C.M. Life's principal office is located at 140 Garden Street, Hartford, Connecticut, where all of C.M. Life's records are maintained. This office space is owned by Connecticut Mutual.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - --------------------------------------------------------------------------------
Benefits, claims and settlement expenses, before reinsurance benefit reimbursements increased by $30,824 from 1994. Surrender benefits before reinsurance increased by $2,443, to $33,494 in 1995 from $31,051 in 1994 and reserves ceded increased $6,173. Contributing to the increase was an increase in death claims of $12,853, increased change in reserves of $8,300, increased reserves ceded of $6,173 and increased surrenders and other benefits of $3,498.
Results of Operations (dollar amounts in thousands) --------------------------------------------------- 1994 Compared with 1993 -----------------------
For the year ended December 31, 1994, C.M. Life had net income of $17,788, as compared with net income of $21,094 in 1993. The decrease in net income of $3,306 is attributable to increased benefit, claims and settlement expenses as well as an increase in net realized capital losses and increased federal tax expense, partially offset by increased net premiums, net investment income and decreased reinsurance ceded and acquisition and insurance expenses.
Reinsurance premiums ceded decreased by $2,873 in 1994. The decrease is attributable to the decrease in reinsured business as well as increased retention limits.
Net realized capital losses were $2,533 in 1994 as compared to a net realized gain of $459 in 1993. This loss is due to realized net losses of $7,332, with $4,799 being transferred to the IMR in 1994 as compared to realized net gains of $4,906 in 1993, with $4,447 of those being transferred to the IMR. The $7,332 loss included realized losses of $2,093 related to the bulk sale of a number of mortgages during 1994 and losses of $2,158 resulted from the sale of two real estate properties. There were no real estate sales in 1993.
Benefits, claims and settlement expenses, before reinsurance benefit reimbursements increased by $2,543 from 1993. Surrender benefits before reinsurance increased by $2,116, to $31,051 in 1994 from $28,935 in 1993 and reserves ceded increased $4,928. This increase was partially offset by decreased death claims of $3,217 and decreased change in reserves of $1,580.
C.M. Life's operations have historically provided substantial positive cash flows from operations. The majority of the Company's cash is invested in investment-grade securities to provide ample protection for policyholders. The liabilities of the Company are predominantly long-term in nature and, therefore, the Company invests in long-term fixed maturity investments such as bonds.
C.M. Life's liquidity requirements were met by funds provided from operations and investment activity. The primary uses of funds were to purchase investments and to pay commissions, insurance operating expenses and policy benefits.
C.M. Life invests in fixed maturities with the objective of balancing reasonable returns with liquidity, interest rate and credit risks. As a result, C.M. Life's fixed maturity portfolio consists primarily of government securities and high-quality marketable corporate securities. At December 31, 1995, the fixed maturity securities portfolio consisted of $675,850 of investment grade bonds, which represented 91.8% of the fixed maturity portfolio. Below investment grade bonds (those rated below "Baa") were $60,249 , which represented 8.2% of the fixed maturity portfolio. Ratings are obtained from external rating agencies, and if not externally rated, are rated by C.M. Life internally using similar methods. The interest rates available on below-investment-grade securities are generally significantly higher than available on other corporate debt securities. Also the risk of loss due to default by the borrower is significantly greater with respect to such below- investment-grade securities for any of a number of reasons including: those securities are unsecured or subordinated to other creditors of the issuer, or are issued by companies that usually have high levels of indebtedness. C.M. Life attempts to minimize the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers.
C.M. Life's fixed maturity securities portfolio included $150,694 and $167,641 of mortgage-backed securities at December 31, 1995 and 1994, respectively. The mortgage-backed securities are subject to risks associated with variable prepayments of the underlying mortgages. Prepayments of the underlying mortgages cause those securities to have different actual maturities than scheduled at the time of purchase. The Company limits its investment risk by purchasing fixed maturities either guaranteed by U.S. government-sponsored entities or securities supported in the securitization structure by junior securities enabling the assets to achieve investment grade status.
In 1995, C.M. Life invested in common stock with the objective of securing long-term asset appreciation.
C.M. Life is not currently originating any mortgages. At December 31, 1995 and 1994, C.M. Life's mortgage loans were $26,705 and $42,038, respectively. Mortgage loans, as a percentage of invested assets, have decreased to 2.7% as of December 31, 1995, from 4.8% as of December 31, 1994.
Management closely monitors the ongoing performance of the mortgage loan portfolio. Loans are reviewed individually to determine if other than temporary impairments exist. For non-performing loans, reserves are established considering the value of the underlying collateral. Mortgage loans in the amount of $2,774, or 10.4% of the mortgage loan portfolio, were delinquent 90 days or more as of December 31, 1995. This compares with $2,774, or 6.6% of the mortgage loan portfolio at December 31, 1994.
As of December 31, 1995 and 1994, C.M. Life's policy loans were $126,014 and $109,720, respectively. Policy loans, as a percentage of invested assets, have increased from 12.5% in 1994 to 12.9% in 1995. Variable interest rate policy loans were 98.6% and 98.5% of total policy loans at December 31, 1995 and 1994, respectively. For loans with variable interest rates, the rates are adjusted annually based upon changes in a corporate bond index.
C.M. Life is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products comparable to those of C.M. Life.
MassMutual is the eighth largest life insurance company in the country with over $52 billion in life insurance assets and $103 billion in total assets. Best's Insurance Reports, Life-Health Edition, upgraded C.M. Life's rating on March 4, 1996 to the highest possible rating of A++ as a result of the merger. MassMutual's ratings were the highest possible from A.M. Best (A++), Duff &Phelps (AAA) and Standard & Poors (AAA), and the second-highest rating from Moody's Investors Service (Aa1).
Connecticut Mutual allocates certain expenses to C.M. Life for providing operating facilities, human resources, computer software development and managerial services. Total expenses allocated to C.M. Life were approximately $34,008, $16,412, and $18,831 in 1995, 1994 and 1993, respectively. The increase is attributable to increased sales for C.M. Life and decreased sales for the parent, Connecticut Mutual, resulting in a larger portion of certain expenses being allocated to C.M. Life.
C.M. Life Insurance Company Notes to Financial Statements December 31, 1995, 1994 and 1993 ($ In Thousands)
C.M. Life's financial statements have been prepared in conformity with accounting practices and procedures of the National Association of Insurance Commissioners (NAIC) as prescribed or permitted by the Insurance Department of the State of Connecticut, which are considered to be generally accepted accounting principles (GAAP) for wholly owned stock life insurance subsidiaries of mutual life insurance companies. (see Note 2.h.). The principal accounting practices currently followed by C.M. Life are as follows:
b. Investments - Investments are valued in accordance with procedures prescribed by the NAIC. Fixed maturities eligible for amortization are reported at amortized cost. Eligible preferred stocks are reported at cost and common stocks are reported at market value. Mortgage loans on real estate are reported at the unpaid principal balance unless delinquent, at which time they are reported at the lower of the unpaid principal balance or fair value. Investments in real estate which have been identified for possible sale within the next twelve months are reported at the lower of cost, less accumulated depreciation or market value. The Company calculates depreciation for its real estate investments using principally the straight line method. Policy loans are reported at the aggregate amount of the unpaid balances.
There were no investments which exceeded 10% of total stockholder's equity as of December 31, 1995 and 1994.
c. Disclosure of the Fair Value of Financial Instruments - Fair value is defined as "the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale." See Note 8.
e. Separate Accounts: Separate accounts include the assets and liabilities of certain annuity contracts that must be segregated from C.M. Life's general assets under the terms of the contracts. The assets consist primarily of marketable securities reported at market value. Reserves for these 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. Transfers due from Separate Account, a contra-liability, represents Separate Account liabilities in excess of Separate Account reserves.
g. Cash Equivalents: For purposes of the Statements of Cash Flows, C.M. Life considers all highly liquid short-term investments with a maturity of twelve months or less from the date of purchase to be cash equivalents. The carrying amounts reported approximate those assets' fair value.
C.M. Life is included in Connecticut Mutual's consolidated Federal income tax return and, in accordance with a written tax-sharing agreement, makes a provision for payment to Connecticut Mutual based on its income included in Connecticut Mutual's consolidated taxable income. This provision is based on income which is currently taxable.
C.M. Life reinsures (cedes) a portion of its life insurance business to Connecticut Mutual and other insurers, in order to reduce insurance risk. C.M. Life's retention limit per individual insured is $4 million; the portion of the risk exceeding the retention limit is reinsured with other insurers.
The carrying value and estimated fair value of investments in fixed maturities as of December 31, 1995 and 1994 are as follows:
The carrying value and estimated fair value of C.M. Life's fixed maturities at December 31, 1995, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
Due in one year or less $ 17,729 $ 17,781 Due after one year 306,539 313,886 through five years Due after five years 225,283 240,231 through ten years Due after ten years 35,854 38,499 Mortgage-backed 150,694 157,491 securities ------- -------
Proceeds from sales of fixed maturities were $380,567, $224,884, and $334,801 for 1995, 1994 and 1993, respectively. Gross gains of $3,598, $1,358, and $5,931 and gross losses of $4,658, $4,439, and $1,016 were realized on those sales for 1995, 1994 and 1993, respectively.
The following table provides a breakdown of the carrying value of mortgage loans on real estate by geographical location:
United States Northeast $15,241 $22,111 South Atlantic 8,187 13,090 South Central - 3,462 West 3,277 3,375 ----- -----
During 1995 options (protective puts) were utilized to hedge equity exposures and were accounted for on a mark to market basis. The net 1995 realized losses from this activity were $140. The notional amount of such options totaled $35,900 as of December 31, 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 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, 1995 and 1994.
The estimated fair value for the equity securities is based on quoted market prices from national securities exchanges and over-the-counter markets.
The fair value for performing mortgages is determined by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. Non-performing mortgages are valued based on a discounted cash flow analysis on the underlying collateral using the current market rate for similar collateral.
A portion of annuity reserves, which represent contracts in their accumulation phase, are considered to be financial instruments. The Company determines fair value to be equal to the cash surrender value of these contracts (including market value adjustments, if any), which represents the amount payable to policyholders on demand.
Since supplementary contracts may be perceived as deposit liabilities with defined maturities, the Company has determined fair value based on the discounted value of amounts payable at maturity of the contract. Discount rates used to determine fair value range from 6.5% to 7.9%. All other deposit liabilities are not considered to have defined maturities. The Company has determined fair value for these contracts to be equal to the cash surrender value, which is that amount which is payable to policyholders on demand.
1995 1994 ---- ---- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- Assets ------
Bonds $736,099 $767,888 $717,291 $684,213 Common and Preferred 72,624 72,571 1,815 2,065 Stock Mortgages 26,705 26,783 42,038 40,241 Policy Loans 126,014 126,014 109,720 109,720 Cash and Cash Equivalents 15,069 15,069 3,025 3,025 Assets of Separate 531,432 531,432 309,672 309,672 Account
Connecticut Mutual allocates certain expenses to C.M. Life for providing operating facilities, human resources, computer software development and managerial services. Total expenses allocated to C.M. Life were approximately $34,008, $16,412 and $18,831 in 1995, 1994 and 1993, respectively. The increase is attributable to increased sales for C.M. Life and decreased sales for the parent, Connecticut Mutual, resulting in a larger portion of certain expenses being allocated to C.M. Life.
Fixed maturities $54,625 $47,658 $ 43,983 Mortgage loans on real estate 2,709 4,383 5,813 Policy loans 9,905 7,925 7,448 Amortization of IMR (60) 309 251 Other 3,091 1,449 1,844 ----- ----- -----
Net investment income and realized gains and losses applicable to the Separate Account are not included in C.M. Life's net investment income and realized gains and losses reported in the Statements of Operations.
The cost of investments sold is determined by the specific identification method. Realized gains and losses and the change in the difference between market value and cost for fixed maturities and equity securities are summarized as follows:
Real Estate: Realized gains - - - Realized losses (310) (2,158) - ----- -------
Mortgage Loans: Realized gains 52 - - Realized losses (1,404) (2,093) (13) ------- ------- ----
Net Realized Capital $ (1,140) $ (2,533) $ 459 ---------- ----------- ----------- Gains/(Losses) Unrealized Gains and Losses: Fixed Maturities: Net unrealized gains(losses),end of year $31,789 $(33,077) $ 20,870 Net unrealized gains, beginning (33,077) 20,870 16,497 of year --------- ------ ------
Change in unrealized gains or losses on fixed maturities $64,866 $(53,947) $ 4,373 ======= ======== ==========
The change in unrealized gains and (losses) for equity securities were $7,422, $(30), and $50 as of December 31, 1995, 1994 and 1993, respectively.
C.M. Life is involved in regulatory proceedings and various litigation in the ordinary course of business. In the opinion of management, the ultimate resolution of such proceedings and litigation will not result in fines or judgements which, in the aggregate, would materially affect C.M. Life's financial position.
We have audited the accompanying balance sheets of C.M. Life Insurance Company (a Connecticut corporation and a wholly owned subsidiary of Connecticut Mutual Life Insurance Company) as of December 31, 1995 and 1994, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C.M. Life Insurance Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules I and VI are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Hartford, Connecticut February 15, 1996 (Except with respect to the matter discussed in Note 13, as to which the date is March 4, 1996.)