We have prepared the accompanying statutory financial information, in conformity with the statutory accounting practices, except as to form, of the National Association of Insurance Commissioners (“NAIC”) and the accounting practices prescribed or permitted by the State of Connecticut Insurance Department (“statutory accounting practices”).
The following statutory information as of and for the years ended December 31, 2000, 1999, 1998, 1997, and 1996 has been derived from our audited statutory financial statements. The 2000 and 1999 statutory financial statements have been audited by Deloitte & Touche LLP, independent auditors’. The statutory financial statements for the years 1996 through 1998 were audited by auditors other than Deloitte & Touche LLP.
The accompanying statutory financial statements are different in some respects from financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The more significant differences are as follows:
payments received for universal and variable life products and variable annuities are reported as premium income and changes in reserves, whereas under GAAP, these payments would be recorded as deposits to policyholders’ account balances.
policy loans at the outstanding loan balance less amounts unsecured by the cash surrender value of the policy, and
We develop reserves for life insurance contracts using accepted actuarial methods computed principally on the net level premium, the Commissioners’ Reserve Valuation Method and the California Method bases using the 1980 Commissioners’ Standard Ordinary mortality tables with assumed interest rates ranging from 2.50 to 4.50 percent.
We maintain an Asset Valuation Reserve (“AVR”) and an Interest Maintenance Reserve (“IMR”), in compliance with regulatory requirements. The AVR and other investment reserves stabilize surplus against fluctuations in the value of stocks and bonds. The IMR defers after-tax realized capital gains and losses that result from changes in the overall level of interest rates, for all types of fixed income investments and interest related hedging activities. These interest related capital gains and losses are amortized into net investment income using the grouped method over the remaining life of the investment sold or over the remaining life of the underlying asset.
(1) In 2000, we received a surplus contribution of $85.0 million from MassMutual and in 1998, we received a surplus contribution of $25.0 million from MassMutual.
(3) Includes payable to parent of $61.2 million in 2000, $49.9 million in 1999, $28.8 million in 1998, $13.6 million in 1997 and $9.6 million in 1996.
At December 31, 2000, we had $4.7 billion in total statutory assets, over 250 thousand individual policyholders and $65.0 billion of direct individual life insurance in force. Our total adjusted capital, as defined by the National Association of Insurance Commissioners (“NAIC”), was $167.5 million at December 31, 2000.
The Private Securities Litigation Reform Act of 1995 provides a “Safe harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors which could cause a material difference from the forward-looking statements.
Forward-looking statements are based upon estimates and assumptions. These statements may change due to the business uncertainties, economic uncertainties, competitive uncertainties, and other factors, many of which are beyond our control. Additionally, our business decisions are also subject to change. We do not publicly update or revise any forward-looking statements, as a result of new information, future developments, or otherwise.
Net losses decreased in 2000 primarily due to a new universal life coinsurance treaty, effective January 1, 2000, resulting in increased commission and expense allowance benefits from MassMutual. Excluding this coinsurance treaty, our net loss was approximately the same as the prior year due to continued growth in our annuity and life insurance businesses, partially offset by improved mortality and higher fees received from separate accounts. It is generally expected that the increase in policyholders’ reserves and costs related to the production of new business will exceed the amount of premium earned in the first year of a policy, causing operating losses. We expect that a certain level of losses may continue in conjunction with future growth.
Net income decreased in 1999 due to the continued growth in our annuity business, as well as increases in the amount of life insurance in force. This growth has caused a significant increase in acquisition and related costs, which exceed first year premiums on new business. Generally, the result of this growth is increased policyholders’ benefits and payments, addition to policyholders’ reserves and funds, commissions and expenses, partially offset by increased premium income.
The increase in 2000 in gross investment income from bonds is due to increased investment levels coupled with a 50 basis point increase in the gross yield from 1999. Bond yields are increasing as older, lower yielding bonds mature and are replaced with new bonds that have higher yields. The increase in 1999 in gross investment income from bonds is primarily due to increased investment levels as yields remained relatively steady in 1999.
The increase in mortgage loans’ investment income in 2000 and 1999 is primarily due to an increase in outstanding commercial mortgages combined with an overall increase in mortgage yields over the last two years.
Fees increased in 2000 and 1999 due to increases in fees collected from separate accounts as a result of increased variable life and variable annuity sales. Additionally, in 2000, commissions and expense allowances on reinsurance ceded increased primarily due to a new coinsurance agreement with MassMutual resulting in a $45.0 million increase in commission and expense allowance benefits. In 1999, we experienced a decrease in commissions and expense allowances on reinsurance ceded and an increase in the reserve adjustment on reinsurance ceded as a result of credits we received on our modified coinsurance agreement with MassMutual.
The increase in policyholders’ benefits and payments in 2000 and 1999 is primarily attributable to surrender benefits on individual annuity products and a $33.0 million 1999 surrender of one large corporate owned life insurance contract holder.
Though it is not known if an increased level of surrenders will continue, we have and are taking steps that we believe will reduce surrender activity by enhancing product offerings through the addition of new fund options and other product features. Annuity benefits and payments increased $12.4 million in 2000 and $1.1 million in 1999 primarily due to an increase in annuity death benefits.
Life insurance surrenders increased $7.1 million in 2000 and $3.1 million in 1999. The life insurance lapse rate, which is based on the amount of life insurance in force, improved to 7.4% for 2000 from 7.9% in 1999 and 6.7% in 1998. Death claims, net of reinsurance, decreased $11.2 million in 2000 to $23.3 million compared to an increase of $11.1 million in 1999. This decrease in 2000 is due to favorable direct mortality experienced in the life and corporate owned life strategic business units. The increase in 1999 is primarily due to unfavorable direct mortality experience, partially offset by favorable reinsurance recoveries.
The increase in federal income taxes during 2000 is primarily attributable to the declining net loss from operations before federal income taxes plus the timing of the tax deductibility of policyholder acquisition costs. The decrease in federal income taxes in 1999 is due to the declining net gain (loss) from operations before federal income taxes, partially offset by the difference between statutory insurance reserves and tax reserves and the timing of the tax deductibility of policyholder acquisition costs and other items.
The decrease in 2000 realized capital losses after transfers to the IMR, is primarily attributable to a decline in losses from investments in affiliated mutual funds. We attribute the increase in 1999 realized capital losses after transfers to the IMR, primarily to losses from investments in affiliated mutual funds, and credit related losses from the sale of bonds.
Bonds and short-term securities in NAIC classes 1 and 2 were 64% of general account invested assets at December 31, 2000, and December 31, 1999. The percentage of our general account invested assets representing bonds and short-term investments in NAIC classes 3 through 6 increased to 7% at December 31, 2000, from 6% at December 31, 1999. See “Investments” section for more discussion of NAIC Investment classes.
As with assets, most of the 2000 growth occurred in the separate account liabilities. The growth in separate accounts is primarily attributable to the continued increase in the deposits of variable annuity products.
additional paid in capital of $85.0 million contributed by MassMutual for general corporate purposes,
a decrease of $9.0 million primarily due to an increase in non-admitted assets and
a decrease of $3.6 million due to unrealized capital losses on bonds and affiliated common stocks.
Net cash provided by operating activities decreased $91.7 million, or 58%, in 2000. We attribute this decrease primarily to increased surrender benefits, general expenses, and commissions. This decrease was partially offset by increased sales, investment income, and fees from separate accounts.
Loans and purchases of investments increased $88.1 million, or 18%, primarily due to a higher level of bond purchase activity during 2000 driven by capital contributions received in 2000. Sales and maturities of investments and receipts from repayments of loans decreased $48.1 million, or 12%, in 2000. We attribute this decrease primarily to a reduction in the sales of affiliated mutual funds in 2000.
We calculate the yield on each investment category, before federal income taxes as: (a) two times gross investment income divided by (b) the sum of assets at the beginning of the year and assets at the end of the year, less gross investment income. If investment expenses were deducted, our net yields would be 7.7%, 7.2%, and 7.7% for the years ended December 31, 2000, 1999 and 1998, respectively.
The following table provides certain information regarding the maturity distribution of bonds, excluding short-term securities:
We carefully monitor and manage our bond portfolio to ensure that bond maturities are sufficiently
Bonds consist primarily of government securities and high-quality marketable corporate securities. We invest a significant portion of our investment funds in high quality publicly traded bonds in order to maintain and manage liquidity and reduce the risk of default in the portfolio.
The table below sets forth the NAIC SVO ratings for our bond portfolio (including short-term securities) and, what we believe are the equivalent public rating agency designations. At December 31, 2000 and 1999, 90% and 91%, respectively, of the portfolio was invested in NAIC Classes 1 and 2 securities.
The tables below set forth the NAIC SVO ratings for our publicly traded and privately placed bond portfolios, including short-term securities, along with what we believe are the equivalent public rating agency designations.
The NAIC defines under-performing bonds as those whose deferral of interest and/or principal payments are deemed to be caused by the inability of the obligor to make such payments as called
As a result of our conservative monitoring process, we generate an internal watch list, which includes certain securities that would not be classified as under-performing under the SVO credit rating system. At December 31, 2000, bonds having a carrying value of $17.7 million, or 2% of the total bond portfolio including short-term securities, had been placed on our internal watch list. The internal watch list is comprised of bonds that have the following NAIC ratings:
At December 31, 2000, mortgage loans represented 19% of the total investments in the general account compared to 18% at December 31, 1999. Mortgage loans consist of commercial mortgage loans and residential mortgage loan pools. At December 31, 2000, commercial mortgage loans comprised 80% of the mortgage loan portfolio compared to 72% at December 31, 1999.
We consider the maturities of commercial mortgage loans to be sufficiently diversified, and carefully monitor and manage maturities in light of our liquidity needs. In 2000, we added approximately twenty-eight new loans. Fifteen of the new loans were office buildings, which resulted in an increase in our carrying value of office building mortgages as illustrated in the following chart. Additionally, in 2000, borrowers paid off eight loans, which totaled $18.9 million.
We revalue all properties each year and re-inspect all properties either each year or every other year based on internal quality ratings.
The carrying value of current and potential problem mortgage loans, consisting of restructured mortgage loans, was $2.9 million at December 31, 2000 and $10.3 million at December 31, 1999. There were no problem commercial 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, 2000:
Our total investment reserves at December 31, 2000, are $20.8 million, a decrease of $1.9 million, or 8%, from $22.7 million in December 31, 1999.
The balance is comprised of the AVR and other investment reserves which are recorded as liabilities on the statement of financial position as follows:
These amounts offset unrealized capital gains (losses), recorded as a change in shareholder’s equity. Amounts include unrealized losses due to market value reductions of securities with a NAIC quality rating of 6 and net changes in the unrealized capital gains and losses from affiliated mutual funds.
We have audited the accompanying statutory statement of income, changes in shareholder's equity, and of cash flows of C.M. Life Insurance Company for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We have not audited the financial statements of C.M. Life Insurance Company for any period subsequent to December 31, 1998.
The accompanying statutory financial statements have been prepared in conformity with the statutory accounting practices, except as to form, of the National Association of Insurance Commissioners (“NAIC”) and the accounting practices prescribed or permitted by the State of Connecticut Insurance Department and are different in some respects from financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“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 capitalize these expenses and recognize them over the life of the policies; (b) statutory policy reserves are based upon the commissioners reserve valuation methods and statutory mortality, morbidity and interest assumptions, whereas GAAP reserves would generally be based upon net level premium and estimated gross margin methods and appropriately conservative estimates of future mortality, morbidity and interest assumptions; (c) bonds are generally carried at amortized cost whereas GAAP generally reports them at fair value; (d) deferred income taxes are not provided for book-tax temporary differences as would be provided by GAAP; and (e) payments received for universal and variable life products and variable annuities are reported as premium income and changes in reserves, whereas under GAAP, these payments would be recorded as deposits to policyholders’ account balances.
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. 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, persistency and asset valuations, could cause actual results to differ from the estimates used in the financial statements.
Certain 1999 balances have been reclassified to conform to current year presentation.
Bonds are valued in accordance with rules established by the NAIC. Generally, bonds are valued at amortized cost, using the interest method.
Net transfers to separate accounts of $1,501.7 million, $341.4 million and $121.0 million in 2000, 1999 and 1998, respectively, are included in addition to policyholders’ reserves and funds, in the Statutory Statements of Income.
During 2000, the Company adopted the continuous application of the Commissioner’s Reserve Valuation Method of calculating individual annuity reserves resulting in a $9.0 million decrease to shareholder’s equity. Previously, the Company used a curtate application of the Commissioner’s Reserve Valuation Method.
The Company plans to file a separate company 2000 federal income tax return.
The Board of Directors of MassMutual has authorized the contribution of funds to the Company sufficient to meet the capital requirements of each state in the United States of America in which the Company is licensed to do business. Substantially all of the statutory shareholder’s equity is subject to dividend restrictions relating to various state regulations, which limit the payment of dividends to the shareholder without prior approval. Under these regulations, $9.5 million of shareholder’s equity is available for distribution to the shareholder in 2001 without prior regulatory approval.
The carrying value and estimated fair value of bonds at December 31, 2000, 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 $316.8 million during 2000, $325.8 million during 1999, and $480.4 million during 1998. Gross capital gains of $2.2 million in 2000, $2.1 million in 1999 and $5.0 million in 1998 and gross capital losses of $2.6 million in 2000, $4.9 million in 1999 and $0.9 million in 1998 were realized on those sales, portions of which were deferred into the IMR.
The Company had restructured loans with book values of $2.9 and $10.3 million at December 31, 2000 and 1999, respectively. These loans typically have been modified to defer a portion of the contractual interest payments to future periods. Interest deferred to future periods was immaterial in 2000, 1999 and 1998.
Approximately 60% of the Company’s commercial mortgage loans at December 31, 2000 and 1999, were loans whose underlying collateral is comprised of office buildings. There were no significant regional concentrations of commercial mortgage loans at December 31, 2000 and 1999.
At December 31, 2000, scheduled commercial mortgage loan maturities were as follows: 2001 - $8.3 million; 2002 - $27.0 million; 2003 - $29.1 million; 2004 - $22.1 million; 2005 - $18.9 million; and $109.6 million thereafter.
The Company uses common derivative financial instruments to manage its investment risks, primarily to reduce interest rate and duration imbalances determined in asset/liability analyses. These financial instruments described below are not recorded in the financial statements, unless otherwise noted. The Company does not hold or issue these financial instruments for trading purposes.
Fair values are based on quoted market prices, when available. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These valuation techniques require management to develop a significant number of assumptions, including discount rates and estimates of future cash flow. Derived fair value estimates cannot be substantiated by comparison to independent markets or to disclosures by other companies with similar financial instruments. These fair value disclosures may not represent the amount that could be realized in immediate settlement of the financial instrument. The following table summarizes the carrying value and fair value of the Company’s financial instruments at December 31, 2000 and 1999.
Mortgage loans: The estimated fair value of mortgage loans is determined from a pricing matrix for performing loans and the estimated underlying real estate value for non-performing loans.
Off-balance sheet financial instruments: The fair values for off-balance sheet financial instruments are based upon market prices or prices obtained from brokers.
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. The Company retains the assets and related reserves for payment of future benefits on the ceded policies. Premium income of $26.7 million, $29.8 million and $33.7 million was ceded to MassMutual in 2000, 1999 and 1998, respectively. Policyholder benefits of $38.4 million, $38.7 million and $38.4 million were ceded to MassMutual in 2000, 1999 and 1998, respectively.
The Company also has a stop-loss agreement with MassMutual under which the Company cedes claims which, in aggregate, exceed .32% of the covered volume for any year, with maximum coverage of $25.0 million above the aggregate limit. The aggregate limit was $72.4 million in 2000, $45.4 million in 1999, and $36.9 million in 1998 and it was not exceeded in any of the years. Premium income of $1.3 million, $1.3 million and $1.0 million was ceded to MassMutual in 2000, 1999 and 1998, respectively.
The relationship of the Company, MassMutual and affiliated companies as of December 31, 2000, is illustrated below. Subsidiaries are wholly-owned by MassMutual, except as noted.