Other income decreased $4.4 million to a charge of $3.2 million in 1997 from income of $1.2 million in 1996. This decrease is attributable to reinsurance activity. The components of other income are primarily commissions and expense allowances on reinsurance ceded which decreased $1.0 million to $14.0 million in 1997 from $15.0 million in 1996 from charges incurred on the modified coinsurance agreement with MassMutual, and a reserve adjustment on reinsurance ceded (recorded as a charge to other income) which increased $3.6 million to $17.3 million in 1997 from $13.7 million in 1996.
C.M. Life utilizes its investments in the privately placed bond portfolio to enhance the value of the overall portfolio, increase diversification and obtain higher yields than are possible with comparable quality public market securities. To control risk, C.M. Life relies upon broader access to management information, strengthened negotiated protective convenants, call protection features, and a higher level of collateralization than can customarily be achieved in the public market. The strength of the privately placed bond portfolio is demonstrated by the predominance of NAIC Categories 1 and 2 securities.
The following tables set forth by property type and geographic distribution the carrying value of commercial mortgage loan balances:
The carrying values of current and potential problem mortgage loans consisted of restructured loans and was $17.3 million and $21.9 million at December 31, 1997 and 1996, respectively. There were no problem mortgage loans in process of foreclosure, in default or in actively managed properties.
The following tables set forth current and potential problem mortgage loans by property type and geographic region as of December 31, 1997:
Reserves for individual annuities are based on accepted actuarial methods, principally at interest rates ranging from 5.5 to 9.0 percent. Reserves for policies and contracts considered investment contracts have a carrying value of $115.6 million and $113.7 million at December 31, 1997 and 1996, respectively (fair value of $116.0 million and $113.7 million at December 31, 1997 and 1996, respectively as determined by discounted cash flow projections).
Life insurance premium revenue is recognized annually on the anniversary date of the policy. Annuity premium is recognized when received. Commissions and other costs related to the issuance of new policies, maintenance and settlement costs are charged to current operations when incurred.
Provision for federal income taxes is based upon the Company's best estimate of its tax liability. No deferred tax effect is recognized for temporary differences that may exist between financial reporting and taxable income. Accordingly, the reporting of miscellaneous temporary differences, such as reserves and acquisition costs, resulted in effective tax rates which differ from the statutory tax rate.
The Company enters into forward U.S. Treasury commitments for the purpose of managing interest rate exposure. The Company generally does not take delivery on forward commitments. These commitments are instead settled with offsetting transactions. Gains and losses on forward commitments are recorded when the commitment is closed and amortized through the Interest Maintenance Reserve over the remaining life of the asset. At December 31, 1997 and 1996, the Company had U. S. Treasury purchase commitments which will settle during the following year with contractual amounts of $3.0 million and $2.0 million, respectively.
8. Liquidity The withdrawal characteristics of the policyholder's reserves and funds, including separate accounts, and the invested assets which support them at December 31, 1997 are illustrated below:
The Company is involved in litigation arising in and out of the normal course of its business. Management intends to defend these actions vigorously. While the outcome of litigation cannot be foreseen with certainty, it is the opinion of management, after consultation with legal counsel, that the ultimate resolution of these matters will not materially affect its financial position, results of operations or liquidity.