UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-65423
MONY LIFE INSURANCE COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of June 30, 2005.
As of March 16, 2006, 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.
TABLE OF CONTENTS
Part I Page
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Item 1. Business..........................................................1-1
Overview..........................................................1-1
Recent Events.....................................................1-1
Products..........................................................1-1
General Account Investment Portfolio..............................1-2
Competition.......................................................1-3
Regulation........................................................1-3
Employees.........................................................1-5
Parent Company....................................................1-5
Other Information.................................................1-5
Item 1A. Risk Factors......................................................1A-1
Item 1B. Unresolved Staff Comments.........................................1B-1
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
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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
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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
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Item 15. Exhibits, Financial Statement Schedules...........................15-1
Signatures...................................................................S-1
Index to Exhibits............................................................E-1
*Omitted pursuant to General Instruction I to Form 10-K
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FORWARD-LOOKING STATEMENTS
Some of the statements made in this report, including statements made in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", may constitute forward-looking statements. Forward-looking
statements include, among other things, discussions concerning potential
exposure of MONY Life Insurance Company of America 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," "plans," "expects," "projects," "should,"
"probably," "risk," "target," "goals," "objectives," or similar expressions.
MONY Life Insurance Company of America claims the protection afforded by the
safe harbor for forward-looking statements contained in Section 21E of the
Securities Exchange Act of 1934, 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. Forward-looking statements
are not a guarantee of future performance. Actual results could differ
materially from those anticipated by forward-looking statements due to a number
of important factors, including those discussed under "Risk Factors" and
elsewhere in this report.
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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, 2005, MLOA had approximately 273,000 insurance policies and annuity
contracts in force.
MONY Life is a wholly owned subsidiary of AXA Financial, Inc. ("AXA Financial")
and AXA Financial 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
AXA Financial substantially completed the integration of the MONY Companies in
2005, including the combination of MONY's and AXA Financial's retail and
wholesale distribution forces and key service operations. 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 life and interest-sensitive life
insurance products (including group interest-sensitive life insurance products).
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 variable
annuities, fixed deferred annuities and payout 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. The investment options available
to MLOA's variable life and variable annuity contractholders are comprised of
the proprietary fund family of EQ Advisors Trust and various non-proprietary
fund families. MLOA's variable life insurance contracts have as many as 76
investment options and MLOA's variable annuity contracts have as many as 66
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 integration, management continues to evaluate the
products sold by MLOA as part of an overall review of insurance products offered
by AXA Equitable and AXA Financial'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 Group. This
evaluation has resulted in the recent discontinuation by MLOA of new sales of
all life insurance and annuity products, except for certain variable and fixed
annuities in limited markets, interest-sensitive whole life insurance and group
term life insurance. Since this review of products is ongoing, and since future
decisions regarding 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 new business.
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(1) As used in this Form 10-K, the term "AXA Financial Group" 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 AXA Financial on July 8, 2004 that merged
with and into AXA Financial on July 22, 2004 (the "MONY Acquisition"), and
the term "MONY Companies" means MONY Life Insurance Company ("MONY Life"),
MLOA, 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
MLOA's annuity and life insurance products have been distributed through
financial professionals associated with AXA Advisors, LLC, an affiliated
broker-dealer, and AXA Network, LLC, an affiliated insurance agency. As of
December 31, 2005, AXA Advisors, LLC and AXA Networks, LLC had approximately
5,980 financial professionals.
MLOA has also distributed its products on a wholesale basis through AXA
Distributors, LLC, AXA Financial Group's wholesale distribution company, to
third-party broker-dealers and insurance brokerage general agencies.
In 2005, MONY Life financial professionals became financial professionals of AXA
Network and AXA Advisors. Also in 2005, AXA Distributors, LLC replaced MONY
Life's distribution company as the wholesale distributor of insurance products
of MLOA.
REINSURANCE
MLOA reinsures most of its variable life, interest-sensitive life and term life
insurance policies on an excess of retention basis. In 2005, MLOA retained up to
a maximum of $4 million of risk on single-life policies and up to a maximum of
$6 million on second-to-die policies. For amounts applied for in excess of those
limits, reinsurance is ceded to AXA Equitable up to a combined maximum of $25
million of risk on single-life policies and up to a maximum of $30 million on
second-to-die policies. For amounts issued in excess of those limits,
reinsurance from unaffiliated third parties is sought. New term life policies
continued to be coinsured on a first dollar basis, with MLOA reinsuring up to
65% of each risk up to its $4.0 million retention and 100% of any excess. The
reinsurance arrangements obligate the reinsurer to pay a portion of any death
claim in excess of the amount retained by MLOA in exchange for an agreed-upon
premium. 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 4.6% 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 provide guaranteed minimum income benefit ("GMIB") features and/or
guaranteed minimum death benefit ("GMDB") features. At December 31, 2005, MLOA
had fully reinsured, subject to certain maximum amounts or caps in any one
period, the GMIB benefit and reinsured approximately 33.3% of its net amount at
risk to the GMDB obligation on annuity contracts in force as of December 31,
2005.
For additional information about reinsurance strategies implemented by MLOA, see
Note 12 of Notes to Financial Statements.
In addition, MLOA 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 remained in effect for
interest-sensitive life insurance policies previously assumed and for new level
term and interest-sensitive life business issued on or subsequent to January 1,
2005. In 2005, these MODCO reinsurance arrangements were terminated for level
term life insurance and interest-sensitive life insurance policies and rescinded
as of January 1, 2005 for term life insurance policies. 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 that was terminated in 2005, MLOA does not assume
reinsurance from any other insurance company.
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, 2005:
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MONY LIFE INSURANCE COMPANY OF AMERICA
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
-----------------------------------------
AMOUNT % OF TOTAL
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Fixed maturities (2)................... $ 2,050.0 78.2%
Mortgages.............................. 290.2 11.1
Other invested assets.................. 54.8 2.1
Policy loans........................... 96.3 3.7
Cash and short-term investments (3).... 129.7 4.9
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Total.................................. $ 2,621.0 100.0%
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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 $14.4 million on fixed maturities
classified as available for sale. Fixed maturities includes approximately
$101.0 million, net amortized cost of below investment grade securities.
(3) Comprised of cash and short-term investments included within the "Cash and
cash equivalent" 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 financial and claims-paying ratings; size; product
quality, range, features/functionality and price; 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 16, 2006 the financial strength or
claims-paying rating of MLOA was "AA-" from Standard & Poor's Corporation (4th
highest of 21 ratings; with positive 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 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. In recent years, 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
1-3
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.
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 2005, 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. 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 allowed increased funding levels for tax
qualified retirement products. In 2003, reductions in income tax rates on
long-term capital gains and qualifying corporate dividends were enacted which
adversely impacted the attractiveness of cash value life insurance and annuity
products relative to other investment alternatives that 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 both nonqualified deferred compensation plan and
qualified plan (including tax sheltered annuities) rules. These provisions, to
the extent enacted, 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. The President's Advisory Panel on Federal Tax
Reform recently announced its tax reform options. If enacted by Congress, these
options would make sweeping changes to many long-standing tax rules. These
changes would include the creation of new tax-favored savings accounts that
would replace many existing qualified plan arrangements and would eliminate
certain tax benefits currently available to cash value life insurance and
deferred annuity products by annually taxing any withdrawable cash value
build-up in such products. Management believes that the enactment of these
options into law in their current or similar form could adversely affect sales,
funding and surrender of cash value life insurance and deferred annuity
products. Management cannot predict what, if any, legislation will actually be
proposed or enacted based on these options or what other proposals or
legislation, if any, may be introduced or enacted relating to MLOA's business 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 that may
result in censure, fines, the issuance of cease-and-desist orders or other
sanctions.
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.
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.
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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 laws relating to the use and protection 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 one
of the largest insurance groups in the world and operates primarily in Western
Europe, North America, and the Asia/Pacific region and, to a lesser extent, in
other regions including Eastern Europe, 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 AXA Financial'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 AXA Financial's website at the above address.
1-5
PART I, ITEM 1A.
RISK FACTORS
In the course of conducting our business operations, we could be exposed to a
variety of risks. This "Risk Factors" section provides a summary of some of the
significant risks that could affect our business, financial condition or results
of operations. In this section, the terms "we," "us" and "our" refer to MONY
Life Insurance Company of America.
EQUITY MARKET DECLINES AND VOLATILITY MAY ADVERSELY IMPACT OUR PROFITABILITY.
Declines or volatility in equity markets can negatively impact the investment
returns we earn in those markets as well as our business and profitability.
Examples of the effects of declines or volatility in equity markets include the
following:
o Sustained equity market declines that result in decreases in the account
values of our variable life and annuity contracts could reduce the amount
of revenue we derive from fees charged on those account values;
o Sustained equity market declines that result in decreases in the account
values of our variable life and annuity contracts that provide guaranteed
benefits would increase the size of our potential obligations related to
such guaranteed benefits. This could result in an increase in claims and
reserves related to those contracts, net of any reinsurance reimbursements
or proceeds from our hedging program;
o Increased volatility of equity markets may result in changes to the fair
value of our GMIB reinsurance contracts, which could result in increased
volatility of our earnings;
o Increased volatility of equity markets may increase surrenders and
withdrawals of our variable life and annuity contracts, which could
negatively impact our future profitability;
o Equity market declines could negatively impact the value of equity
securities we hold for investment, thereby reducing our capital; and
o Deferred acquisition costs, referred to as DAC, and value of business
acquired, referred to as VOBA, are accounting methods for amortizing the
sales costs related to the acquisition of new life insurance and annuity
business over the period in which that business will generate earnings for
us. DAC and VOBA amortization rates are based in part on investment return
and related estimates that, in turn, are based on actual market trends and
reasonable expectations as to future performance drawn from those trends.
Equity market declines could lead to reductions in these estimates that, in
turn, could accelerate our DAC and VOBA amortization and reduce our current
earnings.
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT OUR MARGINS ON
INTEREST-SENSITIVE ANNUITY AND LIFE INSURANCE CONTRACTS AND INCREASE SURRENDERS
AND WITHDRAWALS FROM THOSE CONTRACTS.
Our margin or "spread" on interest-sensitive annuity and life insurance
contracts is the difference between the yield we derive from portfolio
investments that are intended to support our required payments under these
contracts and the interest rates we credit to holders of these contracts. This
spread is a significant part of our earnings.
If interest rates fall and remain at significantly lower levels, the minimum
interest rates that we guarantee on interest-sensitive annuity and life
insurance contracts would cause our spreads on these contracts to deteriorate
and possibly become negative which could have a material adverse effect on our
profitability. Also, such a fall in interest rates could result in increased
reserve requirements for those contracts.
A rapid and sustained rise in interest rates poses risks of deteriorating
spreads and high surrenders of our interest-sensitive annuity and life insurance
contracts. In such an environment, we may face pressure to increase credited
rates on those contracts to match rates offered by our competitors on new
deposits. Such changes in our credited rates on these contracts generally occur
more quickly than corresponding changes to the rates we earn on related
portfolio investments, thereby reducing our spreads on such contracts. Also, a
high level of surrenders associated with a rapid and sustained rise in interest
rates could require us to liquidate portfolio investments to fund surrender
payments at a time when the value of those investments has decreased.
AN OVERALL ECONOMIC DOWNTURN COULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL
POSITION.
An overall economic downturn could negatively affect the value of our portfolio
investments and increase surrenders and withdrawals from our life insurance and
annuity contracts. In particular, an economic downturn could significantly
affect the value of our portfolio investments since the majority of our
portfolio is invested in bonds and mortgage loans that may suffer credit and
value deterioration during such a downturn. Reductions in the value of our
portfolio investments coupled with increased surrenders and withdrawals from our
contracts could adversely affect our revenues and financial position.
1A-1
OUR RESERVES COULD BE INADEQUATE DUE TO DIFFERENCES BETWEEN OUR ACTUAL
EXPERIENCE AND MANAGEMENT'S ESTIMATES AND ASSUMPTIONS.
Our reserve requirements are calculated based on a number of estimates and
assumptions, including estimates and assumptions related to future mortality,
morbidity, persistency, interest rates, claims experience and reinvestment
rates. For a description of some of these estimates, see "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Critical Accounting Estimates". Our reserves could be inadequate if actual
results differ significantly from our estimates and assumptions. If so, we will
be required to increase reserves resulting in a charge to our earnings.
LOSSES DUE TO DEFAULTS, ERRORS OR OMISSIONS BY THIRD PARTIES COULD ADVERSELY
IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
We depend on third parties that owe us money, securities or other assets to pay
or perform under their obligations. These parties include the issuers whose
securities we hold in our investment portfolios, borrowers under the mortgage
loans we make, customers, trading counterparties, counterparties under swap and
other derivative contracts, clearing agents, exchanges, clearing houses and
other financial intermediaries. These parties may default on their obligations
to us due to bankruptcy, lack of liquidity, downturns in the economy or real
estate values, operational failure or other reasons. Losses associated with
defaults by these third parties could adversely impact our business and results
of operations.
REINSURANCE MAY BE INADEQUATE TO PROTECT US AGAINST LOSSES AND WE MAY INCUR
LOSSES FROM OUR REINSURERS' FAILURE TO MEET THEIR OBLIGATIONS.
In the normal course of business, we seek to reduce risk through reinsurance.
Under our reinsurance arrangements, other insurers assume a portion of the
claims and related expenses on certain business we underwrite; however, we
remain liable as the direct insurer on all risks we reinsure. These reinsurance
arrangements do not eliminate our obligation to pay related claims and we are
subject to our reinsurers' credit risk with respect to our ability to recover
amounts due from them. Although we evaluate periodically the financial condition
of our reinsurers, our reinsurers may become financially unsound by the time
their financial obligation to us becomes due. The inability of any reinsurer to
meet its financial obligations to us could negatively impact our results of
operations. See "Business - Reinsurance and Hedging" and Note 12 of Notes to
Financial Statements for additional information regarding our reinsurance
arrangements.
OUR EARNINGS ARE IMPACTED BY DAC AND VOBA CALCULATIONS THAT ARE BASED ON
ESTIMATES THAT ARE SUBJECT TO CHANGE.
Our earnings for any period depend in part on the amount of our life insurance
and annuity product acquisition costs (including commissions, underwriting,
agency and policy issue expenses) that can be deferred as DAC rather than
expensed immediately. They also depend in part on the pattern of DAC and VOBA
amortization and the recoverability of DAC and VOBA which are both 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. Revisions to our
estimates are reflected in our earnings for the period in which the estimates
are revised.
A DOWNGRADE IN OUR FINANCIAL STRENGTH AND CLAIMS-PAYING RATINGS COULD ADVERSELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Claims paying and financial strength ratings are important factors in
establishing the competitive position of insurance companies. A downgrade in
these ratings could adversely affect our business and results of operations by
increasing surrenders and withdrawals from our contracts. A downgrade in our
ratings may also adversely affect our cost of raising capital or limit our
access to sources of capital. See "Business - Competition" for a full
description of our ratings.
LEGAL AND REGULATORY ACTIONS COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
BUSINESSES.
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 these 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.
We are involved in such litigation and our results of operations and financial
position could be affected by defense and settlement costs and any unexpected
material adverse outcomes in such litigations as well as in other material
litigations pending against us. 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.
1A-2
In addition to the litigation described above, examinations by Federal and state
regulators and other governmental agencies could result in adverse publicity,
sanctions, fines and other costs. At this time, management cannot predict what
actions regulators may take or what the impact of such actions might be. Fines,
other sanctions and/or other costs could result from ongoing or future
regulatory matters. For further information, see "Business - Regulation" and
Note 15 of Notes to Financial Statements.
WE MAY BE ADVERSELY AFFECTED TO THE EXTENT THAT WE FACE INCREASED REGULATION
AND/OR HEIGHTENED REGULATORY SCRUTINY.
We are subject to extensive regulation and supervision by the insurance
regulators in all states (other than New York), the District of Columbia and
Puerto Rico. In recent years, 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. To the extent that
the amount of regulatory scrutiny or the amount of regulation continues to
increase, our costs of compliance will increase. Such increases in our
compliance obligations could materially increase our costs and adversely affect
our earnings. In addition, changes in the regulatory environment, including
increased activism by state attorneys general, insurance commissioners and other
regulators, could have a material adverse impact on our business and results of
operations. For additional information, see "Business - Regulation".
CHANGES IN U.S. TAX LAWS MAY ADVERSELY AFFECT OUR PROFITABILITY.
Currently, special U.S. tax law provisions apply to life insurance and annuity
products. Our profitability may be materially affected by changes in tax laws
and regulations, including changes relating to savings, retirement funding and
taxation. Adverse changes could include the introduction of taxation of annual
increases in the account value of life insurance and annuity products, improved
tax treatment of mutual funds or other investments as compared to insurance
products or repeal of the Federal estate tax. 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. For additional information,
see "Business - Regulation - Federal Tax Initiatives".
CHANGES IN ACCOUNTING STANDARDS COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
RESULTS OF OPERATIONS.
Our financial statements are prepared in accordance with generally accepted
accounting principles that are revised from time to time. In the future, new
accounting pronouncements, as well as new interpretations of existing accounting
pronouncements, may have material adverse effects on our results of operations
and/or financial position. For information about recent accounting
pronouncements, see Note 3 of Notes to Financial Statements.
OUR LOSSES PROVIDED FOR DISCONTINUED OPERATIONS MAY DIFFER FROM THE LOSSES
ULTIMATELY REALIZED.
The determination of the allowance for future losses from our discontinued
operations involves numerous estimates and subjective judgments, including those
regarding expected performance of investment assets, asset reinvestment rates,
ultimate mortality experience and other factors that affect investment and
benefit projections. To the extent actual results or future projections of
discontinued operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations.
OUR DISCLOSURE AND INTERNAL CONTROL SYSTEM CANNOT GUARANTEE THAT OUR PUBLIC
DISCLOSURE AND FINANCIAL STATEMENTS DO NOT CONTAIN ERRORS.
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. Also, the effectiveness of a disclosure and
internal control system may vary over time due to changes in conditions.
1A-3
PART I, ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
1B-1
PART I, ITEM 2.
PROPERTIES
MLOA does not lease or own space for its operations. Facilities are provided to
MLOA for the conduct of its business pursuant to service agreements with
affiliated companies. For additional information, see Note 11 of Notes to
Financial Statements.
2-1
PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 15 of Notes to Financial Statements for the year
ended December 31, 2005 (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. MLOA did not pay
any shareholder dividends in 2005 or 2004. 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" and "Risk Factors" included elsewhere in this Form
10-K.
GENERAL
On July 8, 2004, the acquisition of MONY by AXA Financial was completed and,
under the terms of the related merger agreement, AXA Financial 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 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").
Until December 31, 2004, MLOA had 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 quarter 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 Group 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 ($5.9 million after Federal income tax) for the six months ended
December 31, 2004.
o MONY Life contributed 1.2 million units of AllianceBernstein, an affiliate,
which it had received from AXA Financial Group, to MLOA, increasing MLOA's
statutory surplus by $37.2 million.
USFL's MODCO arrangement with MLOA remained in effect for the universal life
insurance policies inforce at December 31, 2004, as well as for new universal
life and level premium term life insurance business issued during 2005. This
MODCO agreement was terminated as of December 31, 2005. In connection with the
termination, USFL recaptured the reinsured universal life business inforce as of
December 31, 2005 and unwound the reinsurance to MLOA of the level premium term
business issued during 2005.
The 2005 recapture of the universal life reinsurance from USFL resulted in
pre-tax gains to MLOA of $0.6 million ($0.4 million after Federal income tax)
for the year ended December 31, 2005. In addition, in connection with the
unwinding of the reinsurance of term life policies issued in 2005, MLOA received
a payment of $0.7 million from USFL representing interest on net payments made
to USFL during the year under the MODCO agreement.
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 AXA Financial'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 Group. This evaluation
has resulted in the recent discontinuation by MLOA of new sales of all life
insurance and annuity products, except for certain fixed and variable annuities
in limited markets, interest-sensitive whole life insurance and group term life
insurance. Since this review of products is ongoing, and since future decisions
regarding 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 new business.
The earnings narrative that follows discusses the results for 2005 compared to
the 2004 results.
RESULTS OF OPERATIONS
The acquisition of MONY by AXA Financial Group on July 8, 2004 resulted in a new
basis of accounting for the Successor period beginning July 1, 2004. Information
relating to the Predecessor period prior to the completion of the acquisition is
presented using MLOA's historical basis of accounting. The following management
narrative should be read taking into account not only this new accounting basis
but also other significant changes to MLOA's operations following AXA Financial
Group's acquisition of MONY,
7-1
including, but not limited to: (1) USFL's December 31, 2005 recapture of all
universal life policies that had previously been assumed by MLOA under its MODCO
agreement with USFL; (2) USFL's December 31, 2004 recapture of all term life
policies that had previously been assumed by MLOA under its MODCO agreement with
USFL, and the unwinding of term life reinsurance assumed from USFL during 2005;
(3) significant MLOA cost reductions associated with AXA Financial Group's
integration of the MONY Companies; and (4) the discontinuation of new sales of
all life insurance and annuity products, except for certain fixed and variable
annuities in limited markets, interest-sensitive whole life insurance and group
term life insurance. To assist in the comparability of MLOA's financial results
and related discussions, results of operations for the year ended December 31,
2004 include results for six months of the Successor and six months of the
Predecessor and are designated as "combined", as follows:
YEAR Twelve Months Six Months Six Months
ENDED Ended Ended Ended
DECEMBER 31, December 31, December 31, June 30,
2005 2004 2004 2004
-------------- --------------- ------------- -------------
(SUCCCESSOR) (Combined) (Successor) (Predecessor)
(IN MILLIONS)
REVENUES:
Universal life and investment-type product policy fee income..... $ 168.3 $ 163.5 $ 80.8 $ 82.7
Premiums......................................................... 53.8 162.4 85.0 77.4
Net investment income............................................ 135.0 127.1 62.8 64.3
Investment losses, net........................................... (2.2) (5.3) (4.6) (0.7)
Other income..................................................... 22.0 34.1 26.7 7.4
-------------- --------------- ------------- -------------
Total revenues......................................... 376.9 481.8 250.7 231.1
-------------- --------------- ------------- -------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits.......................................... 99.5 172.0 91.2 80.8
Interest credited to policyholders' account balances............. 99.9 104.1 50.0 54.1
Compensation and other benefits.................................. 30.7 77.9 32.1 45.8
Commissions...................................................... 72.9 162.0 76.5 85.5
Interest expense................................................. 1.6 2.6 1.3 1.3
Amortization of deferred policy acquisition costs and value of
business acquired............................................. 41.2 57.1 22.4 34.7
Capitalization of deferred policy acquisition costs ............. (78.1) (181.3) (87.5) (93.8)
Rent expense..................................................... 10.5 12.8 3.0 9.8
Other operating costs and expenses............................... 40.7 61.0 22.8 38.2
-------------- --------------- ------------- -------------
Total benefits and other deductions.................... 318.9 468.2 211.8 256.4
-------------- --------------- ------------- -------------
Earnings (loss) before income taxes and cumulative effect of
accounting change............................................. 58.0 13.6 38.9 (25.3)
Income tax (expense) benefit..................................... (16.7) (1.9) (12.4) 10.5
-------------- --------------- ------------- -------------
Net earnings (loss) before cumulative effect of accounting change 41.3 11.7 26.5 (14.8)
Cumulative effect of accounting change, net of income taxes...... - 3.8 - 3.8
-------------- --------------- ------------- -------------
Net Earnings (Loss).............................................. $ 41.3 $ 15.5 $ 26.5 $ (11.0)
============== =============== ============= =============
YEAR ENDED DECEMBER 31, 2005 COMPARED TO COMBINED TWELVE MONTHS ENDED DECEMBER
31, 2004
Earnings before income taxes and the cumulative effect of an accounting change
were $58.0 million for the full year 2005, an increase of $44.4 million from
earnings before income taxes and cumulative effect of an accounting change of
$13.6 million for the combined twelve months of 2004. Net earnings for MLOA were
$41.3 million for the full year 2005, up from net earnings of $15.5 million for
the combined twelve months of 2004. 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.
Revenues. Total revenues for the full year 2005 decreased $104.9 million as
compared to the combined twelve months of 2004.
Premiums totaled $53.8 million for the full year 2005, a $108.6 million decrease
from the combined twelve months of 2004, principally due to a decrease in
premiums assumed under the MODCO agreement with USFL attributable to the
December 31, 2004 recapture by USFL of all of the term life policies in force
that had previously been assumed by MLOA under the MODCO agreement and the 2005
unwinding. These decreases were partially offset by an increase in renewal
premiums on level term business attributable to a higher in-force block of
business for MLOA.
7-2
Net investment income was $135.0 million for the full year 2005, $7.9 million
higher than the combined twelve months of 2004. The increase was principally due
to increased income on fixed maturities as a result of higher average assets and
a decrease in investment related expenses attributable to cost reductions
associated with AXA Financial Group's integration of the MONY Companies,
partially offset by decreased income on mortgage loans due to lower average
assets.
Investment losses, net were $2.2 million for the full year 2005 compared to
investment losses, net of $5.3 million for the combined twelve months of 2004.
The lower losses was principally due to net losses on sales of fixed maturities
of $2.2 million compared to $8.0 million in the combined twelve months of 2004,
partially offset by gains on sales of mortgage loans in the prior year period of
$2.7 million.
There was a $12.1 million decrease in other income to $22.0 million for the full
year 2005 from $34.1 million for the combined twelve months of 2004. The
decrease was principally due to the impact of the $0.6 million gain recognized
on the recapture of the universal life policies that had previously been assumed
under MLOA's MODCO agreement with USFL in the current year period compared to
the $9.0 gain recognized on the recapture of the term life policies assumed
under MLOA's MODCO agreement with USFL in the prior year period. Additionally,
there were decreases in the value of the embedded derivative related to the
reinsurance agreement with USFL resulting in a loss of $(1.7) million in 2005
compared to a gain of $2.5 million in 2004 and an insurance recovery of $2.4
million in the first quarter 2004, partially offset by $4.1 million of equity in
net earnings from the investment in AllianceBernstein units in 2005.
Benefits and Other Deductions. Total benefits and other deductions for the full
year 2005 decreased $149.3 million to $318.9 million from $468.2 million for the
combined twelve months of 2004.
Policyholders' benefits decreased $72.5 million to $99.5 million in the full
year 2005, resulting principally from a decrease in assumed benefits under the
MODCO treaty with USFL and a decrease in the change in reserves due to a
reduction in new sales of certain life insurance and annuity products, offset by
an increase in claims on universal life and level term products.
Compensation and benefits decreased $47.2 million to $30.7 million for the full
year 2005 from $77.9 million for the combined twelve months of 2004, principally
due to cost reductions associated with AXA Financial Group's integration of the
MONY Companies and a decrease in the cost of personnel services provided to MLOA
under its service agreement with AXA Equitable as certain products previously
offered by MLOA were replaced by other AXA Financial Group products.
Commissions decreased $89.1 million during the full year 2005 to $72.9 million
principally due to a decrease in the reinsurance expense allowance paid to USFL
as a result of the recapture by USFL on December 31, 2004 of all of the term
life policies in force that had previously been assumed by MLOA under the MODCO
agreement and a decrease in first year commissions as certain life insurance and
annuity products previously offered by MLOA were replaced by other AXA Financial
Group products.
Amortization of DAC and VOBA decreased $15.9 million to $41.2 million for the
full year 2005 principally due to the impact of new basis accounting in the
successor period. DAC was replaced with VOBA as part of purchase accounting.
Amortization of DAC attributable to the Predecessor period in 2004 was $34.7
million. Amortization of VOBA resulting from the new purchase accounting basis
in 2005 was $32.5 million compared to $16.7 for the six months ended December
31, 2004.
DAC capitalization of $78.1 million for the full year 2005 decreased $103.2
million from $181.3 million in the combined twelve months of 2004 principally
due to respective decreases of $16.1 million and $34.1 million in first year
commissions and deferrable operating expenses due to lower sales in the
successor period as certain products previously offered by MLOA were replaced by
other AXA Financial Group products and a $53.0 million decrease in reinsurance
expense allowances paid to USFL.
Rent expense decreased $2.3 million to $10.5 million for the full year 2005,
reflecting the cost reductions associated with AXA Financial Group's integration
of the MONY Companies.
Other operating costs and expenses totaling $40.7 million for the full year 2005
decreased by $20.3 million from $61.0 million for the combined twelve months of
2004 principally due to cost reductions associated with AXA Financial Group's
integration of the MONY Companies and a decrease in services provided to MLOA
under its service agreement with AXA Equitable as certain products previously
offered by MLOA were replaced by other AXA Financial Group products.
Premiums and Deposits. Total premiums and deposits for life insurance and
annuity products, excluding reinsurance assumed under the MODCO treaty with
USFL, for the full year 2005 decreased by $351.8 million from the combined
twelve months of 2004 to $420.6 million. The decrease was attributable to a
reduction in new sales of certain life insurance of $203.5 million and of
annuity products of $148.3 million.
7-3
Surrenders and Withdrawals. When totals for the full year 2005 are compared to
the combined twelve months of 2004, surrenders and withdrawals increased from
$486.1 million to $651.6 million with respective increases of $103.6 million and
$63.4 million reported for variable and interest-sensitive life and individual
annuities offset by a decrease of $1.5 million reported for traditional life
insurance products. The annualized annuities surrender rate increased to 13.2%
in the 2005 period from 11.9% in the 2004 period, while the variable and
interest-sensitive life surrender rates showed an increase from 4.55% in the
2004 period to 8.92% in the 2005 period. The increase in surrenders on variable
and interest-sensitive life is due to large COLI surrenders in fourth quarter
2005. Except for the large COLI surrenders in the fourth quarter 2005, the
trends in surrender and withdrawal rates described above continue to fall within
the range of expected experience.
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, 2005, this asset pool included an aggregate of
$126.3 million in highly liquid short-term investments, as compared to $198.0
million at December 31, 2004. 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 quarter 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 Group 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 ($5.9 million after Federal income tax) for the six months ended
December 31, 2004.
o MONY Life contributed 1.2 million units of AllianceBernstein, an affiliate,
which it had received from AXA Financial Group, to MLOA, increasing MLOA's
statutory surplus by $37.2 million.
USFL's MODCO arrangement with MLOA remained in effect for the universal life
insurance policies inforce at December 31, 2004, as well as for new universal
life and level premium term life insurance business issued during 2005. This
MODCO agreement was terminated as of December 31, 2005. In connection with the
termination, USFL recaptured the reinsured universal life business inforce as of
December 31, 2005 and unwound the reinsurance to MLOA of the level premium term
business issued during 2005.
The 2005 recapture of the universal life reinsurance from USFL resulted in
pre-tax gains to MLOA of $0.6 million ($0.4 million after Federal income tax)
for the year ended December 31, 2005. In addition, in connection with the
unwinding of the reinsurance of term life policies issued in 2005, MLOA received
a payment of $0.7 million from USFL representing interest on net payments made
to USFL during the year under the MODCO agreement.
Management continues to evaluate the products sold by MLOA as part of an overall
review of products offered by AXA Equitable and AXA Financial'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 Group.
7-4
SUPPLEMENTARY INFORMATION
At December 31, 2005, MLOA had a $33.8 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, 2005
(IN MILLIONS)
Payments Due by Period
------------------------------------------------------------
Less Than Over
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
------------- ------------- ----------- ------------ ---------------
Note Payable to Affiliate............... $ 33.8 $ 3.2 $ 10.9 $ 8.6 $ 11.1
=============== ============ =========== ============= ===============
Interest on the note payable to affiliate will be approximately $3.2 million,
$3.4 million, $3.6 million, $3.9 million and $4.2 million in 2006, 2007, 2008,
2009 and 2010, respectively. 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, 2005 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 generally accepted accounting principles 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.
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
7-5
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 Group.
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 that differ
significantly from historical trends.
Stock-based Compensation - Although MLOA has no employees, under a service
agreement with AXA Equitable, MLOA pays for services provided on its behalf
including stock-based compensation (see Note 10 of Notes to Financial
Statements). Prior to the adoption of SFAS No. 123(R), "Share-based Payments,"
on January 1, 2006, equity settled stock option awards only resulted in
compensation expense if the current market price of the underlying stock
exceeded the option strike price at the grant date. Compensation expense for
cash settled award programs, such as tandem Stock Appreciation Rights and
Performance Units, is recorded based upon changes in the fair value of the AXA
ADRs or AXA shares. In connection with the adoption of SFAS No. 123(R) at
January 1, 2006, MLOA will begin recognizing compensation expense for the
unvested portion of awards outstanding on January 1, 2006 over the balance of
the vesting period and for new awards after January 1, 2006, for the fair values
of the option awards over the vesting period. Significant factors that could
affect results include, but are not limited to, assumptions incorporated in the
option pricing models, changes in the market price of AXA ADRs and AXA ordinary
shares and grants of additional awards.
7-6
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 89.2% of the carrying value of General Account Investment
Assets at December 31, 2005. 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,
2005 and 2004 would have on the fair value of fixed maturities and mortgage
loans:
DECEMBER 31, 2005 December 31, 2004
------------------------------------ ---------------------------------
BALANCE AFTER Balance After
FAIR +100 BASE Fair +100 Base
VALUE POINT CHANGE Value Point Change
----------------- ----------------- --------------- -----------------
(IN MILLIONS)
Fixed maturities.................................. $2,035.6 $1,937.0 $ 1,927.2 $ 1,850.8
Mortgage loans on real estate..................... 291.3 280.4 378.0 365.1
----------------- ----------------- --------------- -----------------
Total....................................... $2,326.9 $2,217.4 $ 2,305.2 $ 2,215.9
================= ================= =============== =================
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 2005 and 2004, the aggregate carrying value of policyholders'
liabilities were $2,485.0 million and $2,493.0 million, respectively, including
$971.5 million and $1,019.8 million of liabilities, respectively, related to the
General Account's investment contracts. The aggregate fair value of those
investment contracts at years end 2005 and 2004 were $1,039.1 million and
$1,159.1 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
$1,131.6 million and $1,291.1 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 2005 levels.
7A-1
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
MONY LIFE INSURANCE COMPANY OF AMERICA
Report of Independent Registered Public Accounting Firm........................................................................ F-1
Financial Statements:
Balance Sheets, December 31, 2005 and December 31, 2004.................................................................... F-2
Statements of Operations, Year Ended December 31, 2005 (Successor), Six months Ended December 31, 2004 (Successor),
Six Months Ended June 30, 2004 (Predecessor) and Year Ended December 31, 2003 (Predecessor)............................... F-3
Statements of Shareholder's Equity, Years Ended December 31, 2005, 2004 and 2003........................................... F-4
Statements of Cash Flows, Year Ended December 31, 2005 (Successor), Six Months Ended December 31, 2004 (Successor),
Six Months Ended June 30, 2004 (Predecessor) and Year Ended December 31, 2003 (Predecessor)............................... F-5
Notes to Financial Statements.............................................................................................. F-7
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules....................................... F-30
Financial Statement Schedules:
Schedule I - Summary of Investments - Other Than Investments in Related Parties, December 31, 2005............................. F-31
Schedule IV - Reinsurance, Year Ended December 31, 2005 (Successor), Six Months Ended December 31, 2004 (Successor),
Six Months Ended June 30, 2004 (Predecessor), and Year Ended December 31, 2003 (Predecessor)............................... F-32
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 sheets 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 at December 31, 2005 and December 31, 2004 and the results of its
operations and its cash flows for the year ended December 31, 2005 and the six
months ended December 31, 2004 and the six (predecessor) months ended June 30,
2004 and the (predecessor) year 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 certain nontraditional
long-duration contracts and for Separate Accounts.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 17, 2006
F-1
MONY LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
DECEMBER 31, December 31,
2005 2004
------------------ ------------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value......................... $2,035.6 $1,927.2
Mortgage loans on real estate........................................................ 290.2 373.2
Policy loans......................................................................... 96.3 93.0
Other invested assets................................................................ 54.8 57.2
------------------ ------------------
Total investments............................................................. 2,476.9 2,450.6
Cash and cash equivalents............................................................... 129.7 198.8
Amounts due from reinsurers............................................................. 106.2 76.0
Deferred policy acquisition costs....................................................... 106.8 57.3
Value of business acquired.............................................................. 328.2 354.8
Other assets............................................................................ 29.5 25.3
Separate Accounts' assets............................................................... 3,485.1 3,732.2
------------------ ------------------
TOTAL ASSETS............................................................................ $6,662.4 $6,895.0
================== ==================
LIABILITIES
Policyholders' account balances......................................................... $2,175.9 $2,228.5
Future policy benefits and other policyholders liabilities.............................. 309.1 264.5
Other liabilities....................................................................... 47.4 48.1
Note payable to affiliate............................................................... 33.8 36.8
Income taxes payable.................................................................... 50.6 45.2
Separate Accounts' liabilities.......................................................... 3,485.1 3,732.2
------------------ ------------------
Total liabilities................................................................ 6,101.9 6,355.3
------------------ ------------------
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.......................................................... 495.8 495.8
Retained earnings....................................................................... 67.8 26.5
Accumulated other comprehensive (loss) income........................................... (5.6) 14.9
------------------ ------------------
Total shareholder's equity....................................................... 560.5 539.7
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.............................................. $6,662.4 $6,895.0
================== ==================
See Notes to Financial Statements.
F-2
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS
YEAR Six Six Year
ENDED Months Ended Months Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
----------------- --------------- ----------------- -------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee income.... $ 168.3 $ 80.8 $ 82.7 $ 166.2
Premiums........................................................ 53.8 85.0 77.4 141.0
Net investment income........................................... 135.0 62.8 64.3 118.5
Investment (losses) gains, net.................................. (2.2) (4.6) (0.7) 11.8
Other income.................................................... 22.0 26.7 7.4 17.2
----------------- --------------- ----------------- -------------
Total revenues........................................... 376.9 250.7 231.1 454.7
----------------- --------------- ----------------- -------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits......................................... 99.5 91.2 80.8 156.8
Interest credited to policyholders' account balances............ 99.9 50.0 54.1 91.5
Compensation and other benefits................................. 30.7 32.1 45.8 80.6
Commissions..................................................... 72.9 76.5 85.5 160.2
Interest expense................................................ 1.6 1.3 1.3 2.8
Amortization of deferred policy acquisition costs and value of
business acquired............................................ 41.2 22.4 34.7 55.2
Capitalization of deferred policy acquisition costs ............ (78.1) (87.5) (93.8) (193.7)
Rent expense.................................................... 10.5 3.0 9.8 14.6
Other operating costs and expenses.............................. 40.7 22.8 38.2 55.5
----------------- --------------- ----------------- -------------
Total benefits and other deductions................... 318.9 211.8 256.4 423.5
----------------- --------------- ----------------- -------------
Earnings (loss) before income taxes and cumulative effect of
accounting change............................................ 58.0 38.9 (25.3) 31.2
Income tax (expense) benefit.................................... (16.7) (12.4) 10.5 (4.9)
----------------- --------------- ----------------- -------------
Net earnings (loss) before cumulative effect of accounting
change....................................................... 41.3 26.5 (14.8) 26.3
Loss from real estate to be disposed of, net of income taxes.... - - - (0.1)
Cumulative effect of accounting change, net of income taxes..... - - 3.8 -
----------------- --------------- ----------------- -------------
Net Earnings (Loss)............................................. $ 41.3 $ 26.5 $ (11.0) $ 26.2
================= =============== ================= =============
See Notes to Financial Statements.
F-3
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON IN EXCESS RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK OF PAR EARNINGS INCOME (LOSS) EQUITY
-----------------------------------------------------------------------------
(IN MILLIONS)
PREDECESSOR BALANCE, JANUARY 1, 2003.................. $ 2.5 $ 449.7 $ 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
Group'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...................... 41.4
----------- -------- ----------- ----------- -----------
SUCCESSOR BALANCE, DECEMBER 31, 2004.................. 2.5 495.8 26.5 14.9 539.7
Comprehensive income:
Net earnings.................................... - - 41.3 - 41.3
Other comprehensive loss........................ - - - (20.5) (20.5)
-----------
Comprehensive income...................... 20.8
----------- -------- ----------- ----------- -----------
SUCCESSOR BALANCE, DECEMBER 31, 2005.................. $ 2.5 $ 495.8 $ 67.8 $ (5.6) $ 560.5
=========== ======== =========== =========== ===========
See Notes to Financial Statements.
F-4
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- --------------- -------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Net earnings (loss)................................................. $ 41.3 $ 26.5 $ (11.0) $ 26.2
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Interest credited to policyholders' account balances........... 99.9 50.0 54.1 91.5
Universal life and investment-type product policy fee income... (168.3) (80.8) (82.7) (166.2)
Change in accrued investment income............................ (1.8) (3.0) 4.7 (1.7)
Investment losses (gains)...................................... 2.2 4.6 0.7 (17.3)
Change in deferred policy acquisition costs and VOBA........... (36.9) (65.1) (60.8) (138.5)
Change in future policy benefits and other policyholders
liabilities................................................ 57.5 1.1 (3.2) 5.4
Provision for depreciation and amortization.................... 14.1 7.9 1.5 0.7
Cumulative effect of the adoption of SOP 03-1.................. - - (5.9) -
Loss on discontinued real estate operations.................... - - - 0.1
Gain on recapture from reinsurance from USFL................... (0.6) (9.0) - -
Other, net..................................................... (10.0) (20.4) 49.1 81.7
--------------- --------------- -------------- -----------------
Net cash used in operating activities............................... (2.6) (88.2) (53.5) (118.1)
--------------- --------------- -------------- -----------------
Cash flows from investing activities:
Sales, maturities or repayments of:
Fixed maturity securities..................................... 173.5 188.7 431.5 358.7
Mortgage loans on real estate................................. 100.8 93.8 43.0 80.1
Other invested assets......................................... - 4.3 0.1 0.3
Acquisitions of investments:
Fixed maturity securities..................................... (348.0) (473.1) (272.4) (548.5)
Mortgage loans on real estate................................. (18.1) (18.7) (66.1) (139.1)
Other invested assets......................................... (0.1) (0.4) (0.2) (0.6)
Policy loans, net............................................. (3.3) (3.9) (3.0) (6.3)
--------------- --------------- -------------- -----------------
Net cash (used in) provided by investing activities................. (95.2) (209.3) 132.9 (255.4)
--------------- --------------- -------------- -----------------
F-5
MONY LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- ---------------- -------------- ---------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Cash flows from financing activities:
Policyholders' account balances:
Deposits...................................................... 521.4 284.6 477.8 969.6
Withdrawals and transfers to Separate Accounts................ (505.7) (196.9) (337.1) (545.8)
Repayment of note to affiliate................................... (3.0) (1.4) (1.4) (2.6)
Proceeds received from recapture of reinsurance with USFL........ 12.2 10.4 - -
Other, net....................................................... 3.8 - - -
Capital contribution............................................. - - - 100.0
--------------- --------------- --------------- ---------------
Net cash provided by financing activities........................... 28.7 96.7 139.3 521.2
--------------- --------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents................ (69.1) (200.8) 218.7 147.7
Cash and cash equivalents, beginning of period...................... 198.8 399.6 180.9 33.2
--------------- --------------- --------------- ---------------
Cash and Cash Equivalents, End of Period............................ $ 129.7 $ 198.8 $ 399.6 $ 180.9
=============== =============== =============== ===============
Supplemental cash flow information:
Interest Paid..................................................... $ 2.4 $ 1.3 $ 1.3 $ 2.8
=============== =============== =============== ===============
Income Taxes Refunded............................................. $ - $ (48.2) $ - $ (27.4)
=============== =============== =============== ===============
Schedule of non-cash financing activities:
Capital contribution of AllianceBernstein 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. ("AXA Financial",
which together with its consolidated subsidiaries is referred to herein as
"AXA Financial Group").
2) MERGER OF MONY WITH AXA FINANCIAL GROUP
On July 8, 2004, the acquisition of The MONY Group Inc. ("MONY") by AXA
Financial was completed and, under the terms of the related merger
agreement, AXA Financial 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"). 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), AXA Financial 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 operations 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 Value of
Business Acquired ("VOBA") and liabilities, including policyholder
reserves, required management to exercise judgment to assess the value of
these items. The Purchase Adjustments resulted in a revalued balance
sheet, which may result in future earnings trends that 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 generally accepted accounting principles in the United States of
America ("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 term "full year 2005" and "full year 2004" refers to the year ended
December 31, 2005 and 2004, respectively. 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 term "full year 2003"
refers to the year ended December 31, 2003. References to "Successor"
refer to MLOA on or after July 1, 2004, after giving effect to the
implementation of the Purchase Adjustments recorded in connection with the
acquisition of MONY by AXA Financial Group.
F-7
Certain reclassifications have been made in the amounts presented for
prior periods to conform to the current presentation. The December 31,
2004 comparative balance sheet reflects the reclassification of $87.9
million in reserves on one of MLOA's interest-sensitive products from
future policy benefits and other policyholder's liabilities to
policyholders' account balances.
Accounting Changes
------------------
Effective January 1, 2004, MLOA adopted Statement of Position ("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)
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 liabilities associated
with the market value adjustment feature that are now reported at the
accrued account balance. Prior to the adoption of SOP 03-1, such
liabilities had been reported at market adjusted value.
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 May 30, 2005, Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting
Changes and Error Corrections," a replacement of Accounting Principles
Board Opinion ("APB") No. 20, "Accounting Changes," and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements". SFAS No.
154 applies to all voluntary changes in accounting principle as well as to
changes required by an accounting pronouncement that does not include
transition provisions. To enhance comparability, this statement requires
retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
The cumulative effect of the change is reported in the carrying value of
assets and liabilities as of the first period presented, with the offset
applied to opening retained earnings. Each period presented is adjusted to
show the period specific effects of the change. Only direct effects of the
change will be retrospectively recognized; indirect effects will be
recognized in the period of change. SFAS No. 154 carries forward without
change APB No. 20's guidance for reporting the correction of an error and
a change in accounting estimate as well as SFAS No. 3's provisions
governing reporting accounting changes in interim financial statements.
SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.
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 plans and other stock-based compensation plans using the intrinsic
value method in accordance with the provisions of APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. In accordance
with the opinion, stock option awards result in compensation expense only
if the current market price of the underlying stock exceeds the option
strike price at the grant date. See Note 10 of Notes to Financial
Statements 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".
On December 16, 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," requiring the cost of all share-based payments to employees,
including stock options, stock appreciation rights, and certain employee
stock purchase plans, to be recognized in the financial statements based
on their fair values. By ruling of the Securities and Exchange Commission
("SEC"), effective April 21, 2005, public companies were permitted to
delay their initial adoption of SFAS No. 123(R) from the first interim
period to the first annual period beginning on or after June 15, 2005.
Consequently, AXA Financial Group, including MLOA, implemented SFAS 123(R)
effective January 1, 2006 and will reflect the resulting impacts of
adoption in its financial reporting for first quarter 2006. As more fully
described in Note 10 of Notes to Financial Statements, MLOA elected under
SFAS No. 123, "Accounting for Stock-Based Compensation," to continue to
account for stock-based compensation using the
F-8
intrinsic value method prescribed by APB No. 25, and its related
interpretations, and to provide only pro-forma disclosure of the effect on
net earnings from applying the fair value based method. Accordingly,
adoption of SFAS No. 123(R) will result in compensation expense for
certain types of AXA Financial Group's equity-settled award programs for
which no cost previously would have been charged to net earnings under APB
No. 25, such as for employee options to purchase AXA American Depository
Receipts ("ADRs") and AXA ordinary shares and for employee stock purchase
plans. Similarly, certain types of AXA Financial Group's cash-settled
award programs, such as stock appreciation rights, may be expected to
result in different amounts of compensation expense or different patterns
of expense recognition under SFAS No. 123(R) as compared to APB No. 25.
To effect its adoption of SFAS No. 123(R) on January 1, 2006, AXA
Financial Group elected the "modified prospective method" of transition to
the new accounting and reporting requirements for share-based payments.
Consequently, the resulting impacts of adoption to be reflected in MLOA's
financial reporting for first quarter 2006 will not include a restatement
of prior-period results to reflect the original recognition provisions of
SFAS No. 123 as would be required under the alternative "modified
retrospective method" of transition. Under the modified prospective
method, AXA Financial Group will be required to apply the measurement,
recognition, and attribution requirements of SFAS 123(R) to new awards and
to awards modified, repurchased or cancelled after January 1, 2006. In
addition, the modified prospective method will require AXA Financial Group
to recognize compensation expense over the remaining future
service/vesting periods for the unvested portions of awards outstanding at
January 1, 2006, applying the same estimates of fair value and the same
attribution method used previously to prepare SFAS No. 123 pro-forma
disclosures. The unrecognized compensation cost associated with unvested
stock option awards as at January 1, 2006 was approximately $3.4 million
($2.2 million after-tax) and, under SFAS No. 123(R), will result in
incremental expense in the Statements of Operations of MLOA over a
weighted average remaining service/vesting period of approximately 2.0
years. Absent additional forfeiture considerations, results for 2006 would
be expected to include approximately $1.9 million ($1.2 million after-tax)
of additional compensation expense as related to unvested stock option
awards at January 1, 2006 as a result of the adoption of SFAS 123(R).
The full impact of adoption of SFAS 123(R) cannot be predicted at this
time because it is largely dependent upon the nature and levels of
share-based payments granted in the future. Nonetheless, while there exist
differences between certain requirements of SFAS Nos. 123 and 123(R), the
estimated impacts in previous periods of applying a fair-value approach to
accounting for share-based awards made to employees of AXA Financial Group
are described and/or disclosed on a pro-forma basis in Note 10 of Notes to
Financial Statements. Management is continuing to assess the impacts of
adoption of SFAS 123(R), including accounting for the income tax effects
of share-based compensation, for which AXA Financial Group likely will
elect the transition alternative available for income taxes provided by
the November 10, 2005 issuance of FSP No. 123(R)-3 "Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards".
In addition, management is continuing to assess the impacts of the related
amendment to SFAS No. 95, "Statement of Cash Flows," that in periods
subsequent to adoption of SFAS 123(R) will require tax deductions in
excess of recognized compensation cost to be classified as resulting from
a financing activity rather than as an operating cash flow as currently
required.
Neither SFAS No. 123 nor SFAS No. 123(R) 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 require
consideration of certain factors in selecting one that is appropriate for
the unique substantive characteristics of the instruments awarded and one
that can be supported by information that is available, such as exercise
behavior. In its implementation of SFAS 123(R), AXA Financial Group
expects to continue to use the Black-Scholes-Merton formula to estimate
the fair values of employee stock options. As more fully described in Note
10 of Notes to Financial Statements, and consistent with the fair value
measurement objectives of SFAS 123 and SFAS 123(R), beginning with awards
granted in 2005, AXA Financial Group modified its methodologies for
developing the expected stock price volatility and expected dividend
assumptions used in this pricing formula. With respect to the valuation of
options to purchase AXA ADRs, these changes each represent a change in
accounting estimate under SFAS No. 154 "Accounting Changes and Error
Corrections," and, accordingly, will be applied prospectively in
determining the fair values of employee stock options to be measured and
accounted for in accordance with SFAS No. 123(R).
On September 19, 2005, the American Institute of Certified Public
Accountants ("AICPA") released SOP 05-1, "Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts". The SOP requires
identification of transactions that result in a substantial change in an
insurance contract. Transactions subject to review include internal
contract exchanges, contract modifications via amendment, rider or
endorsement and elections of benefits, features or rights contained within
the contract. If determined that a substantial change has occurred, the
related DAC/VOBA must be written off. The SOP is effective for
transactions occurring in fiscal years beginning after December 15, 2006,
with earlier adoption encouraged. Restatement of previously issued annual
financial statements is not permitted, and disclosure of the pro forma
effects of retroactive application or the pro forma effect on the year of
adoption is not required. Management is currently assessing the potential
impact of this new guidance on the financial results of MLOA.
F-9
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.
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 including common stock classified as available for sale
securities are carried at estimated fair value and are included in Other
invested assets.
Units held in AllianceBernstein L.P. (formally Alliance Capital Management
L.P.) ("AllianceBernstein") 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.
F-10
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 revenue 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 arose from the acquisition of MONY, was established in
accordance with business combination purchase accounting guidance. VOBA is
the actuarially determined present value of estimated future gross profits
of insurance contracts in force at the date of the acquisition. VOBA is
amortized over the expected life of the contracts (approximately 10-30
years) according to the type of contract 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
F-11
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,
2005, current projections of future average gross market returns assume a
3.5% return for 2006, which is within the maximum and minimum limitations,
and assume a reversion to the mean of 9.0% after 5 quarters.
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 ("GMDB") 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 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.
F-12
Interest rates used in establishing such liabilities range from 2.0% to
6.75% 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, 2005, 2004 and 2003,
investment results of such Separate Accounts were gains of $197.5 million,
$371.2 million and $628.1 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 policies including those
funded by Separate Accounts are included in revenues.
Other Accounting Policies
-------------------------
MLOA filed 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 periods. Beginning in the Successor period, MLOA files 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.
F-13
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, 2005
-----------------
Fixed Maturities:
Available for Sale:
Corporate........................ $ 1,843.9 $ 9.3 $ 23.4 $ 1,829.8
Mortgage-backed.................. 24.9 0.3 - 25.2
U.S. Treasury, government
and agency securities.......... 92.3 0.4 0.5 92.2
States and political
subdivisions................... 1.1 - - 1.1
Foreign governments.............. 10.2 0.1 0.1 10.2
Redeemable preferred stock....... 77.6 1.1 1.6 77.1
----------------- ------------------ ----------------- ----------------
Total Available for Sale....... $ 2,050.0 $ 11.2 $ 25.6 $ 2,035.6
================= ================== ================= ================
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
States and political
subdivisions................... - - - -
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
================= ================== ================= ================
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, 2005 and 2004, securities without a
readily ascertainable market value having an amortized cost of $527.1
million and $497.4 million, respectively, had estimated fair values of
$527.0 million and $505.1 million, respectively.
F-14
The contractual maturity of bonds at December 31, 2005 is shown below:
AVAILABLE FOR SALE
------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
(IN MILLIONS)
Due in one year or less............................................. $ 108.6 $ 107.6
Due in years two through five........................................ 475.5 470.0
Due in years six through ten......................................... 1,064.4 1,057.0
Due after ten years.................................................. 299.0 298.7
Mortgage-backed securities........................................... 24.9 25.2
---------------- -----------------
Total................................................................ $ 1,972.4 $ 1,958.5
================ =================
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 Group'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 other than temporarily impaired, then the
appropriate provisions are taken.
The following table discloses fixed maturities (217 issues) that have
been in a continuous unrealized loss position for less than a twelve
month period and greater than a twelve month period as of December 31,
2005:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------------ ---------------------------- -----------------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
------------- -------------- ------------- --------------- -------------- --------------
(IN MILLIONS)
Fixed Maturities:
Corporate.................. $ 903.7 $ 18.1 $ 267.6 $ 5.3 $ 1,171.3 $ 23.4
Mortgage-backed............ - - - - - -
U.S. Treasury, government
and agency securities.... 36.5 0.2 16.6 0.3 53.1 0.5
States and political
subdivisions............. 1.1 - - - 1.1 -
Foreign governments........ 2.0 - 6.0 0.1 8.0 0.1
Redeemable
preferred stock.......... 60.0 1.6 - - 60.0 1.6
------------- -------------- ------------- --------------- -------------- --------------
Total Temporarily
Impaired Securities ....... $ 1,003.3 $ 19.9 $ 290.2 $ 5.7 $ 1,293.5 $ 25.6
============= ============== ============= =============== ============== ==============
MLOA's fixed maturity investment portfolio includes corporate high yield
securities consisting primarily of public high yield bonds. 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, 2005, approximately $101.0 million, or 4.9%, of the
$2,050.0 million aggregate amortized cost of fixed maturities held by MLOA
was considered to be other than investment grade.
At December 31, 2005, there were $2.4 million of fixed maturities which
were non-income producing for the twelve months preceding that date.
F-15
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, 2005 and 2004
were $3.9 million and $4.5 million, respectively.
Interest income recognized on impaired mortgage loans totaled $0.3
million, $0.1 million, $0.0 million and $0.2 million for the full year
2005, six months ended December 31, 2004, six months ended June 30, 2004
and full year 2003, respectively.
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, 2005 and 2004, the carrying value of mortgage loans on real
estate that had been classified as nonaccrual loans was $3.2 million and
$0.0 million, respectively.
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- -------------- --------------- ----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Balances, beginning of period.............................. $ - $ 1.7 $ 4.4 $ 3.7
Additions charged to income................................ - - 0.3 0.7
Deductions for writedowns and asset dispositions........... - - (3.0) -
Effect of push-down accounting of AXA Financial Group's
purchase price of MLOA's net assets...................... - (1.7) - -
--------------- -------------- --------------- ----------------
Balances, End of Period.................................... - $ - $ 1.7 $ 4.4
=============== ============== =============== =================
Balances, end of period comprise:
Mortgage loans on real estate.............................. $ - $ - $ 1.7 $ 4.4
=============== ============== =============== =================
The following presents MLOA's investment in 1.2 million units in
AllianceBernstein, an affiliate, which is included in Other invested
assets:
DECEMBER 31,
2005
-----------------
(IN MILLIONS)
Balance, beginning of year .............................................. $ 49.1
Equity in net earnings................................................... 4.1
Dividends received....................................................... (3.8)
-----------------
Balance, End of Period................................................... $ 49.4
=================
F-16
5) VALUE OF BUSINESS ACQUIRED
The following presents MLOA's VOBA asset related to AXA Financial Group's
acquisition of MONY as of December 31, 2005:
LESS: LESS:
ACCUMULATED IMPACT OF
GROSS CARRYING AMORTIZATION RECAPTURE (2) NET
AMOUNT (1)
--------------- --------------- --------------- ------------------
(IN MILLIONS)
VOBA................................... $ 416.5 $ (43.4) $ (44.9) $ 328.2
=============== =============== =============== ==================
-------------
(1) Includes reactivity to unrealized investment gains and losses.
(2) Relates to the December 31, 2005 and 2004 recapture by USFL of
universal life insurance contracts and level term premium insurance
contracts previously ceded to MLOA under the MODCO agreement between
MLOA and USFL.
For the full year 2005 and six months ended December 31, 2004, total
amortization expense related to VOBA was $32.5 million, $16.7 million,
respectively. VOBA amortization is estimated to range between $27.0
million and $37.0 million annually through 2010.
6) NET INVESTMENT INCOME AND INVESTMENT (LOSSES) GAINS
The sources of net investment income follow:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- ---------------- ----------------- ----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Fixed maturities.....................................$ 107.1 $ 45.8 $ 51.8 $ 94.1
Mortgage loans on real estate........................ 25.2 16.0 16.0 29.6
Policy loans......................................... 6.0 3.0 2.9 5.5
Other investment income.............................. 4.4 2.1 (0.9) 0.9
--------------- ---------------- ----------------- ----------------
Gross investment income........................... 142.7 66.9 69.8 130.1
Investment expenses.................................. (7.7) (4.1) (5.5) (11.6)
--------------- ---------------- ----------------- ----------------
Net Investment Income................................$ 135.0 $ 62.8 $ 64.3 $ 118.5
=============== ================ ================= =================
F-17
Investment (Losses) Gains, including changes in the valuation allowances,
follow:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
-------------- ---------------- ----------------- ----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Fixed maturities..................................... $ (2.2) $ (4.6) $ (3.4) $ 8.1
Mortgage loans on real estate........................ - - 2.7 3.5
Other................................................ - - - 0.2
-------------- ---------------- ----------------- ----------------
Investment (Losses) Gains, Net....................... $ (2.2) $ (4.6) $ (0.7) $ 11.8
============== ================ ================= ================
Writedowns of fixed maturities amounted to $2.0 million, $5.1 million,
$0.9 million and $8.6 million for the full year 2005, six months ended
December 31, 2004, six months ended June 30, 2004 and full year 2003,
respectively. There were no writedowns of mortgage loans on real estate
and equity real estate for the full year 2005, six months ended December
31, 2004, six months ended June 30, 2004 and full year 2003.
For the full year 2005, six months ended December 31, 2004, six months
ended June 30, 2004 and full year 2003, respectively, proceeds received on
sales of fixed maturities classified as available for sale amounted to
$53.4 million, $48.9 million, $363.1 million and $145.3 million. Gross
gains of $1.0 million, $2.1 million, $6.9 million and $10.7 million and
gross losses of $1.4 million, $1.3 million, $10.0 million and $0.0
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 full year 2005, six months ended
December 31, 2004, six months ended June 30, 2004 and full year 2003
amounted to $(50.5) million, $36.1 million, $(41.0) million and $(3.2)
million, respectively.
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:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- --------------- ----------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Balance, beginning of period........................ $ 14.9 $ 12.8 $ 24.2 $ 24.7
Changes in unrealized investment (losses) gains..... (50.5) 36.1 (41.5) (2.9)
Changes in unrealized investment gains (losses)
attributable to:
DAC and VOBA..................................... 18.9 (13.2) 23.9 2.2
Deferred income taxes............................ 11.1 (8.0) 6.2 0.2
Effect of push-down accounting of AXA Financial
Group's purchase price on MLOA's net assets...... - (12.8) - -
---------------- --------------- ----------------- -----------------
Balance, end of period.............................. $ (5.6) $ 14.9 $ 12.8 $ 24.2
================ =============== ================= =================
Balance, end of period comprises:
Unrealized investment gains on:
Fixed maturities.............................. $ (14.4) $ 36.1 $ 43.5 $ 84.9
Amounts of unrealized investment gains (losses)
attributable to:
DAC and VOBA................................... 5.7 (13.2) (23.9) (47.8)
Deferred income taxes.......................... 3.1 (8.0) (6.8) (12.9)
--------------- --------------- ----------------- -----------------
Balance, end of period.............................. $ (5.6) $ 14.9 $ 12.8 $ 24.2
================ =============== ================= =================
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.
F-18
7) OTHER COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income for the past three
years follow:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
-------------- ------------------ ---------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Net unrealized (losses) gains on investments:
Net unrealized (losses) gains arising during the
period........................................ $ (50.5) $ 36.3 $ (41.7) $ (6.4)
Losses (gains) reclassified into net earnings
during the period............................. - (0.2) 0.2 3.5
-------------- ------------------ ---------------- -----------------
Net unrealized (losses) gains on investments........ (50.5) 36.1 (41.5) (2.9)
Adjustments for DAC and VOBA and deferred income
taxes............................................ 30.0 (21.2) 30.1 2.4
-------------- ------------------ ---------------- -----------------
Total Other Comprehensive (Loss) Income.............. $ (20.5) $ 14.9 $ (11.4) $ (0.5)
============== ================== ================ =================
8) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
A) Variable Annuity Contracts - GMDB and GMIB
------------------------------------------
MLOA has certain variable annuity contracts with GMDB and GMIB features in
force that guarantee one of the following:
o Return of Premium: the benefit is the greater of current account
value or premiums paid (adjusted for withdrawals);
o 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);
o 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; or
o Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
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 2005:
F-19
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
Paid guarantee benefits.......................... (2.9) - (2.9)
Other changes in reserve 2.6 0.1 2.7
---------------- ----------------- -----------------
Balance at December 31, 2005........................ $ 0.7 $ 0.2 $ 0.9
================ ================= =================
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........................... 2.9
Other changes in reserve.......................... (3.5)
----------------
Balance at December 31, 2004........................ (0.9)
Paid guarantee benefits........................... (0.1)
Other changes in reserve.......................... 1.2
----------------
Balance at December 31, 2005........................ $ 0.2
================
The December 31, 2005 values for those variable annuity contracts with
GMDB and GMIB features are presented in the following table. For contracts
with the GMDB feature, the net amount at risk in the event of death is the
amount by which the GMDB benefits exceed related account values. For
contracts with the GMIB feature, the net amount at risk in the event of
annuitization is 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. Since variable annuity contracts with
GMDB guarantees may also offer GMIB guarantees in the same contract, the
GMDB and GMIB amounts listed are not mutually exclusive:
F-20
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
----------- -------------- ------------- ------------- --------------
(IN MILLIONS)
GMDB:
-----
Account values invested in:
General Account........... $ 196 $ 316 N.A. $ 34 $ 546
Separate Accounts......... $ 860 $ 1,582 N.A. $ 168 $ 2,610
Net amount at risk, gross...... $ 12 $ 220 N.A. $ 35 $ 267
Net amount at risk, net of
amounts reinsured............ $ 12 $ 167 N.A. $ - $ 179
Average attained age of
contractholders.............. 61.1 61.0 N.A. 60.2 61.0
Percentage of contractholders
over age 70.................. 18.2% 15.7% N.A. 12.5% 16.6%
Contractually specified
interest return rates....... N.A. N.A. N.A. 5.0%
GMIB:
-----
Account values invested in:
General Account........... N.A. N.A. $ 34 N.A. $ 34
Separate Accounts......... N.A. N.A. $ 168 N.A. $ 168
Net amount at risk, gross...... N.A. N.A. - N.A. -
Net amount at risk, net of
amounts reinsured............ N.A. N.A. - N.A. -
Weighted average years
remaining until earliest
annuitization............... N.A. N.A. 6.8 N.A. 6.8
Contractually specified
interest return rates....... N.A. N.A. 5.0% N.A.
B) Separate Account Investments by Investment Category Underlying GMDB
-------------------------------------------------------------------
and GMIB Features
-----------------
The total account values of variable annuity contracts with GMDB and GMIB
features include amounts allocated to the guaranteed interest option which
is part of the General Account and variable investment options which
invest through Separate Accounts in variable insurance trusts. The
following table presents the aggregate fair value of assets, by major
investment category, held by Separate Accounts that support variable
annuity contracts with GMDB and GMIB benefits and guarantees. The
investment performance of the assets impacts the related account values
and, consequently, the net amount of risk associated with the GMDB and
GMIB benefits and guarantees. Since variable annuity 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,
2005 2004
---------------- ------------------
(IN MILLIONS)
GMDB:
Equity................................................................. $ 2,054 $ 2,209
Fixed income........................................................... 400 452
Balanced............................................................... 62 67
Other.................................................................. 94 108
---------------- ------------------
Total.................................................................. $ 2,610 $ 2,836
================ ==================
GMIB:
Equity................................................................. $ 127 $ 126
Fixed income........................................................... 33 37
Balanced............................................................... 3 3
Other.................................................................. 5 4
---------------- ------------------
Total.................................................................. $ 168 $ 170
================ ==================
C) 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, 2005 and 2004, MLOA had liabilities of
$0.1 million and $0.5 million, respectively, for no lapse guarantees
reflected in the General Account in future policy benefits and other
policyholders liabilities.
F-21
9) INCOME TAXES
A summary of the income tax expense in the statements of operations
follows:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- ---------------- ----------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Income tax expense (benefit):
Current expense (benefit)....................... $ 2.5 $ - $ (29.3) $ (30.1)
Deferred expense................................ 14.2 12.4 18.8 35.0
--------------- ---------------- ----------------- ---------------
Total............................................... $ 16.7 $ 12.4 $ 10.5 $ 4.9
=============== ================ ================= ===============
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:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
---------------- -------------- ----------------- ----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Tax at statutory rate................................. $ 20.3 $ 13.6 $ (8.9) $ 10.9
Dividends received deduction.......................... (3.7) (1.2) (1.6) (3.2)
Tax settlements/accrual adjustments................... - - - (2.8)
Other................................................. 0.1 - - -
---------------- -------------- ----------------- ----------------
Federal income tax expense (benefit).................. $ 16.7 $ 12.4 $ (10.5) $ 4.9
================ ============== ================= ================
The components of the net deferred Federal income taxes are as follows:
DECEMBER 31, 2005 December 31, 2004
--------------------------------- ---------------------------------
ASSETS LIABILITIES Assets Liabilities
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Reserves and reinsurance............... $ 189.2 $ - $ 227.3 $ -
DAC.................................... 35.1 - 25.6 -
VOBA................................... - 112.8 - 124.1
Investments............................ - 153.5 - 182.1
Tax loss carryforwards................. 5.3 - 9.6 -
Goodwill and intangibles............... - 5.2 - 10.6
Other.................................. - 15.0 0.2 -
--------------- ---------------- --------------- ---------------
Total.................................. $ 229.6 $ 286.5 $ 262.7 $ 316.8
=============== ================ =============== ===============
At December 31, 2005, MLOA has a Federal tax loss carryforwards in the
amount of $15.1 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
MLOA'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 MLOA's returns will
have no material adverse effect on MLOA's results of operations or
financial position.
F-22
10) STOCK OPTIONS
Although MLOA has no employees, under its respective service agreements
with AXA Equitable (Successor Period) and MONY Life (Predecessor Period),
MLOA is charged for services, including personnel services and employee
benefits, provided on its behalf. MLOA's affiliates account for
stock-based compensation plans using the intrinsic value method prescribed
in APB No. 25. The following table reflects the effect on net earnings
(loss) if compensation expense allocated to MLOA as related to options
awarded under the AXA Financial Group and MONY stock-based compensation
plans had been determined based on SFAS No. 123's fair value based method:
AXA FINANCIAL
GROUP MONY
----------------- ----------------------------------
YEAR Six Months Year
ENDED Ended Ended
DECEMBER 31, June 30, December 31,
2005 2004 2003
----------------- ---------------- -----------------
(SUCCESSOR) (Predecessor) (Predecessor)
(IN MILLIONS)
Net Earnings (Loss) as reported.................................... $ 41.3 $ (11.0) $ 26.2
Less: total stock-based employee compensation expense determined
under fair value method for all awards, net of income tax...... (1.6) (1.9) (2.8)
----------------- ---------------- -----------------
Pro Forma Net Earnings (Loss)...................................... $ 39.7 $ (12.9) $ 23.4
================= ================ =================
11) RELATED PARTY TRANSACTIONS
Under its respective service agreements with affiliates AXA Equitable
(Successor Period) and MONY Life (Predecessor Period), 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 $74.7
million, $54.1 million, $88.7 million and $73.8 million for the full year
2005, six months ended December 31, 2004, six months ended June 30, 2004
and full year 2003, respectively. At December 31, 2005, MLOA reported a
receivable from AXA Equitable in connection with its service agreement of
$6.3 million. At December 31, 2004, MLOA's receivable from MONY Life in
connection with its predecessor service agreement was $2.3 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 $2.4 million,
$2.5 million, $3.0 million, and $6.0 million for the full year 2005, six
months ended December 31, 2004, six months ended June 30, 2004 and full
year 2003, respectively. In addition, MLOA had an intercompany payable of
$0.0 million and $0.2 million at December 31, 2005 and December 31, 2004,
respectively, related to these agreements.
As more fully described in Note 12 in Notes to Financial Statements,
during the Successor period MLOA began to cede its new variable and
universal life policies on an excess of retention basis with AXA
Equitable.
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 premium 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 shared in all premiums and benefits for the
reinsured policies based on the 90% quota share percentage, after
consideration of
F-23
existing reinsurance agreements previously in force on this business. In
addition, MLOA reimbursed USFL for its quota share of expense allowances,
as defined in the MODCO agreement.
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 gains on the recaptures of the term life reinsurance from USFL of
$9.0 million ($5.9 million after Federal income tax).
As of December 31, 2005, USFL recaptured all of the universal life
policies that had previously been assumed by MLOA under this MODCO
agreement. Other income for the year ended December 31, 2005 reflects the
resulting pre-tax gains on the recaptures of the universal life and term
life reinsurance from USFL of $0.6 million ($0.4 million after Federal
income tax).
The MODCO agreement remained in effect for level premium term life
insurance issued during 2005. However, in the fourth quarter of 2005, the
MODCO agreement was terminated effective January 1, 2005, and all MODCO
reinsurance transactions relating to level term that took place between
USFL and MLOA during 2005 were unwound. In connection with this unwinding,
MLOA received a payment of $0.7 million representing interest on net
payments made to USFL during the year under the MODCO agreement.
The statements of operations include certain revenues and expenses assumed
from USFL under the MODCO agreement as follows:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- -------------- ---------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
REVENUES:
Universal life and investment-type product
policy fee income........................ $ 19.9 $ 7.8 $ 7.3 $ 12.0
Premiums.................................... - 59.2 53.2 88.7
Other (loss) income......................... (0.2) 16.2 (4.6) -
--------------- -------------- ---------------- -----------------
Total revenues......................... 19.7 83.2 55.9 100.7
--------------- -------------- ---------------- -----------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits..................... 10.5 53.2 40.7 69.0
Interest credited to policyholders' account
balances................................. 6.1 2.6 2.3 3.3
Amortization of deferred policy acquisition
costs and value of business acquired..... 2.4 6.0 8.7 13.8
Capitalization of deferred policy
acquisition costs ....................... (14.0) (34.9) (33.4) (60.7)
Commissions................................. 14.2 43.4 44.3 77.4
--------------- -------------- ---------------- -----------------
Total benefits and other deductions.... 19.2 70.3 62.6 102.8
--------------- -------------- ---------------- -----------------
Earnings (Loss) Before Income Taxes and
Cumulative Effect of an Accounting
Change................................. $ 0.5 $ 12.9 $ (6.7) $ (2.1)
=============== ============== ================ =================
F-24
The following table presents the impact on MLOA's assets and liabilities
of the recaptures of reinsurance from USFL:
DECEMBER 31, December 31,
2005 2004
------------------- -------------------
(IN MILLIONS)
ASSETS
Fixed maturities................................................ $ - $ 84.6
Cash and cash equivalents....................................... 12.2 10.4
Accrued investment income....................................... - 1.1
Deferred policy acquisition costs............................... (20.1) (24.3)
VOBA............................................................ (12.8) (32.1)
Other assets.................................................... (1.6) 6.3
------------------- -------------------
Total assets............................................... $ (22.3) $ 46.0
------------------- -------------------
LIABILITIES
Future policy benefits.......................................... $ (26.5) $ 34.1
Other liabilities............................................... 3.6 2.9
Income taxes payable............................................ 0.2 3.1
------------------- -------------------
Total liabilities.......................................... (22.7) 40.1
------------------- -------------------
Net Impact of Recapture of Reinsurance from USFL........... $ 0.4 $ 5.9
=================== ===================
At December 31, 2005 and 2004, MLOA recorded payables of $3.1 million and
$27.8 million, respectively, to USFL in connection with the MODCO
agreement.
In accordance with the guidance contained in FASB Derivates Implementation
Group Issue B36, the MODCO agreement between USFL and MLOA was considered
to contain an embedded derivative representing a total return swap. The
fair value of this total return swap asset was $3.3 million at December
31, 2004. The embedded derivative asset of $1.6 million was written off as
of December 31, 2005 in connection with the termination of the MODCO
agreement. Changes in fair value of the total return swap asset resulted
in (losses) income of $(1.4) million, $7.1 million and $(4.6) million for
the full year 2005, six months ended December 31, 2004 and six months
ended June 30, 2004, respectively.
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, 2005 is $33.8 million.
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 that 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, through October 2005 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. In November 2005 AXA
Equitable increased the retention on single-life policies to $25.0 million
and on second-to-die policies to $30.0 million. 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 100.0% of any excess. A contingent liability exists with
respect to reinsurance ceded should the reinsurers be unable to meet their
obligations.
At December 31, 2005 and 2004, respectively, reinsurance recoverables
related to insurance contracts amounted to $106.2 million and $76.0
million, of which $51.3 million and $43.9 million relates to one specific
reinsurer.
F-25
The following table summarizes the effect of reinsurance:
YEAR Six Months Six Months Year
ENDED Ended Ended Ended
DECEMBER 31, December 31, June 30, December 31,
2005 2004 2004 2003
--------------- ----------------- ---------------- -----------------
(SUCCESSOR) (Successor) (Predecessor) (Predecessor)
(IN MILLIONS)
Direct premiums................................... $ 93.4 $ 44.8 $ 37.7 $ 73.2
Reinsurance assumed from USFL..................... - 59.2 53.2 88.7
Reinsurance ceded................................. (39.6) (19.0) (13.5) (20.9)
--------------- ----------------- ---------------- -----------------
Premiums.......................................... $ 53.8 $ 85.0 $ 77.4 $ 141.0
=============== ================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded........................ $ 33.9 $ 22.7 $ 15.9 $ 30.0
=============== ================= ================ =================
Policyholders' Benefits Ceded..................... $ 57.9 $ 24.0 $ 10.8 $ 42.6
=============== ================= ================ =================
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.
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 of Notes to Financial Statements are presented
below:
F-26
DECEMBER 31,
--------------------------------------------------------------------
2005 2004
--------------------------------- ---------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
Mortgage loans on real estate.......... $ 290.2 $ 291.3 $ 373.2 $ 378.0
Policy loans........................... 96.3 111.6 93.0 107.9
Policyholders liabilities:
Investment contracts................ 938.0 933.1 977.8 972.2
Note payable to affiliate.............. 33.8 33.8 36.8 36.8
14) COMMITMENTS AND CONTINGENT LIABILITIES
MLOA had $20.2 million in commitments under existing mortgage loan
agreements at December 31, 2005.
15) LITIGATION
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 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. After
extensive motion practice by the parties, which led to the dismissal of
most of the claims and a decertification of the class, with respect to one
remaining claim, in December 2005, the case was settled on an individual
basis. 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 similar putative class actions, of which
there are two remaining, were consolidated and transferred by the Judicial
Panel on Multidistrict Litigation to the United States District Court for
the District of Massachusetts. In STOCKLER, MLOA has filed a motion for
summary judgment that is currently pending.
-----------------------------------------
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. 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 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.
F-27
16) STATUTORY FINANCIAL INFORMATION
MLOA is restricted as to the amounts it may pay as dividends to MONY Life.
Under Arizona Insurance Law, a domestic life insurer may, without prior
approval of the Superintendent, pay a dividend to its shareholder not
exceeding an amount calculated based on a statutory formula. Based on this
formula, no such discretionary dividends could be paid in 2006. For 2005,
2004 and 2003, MLOA's statutory net loss was $5.6 million, $83.4 million
and $79.6 million, respectively. Statutory surplus, capital stock and
Asset Valuation Reserve ("AVR") totaled $269.8 million and $250.1 million
at December 31, 2005 and 2004, respectively. There were no shareholder
dividends paid to MONY Life by MLOA in 2005, 2004 and 2003.
At December 31, 2005, MLOA, in accordance with various government and
state regulations, had $7.1 million of securities deposited with such
government or state agencies.
At December 31, 2005 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, 2005.
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.
17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2005 and 2004 are summarized
below:
THREE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
MARCH 31, (2) JUNE 30, (2) (2) (1)(2)
--------------- --------------- ---------------- -------------------
(SUCCESSOR) (Successor) (Successor) (Successor)
(IN MILLIONS)
2005
----
Total Revenues..................... $ 107.4 $ 94.1 $ 100.7 $ 74.7
=============== =============== ================ ===================
(Loss) Earnings from Continuing
Operations....................... $ (0.1) $ 13.5 $ 7.7 $ 20.2
=============== =============== ================ ===================
Net (Loss) Earnings................ $ (0.1) $ 13.5 $ 7.7 $ 20.2
=============== =============== ================ ===================
F-28
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30,(3) September 30, December 31, (4)
--------------- --------------- ---------------- -------------------
(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
================ =============== ================ ===================
(1) Results for the three months ended December 31, 2005 include the net
gain of $0.4 million recorded from the recapture by USFL of all of
the universal life policies that had previously been assumed by MLOA
under its MODCO agreement with USFL and the net gain of $1.9 million
from the unwinding of the MODCO transactions related to level
premium term life insurance issued during the first nine months of
2005 under MLOA's MODCO agreement with USFL (see Note 11 of Notes to
Financial Statements).
(2) Results for the three months ended December 31, 2005 include
recorded adjustments related to prior quarters' inter-company
expense allocations and DAC capitalization. The effect on these
adjustments was to increase net income for the period by $7.1
million. Net earnings for the three months ended March 31, June 30
and September 30, 2005 were understated by $2.1 million, $2.1
million and $2.9 million, respectively.
(3) 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.
(4) Results for the three months ended December 31, 2004 include the net
gain of $5.9 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 of Notes to Financial
Statements).
F-29
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 17, 2006 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 17, 2006
F-30
MONY LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2005
ESTIMATED CARRYING
TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE
------------------ ----------------- ----------------- -----------------
(IN MILLIONS)
Fixed maturities:
U.S. government, agencies and authorities............ $ 92.3 $ 92.2 $ 92.2
Mortgage-backed...................................... 24.9 25.2 25.2
State, municipalities and political subdivisions..... 1.1 1.1 1.1
Foreign governments.................................. 10.2 10.2 10.2
Public utilities..................................... 217.6 217.5 217.5
All other corporate bonds............................ 1,626.3 1,612.3 1,612.3
Redeemable preferred stocks.......................... 77.6 77.1 77.1
---------------- ----------------- -----------------
Total fixed maturities............................... 2,050.0 2,035.6 2,035.6
---------------- ----------------- -----------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............. -- -- --
Mortgage loans on real estate........................... 290.2 291.3 290.2
Real estate............................................. -- -- --
Real estate acquired in satisfaction of debt............ -- -- --
Real estate joint ventures.............................. 3.9 -- 3.9
Policy loans............................................ 96.3 111.6 96.3
Other limited partnership interests..................... -- -- --
Other invested assets................................... 1.6 -- 1.6
---------------- ----------------- -----------------
Total Investments....................................... $ 2,442.0 $ 2,438.5 $ 2,427.6
================ ================= =================
(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 $49.4 million investment in units of
AllianceBernstein L.P., a related party.
F-31
MONY LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE IV
REINSURANCE
AT AND FOR THE YEAR ENDED DECEMBER 31, 2005 (SUCCESSOR),
SIX MONTHS ENDED DECEMBER 31, 2004 (SUCCESSOR),
SIX MONTHS ENDED JUNE 30, 2004 (PREDECESSOR),
AND YEAR ENDED DECEMBER 31, 2003 (PREDECESSOR)
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------------- ----------------- ----------------- ---------------- ---------------
(IN MILLIONS)
2005 (SUCCESSOR)
----------------
Life Insurance In-force...... $ 59,916.9 $ 24,727.1 $ - $ 35,189.8 -
================ ================= ================= ================
Premiums:
Life insurance and
Annuities............... $ 93.4 $ 39.6 $ - $ 53.8 -
Accident and health....... - - - - -
---------------- ----------------- ----------------- ----------------
Total Premiums............... $ 93.4 $ 39.6 $ - $ 53.8 -
================ ================= ================= ================
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%
================ ================= ================= ================
F-32
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, 2005.
Based on that evaluation, management, including the Chief Executive
Officer and Chief Financial Officer, concluded that MLOA's disclosure
controls and procedures are effective. There has been no change in MLOA's
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, MLOA's internal control over financial
reporting.
9A-1
PART II, ITEM 9B.
OTHER INFORMATION
None.
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 2005 and 2004, 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).
2005 2004
------------ -------------
(IN THOUSANDS)
Principal Accounting Fees and Services:
Audit fees.............................................. $ 583 $ 535
Audit related fees...................................... 81 95
Tax fees................................................ 65 2
All other fees.......................................... 3 -
------------ -------------
Total........................................................ $ 732 $ 632
============ =============
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; provided, however, that the audit committee has delegated to its
chairperson the ability to pre-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, 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 17, 2006 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 17, 2006
- -------------------------------------------- Executive Officer, Director
Christopher M. Condron
/s/ Stanley B. Tulin Vice Chairman of the Board and March 17, 2006
- -------------------------------------------- Chief Financial Officer, Director
Stanley B. Tulin
/s/ Richard S. Dziadzio Executive Vice President and March 17, 2006
- -------------------------------------------- Deputy Chief Financial Officer
Richard S. Dziadzio
/s/ Alvin H. Fenichel Senior Vice President and Controller March 17, 2006
- --------------------------------------------
Alvin H. Fenichel
/s/ Henri de Castries Director March 17, 2006
- --------------------------------------------
Henri de Castries
/s/ Bruce W. Calvert Director March 17, 2006
- --------------------------------------------
Bruce W. Calvert
/s/ Denis Duverne Director March 17, 2006
- --------------------------------------------
Denis Duverne
/s/ Mary R. Henderson Director March 17, 2006
- -------------------------------------------
Mary R. Henderson
/s/ James F. Higgins Director March 17, 2006
- -------------------------------------------
James F. Higgins
S-1
/s/ W. Edwin Jarmain Director March 17, 2006
- -------------------------------------------
W. Edwin Jarmain
/s/ Christina Johnson Director March 17, 2006
- -------------------------------------------
Christina Johnson
/s/ Scott D. Miller Director March 17, 2006
- -------------------------------------------
Scott D. Miller
/s/ Joseph H. Moglia Director March 17, 2006
- -------------------------------------------
Joseph H. Moglia
/s/ Peter J. Tobin Director March 17, 2006
- -------------------------------------------
Peter J. Tobin
S-2
INDEX TO EXHIBITS
Number Description Method of Filing
- ---------- ----------------------------------------- ---------------------------------------------
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 as Exhibit 10.2 to MLOA's Annual
between MLOA and AXA Equitable Life Report on Form 10-K for the fiscal year
Insurance Company dated as of February ended December 31, 2005 and incorporated by
1, 2005 reference herein.
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
31.1 Section 302 Certification made by the Filed herewith
registrant's Chief Executive Officer
31.2 Section 302 Certification made by the Filed herewith
registrant's Chief Financial Officer
32.1 Section 906 Certification made by the Filed herewith
registrant's Chief Executive Officer
32.2 Section 906 Certification made by the Filed herewith
registrant's Chief Financial Officer
E-1