For the year ended December 31, 1995, C.M. Life had net income of $13,750, as compared with net income of $17,788 in 1994. The decrease in net income of $4,038 is attributable to increased benefit, claims and settlement expenses and increased acquisition and insurance expenses which exceeded the increase in net premiums and net investment income.
Premiums before reinsurance ceded increased $23,040 to $134,278 in 1995 from $111,238 in 1994. Premiums for CM Windows, a single premium deferred annuity, increased $9,412 to $18,894 in 1995 from $9,482 in 1994. The increase is attributable to higher interest rates and increased promotional efforts, which increased demand for single premium deferred annuity products. Premiums for life insurance products increased $13,628 to $115,384 in 1995 from $101,756 in 1994 due to higher sales of universal life policies, primarily the Enterprise Plus product, as well as by increased renewal premiums.
Reinsurance premiums ceded decreased by $3,300 in 1995. The decrease is attributable to the decrease in reinsured business as well as increased retention limits. The Enterprise Plus Universal Life product is not included in the C.M. Life/Connecticut Mutual reinsurance treaty.
Net investment income increased by $8,928 over 1994. This increase is attributable to increased invested assets and policy loans.
Acquisition expenses increased $21,190 over 1994. This increase is attributable to increased sales, especially of the new Enterprise Plus Universal Life product.
Income tax expense decreased by $4,712 over 1994. This decrease is attributable to lower taxable income in 1995 versus 1994. Taxable income was $27,726, $38,660 and $33,080 in 1995, 1994 and 1993, respectively. C.M. Life's Federal income tax expense is based on income which is currently taxable. The differences between pre-tax book income and taxable income are primarily for lower tax basis reserves for future policy benefits and other book/tax differences associated with gross investment income.
Premiums before reinsurance ceded increased $3,141 to $111,238 in 1994 from $108,097 in 1993. Premiums for CM Windows, a single premium deferred annuity, increased $7,343 to $9,482 in 1994 from $2,139 in 1993. The increase is attributable to higher interest rates, which increased demand for single premium deferred annuity products. Premiums for life insurance products decreased $4,202 to $101,756 in 1994 from $105,958 in 1993 due to lower sales of new universal life policies and Executive Benefit Life policies offset by higher term policy sales.
Income tax expense increased by $2,247 over 1993. This increase is attributable to higher taxable income in 1994 versus 1993. Taxable income was $38,660, $33,080 and $27,414 in 1994, 1993 and 1992, respectively. C.M. Life's Federal income tax expense is based on income which is currently taxable. The differences between pre-tax book income and taxable income are primarily lower tax basis reserves for future policy benefits and other book/tax differences associated with gross investment income.
There is not expected to be any material change to C.M. Life's liquidity as a result of the merger of CML and MassMutual.
During 1995, 1994 and 1993, C.M. Life's operations consisted of one business segment which was principally the sale of universal life insurance and annuity products. C.M. Life is not dependent upon any single customer and no single customer accounted for more than 10% of revenues in 1995, 1994 and 1993.
Investments ----------- At December 31, 1995, the composition of C.M. Life's $976,511 of invested assets was 75.5% fixed maturities, 7.4% equity securities, 2.7% mortgage loans, 12.9% policy loans, and 1.5% cash and cash equivalents.
Restructured loans are loans whose terms such as interest rate, amortization, or maturity have been modified and are currently performing pursuant to such modified terms. C.M. Life restructures loans to protect its investment and only when it is anticipated that the borrower will be able to meet the modified terms. As of December 31, 1995 and 1994, $17,128 and $24,034 of mortgage loans have been restructured.
Currently, the Federal government does not directly regulate the business of insurance. However, Federal legislative, regulatory and judicial decisions and initiatives often have significant effects on C.M. Life's business. Types of changes that are most likely to affect C.M. Life's business include changes to: (a) the taxation of life insurance companies; (b) the tax treatment of insurance products; (c) the securities laws, particularly as they relate to insurance and annuity products; (d) the "business of insurance" exemption from any of the provisions of the anti-trust laws; and (e) declining barriers which prevent most banks from selling or underwriting insurance. C.M. Life could also be affected by federal initiatives that have impact on the ownership of or investment in United States companies by foreign companies or investors.
The Financial Accounting Standards Board (FASB) has issued an interpretation declaring that financial statements of mutual life insurance companies, and their wholly owned subsidiaries, which are prepared on the basis of statutory accounting principles, will no longer be considered to be in conformity with Generally Accepted Accounting Principles (GAAP). This interpretation applies to financial statements issued for fiscal years beginning after December 15, 1995. Certain accounting principles for mutual life insurance companies, which will be required to be in compliance with GAAP, were also issued by the FASB and the American Institute of Certified Public Accountants in January 1995. The financial statement impact of adopting these accounting principles has not been determined by the Company. The effect of initially adopting the FASB interpretation will be reported retroactively through restatement of all previously issued financial statements presented for comparative purposes for fiscal years beginning after December 15, 1992.
C.M. Life Insurance Company (C.M. Life) is a wholly owned stock life insurance subsidiary of Connecticut Mutual Life Insurance Company (Connecticut Mutual). C.M. Life is primarily engaged in the sale of individual life insurance and annuity products. C.M. Life is licensed to transact business in all states except New York.
a. Assets - Assets are stated at amounts reported to state regulatory authorities. Certain assets, such as prepaid agent commissions and other prepaid expenses, are excluded from the balance sheet and amounted to $3,839 and $2,684 as of December 31, 1995 and 1994.
The Company maintains an Interest Maintenance Reserve (IMR), prescribed by the NAIC, for all fixed income investments and defers all interest rate related losses, net of taxes, as they occur. The deferral is subsequently amortized to net investment income over the period remaining to maturity of the assets sold. All other realized gains and losses are reported in the Statements of Operations upon sale. Unrealized capital gains and losses are reported as additions to or reductions from retained earnings.
The Asset Valuation Reserve (AVR), prescribed by the NAIC, provides a general reserve for possible decline in the value of bonds, stocks, mortgage loans, real estate and other invested assets. The reserve is computed based on prescribed factors, each designed to address specific asset risks. Changes in the AVR are charged or credited directly to retained earnings. The AVR increased by $9,228 and $106 in 1995 and 1994, respectively.
d. Reserves for Payment of Future Benefits: Reserves for payment of future benefits on life insurance, developed using accepted actuarial methods, are established and maintained primarily on the Commissioners' Reserve Valuation Method utilizing the 1980 Commissioners' Standard Ordinary Mortality Table with interest rates of 4%-4 1/2%. Reserves for single premium deferred annuities are calculated based on the Commissioners' Annuity Reserve Valuation Method utilizing the change in fund method and assuming interest on changes in funds of 8.0%, 7.0% and 7.5% in 1995, 1994 and 1993, respectively. Additional reserves are maintained for contracts where the cash surrender value exceeds the actuarially determined reserve.
f. Premiums and Insurance Operating Expenses: Premiums are reported as income when due. Commissions and other costs relating to the solicitation, underwriting and issuance of new contracts are reported as acquisition and insurance expenses in the year incurred.
h. New Accounting Pronouncements: The Financial Accounting Standards Board (FASB) has issued an interpretation stating that financial statements of mutual life insurance companies, and their wholly owned subsidiaries, which are prepared on the basis of statutory accounting principles, will no longer be considered to be in conformity with GAAP. This interpretation applies to financial statements issued for fiscal years beginning after December 15, 1995. Certain accounting principles for mutual life insurance companies, which will be required to be in compliance with GAAP, were also issued by the FASB and the American Institute of Certified Public Accountants in January 1995. The financial statement impact of adopting these accounting principles has not been determined by the Company. The effect of initially adopting the FASB interpretation shall be reported retroactively through restatement of all previously issued financial statements presented for comparative purposes for fiscal years beginning after December 15, 1992.
i. Reclassifications: The 1994 and 1993 financial statements and Notes to Financial Statements reflect certain reclassifications to conform with the 1995 presentation.
j. Certain Risks and Uncertainties: The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities, both at the date of the financial statements. Management must also make estimates and assumptions that affect amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Future events, which could impact the estimates used in these financial statements, include changes in the levels of mortality and interest rates.
The reinsurance contract with Connecticut Mutual is a modified coinsurance quota-share treaty. Under the treaty C.M. Life cedes 50% of the premiums on universal life policies issued in 1985 and 75% of the premiums with issue dates on or after January 1, 1986. In return Connecticut Mutual pays C.M. Life a stipulated expense allowance, death and surrender benefits, and a modified coinsurance adjustment. Reserves for payment of future benefits for the ceded policies are retained by C.M. Life.
C.M. Life also has a stop-loss agreement with Connecticut Mutual under which C.M. Life cedes claims which, in aggregate, exceed $24,245 in 1995, $18,348 in 1994, and $16,431 in 1993. In 1995, 1994, and 1993, the limit was not exceeded. The agreement was amended and renewed in 1994 for a duration of three years. The amended maximum coverage is $25,000. C.M. Life paid approximately $602, $435, and $446 in premiums under the agreement in 1995, 1994 and 1993, respectively.
C.M. Life is contingently liable with respect to ceded reinsurance in the event any reinsurer is unable to fulfill its contractual obligations.
Outstanding mortgages whose terms have been modified aggregated $17,128 and $24,034 which represents 64.1% and 57.2% of the total portfolio as of December 31, 1995 and 1994, respectively. Income recognized during 1995, 1994 and 1993 on these restructured loans was $1,317, $1,379 and $1,495, respectively. Income that would have been recognized during 1995, 1994 and 1993 on these loans, if such loans had been current in accordance with their original terms and had been outstanding throughout the year, was $1,799, $2,296 and $2,568, respectively. Commitments to loan additional funds to mortgage loan borrowers, on loans whose terms have been modified, are not significant.
Loans either overdue more than three months or in the process of foreclosure were $2,774 at December 31, 1995 and 1994. Additionally, C.M. Life had properties which it acquired in satisfaction of debt of $1,897 at December 31, 1994.
The Company has identified certain assets and liabilities as financial instruments that require fair value disclosure. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If quoted market prices are not available, the values are estimated using discounted cash flow analysis or other valuation techniques. These various techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used to estimate the fair value of each class of these instruments for which it is practicable to estimate the value.
The estimated fair value for the public bonds is based on the quoted market price from various external bond pricing services. Private bonds are assigned an internal quality rating which parallels independent rating agency criteria and is consistent with NAIC ratings. The fair value of these bonds is estimated by discounting the expected future cash flows using a current discount rate based on the quality rating and maturity of the specific instruments.
Policy loans are issued with either fixed or variable interest rates, depending upon the terms of the policies. For those loans with fixed interest rates, the interest rates range from 5% to 8%. Since policy loans do not have defined maturities, management believes it is impractical to estimate the fair value of fixed rate policy loans. For loans with variable interest rates, the rates are adjusted annually based upon changes in a corporate bond index and are stated at fair value.
Future Policy Benefits Annuity Reserves- Accumulation Phase 49,078 49,683 30,239 28,868 Other Deposits 54,269 54,918 31,690 29,484 Other Liabilities Funds Deposited Under Income Settlements- Supplementary Contracts Without Life Contingencies 215 208 270 260 Liabilities of Separate 531,432 531,432 309,672 309,672 Account
Total investment income 70,270 61,742 59,339 Less: Applicable investment 1,455 1,837 1,879 expenses ----- ----- -----
1995 1994 1993 ---- ---- ---- Realized Gains and Losses: Fixed Maturities: Realized gains $ 3,598 $ 1,358 $ 5,931 Realized losses (4,658) (4,439) (1,016) ------- ------- -------
Equity Securities and Options: Realized gains 1,518 - 4 Realized losses (758) - - ----- ---------- ----------
On September 8, 1995, the Board of Directors of Connecticut Mutual approved the merger of Connecticut Mutual and Massachusetts Mutual Life Insurance Company. Thereafter, a definitive agreement was signed by both companies. On January 27, 1996, Connecticut Mutual and insurance subsidiary policyholders' and other insureds and annuitants approved the merger. The merger was reviewed by the insurance regulatory authorities in Massachusetts and Connecticut, and approved. The merger was effective March 1, 1996.