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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 333-65423
MONY LIFE INSURANCE COMPANY OF
AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ARIZONA 86-0222062
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1290 AVENUE OF THE AMERICAS,
NEW YORK, NEW YORK 10104
(212) 554-1234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
No voting or non-voting common equity of the Registrant is held by
non-affiliates of the Registrant as of June 30, 2004. Indicate by check mark
whether the Registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). Yes __ No X
As of March 30, 2005, 2,500,000 shares of the Registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction I(1)(a) and (b)
of Form 10-K and is therefore filing this Form with the Reduced Disclosure
Format.
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TABLE OF CONTENTS
PAGE
PART I
Item 1: Business ....................................................................................................... 1-1
Overview ....................................................................................................... 1-1
Recent Events .................................................................................................. 1-1
Products ....................................................................................................... 1-1
General Account Investment Portfolio ........................................................................... 1-3
Competition .................................................................................................... 1-3
Regulation ..................................................................................................... 1-3
Employees ...................................................................................................... 1-5
Parent Company ................................................................................................. 1-5
Other Information .............................................................................................. 1-5
Item 2: Properties ..................................................................................................... 2-1
Item 3: Legal Proceedings .............................................................................................. 3-1
Item 4: Submission of Matters to a Vote of Security Holders* ........................................................... 4-1
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ... 5-1
Item 6: Selected Financial Data* ....................................................................................... 6-1
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management Narrative") . 7-1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................... 7A-1
Item 8. Financial Statements and Supplementary Data .................................................................... FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure ........................... 9-1
Item 9A. Controls and Procedures ........................................................................................ 9A-1
Item 9B. Other Information .............................................................................................. 9B-1
PART III
Item 10. Directors and Executive Officers of the Registrant* ............................................................ 10-1
Item 11. Executive Compensation* ........................................................................................ 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters* ................ 12-1
Item 13: Certain Relationships and Related Transactions* ................................................................ 13-1
Item 14: Principal Accounting Fees and Services ......................................................................... 14-1
PART IV
Item 15: Exhibits and Financial Statement Schedules ..................................................................... 15-1
Signatures ................................................................................................................. S-1
Index to Exhibits .......................................................................................................... E-1
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*Omitted pursuant to General Instruction I to Form 10-K
PART I
PART I, ITEM 1.
BUSINESS(1)
OVERVIEW
MONY Life Insurance Company of America ("MLOA") is an Arizona stock life
insurance company and a wholly owned subsidiary of MONY Life. MLOA's
primary business is to provide life insurance and annuity products to both
individuals and businesses. MLOA is licensed to sell its products in 49
states (not including New York), the District of Columbia and Puerto Rico.
As of December 31, 2004, MLOA had approximately 280,000 insurance policies
and contracts in force.
MONY Life is a wholly owned subsidiary of AXA Financial, Inc. (the "Holding
Company") and the Holding Company is a wholly owned subsidiary of AXA, a French
holding company for an international group of insurance and related financial
services companies. AXA is subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, and files annual reports on Form
20-F. For additional information regarding AXA, see "Parent Company".
RECENT EVENTS
On July 8, 2004, the Holding Company completed its acquisition of MONY
(the "MONY Acquisition"). For additional information regarding the MONY
Acquisition, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 of Notes to Financial
Statements.
PRODUCTS
Prior to the MONY Acquisition, MLOA offered a broad portfolio of life
insurance products consisting primarily of variable universal life
insurance ("VUL") and universal life insurance (including group universal
life insurance). In addition, MLOA has offered whole life and a variety of
term life insurance products. MLOA has also offered a variety of annuity
products, such as flexible premium variable annuities, flexible premium
deferred annuities and single premium immediate annuities. For additional
information regarding certain features of MLOA's variable annuity
products, see Note 8 of Notes to Financial Statements.
Variable life and variable annuity contractholders have a broad selection
of investment accounts representing a range of investment objectives in
which to invest the assets held under their contracts. Since the merger in
2004 of two MONY affiliated mutual fund families into EQ Advisors Trust
("EQAT"), the investment options available to MLOA's variable life and
variable annuity contractholders are comprised of EQAT's proprietary fund
family and various non-proprietary fund families. MLOA's variable life
insurance contracts have as many as 81 investment options and MLOA's
variable annuity contracts have as many as 68 investment options.
Depending on the investment options available under the specific contract,
variable contractholders may allocate their funds among a wide variety of
these investment options.
In connection with the MONY Acquisition, management continues to evaluate
the products sold by MLOA as part of an overall review of insurance
products offered by AXA Equitable and the Holding Company's other
insurance subsidiaries with a view towards reducing duplication of
products, improving the quality of the product line-up and enhancing the
overall profitability of AXA Financial. This evaluation has resulted in
the recent discontinuation of new sales of certain insurance and annuity
products offered by MLOA, including all non-variable universal life
products, all single premium immediate annuity products and most variable
annuity products. It is contemplated that new sales of certain other life
insurance and annuity products offered by MLOA will be discontinued during
2005 and possibly thereafter. Since this review of products is ongoing,
and since future decisions with regard to product development depend on
factors and considerations not yet known, management is unable to predict
the extent to which, if at all, MLOA will continue to issue significant
amounts of new business.
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(1) As used in this Form 10-K, the term "AXA Financial" refers to AXA
Financial, Inc., a Delaware corporation incorporated in 1991 and its
consolidated subsidiaries, including AXA Equitable Life Insurance Company ("AXA
Equitable"). The term "MONY" refers to The MONY Group Inc., a Delaware
corporation acquired by the Holding Company on July 8, 2004, that merged with
and into the Holding Company on July 22, 2004, and the term "MONY Companies"
means MONY Life Insurance Company ("MONY Life"), MLOA, Advest, Inc. ("Advest"),
U.S. Financial Life Insurance Company ("USFL")and the other subsidiaries of MONY
acquired by AXA Financial in the MONY Acquisition. The term "Separate Accounts"
refers to the separate account investment assets of MLOA excluding the assets
held in those separate accounts on which MLOA bears the investment risk. The
term "General Account Investment Assets" refers to assets held in the General
Account associated with MLOA's continuing operations.
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DISTRIBUTION
Retail distribution of MLOA's insurance products is accomplished principally
through MONY Life financial professionals. As of December 31, 2004, MONY Life
had approximately 920 financial professionals. MONY Life financial professionals
receive sales compensation based on a percentage of the premiums paid on each
product they sell. The percentage paid to MONY Life financial professionals is
directly linked to their production levels. MONY Life financial professionals
who sell variable products are also registered representatives of MONY
Securities Corporation, MLOA's broker-dealer affiliate.
MLOA also distributes its products on a wholesale basis, principally through
MONY Life's MONY Partners division, to third-party broker-dealers and insurance
brokerage general agencies.
MLOA's products are also distributed by financial professionals associated with
Advest and AXA Network, LLC ("AXA Network"), both of which are subsidiaries of
the Holding Company. Financial professionals of AXA Network who sell variable
products are also registered representatives of AXA Advisors, LLC ("AXA
Advisors"), a broker-dealer subsidiary of the Holding Company.
During the second quarter of 2005, MONY Life financial professionals are
expected to become financial professionals of AXA Network and AXA Advisors. In
addition, AXA Distributors, LLC, an AXA Financial broker-dealer and insurance
agency, is also expected to replace MONY Partners as the wholesale distributor
of insurance products of MLOA during the second quarter of 2005.
REINSURANCE
Prior to the MONY Acquisition, MLOA maintained a variety of indemnity
reinsurance agreements with reinsurers to control its loss exposure. These
reinsurance arrangements obligated the reinsurer to pay a portion of any death
claims in excess of the amount retained by MLOA in exchange for an agreed-upon
premium. Prior to the MONY Acquisition, MLOA's general practice was to retain no
more than of $4 million on single-life policies and $6 million on second-to-die
policies.
Following the MONY Acquisition, MLOA has continued to reinsure most of its
new variable life, universal life and term life policies on an excess of
retention basis, retaining up to a maximum of $4 million on single-life
policies and $6 million on second-to-die policies. For amounts in excess
of those limits, reinsurance is now ceded to AXA Equitable up to a maximum
of $15 million on single-life policies and $20 million on second-to-die
policies. For amounts issued in excess of those limits, reinsurance from
unaffiliated third parties is sought. A contingent liability exists in
respect to such reinsurance should the reinsurers be unable to meet their
obligations. MLOA evaluates the financial condition of its reinsurers in
an effort to minimize its exposure to significant losses from reinsurer
insolvencies. MLOA is not a party to any risk reinsurance arrangement with
any reinsurer pursuant to which the amount of reserves on reinsurance
ceded to such reinsurer equals more than 4.3% of the total policy life
reserves of MLOA (including Separate Accounts).
MLOA also continues to reinsure a percentage of its exposure on variable
annuity products that offer guaranteed minimum income benefit ("GMIB")
features and/or guaranteed minimum death benefit ("GMDB") features. At
December 31, 2004, MLOA had fully reinsured, subject to certain maximum
amounts or caps in any one period, the GMIB benefit and reinsured
approximately 10% of its net amount at risk to the GMDB obligation on
annuity contracts in force as of December 31, 2004. Prior to the MONY
Acquisition, MLOA had ceded a greater portion of its GMDB exposure.
For additional information about reinsurance strategies implemented by MLOA, see
Note 12 of Notes to Financial Statements.
In addition, MLOA has entered into certain arrangements with USFL, an affiliated
insurance company, whereby MLOA has provided reinsurance to USFL. In December
2004, USFL recaptured all of the term life policies in force at that time that
had previously been assumed by MLOA under a modified coinsurance ("MODCO")
agreement. USFL's MODCO reinsurance arrangements remain in effect for universal
life insurance policies previously assumed and for new level term and universal
life business issued on or subsequent to January 1, 2005. For additional
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - General", "- Liquidity and Capital Resources" and
Note 11 of Notes to Financial Statements. Other than in respect of the MODCO
agreement with USFL, MLOA does not assume reinsurance from any other insurance
company.
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GENERAL ACCOUNT INVESTMENT PORTFOLIO
GENERAL. The General Account consists of a diversified portfolio of
principally fixed-income investments.
The following table summarizes General Account Investment Assets by asset
category at December 31, 2004:
MONY LIFE INSURANCE COMPANY OF AMERICA
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
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AMOUNT % OF TOTAL
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Fixed maturities (2)................... $ 1,891.1 72.3%
Mortgages.............................. 373.2 14.3
Equity real estate..................... 1.5 0.1
Other equity investments............... 57.7 2.2
Policy loans........................... 93.0 3.5
Cash and short-term investments (3).... 199.4 7.6
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Total.................................. $ 2,615.9 100.0%
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(1) Net amortized cost is the cost of the General Account Investment
Assets (adjusted for impairments in value deemed to be other than
temporary, if any) less depreciation and amortization, where
applicable, and less valuation allowances on mortgage and real estate
portfolios.
(2) Excludes net unrealized gains of $36.1 million on fixed maturities
classified as available for sale. Fixed maturities includes
approximately $133.6 million, net amortized cost of below investment
grade securities.
(3) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the
balance sheet.
As part of MLOA's investment management process, management, with the assistance
of its investment advisors, constantly monitors General Account investment
performance. This internal review process culminates with a quarterly review of
assets that determines whether any investments are other than temporarily
impaired and whether specific investments should be put on an interest
non-accrual basis.
COMPETITION
There is strong competition among insurers, banks, brokerage firms and
other financial institutions and providers seeking clients for the types
of products that have been provided by MLOA. Competition is particularly
intense among a broad range of financial institutions and other financial
service providers for retirement and other savings dollars. The principal
competitive factors affecting MLOA's business are price, financial and
claims-paying ratings; size, strength, professionalism and objectivity of
the sales force; product quality, range and features/functionality;
crediting rates on fixed products; visibility and brand recognition in the
marketplace; and reputation and quality of service.
As noted above, ratings are an important factor in establishing the competitive
position of insurance companies. As of March 30, 2005 the financial strength or
claims-paying rating of MLOA was "A+" from Standard & Poor's Corporation (5th
highest of 20 ratings; with stable outlook), "Aa3" from Moody's Investors
Service (4th highest of 22 ratings; with stable outlook), "A+" from A.M. Best
Company, Inc. (2nd highest of 15 ratings; with stable outlook), and "AA" from
Fitch Investors Service, L.P. (3rd highest of 24 ratings; with stable outlook).
REGULATION
STATE SUPERVISION. MLOA is licensed to transact insurance business in all states
other than New York and is subject to extensive regulation and supervision by
insurance regulators in these states and the District of Columbia and Puerto
Rico. MLOA is domiciled in Arizona and is primarily regulated by the Director of
Insurance of the Arizona Department of Insurance. The extent of state regulation
varies, but most jurisdictions have laws and regulations governing sales
practices, standards of solvency, levels of reserves, risk-based capital,
permitted types and concentrations of investments, and business conduct to be
maintained by insurance companies as well as agent licensing, approval of policy
forms and, for certain lines of insurance, approval or filing of rates. MLOA is
required to file detailed annual financial statements, prepared on a statutory
accounting
1-3
basis, with supervisory agencies in each of the jurisdictions in which it does
business. Such agencies may conduct regular or targeted examinations of the
operations and accounts of MLOA and may make occasional requests for particular
information from MLOA. Recently, the insurance industry has seen an increase in
inquiries from state attorneys general and insurance commissioners regarding
compliance with certain state insurance and securities laws. For example,
certain attorneys general and insurance commissioners have requested information
from insurance companies regarding collusive bidding and revenue sharing
practices and practices associated with replacements and exchanges of life
insurance and annuities. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Statements and Risk Considerations."
HOLDING COMPANY AND SHAREHOLDER DIVIDEND REGULATION. Several states,
including Arizona, regulate transactions between an insurer and its
affiliates under insurance holding company acts. These acts contain
certain reporting requirements and restrictions on provision of services
and on transactions, such as intercompany service agreements, asset
transfers, reinsurance, loans and shareholder dividend payments by
insurers. Depending on their size, such transactions and payments may be
subject to prior notice to, or approval by, the Arizona Department of
Insurance. In 2004, MLOA did not make any shareholder dividend payments.
STATUTORY SURPLUS AND CAPITAL. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders
within their jurisdiction when, in their judgment, such regulators
determine that the issuing company is not maintaining adequate statutory
surplus or capital.
FEDERAL TAX INITIATIVES. Although the Federal government generally does not
directly regulate the insurance business, many Federal tax laws affect the
business in a variety of ways. There are a number of existing, newly enacted or
recently proposed Federal tax initiatives that may significantly affect MLOA. In
June 2001, legislation was enacted which, among other things, provides several
years of lower rates for estate, gift and generation skipping taxes ("GST") as
well as one year of estate and GST repeal (in 2010) before a return to 2001 law
for the year 2011 and thereafter. Recently, legislation has been proposed
regarding extending or making permanent the repeal of the estate and generation
skipping taxes. If enacted, this legislation would have an adverse impact on
sales and surrenders of life insurance in connection with estate planning. Other
provisions of the 2001 legislation increased amounts which may be contributed to
tax qualified retirement plans and could have a positive impact on funding
levels of tax qualified retirement products. In 2003, reductions in income tax
rates on long-term capital gains and qualifying corporate dividends were enacted
which could adversely impact the relative attractiveness of cash value life
insurance and annuity products (and may adversely impact the sales of such
products) relative to other investment alternatives which may qualify for these
lower rates. While set to expire, there are proposals to extend or make such
reduced rates permanent. Other provisions of recently enacted and proposed
legislation and Treasury regulations relate to the business use of life
insurance, split-dollar arrangements, creation of new tax favored savings
accounts and modifications to nonqualified deferred compensation plans and
qualified plan rules. These provisions could adversely affect the sale of life
insurance to businesses, as well as the attractiveness of qualified plan
arrangements, cash value life insurance and annuities. The U.S. Congress may
also consider proposals such as Social Security reform or comprehensive overhaul
of the Federal tax law (whether in response to recommendations of a Presidential
Advisory Panel on Federal Tax Reform or otherwise), which, if enacted, could
adversely impact the attractiveness of cash value life insurance, annuities and
tax qualified retirement products. Management cannot predict what other
proposals may be made, what legislation, if any, may be introduced or enacted or
what the effect of any such legislation might be.
SECURITIES LAWS. MLOA and certain policies and contracts offered by MLOA
are subject to regulation under the Federal securities laws administered
by the Securities and Exchange Commission (the "SEC") and under certain
state securities laws. The SEC conducts regular examinations of MLOA's
operations, and from time to time makes requests for particular
information from MLOA. The SEC and other governmental regulatory
authorities, including state securities administrators, may institute
administrative or judicial proceedings which may result in censure, fines,
the issuance of cease-and-desist orders or other sanctions.
MLOA is also registered as an investment advisor under the Investment
Advisers Act of 1940, as amended (the "Investment Advisers Act"). The
investment advisory activities of MLOA are subject to various Federal and
state laws and regulations. These laws and regulations generally grant
supervisory agencies broad administrative powers, including the power to
limit or restrict the carrying on of business for failure to comply with
such laws and regulations. In case of such an event, the possible
sanctions that may be imposed include the suspension of individual
employees, limitations on engaging in business for specific periods,
revocation of registration as an investment advisor, censures and fines.
Sales of variable insurance and annuity products are regulated by the SEC
and the National Association of Securities Dealers (the "NASD").
Currently, the SEC, the NASD and other regulators are investigating
certain sales practices involving certain sales of variable annuities and
transactions in which an existing variable annuity is replaced by, or
exchanged for, a new variable annuity.
1-4
Certain Separate Accounts of MLOA are registered as investment companies
under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Separate Account interests under certain annuity contracts
and insurance policies issued by MLOA are also registered under the
Securities Act of 1933, as amended.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements
and Risk Considerations".
PRIVACY OF CUSTOMER INFORMATION.
Federal and state law and regulation require financial institutions to
protect the security and confidentiality of customer information and to
notify customers about their policies and practices relating to their
collection, disclosure and protection of customer information. Federal and
state laws also regulate disclosures of customer information. Congress and
state legislatures are expected to consider additional regulation relating
to privacy and other aspects of customer information.
EMPLOYEES
MLOA has no employees. MLOA has service agreements with affiliates pursuant to
which MLOA is provided services necessary to operate its business. For
additional information, see Note 11 of Notes to Financial Statements.
PARENT COMPANY
AXA, the ultimate parent company of MLOA, is the holding company for an
international group of insurance and related financial services companies
engaged in the financial protection and wealth management business. AXA is
the largest French insurance group and one of the largest insurance groups
in the world. AXA operates primarily in Western Europe, North America, and
the Asia/Pacific region and, to a lesser extent, in other regions
including the Middle East, Africa and South America. AXA has five
operating business segments: life and savings, property and casualty,
international insurance (including reinsurance), asset management, and
other financial services.
Neither AXA nor any affiliate of AXA has any obligation to provide
additional capital or credit support to MLOA.
OTHER INFORMATION
All of MLOA's officers, including its chief executive officer, chief
financial officer and controller, are subject to the Policy Statement on
Ethics (the "Code"), a code of ethics as defined under Regulation S-K.
The Code complies with Section 406 of the Sarbanes-Oxley Act of 2002 and is
available on the Holding Company's website at www.axa-financial.com. MLOA
intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K
regarding certain amendments to or waivers from provisions of the Code that
apply to its chief executive officer, chief financial officer and controller by
posting such information on the Holding Company's website at the above address.
1-5
PART I, ITEM 2.
PROPERTIES
AXA Equitable leases on a long-term basis approximately 810,000 square feet of
office space located at 1290 Avenue of the Americas, New York, NY, which serves
as the Holding Company's, AXA Equitable's, MONY Life's and MLOA's headquarters.
Management believes this facility is adequate for its present needs in all
material respects.
2-1
PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 15 of Notes to Registrant's Financial Statements
for the year ended December 31, 2004 (Part II, Item 8 of this report) are
incorporated herein by reference.
3-1
PART I, ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
PART II, ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of MLOA's outstanding equity securities are owned by MONY Life and,
consequently, there is no public market for these securities. In 2004, MLOA did
not pay any shareholder dividends. Future dividend decisions will be made by the
Board of Directors on the basis of a number of factors, including the operating
results and financial requirements of MLOA and the impact of regulatory
restrictions.
5-1
PART II, ITEM 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
6-1
PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS IS OMITTED PURSUANT TO GENERAL INSTRUCTION I (2)(A) OF FORM 10-K. THE
MANAGEMENT NARRATIVE FOR MLOA THAT FOLLOWS SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND RELATED NOTES AND INFORMATION DISCUSSED UNDER
FORWARD-LOOKING STATEMENTS INCLUDED ELSEWHERE IN THIS FORM 10-K.
GENERAL
On July 8, 2004, the acquisition of MONY by the Holding Company was completed
and, under the terms of the related merger agreement, the Holding Company paid
or made provisions to pay MONY shareholders approximately $1.5 billion in cash,
representing $31.00 for each share of MONY's common stock. MONY shareholders
also received a dividend from MONY totaling $0.34755 per share. The acquisition
was accounted for using the purchase method under Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". In connection with the acquisition, MLOA
adjusted the cost basis of its assets and liabilities to fair value on the
acquisition date (the "Purchase Adjustments"). AXA Financial is in the process
of completing the valuations of a portion of the assets acquired and liabilities
assumed; thus the allocation of the purchase price is subject to refinement.
MLOA has a modified co-insurance ("MODCO") agreement with USFL, an affiliate,
whereby MLOA had reinsured 90% of all level term life insurance policies written
by USFL after January 1, 1999 and all term life and universal life insurance
policies written by USFL after January 1, 2000. During third and fourth quarters
2004, MLOA experienced declines in statutory surplus caused by first year
statutory business strain and the establishment of additional liabilities for
statutory purposes on level term business written by USFL due to updated
mortality assumptions.
In order to strengthen the statutory surplus position of MLOA, AXA Financial
completed the following transactions in December 2004:
o USFL recaptured all of the term life policies in force as of
December 31, 2004 that had previously been assumed by MLOA under
the MODCO agreement, which resulted in the recognition by MLOA in 2004
of a $9.0 million pre-tax gain. The MODCO reinsurance arrangement
remainsin effect for the universal life insurance policies previously
assumed and for new level term and universal life business issued
on or subsequent to January 1, 2005.
o MONY Life contributed 1.2 million units (the "Alliance Units") of
Alliance Capital Management L.P. ("Alliance Capital"), an affiliate,
which it had received from AXA Financial, to MLOA, increasing MLOA's
statutory surplus by $37.2 million.
In connection with the MONY Acquisition, management continues to evaluate the
products sold by MLOA as part of an overall review of products offered by AXA
Equitable and its other affiliates with a view towards reducing duplication of
products, improving the quality of the product line-up and enhancing the overall
profitability of AXA Financial. This evaluation has resulted in the recent
discontinuation of new sales of certain insurance and annuity products offered
by MLOA, including all non-variable universal life products, all single premium
immediate annuity products and most variable annuity products. It is
contemplated that new sales of certain other life insurance and annuity products
offered by MLOA will be discontinued during 2005 and possibly thereafter. Since
this review of products is ongoing, and since future decisions with regard to
product development depend on factors and considerations not yet known,
management is unable to predict the extent to which, if at all, MLOA will
continue to issue meaningful amounts of new business.
The earnings narrative that follows discusses the results for 2004 compared to
the 2003 results.
RESULTS OF OPERATIONS
The acquisition of MONY by the Holding Company on July 8, 2004, resulted in a
new basis of accounting for the successor period beginning July 1, 2004.
Information relating to all predecessor periods prior to completion of the
acquisition is presented using MLOA's historical basis of accounting. For
accounting purposes (due to convenience and immateriality of the results of the
MONY Companies from July 1 through July 8), the Holding Company has consolidated
the MONY Companies and reflected its results from July 1, 2004 in its
consolidated Statements of Earnings and consolidated Cash Flows. MLOA's activity
for the period from July 1, 2004 through July 8, 2004 is therefore included in
the successor period and excluded from the predecessor period. To assist in the
comparability of MLOA's financial results and discussions, results of operations
for the year ended December 31, 2004 include results for six months of the
Predecessor and six months of the Successor and are designated as "combined", as
follows:
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Six Months Six Months Twelve Months Year
Ended Ended Ended Ended
June 30, December 31, December 31, December 31,
2004 2004 2004 2003
------------ ------------ ------------ ------------
(PREDECESSOR) (SUCCESSOR) (COMBINED) (PREDECESSOR)
(IN MILLIONS)
REVENUES:
Universal life and investment-type product policy fee income........ $ 82.7 $ 80.8 $ 163.5 $ 166.2
Premiums............................................................ 77.4 85.0 162.4 141.0
Net investment income............................................... 64.3 62.8 127.1 118.5
Investment (losses) gains, net...................................... (0.7) (4.6) (5.3) 11.8
Other income........................................................ 7.4 26.7 34.1 17.2
----------- ----------- ----------- -----------
231.1 250.7 481.8 454.7
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES:
Policyholders' benefits............................................. 80.8 91.2 172.0 156.8
Interest credited to policyholders' account balances................ 54.1 50.0 104.1 91.5
Commissions......................................................... 37.5 29.6 67.1 73.0
Amortization of deferred policy acquisition costs................... 34.7 5.7 40.4 55.2
Capitalization of deferred policy acquisition costs ................ (93.8) (87.5) (181.3) (193.7)
Amortization of value of business acquired.......................... -- 16.7 16.7 --
Other operating costs and expenses.................................. 143.1 106.1 249.2 240.7
----------- ----------- ----------- -----------
256.4 211.8 468.2 423.5
----------- ----------- ----------- -----------
(Loss)/earnings from continuing operations before income taxes...... (25.3) 38.9 13.6 31.2
Income tax benefit/(expense)........................................ 10.5 (12.4) (1.9) (4.9)
----------- ----------- ----------- -----------
Net (loss)/earnings from continuing operations...................... (14.8) 26.5 11.7 26.3
Loss from real estate to be disposed of, net of taxes............... -- -- -- (0.1)
Cumulative effect on prior periods of the adoption of SOP 03-1, net
of taxes......................................................... 3.8 -- 3.8 --
----------- ----------- ----------- -----------
Net (Loss)/Earnings................................................. $ (11.0) $ 26.5 $ 15.5 $ 26.2
=========== =========== =========== ===========
COMBINED TWELVE MONTHS OF DECEMBER 31, 2004 COMPARED TO YEAR ENDED
DECEMBER 31, 2003
Earnings before income taxes and cumulative effect of a change in accounting
principle for the January 1, 2004 adoption of SOP 03-1 were $13.6 million for
the combined twelve months of 2004, a decrease of $17.6 million from earnings
before income taxes of $31.2 million for 2003. Net earnings for MLOA totaled
$15.5 million for the combined twelve months of 2004, down from $26.2 million
for 2003. In first quarter 2004, MLOA recorded earnings of $3.8 million (net of
related income taxes of $2.1 million) for the cumulative effect of the January
1, 2004 adoption of SOP 03-1. For further information see "Accounting Changes"
in Note 3 of Notes to Financial Statements.
REVENUES. Total revenues for the combined twelve months of 2004 increased $27.1
million as compared to 2003.
Universal life and investment type policy fee income was $163.5 million, $2.7
million lower than in 2003, principally due to adjustments in the predecessor
period related to prior quarters' calculations of reinsurance reserve credits
partially offset by increased Flexible Premium Variable Annuity ("FPVA") fees.
Premiums totaled $162.4 million for the combined twelve months of 2004, a $21.4
million increase from the prior year, principally due to an increase in premiums
assumed under the MODCO agreement with USFL attributable to growth in USFL's
in-force block of business.
Net investment income was $127.1 million, $8.6 million higher than in 2003. The
increase was principally due to increased income on fixed maturities and
mortgage loans on real estate as a result of higher average fixed maturities
asset balances and a decrease in investment related expenses attributable to
cost reductions associated with AXA Financial's integration of the MONY
Companies.
Investment losses, net were $5.3 million in the combined twelve months of 2004
compared to net gains of $11.8 million in 2003. The net losses in the combined
twelve months of 2004 were principally due to impairments on fixed maturities of
$5.1 million. The net gains in 2003 were principally attributable to bond and
mortgage prepayments.
There was a $16.9 million increase in other income to $34.1 million in the
combined twelve months of 2004 from $17.2 million in 2003. The increase was
principally attributable to the impact of the $9.0 million gain recognized on
the recapture of the reinsurance agreement with USFL, higher reinsurance expense
allowances recognized under a new reinsurance treaty
7-2
entered into on January 1, 2004 and an insurance recovery recorded in first
quarter 2004, partially offset by a $2.2 million decrease in the gain on the
embedded derivative related to the reinsurance agreement with USFL.
BENEFITS AND OTHER DEDUCTIONS. Total benefits and other deductions for the
combined twelve months of 2004 increased $44.7 million to $468.2 million from
$423.5 million in 2003.
Policyholders' benefits increased $15.2 million to $172.0 million in the
combined twelve months of 2004, resulting principally from an increase in
assumed benefits under the MODCO treaty with USFL offset by a decrease in the
change in reserves due to reduced sales of certain annuity products and better
mortality experience.
The $12.6 million increase in interest credited to policyholders' account
balances to $104.1 million for the combined twelve months of 2004 was
principally due to growth in the Variable Universal Life ("VUL"), Corporate
Sponsored Variable Universal Life ("CSVUL") and Flexible Premium Deferred
Annuity ("FPDA") product lines primarily in the predecessor period, and
adjustments in the predecessor period related to prior quarters' calculations of
interest credited on certain life insurance and annuity products.
Commissions decreased $5.9 million during the combined twelve months of 2004 to
$67.1 million principally due to a decrease in sales of life insurance and
annuity products in the successor period as certain products offered by MLOA are
substituted by AXA Financial's products.
Amortization of deferred policy acquisition costs ("DAC") decreased $14.8
million to $40.4 million for the combined twelve months of 2004 due principally
to the impact of new basis accounting in the successor period offset by
increased amortization on life insurance and annuity products in the predecessor
period as a result of lower amortization in the first six months of 2003 due to
the unlocking impact from the recognition of higher expected future margins
driven by higher fees related to variable annuity contracts.
Amortization of value of business acquired ("VOBA") resulting from the new
purchase accounting basis in the successor period was $16.7 million. VOBA, which
is established in accordance with business combination purchase accounting
guidance, is based on the present value of future profits embedded in the
acquired contracts. VOBA is determined by estimating the net present value of
future cash flows expected to result from contracts in force at the date of the
transaction. VOBA will be amortized over the expected life of the contracts
(approximately 10-30 years). VOBA is subject to loss recognition testing at the
end of each accounting period according to the type of contract involved using
the methods described below as applicable.
DAC and VOBA for universal life and investment-type policies are amortized over
the expected total life of the contract group as a constant percentage of
estimated gross profits. Estimates and assumptions underlying these DAC and VOBA
amortization rates are reassessed and updated at the end of each reporting
period ("DAC and VOBA unlocking"). The effect of DAC and VOBA unlocking is
reflected in earnings in the period such estimated gross profits are revised. A
decrease in expected gross profits would accelerate DAC and VOBA amortization.
Conversely, an increase in expected gross profits would slow down DAC and VOBA
amortization.
Expected gross profits for variable and interest-sensitive life insurance and
variable annuities arise principally from investment results, Separate Account
fees, mortality and expense margins and surrender charges. Based on historical
and anticipated future experience other significant assumptions underlying gross
profit estimates relate to contract persistency and General Account investment
spreads. A significant assumption in the development of expected gross profits
and, therefore, the amortization of DAC and VOBA on these products relates to
projected future Separate Account performance. Expected future gross profit
assumptions related to Separate Account performance are set by management using
a long-term view of expected average market returns by applying a reversion to
the mean approach. In applying this approach to develop estimates of future
returns, it is assumed that the market will return to an average gross long-term
return estimate, developed with reference to historical long-term equity market
performance and subject to assessment of the reasonableness of resulting
estimates of future return assumptions. For purposes of making this
reasonableness assessment, management has set limitations as to maximum and
minimum future rate of return assumptions, as well as a limitation on the
duration of use of these maximum or minimum rates of return. Currently, the
average gross long-term annual return estimate is 9.0% (6.90% net of product
weighted average Separate Account fees), and the gross maximum and minimum
annual rate of return limitations are 15.0% (12.65% net of product weighted
average Separate Account fees) and 0% (-2.35% net of product weighted average
Separate Account fees), respectively. The maximum duration over which these rate
limitations may be applied is 5 years. This approach will continue to be applied
in future periods. If actual market returns continue at levels that would result
in assuming future market returns of 9% for more than 5 years in order to reach
the average gross long-term return estimate, the application of the 5 year
maximum duration limitation would result in an acceleration of DAC and VOBA
amortization. Conversely, actual market returns resulting in assumed future
market returns of 0% for more than 5 years would result in a required
deceleration of DAC and VOBA amortization. As of December 31, 2004, current
projections of future average gross market returns assume a 2.3% return for 2005
which is within the maximum and minimum limitations and assume a reversion to
the mean of 9.0% after 1.5 years.
7-3
In addition, projections of future mortality assumptions related to variable and
interest-sensitive life products are based on a long-term average of actual
experience. This assumption is updated quarterly to reflect recent experience as
it emerges. Improvement of life mortality in future periods from that currently
projected would result in future deceleration of DAC and VOBA amortization.
Conversely, deterioration of life mortality in future periods from that
currently projected would result in future acceleration of DAC and VOBA
amortization. Generally, life mortality experience has been improving in recent
years.
DAC capitalization of $181.3 million for the combined twelve months of 2004
decreased $12.4 million, from $193.7 million in 2003, due to a decrease in
commissions and deferrable operating expenses in the successor period.
Other operating costs and expenses totaled $249.2 million for the combined
twelve months of 2004, an increase of $8.5 million from $240.7 million in 2003.
The increase was principally due to an increase in expenses related to services
rendered by MONY Life on MLOA's behalf (primarily salaries, incentive
compensation and rent) during the predecessor period, partially offset by a
decrease in the successor period attributable to cost reductions associated with
AXA Financial's integration of the MONY Companies.
FEDERAL INCOME TAXES. Federal income tax expense totaled $1.9 million for the
combined twelve months of 2004 as compared to the $4.9 million reported in 2003.
The 2004 tax decrease resulted principally from the tax benefit recorded on the
loss in the 2004 predecessor period partially offset by increased earnings in
the successor period. See Note 9 of Notes to Financial Statements for details of
the sources of the differences between the statutory federal income tax rate of
35.0% and MLOA's effective tax rate.
PREMIUMS AND DEPOSITS. Total premiums and deposits for insurance and annuity
products, excluding reinsurance assumed under the MODCO treaty with USFL, for
the combined twelve months of 2004 decreased from prior year levels by $181.4
million to $772.4 million. The decrease was principally attributable to a
decrease in new sales of certain insurance and annuity products issued by MLOA
as a result of certain products offered by AXA Financial being substituted for
similar products previously offered by MLOA. Sales of annuities in the combined
twelve months of 2004 totaled $279.9 million, a 38.8% decrease from the prior
year, as a result of the decrease in MLOA's product sales during the successor
period and lower fixed annuity sales reflecting the lower interest rate
environment.
SURRENDERS AND WITHDRAWALS. When totals for the combined twelve months of 2004
are compared to the prior year, surrenders and withdrawals increased from $402.9
million to $486.1 million with respective increases of $63.2 million and $20.4
million reported for individual annuities and variable and interest-sensitive
life products offset by a $0.4 million decrease reported for traditional life
insurance products. The annualized annuities surrender rate increased to 11.9%
in the 2004 combined period from 11.4% in 2003, while the individual life
surrender rates showed an increase to 3.55% from 2.99%. The dollar increase in
annuity surrenders resulted from higher account balances driven by market
appreciation and positive net cash flows. The trends in surrender and withdrawal
rates described above continue to fall within the range of expected experience.
The increase in surrenders and withdrawals on life products was substantially
related to a large COLI surrender.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of MLOA's cash flows are premiums, deposits and charges on
policies and contracts, investment income, repayments of principal and proceeds
from sales of fixed maturities, sales of General Account Investment Assets and
capital contributions from MONY Life.
MLOA's liquidity requirements principally relate to the liabilities associated
with its various life insurance and annuity products and operating expenses,
including debt service on its note payable to an affiliate. MLOA's liabilities
include the payment of benefits under life insurance and annuity products, as
well as cash payments in connection with policy surrenders, withdrawals and
loans.
SOURCES OF LIQUIDITY. MLOA's primary source of short-term liquidity to support
its insurance operations is a pool of highly liquid, high quality short-term
instruments structured to provide liquidity in excess of the expected cash
requirements. At December 31, 2004, this asset pool included an aggregate of
$198.0 million in highly liquid short-term investments, as compared to $159.0
million at December 31, 2003. In addition, a substantial portfolio of public
bonds including U.S. Treasury and agency securities and other investment grade
fixed maturities is available to meet MLOA's liquidity needs.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations and
scheduled maturities of fixed maturities to satisfy MLOA's liquidity needs.
During third and fourth quarters 2004, MLOA experienced declines in statutory
surplus caused by first year statutory business strain and the establishment of
additional liabilities for statutory purposes on level term business written by
USFL due to updated mortality assumptions. In order to strengthen the statutory
surplus position of MLOA, AXA Financial completed the following transactions in
December 2004:
7-4
o USFL recaptured all of the term life policies in force as of
December 31, 2004 that had previously been assumed by MLOA under
the MODCO agreement, which resulted in a $62.8 million increase in
MLOA's statutory surplus. The MODCO reinsurance arrangement
remains in effect for the universal life insurance policies
previously assumed and for new level term and universal life
business issued on or subsequent to January 1, 2005.
o MONY Life contributed 1.2 million units of Alliance Capital
("Alliance Units"), an affiliate, which it had received from AXA
Financial, to MLOA, increasing MLOA's statutory surplus by $37.2
million.
In 2003, MLOA received cash contributions from MONY Life of $100.0 million to
support its statutory capital and surplus.
Management is reviewing on an ongoing basis the extent to which MLOA will
continue to offer new life insurance and annuity products. It is currently
anticipated that the number of products offered by MLOA and the volume of
product sales will decline over time as MLOA's products are substituted by AXA
Financial products with a view towards reducing duplication of products,
improving the quality of the product line-up and enhancing the overall
profitability of AXA Financial.
SUPPLEMENTARY INFORMATION
At December 31, 2004, MLOA had a $36.8 million, 6.8% note payable outstanding
with MONY Benefits Management Corp. ("MBMC"), an affiliate. Principal and
interest are payable quarterly to MBMC.
A schedule of future payments under certain of MLOA's contractual obligations
follows:
CONTRACTUAL OBLIGATIONS - DECEMBER 31, 2004
(IN MILLIONS)
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
LESS THAN OVER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----- --------- ---------- --------- -------
Note payable to affiliate (1)...................... $49.8 $ 5.4 $ 16.2 $ 10.8 $17.4
- --------------
(1) Reflects aggregate contractual debt service payments on the note payable
to an affiliate. The aggregate maturities of the note payable to an
affiliate based on required remaining principal payments for each of the
next five years are $3.0 million for 2005, $3.2 million for 2006, $3.4
million for 2007, $3.6 million for 2008, $3.9 million for 2009 and $19.7
million thereafter. The table assumes that the note payable is held to
maturity.
MLOA also has contractual obligations to the policy and contractholders of its
various life insurance and annuity products and/or their designated
beneficiaries. These obligations include paying death claims and making annuity
payments. The timing of such payments depends upon such factors as the mortality
and persistency of its customer base.
In addition, MLOA has financial obligations under contingent commitments at
December 31, 2004 including guarantees or commitments to fund private fixed
maturities, agricultural loans and floating rate commercial mortgages.
Information on these contingent commitments can be found in Notes 11, 13 and 15
of Notes to Financial Statements.
Further, MLOA is exposed to potential risk related to its own ceded reinsurance
agreements with other insurers and to insurance guaranty fund laws in 49 states
(not including New York), the District of Columbia and Puerto Rico. Under these
laws, insurers doing business in these states can be assessed amounts up to
prescribed limits to protect policyholders of companies that become impaired or
insolvent.
CRITICAL ACCOUNTING ESTIMATES
MLOA's management narrative is based upon MLOA's financial statements that have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions (including normal, recurring
accruals) 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. On an on-going basis, MLOA evaluates its estimates, including
those related to investments, recognition of insurance income and related
expenses, DAC and VOBA, future policy benefits, and pension cost. MLOA bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such factors
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates under different assumptions or conditions.
7-5
MLOA believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.
INVESTMENTS - MLOA records an investment impairment charge when it believes an
investment has experienced a decline in fair value that is other than temporary.
Identifying those situations requires management's careful consideration of the
facts and circumstances, including but not limited to the duration and extent to
which the fair value has been depressed, the financial position, cash flows, and
near-term earnings potential of the issuer, as well as MLOA's ability and intent
to retain the investment to allow sufficient time for any anticipated recovery
in fair value. The basis for measuring fair value may require utilization of
investment valuation methodologies, such as discounted cash flow analysis, if
quoted market prices are not readily available.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES - Profits on
non-participating traditional life policies and annuity contracts with life
contingencies emerge from the matching of benefits and other expenses against
the related premiums. Profits on universal life and investment-type contracts
emerge from the matching of benefits and other expenses against the related
contract margins. This matching is accomplished by means of the provision for
liabilities for future policy benefits and the deferral, and subsequent
amortization of policy acquisition costs. Secular trends and MLOA's own
mortality, morbidity, persistency and claims experience have a direct impact on
the benefits and expenses reported in any given period.
DAC AND VOBA - For universal life and investment-type contracts, DAC and VOBA
amortization may be affected by changes in estimated gross profits and margins
principally related to investment results, Separate Account fees, mortality and
expense margins, lapse rates and anticipated surrender charges. Should revisions
to estimated gross profits or margins be required, the effect is reflected in
earnings in the period such estimated gross profits are revised. Additionally,
the level of operating expenses that can be deferred is another significant
factor in MLOA's reported profitability in any given period. VOBA was recorded
in conjunction with the acquisition of MONY and represents the present value of
estimated future profits from the insurance and annuity policies in-force when
the business was acquired by AXA Financial.
FUTURE POLICY BENEFITS - Future policy benefit liabilities for traditional
policies are based on actuarial assumptions as to such factors as mortality,
morbidity, persistency, interest and expenses. Determination of the GMDB/GMIB
liabilities is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates, mortality experience and, for GMIB, GMIB
election rates. Premium deficiency reserves are based upon estimates of future
gross premiums, expected policy benefits and other expenses.
PENSION COST - Although MLOA has no employees, under service agreements with
affiliated companies, MLOA pays for services provided on its behalf, including
pension plan and other postretirement benefits (see Note 11 of Notes to
Financial Statements). Net periodic pension cost is the aggregation of the
compensation cost of benefits promised, interest cost resulting from deferred
payment of those benefits, and investment results of assets dedicated to fund
those benefits. Each cost component is based on the affiliated companies' best
estimate of long-term actuarial and investment return assumptions. Actual
experience different from that assumed generally is recognized prospectively
over future periods; however, significant variances could result in immediate
recognition if they exceed certain prescribed thresholds or in conjunction with
a reconsideration of the related assumptions.
PURCHASE ADJUSTMENTS - The determination of the purchase adjustments relating to
investments reflects management's reliance on independent price quotes where
available. Other purchase adjustments required significant management estimates
and assumptions. The purchase adjustments related to VOBA and liabilities,
including policyholder reserves, required management to exercise judgment to
assess the value of these items. MLOA's purchase adjustments resulted in a
revalued balance sheet, which may result in future earnings trends which differ
significantly from historical trends.
FORWARD-LOOKING STATEMENTS AND RISK CONSIDERATIONS
MLOA's management 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 operations, economic
performance and financial position. Forward-looking statements include, among
other things, discussions concerning MLOA's potential exposure to market risks,
as well as statements expressing management's expectations, beliefs, estimates,
forecasts, projections and assumptions, as indicated by words such as
"believes," "estimates," "intends," "anticipates," "expects," "projects,"
"should," "probably," "risk," "target," "goals," "objectives," or similar
expressions. MLOA claims the protection afforded by the safe harbor for
forward-looking statements contained in Section 21E of the Exchange Act, and
assumes no duty to update any forward-looking statement. Forward-looking
statements are based on management's expectations and beliefs concerning future
developments and their potential effects, and 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 MLOA's other public filings, press
releases, oral presentations and discussions. The following discussion
highlights some of the more important risk and other factors that could cause
such differences and/or, if realized, could have a material adverse effect on
MLOA's financial position and/or results of operations.
7-6
MARKET RISK. MLOA's businesses are subject to market risks arising from its
insurance asset/liability management. The primary market risk exposures result
from interest rate fluctuations, equity price movements and changes in credit
quality. The nature of these risks is discussed under the caption
"Quantitative and Qualitative Disclosures About Market Risk" contained herein
and in Note 13 of Notes to Financial Statements.
Increased volatility of equity markets can impact MLOA's profitability. In
addition to impacts on equity securities held in MLOA's General Account,
significant changes in equity markets impact asset-based policy fees charged on
variable life and annuity products. Moreover, for variable life and annuity
products with GMDB/GMIB and other guaranteed features, sustained periods with
declines in the value of underlying Separate Account investments would increase
MLOA's net exposure to guaranteed benefits under those contracts (increasing
claims and reserves, net of any reinsurance) at a time when fee income for these
benefits is also reduced from prior period levels.
Equity market volatility also may impact DAC and VOBA amortization on variable
and universal life insurance contracts and variable annuities. To the extent
that actual market trends, and reasonable expectations as to future performance
drawn from those trends, lead to reductions in the investment return and/or
other related estimates underlying the DAC and VOBA amortization rates, DAC and
VOBA amortization could be accelerated. Volatile equity markets can also impact
the level of contractholder surrender activity, which, in turn, can impact
future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs charged to MLOA under its service agreements
with affiliates pursuant to which personnel services, employee benefits,
facilities, supplies and equipment are provided to MLOA to conduct its business.
The effects of significant equity market fluctuations on MLOA's operating
results can be complex and subject to a variety of estimates and assumptions,
such as assumed rates of long-term equity market performance, making it
difficult to reliably predict effects on operating earnings over a broad range
of equity market performance alternatives. Further, these effects may not always
be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 3.0% to 6.0%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an environment, there is pressure to increase credited rates
on interest-sensitive products to match competitors' new money rates. However,
such changes in credited rates generally occur more quickly than the earned
rates on the related invested asset portfolios reflect changes in market yields.
The greater and faster the rise in interest rates, the more the earned rates
will tend to lag behind market rates.
OTHER RISKS. MLOA's future sales of life insurance and annuity products are
dependent on numerous factors including: implementation of AXA Financial's
integration strategy for MLOA, including the contemplated discontinuation of new
sales of certain life insurance and annuity products offered by MLOA; the
intensity of competition from other insurance companies, banks and other
financial institutions; conditions in the securities markets; the strength and
professionalism of distribution channels; the continued development of existing
and additional channels; the financial and claims-paying ratings of MLOA; its
reputation and visibility in the market place; its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner; its ability to obtain reinsurance for certain products,
the offering of which products depends upon the ability to reinsure all or a
substantial portion of the risks; its investment management performance; and
unanticipated changes in industry trends.
In addition, the nature and extent of competition and the markets for products
sold by MLOA may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation.
Management cannot predict what proposals may be made, what legislation, if any,
may be introduced or enacted or what the effect of any such legislation might
be. See "Business - Regulation" contained herein.
The profitability of MLOA depends on a number of factors including: levels of
gross operating expenses and the amount which can be deferred as DAC and
software capitalization; successful implementation of expense-reduction
initiatives, including those anticipated from the integration of the businesses
of AXA Financial and MLOA; secular trends; increased costs and impact of
compliance, regulatory examinations and oversight; the ability to reach sales
targets for key products including the continuing market receptivity of its
variable annuity products; MLOA's mortality, morbidity, persistency and claims
experience; margins between investment results
7-7
from MLOA's General Account Investment Assets and interest credited on
individual insurance and annuity products, which are subject to contractual
minimum guarantees; the level of claims and reserves on contracts with GMDB/GMIB
and other guaranteed features, the impact of related reinsurance and the
effectiveness of any program management implements to hedge certain risks
associated with such features; the account balances against which policy fees
are assessed on universal and variable life insurance and variable annuity
products; the pattern of DAC and VOBA amortization which is based on models
involving numerous estimates and subjective judgments including those regarding
investment, mortality and expense margins, expected market rates of return,
lapse rates and anticipated surrender charges; the adequacy of reserves and the
extent to which subsequent experience differs from management's estimates and
assumptions, including future reinvestment rates, used in determining those
reserves; and the effects of any future terrorist attacks or the war on
terrorism. With regard to terrorism generally, in August 2004, the Federal
government announced a heightened threat level for financial institutions.
Recoverability of DAC and VOBA is dependent on future contract cash flows
(including premiums and deposits, contract charges, benefits, surrenders,
withdrawals, and expenses), which can be affected by equity market and interest
rate trends as well as changes in contract persistency levels. The performance
of MLOA's General Account Investment Assets depends, among other things, on
levels of interest rates and the markets for equity securities and real estate,
the need for asset valuation allowances and writedowns, and the performance of
equity investments that have created, and in the future may create, significant
volatility in investment income.
DISCLOSURE AND INTERNAL CONTROL SYSTEM. There are inherent limitations in the
effectiveness of any system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple error or mistake,
fraud, the circumvention of controls by individual acts or the collusion of two
or more people, or management override of controls. Accordingly, even an
effective disclosure and internal control system can provide only reasonable
assurance with respect to disclosures and financial statement preparation.
Furthermore, because of changes in conditions, the effectiveness of a disclosure
and internal control system may vary over time.
TECHNOLOGY AND INFORMATION SYSTEMS. Information systems are central to, among
other things, designing and pricing products, marketing and selling products and
services, processing policyholder and investor transactions, client
recordkeeping, communicating with retail sales associates, employees and
clients, and recording information for accounting and management purposes in a
secure and timely manner. These systems are maintained to provide customer
privacy and are tested to ensure the viability of business resumption plans. Any
significant difficulty associated with the operation of such systems, or any
material delay or inability to develop needed system capabilities, could have a
material adverse effect on MLOA's results of operations and, ultimately, its
ability to achieve its strategic goals.
LEGAL ENVIRONMENT. A number of lawsuits have been filed against life and health
insurers and affiliated distribution companies involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. Some of the lawsuits have resulted in the award of substantial
judgments against other insurers, including material amounts of punitive
damages, or in substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. MLOA, like other life insurers, is
involved in such litigation and MLOA's results of operations and financial
position could be affected by defense and settlement costs and any unexpected
material adverse outcome in such litigations as well as in other material
litigations pending against MLOA. The frequency of large damage awards,
including large punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs in some jurisdictions, continues to
create the potential for an unpredictable judgment in any given matter. In
addition, examinations by Federal and state regulators and other regulatory and
related agencies, including, among others, state insurance departments and state
securities agencies, could result in adverse publicity, sanctions and fines. In
the last year, MLOA has provided information and documents to the SEC, the NASD
and state attorneys general and insurance and securities regulators on a wide
range of issues, including supervisory issues, valuation, suitability,
replacements and exchanges of variable life insurance and annuities and related
matters. At this time, management cannot predict what other actions the SEC,
NASD and/or other regulators may take or what the impact of such actions might
be. Fines and other sanction could result from pending regulatory matters. For
further information, see "Business - Regulation" and "Legal Proceedings"
contained herein.
FUTURE ACCOUNTING PRONOUNCEMENTS. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on MLOA's statements of operations and shareholder's equity. See Note 3
of Notes to Financial Statements for pronouncements issued but not effective at
December 31, 2004.
REGULATION. The businesses conducted by MLOA are subject to extensive regulation
and supervision by state insurance departments and Federal and state agencies
regulating, among other things, insurance and annuities, securities
transactions, investment companies, investment advisors and anti-money
laundering compliance programs. Changes in the regulatory environment could have
a material impact on operations and results. The activities of MLOA are subject
to the supervision of the insurance regulators of each of the 49 states (not
including New York), the District of Columbia and Puerto Rico. See "Business -
Regulation" contained herein.
7-8
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MLOA's operations are subject to financial, market, political and economic
risks, as well as to risks inherent in the business operations. The discussion
that follows provides additional information on market risks arising from its
insurance asset/liability management activities. Primary market risk exposure
results from interest rate fluctuations and changes in credit quality.
MLOA's results of operations significantly depend on profit margins between
investment results from General Account Investment Assets and interest credited
on individual insurance and annuity products. Management believes its fixed rate
liabilities should be supported by a portfolio principally composed of fixed
rate investments that 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. See the "Investments" section of Note 3 of Notes to
Financial Statements for the accounting policies for the investment portfolios.
The objective of portfolio management is to maximize returns, taking into
account interest rate and credit risks. Insurance asset/liability management
includes strategies to minimize exposure to loss as interest rates and economic
and market conditions change. As a result, the fixed maturity portfolio has
modest exposure to call and prepayment risk and the vast majority of mortgage
holdings are fixed rate mortgages that carry yield maintenance and prepayment
provisions.
MLOA's assets with interest rate risk include fixed maturities and mortgage
loans that make up 93.8% of the carrying value of General Account Investment
Assets at December 31, 2004. As part of its asset/liability management,
quantitative analyses are used to model the impact various changes in interest
rates have on assets with interest rate risk. The table that follows shows the
impact an immediate 100 basis point increase in interest rates at December 31,
2004 and 2003 would have on the fair value of fixed maturities and mortgage
loans:
DECEMBER 31, 2004 December 31, 2003
------------------------- --------------------------
BALANCE AFTER Balance After
FAIR +100 BASE Fair +100 Base
VALUE POINT CHANGE Value Point Change
--------- ------------- --------- --------------
($ IN MILLIONS)
Fixed maturities...................... $ 1,927.2 $ 1,850.8 $ 1,734.0 $ 1,657.7
Mortgage loans on real estate......... 378.0 365.1 445.7 428.8
--------- --------- --------- ---------
Total........................... $ 2,305.2 $ 2,215.9 $ 2,179.7 $ 2,086.5
========= ========= ========= =========
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it 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 various 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.
At years end 2004 and 2003, the aggregate carrying value of policyholders'
liabilities were $2,492.7 million and $2,235.3 million, respectively, including
$1,019.8 million and $855.9 million of liabilities, respectively, related to the
General Account's investment contracts. The aggregate fair value of those
investment contracts at years end 2004 and 2003 were $1,159.1 million and
$1,043.2 million, respectively. The impact of a relative 1% decrease in interest
rates would be an increase in the fair value of those investment contracts to
$1,291.1 million and $1,173.1 million, respectively. Those investment contracts
represent only a portion of total policyholders' liabilities. As such,
meaningful assessment of net market risk exposure cannot be made by comparing
the results of the invested assets sensitivity analyses presented herein to the
potential exposure from the policyholders' liabilities quantified in this
paragraph.
Asset/liability management is integrated into many aspects of MLOA's operations,
including investment decisions, product development and determination of
crediting rates. As part of the risk management process, numerous economic
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. Key variables include policyholder behavior,
such as persistency, under differing crediting rate strategies. On the basis of
these more comprehensive analyses, management believes there is minimal solvency
risk to MLOA with respect to interest rate movements of 100 basis points from
year end 2004 levels.
7A-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MONY LIFE INSURANCE COMPANY OF AMERICA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Registered Public Accounting Firm - Successor period.................................................... F-1
Report of Independent Registered Public Accounting Firm - Predecessor periods................................................. F-1
Financial Statements:
Balance Sheets, December 31, 2004 (Successor) and December 31, 2003 (Predecessor)........................................ F-2
Statements of Operations, Six Months Ended December 31, 2004 (Successor), Six Months Ended June 30, 2004 (Predecessor),
and Years Ended December 31, 2003 and 2002 (Predecessor).............................................................. F-3
Statements of Shareholder's Equity, Years Ended December 31, 2004, 2003 and 2002......................................... F-4
Statements of Cash Flows, Six Months Ended December 31, 2004 (Successor), Six Months Ended June 30, 2004 (Predecessor),
and Years Ended December 31, 2003 and 2002 (Predecessor).............................................................. F-5
Notes to Financial Statements............................................................................................ F-7
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules...................................... F-28
Financial Statement Schedules:
Schedule I - Summary of Investments - Other Than Investments in Related Parties, December 31, 2004............................ F-29
Schedule IV - Reinsurance, Six Months Ended December 31, 2004 (Successor), Six Months Ended June 30, 2004 (Predecessor), and
Years Ended December 31, 2003 and 2002 (Predecessor).......................................................................... F-30
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
MONY Life Insurance Company of America:
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of MONY Life Insurance Company of
America (Successor Company) at December 31, 2004, and the results of its
operations and its cash flows for the period from July 1, 2004 through December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
MONY Life Insurance Company of America:
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of MONY Life Insurance Company of
America (Predecessor Company) at December 31, 2003, and the results of its
operations and its cash flows for the period from January 1, 2004 through June
30, 2004 and for each of the years in the two year period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 our opinion.
As discussed in Note 3 to the financial statements, in 2004 MONY Life Insurance
Company of America changed its method of accounting for variable interest
entities and certain nontraditional long-duration contracts and for Separate
Accounts, in 2003 changed its method of accounting for embedded derivatives
arising from the modified co-insurance arrangement and in 2002 changed its
method of accounting for long-lived assets.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 2005
F-1
MONY LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2004 2003
-------------- --------------
(SUCCESSOR) (PREDECESSOR)
( IN MILLIONS)
ASSETS
Investments:
Fixed maturities available-for-sale, at estimated fair value............................. $ 1,927.2 $ 1,734.0
Mortgage loans on real estate............................................................ 373.2 419.6
Policy loans............................................................................. 93.0 86.1
Real estate held for the production of income............................................ 1.5 2.2
Other invested assets.................................................................... 57.7 16.7
-------------- --------------
Total investments................................................................. 2,452.6 2,258.6
-------------- --------------
Cash and cash equivalents................................................................... 199.4 180.9
Accrued investment income................................................................... 27.8 29.5
Amounts due from reinsurers................................................................. 75.6 59.6
Deferred policy acquisition costs........................................................... 57.3 758.1
Value of business acquired.................................................................. 354.8 --
Other assets................................................................................ 6.6 12.2
Separate Accounts' assets................................................................... 3,732.2 3,504.0
-------------- --------------
TOTAL ASSETS ............................................................................. $ 6,906.3 $ 6,802.9
============== ==============
LIABILITIES
Policyholders' account balances............................................................. $ 2,133.2 $ 1,962.4
Future policy benefits...................................................................... 320.4 186.6
Other policyholders' liabilities............................................................ 39.1 86.3
Other liabilities........................................................................... 59.7 108.7
Note payable to affiliate................................................................... 36.8 39.6
Income taxes payable........................................................................ 45.2 149.7
Separate Accounts' liabilities.............................................................. 3,732.2 3,504.0
-------------- --------------
Total liabilities.................................................................... 6,366.6 6,037.3
-------------- --------------
Commitments and contingencies (Notes 10, 13, 14 and 15)
SHAREHOLDER'S EQUITY
Common stock, $1.00 par value; 5.0 million shares authorized, 2.5 million issued and
outstanding.............................................................................. 2.5 2.5
Capital in excess of par value.............................................................. 495.8 599.7
Retained earnings........................................................................... 26.5 139.2
Accumulated other comprehensive income...................................................... 14.9 24.2
-------------- --------------
Total shareholder's equity........................................................... 539.7 765.6
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................................. $ 6,906.3 $ 6,802.9
============== ==============
See Notes to Financial Statements.
F-2
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS
SIX MONTHS SIX MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
2004 2004 2003 2002
------------ ------------ ------------ ------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
REVENUES:
Universal life and investment-type product policy fee income...... $ 80.8 $ 82.7 $ 166.2 $ 153.8
Premiums.......................................................... 85.0 77.4 141.0 100.6
Net investment income............................................. 62.8 64.3 118.5 107.5
Investment (losses) gains, net.................................... (4.6) (0.7) 11.8 (10.2)
Other income...................................................... 26.7 7.4 17.2 5.7
----------- ----------- ----------- -----------
250.7 231.1 454.7 357.4
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES:
Policyholders' benefits........................................... 91.2 80.8 156.8 127.8
Interest credited to policyholders' account balances.............. 50.0 54.1 91.5 75.8
Commissions....................................................... 29.6 37.5 73.0 54.8
Amortization of deferred policy acquisition costs................. 5.7 34.7 55.2 81.8
Capitalization of deferred policy acquisition costs .............. (87.5) (93.8) (193.7) (172.6)
Amortization of value of business acquired........................ 16.7 -- -- --
Other operating costs and expenses................................ 106.1 143.1 240.7 214.9
----------- ----------- ----------- -----------
211.8 256.4 423.5 382.5
----------- ----------- ----------- -----------
Earnings/(loss) from continuing operations
before income taxes............................................ 38.9 (25.3) 31.2 (25.1)
Income tax (expense)/benefit...................................... (12.4) 10.5 (4.9) 8.8
----------- ----------- ----------- -----------
Net earnings/(loss) from continuing operations.................... 26.5 (14.8) 26.3 (16.3)
Loss from real estate to be disposed of, net of taxes............. -- -- (0.1) (0.8)
Cumulative effect on prior periods of the adoption of
SOP 03-1, net of taxes......................................... -- 3.8 -- --
----------- ----------- ----------- -----------
Net Earnings/(Loss)............................................... $ 26.5 $ (11.0) $ 26.2 $ (17.1)
=========== =========== =========== ===========
See Notes to Financial Statements.
F-3
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON IN EXCESS RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK OF PAR EARNINGS INCOME/(LOSS) EQUITY
----------- ----------- ----------- ------------- -------------
(IN MILLIONS)
PREDECESSOR BALANCE, DECEMBER 31, 2001..................... $ 2.5 $ 349.7 $ 130.1 $ 4.7 $ 487.0
Capital contributions...................................... 150.0 150.0
Comprehensive income:
Net loss............................................. (17.1) (17.1)
Other comprehensive income........................... 20.0 20.0
----------- ----------- ------------ ----------- -----------
Comprehensive income........................... 2.9
----------- ----------- ------------ ----------- -----------
PREDECESSOR BALANCE, DECEMBER 31, 2002..................... 2.5 499.7 113.0 24.7 639.9
Capital contributions...................................... 100.0 100.0
Comprehensive income:
Net earnings......................................... 26.2 26.2
Other comprehensive loss............................. (0.5) (0.5)
----------- ----------- ------------ ----------- ------------
Comprehensive income........................... 25.7
----------- ----------- ------------ ----------- -----------
PREDECESSOR BALANCE, DECEMBER 31, 2003..................... 2.5 599.7 139.2 24.2 765.6
Comprehensive loss:
Net loss............................................. (11.0) (11.0)
Other comprehensive loss............................. (11.4) (11.4)
----------- ----------- ------------ ----------- -----------
Comprehensive loss............................. (22.4)
----------- ----------- ------------ ----------- -----------
PREDECESSOR BALANCE, JUNE 30, 2004......................... 2.5 599.7 128.2 12.8 743.2
Effect of push-down accounting of AXA Financial's purchase
price on MLOA's net assets.............................. -- (153.0) (128.2) (12.8) (294.0)
----------- ----------- ------------ ----------- -----------
SUCCESSOR BALANCE, JULY 1, 2004............................ 2.5 446.7 -- -- 449.2
Capital contributions...................................... 49.1 49.1
Comprehensive income:
Net earnings......................................... 26.5 26.5
Other comprehensive income........................... 14.9 14.9
----------- ----------- ------------ ----------- -----------
Comprehensive income........................... 43.1
----------- ----------- ------------ ----------- -----------
SUCCESSOR BALANCE, DECEMBER 31, 2004....................... $ 2.5 $ 495.8 $ 26.5 $ 14.9 $ 539.7
=========== =========== ============ =========== ===========
See Notes to Financial Statements.
F-4
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
2004 2004 2003 2002
------------ ------------ ------------ ------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Net earnings/(loss)................................................. $ 26.5 $ (11.0) $ 26.2 $ (17.1)
Adjustments to reconcile net earnings/(loss) to net cash
used in operating activities:
Interest credited to policyholders' account balances........... 46.6 50.5 84.5 72.5
Universal life and investment-type product policy fee income... (36.4) (37.6) (67.6) (66.9)
Change in accrued investment income............................ (3.0) 4.7 (1.7) (5.5)
Investment losses/(gains)...................................... 4.6 0.7 (17.3) 10.2
Change in deferred policy acquisition costs and VOBA........... (63.8) (60.8) (138.5) (90.8)
Change in future policy benefits............................... (6.3) (2.7) 7.0 22.8
Change in other policyholders liabilities...................... 6.4 (1.5) (2.8) 12.0
Provision for depreciation and amortization.................... 7.9 1.5 0.7 (2.0)
Cumulative effect of the adoption of SOP 03-1.................. -- (5.9) -- --
Loss on discontinued real estate operations.................... -- -- 0.1 1.2
Loss on recapture from reinsurance............................. 6.7 -- -- --
Other, net..................................................... (36.8) 49.1 81.7 (8.5)
--------- --------- --------- ---------
Net cash used in operating activities............................... (47.6) (13.0) (27.7) (72.1)
--------- --------- --------- ---------
Cash flows from investing activities:
Sales, maturities or repayments of:
Fixed maturity securities..................................... 188.7 431.5 358.7 258.3
Mortgage loans on real estate................................. 93.8 43.0 80.1 48.6
Other invested assets......................................... 4.3 0.1 0.3 2.6
Acquisitions of investments:
Fixed maturity securities..................................... (473.1) (272.4) (548.5) (505.6)
Mortgage loans on real estate................................. (18.7) (66.1) (139.1) (276.2)
Other invested assets......................................... (0.4) (0.2) (0.6) (1.3)
Policy loans, net............................................. (3.9) (3.0) (6.3) (8.2)
--------- --------- --------- ---------
Net cash (used in)/provided by investing activities................. (209.3) 132.9 (255.4) (481.8)
--------- --------- --------- ---------
F-5
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
(CONTINUED)
SIX MONTHS SIX MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
2004 2004 2003 2002
----------- ------------- ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Cash flows from financing activities:
Policyholders' account balances:
Deposits....................................................... 241.2 433.7 872.2 876.8
Withdrawals and transfers to Separate Accounts................. (193.5) (333.5) (538.8) (539.9)
Proceeds of demand note payable to affiliate...................... -- -- -- 121.0
Repayment of demand note payable to affiliate..................... -- -- -- (121.0)
Repayment of note to affiliate.................................... (1.4) (1.4) (2.6) (2.4)
Proceeds received from recapture of reinsurance with USFL......... 10.4 -- -- --
Capital contribution.............................................. -- -- 100.0 150.0
----------- ------------- ------------- -------------
Net cash provided by financing activities............................ 56.7 98.8 430.8 484.5
----------- ------------- ------------- -------------
Net (decrease)/increase in cash and cash equivalents................. (200.2) 218.7 147.7 (69.4)
Cash and cash equivalents, beginning of period....................... 399.6 180.9 33.2 102.6
----------- ------------- ------------- -------------
Cash and Cash Equivalents, End of Period............................. $ 199.4 $ 399.6 $ 180.9 $ 33.2
=========== ============= ============= =============
Supplemental cash flow information:
Interest Paid...................................................... $ 1.3 $ 1.3 $ 2.8 $ 3.0
=========== ============= ============= =============
Income Taxes Refunded.............................................. $ (48.2) $ -- $ (27.4) $ (36.9)
=========== ============= ============= =============
Schedule of non-cash financing activities:
Capital contribution of Alliance units from MONY Life.............. $ 49.1 $ -- $ -- $ --
=========== ============= ============= =============
Transfer of bonds from USFL due to recapture of
reinsurance with USFL (Note 11)................................... $ 84.6 $ -- $ -- $ --
=========== ============= ============= =============
See Notes to Financial Statements.
F-6
MONY LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
MONY Life Insurance Company of America ("MLOA"), an Arizona stock life
insurance company whose primary business is to provide life insurance and
annuity products to both individuals and businesses, is a wholly-owned
subsidiary of MONY Life Insurance Company ("MONY Life"). MONY Life is a
wholly-owned subsidiary of MONY Holdings, LLC ("MONY Holdings"), which is
a downstream holding company of AXA Financial, Inc. ("the Holding
Company", which together with its consolidated subsidiaries is referred to
herein as "AXA Financial").
2. MERGER OF MONY WITH AXA FINANCIAL
On July 8, 2004, the acquisition of The MONY Group Inc. ("MONY") by the
Holding Company was completed and, under the terms of the related merger
agreement, the Holding Company paid or made provisions to pay MONY
shareholders approximately $1.5 billion in cash, representing $31.00 for
each share of MONY's common stock. MONY shareholders also received a
dividend from MONY totaling $0.34755 per share.
The acquisition was accounted for using the purchase method under
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets".
In connection with the acquisition, MLOA adjusted the cost basis of its
assets and liabilities to fair value on the acquisition date (the
"Purchase Adjustments"). AXA Financial is in the process of completing the
valuations of a portion of the assets acquired and liabilities assumed;
thus, the allocation of the purchase price is subject to refinement.
Revisions to the assessments of fair values for Value of Business Acquired
("VOBA"), policyholders reserves, deferred taxes and other assets and
liabilities were made in the fourth quarter of 2004. The refinements to
the fair values resulted in adjustments, recorded in the fourth quarter of
2004, consisting of changes from initially determined values as of July 1,
2004, as follows:
ADJUSTMENTS TO FAIR
VALUE
AT JULY 1, 2004
INCREASE/(DECREASE)
---------------------
(IN MILLIONS)
ASSETS
Fixed maturities................................... $ (1.1)
Amounts due from reinsurers........................ 0.2
VOBA............................................... (18.6)
Other assets....................................... 2.3
------------
TOTAL ASSETS....................................... $ (17.2)
------------
LIABILITIES
Future policy benefits and other policyholders'
liabilities........................................ $ 43.1
Other liabilities.................................. (8.7)
Income taxes payable............................... (18.0)
------------
TOTAL LIABILITIES.................................. 16.4
------------
DECREASE IN NET ASSETS............................. $ (33.6)
============
References in these financial statements to "Predecessor" refer to MLOA
prior to July 1, 2004. References to "Successor" refer to MLOA on and
after July 1, 2004, after giving effect to the implementation of the
Purchase Adjustments. For accounting purposes (due to convenience and
immateriality of the results of MONY and its subsidiaries from July 1
through July 8), the Holding Company has consolidated MONY and its
subsidiaries and reflected its results from July 1, 2004 in its
consolidated Statements of Earnings and consolidated Cash Flows. MLOA's
activity for the period from July 1, 2004 through July 8, 2004 is
therefore included in the Successor's statement of earnings and excluded
from the Predecessor's statement of operations. The Predecessor's
statement of operations is presented using MLOA's historical basis of
accounting.
The determination of the Purchase Adjustments relating to investments
reflects management's reliance on independent price quotes where
available. Other Purchase Adjustments required significant management
estimates and assumptions. The Purchase Adjustments related to VOBA and
liabilities, including policyholder reserves, required management to
exercise judgment to assess the value of these items. MLOA's Purchase
Adjustments resulted in a revalued balance sheet, which may result in
future
F-7
earnings trends which differ significantly from historical trends.
MLOA does not anticipate any material impact on its liquidity, or its
ability to pay policyholders claims, arising out of the purchase
accounting process related to the merger.
3) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The preparation of the accompanying financial statements in conformity
with U.S. generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions (including normal, recurring
accruals) that affect the reported amounts of assets and liabilities and
the 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 from these
estimates. The accompanying financial statements reflect all adjustments
necessary in the opinion of management to present fairly the financial
position of MLOA and its results of operations and cash flows for the
periods presented.
The terms "six months ended December 31, 2004" and "six months ended June
30, 2004" refer to the 2004 Successor and Predecessor periods,
respectively. The terms "full year 2003" and "full year 2002" refer to the
years ended December 31, 2003 and 2002, respectively.
Prior to the acquisition of MONY by the Holding Company, MLOA recorded
adjustments related to prior quarters' calculations of reinsurance reserve
credits and interest credited on certain life insurance and annuity
products. The effect of these adjustments was to increase the
Predecessor's net loss for the six months ended June 30, 2004 by $6.0
million.
Certain reclassifications have been made in the prior period amounts to
conform to the current presentation.
ACCOUNTING CHANGES
------------------
Effective January 1, 2004, MLOA adopted SOP 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts". SOP 03-1 required a
change in MLOA's accounting policies relating to (a) assets and
liabilities associated with market value adjusted fixed rate investment
options available in certain variable annuity contracts issued by MLOA,
and (b) liabilities related to certain mortality and annuitization
benefits, such as the no lapse guarantee feature contained in variable and
interest-sensitive life policies.
The adoption of SOP 03-1 resulted in a change in the method of determining
liabilities associated with the no lapse guarantee feature contained in
variable and interest-sensitive life contracts. While both MLOA's previous
method of establishing the no lapse guarantee reserve and the SOP 03-1
method are based on accumulation of a portion of the charges for the no
lapse guarantee feature, SOP 03-1 specifies a different approach for
identifying the portion of the fee to be accrued and establishing the
related reserve.
The adoption of SOP 03-1 as of January 1, 2004 resulted in a decrease in
the six months ended June 30, 2004 (Predecessor) net loss of $3.8 million
related to the cumulative effect of the required changes in accounting.
The determination of liabilities associated with mortality and
annuitization benefits, as well as related impacts on deferred acquisition
costs, is based on models that involve numerous estimates and subjective
judgments. There can be no assurance that the ultimate actual experience
will not differ from management's estimates.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
On December 16, 2004, the FASB issued SFAS Statement No. 123(R),
"Share-Based Payment". SFAS Statement No. 123(R) eliminates the
alternative to apply the intrinsic value method of accounting for employee
stock-based compensation awards that was provided in FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") as
originally issued. SFAS No. 123(R) requires the cost of all share-based
payments to employees, including stock options, stock appreciation rights,
and most tax-qualified employee stock purchase plans, to be recognized in
the financial statements based on the fair value of those awards. Under
SFAS No. 123(R) the cost of equity-settled awards generally is based on
fair value at date of grant, adjusted for subsequent modifications of
terms or conditions, while cash-settled awards require remeasurement of
fair value at the end of each reporting period. SFAS No. 123(R) does not
prescribe or specify a preference for a particular valuation technique or
model for estimating the fair value of employee stock options and similar
awards but instead requires consideration of certain factors in selecting
one that is appropriate for the unique substantive characteristics of the
instruments awarded. SFAS No. 123(R) is effective as of the first interim
or annual reporting period beginning after June 15, 2005 and generally
requires adoption using a modified version of prospective application.
Under "modified prospective" application, SFAS No. 123(R) applies to new
awards granted and to awards modified, repurchased, or cancelled after the
required effective date. Additionally, compensation cost for unvested
awards outstanding as of the required effective date must be recognized
prospectively over the
F-8
remaining requisite service/vesting period based on the fair values of
those awards as already calculated under SFAS No. 123. Entities may
further elect to apply SFAS No. 123(R) on a "modified retrospective" basis
to give effect to the fair value based method of accounting for awards
granted, modified, or settled in cash in earlier periods. The cumulative
effect of initial application, if any, is recognized as of the required
effective date.
As more fully described in Note 10, MLOA is charged for services including
personnel services and employee benefits provided by MONY Life employees,
and, effective with the acquisition of MONY, AXA Equitable employees, on
MLOA's behalf. MONY Life and AXA Financial elected under SFAS No. 123 to
continue to account for stock-based compensation using the intrinsic value
method and instead to provide only pro-forma disclosure of the effect on
net earnings from applying the fair value based method. Consequently,
adoption of SFAS No. 123(R) would be expected to result in recognition of
compensation expense for certain types of AXA Financial's equity-settled
awards, such as options to purchase AXA ADRs, for which no cost previously
would have been charged to net earnings under the intrinsic value method.
Similarly, certain types of AXA Financial's cash-settled awards, such as
stock appreciation rights, may be expected to result either in different
amounts of compensation expense or different patterns of expense
recognition under SFAS No. 123(R) as compared to the intrinsic value
method. Management of AXA Financial currently is assessing the impact of
adoption of SFAS No. 123(R), including measurement and reporting of
related income tax effects, selection of an appropriate valuation model
and determination of assumptions, as well as consideration of plan design
issues.
INVESTMENTS
-----------
The carrying values of fixed maturities identified as available for sale
are reported at estimated fair value. Changes in estimated fair value are
reported in comprehensive income. The amortized cost of fixed maturities
is adjusted for impairments in value deemed to be other than temporary.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and valuation allowances. Valuation allowances
are based on the present value of expected future cash flows discounted at
the loan's original effective interest rate or on its collateral value if
the loan is collateral dependent. However, if foreclosure is or becomes
probable, the collateral value measurement method is used.
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value is
used to measure impairment is recorded on a cash basis. Interest income on
loans where the present value method is used to measure impairment is
accrued on the net carrying value amount of the loan at the interest rate
used to discount the cash flows. Changes in the present value attributable
to changes in the amount or timing of expected cash flows are reported as
investment gains or losses.
Real estate held for the production of income, including real estate
acquired in satisfaction of debt, is stated at depreciated cost less
valuation allowances. At the date of foreclosure (including in-substance
foreclosure), real estate acquired in satisfaction of debt is valued at
estimated fair value. Impaired real estate is written down to fair value
with the impairment loss being included in investment gains (losses), net.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years.
Real estate investments meeting the following criteria are classified as
real estate held-for-sale:
o Management having the authority to approve the action commits the
organization to a plan to sell the property.
o The property is available for immediate sale in its present
condition subject only to terms that are usual and customary for
the sale of such assets.
o An active program to locate a buyer and other actions required to
complete the plan to sell the asset have been initiated and are
continuing.
o The sale of the asset is probable and transfer of the asset is
expected to qualify for recognition as a completed sale within
one year.
o The asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
o Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or
that the plan will be withdrawn.
Real estate held-for-sale is stated at depreciated cost less valuation
allowances. Valuation allowances on real estate held-for-sale are computed
using the lower of depreciated cost or current estimated fair value, net
of disposition costs. Depreciation is discontinued on real estate
held-for-sale.
F-9
Valuation allowances are netted against the asset categories to which they
apply.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which MLOA has control and a
majority economic interest (that is, greater than 50% of the economic
return generated by the entity) or those that meet FIN No. 46(R)
requirements for consolidation are consolidated; those in which MLOA does
not have control and a majority economic interest and those that do not
meet FIN No. 46(R) requirements for consolidation are reported on the
equity basis of accounting and are included either with equity real estate
or other equity investments, as appropriate.
Equity securities include common stock classified as available for sale
securities, and are carried at estimated fair value which equity
securities are included in other invested assets.
Units held in Alliance Capital Management L.P. ("Alliance") are carried on
the equity method and reported in other invested assets.
Short-term investments are stated at amortized cost that approximates fair
value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity of
three months or less.
All securities owned including United States government and agency
securities and mortgage-backed securities are recorded in the financial
statements on a trade date basis.
NET INVESTMENT INCOME, INVESTMENT GAINS (LOSSES), NET AND UNREALIZED
--------------------------------------------------------------------
INVESTMENT GAINS (LOSSES)
-------------------------
Realized investment gains (losses) are determined by identification with
the specific asset and are presented as a component of revenue. Changes in
the valuation allowances are included in investment gains or losses.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by MLOA are accounted for as a separate
component of accumulated comprehensive income, net of related deferred
income taxes, amounts attributable to deferred policy acquisition costs
("DAC") and VOBA related to universal life and investment-type products.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
----------------------------------------------------
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders'
account balances for mortality charges, policy administration charges and
surrender charges. Policy benefits and claims that are charged to expense
include benefit claims incurred in the period in excess of related
policyholders' account balances.
Premiums from non-participating traditional life and annuity policies with
life contingencies generally are recognized as 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.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when due
with any excess profit deferred and recognized in income in a constant
relationship to insurance in-force or, for annuities, the amount of
expected future benefit payments.
DAC AND VOBA
------------
Acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business, including commissions,
underwriting, agency and policy issue expenses, are deferred. DAC is
subject to recoverability testing at the time of policy issue and loss
recognition testing at the end of each accounting period.
VOBA, which is established in accordance with business combination
purchase accounting guidance, is based on the present value of future
profits embedded in the acquired contracts. VOBA is determined by
estimating the net present value of future cash flows expected to result
from contracts in force at the date of the transaction. Future positive
cash flows include investment
F-10
spreads, and fees and other charges assessed to the contracts for as long
as they remain in force, while future negative cash flows include costs to
administer the contracts and taxes. Contract balances, from which the cash
flows arise, are projected using assumptions for add-on deposits,
participant withdrawals, contract surrenders, and investment returns. VOBA
is further explicitly adjusted to reflect the cost associated with the
capital invested in the business. VOBA will be amortized over the expected
life of the contracts (approximately 10-30 years) according to the type of
contract involved using the methods described below as applicable. VOBA is
subject to loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC and VOBA are
amortized over the expected total life of the contract group as a constant
percentage of estimated gross profits arising principally from investment
results, Separate Account fees, mortality and expense margins and
surrender charges based on historical and anticipated future experience,
updated at the end of each accounting period. The effect on the
amortization of DAC and VOBA of revisions to estimated gross profits is
reflected in earnings in the period such estimated gross profits are
revised. A decrease in expected gross profits would accelerate DAC and
VOBA amortization. Conversely, an increase in expected gross profits would
slow DAC and VOBA amortization. The effect on the DAC and VOBA assets that
would result from realization of unrealized gains (losses) is recognized
with an offset to accumulated comprehensive income in shareholder's equity
as of the balance sheet date.
A significant assumption in the amortization of DAC and VOBA on variable
and interest-sensitive life insurance and variable annuities relates to
projected future Separate Account performance. Expected future gross
profit assumptions related to Separate Account performance are set by
management using a long-term view of expected average market returns by
applying a reversion to the mean approach. In applying this approach to
develop estimates of future returns, it is assumed that the market will
return to an average gross long-term return estimate, developed with
reference to historical long-term equity market performance and subject to
assessment of the reasonableness of resulting estimates of future return
assumptions. For purposes of making this reasonableness assessment,
management has set limitations as to maximum and minimum future rate of
return assumptions, as well as a limitation on the duration of use of
these maximum or minimum rates of return. Currently, the average gross
long-term annual return estimate is 9.0% (6.90% net of product weighted
average Separate Account fees), and the gross maximum and minimum annual
rate of return limitations are 15.0% (12.65% net of product weighted
average Separate Account fees) and 0% (-2.35% net of product weighted
average Separate Account fees), respectively. The maximum duration over
which these rate limitations may be applied is 5 years. This approach will
continue to be applied in future periods. If actual market returns
continue at levels that would result in assuming future market returns of
9% for more than 5 years in order to reach the average gross long-term
return estimate, the application of the 5 year maximum duration limitation
would result in an acceleration of DAC and VOBA amortization. Conversely,
actual market returns resulting in assumed future market returns of 0% for
more than 5 years would result in a required deceleration of DAC and VOBA
amortization. As of December 31, 2004, current projections of future
average gross market returns assume a 2.3% return for 2005 which is within
the maximum and minimum limitations and assume a reversion to the mean of
9.0% after 1.5 years.
In addition, projections of future mortality assumptions related to
variable and interest-sensitive life products are based on a long-term
average of actual experience. This assumption is updated quarterly to
reflect recent experience as it emerges. Improvement of life mortality in
future periods from that currently projected would result in future
deceleration of DAC and VOBA amortization. Conversely, deterioration of
life mortality in future periods from that currently projected would
result in future acceleration of DAC and VOBA amortization. Generally,
life mortality experience has been improving in recent years.
Other significant assumptions underlying gross profit estimates relate to
contract persistency and general account investment spread.
For non-participating traditional life policies, DAC and VOBA are
amortized in proportion to anticipated premiums. Assumptions as to
anticipated premiums are estimated at the date of policy issue and are
consistently applied during the life of the contracts. Deviations from
estimated experience are reflected in earnings in the period such
deviations occur. For these contracts, the amortization periods generally
are for the total life of the policy.
POLICYHOLDERS' ACCOUNT BALANCES AND FUTURE POLICY BENEFITS
----------------------------------------------------------
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
MLOA issues certain variable annuity products with a Guaranteed Minimum
Death Benefit ("GMBD") feature. MLOA also issues certain variable annuity
products that contain a Guaranteed Minimum Income Benefit ("GMIB") feature
which, if elected by the policyholder after a stipulated waiting period
from contract issuance, guarantees a minimum lifetime annuity based on
predetermined annuity purchase rates that may be in excess of what the
contract account value can purchase at then-current annuity purchase
rates. This minimum lifetime annuity is based on predetermined annuity
purchase rates applied to a guaranteed
F-11
minimum income benefit base. The risk associated with the GMDB and GMIB
features is that a protracted under-performance of the financial markets
could result in GMDB and GMIB benefits being higher than what accumulated
policyholder account balances would support. Reserves for GMDB and GMIB
obligations are calculated on the basis of actuarial assumptions related
to projected benefits and related contract charges generally over the
lives of the contracts using assumptions consistent with those used in
estimating gross profits for purposes of amortizing DAC and VOBA. The
determination of this estimated liability is based on models which involve
numerous estimates and subjective judgments, including those regarding
expected market rates of return and volatility, contract surrender rates,
mortality experience, and, for GMIB, GMIB election rates. Assumptions
regarding Separate Account performance used for purposes of this
calculation are set using a long-term view of expected average market
returns by applying a reversion to the mean approach, consistent with that
used for DAC and VOBA amortization. There can be no assurance that
ultimate actual experience will not differ from management's estimates.
For reinsurance contracts reinsurance recoverable balances are calculated
using methodologies and assumptions that are consistent with those used to
calculate the direct liabilities.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on the
basis of actuarial assumptions as to mortality, persistency and interest
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on MLOA's experience that, together
with interest and expense assumptions, includes a margin for adverse
deviation. When the liabilities for future policy benefits plus the
present value of expected future gross premiums for a product are
insufficient to provide for expected future policy benefits and expenses
for that product, DAC and VOBA are written off and thereafter, if
required, a premium deficiency reserve is established by a charge to
earnings. Benefit liabilities for traditional annuities during the
accumulation period are equal to accumulated contractholders' fund
balances and, after annuitization, are equal to the present value of
expected future payments. Interest rates used in establishing such
liabilities range from 2.0% to 6.0% for life insurance liabilities and
from 3.0% to 6.75% for annuity liabilities.
SEPARATE ACCOUNTS
-----------------
Generally, Separate Accounts established under Arizona State Insurance Law
are not chargeable with liabilities that arise from any other business of
MLOA. Separate Accounts' assets are subject to General Account claims only
to the extent Separate Accounts' assets exceed Separate Accounts'
liabilities. Assets and liabilities of the Separate Accounts represent the
net deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which MLOA does not
bear the investment risk. Separate Accounts' assets and liabilities are
shown on separate lines in the balance sheets. Assets held in the Separate
Accounts are carried at quoted market values or, where quoted values are
not readily available, at estimated fair values as determined by MLOA.
The investment results of Separate Accounts on which MLOA does not bear
the investment risk are reflected directly in Separate Accounts'
liabilities and are not reported in revenues in the statements of
operations. For the year ended December 31, 2004, 2003 and 2002,
investment results of such Separate Accounts were gains (losses) of $371.2
million, $628.1 million and $(583.4) million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts' liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are included
in revenues.
OTHER ACCOUNTING POLICIES
-------------------------
MLOA will file a consolidated federal income tax return with its parent,
MONY Life, and with MONY Life's other life and non-life subsidiaries for
the predecessor period. Beginning in the successor period, MLOA will file
a consolidated federal income tax return with its parent, MONY Life, and
with MONY Life's other life subsidiaries. Under the life insurance
provisions of the Internal Revenue Code, life insurance companies cannot
file a consolidated federal income tax return with their ultimate parent
for a period of five years from the date of acquisition. 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.
Although MLOA has no employees, under service agreements with affiliates,
MLOA is charged for services, including personnel services and employee
benefits, provided on its behalf. These affiliates account for stock
option and other stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
In accordance with the opinion, stock option awards result in
F-12
compensation expense only if the current market price of the underlying
stock exceeds the option strike price at the grant date. See Note 10 for
the pro forma disclosures required by SFAS No. 123, "Accounting for
Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
4) INVESTMENTS
The following table provides additional information relating to fixed
maturities.
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------------- ----------------- ----------------- ---------------
(IN MILLIONS)
DECEMBER 31, 2004
Fixed Maturities:
Available for Sale:
Corporate..................... $ 1,716.1 $ 34.9 $ 2.9 $ 1,748.1
Mortgage-backed............... 36.2 1.0 -- 37.2
U.S. Treasury, government
and agency securities....... 68.3 1.6 -- 69.9
Foreign governments........... 10.3 0.1 0.1 10.3
Redeemable preferred stock.... 60.2 1.7 0.2 61.7
----------------- ------------------ ----------------- ----------------
Total Available for Sale.... $ 1,891.1 $ 39.3 $ 3.2 $ 1,927.2
================= ================== ================= ================
December 31, 2003
Fixed Maturities:
Available for Sale:
Corporate..................... $ 1,321.2 $ 79.2 $ 2.8 $ 1,397.6
Mortgage-backed............... 51.0 -- 0.8 50.2
U.S. Treasury, government
and agency securities....... 248.4 8.0 1.4 255.0
Foreign governments........... 13.5 0.6 -- 14.1
Redeemable preferred stock.... 15.0 2.1 -- 17.1
----------------- ------------------ ----------------- ----------------
Total Available for Sale.... $ 1,649.1 $ 89.9 $ 5.0 $ 1,734.0
================= ================== ================= ================
For publicly traded fixed maturities, estimated fair value is determined
using quoted market prices. For fixed maturities without a readily
ascertainable market value, MLOA determines estimated fair values using
a discounted cash flow approach, including provisions for credit risk,
generally based on the assumption such securities will be held to
maturity. Such estimated fair values do not necessarily represent the
values for which these securities could have been sold at the dates of
the balance sheets. At December 31, 2004 and 2003, securities without a
readily ascertainable market value having an amortized cost of $497.4
million and $572.2 million, respectively, had estimated fair values of
$505.1 million and $610.0 million, respectively.
The contractual maturity of bonds at December 31, 2004 is shown below:
AVAILABLE FOR SALE
------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
(IN MILLIONS)
Due in one year or less.............................................. $ 51.7 $ 51.5
Due in years two through five........................................ 531.5 534.8
Due in years six through ten......................................... 921.1 945.3
Due after ten years.................................................. 290.4 296.7
Mortgage-backed securities........................................... 36.2 37.2
---------------- -----------------
Total................................................................ $ 1,830.9 $ 1,865.5
================ =================
F-13
Bonds not due at a single maturity date have been included in the above
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.
MLOA's management, with the assistance of its investment advisors,
monitors the investment performance of its portfolio. This review
process culminates with a quarterly review of certain assets by AXA
Financial's Investments Under Surveillance Committee that evaluates
whether any investments are other than temporarily impaired. The review
considers an analysis of individual credit metrics of each issuer as
well as industry fundamentals and the outlook for the future. Based on
the analysis, a determination is made as to the ability of the issuer to
service its debt obligations on an ongoing basis. If this ability is
deemed to be impaired, then the appropriate provisions are taken.
The following table discloses fixed maturities (59 fixed maturities)
that have been in a continuous unrealized loss position for less than a
twelve month period as of December 31, 2004:
LESS THAN 12 MONTHS
------------------------------
GROSS
ESTIMATED UNREALIZED
FAIR VALUE LOSSES
--------------- -------------
Fixed Maturities:
Corporate....................... $ 311.3 $ 2.9
Mortgage-backed................. -- --
U.S. Treasury,
government and
agency securities............. 17.5 --
Foreign governments............. 6.1 0.1
Redeemable
preferred stock............... 44.1 0.2
------------- -------------
Total Temporarily
Impaired Securities ............ $ 379.0 $ 3.2
============= =============
There were no securities in a continuous unrealized loss position for more
than a twelve month period at December 31, 2004.
MLOA's fixed maturity investment portfolio includes corporate high yield
securities consisting of public high yield bonds, redeemable preferred
stocks and directly negotiated debt. These corporate high yield securities
are classified as other than investment grade by the various rating
agencies, i.e., a rating below Baa3/BBB- or National Association of
Insurance Commissioners ("NAIC") designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31, 2004,
approximately $133.6 million, or 7.3%, of the $1,830.9 million aggregate
amortized cost of bonds held by MLOA was considered to be other than
investment grade.
At December 31, 2004, there were no fixed maturities which were non-income
producing for the twelve months preceding that date.
MLOA holds equity in limited partnership interests and other equity method
investments that primarily invest in securities considered to be other
than investment grade. The carrying values at December 31, 2004 and 2003
were $4.5 million and $11.1 million, respectively.
At December 31, 2004, MLOA held 1.2 million units in Alliance, an
affiliate, with a carrying value of $49.1 million.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage loans
on real estate, based on amortized cost, amounted to $0.8 million and $0.0
million at December 31, 2004 and 2003, respectively. There was no gross
interest income on these loans included in net investment income for the
six months ended December 31, 2004, six months ended June 30, 2004, full
years 2003 and 2002. There was no gross interest income on restructured
mortgage loans on real estate that would have been recorded in accordance
with the original terms of such loans for the six months ended December
31, 2004, six months ended June 30, 2004, full years 2003 and 2002.
Interest income recognized on impaired mortgage loans totaled $0.1
million, $0.0 million, $0.2 million and $0.3 million for the six months
ended December 31, 2004, six months ended June 30, 2004, full years 2003
and 2002, respectively.
F-14
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans, interest
income is recognized under the cash basis of accounting and the resumption
of the interest accrual would commence only after all past due interest
has been collected or the mortgage loan on real estate has been
restructured to where the collection of interest is considered likely. At
December 31, 2004 and 2003, there are no mortgage loans on real estate
that had been classified as nonaccrual loans.
MLOA's investment in equity real estate is through direct ownership and
through investments in real estate joint ventures. At December 31, 2004
and 2003, there was no equity real estate held-for-sale.
Accumulated depreciation on real estate was $0.0 million and $1.9 million
at December 31, 2004 and 2003, respectively. Depreciation expense on real
estate totaled $0.0 million, $0.1 million, $0.2 million and $0.0 million
for the six months ended December 31, 2004, six months ended June 30,
2004, full years 2003 and 2002, respectively.
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
------------ ----------- ------------ ------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Balances, beginning of period..................... $ 1.7 $ 4.4 $ 3.7 $ 1.4
Additions charged to income....................... -- 0.3 0.7 2.3
Deductions for writedowns and asset dispositions.. -- (3.0) -- --
Effect of push-down accounting of AXA Financial's
purchase price of MLOA's net assets............. 1.7 -- -- --
-------- ----------- ----------- -----------
Balances, End of Period........................... $ -- $ -- $ 4.4 $ 3.7
======== =========== =========== ===========
Balances, end of period comprise:
Mortgage loans on real estate..................... $ -- $ -- $ 4.4 $ 3.7
======== =========== =========== ===========
5) VALUE OF BUSINESS ACQUIRED
The following presents MLOA's VOBA asset as of December 31, 2004, related
to the Holding Company's acquisition of MONY:
LESS: LESS:
GROSS CARRYING ACCUMULATED IMPACT OF
AMOUNT AMORTIZATION(1) RECAPTURE(2) NET
-------------- --------------- ------------ -----------
(IN MILLIONS)
VOBA.............................................. $ 416.5 $ (29.6) $ (32.1) $ 354.8
=========== =========== =========== ===========
For the six months ended December 31, 2004, total amortization expense
related to VOBA was $16.7 million. VOBA amortization is estimated to range
between $36.0 million and $46.0 million annually over the next five years.
-------------
(1) Includes reactivity to unrealized investment gains and losses.
(2) The impact of recapture shown above relates to the December 31, 2004
recapture by USFL of level premium term insurance contracts
previously ceded to MLOA under the modified coinsurance agreement
between MLOA and USFL, as described further in Note 11.
F-15
6) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
------------ ------------ ------------ ------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Fixed maturities....................................... $ 45.8 $ 51.8 $ 94.1 $ 87.3
Mortgage loans on real estate.......................... 16.0 16.0 29.6 14.8
Policy loans........................................... 3.0 2.9 5.5 6.3
Other investment income................................ 2.1 (0.9) 0.9 3.0
----------- ----------- ----------- -----------
Gross investment income............................... 66.9 69.8 130.1 111.4
Investment expenses.................................... (4.1) (5.5) (11.6) (3.9)
----------- ----------- ----------- -----------
Net Investment Income.................................. $ 62.8 $ 64.3 $ 118.5 $ 107.5
=========== =========== =========== ===========
Investment Gains (Losses), including changes in the valuation allowances,
follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ------------ ------------ ------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Fixed maturities................................... $ (4.6) $ (3.4) $ 8.1 $ (7.4)
Mortgage loans on real estate...................... - 2.7 3.5 (2.2)
Other.............................................. - - 0.2 (0.6)
--------- ----------- ----------- -----------
Investment Gains (Losses), Net..................... $ (4.6) $ (0.7) $ 11.8 $ (10.2)
========= =========== =========== ===========
Writedowns of fixed maturities amounted to $5.1 million, $0.9 million,
$8.6 million and $12.5 million for the six months ended December 31, 2004,
six months ended June 30, 2004, full years 2003 and 2002, respectively.
There were no writedowns of mortgage loans on real estate and equity real
estate for the six months ended December 31, 2004, six months ended June
30, 2004, full years 2003 and 2002.
For the six months ended December 31, 2004, six months ended June 30,
2004, full years 2003 and 2002, respectively, proceeds received on sales
of fixed maturities classified as available for sale amounted to $48.9
million, $363.1 million, $145.3 million and $82.8 million. Gross gains of
$2.1 million, $6.9 million, $10.7 million and $4.8 million and gross
losses of $1.3 million, $10.0 million, $0.0 million and $1.0 million,
respectively, were realized on these sales. The change in unrealized
investment gains (losses) related to fixed maturities classified as
available for sale for the six months ended December 31, 2004, six months
ended June 30, 2004, full years 2003 and 2002 amounted to $36.1 million,
$(41.0) million, $(3.2) million and $69.2 million, respectively.
F-16
The net unrealized investment gains (losses) included in the balance
sheets as a component of accumulated other comprehensive income and the
changes for the corresponding years, on a line by line basis, follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Balance, beginning of period........................... $ 12.8 $ 24.2 $ 24.7 $ 4.7
Changes in unrealized investment gains (losses)........ 36.1 (41.5) (2.9) 68.9
Changes in unrealized investment gains (losses)
attributable to:.......................................
DAC and VOBA........................................ (13.2) 23.9 2.2 (38.1)
Deferred income taxes............................... (8.0) 6.2 0.2 (10.8)
Effect of push-down accounting of AXA Financial's
purchase price on MLOA's net assets................. (12.8) -- -- --
----------- ----------- ----------- -----------
Balance, end of period................................. $ 14.9 $ 12.8 $ 24.2 $ 24.7
=========== =========== =========== ===========
Balance, end of period comprises:
Unrealized investment gains on:
Fixed maturities................................. $ 36.1 $ 43.5 $ 84.9 $ 87.9
Amounts of unrealized investment gains (losses)
attributable:....................................
DAC and VOBA to.................................. (13.2) (23.9) (47.8) (50.0)
Deferred income taxes............................ (8.0) (6.8) (12.9) (13.2)
----------- ----------- ----------- -----------
Balance, end of period................................. $ 14.9 $ 12.8 $ 24.2 $ 24.7
=========== =========== =========== ===========
Changes in unrealized gains (losses) reflect changes in fair value of only
those fixed maturities classified as available for sale and do not reflect
any changes in fair value of policyholders' account balances and future
policy benefits.
7) OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the past three
years follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Net unrealized gains (losses) on investments:
Net unrealized gains (losses) arising during the period... $ 36.3 $ (41.7) $ (6.4) $ 72.1
(Gains) losses reclassified into net earnings during
the period................................................ (0.2) 0.2 3.5 (3.2)
----------- ----------- ----------- -----------
Net unrealized gains (losses) on investments................. 36.1 (41.5) (2.9) 68.9
Adjustments for DAC and VOBA and deferred income taxes....... (21.2) 30.1 2.4 (48.9)
----------- ----------- ----------- -----------
Total Other Comprehensive Income (Loss)...................... $ 14.9 $ (11.4) $ (0.5) $ 20.0
=========== =========== =========== ===========
F-17
8) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
Variable Annuity Contracts - GMDB and GMIB
------------------------------------------
MLOA issues certain variable annuity contracts with GMDB and GMIB features
that guarantee either:
a) Return of Premium: the benefit is the greater of current account
value or premiums paid (adjusted for withdrawals);
b) Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), or the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals); or
c) Roll-Up: the benefit is the greater of current account value or
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages.
The following table summarizes the GMDB and GMIB liabilities, before
reinsurance ceded, reflected in the General Account in future policy
benefits and other policyholders' liabilities in 2004:
GMDB GMIB TOTAL
---------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 3.5 $ - $ 3.5
Impact of adoption of SOP 03-1................... (2.8) 0.1 (2.7)
Paid guarantee benefits.......................... (3.0) - (3.0)
Other changes in reserve......................... 3.3 - 3.3
---------------- ----------------- -----------------
Balance at December 31, 2004....................... $ 1.0 $ 0.1 $ 1.1
================ ================= =================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ -
Impact of adoption of SOP 03-1................... 0.3
Paid guarantee benefits ceded.................... (2.9)
Other changes in reserve......................... 3.5
--------------------
Balance at December 31, 2004....................... $ 0.9
====================
F-18
The December 31, 2004 values for those variable contracts with GMDB and
GMIB features are presented in the following table. Since variable
contracts with GMDB guarantees may also offer GMIB guarantees in each
contract, the GMDB and GMIB amounts listed are not mutually exclusive:
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
--------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
GMDB:
Account value (1).................. $ 1,168 $ 2,039 N.A. $ 205 $ 3,412
Net amount at risk, gross.......... $ 16 $ 248 N.A. $ 12 $ 276
Net amount at risk, net of
amounts reinsured................ $ 16 $ 231 N.A. $ 0 $ 247
Average attained age of
contractholders.................. 60.7 60.3 N.A. 59.6 60.4
Percentage of contractholders
over age 70...................... 17.3% 14.2% N.A. 11.3% 15.4%
Guaranteed minimum return rates.... N.A. N.A. N.A. 5.0% 5.0%
GMIB:
Account value (2).................. N.A. N.A. $ 205 N.A. $ 205
Net amount at risk, gross.......... N.A. N.A. $ 0 N.A. $ 0
Net amount at risk, net of
amounts reinsured................ N.A. N.A. $ 0 N.A. $ 0
Weighted average years
remaining until earliest
annuitization............... .... N.A. N.A. 7.3 N.A. 7.3
Guaranteed minimum return
rates........................... N.A. N.A. 5.0% N.A. 5.0%
----------------------
(1) Included General Account balances of $215 million, $327 million and
$35 million, respectively, for a total of $577 million.
(2) Included General Account balances of $35 million.
For contracts with the GMDB feature, the net amount at risk in the event
of death as of December 31, 2004 is the amount by which the GMDB benefits
exceeds related account values.
For contracts with the GMIB feature, the net amount at risk in the event
of annuitization as of December 31, 2004 is defined as the amount by which
the present value of the GMIB benefits exceeds related account values,
taking into account the relationship between current annuity purchase
rates and the GMIB guaranteed annuity purchase rates.
F-19
The following table presents the aggregate fair value of assets, by major
investment fund option, held by Separate Accounts that are subject to GMDB
and GMIB benefits and guarantees. Since variable contracts with GMDB
benefits and guarantees may also offer GMIB benefits and guarantees in
each contract, the GMDB and GMIB amounts listed are not mutually
exclusive:
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
DECEMBER 31, December 31,
2004 2003
---------------- ------------------
(SUCCESSOR) (PREDECESSOR)
(IN MILLIONS)
GMDB:
Equity........................ $ 2,209 $ 2,003
Fixed income.................. 452 413
Balanced...................... 67 67
Other......................... 108 155
---------------- ------------------
Total......................... $ 2,836 $ 2,638
================ ==================
GMIB:
Equity........................ $ 126 $ 72
Fixed income.................. 37 26
Balanced...................... 3 2
Other......................... 4 5
---------------- ------------------
Total......................... $ 170 $ 105
================ ==================
VARIABLE AND INTEREST-SENSITIVE LIFE INSURANCE POLICIES - NO LAPSE GUARANTEE
----------------------------------------------------------------------------
The no lapse guarantee feature contained in variable and
interest-sensitive life insurance policies keeps them in force in
situations where the policy value is not sufficient to cover monthly
charges then due. The no lapse guarantee remains in effect so long as the
policy meets a contractually specified premium funding test and certain
other requirements. At December 31, 2004 MLOA had liabilities of $0.5
million for no lapse guarantees reflected in the General Account in future
policy benefits and other policyholders liabilities.
9) INCOME TAXES
A summary of the income tax expense in the statements of operations follows:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Income tax expense (benefit):
Current (benefit) expense..... $ 0.0 $ (29.3) $ (30.1) $ (56.0)
Deferred expense.............. 12.4 18.8 35.0 47.2
----------- ----------- ----------- -----------
Total............................. $ 12.4 $ (10.5) $ 4.9 $ (8.8)
=========== =========== =========== ===========
F-20
The Federal income taxes attributable to operations are different from
the amounts determined by multiplying the earnings before income taxes
by the expected Federal income tax rate of 35%. The sources of the
difference and their tax effects follow:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Tax at statutory rate................................. $ 13.6 $ (8.9) $ 10.9 $ (8.7)
Dividends received deduction.......................... (1.2) (1.6) (3.2) (1.0)
Tax settlements/accrual adjustments................... - - (2.8) -
Other................................................. - - - 0.9
----------- ----------- ----------- -----------
Federal income tax expense (benefit).................. $ 12.4 $ (10.5) $ 4.9 $ (8.8)
=========== =========== =========== ===========
The components of the net deferred Federal income taxes are as follows:
DECEMBER 31, 2004 December 31, 2003
--------------------------------- ---------------------------------
(SUCCESSOR) (Predecessor)
--------------------------------- ---------------------------------
ASSETS LIABILITIES Assets Liabilities
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Compensation and related benefits...... $ - $ - $ 0.1 $ -
Reserves and reinsurance............... 227.3 - 65.9 -
DAC.................................... 25.6 - - 222.6
VOBA................................... - 124.7 - -
Investments............................ - 182.1 - 25.3
Tax loss carryforwards................. 9.6 - - -
Goodwill and intangibles............... - 10.6 - -
Other.................................. 0.2 - 4.5 -
--------------- ---------------- --------------- ---------------
Total.................................. $ 262.7 $ 317.4 $ 70.5 $ 247.9
=============== ================ =============== ===============
At December 31, 2004, the Company has a federal tax loss carryforwards in
the amount of $27.5 million for book income tax purposes. The loss
carryforwards will expire beginning in the year 2020.
In 2003, the Internal Revenue Service ("IRS") commenced an examination of
the Company's federal income tax returns for the years 1998 through 2001.
The tax years 1994 through 1997 are currently under review by the Appeals
Office of the IRS. Management believes the examination of the Company's
returns will have no material adverse effect on the Company's results of
operations or financial position.
F-21
10) STOCK OPTIONS
Although MLOA has no employees, under service agreements with affiliates,
MLOA is charged for services, including personnel services and employee
benefits, provided on its behalf. In the predecessor periods, MONY Life
elected to account for stock-based compensation using the intrinsic value
method prescribed in APB No. 25. On July, 8, 2004, all outstanding stock
options were paid out or cancelled upon the completion of the acquisition
of MONY by the Holding Company. Based on the definition of an "employee"
prescribed in the Internal Revenue Code, MONY Life's career financial
professionals did not qualify as employees. The following table reflects
the effect on net (loss) earnings of MLOA as if the accounting prescribed
by SFAS 123 had been applied by MONY Life to the options granted to
employees and outstanding as at June 30, 2004, and December 31, 2003 and
2002:
SIX MONTHS Year Year
ENDED Ended Ended
JUNE 30, December 31, December 31,
2004 2003 2002
----------- ----------- -----------
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Net (Loss) Earnings as reported........................... $ (11.0) $ 26.2 $ (17.1)
Less: total stock-based employee compensation expense
determined under fair value method for all awards, net
of income tax............................................. (1.9) (2.8) (2.6)
----------- ----------- -----------
Pro Forma Net (Loss) Earnings............................. $ (12.9) $ 23.4 $ (19.7)
=========== =========== ===========
11) RELATED PARTY TRANSACTIONS
MLOA has service agreements with affiliates whereby personnel services,
employee benefits, facilities, supplies and equipment are provided to MLOA
to conduct its business. The associated costs related to the service
agreements are allocated to MLOA 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
MLOA. As a result of such allocations, MLOA incurred expenses of $24.9
million, $46.2 million, $73.8 million and $61.8 million for the six months
ended December 31, 2004, six months ended June 30, 2004, full years 2003
and 2002, respectively. At December 31, 2004 MLOA had a receivable from
affiliates in connection with these service agreements of $2.3 million. At
December 31, 2003 MLOA had a payable to MONY Life in connection with this
service agreement of $13.6 million.
In addition to the agreements discussed above, MLOA has various other
service and investment advisory agreements with affiliates. The amount of
expenses incurred by MLOA related to these agreements was $2.5 million,
$3.0 million, $6.0 million, and $2.6 million for the six months ended
December 31, 2004, six months ended June 30, 2004, full years 2003 and
2002, respectively. In addition, MLOA had an intercompany payable of $0.2
million and $1.7 million at December 31, 2004 and December 31, 2003,
respectively, related to these agreements.
MLOA entered into a modified coinsurance ("MODCO") agreement with U.S.
Financial Life Insurance Company ("USFL"), an affiliate, effective January
1, 1999, whereby MLOA agreed to reinsure 90% of all level term life
insurance policies written by USFL after January 1, 1999. Effective
January 1, 2000, this agreement was amended to reinsure 90% of all term
life and universal life insurance policies written by USFL after January
1, 2000. A second amendment, effective April 1, 2001, added a new series
of term life insurance policies issued by USFL and a DAC tax provision.
Under the agreement, MLOA shares in all premiums and benefits for the
reinsured policies based on the 90% quota share percentage, after
consideration of existing reinsurance agreements previously in force on
this business. In addition, MLOA reimburses USFL for its quota share of
expense allowances, as defined in the MODCO agreement. The statements of
operations include certain revenues and expenses assumed from USFL under
the MODCO agreement as follows:
F-22
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
REVENUES:
Universal life and investment-type product policy
fees............................................ $ 7.8 $ 7.3 $ 12.0 $ 8.2
Premiums .......................................... 59.2 53.2 88.7 63.9
----------- ----------- ----------- -----------
67.0 60.5 100.7 72.1
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES:
Benefits to policyholders.......................... 53.2 40.7 69.0 43.8
Interest credited to policyholders' account
balances........................................ 2.6 2.3 3.3 2.1
Amortization of deferred policy acquisition costs.. 3.2 8.7 13.8 9.5
Capitalization of deferred policy acquisition
costs .......................................... (34.9) (33.4) (60.7) (49.9)
Amortization of value of business acquired......... 2.8 -- -- --
Other operating costs and expenses................. 43.4 44.3 77.4 61.4
----------- ----------- ----------- -----------
70.3 62.6 102.8 66.9
----------- ----------- ----------- -----------
(Loss)/earnings from continuing operations before
income taxes....................................... $ (3.3) $ (2.1) $ (2.1) $ 5.2
=========== =========== =========== ===========
As of December 31, 2004, USFL recaptured all of the term life policies
that had previously been assumed by MLOA under this MODCO agreement. Other
income for the six months ended December 31, 2004 reflects the resulting
pre-tax gain on recapture of reinsurance from USFL of $9.0 million ($5.0
million after federal income tax). The following table presents the impact
of the recapture of reinsurance with USFL on MLOA's assets and
liabilities:
DECEMBER 31,
2004
--------------
(IN MILLIONS)
ASSETS
Fixed maturities................................... $ 84.6
Cash and cash equivalents.......................... 10.4
Accrued investment income.......................... 1.1
Deferred policy acquisition costs.................. (24.3)
VOBA............................................... (32.1)
Other assets....................................... 6.3
------------
TOTAL ASSETS $ 46.0
------------
LIABILITIES
Future policy benefits............................. $ 34.1
Other liabilities.................................. 2.9
Income taxes payable............................... 4.0
------------
TOTAL LIABILITIES 41.0
------------
Net impact of recapture of reinsurance from USFL... $ 5.0
============
The MODCO arrangement with USFL remains in effect for the universal life
insurance policies previously assumed and for new level term and universal
life business issued on or subsequent to January 1, 2005. At December 31,
2004 and 2003, MLOA recorded a payable of $27.8 million and $17.2 million,
respectively, to USFL in connection with this agreement.
MLOA recognized income (losses) of $7.1 million, $(4.6) million and $5.5
million for the six months ended December 31, 2004, six months ended June
30, 2004 and full year 2003, respectively, on the embedded derivative
within the MODCO agreement with USFL as prescribed by the accounting
provisions of DIG B36, effective for the first fiscal quarter beginning
after September 15, 2003. In addition, MLOA had a swap asset of $3.3
million and $5.5 million at December 31, 2004 and 2003, respectively,
related to this embedded derivative. MLOA accounts for the embedded
derivative as a total return swap.
On March 5, 1999, MLOA borrowed $50.5 million from MONY Benefit 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 December 31, 2004 is $36.8 million.
F-23
12) REINSURANCE
During the predecessor periods, MLOA used a variety of indemnity
reinsurance agreements with reinsurers to control its loss exposure. Under
the terms of these reinsurance agreements, the reinsurer was liable to
reimburse MLOA for the portion of paid claims ceded to it in accordance
with the applicable reinsurance agreement. However, MLOA remains
contingently liable for all benefits payable even if the reinsurers fail
to meet their obligations to MLOA. Life insurance business written by MLOA
was ceded under various reinsurance contracts. MLOA's general practice was
to retain no more than $4.0 million of risk on any one person for
individual products and $6.0 million for last survivor products. For its
variable annuity products, MLOA retained 100% of the risk in connection
with the return of premium death benefit. The benefits in connection with
guaranteed minimum death benefits in excess of the return of premium
benefit, which are offered under certain of MLOA's annuity contracts, were
100% reinsured up to specified limits. Benefits in connection with the
earnings increase benefit rider under the new MONY variable annuity were
similarly reinsured. The guaranteed minimum income benefit in the new
variable annuity product was 100% reinsured up to individual and aggregate
limits as well as limits which are based on benefit utilization.
During the successor period, MLOA continued to reinsure most of its new
variable life and universal life policies on an excess of retention basis,
retaining up to a maximum of $4.0 million on single-life policies and $6.0
million on second-to-die policies. However, for amounts applied for in
excess of those limits, reinsurance is ceded to AXA Equitable up to a
combined maximum of $15.0 million on single-life policies and $20.0
million on second-to-die policies. For amounts applied in excess of those
limits, reinsurance from unaffiliated third parties is now sought. New
term life policies continued to be coinsured on a first dollar basis, with
MLOA reinsuring 65% of each risk up to its $4.0 million retention and 100%
of any excess. A contingent liability exists with respect to reinsurance
ceded should the reinsurers be unable to meet their obligations.
At December 31, 2004 and 2003, respectively, reinsurance recoverables
related to insurance contracts amounted to $75.6 million and $59.6
million, of which $43.9 million and $33.8 million relates to one specific
reinsurer.
The following table summarizes the effect of reinsurance:
SIX MONTHS SIX MONTHS Year Year
ENDED ENDED Ended Ended
DECEMBER 31, JUNE 30, December 31, December 31,
2004 2004 2003 2002
----------- ----------- ----------- -----------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN MILLIONS)
Direct premiums....................................... $ 44.8 $ 37.7 $ 73.2 $ 50.9
Reinsurance assumed from USFL......................... 59.2 53.2 88.7 63.9
Reinsurance ceded..................................... (19.0) (13.5) (20.9) (14.2)
----------- ----------- ----------- -----------
Premiums.............................................. $ 85.0 $ 77.4 $ 141.0 $ 100.6
=========== =========== =========== ===========
Universal Life and Investment-type Product Policy
Fee Income Ceded................................... $ 22.7 $ 15.9 $ 30.0 $ 26.3
=========== =========== =========== ===========
Policyholders' Benefits Ceded......................... $ 24.0 $ 10.8 $ 42.6 $ 32.2
=========== =========== =========== ===========
13) FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
MLOA defines fair value as the quoted market prices for those instruments
that are actively traded in financial markets. In cases where quoted
market prices are not available, fair values are estimated using present
value or other valuation techniques. The fair value estimates are made at
a specific point in time, based on available market information and
judgments about the financial instrument, including estimates of the
timing and amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time MLOA's entire holdings of
a particular financial instrument, nor do they consider the tax impact of
the realization of unrealized gains or losses. In many cases, the fair
value estimates cannot be substantiated by comparison to independent
markets, nor can the disclosed value be realized in immediate settlement
of the instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
F-24
Fair values for mortgage loans on real estate are estimated by discounting
future contractual cash flows using interest rates at which loans with
similar characteristics and credit quality would be made. Fair values for
foreclosed mortgage loans and problem mortgage loans are limited to the
estimated fair value of the underlying collateral if lower.
Fair values of policy loans are estimated by discounting the face value of
the loans from the time of the next interest rate review to the present,
at a rate equal to the excess of the current estimated market rates over
the current interest rate charged on the loan.
The estimated fair values for MLOA's supplementary contracts not involving
life contingencies ("SCNILC") and certain annuities, which are included in
policyholders' account balances, are estimated using projected cash flows
discounted at rates reflecting expected current offering rates.
The fair values for single premium deferred annuities, included in
policyholders' account balances, are estimated as the discounted value of
projected account values. Current account values are projected to the time
of the next crediting rate review at the current crediting rates and are
projected beyond that date at the greater of current estimated market
rates offered on new policies or the guaranteed minimum crediting rate.
Expected cash flows and projected account values are discounted back to
the present at the current estimated market rates.
Fair values for the note payable to affiliate are determined using
contractual cash flows discounted at market interest rates.
The carrying values and estimated fair values for financial instruments
not previously disclosed in Notes 4 and 11 are presented below:
DECEMBER 31,
--------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
(SUCCESSOR) (Predecessor)
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Mortgage loans on real estate.......... $ 373.2 $ 378.0 $ 419.6 $ 445.7
Policy loans........................... 93.0 107.9 86.1 103.0
Policyholders liabilities:
Investment contracts................ 977.8 972.2 946.1 921.3
Note payable to affiliate.............. 36.8 36.8 39.6 39.6
14) COMMITMENTS AND CONTINGENT LIABILITIES
MLOA had $43.1 million in commitments under existing mortgage loan
agreements at December 31, 2004.
15) LITIGATION
(i)Since 1995 a number of purported class actions have been commenced in
various state and federal courts against MONY Life and MLOA alleging that
they 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/or violation of state insurance and/or
deceptive business practice laws). Plaintiffs in these cases seek
primarily equitable relief (e.g., reformation, an accounting, specific
performance, mandatory injunctive relief prohibiting MONY Life and MLOA
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. MONY Life and MLOA
have answered the complaints in each action (except for one being
voluntarily held in abeyance). MONY Life and MLOA have denied any
wrongdoing and have asserted numerous affirmative defenses.
In June 1996, the New York State Supreme Court certified one of those
cases, GOSHEN V. THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK AND MONY
LIFE INSURANCE COMPANY OF AMERICA (NOW KNOWN AS DEFILLIPPO, ET AL. V. THE
MUTUAL LIFE INSURANCE COMPANY OF NEW YORK AND MONY LIFE COMPANY OF
AMERICA), a class action 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
F-25
insurance policy issued by MONY Life and MLOA and sold on an alleged
"vanishing premium" basis during the period January 1, 1982 to December
31, 1995. In March 1997, MONY Life and MLOA filed a motion to dismiss or,
alternatively, for summary judgment on all counts of the complaint. In
October 1997 the New York State Supreme Court granted MONY Life's and
MLOA's motion for summary judgment and dismissed all claims filed in the
Goshen case against MONY Life and MLOA. In December 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 the New York General Business Law
("GBL")), which was remanded back to the New York State Supreme Court for
further proceedings consistent with the opinion. The New York State
Supreme Court subsequently reaffirmed that, for purposes of the remaining
New York GBL claim, only New York purchasers could proceed with such
claims. In July 2002, the New York Court of Appeals affirmed the New York
State Supreme Court's decision holding that only New York purchasers could
assert GBL [Section] 349 claims (New York's Consumer Protection Statute).
In September 2002 in light of the New York Court of Appeals' decision,
MONY Life and MLOA filed a motion to decertify the class with respect to
the sole remaining claim in the case. By orders entered in April and May
2003, the New York State Supreme Court denied preliminarily the motion for
decertification, but held the issue of decertification in abeyance pending
appeals by plaintiffs in related cases and a hearing on whether the class,
or a modified class, could satisfy the requirements of the class action
statute in New York. In December 2004, the Appellate Division, First
Department unanimously reversed the denial of MONY Life's motion for
decertification, and ordered decertification of the class with respect to
the sole remaining GBL claim. In March 2005, the Appellate Divsion denied
plaintiff's motion for reargument or, alternatively, for leave to appeal
that decision to the Court of Appeals.
With the exception of one putative class action currently pending in the
Eastern District of Michigan (STOCKLER V. MONY LIFE INSURANCE COMPANY OF
AMERICA), all 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. While most
of the cases before the District Court have been held in abeyance pending
the outcome in Goshen, in June 2003, the Court granted plaintiffs in two
of the constituent cases (the MCLEAN and SNIPES cases) leave to amend
their complaints to delete all class action claims and allegations other
than (in the case of MCLEAN) those predicated on alleged violations of the
Massachusetts and Illinois consumer protection statutes. In November 2003,
the Court in McLean entered an order granting defendants' motion for
summary judgment on res judicata grounds as to the individual claims of
the proposed class representatives of the putative statewide class
comprised of Massachusetts purchasers, but denied the motion on statute of
limitations grounds as to the individual claims of the proposed class
representatives of the putative state wide class of Illinois purchasers,
but denied the motion on statute of limitations grounds as to the
individual claims of the proposed class representatives of the putative
state wide class of Illinois purchasers. An agreement in principle has
been reached to settle the claims of the individual Illinois plaintiffs
which, if consummated, will result in the dismissal of their claims under
the Illinois consumer protection statue.
(ii) The ten similar and previously disclosed putative class action
lawsuits, arising out of the Holding Company's acquisition of MONY, and
filed between September and October 2003, against the Holding Company (and
in some cases AIMA Acquisition Co., a wholly owned subsidiary of AXA
Financial (AIMA)), MONY and MONY's directors in the Court of Chancery of
the State of Delaware in and for New Castle County, entitled BEAKOVITZ V.
AXA FINANCIAL, INC., ET AL.; BELODOFF V. THE MONY GROUP INC., ET AL.;
BRIAN V. THE MONY GROUP INC. ET AL.; BRICKLAYERS LOCAL 8 AND PLASTERERS
LOCAL 233 PENSION FUND V. THE MONY GROUP, INC., ET AL.; CANTOR V. THE MONY
GROUP, INC., ET AL.; E.M. CAPITAL, INC. V. THE MONY GROUP, INC., ET AL.;
GARRETT V. THE MONY GROUP, INC., ET AL.; LEBEDDA V. THE MONY GROUP, INC.,
ET AL.; MARTIN V. ROTH, ET AL.; AND MUSKAL V. THE MONY GROUP, INC., ET AL.
(collectively, the "MONY Stockholder Litigation") have been settled and
dismissed with prejudice. MLOA's management does not believe the outcome
of this matter will have a material impact on MLOA's financial position or
results of operations.
Related to the MONY Stockholder Litigation, the Holding Company, MONY and
MONY's directors were named in two putative class action lawsuits filed in
New York State Supreme Court in Manhattan, entitled LAUFER V. THE MONY
GROUP, INC., ET AL. and NORTH BORDER INVESTMENTS V. BARRETT, ET AL. A
stipulation of discontinuance for the NORTH BORDER action was filed with
the New York State Supreme Court in November, 2004. MLOA has not been
named as a party in the LAUFER action.
The previously disclosed lawsuit entitled THE MONY GROUP INC. V.
HIGHFIELDS CAPITAL MANAGEMENT LP, LONGLEAF PARTNERS SMALL-CAP FUND AND
SOUTHEASTERN ASSET MANAGEMENT, has been settled and dismissed without
prejudice. MLOA's management does not believe the outcome of this matter
will have a material impact on MLOA's financial position or results of
operations.
-------------------------
Although the outcome of litigation generally cannot be predicted with
certainty, management believes that the ultimate resolution of the
litigations described above should not have a material adverse effect on
the financial position of MLOA. Except as noted above, management
cannot make an estimate of loss, if any, or predict whether or not any of
such other litigations described above will have a material adverse effect
on MLOA's results of operations in any particular period.
In addition to the matters previously reported and those described above,
MLOA is involved in various legal actions and proceedings in connection
with its business. Some of the actions and proceedings have been
F-26
brought on behalf of various alleged classes of claimants and certain of
these claimants seek damages of unspecified amounts. While the ultimate
outcome of such matters cannot be predicted with certainty, in the opinion
of management no such matter is likely to have a material adverse effect
on MLOA's financial position or results of operations. However, it should
be noted that the frequency of large damage awards, including large
punitive damage awards that bear little or no relation to actual economic
damages incurred by plaintiffs in some jurisdictions, continues to create
the potential for an unpredictable judgment in any given matter.
16) STATUTORY FINANCIAL INFORMATION
For 2004, 2003 and 2002, MLOA's statutory net loss was $83.4 million,
$79.6 million and $91.9 million, respectively. Statutory surplus, capital
stock and Asset Valuation Reserve ("AVR") totaled $250.1 million and
$301.0 million at December 31, 2004 and 2003, respectively. There were no
shareholder dividends paid to MONY Life by MLOA in 2004, 2003 and 2002.
At December 31, 2004, MLOA, in accordance with various government and
state regulations, had $6.2 million of securities deposited with such
government or state agencies.
At December 31, 2004 and for the year then ended, there were no
differences in net income and capital and surplus resulting from practices
prescribed and permitted by the State of Arizona and those prescribed by
NAIC Accounting Practices and Procedures effective at December 31, 2004.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The differences between statutory surplus and capital
stock determined in accordance with Statutory Accounting Principles
("SAP") and total shareholder's equity under GAAP are primarily: (a) the
inclusion in SAP of an AVR intended to stabilize surplus from fluctuations
in the value of the investment portfolio; (b) future policy benefits and
policyholders' account balances under SAP differ from GAAP due to
differences between actuarial assumptions and reserving methodologies; (c)
certain policy acquisition costs are expensed under SAP but deferred under
GAAP and amortized over future periods to achieve a matching of revenues
and expenses; (d) under SAP, Federal income taxes are provided on the
basis of amounts currently payable with provisions made for deferred
amounts that reverse within one year while under GAAP, deferred taxes are
recorded for temporary differences between the financial statements and
tax basis of assets and liabilities where the probability of realization
is reasonably assured; (e) the valuation of assets under SAP and GAAP
differ due to different investment valuation and depreciation
methodologies, as well as the deferral of interest-related realized
capital gains and losses on fixed income investments; (f) the valuation of
the investment in Alliance Units under SAP reflects a portion of the
market value appreciation rather than the equity in the underlying net
assets as required under GAAP; (g) computer software development costs are
capitalized under GAAP but expensed under SAP; (h) certain assets,
primarily pre-paid assets, are not admissible under SAP but are admissible
under GAAP and (i) the fair valuing of all acquired assets and liabilities
including VOBA assets required for GAAP purchase accounting.
F-27
17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2004 and 2003 are summarized
below:
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30,(1) SEPTEMBER 30, DECEMBER 31,(2)
------------ ----------- ------------ ---------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
(IN MILLIONS)
2004
Total Revenues.................... $ 125.4 $ 105.7 $ 122.9 $ 127.8
============ =========== ============ ============
Earnings (Loss) from Continuing
Operations...................... $ 1.8 $ (16.6) $ 14.0 $ 12.5
============ =========== ============ ============
Net Earnings (Loss) .............. $ 5.6 $ (16.6) $ 14.0 $ 12.5
============ =========== ============ ============
Three Months Ended
-----------------------------------------------------------------------
March 31, June 30,(1) September 30, December 31,(2)
------------ ----------- ------------ ---------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
(IN MILLIONS)
2003
Total Revenues.................... $ 100.8 $ 117.4 $ 114.6 $ 122.0
============ =========== ============ ============
(Loss) Earnings from Continuing
Operations...................... $ (1.4) $ 7.9 $ 2.2 $ 17.6
============ =========== ============ ============
Net (Loss) Earnings............... $ (1.4) $ 7.9 $ 2.2 $ 17.5
============ =========== ============ ============
(1) Results for the three months ended June 30, 2004 include recorded
adjustments related to prior quarters' calculations of reinsurance
reserve credits and interest credited on certain life insurance and
annuity products. The effect of these adjustments was to increase
the net loss for the period by $6.0 million.
(2) Results for the three months ended December 31, 2004 include the net
gain of $5.0 million recorded from the recapture by USFL of all of
the term policies that had previously been assumed by MLOA under its
MODCO agreement with USFL (see Note 11).
F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
MONY Life Insurance Company of America:
Our audits of the financial statements referred to in our report dated
March 31, 2005 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set
forth therein when read in conjunction with the related financial
statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 31, 2005
F-29
MONY LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2004
ESTIMATED CARRYING
TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE
------------------ ---------------- ---------------- -------------
(IN MILLIONS)
Fixed maturities:
U.S. government, agencies and authorities........... $ 68.3 $ 69.9 $ 69.9
State, municipalities and political subdivisions.... - - -
Foreign governments................................. 10.3 10.3 10.3
Public utilities.................................... 156.5 160.9 160.9
All other corporate bonds........................... 1,595.8 1,624.4 1,624.4
Redeemable preferred stocks......................... 60.2 61.7 61.7
---------------- ---------------- --------------
Total fixed maturities.............................. 1,891.1 1,927.2 1,927.2
---------------- ---------------- --------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............ - - -
Mortgage loans on real estate.......................... 373.2 378.0 373.2
Real estate............................................ 1.5 - 1.5
Real estate acquired in satisfaction of debt........... - - -
Real estate joint ventures............................. 4.5 - 4.5
Policy loans........................................... 93.0 107.9 93.0
Other limited partnership interests.................... - - -
Other invested assets.................................. 4.1 4.1 4.1
---------------- ---------------- --------------
Total Investments...................................... $ 2,367.4 $ 2,417.2 $ 2,403.5
================ ================ ==============
(A) Cost for fixed maturities represents original cost, reduced by
repayments and writedowns and adjusted for amortization of premiums
or accretion of discount; cost for equity securities represents
original cost reduced by writedowns; cost for other limited
partnership interests represents original cost adjusted for equity
in earnings and reduced by distributions.
(B) Other invested assets excludes a $49.1 million investment in units
of Alliance Capital Management L.P., a related party.
F-30
MONY LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE IV
REINSURANCE
AT AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (SUCCESSOR),
SIX MONTHS ENDED JUNE 30, 2004 (PREDECESSOR), AND
YEARS ENDED DECEMBER 31, 2003 AND 2002 (PREDECESSOR)
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------- ------------ -------------- -------------- ---------------
(IN MILLIONS)
SIX MONTHS ENDED DECEMBER 31,
2004 (SUCCESSOR)
Life Insurance In-force...... $ 55,603.7 $ 21,088.4 $ 1,653.1 $ 36,168.4 4.57%
============= ============ ============= =============
Premiums:
Life insurance and
Annuities............... $ 44.8 $ 19.0 $ 59.2 $ 85.0 69.65%
Accident and health....... - - - - -
------------- ------------ ------------- -------------
Total Premiums............... $ 44.8 $ 19.0 $ 59.2 $ 85.0 69.65%
============= ============ ============= =============
SIX MONTHS ENDED JUNE 30,
2004 (PREDECESSOR)
Life Insurance In-force...... $ 75,405.0 $ 18,502.2 $ 25,568.0 $ 82,470.8 31.00%
Premiums:
Life insurance and
Annuities............... $ 37.7 $ 13.5 $ 53.2 $ 77.4 68.73%
Accident and health....... - - - - -
------------- ------------ ------------- -------------
Total Premiums............... $ 37.7 $ 13.5 $ 53.2 $ 77.4 68.73%
============= ============ ============= =============
2003 (Predecessor)
Life Insurance In-force...... $ 68,350.7 $ 16,592.5 $ 22,195.4 $ 73,953.6 30.01%
============= ============ ============= =============
Premiums:
Life insurance and
Annuities............... $ 73.2 $ 20.9 $ 88.7 $ 141.0 62.90%
Accident and health....... - - - - -
------------- ------------ ------------- -------------
Total Premiums............... $ 73.2 $ 20.9 $ 88.7 $ 141.0 62.90%
============= ============ ============= =============
2002 (Predecessor)
Life Insurance In-force...... $ 55,559.7 $ 13,172.7 $ 15,826.5 $ 58,213.5 27.19%
============= ============ ============= =============
Premiums:
Life insurance and
annuities............... $ 50.9 $ 14.2 $ 63.9 $ 100.6 63.52%
Accident and health....... - - - - -
------------- ------------ ------------- -------------
Total Premiums............... $ 50.9 $ 14.2 $ 63.9 $ 100.6 63.52%
============= ============ ============= =============
F-31
PART II, ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
PART II, ITEM 9A.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of MLOA's disclosure controls and procedures as of December 31, 2004.
Based on that evaluation, management, including the Chief Executive
Officer and Chief Financial Officer, concluded that MLOA's disclosure
controls and procedures are effective. Except for the enhancements to
internal controls described below, there has been no change in MLOA's
internal control over financial reporting that occurred during fourth
quarter 2004 that has materially affected, or is reasonably likely to
materially affect, MLOA's internal control over financial reporting.
In connection with the continuing integration process associated with the
Holding Company's recent acquisition of MONY, management has enhanced, and
continues to enhance, the overall internal control environment of MLOA by
implementing new procedures and controls, including increasing and
re-allocating staffing in the accounting department, instituting
additional account reconciliations and upgrading the investment accounting
computer systems.
9A-1
PART II, ITEM 9B.
OTHER INFORMATION
On March 29, 2005, MLOA entered into a services agreement dated as of
February 1, 2005 (the "Services Agreement") with AXA Equitable pursuant to which
AXA Equitable may provide certain personnel, property and services to MLOA.
MLOA and AXA Equitable are both subsidiaries of the Holding Company. The
Services Agreement requires MLOA to pay AXA Equitable the actual costs and
expenses incurred by AXA Equitable in furnishing MLOA such personnel, property
and services. Entry into the Services Agreement was subject to review by the
Arizona and New York insurance departments. MLOA received notice from the
Arizona and New York insurance departments that they did not object to the
Services Agreement in February 2005 and March 2005, respectively.
The foregoing description of the Services Agreement is qualified in its entirety
by reference to the provisions of the Services Agreement, which is attached as
Exhibit 10.9 to this report.
9B-1
PART III, ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
PART III, ITEM 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
PART III, ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I to Form 10-K.
12-1
PART III, ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
PART III, ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered
by PricewaterhouseCoopers LLP ("PwC") for the audit of MLOA's annual
financial statements for 2004 and 2003, and fees for other services
rendered by PwC. The amounts shown represent the amounts allocated to MLOA
under its service agreements with affiliates (see Note 11 of Notes to
Financial Statements).
2004 2003
----- ------
(IN MILLIONS)
Principal Accounting Fees and Services:
Audit fees ....................................... $0.54 $ 0.45
Audit related fees ............................... 0.10 0.09
Tax fees ......................................... - 0.05
All other fees ................................... - 0.04
----- ------
Total............................................. $0.64 $ 0.63
===== ======
Audit fees consist of the aggregate billed or to be billed by PwC for
professional services rendered for the audit of MLOA's annual financial
statements, review of financial statements included in MLOA's Quarterly
Reports on Form 10-Q and services that were provided in connection with
statutory and regulatory filings or engagements.
Audit related fees consist of assurance and related services that are
reasonably related to the performance of the audit or review of MLOA's
financial statements. The nature of the services performed includes fees
related to the execution of audits and attest services not required by
statute or regulations, due diligence related to investments, and
consultations concerning financial accounting and reporting standards.
Tax fees consist of the aggregate fees billed for professional services
rendered by PwC for tax compliance, tax advice, and tax planning.
All other fees consist principally of Information Technology
Implementation Projects.
MLOA's audit committee has determined that all services to be provided by
PwC must be reviewed and approved by the audit committee on a case by case
basis, and therefore has not adopted policies or procedures to pre-approve
engagements, provided, however, that the audit committee has delegated to
its chairperson the ability to approve any non-audit engagement where the
fees are expected to be less than or equal to $100,000 per engagement. Any
exercise of this delegated authority by the audit committee chairperson is
required to be reported at the next audit committee meeting.
14-1
PART IV, ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Financial
Statements and Schedules on page FS-1.
2. Financial Statement Schedules
The financial statement schedules are listed in the Index to
Financial Statements and Schedules on page FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits that begins
on page E-1.
15-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MONY Life Insurance Company of America has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2005 MONY LIFE INSURANCE COMPANY OF AMERICA
By: /s/ Christopher M. Condron
--------------------------------------
Name: Christopher M. Condron
Chairman of the Board, President and
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Christopher M. Condron Chairman of the Board, President and Chief March 31, 2005
- -------------------------------------------- Executive Officer, Director
Christopher M. Condron
/s/ Stanley B. Tulin Vice Chairman of the Board and March 31, 2005
- -------------------------------------------- Chief Financial Officer, Director
Stanley B. Tulin
/s/ Alvin H. Fenichel Senior Vice President and Controller March 31, 2005
- --------------------------------------------
Alvin H. Fenichel
/s/ Bruce W. Calvert Director March 31, 2005
- --------------------------------------------
Bruce W. Calvert
/s/ Henri de Castries Director March 31, 2005
- --------------------------------------------
Henri de Castries
/s/ Denis Duverne Director March 31, 2005
- --------------------------------------------
Denis Duverne
/s/ John C. Graves Director March 31, 2005
- --------------------------------------------
John C. Graves
/s/ Mary R. Henderson Director March 31, 2005
- -------------------------------------------
Mary R. Henderson
/s/ James F. Higgins Director March 31, 2005
- -------------------------------------------
James F. Higgins
S-1
/s/ W. Edwin Jarmain Director March 31, 2005
- -------------------------------------------
W. Edwin Jarmain
/s/ Christina Johnson Director March 31, 2005
- -------------------------------------------
Christina Johnson
/s/ Scott D. Miller Director March 31, 2005
- -------------------------------------------
Scott D. Miller
/s/ Joseph H. Moglia Director March 31, 2005
- -------------------------------------------
Joseph H. Moglia
/s/ Peter J. Tobin Director March 31, 2005
- -------------------------------------------
Peter J. Tobin
S-2
INDEX TO EXHIBITS
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
1.1 Form of Underwriting Agreement among Filed as Exhibit 3(a) to Post-Effective
MLOA, MONY Securities Corp. and MONY Amendment No. 3 dated February 28, 1991 to
Series Fund, Inc. Registration Statement No. 33-20453 and
incorporated by reference herein.
3.1 Articles of Incorporation of MLOA Filed as Exhibit 6(a) to Registration
Statement No. 33-13183 dated April 6, 1987
and incorporated by reference herein.
3.2 By-Laws of MLOA Filed as Exhibit 6(b) to Registration
Statement No. 33-13183 dated April 6, 1987
and incorporated by reference herein.
10.1 Forms of MLOA's Policy Contract Riders Filed as Exhibit 10.6 to MLOA's Annual
Report on Form 10-K for the fiscal year
ended December 31, 2002 and incorporated by
reference herein.
10.2 Amended and Restated Services Agreement Filed herewith
between MLOA and AXA Equitable Life
Insurance Company dated as of
February 1, 2005
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
31.1 Section 302 Certification made by the
registrant's Chief Executive Officer Filed herewith
31.2 Section 302 Certification made by the
registrant's Chief Financial Officer Filed herewith
32.1 Section 906 Certification made by the
registrant's Chief Executive Officer Filed herewith
32.2 Section 906 Certification made by the
registrant's Chief Financial Officer Filed herewith
E-1