The decrease in policy loan gross investment income in 2000 is primarily due to a 19% decrease in average corporate owned life insurance policy loan balances between years. In 1999, gross investment income from policy loans declined due to a shift in the policy loan mix from corporate-owned life insurance type loans to traditional life insurance type loans as a result of a large surrender in late 1999 of a corporate owned life policy with an outstanding policy loan of $33 million.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements of C.M. Life Insurance Company audited by us do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the results of its operations or its cash flows for the year ended December 31, 1998.
The Internal Revenue Service has completed examining the Company’s income tax returns through the year 1995. The Internal Revenue Service is currently examining the Company’s income tax returns for the years 1996 and 1997. The Company believes adjustments which may result from such examinations will not materially affect its financial position.
Interest rate cap agreements grant the purchaser the right to receive the excess of a referenced interest rate over a stated rate calculated by reference to an agreed upon notional amount. Interest rate floor agreements grant the purchaser the right to receive the excess of a stated rate over a referenced interest rate calculated by reference to an agreed upon notional amount. Amounts paid for interest rate caps and floors are amortized into net investment income over the life of the asset on a straight-line basis. Unamortized costs are included in other investments on the Statutory Statements of Financial Position. Amounts receivable and payable are accrued as adjustments to net investment income and included in the Statutory Statements of Financial Position as investment and insurance amounts receivable. Gains and losses on these contracts, including any unamortized cost, are recognized upon termination and are deferred and amortized through the IMR over the remaining life of the associated cap or floor agreement. At December 31, 2000 and 1999, the Company had agreements with notional amounts of $80.0 million and $355.0 million, respectively. The Company’s credit risk exposure on these agreements is limited to the unamortized costs of $0.1 million and $0.2 million at December 31, 2000 and 1999, respectively.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
MassMutual and the Company have an agreement whereby MassMutual, for a fee, furnishes the Company, as required, operating facilities, human resources, computer software development and managerial services. Also, investment and administrative services are provided to the Company pursuant to a management services agreement with MassMutual. Fees incurred under the terms of these agreements were $172.6 million, $124.5 million and $74.1 million in 2000, 1999 and 1998, respectively. While management believes that these fees are calculated on a reasonable basis, they may not necessarily be indicative of the costs that would have been incurred on a stand-alone basis.