The following statutory information for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 has been derived from our audited statutory financial statements. The 1998, 1997 and 1996 statutory financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants. The 1995 and 1994 statutory financial statements were audited by auditors other than PricewaterhouseCoopers LLP.
The accompanying statutory financial statements are different in some respects from financial statements prepared to conform with generally accepted accounting principles ("GAAP"). The more significant differences are as follows:
(a) acquisition costs, such as commissions and other costs directly related to acquiring new business, are charged to current operations as incurred, whereas GAAP would require these expenses to be capitalized and recognized over the life of the policies;
(b) policy reserves are based upon statutory mortality and interest requirements without consideration of withdrawals, whereas GAAP reserves would be based upon reasonably conservative estimates of mortality, morbidity, interest and withdrawals;
Premium income, net of reinsurance ceded, increased $75 million, or 22.7%, to $406 million in 1998 from $331 million in 1997. We attribute this increase primarily to a 23.9% increase in premiums of universal and other life products and a 22.0% increase in premiums of variable annuity products over the prior year. The increase in premium for life insurance products is largely attributable to continued growth in sales of universal and term life products, and the introduction of a new variable life product. Variable annuity premiums have also increased due to the continuing strong growth in sales of these products. The increase in sales comes from MassMutual's career agency system, partially offset by a decrease in sales from brokers. Our business mix remained stable. Universal and other life products comprised 35.7% of total premium income during 1998, compared to 35.3% in 1997. Annuity products were 64.3% of total premium income in 1998, compared to 64.7% in 1997.
Net investment income increased $7 million, or 9.3%, to $82 million in 1998 from $75 million in 1997. We attribute this increase primarily to a 7.6% increase in average invested assets and an increase in the gross yield for the investment portfolio to 7.9% in 1998 from 7.6% in 1997.
Federal income tax expense decreased $12 million, or 63.2%, to $7 million in 1998 from $19 million in 1997. Taxable income, which can differ significantly from statutory book income, decreased $24 million, or 48.0%, to $26 million in 1998 from $50 million in 1997. We attribute the decrease in taxable income primarily to the difference between statutory insurance reserves and tax reserves.
Years Ended December 31, 1998 1997 ---- ---- (In Millions) Bonds ........................................ $ 4 $ 3 Mortgage loans ............................... (1) -- Other investments ............................ 1 -- Federal income taxes ......................... (2) (1) --- --- Net realized capital gains before transfer to IMR .................... 2 2 Transfer to IMR .............................. (3) (2) --- --- Net realized capital gain (loss) ............. $(1) $-- === ===
For the Year Ended December 31, 1997 Compared to the Year Ended December 31,
The increase in commissions is primarily attributable to the modification of an underwriting agreement, discussed below.
Net investment income was $75 million in both 1997 and 1996, as a result of a 3.7% increase in invested assets, offset by a decrease in the average gross yield for the portfolio, which was 7.6% in 1997 compared to 7.9% in 1996.
The decrease in gross investment income from bonds and the increase in mortgage loans reflects a shift in investment strategy toward mortgage loan assets. The increase in gross investment income from other investments reflects enhanced yield on investments in affiliated mutual funds.
Fees and other income decreased $1 million, to $8 million in 1997 from $9 million in 1996. We attribute this decrease primarily to reinsurance activity. The components of fees and other income are primarily commissions and expense allowances on reinsurance
The 1997 gain of $3 million from bonds was primarily interest related and was transferred to IMR net of tax, while in 1996, the $4 million gain from other investments was primarily generated by the sale of common stock.
classes 3 through 6 was 8.0% at December 31, 1998, and 5.9% at December 31, 1997.
Mortgage loans increased $24 million, or 23.5%, to $126 million at December 31, 1998, from $102 million at December 31, 1997. We attribute this increase primarily to continuation of our strategy of increasing our investments in mortgage loans. For the year ended December 31, 1998, $53 million of new loans were issued and $27 million were retired. See "Investments" for discussion of investment reserves.
Other investments consisting of derivatives, preferred stocks and affiliated common stocks increased $12 million, or 18.8%, to $76 million at December 31, 1998, from $64 million at December 31, 1997. Of this increase, financial options increased $6 million, or 300.0%, to $8 million from $2 million at December 31, 1997. We have increased our investment in a combination of cash and derivatives as a result of favorable market conditions in these investments as compared to other investment alternatives. See
To the Board of Directors and Policyholders of C.M. Life Insurance Company
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements audited by us do not present fairly, in conformity with generally accepted accounting principles, the financial position of C.M. Life Insurance Company as of December 31, 1998 and 1997, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 1998.
In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of C.M. Life Insurance Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, on the basis of accounting described in Note 1.
1998 1997 1996 ---- ---- ---- (In Millions) Revenue: Premium income $406.4 $331.3 $314.4 Net investment income 82.4 75.3 75.2 Fees and other income 5.5 7.5 8.7 ------ ------ ------ 494.3 414.1 398.3 ------ ------ ------ Benefits and expenses: Policyholders' benefits and payments 185.2 100.4 99.0 Addition to policyholders' reserves and funds 168.8 200.7 217.8 Operating expenses 72.1 49.5 45.4 Commissions 49.6 33.5 25.0 State taxes, licenses and fees 8.1 3.5 3.2 ------ ------ ------ 483.8 387.6 390.4 ------ ------ ------ Net gain from operations before federal income taxes 10.5 26.5 7.9 Federal income taxes 6.8 19.0 6.3 ------ ------ ------ Net gain from operations 3.7 7.5 1.6 Net realized capital gain (loss) (1.1) 0.1 0.6 ------ ------ ------ Net income $ 2.6 $ 7.6 $ 2.2 ====== ====== ======
C.M. Life Insurance Company (the Company) is a wholly-owned stock life insurance subsidiary of Massachusetts Mutual Life Insurance Company ("MassMutual"). On March 1, 1996, the operations of the Company's former parent, Connecticut Mutual Life Insurance Company, were merged into MassMutual. The Company is primarily engaged in the sale of flexible premium universal life insurance and variable annuity products distributed through career agents. The Company is licensed to sell life insurance and annuities in Puerto Rico, the District of Columbia and 49 states (excluding New York).
In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles ("Codification"). Codification provides a comprehensive guide of statutory accounting principles for use by insurers in all states and is expected to become effective no later than January 1, 2001. The effect of adopting Codification shall be reported as an adjustment to surplus on the effective date. The Company is currently reviewing the impact of Codification; however, since the Department of Insurance of the State of Connecticut has not approved Codification, the ultimate impact cannot be determined at this time.
The preparation of 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, 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 these financial statements.
Mortgage loans are valued at unpaid principal net of unamortized premium or discount. The Company discontinues the accrual of interest on mortgage loans which are delinquent more than 90 days or when collection is uncertain.
Policy loans are carried at the outstanding loan balance less amounts unsecured by the cash surrender value of the policy.
Separate account assets and liabilities represent segregated funds administered and invested by the Company for the benefit of variable annuity contract holders. Assets consist principally of marketable securities reported at fair value. Transfers due from separate accounts represent the policyholders' account values in excess of statutory benefit reserves. Premiums, benefits and expenses of the separate accounts are reported in the Statutory Statement of Income. The Company receives administrative and investment advisory fees from these accounts.
Net transfers to separate accounts of $121.0 million, $146.5 million and $170.5 million in 1998, 1997 and 1996, respectively, are included in the addition to policyholders' reserves and funds.
Assets designated as "non-admitted" (principally prepaid agent commissions, other prepaid expenses and the IMR, when in a net loss deferral position) are excluded from the statutory statement of financial position. These amounted to $5.5 million and $5.7 million as of December 31, 1998 and 1997, respectively and changes therein are charged directly to surplus.
Reserves for individual annuities are based on accepted actuarial methods, principally at interest rates ranging from 5.25 to 9.0 percent. Reserves for policies and contracts considered investment contracts have a carrying value of $129.8 million and $115.6 million at December 31, 1998 and 1997, respectively with a fair value of $132.8 million and $116.0 million at December 31, 1998 and 1997, respectively as determined by discounted cash flow projections.
The Company made certain changes in the valuation of policyholders' reserves which increased surplus by $2.7 million in 1998.
For purposes of the Statutory Statement of Cash Flows, the Company considers all highly liquid short-term investments purchased with a maturity of twelve months or less to be short-term investments.
During 1998, MassMutual contributed additional paid-in capital of $25.0 million to the Company.
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. Similar arrangements were in place with Connecticut Mutual Life Insurance Company, the Company's former parent, prior to its merger with MassMutual. Fees incurred under the terms of these agreements were $74.1 million, $39.7 million and $45.9 million in 1998, 1997 and 1996, respectively.
The Company cedes a portion of its life insurance business to MassMutual and other insurers in the normal course of business. The Company's retention limit per individual insured is $12.0 million; the portion of the risk exceeding the retention limit is reinsured with other insurers. The Company is contingently liable with respect to ceded reinsurance in the event any reinsurer is unable to fulfill its contractual obligations.
The Company has a modified coinsurance quota-share reinsurance agreement with MassMutual whereby the Company cedes 75% of the premiums on certain universal life policies. In return, MassMutual pays the Company a stipulated expense allowance, death and surrender benefits, and a modified coinsurance adjustment based upon experience. Reserves for payment of future benefits for the ceded policies are retained by the Company.
U. S. Treasury securities $ 69.3 $ 1.4 $ 0.1 $ 70.6 and obligations of U.S. government corporations and agencies Debt securities issued by 3.2 -- 0.1 3.1 foreign governments Mortgage-backed securities 57.9 1.6 0.2 59.3 State and local governments 12.1 0.4 0.2 12.3 Corporate debt securities 522.6 17.8 3.0 537.4 Utilities 17.9 0.9 -- 18.8 -------- ------- ------ -------- Total $ 683.0 $ 22.1 $ 3.6 $ 701.5 ======== ======= ====== ========
December 31, 1997 ----------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- --------- (In Millions)
U. S. Treasury securities $ 104.3 $ 2.2 $ 0.2 $ 106.3 and obligations of U.S. government corporations and agencies Debt securities issued by 4.6 -- 0.3 4.3 foreign governments Mortgage-backed securities 38.8 1.0 0.2 39.6 State and local governments 20.0 0.3 -- 20.3 Corporate debt securities 471.8 15.6 1.9 485.5 Utilities 25.0 1.1 -- 26.1 -------- ------- ------ -------- Total $ 664.5 $ 20.2 $ 2.6 $ 682.1 ======== ======= ====== ========
The carrying value and estimated fair value of bonds at December 31, 1998, 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.
The Company utilizes interest rate swap agreements, options, and purchased caps and floors to reduce interest rate exposures arising from mismatches between assets and liabilities and to modify portfolio profiles to manage other risks identified. Under interest rate swaps, the Company agrees to an exchange, at specified intervals, between streams of variable rate and fixed rate interest payments calculated by reference to an agreed-upon notional principal amount. Gains and losses realized on the termination of contracts are deferred and amortized through the IMR over the remaining life of the associated contract. IMR amortization is included in net investment income on the Statutory Statement of Income. Net amounts receivable and payable are accrued as adjustments to investment income and included in investment and insurance amounts receivable on the Statutory Statement of Financial Position. At December 31, 1998 and 1997, the Company had swaps outstanding with notional amounts of $197.5 million and $46.5 million, respectively. The fair value of these instruments was $2.7 million at December 31, 1998 and $0.2 million at December 31, 1997.
The Company utilizes asset swap agreements to reduce exposures, such as currency risk and prepayment risk, built into certain assets acquired. Cross- currency interest rate swaps allow investment in foreign currencies, increasing access to additional investment opportunities, while limiting foreign exchange risk. The net cash flows from asset and currency swaps are recognized as adjustments to the underlying assets' investment income. Gains and losses realized on the termination of these contracts adjusts the bases of the underlying asset. Notional amounts relating to asset and currency swaps totaled $1.0 million at December 31, 1997. The fair values of these instruments were an unrealized gain of $0.1 million at December 31, 1997. As of December 31, 1998, the Company did not have any open asset swap agreements.
The Company enters into forward U.S. Treasury, Government National Mortgage Association ("GNMA") and Federal National Mortgage Association ("FNMA") 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 IMR over the remaining life of the asset. At December 31, 1998 and 1997, the Company had U. S. Treasury, GNMA and FNMA purchase commitments which will settle during the following year with contractual amounts of $1.0 million and $3.0 million, respectively.
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. This exposure is limited to contracts with a positive fair value. The amounts at risk in a net gain position were $14.2 million and $2.6 million at December 31, 1998 and 1997, respectively. The Company monitors exposure to ensure counterparties are credit worthy and concentration of exposure is minimized. Additionally, collateral positions have been obtained with counterparties when considered prudent.
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 impact its financial position, results of operations or liquidity.
The relationship of the Company, its parent and affiliated companies as of December 31, 1998 is illustrated below. Subsidiaries are wholly-owned by the parent, except as noted.
Subsidiaries of MassMutual Holding Trust I ------------------------------------------ Antares Capital Corporation - 99.4% Charter Oak Capital Management, Inc. - 80.0% Cornerstone Real Estate Advisors, Inc. DLB Acquisition Corporation - 85.8% Oppenheimer Acquisition Corporation - 89.36%
MassMutual Holding MSC, Inc. ---------------------------- MassMutual Corporate Value Limited - 40.93% 9048 - 5434 Quebec, Inc. 1279342 Ontario Limited
Affiliates of Massachusetts Mutual Life Insurance Company --------------------------------------------------------- MML Series Investment Fund MassMutual Institutional Funds Oppenheimer Value Stock Fund