C.M. Life's principal office, which is owned by MassMutual, is located at 140 Garden Street, Hartford, Connecticut.
The following summary financial information has been derived from the audited statutory financial statements. The results for past accounting periods are not necessarily indicative of the results to be expected for any future period.
C.M. LIFE INSURANCE COMPANY SELECTED STATUTORY FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS)
Certain prior year amounts have been reclassified to conform with current year presentation. The preceding selected financial data of C.M. Life should be read in conjunction with the statutory financial statements and notes thereto and the related management's discussion and analysis.
Premium income, net of reinsurance ceded, increased $53,525 thousand to $314,372 thousand in 1996 from $260,847 thousand in 1995. The 20.5% growth in premiums is attributable to increased sales of the Universal Life Enterprise Plus product, which increased by 41.0%, and variable annuity products which increased by 26.9%. Sales of single premium deferred annuity products decreased 90.5%, due to less demand in the market place for fixed rate annuity products.
The following table sets forth premium, sales, and other information for C.M. Life's products.
Addition to policyholder reserves, funds and separate accounts decreased $1,079 thousand to $210,324 thousand in 1996 from $211,403 thousand in 1995. Reserve decreases due to the release of reserves upon death withdrawal or surrender of contracts was largely offset by increases in reserves due to strong sales of life and annuity products.
Operating expenses and commissions increased $24,197 thousand to $70,435 thousand in 1996 from $46,238 thousand in 1995. The increase is attributable to increased expenses associated with the production of new business and the modification of C.M. Life's variable annuity underwriting agreements with G.R. Phelps and Co. ,Inc. (G.R. Phelps) and MML Distributors, both affiliated companies. Effective March 1, 1996, C.M. Life modified its underwriting agreements such that it would pay all future commissions relating to variable annuity contracts and would also retain rights to all future contract fees and charges related to these contracts. Prior to the contract modification, G.R. Phelps and MML Distributors paid variable annuity commissions in exchange for the rights to future contract fees and charges related to these contracts. C.M. Life expects the future revenue on these contracts to exceed acquisition costs.
Federal income tax expense decreased $3,090 thousand to $6,286 thousand from $9,376 thousand as a result of decreased taxable income. Taxable income decreased $9,190 thousand to $18,536 thousand in 1996 from $27,725 thousand in 1995. The change in taxable income is primarily attributable to the $15,810 thousand decrease in net gain from operations offset by book tax differences of $6,620 thousand. These book tax differences include the timing of the deductibility of acquisition costs and other items.
Premium income, net of reinsurance ceded, increased $9,671 thousand to $260,847 thousand in 1995 from $251,176 thousand in 1994. Premiums for CM Windows, a single premium deferred annuity product, increased $9,412 thousand or 99.3% to $18,894 thousand in 1995 from $9,482 thousand in 1994. The increase is attributable to higher interest rates and increased promotional efforts, which increased demand for single premium deferred annuity products. Premiums for life insurance products increased $16,928 thousand to $64,652 thousand in 1995 from $47,724 thousand in 1994, due to higher sales of universal life policies, primarily the Enterprise Plus product. Variable annuity premiums decreased $16,669 thousand or 8.6%, due to less demand in the market place for variable products in the first half of 1995.
Policy benefits and payments, net of reinsurance ceded, increased by $14,880 thousand from $44,033 thousand in 1994 to $58,913 thousand in 1995. Surrender benefits increased by $11,969 thousand, to $40,028 thousand in 1995 from $28,059 thousand in 1994. The increase in surrender benefits is primarily attributable to variable annuity products. Death claims, net of reinsurance, increased $5,183 thousand over 1994 due to growth in the in- force life insurance block of business.
Income tax expense decreased by $4,873 thousand over 1994. This decrease is attributable to lower taxable income in 1995 versus 1994. Taxable income was $27,726 thousand and $38,660 thousand in 1995 and 1994 respectively. C.M. Life's federal income tax expense is based on income which is currently taxable. The differences between pre-tax book income and taxable income are primarily due to lower tax basis reserves for future policy benefits and other book tax differences associated with the timing of the deductibility of acquisition costs.
Total assets increased by $306,785 thousand or 19.7% to $1,866,571 thousand at December 31, 1996 from $1,559,786 thousand at year end 1995. Much of this growth was due to continued growth in C.M. Life's separate investment accounts, which assets increased by $248,310 thousand.
Total liabilities increased in 1996 by $310,240 thousand or 21.5% to $1,756,827 thousand from $1,446,587 thousand in 1995. As with assets, most of this growth occurred in the separate investment accounts. Growth in the separate investment account's assets and liabilities is attributable to increased variable annuity sales and deposits and appreciation in the separate account's underlying investments.
C.M. Life's liquid assets include substantial Treasury holdings, short-term money market investments, stocks and marketable long-term fixed income securities. Cash and short-term investments totaled $63,688 thousand at December 31, 1996.
The liquidity position of C.M. Life is proactively managed on an ongoing basis to meet cash needs while minimizing adverse impacts on investments returns. A variety of scenarios are analyzed by modeling potential demands on liquidity, taking into account the provisions of C.M. Life's policies and contracts in force, C.M. Life's cash flow position and the volume of cash and readily marketable securities in C.M. Life's portfolio.
C.M. Life also employs sophisticated quantitative asset/liability cash flow management techniques to optimize and control the investment return and liquidity for each portfolio, taking into account the distinguishing liability characteristics of each portfolio.
A primary liquidity concern for C.M. Life is the risk of early contractholder and policyholder withdrawal. The most affected products are individual life insurance and individual deferred annuities. Personal life insurance policies are less susceptible to withdrawal than annuity contracts because annuities are primarily used as investment vehicles, while personal life policies are used to fulfill longer term financial planning needs. C.M. Life closely evaluates and manages its liquidity risk.
C.M. Life's exposure to early withdrawal for annuity products as of the dates indicated can be described as follows:
During 1996, 1995 and 1994, C.M. Life's operations consisted of one business segment which was principally the sale of universal life insurance and annuity products. C.M. Life is not dependent upon any single customer and no single customer accounted for more than 10% of revenues in 1996, 1995 and 1994.
The C.M. Life's operating expenses are affected by inflation. A large portion of C.M. Life's operating expenses consists of salaries which are subject to wage increases, at least partially affected by the rate of inflation. C.M. Life's continuing efforts to control expenses may reduce the impact of inflation on operating expenses.
The maturities of portfolio bonds are considered to be sufficiently diversified and are carefully monitored and managed in light of C.M. Life's liquidity needs. See "Liquidity and Capital Resources".
Bonds consist primarily of government securities and high-quality marketable corporate securities. At December 31, 1996 and 1995, publicly traded bonds comprised 66.0% and 57.2% of the bond portfolio, respectively, and privately placed bonds comprised the remainder. Substantially all of the publicly traded and privately placed bonds held by C.M. Life are evaluated by the NAIC's Securities Valuation Office ("SVO") which assigns securities to one of six NAIC investment categories with Category 1 securities being the highest quality and Category 6 securities being the lowest quality. Categories 1 and 2 are investment grade, Category 3 is medium quality and Categories 4, 5 and 6 are non-investment grade.
The table below sets forth, as of the dates indicated, the NAIC Securities Valuation Office (SVO) ratings for C.M. Life's bond portfolio (including short-term securities) and the equivalent public rating agency designations. The bond portfolio consists primarily of high grade securities. At December 31, 1996 and 1995, 93.7% and 91.9%, respectively, of the portfolio was invested in NAIC Categories 1 and 2 securities
The following table sets forth by industry category the carrying value and percent of total of the bond portfolio, including short-term securities, as of December 31, 1996.
All mortgage loans are fixed rate commercial mortgages on completed, income producing properties.
During 1996 and 1995, all renewed bullet loans were performing assets prior to renewal and all loan renewals reflected market conditions. Past experience with regard to bullet maturities, however, is not necessarily indicative of future results.
C.M. Life actively monitors and manages its mortgage loan portfolio and also directly services the portfolio. Company personnel perform or review all aspects of loan origination and portfolio management, including lease analysis, property transfer analysis, economic and financial reviews, tenant analysis and oversight of default and bankruptcy proceedings. All properties are revalued each year and reinspected either each year or every other year based on internal quality ratings. C.M. Life uses the following criteria to determine whether a current or potential problem exists: ( i) borrower bankruptcies, (ii) major tenant bankruptcies, (iii) requests for restructuring, (iv) delinquent tax payments, (v) late payments, (vi) loan-to- value or debt service coverage deficiencies and (vii) overall vacancy levels.
As of December 31, 1996 and 1995, C.M. Life's policy loans were $132,942 thousand and $126,014 thousand, respectively. Policy loans, as a percentage of invested assets, were 13.0% and 12.9% at December 31, 1996 and 1995, respectively. Variable interest rate policy loans were 98.6% of total policy loans at December 31, 1996 and 1995. For loans with variable interest rates, the rates are adjusted annually based upon changes in a corporate bond index.
The life insurance industry is highly competitive. There are more than 1,700 life insurance companies in the United States, many of which offer insurance products similar to those marketed by C.M. Life. In addition to competition within the industry, insurers are increasingly facing competition from non- traditional sources in the financial services business, including mutual funds, banks, securities brokerage houses and other financial services entities, many of which provide alternative investment and savings vehicles for consumers. Legislative initiatives proposed at the federal level would, if enacted, reorder the financial services industry, thereby changing the environment in which C.M. Life competes.
MassMutual, C.M. Life's parent, has received the highest ratings from A.M. Best Company, Inc. (A++), Standard & Poor's Corporation (AAA), and Duff & Phelps Credit Rating Company (AAA), as well as a rating of Aa1 by Moody's Investors Service, Inc. (the highest in its "excellent" category). In late 1995 and early 1996, all four of these agencies conducted thorough reviews of MassMutual's ratings in light of the Connecticut Mutual Life Insurance Company merger. In all four cases, the 1995 ratings for MassMutual were reaffirmed.
In addition, as previously discussed, C.M. Life has a modified coinsurance quota-share reinsurance agreement on certain universal life policies and a stop-loss agreement with MassMutual.
C.M. Life is organized as a Connecticut stock life insurance company, and is subject to Connecticut laws governing insurance companies. C.M. Life is regulated and supervised by the State of Connecticut Insurance Commissioner. By March 1 of every year, C.M. Life must prepare and file an annual statement, in a form prescribed by the State of Connecticut Insurance Department, as of December 31 of the preceding year. The Commissioner and his or her agents have the right at all times to review or examine C.M. Life's books and assets. A full examination of C.M. Life's operations is conducted periodically according to the rules and practices of the NAIC. C.M. Life is also subject to the insurance laws of the states in which it is authorized to do business, to various federal and state securities laws and regulations, and to regulatory agencies which administer those laws and regulations.
C.M. Life is licensed to transact its insurance business in, and is subject to regulation and supervision by the Commonwealth of Puerto Rico, the District of Columbia and all 50 states of the United States, except New York. The extent of such regulation varies, but most jurisdictions have laws and regulations requiring the licensing of insurers and their agents and setting standards of solvency and business conduct to be maintained by licensed insurance companies, and may regulate withdrawal from certain markets. In addition, statutes and regulations usually require the approval of policy forms and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. C.M. Life is also subject to regulation of its accounting methodologies and is required to file detailed annual financial statements with supervisory agencies in each of the jurisdictions in which it does business. Each of its operations and accounts is also subject to examination by such agencies at regular intervals.
C.M. Life is subject to guaranty fund assessments in all states in which it does business. The guaranty associations are organized to pay contractual obligations under insurance policies issued by impaired or insolvent insurers. C.M. Life believes such assessments in excess of amounts accrued will not materially affect its financial position, results of operations or liquidity. In 1996, C.M. Life elected not to admit $1,621 thousand of guaranty fund premium tax offset receivable relating to prior assessments.
In addition to regulation of its insurance business, C.M. Life is subject to various types of federal and state laws and regulations affecting the conduct, taxation and other aspects of their businesses. Certain policies and contracts offered by C.M. Life are subject to various levels of regulation under the federal securities laws administered by the Securities and Exchange Commission.
C.M. Life Insurance Company Notes to Financial Statements December 31, 1996, 1995 and 1994
C.M. Life Insurance Company (the Company) is a wholly owned stock life insurance subsidiary of Massachusetts Mutual Life Insurance Company ("MassMutual"). On March 1, 1996, the operations of the Company's former parent, Connecticut Mutual Life Insurance Company, were merged into MassMutual. The Company is primarily engaged in the sale of flexible premium universal life insurance and variable annuity products. The Company is licensed to transact business in all states except New York.
The following is a description of C.M. Life's current principal accounting policies and practices.
For purposes of the statutory Statement of Cash Flows, the Company considers all highly liquid short-term investments with a maturity of twelve months or less from the date of purchase to be cash and short- term investments.
Provision for federal income taxes is based upon C.M. Life's best 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 an effective tax rate which is other than the statutory tax rate.
C.M. Life also has a stop-loss agreement with MassMutual, with maximum coverage at $25,000 thousand, under which C.M. Life cedes claims which, in aggregate, exceed $28,080 thousand in 1996, $24,245 thousand in 1995, and $18,348 thousand in 1994. For each of the years, the limit was not exceeded. C.M. Life paid approximately $400 thousand, $602 thousand, and $435 thousand in premiums under the agreement in 1996, 1995 and 1994, respectively.
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 less valuation reserves held.
The carrying value of investments which were non-income producing for the preceding twelve months was $2,774 thousand at December 31, 1996. C.M. Life had restructured loans with book values of $21,867 thousand and $17,128 thousand at December 31, 1996 and 1995, respectively. The loans typically have been modified to defer a portion of the contracted interest payments to future periods. Interest deferred to future periods totaled $178 thousand in 1996, $171 thousand in 1995 and $183 thousand in 1994.
The withdrawal characteristics of the policyholder's reserves and funds, including separate accounts, and the invested assets which support them at December 31, 1996 are illustrated below:
C.M. Life is subject to insurance guaranty fund laws in the states in which it does business. These laws assess insurance companies amounts to be used to pay benefits to policyholders and claimants of insolvent insurance companies. Many states allow these assessments to be credited against future premium taxes. C.M. Life believes such assessments in excess of amounts accrued will not materially affect its financial position, results of operations or liquidity. In 1996, C.M. Life elected not to admit $1,621 thousand of guaranty fund premium tax offset receivable relating to prior assessments.
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 judgments which, in the aggregate, would materially affect C.M. Life's financial position or results of operations.
Certain 1995 and 1994 amounts have been reclassified to conform with the current year presentation.
Subsidiaries of MassMutual International ---------------------------------------- MassLife Seguros de Vida (Argentina) S.A. MassMutual International (Bermuda) Ltd. Mass Seguros de Vida (Chile) S.A. MassMutual International (Luxemburg) S.A.
We have audited the statutory financial statements and the financial statement schedules of C.M. Life Insurance Company as of December 31, 1996 listed in Item 14(a) 1 and 2 of this Form 10-K. The 1996 financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedules based on our audit.
As described in Note 1 to the financial statements, the Company prepared these financial statements using statutory accounting practices of the National Association of Insurance Commissioners and the 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 determinable at this time, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the third paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of C.M. Life Insurance Company at December 31, 1996 and the results of its operations and its cash flows for the year then ended.
In our originally issued report dated February 15, 1996, we expressed an opinion that the 1995 financial statements, prepared using accounting practices prescribed or permitted by the Insurance Department of the State of Connecticut, present fairly, in all material respects, the financial position of C.M. Life Insurance Company as of December 31, 1995, and the results of its operations, and its cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As described in Note 1 to the financial statements, pursuant to the provisions of Statement of Financial Accounting Standards No. 120 (SFAS No. 120), Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts, financial statements of mutual life insurance enterprises for periods ending on or before December 31, 1996, prepared using accounting practices prescribed or permitted by insurance regulators (statutory financial statements) are no longer considered presentations in conformity with generally accepted accounting principles when presented for comparative purposes with the enterprise's financial statements for periods subsequent to the effective date of SFAS No. 120. Accordingly, our present opinion on the presentation of the 1995 financial statements in accordance with generally accepted accounting principles, as presented herein, is different from that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of C.M. Life Insurance Company as of December 31, 1995, or the results of its operations and it cash flows for each of the two years in the period ended December 31, 1995.
ARTHUR ANDERSEN, LLP Hartford, Connecticut February 15, 1996 (Except with respect to the matter discussed in Note 1, as to which the date is March 4, 1996)