The accompanying statutory financial statements, from which the summary financial information has been derived, have been prepared in conformity with the practices of the NAIC and the accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut. These statutory financial statements are not in conformity with generally accepted accounting principles (GAAP). See notes to statutory financial statements.
For the year ended December 31, 1996, C.M. Life had net income of $2,205 thousand, as compared with net income of $13,750 thousand in 1995. The decrease in net income of $11,545 thousand is primarily attributable to increased sales of Universal Life Enterprise Plus and variable annuity products, which in the year of issuance, generate commissions and other acquisition costs which exceed the revenues received. These products are priced to be profitable over the life of the contract.
Net investment and other income decreased $7,934 thousand to $76,456 thousand in 1996 from $84,390 thousand in 1995. Other income, which is primarily comprised of reserve adjustment and commission and expense allowances on reinsurance ceded, decreased by $14,316 thousand, due to little growth in the reinsured block of business. Net investment income increased by $6,357 thousand primarily attributable to the 4.3% growth in the general investment account assets. The gross yield for the portfolio was 7.9% for 1996 compared to 7.8% for 1995. The components of net investment income are set forth below.
Policy benefits and payments increased $40,053 thousand to $98,966 thousand in 1996 from $58,913 thousand in 1995. Surrender benefits increased by $30,054 thousand, essentially due to increased variable and fixed annuity withdrawals and contract surrenders. The life insurance lapse rate, which is based upon amount of insurance in force, remained at 7.1% for both 1996 and 1995. Death claims, net of reinsurance, grew to $25,168 thousand in 1996 from $16,268 thousand in 1995, which is due to an increase in the life insurance in force and worse than expected mortality. Although mortality experience declined during 1996, C.M. Life does not believe this is an indication of future trends.
Results of Operations --------------------- For the Year Ended December 31, 1995 ------------------------------------ Compared to the Year Ended December 31, 1994 --------------------------------------------
For the year ended December 31, 1995, C.M. Life had net income of $13,750 thousand, as compared with net income of $17,788 thousand in 1994. The decrease in net income of $4,038 thousand is attributable to increased policy benefits and payments and increased acquisition and insurance expenses which exceeded the increase in net premiums and net investment income.
Net investment and other income increased by $1,036 thousand. Net investment income increased by $9,298 thousand to $68,876 thousand in 1995 from $59,887 thousand in 1994. This increase is attributable to an 11.5% increase in general investment account assets and policy loans and an increase in the portfolio yield from 7.5% in 1994 to 7.8% in 1995. Other income, which is primarily comprised of reserve adjustments and commission and expense allowances on reinsurance ceded , decreased by $7,894 thousand, due to less growth in the reinsured block of business in 1995 versus 1994. The components of net investment income are set forth below.
Operating expenses and commissions increased $24,086 thousand or 108.7% over 1994. This increase is primarily attributable to increased costs related to the production of new business.
Net realized capital losses were $540 thousand in 1995 as compared to net realized capital losses of $1,772 thousand in 1994. This loss is due to net realized losses of $1,407 thousand, with $867 thousand being transferred to the Interest Maintenance Reserve (IMR) in 1995 as compared to net realized losses of $5,163 thousand in 1994, with $3,391 thousand being transferred to the IMR.
C.M. Life's principal sources of liquidity are cash flow and holdings of cash, near cash and other readily marketable assets. The primary cash flow sources are investment income and principal repayments on invested assets, life insurance premiums, annuity considerations and deposits.
Based on its ongoing monitoring and analysis of its liquidity sources and demands, C.M. Life believes that it is in a strong liquidity position.
As of December 31, 1996, C.M. Life's total adjusted capital as defined by the NAIC was $128,219 thousand. The NAIC has developed the "Risk Based Capital" (RBC) model to compare the total adjusted capital with a standard design in order to reflect C.M. Life's risk profile. Although C.M. Life believes that there is no single appropriate means of measuring risk-based capital needs, it feels that the NAIC approach to RBC measurement is reasonable, and will manage its capital position with significant attention to maintaining adequate total adjusted capital relative to RBC. C.M. Life's total adjusted capital was well in excess of all RBC standards at December 31, 1996 and 1995. Management believes that C.M. Life enjoys a strong capital position in light of the risks to which it is subject and that it is well-positioned to meet policyholder and other obligations.
In accordance with the life insurance laws and regulations under which C.M. Life operates, it is obligated to carry on its books, as liabilities, actuarially determined reserves to meet its obligations on outstanding contracts. Reserves are based on mortality tables in general use in the United States and are computed to equal amounts that, with additions
from premiums to be received, and with interest on such reserves computed annually at certain assumed rates, will be sufficient to meet C.M. Life's policy obligations at their maturities or in the event of an insured's death. In the accompanying financial statements, these reserves are determined in accordance with statutory regulations.
Inflation also has an indirect effect on C.M. Life. To the extent that the government's economic policy to control the level of inflation results in changes in interest rates, C.M. Life's new sales of insurance products and investment income are affected. Changes in the level of interest rates also have an effect on interest spreads, as investment earnings are reinvested.
At December 31, 1996, C.M. Life had $1,022,587 thousand of invested assets in its general investment account. The portfolio of invested assets is managed to support the liabilities of the lines of business in light of yield, liquidity and diversification considerations. The general investment account portfolio does not include C.M. Life's separate account investment assets.
The following table sets forth C.M. Life's invested assets in the general investment account and gross investment yield thereon (after deducting real estate operating expenses and taxes) as of the dates indicated:
The yield on total investments before indirect expenses was 7.9%, 7.8% and 7.5% for the years ended December 31, 1996, 1995 and 1994, respectively. The yield on each investment category before federal income taxes is calculated as: (a) gross investment income (which for real estate deducts operating expenses and real estate taxes) divided by (b) the average carrying value, which does not include investment reserves.
C.M. Life carries its investments in accordance with methods and values prescribed by the NAIC and adopted by state insurance authorities. Generally, bonds are valued at amortized cost, preferred stocks in good standing at cost, and common stocks at fair value. Mortgage loans are valued at principal less impairments and unamortized discount. Real estate is valued at cost less accumulated depreciation, impairments, and mortgage encumbrances. Depreciation on investment real estate is calculated using the straight-line method. Policy loans are carried at the outstanding loan balance less amounts unsecured by the cash surrender value of the policy. Short-term investments are stated at amortized cost which approximates fair value.
C.M. Life invests a significant portion of its investment funds in high quality publicly traded bonds in order to maintain and manage liquidity and reduce the risk of default in the portfolio. As of December 31, 1996, 96.8% of the publicly traded bonds were rated as NAIC Categories 1 and 2, as illustrated by the following chart:
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. The strength of the privately placed bond portfolio is demonstrated by the predominance of NAIC Categories 1 and 2 securities.
The estimated fair value of bonds is based upon quoted market prices for actively traded securities. C.M. Life subscribes to commercial pricing services providing estimated fair values of fixed income securities that are not actively traded. Estimated fair values for privately placed bonds are generally determined by applying interest rate spreads based on quality and asset type to the appropriate duration on the Treasury yield curve. The tables below set forth the carrying value, gross unrealized gains and losses, net unrealized gains and loses and estimated fair value of the bond portfolio (excluding short-term securities) at December 31, 1996 and 1995.
The common stock portfolio comprised 5.4% and 7.4% of C.M. Life's investments at December 31, 1996 and 1995, respectively. Common stock had a cost of $47,195 thousand in 1996 and $64,255 thousand in 1995; the fair value was $55,642 thousand and $73,361 thousand at December 31, 1996 and 1995, respectively.
The following table provides certain information regarding the maturity distribution of commercial mortgage loans:
At December 31, 1996, 99.6% of the mortgage loan portfolio consisted of bullet loans (loans that do not fully amortize over their term). Scheduled bullet maturities at December 31, 1996 of $4,387 thousand, $6,003 thousand, $1,886 thousand in 1997, 1998 and 1999 and represent 13.0%, 17.8% and 5.6%, respectively, of the mortgage loan portfolio. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
The maturities of commercial mortgage loans are considered by C.M. Life to be sufficiently diversified and are carefully monitored and managed in light of C.M. Life's liquidity needs. See "Liquidity and Capital Resources."
The mortgage loan portfolio comprised 3.3% and 3.1% of C.M. Life's investments at December 31, 1996 and 1995, respectively. The mortgage loan average investment yield was 12.6% and 7.7% for the years ending December 31, 1996 and 1995, respectively.
The following tables set forth by property type and geographic distribution the carrying value of mortgage loan balances as a percentage of the portfolio as of the dates indicated:
C.M. Life's management believes its financial strength, agent skill and historical product performance provide competitive advantages for the products it offers in these markets. In early 1996, after the merger of MassMutual and Connecticut Mutual Life Insurance Company, C.M. Life received the following ratings from the various rating agencies, A.M. Best Company, Inc. (A++), Standard and Poor's Corporation (AAA) and Duff & Phelps Credit Rating Company (AAA).
MassMutual and C.M. Life have an agreement whereby MassMutual for a fee will furnish C.M. Life, as required, operating facilities, human resources, computer software development and managerial services. Investment and administrative services are provided to C.M. Life pursuant to a management services agreement with MassMutual. Fees incurred under the terms of the agreement were $45,914 thousand in 1996. Similar arrangements were in place with Connecticut Mutual Life Insurance Company, C.M. Life's former parent; prior to its merger with MassMutual. Fees incurred in 1995 and 1994 under the arrangement with Connecticut Mutual Life Insurance Company were $34,008 thousand and $16,412 thousand, respectively.
C.M. Life is also subject to risk-based capital (RBC) requirements promulgated by the NAIC. The RBC Model Act will give state insurance commissioners explicit regulatory authority to require various actions by, or take various actions against, insurance companies whose total adjusted capital does not meet the RBC standards. C.M. Life's total adjusted capital was well in excess of all RBC standards at December 31, 1996 and 1995.
C.M. Life's management believes it is in compliance in all material respects with all applicable laws and regulations.
The accompanying statutory financial statements, except as to form, have been prepared in conformity with the practices of the NAIC and the accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut ("statutory accounting practices"). Prior to 1996 financial statements prepared using statutory accounting practices were considered to be in conformity with GAAP for wholly-owned stock life insurance subsidiaries of mutual life insurance companies. In 1993, the Financial Accounting Standards Board ("FASB") issued interpretation No. 40 ("Fin. 40"), "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises", which clarified that wholly owned stock life insurance subsidiaries of mutual life insurance companies issuing financial statements described as prepared in conformity with GAAP after 1995 are required to apply all applicable GAAP pronouncements in preparing those financial statements. In January 1995, the FASB issued Statement No. 120 ("SFAS 120"), "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts," which among other things, extended the applicability of certain FASB statements to mutual life insurance companies and deferred the effective date of Fin. 40 to financial statements issued or reissued after 1996. Accordingly, the financial statements presented herein are no longer considered to be in conformity with GAAP.
The NAIC is currently drafting proposed codification changes to existing statutory accounting practices. At this time, C.M. Life can not determine the impact of these changes, as additional proposals are expected to be made in the near future.
The accompanying statutory financial statements, except as to form, have been prepared in conformity with the practices of the National Association of Insurance Commissioners and the accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut ("statutory accounting practices") which prior to 1996 were considered to be in conformity with generally accepted accounting principles ("GAAP"). In 1993, the Financial Accounting Standards Board ("FASB") issued interpretation No. 40 ("Fin. 40"), "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises", which clarified that wholly owned stock life insurance subsidiaries of mutual life insurance companies issuing financial statements described as prepared in conformity with GAAP after 1995 are required to apply all applicable GAAP pronouncements in preparing those financial statements. In January 1995, the FASB issued Statement No. 120 ("SFAS 120"), "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts," which among other things, extended the applicability of certain FASB statements to mutual life insurance companies and deferred the effective date of Fin. 40 to financial statements issued or reissued after 1996. As required by generally accepted auditing standards, the opinion expressed by our former independent accountants on the 1995 and 1994 financial statements is different from that expressed in their previous report.
The preparation of financial statements requires management to make estimates and assumptions that affect the report amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities, at the date of the financial statements. Management must also make estimates and assumptions that affect the amounts of revenues and expenses during the reporting period. Future events, including changes in the levels of mortality, morbidity, interest rates and asset valuations, could cause actual results to differ from the estimates used in the financial statements.
In compliance with regulatory requirements, C.M. Life maintains an Asset Valuation Reserve and an Interest Maintenance Reserve. The Asset Valuation Reserve and other investment reserves, as prescribed and permitted by the Connecticut Insurance Department, stabilize the policyholders' contingency reserves against fluctuations in the value of stocks, as well as declines in the value of bonds and mortgage loans.
The Interest Maintenance Reserve captures after-tax realized capital gains and losses which result from changes in the overall level of interest rates for all types of fixed income investments. This reserve is amortized into income using the grouped method over the remaining life of the investment sold or over the remaining life of the underlying asset. Net realized after tax capital gains of $425 thousand in 1996 and net realized after tax capital losses of $867 thousand in 1995 and $3,391 thousand in 1994 were transferred to the Interest Maintenance Reserve. Amortization of the Interest Maintenance Reserve into net investment income amounted to $37 thousand in 1996, $61 thousand in 1995, and $309 thousand in 1994. In 1996, 1995 and 1994, the Interest Maintenance Reserve resulted in net loss deferral. In accordance with the practices of the National Association of Insurance Commissioners, the balance was recorded as a reduction of shareholder's equity.
Realized capital gains and losses, less taxes, not includable in the Interest Maintenance Reserve, are recognized in net income. Realized capital gains and losses are determined using the specific identification method. Unrealized capital gains and losses are included in shareholder's equity.
Separate account assets and liabilities represent segregated funds administered and invested by C.M. Life for the benefit of variable annuity and variable life insurance contract holders. The assets consist principally of marketable securities reported at fair value. Transfers due from separate account represents the separate account assets in excess of statutory benefit reserves. Premiums, benefits and expenses of the separate accounts are reported in the statutory statement of operations. Reserves for these life and annuity contracts have been established using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions. C.M. Life receives administrative and investment advisory fees from these accounts.
Assets designated as "non-admitted" (principally prepaid agent commissions, other prepaid expenses and Interest Maintenance Reserve, when in a net loss deferral position) are excluded from the statutory statement of financial position. These amounted to $6,604 thousand and $3,839 thousand as of December 31, 1996 and 1995, respectively and changes therein are charged directly to shareholder's equity.
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 7.0%, 8.0% and 7.0% in 1996, 1995 and 1994, respectively. Additional reserves are maintained for contracts where the cash surrender value exceeds the actuarially determined reserve.
Life insurance premium income 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.
The Board of Directors of MassMutual has authorized the contribution of funds to C.M. Life sufficient to meet the capital requirements of all states in which C.M. Life is licensed to do business. Substantially all of the statutory stockholder's equity is subject to dividend restrictions relating to various state regulations which limit the payment of dividends without prior approval. Under these regulations, $11,320 thousand of stockholder's equity is available for distribution to shareholders in 1997 without prior regulatory approval.
Investment and administrative services are provided to C.M. Life pursuant to a management services agreement with MassMutual. Fees incurred under the terms of the agreement were $45,914 thousand, $34,008 thousand and $16,412 thousand in 1996, 1995 and 1994, respectively.
C.M. Life cedes a portion of its life insurance business to MassMutual and other insurers in the normal course of business. C.M. Life's retention limit per individual insured is $4,000 thousand; the portion of the risk exceeding the retention limit is reinsured with other insurers. C.M. Life is contingently liable with respect to ceded reinsurance in the event any reinsurer is unable to fulfill its contractual obligations.
C.M. Life has a modified coinsurance quota-share reinsurance agreement with MassMutual whereby C.M. Life cedes 50% of the premiums on certain universal life policies issued in 1985 and 75% of the premiums with issue dates on or after January 1, 1986. In return MassMutual 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 maintains a diversified investment portfolio. Investment policies limit concentration in any asset class, geographic region, industry group, economic characteristic, investment quality or individual investment.
The carrying value and estimated fair value of bonds at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Proceeds from sales of investments in bonds were $162,934 thousand during 1996, $380,567 thousand during 1995 and $224,884 thousand during 1994. Gross capital gains of $1,608 thousand in 1996, $3,598 thousand in 1995 and $1,358 thousand in 1994 and gross capital losses of $876 thousand in 1996, $4,658 thousand, in 1995 and $4,439 thousand in 1994 were realized on those sales, a portion of which were included in the Interest Maintenance Reserve. Estimated fair value of non- publicly traded bonds is determined by C.M. Life using a pricing matrix .
Common stocks had a cost of $47,195 thousand in 1996 and $64,225 thousand in 1995.
During 1994 interest rate futures were acquired to hedge the reinvestment of anticipated proceeds from a bulk mortgage sale. The actual gain of $95 thousand was amortized over the expected term of the assets acquired with the mortgage sale proceeds. No interest rate futures were held as of December 31, 1996 and 1995.
10. Affiliated Companies The relationship of the Company, its parent and affiliated companies as of December 31, 1996 is illustrated below. Subsidiaries are wholly-owned by the parent, except as noted.
Subsidiaries of Massachusetts Mutual Life Insurance Company ----------------------------------------------------------- C.M. Assurance Company C.M. Benefit Insurance Company C.M. Life Insurance Company MassMutual Holding Company MassMutual Holding Company Two, Inc. (Sold in March 1996) MassMutual of Ireland, Limited MML Bay State Life Insurance Company MML Distributors, LLC
Subsidiaries of MassMutual Holding Company ------------------------------------------ G.R. Phelps, Inc. MassMutual Holding Trust I MassMutual Holding Trust II MassMutual Holding MSC, Inc. MassMutual International, Inc. MassMutual Reinsurance Bermuda (Sold in December 1996) MML Investor Services, Inc. State House One (Liquidated in December 1996)
Subsidiaries of MassMutual Holding Trust II ------------------------------------------- CM Advantage, Inc. CM International, Inc. CM Property Management, Inc. High Yield Management, Inc. MMHC Investments, Inc. MML Realty Management Urban Properties, Inc. Westheimer 335 Suites, Inc.
MassMutual Holding MSC, Incorporated ------------------------------------ MassMutual/Carlson CBO N.V. - 50% MassMutual Corporate Value Limited - 46%
In our opinion, the 1996 financial statements referred to above present fairly, in all material respects, the financial position of C.M. Life Insurance Company at December 31, 1996, and the results of its operations and its cash flows for the year then ended, on the statutory basis of accounting described in Note 1. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
In our opinion, the financial statements referred to above do present fairly, in all material respects, the financial position of C.M. Life Insurance Company as of December 31, 1995 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as whole. Schedule VI is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.