Our principal office is located at 140 Garden Street, Hartford, Connecticut.
We have prepared the accompanying statutory financial information, included in this filing, in conformity with the practices of the National Association of Insurance Commissioners ("NAIC") and the accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut ("statutory accounting practices").
(c) bonds are generally carried at amortized cost whereas GAAP generally requires they be reported at fair value;
(d) deferred income taxes are not provided for book-tax timing differences as would be required by GAAP; and
(e) payments received for universal life, variable life and variable annuities are reported as premium revenue, whereas under GAAP, these payments would be recorded as deposits to policyholders' account balances.
In accordance with the life insurance laws and regulations under which we operate, we are obligated to carry on our books, as liabilities, actuarially determined reserves to meet our obligations on outstanding contracts. 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 3.0 to 4.5 percent. We develop reserves for individual annuities based on accepted actuarial methods, principally, the Commissioner's Annuity Reserve Valuation Method at interest rates ranging from 5.3 to 9.0 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 shareholder's equity against declines in the value of bonds. The IMR captures 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. The IMR amortizes these capital gains and losses into income using the grouped method over the remaining life of the investment sold or over the remaining life of the underlying asset. We have included the IMR in other liabilities on the Statutory Statement of Financial Position.
The following 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.
C.M. Life Insurance Company Selected Historical Financial Data For the Years Ended December 31, ($ In Millions)
(1) In 1998, we received a surplus contribution of $25 million from MassMutual. (2) Defined by the NAIC as surplus plus Asset Valuation Reserve. We reclassified prior year amounts to conform with current year presentation.
You should read the following discussion in conjunction with the Statutory Financial Statements, Notes to Statutory Financial Statements and Selected Historical Financial Data.
Our direction and operations are guided by a statement of corporate vision. Under that vision we manage our operations to maintain a financially strong and efficient enterprise. Our long-term objectives are to maintain corporate financial strength, enhance policyholder value, and generate and sustain growth. We have pursued these objectives by:
. the adoption of efforts to improve persistency and retention levels, and
For the Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
1998 1997 ---- ---- (In Millions) Revenue: Premium income ............................ $ 406 $ 331 Net investment income ..................... 82 75 Fees and other income ..................... 6 8 ----- ----- Total revenue ........................... 494 414 ----- ----- Benefits and expenses: Policyholders' benefits and payments ................................. 185 100 Addition to policyholders' reserves and funds ....................... 169 201 Expenses, commissions and state taxes .............................. 129 86 ----- ----- Total benefits and expenses ............. 483 387 ----- ----- Net gain from operations before federal income taxes .............. 11 27 Federal income taxes ........................ 7 19 ----- ----- Net gain from operations .................... 4 8 Net realized capital loss ................... (1) -- ----- ----- Net income .................................. $ 3 $ 8 ===== =====
Net income decreased $5 million, or 62.5%, to $3 million in 1998 from $8 million in 1997. We attribute this decrease primarily to the continued growth in our business, which resulted in increased policyholders' benefits and payments, commissions and expenses, partially offset by increased premium income.
The following table sets forth premium, sales, and other information for our products:
Years Ended December 31, 1998 1997 ---- ---- (In Millions) Gross Investment Income Bonds ........................................ $48 $53 Mortgage loans ............................... 8 5 Other investments ............................ 10 4 Policy loans ................................. 12 11 Cash and short-term investments .............. 6 4 --- --- Total gross investment income ................ 84 77 Less: investment expenses ..................... 2 2 --- --- Net investment income .......................... $82 $75 === ===
The decrease in gross investment income from bonds is due to declining portfolio yields. Bond yields are declining as older, higher yielding bonds mature and are replaced with new bonds that have lower yields. The increase in income from mortgage loans is due to an increase in the size of the mortgage portfolio. The increase in gross investment income on other investments results from increased investment in financial options as a result of favorable market conditions and a second quarter dividend received from an affiliated mutual fund. Fluctuations in market conditions will impact future investment results.
Fees and other income decreased $2 million, or 25.0%, to $6 million in 1998 from $8 million in 1997. We attribute this decrease primarily to reinsurance activity with MassMutual, partially offset by higher fees collected from separate accounts. The components of fees and other income are primarily commissions and expense allowances on reinsurance ceded, which decreased $1 million, or 7.1%, to $13 million in 1998 from $14 million in 1997. The decrease resulted from credits we received on our modified coinsurance agreement with MassMutual, and a reserve adjustment on reinsurance ceded
(recorded as a charge to other income) which increased $4 million, or 23.5%, to $21 million in 1998 from $17 million in 1997. This impact from reinsurance activity was partially offset by an increase in separate account fees of $3 million, or 27.3%, to $14 million in 1998 from $11 million in 1997. The increase in separate account fees is due to an increase in administration fees, which is consistent with an increase in the number of policies and amount of insurance in force.
Policyholders' benefits and payments increased $85 million, or 85.0%, to $185 million in 1998 from $100 million in 1997. We attribute this increase primarily to surrender benefits, which increased $87 million, or 138.1%, to $150 million in 1998 from $63 million in 1997, due to increased variable and fixed annuity withdrawals and contract surrenders. This increase reflects the growth in the block of business and market volatility. The life insurance lapse rate, which is based upon the amount of insurance in force, increased to 6.7% for 1998 compared to 6.5% for 1997.
Addition to policyholders' reserves and funds decreased $32 million, or 15.9%, to $169 million in 1998 from $201 million in 1997. We attribute this decrease primarily to slower growth in 1998 compared to 1997 in separate account deposits and an increase in separate account withdrawals.
Realized capital losses, after the transfer to the Interest Maintenance Reserve ("IMR"), were $1 million in 1998, while there were no net realized capital gains or losses in 1997. We attribute the current year loss primarily to credit related mortgage loan losses, which are not transferred to the IMR.
Years Ended December 31, ------------------------ 1997 1996 ---- ---- (In Millions) Revenue: Premium income ............................. $331 $314 Net investment income ...................... 75 75 Fees and other income ...................... 8 9 ---- ---- Total revenue ............................ 414 398 ---- ---- Benefits and expenses: Policyholders' benefits and payments .................................. 100 99 Addition to policyholders' reserves and funds ........................ 201 218 Expenses, commissions and state taxes ............................... 86 73 ---- ---- Total benefits and expenses .............. 387 390 ---- ---- Net gain from operations before federal income taxes ............... 27 8 Federal income taxes ....................... 19 6 ---- ---- Net gain from operations ..................... 8 2 Net realized capital gain (loss) ............. -- -- ---- ---- Net income ................................... $ 8 $ 2 ==== ====
Premium income, net of reinsurance ceded, increased $17 million to $331 million in 1997 from $314 million in 1996. We attribute this 5.4% growth in premiums to increased sales of universal and other life products, partially offset by a decrease in variable annuity products of 5.7% from the prior year. The result reflects a change in our business mix in which universal and other life products comprised 35.3% of total premium income during 1997 compared to 27.7% in 1996, while annuity products were 64.7% in 1997 compared to 72.3% in 1996. Variable annuity premiums have declined due to lower sales through the brokerage distribution channel and a shift in sales through MassMutual's distribution channels away from variable annuity products issued by us to variable annuity products issued by our affiliate, MML Bay State Life Insurance Company.
Years Ended December 31, 1997 1996 ---- ---- (In Millions) Gross Investment Income Bonds ......................... $53 $55 Mortgage loans ................ 5 4 Other investments ............. 4 3 Policy loans .................. 11 10 Cash and short-term investments 4 4 --- --- Total gross investment income . 77 76 Less: investment expenses ...... 2 1 --- --- Net investment income ........... $75 $75 === ===
ceded, a reserve adjustment on reinsurance ceded and fees from separate accounts. The commission and expense allowance on reinsurance ceded decreased $1 million to $14 million in 1997 from $15 million in 1996. Commissions and expense allowances on reinsurance ceded represents charges incurred on our modified coinsurance agreement with MassMutual. The reserve adjustment on reinsurance ceded, which is a charge to other income, increased $3 million to $17 million in 1997 from $14 million in 1996. Fees from separate accounts have increased due to an increase in administration fees, which is consistent with an increase in the number of policies and amount of insurance in force.
Policyholders' benefits and payments increased $1 million, to $100 million in 1997 from $99 million in 1996. Annuity benefits increased $1 million, essentially due to increased variable and fixed annuity withdrawals. The life insurance lapse rate, which is based upon the amount of insurance in force, decreased to 6.5% for 1997 compared to 7.1% for 1996. Death claims, net of reinsurance, remained consistent between both years at $25 million.
Addition to policyholders' reserves and funds decreased $17 million to $201 million in 1997 from $218 million in 1996. Addition to policyholders' reserves and funds includes transfers (to) from the separate accounts based upon policyholder elections. We attribute the decrease primarily to a reduction in the growth of separate account deposits and an increase in separate account withdrawals.
Expenses, commissions, and state taxes increased $13 million, to $86 million in 1997 from $73 million in 1996. We attribute this increase primarily to increased expenses and commissions associated with the production of new business and the modification of our variable annuity underwriting agreements with our brokers.
Federal income tax expense increased $13 million, to $19 million in 1997 from $6 million in 1996. Taxable income increased $31 million, to $50 million in 1997 from $19 million in 1996. We attribute this increase in taxable income primarily to the difference between statutory insurance reserves and tax reserves and the timing of the tax deductibility of acquisition costs.
Years Ended December 31, 1997 1996 ---- ---- (In Millions) Bonds $ 3 $ 1 Mortgage loans -- (2) Other investments -- 4 Federal income taxes (1) (2) --- --- Net realized capital gain before transfer to IMR 2 1 Transfer to IMR (2) (1) --- --- Net realized capital gain (loss) $-- $-- === ===
General account assets increased $89 million, or 7.9%, to $1,212 million as of December 31, 1998, from $1,123 million as of December 31, 1997. We attribute this increase primarily to increases in mortgage loans, bonds, cash and short-term investments, and other investments. These increases were primarily the result of our continued growth.
Bonds increased $18 million, or 2.7%, to $683 million at December 31, 1998, from $665 million at December 31, 1997. While U. S. Treasury and other government holdings decreased as of December 31, 1998, they were more than offset by increases in both mortgage-backed and corporate securities holdings as compared with December 31, 1997. Bonds and short-term securities in NAIC classes 1 and 2 were 61.0% of general account invested assets at December 31, 1998, as compared to 64.9% at December 31, 1997. The percentage of our general account invested assets representing bonds and short-term investments in NAIC
As described in Note 1, these financial statements were prepared in conformity with accounting practices prescribed or permitted by the Department of Insurance of the State of Connecticut, which practices differ from generally accepted accounting principles. The effects on the financial statements of the variances between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material.
1998 1997 ---- ---- (In Millions) Assets: Bonds $ 683.0 $ 664.5 Mortgage loans 126.3 101.6 Other investments 76.3 63.6 Policy loans 150.4 142.5 Cash and short-term investments 105.7 88.4 -------- -------- 1,141.7 1,060.6 Investment and insurance amounts receivable 33.9 30.1 Federal income tax receivable 2.1 -- Transfer due from separate accounts 34.3 32.0 -------- -------- 1,212.0 1,122.7 Separate account assets 1,318.9 1,096.5 -------- -------- $2,530.9 $2,219.2 ======== ========
1998 1997 ---- ---- ($ In Millions Except for Par Value) Liabilities: Policyholders' reserves and funds $ 996.3 $ 951.0 Policyholders' claims and other benefits 3.8 4.5 Payable to parent 28.8 13.6 Federal income taxes -- 6.1 Asset valuation and other investment reserves 23.9 26.6 Other liabilities 18.2 7.7 -------- -------- 1,071.0 1,009.5 Separate account liabilities 1,318.9 1,096.5 -------- -------- 2,389.9 2,106.0 -------- -------- Shareholder's equity: Common stock, $200 par value 50,000 shares authorized 12,500 shares issued and outstanding 2.5 2.5 Paid-in and contributed surplus 68.8 43.8 Surplus 69.7 66.9 -------- -------- 141.0 113.2 -------- -------- $2,530.9 $2,219.2 ======== ========
Shareholder's equity, beginning of year $113.2 $109.8 $113.2 ------ ------ ------ Increases (decreases) due to: Net income 2.6 7.6 2.2 Change in asset valuation and investment reserves 2.7 (4.8) (1.9) Change in net unrealized capital gain (loss) (5.8) 0.8 (1.0) Capital contribution 25.0 -- -- Other 3.3 (0.2) (2.7) ------ ------ ------ 27.8 3.4 (3.4) ------ ------ ------ Shareholder's equity, end of year $141.0 $113.2 $109.8 ====== ====== ======
1998 1997 1996 ---- ---- ---- (In Millions) Operating activities: Net income $ 2.6 $ 7.6 $ 2.2 Additions to policyholders' reserves and funds net of transfers to separate accounts 44.6 44.2 41.6 Net realized capital (gain) loss 1.1 (0.1) (0.6) Other changes 7.8 0.5 (0.8) ------- ------- ------- Net cash provided by operating activities 56.1 52.2 42.4 ------- ------- ------- Investing activities: Loans and purchases of investments (568.6) (438.6) (184.9) Sales and maturities of investments and receipts from repayment of loans 504.8 411.1 191.1 ------- ------- ------- Net cash provided by (used in) investing activities (63.8) (27.5) 6.2 ------- ------- ------- Financing Activities: Capital and surplus contribution 25.0 -- -- ------- ------- ------- Increase in cash and short-term investments 17.3 24.7 48.6 Cash and short-term investments, beginning of year 88.4 63.7 15.1 ------- ------- ------- Cash and short-term investments, end of year $ 105.7 $ 88.4 $ 63.7 ======= ======= =======
The accompanying statutory financial statements, have been prepared in conformity with the statutory accounting practices of the National Association of Insurance Commissioners ("NAIC") and the accounting practices prescribed or permitted by the Department of Insurance of the State of Connecticut and are different in some respects from financial statements prepared in accordance 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; (c) bonds are generally carried at amortized cost whereas GAAP generally requires they be reported at fair value; (d) deferred income taxes are not provided for book-tax timing differences as would be required by GAAP; and (e) payments received for universal life products and variable annuities are reported as premium revenue, whereas under GAAP, these payments would be recorded as deposits to policyholders' account balances.
Certain 1997 and 1996 amounts have been reclassed to conform with the current year presentation.
The following is a description of the Company's principal accounting policies and practices.
Policyholders' reserves for life insurance contracts are developed 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 3.0 to 4.5 percent.
Provision for federal income taxes is based upon the Company's estimate of its 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 acquisition costs, resulted in effective tax rates which differ from the statutory tax rate.
The Company plans to file a separate company 1998 federal income tax return.
Federal tax payments were $16.9 million in 1998, $6.8 million in 1997 and $17.6 million in 1996.
The Board of Directors of MassMutual has authorized the contribution of funds to the Company sufficient to meet the capital requirements of all states 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, $11.3 million of shareholder's equity is available for distribution to the shareholder in 1999 without prior regulatory approval.
Prior to March 1, 1996, the Company had an underwriting agreement with its affiliates GR Phelps & Co., Inc. and MML Distributors LLC. Under this agreement, the affiliates paid commissions and received the cash flows from variable annuity contract fees. Effective March 1, 1996, this agreement was cancelled, and the Company began paying all commissions and retained the right to the related future cash flows from contract fees.
The Company also has a stop-loss agreement with MassMutual under which the Company cedes claims which, in aggregate, exceed 18% of the covered volume for any year, with maximum coverage of $25.0 million above the aggregate limit. The aggregate limit was $36.9 million in 1998, $35.6 million in 1997, and $28.1 million in 1996 and it was not exceeded in any of the years. The Company paid approximately $1.0 million in premiums to MassMutual under the agreement in 1998 and 1997, and $0.4 million in 1996.
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.
The carrying value and estimated fair value of investments in bonds as of December 31, 1998 and 1997 are as follows:
Proceeds from sales of investments in bonds were $480.4 million during 1998, $388.8 million during 1997, and $162.9 million during 1996. Gross capital gains of $5.0 million in 1998, $3.8 million in 1997, and $1.6 million in 1996 and gross capital losses of $0.9 million in 1998, $0.5 million in 1997, and $0.9 million in 1996 were realized on those sales, portions of which were included in the IMR. Estimated fair value of non-publicly traded bonds is determined by the Company using a pricing matrix and quoted market prices for publicly traded bonds.
The fair value of mortgage loans, as determined from a pricing matrix for performing loans and the estimated underlying real estate value for non- performing loans, approximated carrying value.
Policy loans are recorded at cost as it is not practicable to determine the fair value since they do not have a stated maturity.
Investments in affiliated mutual funds had a cost of $62.4 million in 1998 and $50.2 million in 1997 with fair values of $67.7 million in 1998 and $61.4 million in 1997, using quoted market prices. Preferred stocks in good standing had fair values of $0.5 million in 1998 using a pricing matrix for non-publicly traded stocks and quoted market prices for publicly traded stocks. At December 31, 1998, the fair values of preferred stocks approximated cost. The Company did not invest in any preferred stocks at December 31, 1997.
The carrying value of investments which were non-income producing for the preceding twelve months was $0.4 million at December 31, 1998 and 1997.
Options grant the purchaser the right to buy or sell a security or enter into a derivative transaction at a stated price within a stated period. The Company's option contracts have terms of up to ten years. The amounts paid for options purchased are amortized into investment income over the life of the contract on a straight-line basis. Unamortized costs are included in other investments on the Statutory Statement of Financial Position. Gains and losses on these contracts are recorded at the expiration or termination date and are deferred and amortized through the IMR over the remaining life of the option contract. At December 31, 1998 and 1997, the Company had option contracts with notional amounts of $961.2 million and $111.3 million, respectively. The Company's credit risk exposure was limited to the unamortized costs of $7.5 million and $2.2 million which had fair values of $9.8 million and $2.3 million at December 31, 1998 and 1997, respectively.
Interest rate cap agreements grant the purchaser the right to receive the excess of a referenced interest rate over a stated rate calculated by reference to an agreed upon notional amount. Interest rate floor agreements grant the purchaser the right to receive the excess of a stated rate over a referenced interest rate calculated by reference to an agreed upon notional amount. Amounts paid for interest rate caps and floors are amortized into investment income over the life of the asset on a straight-line basis. Unamortized costs are included in other investments on the Statutory Statement of Financial Position. Amounts receivable and payable are accrued as adjustments to investment income and included in the Statutory Statement of Financial Position as investment and insurance amounts receivable. Gains and losses on these contracts, including any unamortized cost, are recognized upon termination and are deferred and amortized through the IMR over the remaining life of the associated cap or floor agreement. At December 31, 1998, the Company had agreements with notional amounts of $355.0 million. The Company's credit risk exposure on these agreements is limited to the unamortized costs of $0.5 million. The fair values of these instruments were $1.6 million at December 31, 1998. At December 31, 1997, the Company did not have any open interest rate caps or floor agreements.
Subsidiaries of Massachusetts Mutual Life Insurance Company ----------------------------------------------------------- CM Assurance Company CM Benefit Insurance Company C.M. Life Insurance Company MassMutual Holding Company MassMutual of Ireland, Limited MML Bay State Life Insurance Company MML Distributors, LLC MassMutual Mortgage Finance, LLC
Subsidiaries of MassMutual Holding Company ------------------------------------------ GR Phelps & Co., Inc. MassMutual Holding Trust I MassMutual Holding Trust II MassMutual Holding MSC, Inc. MassMutual International, Inc. MML Investor Services, Inc.
Subsidiaries of MassMutual International, Inc. ---------------------------------------------- Compensa de Seguros de Vida S.A. - 33.5% MassLife Seguros de Vida (Argentina) S. A. MassMutual International (Bermuda) Ltd. Mass Seguros de Vida (Chile) S. A. - 33.5% MassMutual International (Luxembourg) S. A.