We have prepared the accompanying statutory financial information, in conformity with the practices 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").
(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;
(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.
mortgage loans at unpaid principal net of unamortized premium or discount,
Provision for federal income taxes is based upon our estimate of our 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 policy acquisition costs, resulted in effective tax rates which differ from the statutory tax rate.
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.
This information should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and other information included elsewhere in this filing. The results for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period.
(1) In 1998, we received a surplus contribution of $25 million from MassMutual.
Continued commitment to the high credit quality of our general account investment portfolio.
At December 31, 1999, we had $3.2 billion in total statutory assets, over 200,000 individual policyholders and $56.7 billion of direct individual life insurance in force. Our total adjusted capital, as defined by the National Association of Insurance Commissioners (“NAIC”), was $116 million at December 31, 1999.
The following table sets forth the calculation of total adjusted capital:
Objective testimony to our strong performance and market position is reflected in our ratings, which at year-end 1999 were again among the highest enjoyed by any company in any industry. Our, and MassMutual's, year-end 1999 ratings were again among the highest enjoyed by any company in any industry. Our, and MassMutual's, AAA financial strength rating from Standard & Poor's, A++ (Superior) financial strength rating from A.M. Best, and AAA claims-paying rating from Duff & Phelps were the highest possible. Our, and MassMutual's, Aa1 financial strength rating from Moody's Investors Service was the highest in its "Excellent" category. Each rating agency independently assigns ratings based on its own separate review and takes into account a variety of factors, which are subject to change in making its decision. Accordingly, there can be no assurance of the ratings that will be afforded us in the future.
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.
Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements are those not based on historical information, but rather, related to future operations, strategies, financial results, or other developments, and contain terms such as "may," "expects," "should," "believes, " "anticipates," "intends," "estimates," "projects," "goals," "objectives," or similar expressions.
Net income decreased in 1999 and 1998 primarily 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.
Our business mix has shifted as a result of increasing sales of annuity products. Universal and other life products comprised 26% of total premium income during 1999, compared to 36% in 1998. Annuity products were 74% of total premium income in 1999, compared to 64% in 1998.
The increase in other investments gross investment income in 1998 is primarily due to increased investment in financial options as a result of favorable market conditions and the 1998 extraordinary dividend received from an affiliated mutual fund. Fluctuations in market conditions will impact future investment results.
The components of fees and other income are set forth in the table below:
Commissions increased in 1999 and 1998 primarily due to increases in sales of annuities and life insurance. Life insurance commissions increased $21 million in 1999 and $11 million in 1998, while annuity products contributed increases of $11 million in 1999 and $6 million in 1998. The overall decrease in commissions as a percentage of sales is due to the shift in sales mix to annuity products, which have lower commission rates than life products.
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.
We attribute the increase in 1998 net realized capital losses after transfers to the IMR, primarily to credit related mortgage loan losses, which are not transferred to the IMR.
Total assets at December 31, 1999, increased by $622 million, from December 31, 1998. We attribute this increase primarily to continued growth in our separate accounts, as the result of continued growth in deposits of variable products, partially offset by withdrawals.
General account assets increased $177 million, or 15%, to $1,389 million as of December 31, 1999, from $1,212 million as of December 31, 1998. We attribute this increase primarily to increases in mortgage loans, bonds and cash and short-term investments, partially offset by a reduction in other investments. These increases in investments were primarily the result of our continued growth and the investment of cash flow generated by our operations.
The increase in mortgage loans is primarily attributed to a continuation of our strategy of increasing our investments in mortgage loans due to favorable market conditions. For the year ended December 31, 1999, $130 million of new loans were issued and $31 million was received on outstanding accounts.
Policy loans decreased during 1999 primarily due to a large surrender in late 1999 of a corporate owned life policy with an outstanding policy loan of $33 million.
As with assets, most of the 1999 growth occurred in the separate accounts as discussed earlier.
The increase in policyholders' reserves and funds, primarily attributable to growth from new sales in annuity products and interest credited, was partially offset by transfers to separate accounts and withdrawals.
The increase in other liabilities is primarily due to our continued growth. This resulted in a $21 million increase in payable to parent and a $30 million increase in suspense accounts, partially offset by a net decrease in other liabilities.
a decrease of $3 million due to a change in the valuation of policyholders' reserves,
Cash and short-term investments increased $76 million, or 72%, during 1999 as a result of increased funds available for investment provided by operating activities.
Net cash provided by operating activities increased $103 million, or 184%, in 1999. We attribute the increase primarily to increased sales, investment income, and fees from separate accounts. This increase was partially offset by increased surrender benefits, withdrawals, death benefits, general expenses, and commissions.
Loans and purchases of investments decreased $83 million, or 15%, and sales and maturities of investments and receipts from repayments of loans decreased $102 million, or 20%, in 1999. We attribute these decreases primarily to a lower volume of purchases and sales of bonds due to changes in market conditions.
Our liquid assets include Treasury bond holdings, short-term money market investments, stocks, and marketable long-term fixed income securities. The carrying value of highly liquid securities, comprised of NAIC Class 1 and 2 publicly traded bonds, was approximately $548 million at December 31, 1999.
One of our primary liquidity concerns is the risk of early contract holder and policyholder withdrawal. The two most affected products are individual life insurance and individual deferred annuities. Life insurance policies are less susceptible to withdrawal than annuity contracts because annuities are primarily used as investment vehicles, while life policies are used to fulfill longer-term financial planning needs. We closely evaluate and manage our liquidity risk by, for example, seeking to include provisions such as contingent deferred sales charges limiting withdrawal rights to discourage surrenders.
As of December 31, 1999, our total adjusted capital as defined by the NAIC was $116 million. The NAIC developed the Risk Based Capital ( "RBC") model to compare the total adjusted capital with a standard design in order to reflect an insurance company's risk profile. Although we believe that there is no single appropriate means of measuring RBC needs, we feel that the NAIC approach to RBC measurement is reasonable, and we manage our capital position with significant attention to maintaining adequate total adjusted capital relative to RBC. Our total adjusted capital was well in excess of all RBC standards at December 31, 1999 and 1998. We believe we enjoy a strong capital position in light of our risks and that we are well positioned to meet policyholder and other obligations.
As directed by our policyholders, the majority of our assets are policyholders’ investments in our separate accounts. We record the assets in our separate accounts at market value, and we pass all investment risks on to the policyholders. The following discussion focuses on the general investment account portfolio, which does not include our separate account assets.
At December 31, 1999, we had $1,289 million of invested assets in our general investment account. We manage the portfolio of invested assets to support the general account liabilities of the business in light of yield, liquidity, and diversification considerations.
The following table sets forth our invested assets in the general investment account and related gross investment yield:
We carefully monitor and manage our bond portfolio to ensure that bond maturities are sufficiently diversified in light of our liquidity needs.
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: Publicly Traded Bond Credit Quality
The strength of our privately placed bond portfolio is demonstrated by the predominance of NAIC Classes 1 and 2 securities.
The following table sets forth by industry category the total bond portfolio, including short-term securities, as of December 31, 1999:
At December 31, 1999, 97% of our commercial mortgage loan portfolio consisted of bullet loans compared to 98% at December 31, 1998. Bullet loans are loans that do not fully amortize over their term.
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 1999, we added approximately 34 new loans. Twenty-two 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 1999, borrowers paid off one loan, which totaled $9 million.
The following tables set forth current and potential problem mortgage loans by property type and geographic region as of December 31, 1999:
our evaluation of the borrower's ability to compete in a relevant market.
In compliance with regulatory requirements, we maintain the AVR. The AVR stabilizes surplus against non-interest rate related fluctuations in the value of stocks and bonds. We maintain general investment reserves ("GIR") which are not mandated by regulation, in anticipation of future losses on specific mortgage loans, particularly mortgage loans in the process of foreclosure.
The following table presents the change in total investment reserves for the years 1999 and 1998:
(1) The balance is comprised of the AVR and GIR which are recorded as liabilities on the statement of financial position.
We have audited the accompanying statutory statement of financial position of C.M. Life Insurance Company as of December 31, 1999, and the related statutory statements of income, changes in shareholder’s equity, and cash flows for the year then ended. 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 have audited the accompanying statutory statement of financial position of C.M. Life Insurance Company as of December 31, 1998, and the related statutory statements of income and changes in shareholder's equity, and of cash flows for each of the two years in the period 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide 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.
Addition to policyholders ’ reserves, funds and policy benefits net of
C.M. Life Insurance Company (“the Company”) is a wholly-owned stock life insurance subsidiary of Massachusetts Mutual Life Insurance Company (“MassMutual ”). The Company is primarily engaged in the sale of flexible premium universal and variable 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).
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, persistency and asset valuations, could cause actual results to differ from the estimates used in the financial statements.
Other investments include holdings in affiliated mutual funds and preferred stocks and are valued in accordance with rules established by the NAIC. Generally, investments in mutual funds are valued at fair value and preferred stocks in good standing at cost.
In compliance with regulatory requirements, the Company maintains an Asset Valuation Reserve ( “AVR”) and an Interest Maintenance Reserve (“IMR”). The AVR and other investment reserves stabilize surplus against fluctuations in the value of stocks, as well as declines in the value of bonds and mortgage loans. The IMR defers 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 and interest related hedging activities. These interest rate related 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. Net realized after-tax capital losses of $1.4 million in 1999, and realized after-tax capital gains of $2.6 million in 1998 and $2.0 million in 1997 were deferred into the IMR. Amortization of the IMR into net investment income amounted to $0.5 million in 1999, $0.3 million in 1998 and $0.1 million in 1997. At December 31, 1999, the unamortized IMR deferred was in a net loss position, which in accordance with the regulations, was recorded as a reduction of surplus.
Realized capital gains and losses, less taxes, not includable in the IMR, 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 surplus.
Separate account assets and liabilities represent segregated funds administered and invested by the Company for the benefit of variable life and annuity contractholders. 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 $341.4 million, $121.0 million and $146.5 million in 1999, 1998 and 1997, respectively, are included in addition to policyholders’ reserves and funds, in the Statutory Statements of Income.
Reserves for individual annuities are based on accepted actuarial methods, principally at interest rates ranging from 6.25 to 9.00 percent.
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, and policy maintenance and settlement costs are charged to current operations when incurred.
The Company considers all highly liquid investments purchased with a maturity of twelve months or less to be short-term investments.
The Company plans to file a separate company 1999 federal income tax return.
The Internal Revenue Service has completed its examination of the Company’s income tax returns through the year 1995. The Internal Revenue Service is currently examining the Company’s income tax returns for the years 1996 and 1997. The Company believes adjustments which may result from such examinations will not materially affect its financial position.
Federal tax payments were $6.8 million in 1999, $16.9 million in 1998 and $6.8 million in 1997.
The Company maintains a diversified investment portfolio. Investment policies limit concentration in any asset class, geographic region, industry group, economic characteristic, investment quality or individual investment. In the normal course of business, the Company enters into commitments to purchase privately placed bonds and mortgage loans.
Proceeds from sales of investments in bonds were $325.8 million during 1999, $480.4 million during 1998, and $388.8 million during 1997. Gross capital gains of $2.1 million in 1999, $5.0 million in 1998, and $3.8 million in 1997 and gross capital losses of $4.9 million in 1999, $0.9 million in 1998, and $0.5 million in 1997 were realized on those sales, portions of which were deferred into the IMR.
Approximately 60% and 50% of the Company’s commercial mortgage loans at December 31, 1999 and 1998, respectively, were loans whose underlying collateral is comprised of office buildings. There were no significant regional concentrations of commercial mortgage loans at December 31, 1999 and 1998.
At December 31, 1999, scheduled commercial mortgage loan maturities were as follows: 2000 - $3.3 million; 2001 - $10.2 million; 2002 - $28.6 million; 2003 - $21.5 million; 2004 - $24.4 million; and $74.0 million thereafter.
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 $3.8 million and $14.2 million at December 31, 1999 and 1998, respectively. The Company monitors exposure to ensure counterparties are credit worthy and concentration of exposure is minimized. Additionally, collateral positions are obtained with counterparties when considered prudent.
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 do not purport to be the amount that could be realized in immediate settlement of the financial instrument. The following table summarizes the carrying value and fair values of the Company’s financial instruments at December 31, 1999 and 1998.
Bonds and other investments: The estimated fair value of bonds and other investments is based on quoted market prices when available. If quoted market prices are not available, fair values are determined by the Company using a pricing matrix.
Policy loans, cash and short-term investments: Fair values for these instruments approximate the carrying amounts reported in the Statutory Statements of Financial Position.
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. Fees incurred under the terms of these agreements were $124.5 million, $74.1 million and $39.7 million in 1999, 1998 and 1997, respectively. While management believes that these fees are calculated on a reasonable basis, they may not necessarily be indicative of the costs that would have been incurred on a stand-alone basis.
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 $29.8 million, $33.7 million and $35.1 million was ceded to MassMutual in 1999, 1998 and 1997, respectively. Policyholder benefits of $38.7 million, $38.4 million and $36.9 million were ceded to MassMutual in 1999, 1998 and 1997, respectively.
The Company is involved in litigation arising in and out of the normal course of business, including suits which seek both compensatory and punitive damages. While the Company is not aware of any actions or allegations which should reasonably give rise to any material adverse effect, 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.