In our opinion, the accompanying balance sheet and the related statements of operations, of shareholder's equity and of cash flows present fairly, in all material respects, the financial position of MONY Life Insurance Company of America (Predecessor Company) at December 31, 2003, and the results of its operations and its cash flows for the period from January 1, 2004 through June 30, 2004 and for each of the years in the two year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
MONY LIFE INSURANCE COMPANY OF AMERICA STATEMENTS OF SHAREHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
MONY Life Insurance Company of America ("MLOA"), an Arizona stock life insurance company whose primary business is to provide life insurance and annuity products to both individuals and businesses, is a wholly-owned subsidiary of MONY Life Insurance Company ("MONY Life"). MONY Life is a wholly-owned subsidiary of MONY Holdings, LLC ("MONY Holdings"), which is a downstream holding company of AXA Financial, Inc. ("the Holding Company", which together with its consolidated subsidiaries is referred to herein as "AXA Financial").
ADJUSTMENTS TO FAIR VALUE AT JULY 1, 2004 INCREASE/(DECREASE) --------------------- (IN MILLIONS)
LIABILITIES Future policy benefits and other policyholders' liabilities........................................ $ 43.1 Other liabilities.................................. (8.7) Income taxes payable............................... (18.0) ------------ TOTAL LIABILITIES.................................. 16.4 ------------ DECREASE IN NET ASSETS............................. $ (33.6) ============
On December 16, 2004, the FASB issued SFAS Statement No. 123(R), "Share-Based Payment". SFAS Statement No. 123(R) eliminates the alternative to apply the intrinsic value method of accounting for employee stock-based compensation awards that was provided in FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") as originally issued. SFAS No. 123(R) requires the cost of all share-based payments to employees, including stock options, stock appreciation rights, and most tax-qualified employee stock purchase plans, to be recognized in the financial statements based on the fair value of those awards. Under SFAS No. 123(R) the cost of equity-settled awards generally is based on fair value at date of grant, adjusted for subsequent modifications of terms or conditions, while cash-settled awards require remeasurement of fair value at the end of each reporting period. SFAS No. 123(R) does not prescribe or specify a preference for a particular valuation technique or model for estimating the fair value of employee stock options and similar awards but instead requires consideration of certain factors in selecting one that is appropriate for the unique substantive characteristics of the instruments awarded. SFAS No. 123(R) is effective as of the first interim or annual reporting period beginning after June 15, 2005 and generally requires adoption using a modified version of prospective application. Under "modified prospective" application, SFAS No. 123(R) applies to new awards granted and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for unvested awards outstanding as of the required effective date must be recognized prospectively over the
remaining requisite service/vesting period based on the fair values of those awards as already calculated under SFAS No. 123. Entities may further elect to apply SFAS No. 123(R) on a "modified retrospective" basis to give effect to the fair value based method of accounting for awards granted, modified, or settled in cash in earlier periods. The cumulative effect of initial application, if any, is recognized as of the required effective date.
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.
Valuation allowances are netted against the asset categories to which they apply.
Equity securities include common stock classified as available for sale securities, and are carried at estimated fair value which equity securities are included in other invested assets.
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.
For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as income when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
VOBA, which is established in accordance with business combination purchase accounting guidance, is based on the present value of future profits embedded in the acquired contracts. VOBA is determined by estimating the net present value of future cash flows expected to result from contracts in force at the date of the transaction. Future positive cash flows include investment
spreads, and fees and other charges assessed to the contracts for as long as they remain in force, while future negative cash flows include costs to administer the contracts and taxes. Contract balances, from which the cash flows arise, are projected using assumptions for add-on deposits, participant withdrawals, contract surrenders, and investment returns. VOBA is further explicitly adjusted to reflect the cost associated with the capital invested in the business. VOBA will be amortized over the expected life of the contracts (approximately 10-30 years) according to the type of contract involved using the methods described below as applicable. VOBA is subject to loss recognition testing at the end of each accounting period.
A significant assumption in the amortization of DAC and VOBA on variable and interest-sensitive life insurance and variable annuities relates to projected future Separate Account performance. Expected future gross profit assumptions related to Separate Account performance are set by management using a long-term view of expected average market returns by applying a reversion to the mean approach. In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance and subject to assessment of the reasonableness of resulting estimates of future return assumptions. For purposes of making this reasonableness assessment, management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. Currently, the average gross long-term annual return estimate is 9.0% (6.90% net of product weighted average Separate Account fees), and the gross maximum and minimum annual rate of return limitations are 15.0% (12.65% net of product weighted average Separate Account fees) and 0% (-2.35% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is 5 years. This approach will continue to be applied in future periods. If actual market returns continue at levels that would result in assuming future market returns of 9% for more than 5 years in order to reach the average gross long-term return estimate, the application of the 5 year maximum duration limitation would result in an acceleration of DAC and VOBA amortization. Conversely, actual market returns resulting in assumed future market returns of 0% for more than 5 years would result in a required deceleration of DAC and VOBA amortization. As of December 31, 2004, current projections of future average gross market returns assume a 2.3% return for 2005 which is within the maximum and minimum limitations and assume a reversion to the mean of 9.0% after 1.5 years.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on a long-term average of actual experience. This assumption is updated quarterly to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC and VOBA amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC and VOBA amortization. Generally, life mortality experience has been improving in recent years.
Other significant assumptions underlying gross profit estimates relate to contract persistency and general account investment spread.
Policyholders' account balances for universal life and investment-type contracts are equal to the policy account values. The policy account values represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
MLOA issues certain variable annuity products with a Guaranteed Minimum Death Benefit ("GMBD") feature. MLOA also issues certain variable annuity products that contain a Guaranteed Minimum Income Benefit ("GMIB") feature which, if elected by the policyholder after a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a guaranteed
For reinsurance contracts reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on MLOA's experience that, together with interest and expense assumptions, includes a margin for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC and VOBA are written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated contractholders' fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 2.0% to 6.0% for life insurance liabilities and from 3.0% to 6.75% for annuity liabilities.
compensation expense only if the current market price of the underlying stock exceeds the option strike price at the grant date. See Note 10 for the pro forma disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure".
For publicly traded fixed maturities, estimated fair value is determined using quoted market prices. For fixed maturities without a readily ascertainable market value, MLOA determines estimated fair values using a discounted cash flow approach, including provisions for credit risk, generally based on the assumption such securities will be held to maturity. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the dates of the balance sheets. At December 31, 2004 and 2003, securities without a readily ascertainable market value having an amortized cost of $497.4 million and $572.2 million, respectively, had estimated fair values of $505.1 million and $610.0 million, respectively.
The contractual maturity of bonds at December 31, 2004 is shown below:
Bonds not due at a single maturity date have been included in the above table in the year of final maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
MLOA's management, with the assistance of its investment advisors, monitors the investment performance of its portfolio. This review process culminates with a quarterly review of certain assets by AXA Financial's Investments Under Surveillance Committee that evaluates whether any investments are other than temporarily impaired. The review considers an analysis of individual credit metrics of each issuer as well as industry fundamentals and the outlook for the future. Based on the analysis, a determination is made as to the ability of the issuer to service its debt obligations on an ongoing basis. If this ability is deemed to be impaired, then the appropriate provisions are taken.
LESS THAN 12 MONTHS ------------------------------ GROSS ESTIMATED UNREALIZED FAIR VALUE LOSSES --------------- ------------- Fixed Maturities: Corporate....................... $ 311.3 $ 2.9 Mortgage-backed................. -- -- U.S. Treasury, government and agency securities............. 17.5 -- Foreign governments............. 6.1 0.1 Redeemable preferred stock............... 44.1 0.2 ------------- ------------- Total Temporarily Impaired Securities ............ $ 379.0 $ 3.2 ============= =============
There were no securities in a continuous unrealized loss position for more than a twelve month period at December 31, 2004.
Mortgage loans on real estate are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans on real estate are classified as nonaccrual loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely. At December 31, 2004 and 2003, there are no mortgage loans on real estate that had been classified as nonaccrual loans.
The following presents MLOA's VOBA asset as of December 31, 2004, related to the Holding Company's acquisition of MONY:
For the six months ended December 31, 2004, six months ended June 30, 2004, full years 2003 and 2002, respectively, proceeds received on sales of fixed maturities classified as available for sale amounted to $48.9 million, $363.1 million, $145.3 million and $82.8 million. Gross gains of $2.1 million, $6.9 million, $10.7 million and $4.8 million and gross losses of $1.3 million, $10.0 million, $0.0 million and $1.0 million, respectively, were realized on these sales. The change in unrealized investment gains (losses) related to fixed maturities classified as available for sale for the six months ended December 31, 2004, six months ended June 30, 2004, full years 2003 and 2002 amounted to $36.1 million, $(41.0) million, $(3.2) million and $69.2 million, respectively.
The components of other comprehensive income (loss) for the past three years follow:
MLOA issues certain variable annuity contracts with GMDB and GMIB features that guarantee either:
a) Return of Premium: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals);
c) Roll-Up: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals) accumulated at contractually specified interest rates up to specified ages.
The December 31, 2004 values for those variable contracts with GMDB and GMIB features are presented in the following table. Since variable contracts with GMDB guarantees may also offer GMIB guarantees in each contract, the GMDB and GMIB amounts listed are not mutually exclusive:
---------------------- (1) Included General Account balances of $215 million, $327 million and $35 million, respectively, for a total of $577 million. (2) Included General Account balances of $35 million.
VARIABLE AND INTEREST-SENSITIVE LIFE INSURANCE POLICIES - NO LAPSE GUARANTEE ----------------------------------------------------------------------------
The no lapse guarantee feature contained in variable and interest-sensitive life insurance policies keeps them in force in situations where the policy value is not sufficient to cover monthly charges then due. The no lapse guarantee remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements. At December 31, 2004 MLOA had liabilities of $0.5 million for no lapse guarantees reflected in the General Account in future policy benefits and other policyholders liabilities.
Although MLOA has no employees, under service agreements with affiliates, MLOA is charged for services, including personnel services and employee benefits, provided on its behalf. In the predecessor periods, MONY Life elected to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25. On July, 8, 2004, all outstanding stock options were paid out or cancelled upon the completion of the acquisition of MONY by the Holding Company. Based on the definition of an "employee" prescribed in the Internal Revenue Code, MONY Life's career financial professionals did not qualify as employees. The following table reflects the effect on net (loss) earnings of MLOA as if the accounting prescribed by SFAS 123 had been applied by MONY Life to the options granted to employees and outstanding as at June 30, 2004, and December 31, 2003 and 2002:
MLOA has service agreements with affiliates whereby personnel services, employee benefits, facilities, supplies and equipment are provided to MLOA to conduct its business. The associated costs related to the service agreements are allocated to MLOA based on methods that management believes are reasonable, including a review of the nature of such costs and time studies analyzing the amount of employee compensation costs incurred by MLOA. As a result of such allocations, MLOA incurred expenses of $24.9 million, $46.2 million, $73.8 million and $61.8 million for the six months ended December 31, 2004, six months ended June 30, 2004, full years 2003 and 2002, respectively. At December 31, 2004 MLOA had a receivable from affiliates in connection with these service agreements of $2.3 million. At December 31, 2003 MLOA had a payable to MONY Life in connection with this service agreement of $13.6 million.
In addition to the agreements discussed above, MLOA has various other service and investment advisory agreements with affiliates. The amount of expenses incurred by MLOA related to these agreements was $2.5 million, $3.0 million, $6.0 million, and $2.6 million for the six months ended December 31, 2004, six months ended June 30, 2004, full years 2003 and 2002, respectively. In addition, MLOA had an intercompany payable of $0.2 million and $1.7 million at December 31, 2004 and December 31, 2003, respectively, related to these agreements.
As of December 31, 2004, USFL recaptured all of the term life policies that had previously been assumed by MLOA under this MODCO agreement. Other income for the six months ended December 31, 2004 reflects the resulting pre-tax gain on recapture of reinsurance from USFL of $9.0 million ($5.0 million after federal income tax). The following table presents the impact of the recapture of reinsurance with USFL on MLOA's assets and liabilities:
At December 31, 2004 and 2003, respectively, reinsurance recoverables related to insurance contracts amounted to $75.6 million and $59.6 million, of which $43.9 million and $33.8 million relates to one specific reinsurer.
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.
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.
MLOA had $43.1 million in commitments under existing mortgage loan agreements at December 31, 2004.
insurance policy issued by MONY Life and MLOA and sold on an alleged "vanishing premium" basis during the period January 1, 1982 to December 31, 1995. In March 1997, MONY Life and MLOA filed a motion to dismiss or, alternatively, for summary judgment on all counts of the complaint. In October 1997 the New York State Supreme Court granted MONY Life's and MLOA's motion for summary judgment and dismissed all claims filed in the Goshen case against MONY Life and MLOA. In December 1999, the New York State Court of Appeals affirmed the dismissal of all but one of the claims in the Goshen case (a claim under the New York General Business Law ("GBL")), which was remanded back to the New York State Supreme Court for further proceedings consistent with the opinion. The New York State Supreme Court subsequently reaffirmed that, for purposes of the remaining New York GBL claim, only New York purchasers could proceed with such claims. In July 2002, the New York Court of Appeals affirmed the New York State Supreme Court's decision holding that only New York purchasers could assert GBL [Section] 349 claims (New York's Consumer Protection Statute). In September 2002 in light of the New York Court of Appeals' decision, MONY Life and MLOA filed a motion to decertify the class with respect to the sole remaining claim in the case. By orders entered in April and May 2003, the New York State Supreme Court denied preliminarily the motion for decertification, but held the issue of decertification in abeyance pending appeals by plaintiffs in related cases and a hearing on whether the class, or a modified class, could satisfy the requirements of the class action statute in New York. In December 2004, the Appellate Division, First Department unanimously reversed the denial of MONY Life's motion for decertification, and ordered decertification of the class with respect to the sole remaining GBL claim. In March 2005, the Appellate Divsion denied plaintiff's motion for reargument or, alternatively, for leave to appeal that decision to the Court of Appeals.
The previously disclosed lawsuit entitled THE MONY GROUP INC. V. HIGHFIELDS CAPITAL MANAGEMENT LP, LONGLEAF PARTNERS SMALL-CAP FUND AND SOUTHEASTERN ASSET MANAGEMENT, has been settled and dismissed without prejudice. MLOA's management does not believe the outcome of this matter will have a material impact on MLOA's financial position or results of operations.
For 2004, 2003 and 2002, MLOA's statutory net loss was $83.4 million, $79.6 million and $91.9 million, respectively. Statutory surplus, capital stock and Asset Valuation Reserve ("AVR") totaled $250.1 million and $301.0 million at December 31, 2004 and 2003, respectively. There were no shareholder dividends paid to MONY Life by MLOA in 2004, 2003 and 2002.
(1) Results for the three months ended June 30, 2004 include recorded adjustments related to prior quarters' calculations of reinsurance reserve credits and interest credited on certain life insurance and annuity products. The effect of these adjustments was to increase the net loss for the period by $6.0 million.
MONY LIFE INSURANCE COMPANY OF AMERICA SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2004
(B) Other invested assets excludes a $49.1 million investment in units of Alliance Capital Management L.P., a related party.
MONY LIFE INSURANCE COMPANY OF AMERICA SCHEDULE IV REINSURANCE AT AND FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (SUCCESSOR), SIX MONTHS ENDED JUNE 30, 2004 (PREDECESSOR), AND YEARS ENDED DECEMBER 31, 2003 AND 2002 (PREDECESSOR)