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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,
2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission file number: 33-45123
C.M. LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
| Connecticut |
|
06-1041383 |
| (State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
140 Garden Street, Hartford, Connecticut 06154
(Address of principal executive offices)
(Zip Code)
(860) 987-6500
(Registrant’s telephone number,
including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(1) Yes X No
(2) Yes
X No
APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes
No
APPLICABLE ONLY TO CORPORATE ISSUERS
Registrant has 12,500 shares of common stock outstanding on June 30, 2002, all of which are owned by Massachusetts Mutual Life Insurance Company.
The Registrant meets the conditions set forth in General Instruction H(1) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
1
C.M. LIFE INSURANCE COMPANY
| Part I |
|
Financial Information |
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Item 1: |
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Financial Statements |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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Item 2: |
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12 |
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Item 3: |
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22 |
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| Part II |
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Other Information |
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Item 1: |
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Legal Proceedings |
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None |
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Item 2: |
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Changes in Securities and Use of Proceeds |
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Not Applicable |
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Item 3: |
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Defaults Upon Senior Securities |
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Not Applicable |
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Item 4: |
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Submission of Matters to a Vote of Security Holders |
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Not Applicable |
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Item 5: |
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Other Information |
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None |
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Item 6: |
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23 |
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23 |
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24 |
2
PART I
Item 1
C.M. LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF FINANCIAL POSITION
| |
|
June 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
|
(Unaudited |
) |
|
|
|
|
| |
|
($ In Millions Except for Par Value) |
| Assets: |
| Bonds |
|
$ |
1,299.9 |
|
|
$ |
1,165.7 |
|
| Mortgage loans |
|
|
357.4 |
|
|
|
329.0 |
|
| Policy loans |
|
|
134.3 |
|
|
|
132.4 |
|
| Other investments |
|
|
52.5 |
|
|
|
24.2 |
|
| Cash and short-term investments |
|
|
350.5 |
|
|
|
209.6 |
|
| |
|
|
|
|
|
|
|
|
| Total invested assets |
|
|
2,194.6 |
|
|
|
1,860.9 |
|
| Investment and insurance amounts receivable |
|
|
50.5 |
|
|
|
72.6 |
|
| Deferred income taxes |
|
|
8.1 |
|
|
|
7.1 |
|
| Transfers receivable from separate accounts |
|
|
112.7 |
|
|
|
123.7 |
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| |
|
|
|
|
|
|
|
|
| |
|
|
2,365.9 |
|
|
|
2,064.3 |
|
| Separate account assets |
|
|
3,263.5 |
|
|
|
3,317.5 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
5,629.4 |
|
|
$ |
5,381.8 |
|
| |
|
|
|
|
|
|
|
|
| Liabilities: |
| Policyholders’ reserves and funds |
|
$ |
2,095.0 |
|
|
$ |
1,753.4 |
|
| Policyholders’ claims and other benefits |
|
|
10.1 |
|
|
|
7.0 |
|
| Payable to parent |
|
|
44.5 |
|
|
|
45.0 |
|
| Federal income taxes |
|
|
11.3 |
|
|
|
22.5 |
|
| Asset valuation and other investment reserves |
|
|
17.3 |
|
|
|
16.1 |
|
| Other liabilities |
|
|
29.1 |
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32.4 |
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| |
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|
|
|
|
|
|
|
| |
|
|
2,207.3 |
|
|
|
1,876.4 |
|
| Separate account liabilities |
|
|
3,263.5 |
|
|
|
3,317.5 |
|
| |
|
|
|
|
|
|
|
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| Total liabilities |
|
|
5,470.8 |
|
|
|
5,193.9 |
|
| |
|
|
|
|
|
|
|
|
| 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 |
|
|
198.8 |
|
|
|
198.8 |
|
| Surplus |
|
|
(42.7 |
) |
|
|
(13.4 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholder’s equity |
|
|
158.6 |
|
|
|
187.9 |
|
| |
|
|
|
|
|
|
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|
| Total liabilities and shareholder’s equity |
|
$ |
5,629.4 |
|
|
$ |
5,381.8 |
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| |
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|
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|
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|
See condensed notes to statutory financial statements.
3
PART I
Item 1 (continued)
C.M. LIFE INSURANCE COMPANY STATUTORY STATEMENTS OF INCOME
(Unaudited)
| |
|
Three Months Ended June 30, |
|
| |
|
2002
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|
2001
|
|
| |
|
(In Millions) |
|
| Revenue: |
| |
| Premium income |
|
$ |
483.6 |
|
|
$ |
351.1 |
|
| Net investment income |
|
|
34.4 |
|
|
|
28.3 |
|
| Fees and other income |
|
|
22.6 |
|
|
|
24.9 |
|
| |
|
|
|
|
|
|
|
|
| Total revenue |
|
|
540.6 |
|
|
|
404.3 |
|
| |
|
|
|
|
|
|
|
|
| Benefits and expenses: |
| |
| Policyholders’ benefits and payments |
|
|
172.8 |
|
|
|
120.4 |
|
| Addition to policyholders’ reserves and funds |
|
|
317.5 |
|
|
|
217.8 |
|
| Operating expenses |
|
|
40.2 |
|
|
|
38.5 |
|
| Commissions |
|
|
37.4 |
|
|
|
23.0 |
|
| State taxes, licenses and fees |
|
|
5.0 |
|
|
|
4.0 |
|
| Federal income taxes (benefit) |
|
|
(11.5 |
) |
|
|
2.9 |
|
| |
|
|
|
|
|
|
|
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| Total benefits and expenses |
|
|
561.4 |
|
|
|
406.6 |
|
| |
|
|
|
|
|
|
|
|
| Net loss from operations |
|
|
(20.8 |
) |
|
|
(2.3 |
) |
| |
|
|
|
|
|
|
|
|
| Net realized capital gain (loss) |
|
|
22.0 |
|
|
|
(2.4 |
) |
| |
|
|
|
|
|
|
|
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| Net income (loss) |
|
$ |
1.2 |
|
|
$ |
(4.7 |
) |
| |
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|
See condensed notes to statutory financial statements.
4
PART I
Item 1 (continued)
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF INCOME (Unaudited)
| |
|
Six Months Ended June 30, |
|
| |
|
2002
|
|
|
2001
|
|
| |
|
(In Millions) |
|
| Revenue: |
| |
| Premium income |
|
$ |
915.9 |
|
|
$ |
686.6 |
|
| Net investment income |
|
|
65.0 |
|
|
|
58.4 |
|
| Fees and other income |
|
|
43.8 |
|
|
|
54.5 |
|
| |
|
|
|
|
|
|
|
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| Total revenue |
|
|
1,024.7 |
|
|
|
799.5 |
|
| |
|
|
|
|
|
|
|
|
| Benefits and expenses: |
| |
| Policyholders’ benefits and payments |
|
|
305.6 |
|
|
|
232.6 |
|
| Addition to policyholders’ reserves and funds |
|
|
610.7 |
|
|
|
444.5 |
|
| Operating expenses |
|
|
76.8 |
|
|
|
83.1 |
|
| Commissions |
|
|
62.3 |
|
|
|
57.7 |
|
| State taxes, licenses and fees |
|
|
10.2 |
|
|
|
7.3 |
|
| Federal income tax benefit |
|
|
(4.9 |
) |
|
|
(4.5 |
) |
| |
|
|
|
|
|
|
|
|
| Total benefits and expenses |
|
|
1,060.7 |
|
|
|
820.7 |
|
| |
|
|
|
|
|
|
|
|
| Net loss from operations |
|
|
(36.0 |
) |
|
|
(21.2 |
) |
| |
|
|
|
|
|
|
|
|
| |
| Net realized capital gain |
|
|
15.2 |
|
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(20.8 |
) |
|
$ |
(21.0 |
) |
| |
|
|
|
|
|
|
|
|
See condensed notes to statutory financial statements.
5
PART I
Item 1 (continued)
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY (Unaudited)
| |
|
Six Months Ended June 30, |
|
| |
|
2002
|
|
|
2001
|
|
| |
|
(In Millions) |
|
| |
| Shareholder’s equity, beginning of year, as previously reported |
|
$ |
187.9 |
|
|
$ |
146.7 |
|
| |
| Cumulative effect of the change in statutory accounting principles |
|
|
— |
|
|
|
11.2 |
|
| |
|
|
|
|
|
|
|
|
| Shareholder’s equity, beginning of year, as adjusted |
|
|
187.9 |
|
|
|
157.9 |
|
| |
| Increases (decreases) due to: |
|
|
|
|
|
|
|
|
| Net loss |
|
|
(20.8 |
) |
|
|
(21.0 |
) |
| Change in net unrealized capital gains (losses) |
|
|
0.3 |
|
|
|
(5.3 |
) |
| Change in asset valuation and other investment reserves |
|
|
(1.2 |
) |
|
|
3.2 |
|
| Change in non-admitted assets |
|
|
(9.8 |
) |
|
|
10.8 |
|
| Change in reserve valuation basis |
|
|
1.2 |
|
|
|
— |
|
| Other |
|
|
1.0 |
|
|
|
0.5 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
(29.3 |
) |
|
|
(11.8 |
) |
| |
|
|
|
|
|
|
|
|
| Shareholder’s equity, end of period |
|
$ |
158.6 |
|
|
$ |
146.1 |
|
| |
|
|
|
|
|
|
|
|
See condensed notes to statutory financial statements.
6
PART I
Item 1 (continued)
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOWS (Unaudited)
| |
|
Six Months Ended June 30, |
|
| |
|
2002
|
|
|
2001
|
|
| |
|
(In Millions) |
|
| Operating activities: |
|
|
|
|
|
|
|
|
| |
| Net loss |
|
$ |
(20.8 |
) |
|
$ |
(21.0 |
) |
| Addition to policyholders’ reserves, funds and policy benefits, net of transfers to separate accounts
|
|
|
357.0 |
|
|
|
125.3 |
|
| Net realized capital gain |
|
|
(15.2 |
) |
|
|
(0.2 |
) |
| Change in investment and insurance amounts receivable |
|
|
22.1 |
|
|
|
33.7 |
|
| Change in federal income taxes payable |
|
|
(11.2 |
) |
|
|
(1.4 |
) |
| Other changes |
|
|
(10.9 |
) |
|
|
18.8 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
321.0 |
|
|
|
155.2 |
|
| |
|
|
|
|
|
|
|
|
| Investing activities: |
|
|
|
|
|
|
|
|
| |
| Loans and purchases of investments |
|
|
(498.4 |
) |
|
|
(333.4 |
) |
| Sales and maturities of investments and receipts from repayment of loans |
|
|
318.3 |
|
|
|
167.9 |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(180.1 |
) |
|
|
(165.5 |
) |
| |
|
|
|
|
|
|
|
|
| Increase (decrease) in cash and short-term investments |
|
|
140.9 |
|
|
|
(10.3 |
) |
| |
| Cash and short-term investments, beginning of year |
|
|
209.6 |
|
|
|
115.4 |
|
| |
|
|
|
|
|
|
|
|
| Cash and short-term investments, end of period |
|
$ |
350.5 |
|
|
$ |
105.1 |
|
| |
|
|
|
|
|
|
|
|
See condensed notes to statutory financial statements.
7
Part I
Item 1 (Continued)
C.M. Life Insurance Company
Condensed Notes to Statutory Financial Statements June 30, 2002
(Unaudited)
C.M. Life Insurance Company (“the Company” or “C.M.
Life”), is a wholly-owned stock life insurance subsidiary of Massachusetts Mutual Life Insurance Company (“MassMutual” or the “parent”). The Company is primarily engaged in the sale of life insurance and annuities,
principally flexible premium universal life insurance, variable life insurance and variable annuity products and distributes these products through career agents.
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities
and Exchange Commission. These financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the Company’s audited statutory financial statements for the year
ended December 31, 2001. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the Company’s December 31, 2001 audited statutory financial statements, have been omitted from these interim financial
statements. These unaudited interim financial statements should be read in conjunction with the audited statutory financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K, for the year ended December 31,
2001.
1. Summary of Accounting Practices
The accompanying statutory financial statements have been prepared in conformity with the statutory accounting practices, except as to form, of the National Association of
Insurance Commissioners (“NAIC”) and the accounting practices prescribed or permitted by the State of Connecticut Insurance Department and are different in some respects from financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The more significant differences are as follows: (a) acquisition costs, such as commissions and other variable 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) 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, estimated gross margin method, and appropriate estimates of future mortality, morbidity and interest assumptions; (c)
bonds are generally carried at amortized cost, whereas GAAP generally requires they be reported at fair value; (d) deferred income taxes, which provide for book/tax temporary differences, are subject to limitation and are charged directly to
shareholder’s equity, whereas GAAP would include deferred taxes as a component of net income; (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; (f) assets are reported as “admitted asset” value and “non-admitted assets” are excluded through a charge against surplus, while
under GAAP “non-admitted assets” are recorded, net of any valuation allowance; and (g) reinsurance recoverables on unpaid losses are reported as a reduction of policyholders’ reserves and funds, while under GAAP, they are reported as
an asset. Certain balances have been reclassified to conform to current year presentation.
8
Effective January 1, 2002, the Company adopted Actuarial Guideline XXXIV for minimum guaranteed death benefits included
in variable annuity contracts, resulting in a $1.2 million increase in shareholder’s equity.
The preparation
of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities. Management must also make estimates and
assumptions that affect the amounts of revenues and expenses during the reporting period. Future events, including changes in the levels of mortality, morbidity, interest rates, persistency and asset valuations, could cause actual results to differ
from the estimates used in these financial statements.
In the Company’s opinion, these financial statements
contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly its statutory financial position in accordance with statutory accounting principles, as of June 30, 2002 and December 31, 2001, and the results of
its operations, changes in shareholder’s equity, and its cash flows for the three and six month periods ended June 30, 2002 and 2001.
2. Related Party Transactions
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 $84.0 million and $84.7 million for the six month periods ended June 30, 2002 and 2001, respectively and $45.1
million and $39.3 million for the three month periods ended June 30, 2002 and 2001, 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 participates in variable annuity exchange programs with its
parent whereby certain MassMutual variable annuity contract holders can make a non-taxable exchange of their contract for an enhanced C.M. Life variable annuity contract. The Company received premiums of $163.4 million and $114.9 million for the six
month periods ended June 30, 2002 and June 30, 2001, respectively related to these exchange programs. For the three month periods ended June 30, 2002 and 2001, the Company received premiums of $79.4 million and $62.1 million, respectively. The
Company has an agreement with MassMutual to compensate MassMutual for the lost revenue associated with the exchange of these contracts. As a result of these exchanges, the Company has recorded commissions payable of $1.2 million as of June 30, 2002
and $0.4 million as of December 31, 2001, and has paid $4.9 million and $5.0 million for the three and six month periods ended June 30, 2002 and June 30, 2001, respectively.
The Company cedes a portion of its life insurance business to MassMutual and other insurers in the normal course of business. The Company’s retention limit per
individual insured is $15.0 million; the portion of the risk exceeding the retention limit is reinsured with other insurers, including MassMutual. The Company is contingently liable with respect to ceded reinsurance in the event any reinsurer is
unable to fulfill its contractual obligations.
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 and a modified coinsurance adjustment based upon experience. In return, MassMutual cedes the Company a stipulated expense allowance, death
and surrender benefits. The Company retains the assets and related reserves for payment of future benefits on the ceded policies. For the six month periods ended June 30, 2002 and 2001, premium income of $12.3 million and $13.4 million respectively,
was ceded to MassMutual. For the three month periods ended June 30, 2002 and 2001, premium income of $5.8
9
million and $6.2 million respectively was ceded to MassMutual from the Company. For the six month periods ended June 30, 2002 and 2001, policyholders’ benefits of $18.2 million and $18.1
million respectively, were ceded to the Company. For the three month periods ended June 30, 2002 and 2001, policyholders’ benefits of $10.5 million and $7.6 million respectively, were ceded to the Company. For the six month periods ended June
30, 2002 and 2001, commissions and expense allowances of $4.0 million and $4.3 million were ceded to the Company from MassMutual, while for the three month periods ended June 30, 2002 and 2001, commissions and expense allowances ceded to the Company
were $1.9 million and $2.0 million respectively. A modified coinsurance adjustment of $11.8 million and $16.8 million was ceded by the Company to MassMutual for the six month periods ended June 30, 2002 and 2001, respectively. For the three month
periods ended June 30, 2002 and 2001, a modified coinsurance adjustment of $6.9 million and $7.5 million was ceded to MassMutual.
The Company also has a stop-loss agreement with MassMutual under which the Company cedes claims which, in the aggregate, exceed .32% of the covered volume for any year, with maximum coverage of $25.0 million above the aggregate
limit. The aggregate limit was $69.2 million as of June 30, 2002, and $70.0 million as of December 31, 2001, and it was not exceeded in any of the periods being reported. Premium income of $0.6 million was ceded to MassMutual for the respective six
month periods ended June 30, 2002 and 2001 and premium income of $0.3 million was ceded for the respective three month periods ended June 30, 2002 and 2001.
The Company also has a coinsurance agreement with MassMutual, whereby the Company substantially cedes 100% of the premiums on new issues of certain universal life policies. In return, MassMutual cedes
the Company a stipulated expense allowance and death and surrender benefits. MassMutual holds the assets and related reserves for payment of future benefits on the ceded policies. For the six month periods ended June 30, 2002 and 2001, premium
income of $15.5 million and $29.5 million respectively, was ceded to MassMutual. For the three month periods ended June 30, 2002 and 2001, $8.0 million and $11.8 million, respectively of premiums were ceded to MassMutual. For the six month periods
ended June 30, 2002 and 2001, policyholders’ benefits of $1.5 million and $2.3 million were ceded to the Company. For the three month periods ended June 30, 2002 and June 30, 2001, policyholders’ benefits of $0.1 million and $2.3 million,
respectively, were ceded to the Company. Commissions and expense allowances of $3.0 million and $19.1 million were ceded to the Company from MassMutual for the six month periods ended June 30, 2002 and 2001, respectively. Commissions and expense
allowances of $1.6 million and $6.5 million were ceded to the Company for the three month periods ended June 30, 2002 and 2001, respectively. Additionally, an experience refund of $1.2 million and $3.6 million was ceded to the Company from
MassMutual for the six month periods ended June 30, 2002 and 2001. For the three month periods ended June 30, 2002 and 2001, experience refunds of $0.5 million and $1.9 million were ceded to the Company.
10
3. Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
were as follows:
| |
|
June 30, 2002
|
|
|
December 31, 2001
|
|
| |
|
(In Millions) |
|
| Deferred Tax Assets: |
|
|
|
|
|
|
|
|
| Policy acquisition costs |
|
$ |
52.1 |
|
|
$ |
47.7 |
|
| Policy reserves |
|
|
14.8 |
|
|
|
11.2 |
|
| Investment and other items |
|
|
2.0 |
|
|
|
2.1 |
|
| |
|
|
|
|
|
|
|
|
| Total deferred tax assets |
|
|
68.9 |
|
|
|
61.0 |
|
| Non-admitted deferred tax assets |
|
|
(57.9 |
) |
|
|
(51.0 |
) |
| |
|
|
|
|
|
|
|
|
| Admitted deferred tax assets |
|
|
11.0 |
|
|
|
10.0 |
|
| |
|
|
|
|
|
|
|
|
| Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
| Investment items |
|
|
1.9 |
|
|
|
1.7 |
|
| Policy reserves |
|
|
1.0 |
|
|
|
1.1 |
|
| Expense items |
|
|
— |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
| Total deferred tax liabilities |
|
|
2.9 |
|
|
|
2.9 |
|
| |
|
|
|
|
|
|
|
|
| Net admitted deferred tax assets |
|
$ |
8.1 |
|
|
$ |
7.1 |
|
| |
|
|
|
|
|
|
|
|
11
Part I
Item 2
Management’s Discussion and Analysis Of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with (i) the
unaudited statutory financial statements and condensed notes to statutory financial statements included elsewhere in this filing, (ii) the audited statutory financial statements and notes thereto, and (iii) the Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Forward-Looking Information
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 as forward-looking. Forward-looking
statements are those not based on historical information, but rather, relate 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.
Forward-looking statements are based upon estimates and assumptions. These statements may change due to business uncertainties, economic uncertainties, competitive
uncertainties, and other factors, many of which are beyond the Company’s control. Additionally, the Company’s business decisions are also subject to change. The Company does not publicly update or revise any forward-looking statements as a
result of new information, future developments or otherwise.
12
Results of Operations
For the Three Months Ended June 30, 2002
Compared to the Three Months Ended June 30, 2001
The following table sets forth the components of the Company’s net income (loss):
| |
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Revenue: |
| Premium income |
|
$ |
483.6 |
|
|
$ |
351.1 |
|
|
38 |
% |
| Net investment income |
|
|
34.4 |
|
|
|
28.3 |
|
|
22 |
|
| Fees and other income |
|
|
22.6 |
|
|
|
24.9 |
|
|
(9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
540.6 |
|
|
|
404.3 |
|
|
34 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Benefits and Expenses: |
| Policyholders’ benefits and payments |
|
|
172.8 |
|
|
|
120.4 |
|
|
43 |
|
| Addition to policyholders’ reserves and funds |
|
|
317.5 |
|
|
|
217.8 |
|
|
46 |
|
| Commissions |
|
|
37.4 |
|
|
|
23.0 |
|
|
63 |
|
| Operating expenses, state taxes, licenses and fees |
|
|
45.2 |
|
|
|
42.5 |
|
|
6 |
|
| Federal income taxes (benefit) |
|
|
(11.5 |
) |
|
|
2.9 |
|
|
NM |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total benefits and expenses |
|
|
561.4 |
|
|
|
406.6 |
|
|
38 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net loss from operations |
|
|
(20.8 |
) |
|
|
(2.3 |
) |
|
NM |
|
| Net realized capital gain (loss) |
|
|
22.0 |
|
|
|
(2.4 |
) |
|
NM |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
1.2 |
|
|
$ |
(4.7 |
) |
|
126 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
NM = not meaningful, or in excess of 200%.
Net income for the second quarter 2002 is primarily attributable to increased capital gains, a federal income tax benefit and an increase in net investment income, partially offset by earnings strain
associated with the continued growth of the Company’s annuity and life insurance businesses, an increase in annuity reserves for guaranteed minimum death benefits, higher death benefits, and lower expense allowances on reinsurance ceded. It is
generally expected that the increase in policyholder reserves and costs related to the production of new business will exceed the amount of premium earned in the first year of a policy, causing operating losses. Management expects losses may
continue in conjunction with future growth.
Costs related to the production of new business includes commissions
and other variable producer compensation, management fees assessed by MassMutual and business issuance/processing costs, which include policy assembly and other customer service activities, including fluctuations in the market value of variable
funds during the processing of deposits. During the second quarter of 2002, costs related to the production of new business as a percentage of premiums were lower than the second quarter of 2001 primarily due to a larger portion of new business that
was generated through variable annuity exchange programs with MassMutual contract owners. The production costs associated with new business, generated by the exchange programs is lower than the costs associated with business written directly by the
Company. See “Related Party Transactions” footnote for further information on the annuity exchange programs with MassMutual.
13
The following table sets forth premium data for the Company’s products:
| |
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Premium Income: |
|
|
|
|
|
|
|
|
|
|
|
| Universal, variable, term & corporate owned life insurance |
|
$ |
140.1 |
|
|
$ |
117.5 |
|
|
19 |
% |
| Annuities and supplementary contracts |
|
|
368.2 |
|
|
|
263.0 |
|
|
40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total direct premiums |
|
|
508.3 |
|
|
|
380.5 |
|
|
34 |
|
| Less: reinsurance ceded |
|
|
(24.7 |
) |
|
|
(29.4 |
) |
|
(16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
483.6 |
|
|
$ |
351.1 |
|
|
38 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Premium income increased in the second quarter of 2002 primarily
due to increases in premium received from annuity products as well as life insurance products. Increases in annuity product premium over 2001 were primarily due to an increase in the sale of fixed annuity products, the implementation of a new
variable annuity product in July 2001, and an increase in the premium received from the variable annuity exchange program with MassMutual. Life insurance premium increased over second quarter 2001, primarily due to increased universal life insurance
sales.
The Company’s business mix has shifted in the second quarter of 2002 as a result of increasing sales
of annuity products. Annuity products were 76% of total premium income during 2002, compared to 75% in 2001. Universal life and other life products comprised 24% of total premium income during 2002, compared to 25% in 2001.
The components of net investment income are set forth in the table below:
| |
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Gross Investment Income: |
| Bonds |
|
$ |
22.6 |
|
|
$ |
19.0 |
|
|
19 |
% |
| Mortgage loans |
|
|
6.2 |
|
|
|
5.9 |
|
|
5 |
|
| Policy loans |
|
|
2.4 |
|
|
|
2.3 |
|
|
4 |
|
| Other investments |
|
|
3.3 |
|
|
|
(0.2 |
) |
|
NM |
|
| Cash and short-term investments |
|
|
1.3 |
|
|
|
2.2 |
|
|
(41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total gross investment income |
|
|
35.8 |
|
|
|
29.2 |
|
|
23 |
|
| Investment expenses |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
(13 |
) |
| Interest Maintenance Reserve (“IMR”) amortization |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
NM |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net investment income |
|
$ |
34.4 |
|
|
$ |
28.3 |
|
|
22 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
NM = not meaningful, or in excess of 200%.
Net investment income increased in the second quarter of 2002 primarily due to a 34% increase in average invested assets, partially offset
by a decrease in the annualized gross yield for the investment portfolio to 6.9% in 2002 from 7.6% in 2001. Increased asset levels are primarily due to overall business growth and capital contributions received in December 2001. Annualized gross
investment yields decreased as older, higher yielding bonds matured and were replaced with new bonds purchased in a lower yield environment. After expenses and IMR amortization, net annualized yields were 6.6% and 7.3% for the three month periods
ended June 30, 2002 and 2001, respectively. Fluctuations in market conditions will impact future investment results.
The annualized yield on each investment category, before federal income taxes, is calculated as: (a) two times gross investment income (b) divided by the sum of assets at the beginning of the period and assets at the end of the
period, less gross investment income, (c) multiplied by four.
14
The increase during the second quarter of 2002 in gross investment income from
bonds is primarily due to a 31% increase in average bonds invested, partially offset by a decrease in the annualized yield, from 7.8% in 2001 to 7.1% in 2002. The increase in gross investment income from other investments is primarily due to
increases in derivative instruments holdings. The decrease in gross investment income from cash and short-term investments is primarily due to a decrease in the annualized yield.
The components of fees and other income are set forth in the table below:
| |
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
2001
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Fees |
|
$ |
19.2 |
|
$ |
16.3 |
|
18 |
% |
| Commissions and expense allowances on reinsurance ceded |
|
|
3.4 |
|
|
8.6 |
|
(60 |
) |
| |
|
|
|
|
|
|
|
|
|
| Total fees and other income |
|
$ |
22.6 |
|
$ |
24.9 |
|
(9 |
)% |
| |
|
|
|
|
|
|
|
|
|
Fees decreased in the second quarter of 2002 as compared to
2001, primarily due to a decrease in commissions and expense allowances on reinsurance ceded attributable to a decrease in the activity related to the coinsurance agreements between MassMutual and the Company. This decrease was partially
offset by higher administrative fees collected from the management of investment accounts. See “Related Party Transactions” footnote for a more detailed description of the Company’s modified coinsurance agreements with MassMutual.
Policyholders’ benefits and payments increased in 2002, primarily due to an increase in variable annuity
surrenders, benefit payments on individual annuity products, and death benefits, partially offset by lower life insurance surrenders. Individual annuity surrenders increased $40.2 million, or 39%, annuity benefit payments increased $7.3 million, or
166%, and death benefits increased $4.9 million, or 73%, from the prior year.
Addition to policyholders’
reserves and funds includes transfers to and from the separate accounts, based upon policyholder elections, and a $143.1 million increase in the change in general account reserves. The increase in the change in reserves for the three months ended
June 30, 2002 is primarily attributable to higher premiums, partially offset by decreases in separate account transfers. The $143.1 million increase in the change in general account reserves for the three month period ended June 30, 2002 is
primarily attributable to a $112.4 million increase in the change in annuity reserves and a $30.7 million increase in the change in life reserves. This increase in the change in annuity reserves is primarily due to increases in the reserves as a
result of increased sales of fixed annuity products and a 2002 increase in reserves for guaranteed minimum death benefits. Separate account withdrawals and other transfers increased in the three months ended June 30, 2002 by $17.0 million, while
separate account deposits decreased by $27.7 million.
Commissions increased in the second quarter of 2002
primarily due to increased annuity and life insurance sales. Annuity product commissions increased 193% during the second quarter of 2002 as compared to the prior year. 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.
The increase in
operating expenses, state taxes, licenses and fees for the three months ended June 30, 2002 is primarily due to increased annuity and life insurance sales. Management fees charged by MassMutual include increases in agency allowances and other
expenses associated with the production of new business.
The decrease in federal income taxes for the three
months ended June 30, 2002 is primarily attributable to a decrease in taxable income of $44.2 million and the timing of the tax deductibility of acquisition costs and reserves between periods. Management projects that in the current year the
15
Company will be able to utilize all available tax benefits as the Company will be included in the
consolidated MassMutual tax return for 2002.
Realized capital gains, after transfers to the Interest Maintenance
Reserve (“IMR”), increased $24.4 million, primarily due to increased marked to market adjustments on derivative instruments.
For the Six Months Ended June 30, 2002
Compared to the Six Months Ended June
30, 2001
The following table sets forth the components of the Company’s net loss:
| |
|
Six Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Revenue: |
| Premium income |
|
$ |
915.9 |
|
|
$ |
686.6 |
|
|
33 |
% |
| Net investment income |
|
|
65.0 |
|
|
|
58.4 |
|
|
11 |
|
| Fees and other income |
|
|
43.8 |
|
|
|
54.5 |
|
|
(20 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
1,024.7 |
|
|
|
799.5 |
|
|
28 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
| Benefits and Expenses: |
| Policyholders’ benefits and payments |
|
|
305.6 |
|
|
|
232.6 |
|
|
31 |
|
| Addition to policyholders’ reserves and funds |
|
|
610.7 |
|
|
|
444.5 |
|
|
37 |
|
| Commissions |
|
|
62.3 |
|
|
|
57.7 |
|
|
8 |
|
| Operating expenses, state taxes, licenses and fees |
|
|
87.0 |
|
|
|
90.4 |
|
|
(4 |
) |
| Federal income tax benefit |
|
|
(4.9 |
) |
|
|
(4.5 |
) |
|
9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total benefits and expenses |
|
|
1,060.7 |
|
|
|
820.7 |
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net loss from operations |
|
|
(36.0 |
) |
|
|
(21.2 |
) |
|
70 |
|
| Net realized capital gain (loss) |
|
|
15.2 |
|
|
|
0.2 |
|
|
NM |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(20.8 |
) |
|
$ |
(21.0 |
) |
|
(1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
NM = not meaningful, or in excess of 200%.
The decrease in net loss for the first half of 2002, is primarily attributable to increased realized capital gains and investment income,
partially offset by earnings strain associated with the continued growth of the Company’s annuity and life insurance businesses, higher death benefits, and lower expense allowances on reinsurance ceded. It is generally expected that the
increase in policyholder reserves and costs related to the production of new business will exceed the amount of premium earned in the first year of a policy, causing operating losses. Management expects losses may continue in conjunction with future
growth.
Costs related to the production of new business include commissions and other variable producer
compensation, management fees assessed by MassMutual and business issuance/processing costs, which include policy assembly and other customer service activities, including fluctuations in the market value of variable funds during the processing of
deposits. During the first half of 2002, costs related to the production of new business as a percentage of premiums were lower than the first half of 2001, primarily because a larger portion of new business was generated through variable annuity
exchange programs with MassMutual contract owners. The production costs associated with new business, generated by the exchange programs is lower than the costs associated with business written directly by the Company. See “Related Party
Transactions” footnote for further information on the annuity exchange programs with MassMutual.
16
The following table sets forth premium data for the Company’s products:
| |
|
Six Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Premium Income: |
|
|
|
|
|
|
|
|
|
|
|
| Universal, variable, term & corporate owned life insurance |
|
$ |
262.1 |
|
|
$ |
247.5 |
|
|
6 |
% |
| Annuities and supplementary contracts |
|
|
703.9 |
|
|
|
505.2 |
|
|
39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total direct premiums |
|
|
966.0 |
|
|
|
752.7 |
|
|
28 |
|
| Less: reinsurance ceded |
|
|
(50.1 |
) |
|
|
(66.1 |
) |
|
(24 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
915.9 |
|
|
$ |
686.6 |
|
|
33 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Premium income increased in 2002 primarily due to increases in
premium received from annuity products as well as life insurance products. Increases in annuity product premium over 2001 were primarily due to an increase in sales of fixed annuity products, the implementation of a new variable annuity product in
July, 2001 and an increase in the premium received from the variable annuity exchange programs with MassMutual. Life insurance premium increased in 2002 primarily due to increased universal life insurance sales.
The Company’s business mix has shifted as a result of increasing sales of annuity products. Annuity products were 77% of total
premium income during 2002, compared to 74% in 2001. Universal life and other life products comprised 23% of total premium income during 2002, compared to 26% in 2001.
The components of net investment income are set forth in the table below:
| |
|
Six Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Gross Investment Income: |
|
|
|
|
|
|
|
|
|
|
|
| Bonds |
|
$ |
43.7 |
|
|
$ |
36.9 |
|
|
18 |
% |
| Mortgage loans |
|
|
12.1 |
|
|
|
10.9 |
|
|
11 |
|
| Policy loans |
|
|
4.9 |
|
|
|
4.7 |
|
|
4 |
|
| Other investments |
|
|
4.6 |
|
|
|
3.6 |
|
|
28 |
|
| Cash and short-term investments |
|
|
2.5 |
|
|
|
4.5 |
|
|
(44 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total gross investment income |
|
|
67.8 |
|
|
|
60.6 |
|
|
12 |
|
| Investment expenses |
|
|
(1.9 |
) |
|
|
(1.5 |
) |
|
27 |
|
| Interest Maintenance Reserve (“IMR”) amortization |
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net investment income |
|
$ |
65.0 |
|
|
$ |
58.4 |
|
|
11 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Net investment income increased during the first six months of 2002
due to a 34% increase in average invested assets, partially offset by a decrease in the annualized gross yield for the investment portfolio to 6.8% in 2002 from 8.2% in 2001. Increased asset levels are primarily due to overall business growth and
capital contributions received in December 2001. Annualized gross investment yields decreased as older, higher yielding bonds mature and are replaced with new bonds that have lower yields. After expenses and IMR amortization, net annualized yields
were 6.5% and 7.9%, for the six month periods ended June 30, 2002 and 2001, respectively. Fluctuations in market conditions will impact future investment results.
The annualized yield on each investment category, before federal income taxes, is calculated as: (a) two times gross investment income (b) divided by the sum of assets at
the beginning of the period and assets at the end of the period, less gross investment income, (c) multiplied by two.
17
The increase in 2002 in gross investment income from bonds is primarily due to a
29% increase in average bonds invested, partially offset by a decrease in the annualized yield to 7.2% for 2002 from 7.9% in 2001. The increase in gross investment income from mortgage loans is primarily due to an 18% increase in average mortgage
loan investments, partially offset by a decrease in the annualized yield from 7.6% to 7.2% for 2002. The increase in gross investment income from other investments is primarily due to increases in derivative instruments holdings. The decrease in
gross investment income from cash and short-term investments is primarily due to the decrease in the annualized yield.
The components of fees and other income are set forth in the table below:
| |
|
Six Months Ended June 30,
|
|
| |
|
2002
|
|
2001
|
|
% Change
|
|
| |
|
($ In Millions) |
|
| Fees |
|
$ |
36.8 |
|
$ |
30.9 |
|
19 |
% |
| Commissions and expense allowances on reinsurance ceded |
|
|
7.0 |
|
|
23.6 |
|
(70 |
) |
| |
|
|
|
|
|
|
|
|
|
| Total fees and other income |
|
$ |
43.8 |
|
$ |
54.5 |
|
(20 |
)% |
| |
|
|
|
|
|
|
|
|
|
Fees decreased in the first six months of 2002 as compared to 2001,
primarily due to a decrease in commissions and expense allowances on reinsurance ceded attributable to a decrease in the activity related to the coinsurance agreements between MassMutual and the Company. This decrease in fees and other income was
partially offset by higher administrative fees collected from the management of investment accounts. See “Related Party Transactions” footnote for a more detailed description of the Company’s modified coinsurance agreements with
MassMutual.
Policyholders’ benefits and payments increased in 2002, primarily due to an increase in annuity
surrenders, benefit payments on individual annuity products, and death benefits, partially offset by lower life insurance surrenders. Individual annuity surrenders increased $51.3 million, or 27%, annuity benefit payments increased $15.5 million, or
172%, and death benefits increased $9.6 million, or 66%, from the prior year.
Addition to policyholders’
reserves and funds includes transfers to and from the separate accounts, based upon policyholder elections, and a $214.1 million increase in the change in general account reserves. The increase in 2002 is primarily attributable to higher annuity
premiums, partially offset by decreases in separate account transfers. The $214.1 million increase in 2002 in the change in general account reserves is primarily attributable to a $167.7 million increase in the change in annuity reserves and a $46.4
million increase in the change in life reserves. This increase in the change in annuity reserves is primarily due to increases in the reserves of the Company’s fixed annuity products. Separate account withdrawals and other transfers increased
in 2002 by $34.4 million, while separate account deposits decreased by $11.2 million.
Commissions increased
primarily due to increased sales of annuity insurance products. Annuity product commissions increased $15.7 million, or 108%, which offset the $11.1 million decrease in life insurance commissions. 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.
Operating expenses, state taxes, licenses and fees decreased 4% to $87.0 million in 2002. This is primarily attributable to the slow down of new life insurance business growth. Management fees charged by MassMutual include increases
in agency allowances and other expenses associated with the production of new business.
The increase in
the federal income tax benefit for the six months ended June 30, 2002 is primarily attributable to the increased net loss from operations of $15.2 million and the timing of the tax
18
deductibility of acquisition costs and reserves. The taxable loss increased $3.0 million from $11.0 million as of June 30, 2001 to $14.0 million
as of June 30, 2002. Management projects that in the current year the Company will be able to utilize all available tax benefits as the Company will be included in the consolidated MassMutual tax return for 2002.
Realized capital gains, after transfers to the Interest Maintenance Reserve (“IMR”), increased $15.0 million, primarily due to
increased marked to market adjustments on derivative instruments.
Statement of Financial Position
Assets
Total assets at June 30, 2002 increased by $247.6 million, or 5%, from December 31, 2001. This increase is primarily due to growth in the Company’s general account, partially offset by decreases in the Company’s separate
account assets.
General account assets increased 15% from December 31, 2001, primarily due to increases in all
categories of invested assets, partially offset by a reduction in investment and insurance amounts receivable and transfers from separate accounts. These increases in investments were primarily the result of the Company’s continued growth and
the investment of cash flow generated by the Company’s operations. The portfolio of general account invested assets is managed to support product liabilities in light of yield, liquidity and diversification considerations. The general
investment account portfolio does not include the Company’s separate account invested assets.
Bonds
increased 12% from December 31, 2001. During the six months ended June 30, 2002, $406.3 million of bonds were purchased, while maturities and sales proceeds totaled $265.7 million.
The increase in mortgage loans is primarily attributed to a continuation of the Company’s strategy of increasing investments in mortgage loans due to favorable market
conditions. For the six months ended June 30, 2002, $71.7 million of mortgage loans were issued, while there were $41.0 million of mortgage loan sales and repayments.
Other investments, consisting of real estate, interest rate swaps, financial options, interest rate caps and floors, preferred stocks and common stocks increased 117% from
December 31, 2001. This increase is primarily due to increases in common stock, preferred stock, receivable for securities sold, and an increase in the market value of interest rate swaps.
Investments and insurance amounts receivable decreased 30% from December 31, 2001. This decrease is primarily due to a $14.8 million reduction in amounts recoverable from
reinsurance, and a $4.7 million decrease in life premiums and annuity considerations due, partially offset by a $2.9 million increase in investment income due and accrued.
Liabilities
As with assets,
the 2002 increase in total liabilities occurred in the general account, partially offset by a decrease in separate account liabilities. Total liabilities at June 30, 2002, increased $276.9 million, or 5%, from December 31, 2001.
Policyholders’ reserves and funds at June 30, 2002, increased 19%, primarily due to new sales of annuity and life
insurance products, interest credited and net transfers from separate accounts.
Federal income tax payable
decreased 50% from year end 2001, primarily due to the increase in the federal income tax benefit for the six months ended June 30, 2002. The increase in the federal income tax benefit is primarily due to the increased net loss from operations.
19
Other liabilities decreased 10% from December 31, 2001, primarily due to a $19.4
million reduction in remittances and items not allocated, partially offset by an increase of $13.2 million in payables for securities purchased and a $4.2 million increase in drafts outstanding.
Shareholder’s Equity
The decrease in shareholder’s equity was primarily due to:
| |
• |
|
a net loss of $20.8 million, |
| |
• |
|
a decrease of $9.8 million due to a change in non-admitted assets, and |
| |
• |
|
a decrease of $1.2 million due to a change in the asset valuation and other investment reserves, |
partially offset by:
| |
• |
|
an increase of $1.2 million due to a change in reserve valuation basis, |
| |
• |
|
an increase of $1.0 million due to a change in deferred income taxes, and |
| |
• |
|
an increase of $0.3 million due to a change in unrealized capital gains on general account assets. |
20
Liquidity and Capital Resources
Liquidity
Cash and short-term
investments increased $140.9 million, or 67%, from the prior year end as a result of net cash provided by operating activities exceeding cash used in investing activities.
Net cash provided by operating activities increased $165.8 million, or 107%, for the six months ended June 30, 2002. This increase is primarily due to increased fixed
annuity sales, higher investment income, and lower federal income taxes, partially offset by increased expenses and commissions and lower fees and other income.
Loans and purchases of investments increased 49%, while sales and maturities of investments and receipts from repayments of loans increased 90%, from the prior year, primarily due to increased bond
activity caused by changes in market conditions.
Capital Resources
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. MassMutual’s management is committed to keeping a prudent amount of surplus in the Company.
As of June 30, 2002, the Company’s total adjusted capital (“TAC”), as defined by the NAIC, was $175.8 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 management believes that there is no single appropriate means of measuring RBC needs, management feels that the NAIC
approach to RBC measurement is reasonable, and the Company manages its capital position with significant attention to maintaining adequate total adjusted capital relative to RBC. The Company’s total adjusted capital was in excess of all annual
RBC standards at December 31, 2001. NAIC RBC does not establish quarterly standards with which TAC can be compared. Management believes that the Company enjoys a strong capital position in light of its risks and the Company is well positioned to
meet policyholder and other obligations.
21
Part I
Item 3
The Company’s market
risk and financial instrument holdings as of June 30, 2002, are similar to its market risk and financial instrument holdings as of December 31, 2001, a description of which is included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2001. However in the second quarter 2002, the Company’s investments in bonds, cash and short-term investments and interest rate swaps grew, which changed its exposure to changes in interest rates and the notional amounts of
its swap positions.
At December 31, 2001, a hypothetical 10% parallel increase in interest rates would decrease
the net fair value of the Company’s financial instruments by $29.6 million. As of June 30, 2002, a hypothetical 10% parallel increase in interest rates would decrease the net fair value of the Company’s financial instruments by $44.0
million. Based upon the information and assumptions used in the Company’s asset/liability analysis, the absolute level of interest rates has remained the same; however, the portfolio has both grown and lengthened in duration.
A change in interest rates of 10% would not have a material impact on the Company’s future earnings or cash flows. A
significant portion of the Company’s liabilities are not considered financial instruments and are excluded from the above analysis. Because of the Company’s asset/liability management, a corresponding change in the fair values of these
liabilities, based on the present value of estimated cash flows, would significantly offset the net decrease in fair value estimated above.
The Company also utilizes derivative financial instruments to manage market risks, primarily to reduce interest rate and duration imbalances determined in asset/liability analyses. The Company uses
interest rate swap agreements and options to reduce interest rate exposures arising from mismatches between assets and liabilities and to modify portfolio profiles to manage other risks identified.
The Company had outstanding swaps with notional amounts of $781.7 million at June 30, 2002, and $594.9 million at December 31, 2001. The
Company’s credit risk exposure was limited to the fair value of $6.7 million at June 30, 2002 and December 31, 2001, respectively.
22
Part II
Item 6
C.M. Life Insurance Company Exhibits and Reports on Form 8-K
June 30, 2002
(a) Exhibit Index
| Exhibit No.
|
|
Description of Exhibits
|
| |
| 99.1 |
|
Certification of the Principal Executive Officer, Robert J. O’Connell, of C.M. Life Insurance Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 99.2 |
|
Certification of the Principal Financial Officer, Brent C. Nelson, of C.M. Life Insurance Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant with the Securities and Exchange Commission during the six
month period ended June 30, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
C.M. LIFE INSURANCE COMPANY (Registrant) |
| |
| Date: August 13, 2002 |
|
By: |
|
/s/ ROBERT J.
O’CONNELL
|
| |
|
|
|
Robert J. O’Connell President and Chief Executive Officer (Officer) |
| |
| Date: August 13, 2002 |
|
By: |
|
/s/ BRENT C.
NELSON
|
| |
|
|
|
Brent C. Nelson Senior Vice
President and Controller
(Principal Financial Officer) |
23