by USFL. At September 30, 2000 the Company recorded a payable of $5.6 million to
USFL in connection with this agreement which is included in Accounts Payable and
Other Liabilities in the balance sheet.
Effective September 1, 1999, the Company recaptured its reinsurance
agreements with MONY Life for all in force and new business. The Company
simultaneously entered into new reinsurance agreements with third party
reinsurers which reinsured the same block of business as that previously
reinsured by MONY Life. Under the new reinsurance agreements, the Company
increased its retention limits on new business for any one person for individual
products from $0.5 million to $4.0 million and on last survivor products from
$0.5 million to $6.0 million.
7. NEW ACCOUNTING PRONOUNCEMENTS
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, as amended by SFAS 137, is
effective for all fiscal quarters of the fiscal years beginning after June 15,
2000. SFAS 137 delayed the effective date of SFAS 133 by one year. Adoption of
SFAS 133 is not expected to have a material effect on the Company's financial
condition or results of operations.
9
<PAGE> 12
ITEM 2:
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. This discussion and
analysis of the Company's financial condition and results of operations should
be read in conjunction with the Company's unaudited interim condensed financial
statements and the related notes to the unaudited interim condensed financial
statements included elsewhere herein, and with the Management's Discussion and
Analysis of Financial Condition and Results of Operations section included in
the Company's 1999 Annual Report on Form 10-K.
The Company is a stock life insurance company organized in the state of
Arizona. The Company is a wholly-owned subsidiary of MONY Life Insurance
Company, a stock life insurance company domiciled in the state of New York. MONY
Life, formerly The Mutual Life Insurance Company of New York converted from a
mutual life insurance company to a stock life insurance company (the
"Demutualization"). MONY Life is a wholly-owned subsidiary of 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.
The following table presents the Company's results of operations for the
three-month and nine-month periods ended September 30, 2000 and 1999.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
2000 1999 2000 1999
----- ----- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES:
Universal life and investment-type product
policy fees................................... $44.2 $33.7 $126.2 $105.0
Premiums........................................ 7.2 1.1 19.5 3.4
Net investment income........................... 22.3 23.1 69.3 71.4
Net realized gains on investments............... (1.1) 0.0 (2.9) 1.2
Other income.................................... 2.2 1.3 9.7 4.4
----- ----- ------ ------
Total revenues........................ 74.8 59.2 221.8 185.4
BENEFITS AND EXPENSES:
Benefits to policyholders....................... 18.7 12.0 51.0 32.0
Interest credited to policyholders' account
balances...................................... 15.9 15.5 46.8 48.1
Amortization of deferred policy acquisition
costs......................................... 8.9 12.3 37.0 32.3
Other operating costs and expenses.............. 17.3 12.9 61.6 52.1
----- ----- ------ ------
Total benefits and expenses........... 60.8 52.7 196.4 164.5
----- ----- ------ ------
Income before income taxes...................... $14.0 $ 6.5 $ 25.4 $ 20.9
===== ===== ====== ======
</TABLE>
10
<PAGE> 13
For the Three-Month Period Ended September 30, 2000 Compared to the
Three-Month Period Ended September 30, 1999
Universal life ("UL") and investment-type product fees were $44.2 million
for the three-month period ended September 30, 2000, an increase of $10.5
million, or 31.2%, from $33.7 million reported in the comparable prior year
period. The principal reasons for the change from period to period are as
follows:
Variable universal life ("VUL") and corporate sponsored variable
universal life ("CSVUL") product fees were $14.2 million, for the
three-month period ended September 30, 2000, an increase of $4.7
million, from $9.5 million reported in the comparable prior year period.
The increase in VUL and CSVUL fees resulted primarily from the increase
in new sales of such business and the growing in-force block.
In the third quarter of 2000, under the amended modified coinsurance
agreement ("MODCO") treaty between USFL and the Company, the Company
assumed $5.2 million of UL business in addition to term life insurance.
(See note 6 in Unaudited Interim Condensed Financial Statements).
Premium revenue was $7.2 million for the three-month period ended September
30, 2000, an increase of $6.1 million, from $1.1 million reported in the
comparable prior year period. The increase was primarily the result of a MODCO
agreement between U.S. Financial Life and the Company, which went into effect in
the fourth quarter 1999 (see Note 6 in Unaudited Interim Condensed Financial
Statements).
Net investment income was $22.3 million for the three-month period ended
September 30, 2000, a decrease of $0.8 million, or 3.5%, from $23.1 million
reported in the comparable prior year period. The decrease was primarily related
to a decrease in the average balances of invested assets of $76.9 million, which
was partially offset by a 18 basis point increase in portfolio yields.
Net realized losses on investments were $1.1 million for the three-month
period ended September 30, 2000, a decrease of $1.1 million, from a net realized
gain of $0.0 million reported in the comparable prior year period. The decrease
was a result of higher other than temporary impairment losses on fixed
maturities of $1.0 million, higher losses on mortgage sales and prepayments of
$0.8 million, partially offset by a higher mortgage gain due to allowance
releases of $0.7 million.
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS
ENDED SEPTEMBER 30,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Fixed securities............................................ $(1.0) $ 0.4
Mortgage loans.............................................. (0.2) (0.2)
Real estate................................................. 0.1 (0.0)
Other....................................................... (0.0) (0.2)
----- -----
$(1.1) $ 0.0
===== =====
</TABLE>
Other income was $2.2 million for the three-month period ended September
30, 2000, an increase of $0.9 million, or 69.2%, as compared to $1.3 million in
the comparable prior year period. The increase was primarily due to higher
revenues from supplementary contracts. Income from supplementary contracts
increased due to increased interest rates on new supplementary contracts making
them more attractive.
Benefits to policyholders were $18.7 million for the three-month period
ended September 30, 2000, an increase of $6.7 million, or 55.8%, from $12.0
million reported in the comparable prior year period. The increase was primarily
a result of (i) increased assumed benefits of $3.1 million from the new MODCO
reinsurance treaty with USFL (see Note 6 in Unaudited Interim Condensed
Financial Statements), (ii) lower reinsurance credits of $1.9 million as a
result of higher retention limits in 2000 as compared to 1999, and (iii) higher
death benefits of $1.4 million in the Company's protection products.
Interest credited to policyholders' account balances was $15.9 million for
the three-month period ended September 30, 2000, an increase of $0.4 million, or
2.6%, from $15.5 million reported in the comparable prior
11
<PAGE> 14
year period. The increase was primarily the result of an increase of $1.3
million in interest crediting on corporate sponsored variable universal life
business ("CSVUL"), offset by decreases in single premium deferred annuities
("SPDA") and other annuity products of $1.3 million due to the continued runoff
of these products.
Amortization of deferred policy acquisition costs ("DAC") was $8.9 million
for the three-month period ended September 30, 2000, a decrease of $3.4 million,
or 27.6%, from $12.3 million reported in the comparable prior year period. The
decrease was a result of lower amortization on VUL and CSVUL business of $1.1
million and $2.0 million, respectively, due to higher death claims, and a
decrease in amortization on FPVA of $0.9 million, as a direct result of the
growing levels of exchange activity to the new variable annuity and related
expectation of better future persistency, offset by an increase of $1.2 million
as a result of the new MODCO treaty with USFL (See Note 6 in Unaudited Interim
Condensed Financial Statements).
Other operating costs and expenses were $17.3 million for the three-month
period ended September 30, 2000, an increase of $4.4 million, or 34.1%, from
$12.9 million reported in the comparable prior year period. The increase was due
primarily to higher direct expenses, administration of level term business and
printing costs.
For the Nine-month Period Ended September 30, 2000 Compared to the Nine-month
Period Ended September 30, 1999
Universal life ("UL") and investment-type product fees were $126.2 million
for the nine-month period ended September 30, 2000, an increase of $21.2
million, or 20.2 %, from $105.0 million reported in the comparable prior year
period. The principal reasons for the change from period to period are as
follows:
Flexible premium variable annuity ("FPVA") product fees were $48.4
million for the nine-month period ended September 30, 2000, an increase
of $1.3 million, from $47.1 million reported in the comparable prior
year period. The increase in FPVA fees was primarily due to higher
surrender charges of $2.2 million.
Variable universal life and corporate sponsored variable universal life
("CSVUL") product fees were $43.1 million for the nine-month period
ended September 30, 2000, an increase of $15.8 million, from $27.3
million reported in the comparable prior year period. The increase in
fees resulted primarily from new sales of such business and the growing
in-force block.
In the third quarter of 2000, under the amended modified coinsurance
agreement ("MODCO") treaty between USFL and the Company, the Company
assumed $5.2 million of UL business. (See note 6 in Unaudited Interim
Condensed Financial Statements).
Premium revenue was $19.5 million for the nine-month period ended September
30, 2000, an increase of $16.1 million, from $3.4 million reported in the
comparable prior year period. The increase was primarily the result of a
modified coinsurance treaty ("MODCO") between U.S. Financial Life and the
Company, which went into effect in the fourth quarter 1999 (see Note 6 in
Unaudited Interim Condensed Financial Statements).
Net investment income was $69.3 million for the nine-month period ended
September 30, 2000, a decrease of $2.1 million, or 2.9%, from $71.4 million
reported in the comparable prior year period. The decrease was primarily related
to a decrease in the average balances of invested assets of $44.5 million, which
was partially offset by a 2 basis point increase in portfolio yields.
Net realized losses on investments were $2.9 million for the nine-month
period ended September 30, 2000, a decrease of $4.1 million, from a net realized
gain of $1.2 million reported in the comparable prior year period. The decrease
was a result of lower sales/prepayment gains on fixed maturities of $1.8
million, and higher other than temporary impairment losses on fixed maturities
of $2.5 million.
12
<PAGE> 15
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30,
--------------------------
2000 1999
------- -------
<S> <C> <C>
Fixed securities............................................ $(3.1) $ 1.1
Mortgage loans.............................................. 0.1 (0.4)
Real estate................................................. 0.1 (0.2)
Other....................................................... (0.0) 0.7
----- -----
$(2.9) $ 1.2
===== =====
</TABLE>
Other income was $9.7 million for the nine-month period ended September 30,
2000, an increase of $5.3 million, as compared to $4.4 million in the comparable
prior year period. The increase was primarily due to higher revenues from
supplementary contracts and an increase in reinsurance expense allowance on a
new reinsurance treaty. Income from supplementary contracts increased due to
higher interest rates on new supplementary contracts making them more
attractive.
Benefits to policyholders were $51.0 million for the nine-month period
ended September 30, 2000, an increase of $19.0 million, or 59.4%, from $32.0
million reported in the comparable prior year period. The increase was a result
of (i) higher assumed benefits related to the MODCO treaty with USFL of $8.3
million (see Note 6 in Unaudited Interim Condensed Financial Statements) (ii)
lower reinsurance credits of $11.1 million as a result of higher retention
limits and (iii) an increase of $4.5 million related to supplementary contracts,
offset by lower death benefits of $4.7 million on the Company's protection
segment.
Interest credited to policyholders' account balances was $46.8 million for
the nine-month period ended September 30, 2000, a decrease of $1.3 million, or
2.7%, from $48.1 million reported in the comparable prior year period. The
decrease was primarily the result of lower interest crediting on single premium
deferred annuities ("SPDA") of $2.5 million due to the continued runoff of such
business offset by higher interest crediting of $1.8 million in CSVUL business
due to the increased general account fund values.
Amortization of deferred policy acquisition costs ("DAC") was $37.0 million
for the nine-month period ended September 30, 2000, an increase of $4.7 million,
or 14.6%, from $32.3 million reported in the comparable prior year period. The
increase primarily resulted from an increase of $3.4 million in VUL due to
growth of variable business, and $2.9 million of higher amortization as a result
of the MODCO treaty with USFL (See Note 6 in Unaudited Interim Condensed
Financial Statements), offset by lower amortization related to FPVA of $1.3
million due to the growing levels of exchange activity to the Company's new
variable annuity and related expectation of better future persistency.
Other operating costs and expenses were $61.6 million for the nine-month
period ended September 30, 2000, an increase of $9.5 million, or 18.2%, from
$52.1 million reported in the comparable year. The increase was due primarily to
higher direct expenses, administration of level term business and printing
costs.
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 life insurance premiums. Cash outflows primarily relate to the liabilities
associated with its various annuity and life insurance products, operating
expenses, income taxes, acquisitions of invested assets, and principal and
interest on its outstanding debt obligations. The annuity and life insurance
liabilities relate to the Company's obligation to make benefit payments under
its annuity and insurance 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
13
<PAGE> 16
during the year and, to a lesser extent, changes in rate expectations will
impact the changes in projected asset and liability cash flows during the course
of the year.
When the Company is formulating its cash flow projections it considers,
among other things, its expectations about sales of the Company's products, its
expectations concerning customer behavior in light of current and expected
economic conditions, its expectations concerning competitors and the general
outlook for the economy and interest rates.
The events most likely to cause an adjustment in the Company's investment
policies are: (i) a significant change in its product mix, (ii) a significant
change in the outlook for either the economy in general or for interest rates in
particular and (iii) a significant reevaluation of the prospective risks and
returns of various asset classes.
The following table sets forth the withdrawal characteristics and the
surrender and withdrawal experience of the Company's total annuity reserves and
deposit liabilities at September 30, 2000 and December 31, 1999.
WITHDRAWAL CHARACTERISTICS OF
ANNUITY RESERVES AND DEPOSIT LIABILITIES
<TABLE>
<CAPTION>
AMOUNT AT AMOUNT AT
SEPTEMBER 30, PERCENT DECEMBER 31, PERCENT
2000 OF TOTAL 1999 OF TOTAL
------------- -------- ------------ --------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Not subject to discretionary withdrawal
provisions........................................ $ 53.0 1.2% $ 57.8 1.3%
Subject to discretionary withdrawal -- with market
value adjustment or at carrying value less
surrender charge.................................. 3,786.3 89.2% 4,025.5 88.7
-------- ----- -------- -----
Subtotal............................................ 3,839.3 90.4 4,083.3 90.0
Subject to discretionary withdrawal -- without
adjustment at carrying value...................... 406.4 9.6% 451.8 10.0
-------- ----- -------- -----
Total annuity reserves and deposit liabilities
(gross of reinsurance)............................ $4,245.7 100.0% $4,535.1 100.0%
======== ===== ======== =====
</TABLE>
The following table sets forth by product line the actual amounts paid in
connection with surrenders and withdrawals for the periods indicated.
SURRENDERS AND WITHDRAWALS
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
PRODUCT LINE:
Variable and universal life............. $ 8.4 $ 8.3 $ 26.8 $ 27.7
Annuities(1)............................ 143.4 165.6 537.1 498.4
------ ------ ------ ------
TOTAL......................... $151.8 $173.9 $563.9 $526.1
====== ====== ====== ======
</TABLE>
---------------
(1) Excludes amounts relating to surrenders associated with an exchange program
offered by the Company wherein contractholders surrendered old FPVA
contracts and reinvested the proceeds therefrom in a new enhanced FPVA
product offered by the Company.
Annuity surrenders have increased for the nine-month period ended September
30, 2000 as compared to the comparable prior year period primarily due to the
aging of the block of business and consequent decrease in surrender charge rates
and due to an increase in competition. The Company responded to this trend by
enhancing its variable annuity products by offering new investment fund choices.
In addition, the Company has established a special conservation unit and offers
policyholders the opportunity to exchange their contracts for a new product
series. The positive effects of these conservation efforts are reflected in the
decrease in surrender activity in the third quarter of 2000 as compared to the
comparable prior year period.
During the nine-month period ended September 30, 2000, the Company reported
cash used in operations of $71.6 million. For the nine-month period ended
September 30, 2000, net cash flow used in financing activities was $24.2
million, a decrease of $42.4 million as compared to the prior year. This
decrease is primarily due to the issuance of a note payable to MBMC in the
amount of $50.5 million in 1999 (see Note 5
14
<PAGE> 17
in Unaudited Interim Condensed Financial Statements). 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
September 30, 2000, the Company had readily marketable fixed maturity securities
with a carrying value of $994.3 million, which were comprised of $488.5 million
of public and $505.8 million of private fixed maturity securities. At that date,
approximately 93.3% 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 September
30, 2000, the Company had cash and cash equivalents of $71.6 million.
At September 30, 2000, the Company had commitments outstanding of $4.4
million for fixed rate agricultural loans with periodic interest rate reset
dates. The initial interest rates on the agricultural loans range between 7.9%
and 8.3%. There was a fixed rate commercial mortgage of $5.8 million outstanding
as of September 30, 2000. The interest rate on the commercial loan is 8.0%. The
Company had commitments outstanding to purchase $24.5 million of private fixed
maturity securities as of September 30, 2000 with interest rates ranging from
7.6% to 9.1%.
Of the $52.4 million commercial mortgage loans in the Company's investment
portfolio at September 30, 2000, $2.0 million, $4.6 million, $8.7 million, and
$0.0 million are scheduled to mature in 2000, 2001, 2002 and 2003, respectively.
At September 30, 2000, aggregate maturities of long-term debt based on
required remaining principal payments for 2000 and the succeeding four years are
$0.5 million, $2.3 million, $2.4 million, $2.6 million and $2.8 million,
respectively, and $36.8 million thereafter.
Aggregate contractual debt service payments on the Company's debt at
September 30, 2000, for the remainder of 2000 and the succeeding four years are
$1.3 million, $5.4 million, $5.4 million, $5.4 million and $5.4 million,
respectively and $49.8 million thereafter.
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 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 September 31, 2000 and December 31, 1999, was in excess of the
minimum required RBC.
YEAR 2000
The Company successfully completed its Year 2000 Project (the "Project") to
ensure Year 2000 readiness. The Company developed and implemented an
enterprise-wide plan to prepare for the Year 2000 issue by ensuring compliance
of all applications, operating systems and hardware of mainframe, PC and local
area network ("LAN") platforms; ensuring the compliance of voice and data
network software and hardware; addressing the compliance of key vendors and
other third parties.
The total cost of the Project was $2.4 million. The Company does not expect
to incur any material future cost on the Project.
The Company has not experienced any significant Year 2000 related problems
post-December 31, 1999 with its operations of with any external parties with
which business is conducted. Based on this experience and the amount of work and
testing previously performed, the Company believes the likelihood of a Year 2000
issue that would have a material effect on the Company's consolidated financial
position and results of its operations continues to be remote as the Company
performs month-end, leap year, quarter-end, and year-end processing. However,
there is still the possibility that future Year 2000 related failures in the
Company's systems of equipment and/or failure of external parties to achieve
Year 2000 compliance could have a material adverse effect on the Company's
financial position and results of its operations.
15
<PAGE> 18
INVESTMENTS
The following table illustrates the net investment income yields based on
average annual asset carrying values, excluding unrealized gains (losses) in the
fixed maturity category. Equity real estate income is shown net of operating
expenses and depreciation. Total investment income includes non-cash income from
amortization, payment-in-kind distributions and undistributed equity earnings.
Investment expenses include mortgage servicing fees and other miscellaneous fee
income.
INVESTMENT RESULTS BY ASSET CATEGORY
<TABLE>
<CAPTION>
AS OF THE THREE-MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
NET INVESTMENT AVERAGE ASSET NET INVESTMENT AVERAGE ASSET
INCOME YIELD BALANCES INCOME YIELD BALANCES
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Fixed Maturities.......................... 7.2% $1,016.7 7.2% $1,089.4
Mortgage loans on real estate............. 7.3 139.7 8.2 161.7
Policy loans.............................. 6.0 66.4 5.8 55.7
Real estate............................... 7.1 7.4 5.3 7.5
Cash and other invested assets............ 8.3 57.7 5.5 50.7
-------- --------
Total invested assets before investment
expenses............................. 7.2% $1,287.9 7.2% $1,365.0
======== ========
Investment expenses..................... (0.2) (0.4)
---- ----
Total invested assets after investment
expenses............................. 7.0% 6.8%
==== ====
</TABLE>
<TABLE>
<CAPTION>
AS OF THE NINE-MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
NET INVESTMENT AVERAGE ASSET NET INVESTMENT AVERAGE ASSET
INCOME YIELD BALANCES INCOME YIELD BALANCES
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Fixed Maturities.......................... 7.1% $1,047.2 7.4% $1,043.8
Mortgage loans on real estate............. 8.6 140.0 8.0 144.0
Policy loans.............................. 7.1 63.3 7.1 54.4
Real estate............................... 6.2 7.2 7.0 7.6
Cash and other invested assets............ 7.6 42.0 4.7 94.4
-------- --------
Total invested assets before investment
expenses............................. 7.2% $1,299.7 7.2% $1,344.2
======== ========
Investment expenses..................... (0.1) (0.1)
---- ----
Total invested assets after investment
expenses............................. 7.1% 7.1%
==== ====
</TABLE>
The yield on general account invested assets (including net realized gains
and losses on investments) was 6.6% and 6.8% for the three-month period ended
September 30, 2000 and 1999, respectively and 6.8% and 7.2% for the nine-month
period ended September 30, 2000 and 1999, respectively.
FIXED MATURITIES
Fixed maturities consist of publicly traded debt securities and privately
placed debt securities, and represented 78.6% and 80.0% of total invested assets
at September 30, 2000 and December 31, 1999, respectively.
16
<PAGE> 19
The Securities Valuation Office of the NAIC evaluates the bond investments
of insurers for regulatory reporting purposes and assigns securities to one of
six investment categories called "NAIC Designations". The NAIC Designations
closely mirror the Nationally Recognized Securities Rating Organizations' credit
ratings for marketable bonds. NAIC Designations 1 and 2 include bonds considered
investment grade ("Baa" or higher by Moody's, or "BBB" or higher by S&P) by such
rating organizations. NAIC Designations 3 through 6 are referred to as below
investment grade ("Ba" or lower by Moody's, or "BB" or lower by S&P).
Of the Company's total portfolio of fixed maturity securities at September
30, 2000, 93.3% were investment grade and 6.7% were below investment grade.
The Company reviews all fixed maturity securities at least once each
quarter and identifies investments that management concludes require additional
monitoring. Among the criteria are: (i) violation of financial covenants, (ii)
public securities trading at a substantial discount as a result of specific
credit concerns and (iii) other subjective factors relating to the issuer.
The Company defines problem securities in the fixed maturity category as
securities (i) as to which principal and/or interest payments are in default or
are to be restructured pursuant to commenced negotiations or (ii) are issued by
a company that went into bankruptcy subsequent to the acquisition of such
securities or (iii) are deemed to have other than temporary impairments to
value.
The Company defines potential problem securities in the fixed maturity
category as securities that are deemed to be experiencing significant operating
problems or difficult industry conditions. Typically these credits are
experiencing or anticipating liquidity constraints, having difficulty meeting
projections/budgets and would most likely be considered a below investment grade
risk.
The Company defines restructured securities in the fixed maturity category
as securities where a concession has been granted to the borrower related to the
borrower's financial difficulties that the Company would not have otherwise
considered. The Company restructures certain securities in instances where a
determination was made that greater economic value will be realized under the
new terms than through liquidation or other disposition. The terms of the
restructure generally involve some or all of the following characteristics: a
reduction in the interest rate, an extension of the maturity date and a partial
forgiveness of principal and/or interest.
The following table sets forth the total carrying values of the Company's
fixed maturity portfolio, as well as its problem, potential problem and
restructured fixed maturities as of the dates indicated:
PROBLEM, POTENTIAL PROBLEM AND
RESTRUCTURED FIXED MATURITIES AT FAIR VALUE
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Total fixed maturities (public and private)................. $994.3 $1,048.8
====== ========
Problem fixed maturities.................................... 4.9 4.8
Potential problem fixed maturities.......................... 7.7 6.4
Restructured fixed maturities............................... 0.0 0.0
------ --------
Total problem, potential problem & restructured fixed
maturities................................................ $ 12.6 $ 11.2
====== ========
Total problem, potential problem & restructured fixed
maturities as a percent of total fixed maturities......... 1.3% 1.1%
====== ========
</TABLE>
At September 30, 2000, the Company's largest unaffiliated single
concentration of fixed maturities was $51.6 million of Federal Home Loan
Mortgage Corporation ("FHLMC") which represents 5.2% of total invested assets.
No other individual non-government issuer represents more than 2.3% of invested
assets.
17
<PAGE> 20
The Company held approximately $199.9 million and $217.5 million of
mortgage-backed and asset-backed securities as of September 30, 2000 and
December 31, 1999, respectively. Of such amounts, $66.8 million and $82.4
million, or 33.4% and 37.9%, respectively, represented agency-issued
pass-through and collateralized mortgage obligations ("CMOs") secured by Federal
National Mortgage Association, FHLMC and Government National Mortgage
Association. The balance of such amounts was comprised of other types of
mortgage-backed and asset-backed securities. The Company believes that its
active monitoring of its portfolio of mortgage-backed securities and the limited
extent of its holdings of more volatile types of mortgage-backed securities
mitigate the Company's exposure to losses from prepayment risk associated with
interest rate fluctuations for this portfolio. At September 30, 2000 and
December 31, 1999, 82.8% and 81.9%, respectively, of the Company's
mortgage-backed and asset-backed securities were assigned a NAIC Designation of
1. In addition, the Company believes that it holds a relatively low percentage
of CMOs compared to other life insurance companies.
The following table presents the types of mortgage-backed securities
("MBSs"), as well as other asset-backed securities, held by the Company as of
the dates indicated.
MORTGAGE AND ASSET-BACKED SECURITIES
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
CMOs........................................................ $100.6 $117.0
Asset-backed securities..................................... 94.7 95.9
Commercial MBSs............................................. 4.5 4.5
Pass-through securities..................................... 0.1 0.1
------ ------
Total MBSs and asset-backed securities............ $199.9 $217.5
====== ======
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities,
by contractual maturity dates, (excluding scheduled sinking funds), as of
September 30, 2000 and December 31, 1999 is as follows:
FIXED MATURITY SECURITIES BY CONTRACTUAL MATURITY DATES
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 2000 DECEMBER 31, 1999
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less........................ $ 48.2 $ 48.0 $ 75.8 $ 76.2
Due after one year through five years.......... 265.1 263.4 275.8 274.9
Due after five years through ten years......... 415.7 396.7 383.8 366.5
Due after ten years............................ 88.8 86.3 119.9 113.7
-------- ------ -------- --------
Subtotal............................. 817.8 794.4 855.3 831.3
Mortgage-backed and other asset-backed
securities................................... 199.8 199.9 221.5 217.5
-------- ------ -------- --------
Total................................ $1,017.6 $994.3 $1,076.8 $1,048.8
======== ====== ======== ========
</TABLE>
MORTGAGE LOANS
Mortgage loans comprised 9.1% and 12.6% of total invested assets as of
September 30, 2000 and December 31, 1999, respectively. Mortgage loans consist
of commercial and agricultural loans. As of September 30, 2000 and December 31,
1999, commercial mortgage loans comprised $52.4 million and $52.8 million or
45.5% and 32.0% of total mortgage loan investments, respectively. Agricultural
loans comprised
18
<PAGE> 21
$62.7 million and $112.2 million, or 54.5% and 68.0% of total mortgage loan
investments at September 30, 2000 and December 31, 1999, respectively.
COMMERCIAL MORTGAGE LOANS
For commercial mortgages, the carrying value of the largest amount loaned
on any one single property aggregated $28.4 million and represented 2.2% of
general account invested assets as of September 30, 2000. No other mortgage loan
represents more than 0.5% of invested assets. Total mortgage loans to the 5
largest borrowers accounted in the aggregate for 82.6% of the total carrying
value of the commercial loan portfolio and less than 3.5% of total invested
assets at September 30, 2000.
The following table presents the Company's commercial mortgage loan
maturity profile for the periods indicated.
COMMERCIAL MORTGAGE LOAN PORTFOLIO MATURITY PROFILE
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- -----------------
CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL
-------- ----- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less........................... $ 6.6 12.6% $ 2.2 4.2%
Due after one year through five years............. 39.3 75.0 41.6 78.8
Due after five years through ten years............ 4.6 8.7 7.0 13.2
Due after ten years............................... 1.9 3.7 2.0 3.8
----- ----- ----- -----
Total................................... $52.4 100.0% $52.8 100.0%
===== ===== ===== =====
</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 watchlist are categorized by the Company as "potential problem" loans.
Loans for which the original terms of the mortgages have been modified or for
which interest or principal payments have been deferred are categorized by the
Company as "restructured" loans.
The following table presents the carrying amounts of problem, potential
problem and restructured commercial mortgage loans relative to the carrying
value of all commercial mortgage loans as of the dates
19
<PAGE> 22
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 dates indicated.
PROBLEM AND RESTRUCTURED COMMERCIAL MORTGAGES AT CARRYING VALUE
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Total commercial mortgages.................................. $52.4 $52.8
===== =====
Problem commercial mortgages................................ $ -- $ --
Restructured commercial mortgages........................... 11.2 11.0
----- -----
Total problem and restructured commercial mortgages......... $11.2 $11.0
===== =====
Valuation allowances/writedowns(1):
Problem loans............................................... $ -- $ --
Restructured loans.......................................... 0.2 0.5
===== =====
Total valuation allowances/writedowns....................... $ 0.2 $ 0.5
===== =====
Total valuation allowances/writedowns as a percent of
problem and restructured commercial mortgages at carrying
value before valuation allowances and writedowns.......... 1.8% 4.3%
===== =====
</TABLE>
---------------
(1) As of September 30, 2000 and December 31, 1999, there were $0.2 million and
$0.5 million of valuation allowances/writedowns relating to restructured
commercial mortgages.
In addition to valuation allowances and impairment writedowns recorded on
specific commercial mortgage loans classified as problem, potential problem, and
restructured mortgage loans, the Company records a non-specific estimate of
expected losses on all other such mortgage loans based on its historical loss
experience for such investments. As of September 30, 2000 and December 31, 1999,
such reserves were $0.6 million and $0.6 million, respectively.
AGRICULTURAL MORTGAGE LOANS
Problem, Potential Problem and Restructured Agricultural Mortgages
The Company defines problem, potential problem and restructured
agricultural mortgages in the same manner as it does for commercial mortgages.
The following table presents the carrying amounts of problem, potential problem
and restructured agricultural mortgages relative to the carrying value of all
agricultural mortgages as of each of the dates indicated.
20
<PAGE> 23
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED AGRICULTURAL MORTGAGES AT CARRYING
VALUE
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Total agricultural mortgages................................ $62.7 $112.2
===== ======
Problem agricultural mortgages(1)........................... $ 6.6 $ 1.1
Potential problem agricultural mortgages.................... 0.0 0.4
Restructured agricultural mortgages......................... 0.9 0.9
----- ------
Total problem, potential problem & restructured agricultural
mortgages(2).............................................. $ 7.5 $ 2.4
===== ======
Total problem, potential problem & restructured agricultural
mortgages as a percent of total agricultural mortgages.... 12.0% 2.1%
===== ======
</TABLE>
---------------
(1) Problem agricultural mortgages included delinquent mortgage loans of $4.2
million and $1.1 million at September 30, 2000 and December 31, 1999,
respectively. There were mortgage loans in the process of foreclosure of
$2.4 million and $0.0 million at September 30, 2000 and December 31, 1999,
respectively.
(2) As of September 30, 2000 and December 31, 1999, there were $0.0 million and
$0.0 million valuation allowances/writedowns relating to problem, potential
problem and restructured agricultural mortgages.
In addition to valuation allowances and impairments writedowns recorded on
specific agricultural mortgage loans classified as problem, potential problem,
and restructured mortgage loans, the Company records a non-specific estimate of
expected losses on all other agricultural mortgage loans based on its historical
loss experience for such investments. As of September 30, 2000 and December 31,
1999, such reserves were $0.6 million and $1.1 million, respectively.
EQUITY REAL ESTATE
The Company holds real estate as part of its general account investment
portfolio. The Company has adopted a policy of not investing new funds in equity
real estate except to safeguard values in existing investments or to honor
outstanding commitments. As of September 30, 2000 and December 31, 1999, the
carrying value of the Company's real estate investments was $7.4 million and
$6.9 million, respectively, or 0.5% and 0.5%, respectively, of general account
invested assets. The Company owns investment real estate, real estate acquired
upon foreclosure and minority owned joint ventures.
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 $5.6 million and
$5.3 million as of September 30, 2000 and December 31, 1999, respectively. The
carrying value of real estate to be disposed of was $1.9 million and $1.6
million as of September 30, 2000 and December 31, 1999, respectively.
INVESTMENT IMPAIRMENTS AND VALUATION ALLOWANCES
The cumulative asset specific impairment adjustments and provisions for
valuation allowances that were recorded as of the end of each period are shown
in the table below and are reflected in the corresponding asset values discussed
above.
21
<PAGE> 24
CUMULATIVE IMPAIRMENT ADJUSTMENTS ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Fixed maturities............................................ $3.0 $0.5
Real estate(1).............................................. 1.4 1.4
---- ----
Total............................................. $4.4 $1.9
==== ====
</TABLE>
---------------
(1) Includes $1.2 million and $1.2 million as of September 30, 2000 and December
31, 1999, respectively, relating to impairments taken upon foreclosure of
mortgage loans.
CUMULATIVE PROVISIONS FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Mortgages................................................... $1.4 $2.3
Real estate................................................. 0.2 0.3
---- ----
Total............................................. $1.6 $2.6
==== ====
</TABLE>
TOTAL CUMULATIVE IMPAIRMENT ADJUSTMENTS AND PROVISIONS
FOR VALUATION ALLOWANCES ON INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
($ IN MILLIONS)
<S> <C> <C>
Fixed maturities............................................ $3.0 $0.5
Mortgages................................................... 1.4 2.3
Real estate................................................. 1.6 1.7
---- ----
Total............................................. $6.0 $4.5
==== ====
</TABLE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company's 1999 Annual Report on Form 10-K for a description of
the Company's exposures to market risk, as well as the Company's objectives,
policies and strategies relating to the management of such risks. The relative
sensitivity to changes in fair value from interest rates and equity prices at
September 30, 2000 is not materially different from that presented in the
Company's 1999 Annual Report on Form 10-K at December 31, 1999.
22
<PAGE> 25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since late 1995 a number of purported class actions have been commenced in
various state and federal courts against the Company alleging that the Company
engaged in deceptive sales practices in connection with the sale of whole and
universal life insurance policies 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 violation of state insurance and/or
deceptive business practice laws). Plaintiffs in these cases seek primarily
equitable relief (e.g., reformation, specific performance, mandatory injunctive
relief prohibiting the Company from canceling policies for failure to make
required premium payments, imposition of a constructive trust and creation of a
claims resolution facility to adjudicate any individual issues remaining after
resolution of all class-wide issues) as opposed to compensatory damages,
although they also seek compensatory damages in unspecified amounts. The Company
has answered the complaints in each action (except for one being voluntarily
held in abeyance), has denied any wrongdoing and has asserted numerous
affirmative defenses.
On June 7, 1996, the New York State Supreme Court certified one of those
cases, the Goshen v. The Mutual Life Insurance Company of New York and MONY Life
Insurance Company of America, (now known as DeFilippo, et al v. The Mutual Life
Insurance Company of New York and MONY Life Insurance Company), the first of the
class actions filed, as a nationwide class consisting of all persons or entities
who have, or at the time of the policy's termination had, an ownership interest
in a whole or universal life insurance policy issued by MONY and sold on an
alleged "vanishing premium" basis during the period January 1, 1982 to December
31, 1995. On March 27, 1997, MONY filed a motion to dismiss or, alternatively,
for summary judgment on all counts of the complaint. All of the other putative
class actions have been consolidated and transferred by the Judicial Panel on
Multidistrict Litigation to the United States District Court for the District of
Massachusetts, and/or are being held in abeyance pending the outcome of the
Goshen case.
On October 21, 1997, the New York State Supreme Court granted MONY's motion
for summary judgment and dismissed all claims filed in the Goshen case against
us. On December 20, 1999, the New York State Court of Appeals affirmed the
dismissal of all but one of the claims in the Goshen case (a claim under New
York's General Business Law), which has been remanded back to the New York State
Supreme Court for further proceedings consistent with the opinion. The New York
State Supreme Court has subsequently reaffirmed that, for purposes of the
remaining New York General Business Law claim, the class is now limited to New
York purchasers only (and plaintiffs have appealed this aspect of the ruling),
and has further held that the New York General Business Law claims of all class
members whose claims accrued prior to November 29, 1992 are barred by the
applicable statute of limitations. MONY intends to defend itself vigorously
against the sole remaining claim.
In addition to the foregoing, from time to time the Company is 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.
There can be no assurance, however, that the present litigation relating to
sales practices will not have a material adverse effect on MONY.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
II-1
<PAGE> 26
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter covered by this
report.
II-2
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONY LIFE INSURANCE COMPANY OF AMERICA
By: /s/ RICHARD DADDARIO
------------------------------------
Richard Daddario
Director, Vice President and
(Authorized Financial Officer)
Signatory and Principal
Date: November 13, 2000.
S-1
