Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-K
_______
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[_] 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 33-85988
C.M. LIFE INSURANCE COMPANY
Incorporated under the laws IRS Employer
of the State of Connecticut Identification No. 06-104383
140 Garden Street, Hartford, Connecticut 06154
Telephone Number: Area Code 860-987-6500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________
Indicate by check mark whether the registrant (1) has filed all reports 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 ____
-----
Registrant has 12,500 shares of common stock outstanding on March 25, 1998, all
of which are owned by Massachusetts Mutual Life Insurance Company.
1
PART I
ITEM 1. BUSINESS
- -----------------
C.M. Life Insurance Company ("C.M. Life" or "The Company"), 140 Garden Street,
Hartford, Connecticut, 06154, is a stock life insurance company. It was
chartered by a Special Act of the Connecticut General Assembly on April 25,
1980. It is principally engaged in the sale of life insurance and annuities,
primarily flexible premium universal life insurance and variable annuity
products, and is licensed to sell life insurance and annuities in Puerto Rico,
the District of Columbia and all 50 states except New York. Effective March 1,
1996, C.M. Life became a wholly owned stock life insurance subsidiary of
Massachusetts Mutual Life Insurance Company ("MassMutual") when the operations
of C.M. Life's former parent, Connecticut Mutual Life Insurance Company were
merged with and into MassMutual.
Founded in 1851, MassMutual is the seventh largest mutual life insurance company
in the United States, based on 1996 statutory assets. At December 31, 1997,
MassMutual had $57.6 billion in total assets and $4.2 billion in total adjusted
capital. MassMutual's primary business is ordinary life insurance, with over
2.7 million policyholders and approximately $202 billion of life insurance in
force at December 31, 1997. MassMutual also provides, directly or through its
subsidiaries, a wide range of annuity and disability products and pension and
pension related products and services, as well as investment services to
individuals, corporations and other institutions, in all 50 states of the United
States, Puerto Rico and the District of Columbia. MassMutual, its subsidiaries
or its affiliates, are also licensed to transact business in six provinces of
Canada, Chile, Argentina, Bermuda and Luxembourg, although its operations in
such jurisdictions are not material.
The principal lines of business of MassMutual and its subsidiaries are (i)
Individual Line Operations, which includes individual protection products,
including life and disability; and individual accumulation products, which
provide annuities, large corporate market and investment products and services;
(ii) Retirement Services, which provides group pension investment products and
administrative services, primarily to sponsors of tax qualified retirement
plans; (iii) MassMutual Investment Group, which provides investment advisory
services to MassMutual, it's affiliates, and various outside individual and
institutional investors through MassMutual's investment management staff and its
principal subsidiaries.
MassMutual's and its subsidiaries' direction and operations are guided by a
statement of corporate vision. C.M. Life's operations are managed so as to
maintain a financially strong and efficient enterprise. C.M. Life's long-term
objectives are to maintain corporate financial strength, enhance policyholder
value, and generate and sustain growth. C.M. Life has pursued these objectives
by emphasizing profitability through refined product pricing, sophisticated
asset/liability management, rigorous expense control, prudent underwriting
standards, the adoption of efforts to improve persistency and retention levels,
and continued commitment to the high credit quality of its general account
investment portfolio.
With regard to profitability, management believes that net gain from operations,
rather than net income, is the most relevant statutory measure of operating
results for C.M. Life. Net gain from operations represents the excess of income
derived from C.M. Life's lines of business over the costs of operating those
lines (after deducting taxes). Net income is net gain from operations adjusted
by any realized capital gains or losses (net of taxes). Management's investment
philosophy and practice do not emphasize capital gains as a recurring source of
income or capital and does not manage its investment portfolio to realize gains
for non-economic purposes.
The financial information of C.M. Life included in this filing consists of
statutory financial statements, which except as to form, have been prepared 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").
The accompanying statutory financial statements are different in some respects
from GAAP financial statements. The more significant differences are as
follows: (a) acquisition costs, such as commissions and other costs directly
2
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
valued 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.
Products
--------
C.M. Life sells term, universal life and variable annuity products. The
Regular Series Universal Life product is an interest-sensitive, flexible-
premium, universal life policy. An additional universal life product is an
Employee Series Universal Life product sold as a flexible-premium universal
life policy for use in employer-sponsored sales. These products are sold
in all states except New York. Also available for sale is Universal Life
Enterprise Plus sold as a flexible-premium, non-participating interest-
sensitive universal life policy. In 1996, Enterprise Survivorship
Universal Life was introduced.
The annuity products include CM Windows, Panorama Plus Variable Annuity
("Panorama Plus"), Panorama Premier Variable Annuity ("Panorama Premier"),
and OFFITBANK Variable Annuity ("OFFITBANK VA").
CM Windows is a single-premium deferred annuity paying a fixed interest
rate guaranteed for the life of the contract. This product is not
registered with the Securities and Exchange Commission ("SEC"). CM Windows
may be sold by any licensed agent or broker who is contracted with C.M.
Life. As of December 31, 1997, CM Windows was available for sale in 47
states and the District of Columbia.
Panorama Plus is distributed by MML Distributors, LLC ("MML Distributors"),
formerly Connecticut Mutual Financial Services, LLC and MML Investors
Services, Inc. ("MMLISI") and allows for investment in Panorama Plus
Separate Account or C.M. Life's General Account. The Separate Account
invests in shares of Panorama Series Fund, Inc. and in shares of
Oppenheimer Variable Account Funds. The General Account provides for a
guaranteed interest rate and the protection of principal. Interest rates
are declared quarterly and are guaranteed never to fall below 3 percent per
year. An investment in Panorama Plus may be divided among the investment
portfolios offered by the Separate Account, an account maintained
separately from a life insurance company's general accounts to help manage
the funds used for nonguaranteed insurance products the General Account, or
any combination thereof. This product is registered with the SEC.
Panorama Plus is sold by licensed representatives of broker-dealers who
maintain a current selling group agreement with MML Distributors, as well
as, registered representatives of MMLISI. As of December 31, 1997,
Panorama Plus was available in 49 states and the District of Columbia.
Panorama Premier is distributed by MML Distributors and MMLISI, and allows
for investment in the Panorama Premier segment of C.M. Multi-Account A, a
separate account of C.M. Life, or C.M. Life's General Account. The
Panorama Premier segment of the Separate Account invests in shares of
Panorama Series Fund, Inc. and shares of Oppenheimer Variable Account
Funds. The General Account provides for a guaranteed interest rate and the
protection of principal. Interest rates are declared quarterly and are
guaranteed never to fall below 3 percent per year. An investment in
Panorama Premier may be divided among the investment portfolios of the
Panorama Premier Division of the Separate Account, the General Account, or
any combination thereof. This product is registered with the SEC.
Panorama Premier is sold by licensed representatives of broker-dealers who
maintain a current selling group agreement with MML Distributors, as well
as registered representatives of MMLISI. As of December 31, 1997, Panorama
Premier was available for sale in 48 states, Puerto Rico and the District
of Columbia.
OFFITBANK VA is distributed by MML Distributors and allows for investment
in the OFFITBANK Sement of C.M. Multi-Account A , a separate account of
C.M. Life. The OFFITBANK segment of the Separate Account invests in shares
of the OFFITBANK Variable Insurance Fund, Inc. and shares of Oppenheimer
Variable Account Funds. An investment in OFFITBANK VA may be divided among
the investment portfolios of the OFFITBANK segment of the Separate Account.
This product is registered with the SEC. OFFITBANK VA is
3
sold by licensed representatives of broker-dealers who maintain a current
selling group agreement with MML Distributors. As of December 31, 1997,
OFFITBANK VA was available for sale in 46 states and the District of
Columbia.
Reinsurance
-----------
C.M. Life cedes a portion of its life insurance business to MassMutual and
other insurers in the normal course of business. C.M. Life's retention
limit per individual insured is $4.0 million; the portion of the risk
exceeding the retention limit is reinsured with other insurers. C.M. Life
is contingently liable with respect to ceded reinsurance in the event any
reinsurer is unable to fulfill its contractual obligations.
C.M. Life has a modified coinsurance quota-share reinsurance agreement with
MassMutual whereby C.M. Life cedes 75% of the premiums on certain universal
life policies. In return MassMutual pays C.M. Life a stipulated expense
allowance, death and surrender benefits, and a modified coinsurance
adjustment. Reserves for payment of future benefits and related assets for
the ceded policies are retained by C.M. Life.
C.M. Life also has a stop-loss agreement with MassMutual, with maximum
coverage at $25.0 million, under which C.M. Life cedes claims that, in
aggregate, exceed $35.6 million in 1997, $28.1 million in 1996, and $24.2
million in 1995. For each of these years, the limit was not exceeded.
C.M. Life paid approximately $1.0 million, $0.4 million, and $0.6 million
in premiums under the agreement in 1997, 1996 and 1995, respectively.
Competition
-----------
The life insurance industry is highly competitive. There are more than
1,700 life insurance companies in the United States, many of which offer
individual 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.
C.M. Life's management believes its financial strength, agent skill and
historical product performance provide competitive advantages for the
products it offers in these markets. C.M. Life received the following
ratings from the various rating agencies, A.M. Best Company, Inc. (A++),
Standard and Poor's Corporation (AAA) and Duff & Phelps Credit Rating
Company (AAA), as well as rating of Aa1 by Moody's Investor Service, Inc.
(the highest in its "excellent" category).
During 1997, MassMutual's, C.M. Life's parent, financial strength continued
to be recognized favorable by the rating agencies. MassMutual 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).
Each rating agency independently assigns ratings based on its own separate
review and takes into account a variety of factors (which are subject to
change) in making its decision. Accordingly, there can be no assurance of
the ratings that will be afforded C.M. Life in the future.
Transactions with MassMutual
----------------------------
MassMutual and C.M. Life have an agreement whereby MassMutual for a fee will
furnish C.M. Life, as required, operating facilities, human resources,
computer software development and managerial services. Investment and
administrative services are provided to C.M. Life pursuant to a management
services agreement with MassMutual. Fees incurred under the terms of the
agreement were $39.7 million and $45.9 million in 1997 and 1996
respectively. Similar arrangements were in place with Connecticut Mutual
Life Insurance Company, C.M. Life's former parent, prior to its merger with
MassMutual. Fees incurred in 1995 under the arrangement with Connecticut
Mutual Life Insurance Company were $34.0 million.
4
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.
Prior to March 1, 1996, C.M. Life had an underwriting agreement with its
affiliates GR Phelps and MML Distributors. Under this agreement, the
affiliates paid commissions and received the cash flows from variable
annuity contracts. Effective March 1, 1996, this agreement was modified,
and C.M. Life began paying all commissions and retained the right to the
related future cash flows from contract fees.
Regulation
----------
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 Insurance Department of the State of
Connecticut ("The 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.
All 50 states of the United States, the District of Columbia and Puerto Rico
have insurance guaranty fund laws requiring insurance companies doing
business within those jurisdictions to participate in guaranty associations
which are organized to pay contractual obligations under insurance policies
(and certificates issued under group insurance policies) issued by impaired
or insolvent life insurance companies. These associations levy assessments
(up to prescribed limits) on all member insurers in a particular state on
the basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent insurer
is engaged. Some states permit member insurers to recover assessments paid
through full or partial premium tax offsets, usually over a period of years.
C.M. Life believes such assessments in excess of amounts accrued will not
materially affect its financial position, results of operations or
liquidity. C.M. Life elected not to admit $1.3 million and $1.6 million of
guaranty fund premium tax recoveries relating to prior assessments in 1997
and 1996, respectively.
C.M. Life is also subject to risk-based capital (RBC) requirements
promulgated by the NAIC. The RBC Model Act gives state insurance
commissioners explicit regulatory authority to require various actions by,
or take various actions against, insurance companies whose total adjusted
capital does not meet the RBC standards. C.M. Life's total adjusted capital
was well in excess of all RBC standards at December 31, 1997 and 1996.
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 its 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's management believes it is in compliance, in all material
respects, with all applicable laws and regulations.
5
New Accounting Pronouncements
-----------------------------
The NAIC is currently engaged in an extensive project to codify statutory
accounting principles ("Codification") with a goal of providing a
comprehensive guide of statutory accounting principles for use by insurers
in all states. This comprehensive guide, which has not been approved by the
NAIC or any state insurance department, includes seventy two Statements of
Statutory Accounting Principles ("SSAPs") and is expected to be effective no
earlier than January 1, 1999. The effect of adopting these SSAPs shall be
reported as an adjustment to surplus on the effective date. Management is
currently reviewing the impact of Codification. However, since the SSAPs
have not been finalized, the ultimate impact cannot be determined at this
time.
In June, 1997, the FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", and No. 131,
"Disclosure about Segments of an Enterprise and Related Information", and
are effective for financial statements issued for periods beginning after
December 15, 1997. The adoption of these pronouncements is expected to
impact only the presentation of financial information.
ITEM 2. PROPERTIES
- -------------------
C.M. Life's principal office is located at 140 Garden Street, Hartford,
Connecticut.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
C.M. Life is a defendant in actions arising out of its insurance and investment
operations and is from time to time involved as a party to various governmental
and administrative proceedings. C.M. Life does not believe that any liability
which may result from these actions is likely to have a material adverse effect
on the financial position of C.M. Life.
C.M. Life is not involved in any litigation that is of material importance in
relation to its financial operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during 1997, other
than routine corporate governance matters.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
C.M. Life is a wholly owned subsidiary of Massachusetts Mutual Life Insurance
Company, and as such, there is no market for its common stock.
6
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The financial information of C.M. Life has been prepared on the basis of
Statutory Accounting Practices prescribed or permitted by the Department of
Insurance of the State of Connecticut. The following statutory information for
the years ended and at December 31, 1997, 1996, 1995, 1994 and 1993 has been
derived from C.M. Life's statutory financial statements and have been audited by
Coopers & Lybrand L.L.P., independent accountants for the years 1997 and 1996.
Coopers & Lybrand L.L.P. did not audit the statutory financial statements of
C.M. Life for the years 1995, 1994 and 1993. Those statements were audited by
other auditors. For a description of the accounting principles applicable to
this financial information and certain differences between statutory accounting
practices and GAAP, see below. The information presented below 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 Prospectus. The
results for past accounting periods are not necessarily indicative of the
results to be expected for any future accounting period.
The accompanying statutory financial statements are different in some respects
from GAAP financial statements. 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
valued 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.
7
ITEM 6. SELECTED FINANCIAL DATA
C.M. LIFE INSURANCE COMPANY
SELECTED STATUTORY FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
($ IN MILLIONS)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenue:
Premium income $ 331.3 $ 314.4 $ 260.8 $ 251.2 $180.4
Net investment and other income 72.1 76.4 84.4 81.7 86.5
-------- -------- -------- -------- ------
403.4 390.8 345.2 332.9 266.9
-------- -------- -------- -------- ------
Benefits and expenses:
Policy benefits and payments 100.4 99.0 58.9 42.4 30.8
Additions to policyholder reserves, funds
and separate accounts 190.0 210.3 211.4 230.3 175.9
Operating expenses 49.5 45.4 32.1 14.8 17.5
Commissions 33.5 25.0 14.1 7.4 7.8
State taxes, licenses and fees 3.5 3.2 5.0 4.2 3.0
-------- -------- -------- -------- ------
376.9 382.9 321.5 299.1 235.0
-------- -------- -------- -------- ------
Net gain from operations before federal
Income taxes 26.5 7.9 23.7 33.8 31.9
Federal income taxes 19.0 6.3 9.4 14.2 11.0
-------- -------- -------- -------- ------
Net gain from operations 7.5 1.6 14.3 19.6 20.9
Net realized capital gain (loss) 0.1 0.6 (0.5) (1.8) 0.2
-------- -------- -------- -------- ------
Net income $ 7.6 $ 2.2 $ 13.8 $ 17.8 $ 21.1
======== ======== ======== ======== ======
Assets:
General account $1,122.7 $1,086.9 $1,028.4 $ 912.6 $831.4
Separate account 1,096.5 779.7 531.4 309.7 145.7
-------- -------- -------- -------- ------
Total assets $2,219.2 $1,866.6 $1,559.8 $1,222.3 $977.1
======== ======== ======== ======== ======
Liabilities:
Policyholders' reserves and funds $ 951.0 $ 907.5 $ 867.7 $ 783.8 $715.0
Investment reserves 26.6 21.8 19.9 6.6 6.5
Other liabilities 31.9 47.8 27.6 18.3 22.0
Separate account reserves and liabilities 1,096.5 779.7 531.4 309.7 145.7
-------- -------- -------- -------- ------
Total liabilities 2,106.0 1,756.8 1,446.6 1,118.4 889.2
-------- -------- -------- -------- ------
Capital Stock and Surplus:
Common stock 2.5 2.5 2.5 2.5 2.5
Paid in capital and contributed surplus 43.8 43.8 43.8 43.8 43.8
Unassigned surplus 66.9 63.5 66.9 57.6 41.6
-------- -------- -------- -------- ------
Total capital stock and surplus 113.2 109.8 113.2 103.9 87.9
-------- -------- -------- -------- ------
Total liabilities and capital stock and $2,219.2 $1,866.6 $1,559.8 $1,222.3 $977.1
surplus ======== ======== ======== ======== ======
Total adjusted capital data (1)
Total stockholders' equity $ 113.2 $ 109.8 $ 113.2 $ 103.9 $ 87.9
Asset valuation reserve 22.7 18.5 16.0 6.6 6.6
-------- -------- -------- -------- ------
Total adjusted capital $ 135.9 $ 128.3 $ 129.2 $ 110.5 $ 94.5
======== ======== ======== ======== ======
(1) Defined by the NAIC as surplus plus Asset Valuation Reserve ("AVR").
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 notes thereto and the
related management's discussion and analysis.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
---------------------
For the Year Ended December 31, 1997
------------------------------------
Compared to the Year Ended December 31, 1996
--------------------------------------------
For the year ended December 31, 1997, C.M. Life had a net gain from
operations of $7.5 million, as compared with a net gain of $1.6 million in
1996. The increase of $5.9 million was primarily attributable to increased
sales of Universal and other life products and increased fees received from
the separate accounts partially offset by increased commissions, increased
expenses associated with management services charged by MassMutual and
increased federal income taxes attributable to taxable income in excess of
book income. The increase in fees from separate accounts and the increase
in commissions are primarily attributable to the modification of the
underwriting agreement, discussed below.
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 in return, would 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.
Premium income, net of reinsurance ceded, increased $16.9 million to $331.3
million in 1997 from $314.4 million in 1996. The 5.4% growth in premiums is
attributable to increased sales of Universal and other life products
partially offset by a decrease in variable annuity products of 5.7% from
the prior year. The result reflects a change in CM Life's business mix in
which Universal and other life products comprised 35.5% of total premium
income during 1997 compared to 27.9% in 1996, while annuity products were
64.5% in 1997 compared to 72.1% in 1996. Variable annuity premiums have
declined due to lower sales through the brokerage distribution channel and
a shift in sales through MassMutual's distribution channels from variable
annuity products issued by CM Life to variable annuity products issued by
C.M. Life's affiliate, MML Bay State Life Insurance Company.
The following table sets forth premium, sales, and other information for
C.M. Life's products.
Years Ended December 31,
1997 1996
---- ----
($ In Millions)
Gross Ceded Net Gross Ceded Net
Premium income
Universal and other life $164.4 $(46.9) $ 117.5 $134.2 $(46.5) $ 87.7
Annuities 213.8 - 213.8 $226.7 - 226.7
------ ------ --------- ------- ------- ---------
Total $378.2 $(46.9) $ 331.3 $360.9 $(46.5) $ 314.4
====== ====== ========= ======= ======= =========
Life insurance sales - face amount
Universal and other life $14,188.7 $ 7,113.4
Life insurance in force
Universal and other life $36,147.6 $24,357.4
Number of policies in force
Universal and other life
(in whole units) 136,794 111,138
Net investment and other income decreased $4.3 million to $72.1 million in
1997 from $76.4 million in 1996. Net investment income was level at $75.3
million in 1997 compared to $75.2 million in 1996 as result of a 3.7%
increase in invested assets offset by a decrease in the average gross yield
for the portfolio which was 7.6% in 1997 compared to 7.9% in 1996.
9
The components of net investment income are set forth below.
Years Ended December 31,
1997 1996
---- ----
(In Millions)
Gross Investment Income
Bonds $52.8 $55.4
Common and preferred stock 4.2 2.8
Mortgage loans 5.0 3.8
Policy loans 10.6 10.0
Cash and short-term investments 4.1 4.0
----- -----
Total gross investment income 76.7 76.0
Less: investment expenses 1.4 0.8
----- -----
Net investment income $75.3 $75.2
===== =====
The decrease in gross investment income from bonds and the increase in
mortgage loans reflects a shift in the investments in those assets. The
increase in gross investment income on common stock reflects enhanced
yields on investments in affiliated mutual funds.
Other income decreased $4.4 million to a charge of $3.2 million in 1997
from income of $1.2 million in 1996. This decrease is attributable to
reinsurance activity. The components of other income are primarily
commissions and expense allowances on reinsurance ceded which decreased
$1.0 million to $14.0 million in 1997 from $15.0 million in 1996 from
charges incurred on the modified coinsurance agreement with MassMutual, and
a reserve adjustment on reinsurance ceded (recorded as a charge to other
income) which increased $3.6 million to $17.3 million in 1997 from $13.7
million in 1996.
Policy benefits and payments increased $1.4 million to $100.4 million in
1997 from $99.0 million in 1996. Surrender and annuity benefits increased
$0.5 million and $0.9 million, respectively, essentially due to increased
variable and fixed annuity withdrawals and contract surrenders. The life
insurance lapse rate, which is based upon 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 years at $25.1 million and $25.2
million for 1997 and 1996, respectively.
Addition to policyholder reserves, funds and separate accounts decreased
$20.3 million to $190.0 million in 1997 from $210.3 million in 1996.
Additions to policyholder reserves, funds and separate accounts includes
transfers (to) from the separate account based upon policyholder elections.
The decrease is primarily attributable to a reduction in separate account
deposits and an increase in separate account withdrawals, partially offset
by an increase in fees charged by the general account for assets under
management, which increased due to deposits and market appreciation.
Operating expenses, commissions and state taxes, licenses and fees,
increased $12.9 million to $86.5 million in 1997 from $73.6 million in
1996. The increase is attributable to increased expenses and commissions
associated with the production of new business and the modification of C.M.
Life's variable annuity underwriting agreements with its affiliates, G.R.
Phelps and MML Distributors, discussed above, which also increased
commissions.
Federal income tax expense increased $12.7 million to $19.0 million in 1997
from $6.3 million in 1996. Taxable income increased $31.2 million to $49.7
million in 1997 from $18.5 million in 1996. The increase in taxable income
is primarily attributable to the difference between statutory insurance
reserves and tax reserves and the timing of the tax deductibility of
acquisition costs and other items.
Realized capital gains, after the transfer to the Interest Maintenance
Reserve ("IMR"), which captures after tax realized capital gains and losses
due to changes in interest rates for all types of fixed income investments,
decreased $0.5 million to $0.1 million in 1997 from $0.6 million in 1996.
The decrease in 1997 from 1996 is primarily attributable to gains generated
during the first quarter of 1996 on the sale of common stock
10
investments. The 1997 gain of $3.4 million from bonds were primarily
interest related and was transferred to IMR net of tax.
Net realized capital gains (losses) were comprised of the following:
Years Ended December 31,
1997 1996
---- ----
(In Millions)
Bonds $ 3.4 $ 0.7
Preferred stocks - 0.1
Common stocks - 4.7
Mortgage loans (0.2) (2.2)
Hedging instruments - (0.9)
Federal income taxes (1.1) (1.4)
----- -----
Net realized capital gain
before transfer to IMR 2.1 1.0
Transfer to IMR (2.0) (0.4)
----- -----
Net realized capital gain $ 0.1 $ 0.6
===== =====
As a result of the foregoing factors, net income for 1997 was $7.6 million
compared to $2.2 million in 1996, representing an increase of $5.4 million
or 245.5% increase over prior year.
Results of Operations
---------------------
For the Year Ended December 31, 1996
------------------------------------
Compared to the Year Ended December 31, 1995
--------------------------------------------
For the year ended December 31, 1996, C.M. Life had a net gain from
operations of $1.6 million, as compared with a net gain of $14.3 million in
1995. The decrease of $12.7 million is primarily attributable to increased
sales of Universal Life Enterprise Plus and variable annuity products,
which in the year of issuance, generate commissions and other acquisition
costs which exceed the revenues received. These products are priced to be
profitable over the life of the contract.
Premium income, net of reinsurance ceded, increased $53.6 million to $314.4
million in 1996 from $260.8 million in 1995. The 20.6% growth in premiums
is attributable to increased sales of the Universal Life Enterprise Plus
product, which increased by 41.0%, and variable annuity products which
increased by 26.9%. Sales of single premium deferred annuity products
decreased 90.5%, due to less demand in the market place for fixed rate
annuity products.
The following table sets forth premium, sales and other information for
C.M. Life's products.
Years Ended December 31,
1996 1995
---- ----
($ In Millions)
Premium income
Universal and other life $ 87.7 $ 64.7
Annuities 226.7 196.1
--------- ---------
Total $ 314.4 $ 260.8
========= =========
Life insurance sales - face amount
Universal and other life $ 7,113.4 $ 5,024.4
Life insurance in force
Universal and other life $24,357.4 $19,133.0
Number of policies in force
Universal and other life( in whole units) 111,138 98,033
11
Net investment and other income decreased $7.9 million to $76.5 million in
1996 from $84.4 million in 1995. Other income, which is primarily comprised
of reserve adjustment and commission and expense allowances on reinsurance
ceded, decreased by $14.3 million, due to little growth in the reinsured
block of business. Net investment income increased by $6.3 million
primarily attributable to the 4.3% growth in the general investment account
assets. The gross yield for the portfolio was 7.9% for 1996 compared to
7.8% for 1995.
The components of net investment income are set forth below.
Years Ended December 31,
1996 1995
---- ----
(In Millions)
Gross Investment Income
Bonds $55.4 $54.7
Common and preferred stock 2.8 2.2
Mortgage loans 3.8 2.7
Real estate - 0.5
Policy loans 10.0 9.9
Cash and short-term investments 4.0 0.4
----- -----
Total gross investment income 76.0 70.4
Less: investment expenses 0.8 1.5
----- -----
Net investment income $75.2 $68.9
===== =====
Policy benefits and payments increased $40.1 million to $99.0 million in
1996 from $58.9 million in 1995. Surrender benefits increased by $22.7
million, essentially due to increased variable and fixed annuity
withdrawals and contract surrenders. The life insurance lapse rate, which
is based upon amount of insurance in force, remained at 7.1% for both 1996
and 1995. Death claims, net of reinsurance, grew to $25.2 million in 1996
from $16.3 million in 1995, which is due to an increase in the life
insurance in force and worse than expected mortality. Although mortality
experience declined during 1996, C.M. Life does not believe this is an
indication of future trends.
Addition to policyholder reserves, funds and separate accounts decreased
$1.1 million to $210.3 million in 1996 from $211.4 million 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, commissions and state taxes, licenses and fees
increased $22.4 million to $73.6 million in 1996 from $51.2 million 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 its affiliates, G.R. Phelps and MML
Distributors, as discussed in the preceding section.
Federal income tax expense decreased $3.1 million to $6.3 million from $9.4
million as a result of decreased taxable income. Taxable income decreased
$9.2 million to $18.5 million in 1996 from $27.7 million in 1995. The
change in taxable income is primarily attributable to the $15.8 million
decrease in net gain from operations offset by book tax differences of $6.6
million. These book tax differences include the timing of the deductibility
of acquisition costs and other items.
Realized capital gains, after the transfer to the Interest Maintenance
Reserve ("IMR"), which captures after tax realized capital gains and losses
due to changes in interest rates for all types of fixed income investments,
increased $1.2 million to $0.7 million in 1996 from a realized loss of $0.5
million in 1995. The increase is primarily attributable to gains generated
during the first quarter of 1996 on the sale of common stock investments.
12
Net realized capital gains (losses) were comprised of the following:
Years Ended December 31,
1996 1995
---- ----
(In Millions)
Bonds $ 0.7 $(1.1)
Preferred stocks 0.1 0.2
Common stocks 4.7 0.7
Mortgage loans (2.2) (1.4)
Real estate - (0.3)
Hedging instruments (0.9) (0.1)
Federal income taxes (1.4) 0.6
----- -----
Net realized capital gain (loss)
before transfer to IMR 1.0 (1.4)
Transfer to IMR (0.4) 0.9
----- -----
Net realized capital gain (loss) $ 0.6 $(0.5)
===== =====
As a result of the foregoing factors, net income for 1996 was $2.2 million
compared to $13.8 million in 1995, representing a decrease of $11.6 million
or 84% decrease over prior year.
Statement of Financial Position
-------------------------------
Total assets at December 31, 1997 were $2,219.2 million, representing an
increase of $352.6 million or 18.9%, from $1,866.6 million at December 31,
1996. Much of this increase was due to continued growth in C.M. Life's
separate investment accounts, which increased by $316.7 million, or 40.6%
to $1,096.5 million at December 31, 1997 from $779.8 million at December
31, 1996. Invested assets in C.M. Life's general account portfolio at
December 31, 1997 increased by $38.1 million, or 3.7% to $1,060.6 million
from $1,022.5 million at December 31, 1996.
Bonds at December 31, 1997 were $664.5 million, representing a decrease of
$72.0 million, or 9.8% from $736.5 million at December 31, 1996. This
reflects a shift to investing additional funds in commercial mortgages to
enhance yields. Bonds and short-term securities in NAIC categories 1 and 2
were 65.0% of general investment account assets at December 31, 1997, as
compared to 73.1% at December 31, 1996. The percentage of general
investment account assets representing bonds and short-term investments in
NAIC categories 3 through 6 was 5.9% at December 31, 1997 and 4.9% at
December 31, 1996.
Common stocks at December 31, 1997 were $61.4 million, representing an
increase of $5.8 million, or 10.4% from $55.6 million at December 31, 1996.
This increase is a result of dividend reinvestment. Cash and short-term
investments at December 31, 1997 were $88.4 million, representing an
increase of $24.7 million, or 38.8% from $63.7 million at December 31,
1996.
Mortgage loans at December 31, 1997 were $101.6 million, representing an
increase of $67.8 million, or 200.6%, from $33.8 million at December 31,
1996. This is principally due to additional investments in mortgage loans
and additional mortgages purchased. See "Investments" for discussion of
investment reserves.
Separate account assets at December 31, 1997 were $1,096.5 million,
representing an increase of $316.7 million, or 40.6%, from $779.8 million
at December 31, 1996. This increase is due to significant market
appreciation and continued deposits of variable products partially offset
by withdrawals.
Total liabilities at December 31, 1997 were $2,106.0 million, representing
an increase of $349.2 million, or 19.9%, from $1,756.8 million at December
31, 1996. As with assets, most of this growth occurred in the separate
investment accounts as discussed above.
13
Policyholders' reserves and funds at December 31, 1997 were $951.0 million,
representing an increase of $43.5 million, or 4.8%, from $907.5 million at
December 31, 1996. The increase, primarily attributable to universal and
other life products, is consistent with increased sales of these products.
Policy loans at December 31, 1997 were $142.5 million, representing an
increase of $9.6 million, or 7.2%, from $132.9 million at December 31,
1996.
C.M. Life utilizes sophisticated asset/liability analysis techniques in
order to set the investment policy for each liability class and test the
adequacy of the projected cash flow provided by assets to meet all of its
future policyholder and other obligations. These studies are performed
using stress tests regarding future credit and other asset losses, market
interest rate fluctuations, claim losses and other considerations. The
result is a complete picture of the adequacy of the underlying assets,
reserves and capital. See Liquidity and Capital Resources below for further
discussions on this issue.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities was $52.2 million, $42.4 million,
and $97.9 million for the years ended 1997, 1996 and 1995, respectively. In
1997, net cash provided by operating activities increased by $9.8 million
as compared to 1996, primarily due to increased sale of Universal and other
life products and reductions of policyholder reserves attributable to
reinsurance. The Board of Directors of MassMutual has authorized the
contribution of funds to C.M. Life sufficient to meet the capital
requirements of all states in which C.M. Life is licensed to do business.
C.M. Life has structured its investment portfolio to ensure a strong
liquidity position in order to permit timely payment of policy and contract
benefits without requiring an untimely sale of assets. C.M. Life manages
its liquidity position by matching its exposure to cash demands with
adequate sources of cash and other liquid assets.
C.M. Life's principal sources of liquidity are cash flow and holdings of
cash, near cash and other readily marketable assets. The primary cash flow
sources are investment income and principal repayments on invested assets,
life insurance premiums, annuity considerations and deposits.
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 $88.4 million at
December 31, 1997.
The liquidity position of C.M. Life is proactively managed on an ongoing
basis to meet cash needs while minimizing adverse impacts on investment
returns. A variety of scenarios are analyzed by modeling potential demands
on liquidity, taking into account the provisions of C.M. Life's policies
and contracts in force, C.M. Life's cash flow position and the volume of
cash and readily marketable securities in C.M. Life's portfolio.
C.M. Life also employs sophisticated quantitative asset/liability cash flow
management techniques to optimize and control the investment return and
liquidity for its portfolio, taking into account the liability
characteristics of its portfolio.
A primary liquidity concern for C.M. Life is the risk of early
contractholder and policyholder withdrawal. The most affected products are
individual life insurance and individual deferred annuities. Personal life
insurance policies are less susceptible to withdrawal than annuity
contracts because annuities are primarily used as investment vehicles,
while personal life policies are used to fulfill longer-term financial
planning needs. C.M. Life closely evaluates and manages its liquidity risk.
14
C.M. Life's exposure to early withdrawal for annuity products as of the
dates indicated can be described as follows:
Withdrawal Characteristics of Annuity Actuarial Reserves and Deposit Fund
Liabilities
December 31,
------------
1997 1996
---- ----
% of % of
Amount Total Amount Total
------ ----- ------ -----
($ In Millions)
Subject to discretionary withdrawal
with adjustment:
At market value $1,064.4 90.2% $755.4 87.1%
At book value less
surrender charge 91.1 7.7 88.4 10.3
-------- ------ ------ -----
Subtotal 1,155.5 97.9 843.8 97.4
Subject to discretionary
withdrawal without
adjustment:
At book value
(minimal or no charge or
adjustment) 23.2 2.0 22.3 2.5
Not subject to discretionary
withdrawal 1.4 0.1 1.5 0.1
-------- ------ ------ -----
Total annuity actuarial
reserves and deposit
fund liabilities (gross) 1,180.1 100.0% 867.6 100.0%
Less reinsurance - -
-------- ------
Total annuity actuarial
reserves and deposit
fund liabilities $1,180.1 $867.6
======== ======
Based on its ongoing monitoring and analysis of its liquidity sources and
demands, C.M. Life believes that it is in a strong liquidity position.
Capital Resources
-----------------
As of December 31, 1997, C.M. Life's total adjusted capital as defined by
the NAIC was $135.9 million in 1997. The NAIC developed the Risk Based
Capital ("RBC") model to compare the total adjusted capital with a standard
design in order to reflect C.M. Life's risk profile. Although C.M. Life
believes that there is no single appropriate means of measuring risk-based
capital needs, it feels that the NAIC approach to RBC measurement is
reasonable, and will manage its capital position with significant attention
to maintaining adequate total adjusted capital relative to RBC. C.M. Life's
total adjusted capital was well in excess of all RBC standards at December
31, 1997 and 1996. Management believes that C.M. Life enjoys a strong
capital position in light of the risks to which it is subject and that it
is well positioned to meet policyholder and other obligations.
Year 2000 Issue
---------------
Like other businesses and governments around the world, C.M. Life could be
adversely affected if the computer systems used by the company and those
with which it does business do not properly recognize the year 2000. This
is commonly known as the "Year 2000 issue." In 1996, C.M. Life's parent
company, MassMutual, began an enterprise wide process of identifying,
evaluating and implementing changes to computer systems and applications
software to address the Year 2000 issue on its own behalf and on behalf of
its insurance subsidiaries, including C.M. Life.
15
MassMutual is addressing the Year 2000 issue internally with modifications
to existing programs and conversions to new programs. C.M. Life's costs
related to the Year 2000 issue are being currently expensed by C.M. Life
and when measured against C.M. Life's net gain from operations, are not
material to C.M. Life. MassMutual is also seeking assurances from vendors,
customers, service providers and others with which MassMutual and its
subsidiaries conducts business, in order to identify and resolve the Year
2000 issue
Segment Information
-------------------
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 1997, 1996 and 1995.
Reserves
--------
In accordance with the life insurance laws and regulations under which C.M.
Life operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on outstanding
contracts.
Policyholders' reserves for life contracts are developed using accepted
actuarial methods computed principally on the net level premium and the
Commissioners' Reserve Valuation Method bases using the American Experience
and 1980 Commissioners' Standard Ordinary mortality tables with assumed
interest rates ranging from 4.0 to 4.5 percent. Reserves for individual
annuities are based on accepted actuarial methods, principally the
Commissioners Annuity Reserve Valuation Method at interest rates ranging
from 5.5 to 9.0 percent.
Capital Stock and Surplus
-------------------------
Capital stock and surplus equity was $113.2 million at December 31, 1997,
an increase of $3.4 million, or 3.1%, from December 31, 1996. This increase
was composed of (i) 1997 net income of $7.6 million, (ii) an increase of
$0.8 million from unrealized capital gains, (iii) a decrease of $76 million
due to the change in Asset Valuation Reserve ("AVR") and General Investment
Reserve ("GIR"), and (iv) a decrease of $0.2 million due to other changes.
Inflation
---------
The C.M. Life's operating expenses are affected by inflation. A large
portion of C.M. Life's operating expenses consists of administrative fees
charged by MassMutual, the largest component of which is salaries, which
are subject to wage increases, at least partially affected by the rate of
inflation. C.M. Life's and MassMutual's continuing efforts to control
expenses may reduce the impact of inflation on operating expenses.
Inflation also has an indirect effect on C.M. Life. To the extent that the
government's economic policy to control the level of inflation results in
changes in interest rates, C.M. Life's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also
have an effect on interest spreads, as investment earnings are reinvested.
Investments
-----------
At December 31, 1997, C.M. Life had $1,060.6 million of invested assets in
its general investment account. The portfolio of invested assets is managed
to support product liabilities in light of yield, liquidity and
diversification considerations. The general investment account portfolio
does not include C.M. Life's separate account investment assets.
16
The following table sets forth C.M. Life's invested assets in the general
investment account and gross investment yield:
December 31,
------------
1997 1996 1995
---- ---- ----
Carrying % of Carrying % of Carrying % of
Value Total Yield Value Total Yield Value Total Yield
-------- ------ ------ -------- ------ ------ ------ ------ ------
($ In Millions)
Bonds $ 664.5 62.7% 7.9% $ 736.5 72.0% 7.8% $736.1 75.1% 7.8%
Common stocks 61.4 5.8 7.4 55.6 5.4 4.5 72.4 7.4 6.0
Mortgage loans 101.6 9.6 7.6 33.8 3.3 12.6 30.7 3.1 7.7
Policy loans 142.5 13.4 8.0 132.9 13.0 8.1 126.0 12.9 8.8
Other 2.2 0.2 - - - - 0.2 - 5.8
Cash and short-term
Investments 88.4 8.3 5.3 63.7 6.3 10.6 15.1 1.5 4.5
-------- ----- --- -------- ----- ---- ------ ----- ---
Total investments $1,060.6 100.0% 7.6% $1,022.5 100.0% 7.9% $980.5 100.0% 7.9%
======== ===== === ======== ===== ==== ====== ===== ===
The yield on total investments before indirect expenses was 7.6%, 7.9% and
7.9% for the years ended December 31, 1997, 1996 and 1995, respectively. If
investment expenses were deducted, net yields would be 7.5%, 7.8% and 7.7%,
respectively. The yield on each investment category, before federal income
taxes, is calculated as: (a) two times gross investment income divided by
(b) the sum of assets at the beginning of the year and assets at the end of
the year, less gross investment income. This is the formula which was
specified by the NAIC for calculating investment yield when this
information was last required to be included in the annual statement filed
with the Connecticut Department of Insurance.
C.M. Life carries its investments in accordance with methods and values
prescribed by the NAIC and adopted by state insurance authorities.
Generally, bonds are valued at amortized cost, preferred stocks in good
standing at cost, and common stocks at fair value. Mortgage loans are
valued at principal less impairments and unamortized discount. Real estate
is valued at cost less accumulated depreciation, impairments, and mortgage
encumbrances. Depreciation on investment real estate is calculated using
the straight-line method. Policy loans are carried at the outstanding loan
balance less amounts unsecured by the cash surrender value of the policy.
Short-term investments are stated at amortized cost, which approximates
fair value.
C.M. Life periodically uses standard derivative financial instruments such
as options, and futures to hedge certain risks associated with anticipated
purchases and sales of investments and certain payments denominated in
foreign currencies. These derivative financial instruments are used to
protect C.M. Life from market fluctuations in interest and exchange rates
between the contract date and the date on which the hedged transaction
occurs. C.M. Life is subject to off-balance sheet risk that the
counterparties of the transactions will fail to perform as contracted. C.M.
Life manages this risk by only entering into contracts with highly rated
institutions and listed exchanges. C.M. Life does not hold or issue
derivative financial instruments for trading purposes.
17
Bonds
-----
The following table provides certain information regarding the maturity
distribution of bonds (excluding short-term securities):
Bond Maturities
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Due in one year or less $ 34.3 5.2% $ 76.7 10.4%
Due after one year
through five years 227.7 34.3 284.2 38.6
Due after five years
through ten years 209.7 31.6 202.7 27.5
Due after ten years 80.3 12.1 84.5 11.5
Mortgage-backed
securities(1) 112.5 16.8 88.4 12.0
------ ------ ------- ------
$664.5 100.0% $736.5 100.0%
====== ====== ======= ======
(1) Including securities guaranteed by the U.S. Government.
The maturities of portfolio bonds are considered to be sufficiently
diversified and are carefully monitored and managed in light of C.M.
Life's liquidity needs.
Bonds consist primarily of government securities and high-quality
marketable corporate securities. At December 31, 1997 and 1996, publicly
traded bonds comprised 64.1% and 66.0% of the bond portfolio, respectively,
and privately placed bonds comprised the remainder. Substantially all of
the publicly traded and privately placed bonds held by C.M. Life are
evaluated by the NAIC's Securities Valuation Office ("SVO") which assigns
securities to one of six NAIC investment categories with Category 1
securities being the highest quality and Category 6 securities being the
lowest quality. Categories 1 and 2 are investment grade, Category 3 is
medium quality and Categories 4, 5 and 6 are non-investment grade. The
remainder of the securities which have not as yet received NAIC ratings are
rated under an internal system which C.M. Life believes to be equivalent to
that used by the SVO.
The table below sets forth, as of the dates indicated, the NAIC SVO ratings
for C.M. Life's bond portfolio (including short-term securities) and the
equivalent public rating agency designations. The bond portfolio consists
primarily of high grade securities. At December 31, 1997 and 1996, 91.7%
and 93.7%, respectively, of the portfolio was invested in NAIC Categories 1
and 2 securities.
Bond Credit Quality
(includes short-term securities)
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $ 421.9 56.2% $452.6 56.7%
2 Baa 267.3 35.5 295.3 37.0
3 Ba 49.1 6.5 36.1 4.5
4 B 6.3 0.8 11.8 1.5
5 Caa and lower 7.0 0.9 - -
6 In or near default 0.6 0.1 2.0 0.3
------- ------ ------ ------
Total $ 752.2 100.0% $797.8 100.0%
======= ====== ====== ======
18
C.M. Life invests a significant portion of its investment funds in high
quality publicly traded bonds in order to maintain and manage liquidity and
reduce the risk of default in the portfolio. As of December 31, 1997,
95.9% of the publicly traded bonds were rated as NAIC Categories 1 and 2,
as illustrated by the following chart:
Publicly Traded Bond Credit Quality
(includes short-term securities)
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------------- ---------------------- --------- ------- --------- ------
1 Aaa/Aa/A $320.8 66.5% $364.4 69.2%
2 Baa 142.0 29.4 145.4 27.6
3 Ba 14.0 2.9 11.5 2.2
4 B 5.7 1.2 5.5 1.0
5 Caa and lower - - - -
6 In or near default - - - -
------ ------ ------ -----
Total $482.5 100.0% $526.8 100.0%
====== ====== ====== =====
C.M. Life utilizes its investments in the privately placed bond portfolio
to enhance the value of the overall portfolio, increase diversification
and obtain higher yields than are possible with comparable quality public
market securities. To control risk, C.M. Life relies upon broader access
to management information, strengthened negotiated protective convenants,
call protection features, and a higher level of collateralization than can
customarily be achieved in the public market. The strength of the
privately placed bond portfolio is demonstrated by the predominance of NAIC
Categories 1 and 2 securities.
Privately Placed Bond Credit Quality
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $101.2 37.5% $ 88.2 32.6%
2 Baa 125.3 46.5 149.9 55.3
3 Ba 35.1 13.0 24.6 9.1
4 B 0.5 0.2 6.3 2.3
5 Caa and lower 7.0 2.6 - -
6 In or near default 0.6 0.2 2.0 0.7
------ ------ ------ -------
Total $269.7 100.0% $271.0 100.0%
====== ====== ====== =======
19
The following table sets forth by industry category the carrying value and
percent of total of the bond portfolio, including short-term securities, as
of December 31, 1997.
Bond Portfolio By Industry
December 31, 1997
-----------------
Private Public (1) Total
------- ---------- -----
Carrying % of Carrying % of Carrying % of
Industry Category Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
($ In Thousands)
Collateralized(2) $ 39.8 14.7% $166.8 34.7% $206.6 27.5%
Natural Resources 31.5 11.7 52.8 10.9 84.3 11.2
Finance & Leasing Co. 8.6 3.2 55.3 11.5 63.9 8.5
U.S. Government 10.4 3.9 49.3 10.2 59.7 7.9
Consumer Goods 35.3 13.0 18.9 3.9 54.2 7.2
Producer Goods 40.0 14.7 11.2 2.3 51.2 6.8
Utilities 13.4 5.0 25.0 5.2 38.4 5.1
Banking 5.0 1.9 29.8 6.2 34.8 4.6
Other Services 25.3 9.4 4.6 1.0 29.9 4.0
Media 17.0 6.3 8.4 1.7 25.4 3.4
Insurance & Other Financial
Services 10.7 4.0 12.2 2.5 22.9 3.0
Transportation 3.0 1.1 18.0 3.7 21.0 2.8
Health Care 1.5 0.6 17.6 3.6 19.1 2.5
Aerospace 10.6 3.9 1.1 0.2 11.7 1.6
Merchandise Retailers 3.4 1.3 1.0 0.2 4.4 0.6
Food Wholesalers 1.0 0.4 - - 1.0 0.1
Others 13.2 4.9 10.5 2.2 23.7 3.2
------ ----- ------ ----- ------ -----
Total $269.7 100.0% $482.5 100.0% $752.2 100.0%
====== ===== ====== ===== ====== =====
(1) Includes short-term securities. These bonds are collateralized by mortgages
backed by FNMA, GNMA or FHLMC and include collateralized mortgage
obligations and pass-through securities. These amounts also include asset
backed securities such as credit card, automobile and residential mortgage
securities.
The estimated fair value of bonds is based upon quoted market prices for
actively traded securities. C.M. Life subscribes to commercial pricing
services providing estimated fair values of fixed income securities that
are not actively traded. Estimated fair values for privately placed bonds
are generally determined by applying interest rate spreads based on quality
and asset type to the appropriate duration on the Treasury yield curve.
The tables below set forth the carrying value, gross unrealized gains and
losses, net unrealized gains and losses and estimated fair value of the
bond portfolio (excluding short-term securities) at December 31, 1997 and
1996.
December 31, 1997
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
----- ----- ------ ----------- -----
($ In Millions)
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $104.3 $ 2.2 $0.2 $ 2.0 $106.3
Debt Securities issued by
Foreign Governments 4.6 - 0.3 (0.3) 4.3
Mortgage-backed securities 38.8 1.0 0.2 0.8 39.6
State and local governments 20.0 0.3 - 0.3 20.3
Corporate debt securities 471.8 15.6 1.9 13.7 485.5
Utilities 25.0 1.1 - 1.1 26.1
------ ----- ---- ----- ------
$664.5 $20.2 $2.6 $17.6 $682.1
====== ===== ==== ===== ======
20
December 31, 1996
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
----- ----- ------ ----------- -----
($ In Millions)
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $138.8 $ 2.2 $1.0 $ 1.2 $140.0
Debt Securities issued by
Foreign Governments 3.9 0.1 - 0.1 4.0
Mortgage-backed securities 37.4 0.7 0.7 - 37.4
State and local governments 10.3 0.2 0.1 0.1 10.4
Corporate debt securities 509.2 11.6 3.7 7.9 517.1
Utilities 36.9 1.2 0.2 1.0 37.9
------ ----- ---- ----- ------
$736.5 $16.0 $5.7 $10.3 $746.8
====== ===== ==== ===== ======
Common Stocks
-------------
The common stock portfolio comprised 5.8% and 5.4% of C.M. Life's
investments at December 31, 1997 and 1996, respectively. Common stock had a
cost of $50.2 million in 1997 and $47.2 million in 1996; the fair value was
$61.4 million and $55.6 million at December 31, 1997 and 1996, respectively.
Mortgage Loans
--------------
Mortgage loans represented 9.6% and 3.2% of the total investments in the
general account at December 31, 1997 and 1996, respectively. Mortgage loans
consist of commercial mortgage loans and residential mortgage loan pools.
At December 31, 1997 and 1996, commercial mortgage loans comprised 69.4% and
100.0% of the mortgage loan portfolio.
The following table provides certain information regarding the maturity
distribution of commercial mortgage loans:
Commercial Mortgage Loan Maturities
December 31, 1997
-----------------
Carrying % of
Value Total
-------- ------
($ In Millions)
Due in one year or less $ 5.9 5.8%
Due after one year
through five years 47.1 46.3
Due after five years
through ten years 17.5 17.2
Residentials 31.1 30.7
------ -----
Total $101.6 100.0%
====== =====
Total gross investment income on mortgage loans for the year ended December
31, 1997 was $5.0 million, a 36.7% increase from $3.9 million at December
31, 1996. This increase was due to a shift in investment philosophy from
bonds to residential mortgage loans. Net realized capital losses were $0.2
and $2.2 million for the years ended December 31, 1997 and 1996.
Residential
-----------
The residential mortgage loan portfolio consists of conventional and FHA/VA
mortgage pools. The Company imposes rigorous investment standards,
including governmental agency guarantees, seasoned pools and discount
pricing as protection against prepayment risk.
21
Commercial
----------
The commercial mortgage loan portfolio consists of fixed rate loans on
completed, income producing properties.
At December 31, 1997, 99.9% of the commercial mortgage loan portfolio
consisted of bullet loans (loans that do not fully amortize over their term)
compared to 99.6% at December 31, 1996. Scheduled bullet maturities at
December 31, 1997 of $5.8 million, $10.5 million, $2.8 million and $14.6
million in 1998, 1999, 2000 and 2001 and represent 8.3%, 14.9%, 3.9% and
20.7%, respectively, of the commercial mortgage loan portfolio. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
C.M. Life had one of bullet loan of $4.4 million scheduled to mature during
1997 which was paid off at discount in 1997.
During 1997 and 1996, all renewed bullet loans were performing assets prior
to renewal and all loan renewals reflected market conditions. Past
experience with regard to bullet maturities, however, is not necessarily
indicative of future results.
The maturities of commercial mortgage loans are considered by C.M. Life to
be sufficiently diversified and are carefully monitored and managed in light
of C.M. Life's liquidity needs.
The following tables set forth by property type and geographic distribution
the carrying value of commercial mortgage loan balances:
Commercial Mortgage Loans by
Property Type
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $22.4 31.8% $16.3 48.2%
Apartments 19.8 28.1 4.1 12.1
Hotels & Motels 17.4 24.7 - -
Industrial & Other 5.5 7.8 8.0 23.7
Retail 5.3 7.6 5.4 16.0
----- ----- ----- -----
$70.4 100.0% $33.8 100.0%
===== ===== ===== =====
Commercial Mortgage Loans by
Geographic Distribution
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
West $ 3.5 5.0% $ 3.7 10.9%
Northeast 18.2 25.8 12.8 37.9
Mid-Atlantic 9.4 13.3 3.5 10.4
Southeast 26.4 37.6 8.6 25.4
Midwest 5.9 8.4 2.0 5.9
Southwest 7.0 9.9 3.2 9.5
----- ----- ----- -----
$70.4 100.0% $33.8 100.0%
===== ===== ===== =====
22
Policy Loans
------------
As of December 31, 1997 and 1996, C.M. Life's policy loans were $142.5
million and $132.9 million, respectively. Policy loans, as a percentage of
invested assets, were 13.4% and 13.0% at December 31, 1997 and 1996,
respectively. Variable interest rate policy loans were 100% of total policy
loans at December 31, 1997 and 98.6% in 1996. For loans with variable
interest rates, the rates are adjusted annually based upon changes in a
corporate bond index.
Portfolio Surveillance and Under-Performing Investments
-------------------------------------------------------
Bonds
-----
C.M. Life reviews all bonds on a regular basis utilizing the following
criteria: (i) material declines in revenues or margins, (ii) significant
uncertainty regarding the issuer's industry, (iii) debt service coverage or
cash flow ratios that fall below industry-specific thresholds, (iv)
violation of financial covenants, (v) trading of public securities at a
substantial discount due to specific credit concerns and (vi) other
subjective factors that relate to the issuer. The bond portfolio is actively
reviewed to estimate the likelihood and amount of financial defaults or
write-downs in the portfolio and to make timely decisions as to the
potential sale or re-negotiation of terms of specific investments.
As defined by the NAIC, under performing bonds are those whose deferral of
interest and/or principal payments are deemed to be caused by the inability
of the obligor to make such payments as called for in the bond contract.
C.M. Life does not accrue interest income on bonds delinquent more than 90
days or when management believes the collection of interest is uncertain.
Interest not accrued on bonds totaled $0.1 million and zero million for the
years ended December 31, 1997 and 1996.
The carrying values of NAIC Category 5 and 6 bonds, as of the indicated
dates, were as follows:
NAIC Category 5 and 6 Bonds
Carrying Value
December 31,
------------
1997 1996
---- ----
(In millions)
Performing:
Private $ 7.0 $ -
----- -----
Total 7.0 -
----- -----
Under performing:
Private 0.6 2.0
----- -----
Total 0.6 2.0
----- -----
Total $ 7.6 $ 2.0
===== =====
As a result of C.M. Life's conservative monitoring process, an internal watch
list is generated which includes certain securities that would not be classified
as under-performing under the SVO credit rating system. At December 31, 1997,
bonds having a carrying value of $22.6 million (34.0% of the total bond
portfolio) had been placed on the internal watch list, which is comprised of
bonds that have the following NAIC ratings: $6.8 million NAIC Category 2, $4.7
million NAIC Category 3, $4.1 million NAIC Category 4 and $7.0 million NAIC
Category 5.
Mortgage Loans
- --------------
C.M. Life actively monitors, manages and directly services its commercial
mortgage loan portfolio. C.M. Life's 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 re-valued each year
and re-inspected either each
23
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.
Restructured mortgage loans are loans for which current payment terms have been
modified to less than current market rates, at the time of modification and are
currently performing in accordance with such modified terms. Loans on which
maturities have been extended but on which current payments are being made at or
above market interest rates are not classified as restructured loans.
The carrying values of current and potential problem mortgage loans consisted of
restructured loans and was $17.3 million and $21.9 million at December 31, 1997
and 1996, respectively. There were no problem mortgage loans in process of
foreclosure, in default or in actively managed properties.
The AVR contains a commercial mortgage loan component which totaled $2.2 million
at the end of 1997. In addition, at December 31, 1997, C.M. Life maintained a
GIR of $3.9 million for properties in the process of foreclosure and for other
anticipated losses. See "Investment Reserves."
C.M. Life does not accrue interest income on mortgage loans which are delinquent
more than 90 days or when management believes the collection of interest is
uncertain. Interest not accrued on mortgage loans was zero million for both the
years ended December 31, 1997 and 1996.
The following tables set forth current and potential problem mortgage loans by
property type and geographic region as of December 31, 1997:
Commercial Mortgage Loan Distribution By Property Type
December 31, 1997
-------------------------------------------------
Problem % of
Total Loan Total Loan Loan
Amount Amount Amount
---------- ---------- -------
($ In millions)
Office $22.4 $10.4 14.8 %
Retail 5.3 3.4 4.8
Industrial and Other 5.5 3.5 5.0
Apartments 19.8 - -
Hotels and Motels 17.4 - -
----- ----- -----
Total $70.4 $17.3 24.6 %
===== ===== =====
Commercial Mortgage Loan Distribution By Region
December 31, 1997
-------------------------------------------------
Problem % of
Total Loan Total Loan Loan
Amount Amount Amount
---------- ---------- -------
($ In millions)
West $ 3.5 $ 3.5 5.0%
Northeast 18.2 10.4 14.8
Mid-Atlantic 9.4 3.4 4.8
Southeast 26.4 - -
Midwest 5.9 - -
Southwest 7.0 -
----- -----
Total $70.4 $17.3 24.6%
===== ===== ====
24
Write-downs and Investment Reserves
- -----------------------------------
When C.M. Life determines that it is probable that the net realizable value of
an invested asset is less than its carrying value, appropriate write-downs or
investment reserves are established and recorded in accordance with statutory
practice.
In the case of bonds, the net realizable value is determined in accordance with
principles established by the SVO using criteria such as the net worth and
capital structure of the borrower, the value of the collateral, the presence of
additional credit support and C.M. Life's evaluation of the borrower's ability
to compete in a relevant market.
In the case of real estate and commercial mortgage loans, borrower and property-
specific assessments are also made.
In compliance with regulatory requirements, C.M. Life maintains the AVR. The
AVR stabilizes policyholders' contingency reserves against non-interest rate
related fluctuations in the value of stocks, bonds, mortgage loans and real
estate investments. GIR, which are not mandated by regulation, are maintained by
C.M. Life in anticipation of future losses on specific mortgage loans and real
estate holdings, particularly mortgage loans in the process of foreclosure.
C.M. Life's total investment reserves at December 31, 1997 were $26.6 million,
an 18.0% increase from December 31, 1996, consisting of AVR of $22.7 million and
mortgage loan GIR of $3.9 million.
25
The following table presents the change in total investment reserves for the
years 1997 and 1996:
TOTAL INVESTMENT RESERVES
Bonds, Preferred
Stocks and
Short-term Mortgage Common
Investments Loans Stock Total
----------------- --------- ------- ------
(In millions)
BALANCE AT DECEMBER 31, 1995 (1) $ 6.1 $ 4.5 $ 9.3 $19.9
===== ===== ===== =====
Reserve contributions (2) 1.7 0.2 0.2 2.1
Transfers among categories - - - -
Net realized capital gains (losses) (3) - (1.4) 3.1 1.7
Unrealized capital gains (losses) (4) (2.2) - 0.3 (1.9)
----- ----- ----- -----
Net change to Policyholders'
Contingency Reserves (5) (0.5) (1.2) 3.6 1.9
----- ----- ----- -----
BALANCE AT DECEMBER 31, 1996(1) 5.6 3.3 12.9 21.8
Reserve contributions (2) 1.3 2.9 (0.3) 3.9
Transfers among categories - - - -
Net realized capital gains (losses) (3) 0.1 (0.1) - -
Unrealized capital gains (losses) (4) (1.8) - 2.7 0.9
----- ----- ----- -----
Net change to Investment
Contingency Reserves (5) (0.4) 2.8 2.4 4.8
----- ----- ----- -----
BALANCE AT DECEMBER 31, 1997(1) $ 5.2 $ 6.1 $15.3 $26.6
===== ===== ===== =====
(1) The balance is comprised of the AVR and GIR, which are recorded separately
as liabilities on the statutory statement of financial position as follows:
AVR GIR Total
----- ---- -----
(In millions)
Balance at December 31, 1995 $15.9 $4.0 $19.9
Balance at December 31, 1996 $18.5 $3.3 $21.8
Balance at December 31, 1997 $22.7 $3.9 $26.6
(2) Amounts represent contributions calculated on a statutory formula plus
amounts deemed necessary by C.M. Life. Represents the net impact on
Policyholders' Contingency Reserves for investment gains and losses not
related to changes in interest rates.
(3) These amounts offset realized capital gains (loss), net of tax, that have
been recorded as a component of net income. Amounts include realized
capital gains and losses, net of tax, on sales not related to interest
fluctuations, such as repayments of mortgage loans at a discount, mortgage
loan foreclosures and real estate permanent write-downs.
(4) These amounts offset unrealized capital gains (loss), recorded as a change
in Policyholders' Contingency Reserves (Surplus). Amounts include
unrealized losses due to market value reductions of securities with a NAIC
quality rating of 6 and net changes in the undistributed earnings of
subsidiaries.
(5) Amounts represent the reserve contribution (note 2) less amounts already
recorded (notes 3 and 4). This net change in reserves is recorded as a
charge to Policyholders' Contingency Reserves.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Financial statements, in the form required by Regulation S-X, are set forth
below. The Registrant is not required to file supplementary financial data
specified by Item 302 of Regulation S-K.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
C.M. Life Insurance Company
We have audited the accompanying statutory statements of financial position of
C.M. Life Insurance Company as of December 31, 1997 and 1996, and the related
statutory statements of income, changes in capital stock and surplus, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The statutory
financial statements of C.M. Life Insurance Company for the year ended December
31, 1995 were audited by other auditors whose report, dated February 15, 1996,
expressed an adverse opinion on those statements as to fair presentation in
conformity with generally accepted accounting principles and expressed an
unqualified opinion in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Connecticut.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1, these financial statements were prepared in
conformity with 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 ("statutory accounting
principles"), 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 at this time, are presumed to be material.
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 at December 31, 1997 and 1996, or the results of
its operations or its cash flows for the years then ended.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of C.M. Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, on the statutory basis of accounting described in Note
1.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
February 6, 1998
27
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF FINANCIAL POSITION
December 31,
1997 1996
------ ------
(In Millions)
Assets:
Bonds $ 664.5 $ 736.5
Common stocks 61.4 55.6
Mortgage loans 101.6 33.8
Other investments 2.2 -
Policy loans 142.5 132.9
Cash and short-term investments 88.4 63.7
-------- --------
1,060.6 1,022.5
Investment and insurance amounts
receivable 30.1 32.9
Federal income tax receivable - 7.1
Transfer due from separate account 32.0 24.3
-------- --------
1,122.7 1,086.8
Separate account assets 1,096.5 779.8
-------- --------
$2,219.2 $1,866.6
======== ========
See notes to statutory financial statements.
28
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF FINANCIAL POSITION, Continued
December 31,
1997 1996
------ ------
($ In Millions Except for Par Value
and Share Amounts)
Liabilities:
Policyholders' reserves and funds $ 951.0 $ 907.5
Policyholders' claims and other benefits 4.5 3.8
Payable to parent 13.6 9.6
Federal income taxes payable 6.1 -
Asset valuation reserve 22.7 18.5
Investment reserves 3.9 3.3
Other liabilities 7.7 34.3
-------- --------
1,009.5 977.0
Separate account reserves and liabilities 1,096.5 779.8
-------- --------
2,106.0 1,756.8
-------- --------
Capital stock and surplus:
Common stock, $200 par value
50,000 shares authorized
12,500 shares issued and outstanding 2.5 2.5
Paid-in and contributed surplus 43.8 43.8
Surplus 66.9 63.5
-------- --------
113.2 109.8
-------- --------
$2,219.2 $1,866.6
======== ========
See notes to statutory financial statements.
29
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF INCOME
Years Ended December 31,
1997 1996 1995
------ ------ ------
(In Millions)
Revenue:
Premium income $331.3 $314.4 $ 260.8
Net investment and other income 72.1 76.4 84.4
------ ------ -------
403.4 390.8 345.2
------ ------ -------
Benefits and expenses:
Policy benefits and payments 100.4 99.0 58.9
Addition to policyholders reserves, funds
and separate accounts 190.0 210.3 211.4
Operating expenses 49.5 45.4 32.1
Commissions 33.5 25.0 14.1
State taxes, licenses and fees 3.5 3.2 5.0
------ ------ -------
376.9 382.9 321.5
------ ------ -------
Net gain from operations before federal
income taxes 26.5 7.9 23.7
Federal income taxes 19.0 6.3 9.4
------ ------ -------
Net gain from operations 7.5 1.6 14.3
Net realized capital gain (loss) 0.1 0.6 (0.5)
------ ------ -------
Net income $ 7.6 $ 2.2 $ 13.8
====== ====== =======
See notes to statutory financial statements.
30
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
Years Ended December 31,
1997 1996 1995
------ ------ ------
(In Millions)
Capital stock and surplus equity,
beginning of year $109.8 $113.2 $103.8
Increases (decreases) due to:
Net income 7.6 2.2 13.8
Change in asset valuation and investment
reserves (4.8) (1.9) (9.2)
Change in non-admitted assets and other (0.2) (2.7) (1.2)
Net unrealized capital gain (loss) 0.8 (1.0) 6.0
------ ------ ------
3.4 (3.4) 9.4
------ ------ ------
Capital stock and surplus equity, end of year $113.2 $109.8 $113.2
====== ====== ======
See notes to statutory financial statements.
31
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
------- ------- -------
(In Millions)
Operating activities:
Net income $ 7.6 $ 2.2 $ 13.8
Additions to policyholders reserves and funds
net of transfers to separate accounts 44.2 41.6 84.2
Net realized capital gain (loss) (0.1) (0.6) 0.5
Other changes 0.5 (0.8) (0.6)
------- ------- -------
Net cash provided by operating activities 52.2 42.4 97.9
------- ------- -------
Investing activities:
Loans and purchases of investments (438.6) (184.9) (491.9)
Sales and maturities of investments and
receipts from repayment of loans 411.1 191.1 406.0
------- ------- -------
Net cash provided by (used in) investing
activities (27.5) 6.2 (85.9)
------- ------- -------
Increase in cash and short-term investments 24.7 48.6 12.0
Cash and short-term investments, beginning of
year 63.7 15.1 3.1
------- ------- -------
Cash and short-term investments, end of year $ 88.4 $ 63.7 $ 15.1
======= ======= =======
See notes to statutory financial statements.
32
NOTES TO STATUTORY FINANCIAL STATEMENTS
1. Nature of Operations and Basis of Presentation
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 distributed
through career agents. The Company is licensed to sell life insurance and
annuities in Puerto Rico, the District of Columbia and all 50 states except
New York.
The accompanying statutory financial statements, except as to form, 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 Insurance Department of the State
of Connecticut.
The accompanying statutory financial statements are different in some
respects from GAAP financial statements. 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 valued 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.
The NAIC is currently engaged in an extensive project to codify statutory
accounting principles ("Codification") with a goal of providing a
comprehensive guide of statutory accounting principles for use by insurers
in all states. This comprehensive guide, which has not been approved by
the NAIC or any state insurance department includes seventy-two Statements
of Statutory Accounting Principles ("SSAPs") and is expected to be
effective no earlier than January 1, 1999. The effect of adopting these
SSAPs shall be reported as an adjustment to surplus on the effective date.
Management is currently reviewing the impact of Codification. However,
since the SSAPs have not been finalized, the ultimate impact cannot be
determined at this time.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as disclosures of contingent assets and liabilities, at
the date of the financial statements. Management must also make estimates
and assumptions that affect the amounts of revenues and expenses during the
reporting period. Future events, including changes in the levels of
mortality, morbidity, interest rates and asset valuations, could cause
actual results to differ from the estimates used in the financial
statements.
33
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies
The following is a description of the Company's principal accounting
policies and practices.
a. Investments
Bonds and stocks are valued in accordance with rules established by
the National Association of Insurance Commissioners. Generally, bonds
are valued at amortized cost, preferred stocks in good standing at
cost, and common stocks at fair value.
Mortgage loans are valued at unpaid principal less unamortized
discount.
Policy loans are carried at the outstanding loan balance less amounts
unsecured by the cash surrender value of the policy.
Short-term investments are stated at amortized cost, which
approximates fair value.
In compliance with regulatory requirements, the Company maintains an
Asset Valuation Reserve and an Interest Maintenance Reserve. The Asset
Valuation Reserve and other investment reserves stabilize surplus
against fluctuations in the value of stocks, as well as declines in
the value of bonds and mortgage loans.
The Interest Maintenance Reserve captures after-tax realized capital
gains and losses which result from changes in the overall level of
interest rates for all types of fixed income investments, as well as
other financial instruments, including financial futures, U. S.
Treasury purchase commitments, options and interest rate swaps. This
reserve is amortized into income using the grouped method over the
remaining life of the investment sold or over the remaining life of
the underlying asset. Net realized after tax capital gains of $2.0
million in 1997 and $0.4 million in 1996 and net realized after tax
capital losses of $0.9 million in 1995 were transferred to the
Interest Maintenance Reserve. Amortization of the Interest Maintenance
Reserve into net investment income amounted to $0.1 million in 1997,
1996 and 1995. At December 31, 1997, 1996 and 1995, the Interest
Maintenance Reserve consisted of a net loss deferral which was
recorded as a reduction of surplus.
Realized capital gains and losses, less taxes, not includable in the
Interest Maintenance Reserve, are recognized in net income. Realized
capital gains and losses are determined using the specific
identification method. Unrealized capital gains and losses are
included in surplus.
b. Separate Accounts
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of variable
annuity contract holders. The assets consist principally of marketable
securities reported at fair value. Transfers due from separate account
represents the policyholders' account values in excess of statutory
benefit reserves. Premiums, benefits and expenses of the separate
accounts are reported in the Statutory Statement of Income. Reserves
for these life and annuity contracts have been established using
assumed interest rates and valuation methods that will provide
reserves at least as great as those required by law and contract
provisions. The Company receives administrative and investment
advisory fees from these accounts.
34
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
c. Non-admitted Assets
Assets designated as "non-admitted" (principally prepaid agent
commissions, other prepaid expenses and the Interest Maintenance
Reserve, when in a net loss deferral position) are excluded from the
statutory statement of financial position. These amounted to $5.7
million and $6.6 million as of December 31, 1997 and 1996,
respectively and changes therein are charged directly to surplus.
d. Policyholders' Reserves and Funds
Policyholders' reserves for life contracts are developed using
accepted actuarial methods computed principally on the net level
premium and the Commissioners' Reserve Valuation Method bases using
the American Experience and 1980 Commissioners' Standard Ordinary
mortality tables with assumed interest rates ranging from 4.0 to 4.5
percent.
Reserves for individual annuities are based on accepted actuarial
methods, principally at interest rates ranging from 5.5 to 9.0
percent. Reserves for policies and contracts considered investment
contracts have a carrying value of $115.6 million and $113.7 million
at December 31, 1997 and 1996, respectively (fair value of $116.0
million and $113.7 million at December 31, 1997 and 1996, respectively
as determined by discounted cash flow projections).
e. Premium and Related Expense Recognition
Life insurance premium revenue is recognized annually on the
anniversary date of the policy. Annuity premium is recognized when
received. Commissions and other costs related to the issuance of new
policies, maintenance and settlement costs are charged to current
operations when incurred.
f. Cash and Short-term Investments
For purposes of the Statutory Statement of Cash Flows, the Company
considers all highly liquid short-term investments purchased with a
maturity of twelve months or less to be cash and short-term
investments.
3. Federal Income Taxes
Provision for federal income taxes is based upon the Company'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 effective
tax rates which differ from the statutory tax rate.
35
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
The Internal Revenue Service has completed its examination of the Company's
income tax returns through the year 1991 and is currently examining the
Company for the years 1992 through 1995. The Company believes any
adjustments resulting from such examinations will not materially affect its
financial statements.
The Company plans to file a separate company 1997 federal income tax
return.
Federal tax payments were $6.8 million in 1997, $17.6 million in 1996 and
$10.7 million in 1995.
4. Capital Stock and Surplus
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 capital stock and surplus is subject to dividend
restrictions relating to various state regulations which limit the payment
of dividends without prior approval. Under these regulations, $10.7 million
of capital stock and surplus is available for distribution to the
shareholder in 1998 without prior regulatory approval.
5. Related Party Transactions
MassMutual and the Company have an agreement whereby MassMutual, for a fee,
will furnish the Company, as required, operating facilities, human
resources, computer software development and managerial services.
Investment and administrative services are provided to the Company pursuant
to a management services agreement with MassMutual. Similar arrangements
were in place with Connecticut Mutual Life Insurance Company, the Company's
former parent, prior to its merger with MassMutual. Fees incurred under the
terms of these agreements were $39.7 million, $45.9 million and $34.0
million in 1997, 1996 and 1995, respectively.
Prior to March 1, 1996, the Company had an underwriting agreement with its
affiliates GR Phelps and MML Distributors. 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 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 $4 million; the portion of the
risk exceeding the retention limit is reinsured with other insurers. 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 Mass Mutual whereby the Company cedes 75% of the premiums on certain
universal life policies. In return, MassMutual pays the Company a
stipulated expense allowance, death and surrender benefits, and a modified
coinsurance adjustment. Reserves for payment of future benefits for the
ceded policies are retained by the Company.
36
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
The Company also has a stop-loss agreement with MassMutual, with maximum
coverage at $25.0 million, under which the Company cedes claims which, in
aggregate, exceed $35.6 million in 1997, $28.1 million in 1996, and $24.2
million in 1995. For each of the years, the limit was not exceeded. The
Company paid approximately $1.0 million, $0.4 million, and $0.6 million in
premiums under the agreement in 1997, 1996 and 1995, respectively.
6. Investments
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.
a. Bonds
The carrying value and estimated fair value of investments in bonds as
of December 31, 1997 and 1996 are as follows:
December 31, 1997
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- ---------
(In Millions)
U. S. Treasury securities
and obligations of U.S.
government corporations
and agencies $104.3 $ 2.2 $0.2 $106.3
Debt securities issued by
foreign governments 4.6 0.0 0.3 4.3
Mortgage-backed securities 38.8 1.0 0.2 39.6
State and local governments 20.0 0.3 - 20.3
Corporate debt securities 471.8 15.6 1.9 485.5
Utilities 25.0 1.1 - 26.1
------ ----- ---- ------
Total $664.5 $20.2 $2.6 $682.1
====== ===== ==== ======
December 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- ---------
(In Millions)
U. S. Treasury securities
and obligations of U.S.
government corporations
and Agencies $138.8 $ 2.2 $1.0 $140.0
Debt securities issued by
foreign governments 3.9 0.1 - 4.0
Mortgage-backed securities 37.4 0.7 0.7 37.4
State and local governments 10.3 0.2 0.1 10.4
Corporate debt securities 509.2 11.6 3.7 517.1
Utilities 36.9 1.2 0.2 37.9
------ ----- ---- ------
Total $736.5 $16.0 $5.7 $746.8
====== ===== ==== ======
37
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
The carrying value and estimated fair value of bonds at December 31,
1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment
penalties.
Estimated
Carrying Fair
Value Value
--------- ---------
(In Millions)
Due in one year or less $ 34.3 $ 34.3
Due after one year through five years 227.7 232.0
Due after five years through ten years 209.7 217.4
Due after ten years 80.3 83.4
------ ------
552.0 567.1
Mortgage-backed securities, including
securities guaranteed by the U.S. Government 112.5 115.0
------ ------
Total $664.5 $682.1
====== ======
Proceeds from sales of investments in bonds were $388.8 million during
1997, $162.9 million during 1996, and $380.6 million during 1995.
Gross capital gains of $3.8 million in 1997, $1.6 million in 1996, and
$3.6 million in 1995 and gross capital losses of $0.5 million in 1997,
$0.9 million in 1996, and $4.7 million in 1995 were realized on those
sales, portions of which were included in the Interest Maintenance
Reserve. Estimated fair value of non-publicly traded bonds is
determined by the Company using a pricing matrix.
b. Stocks
Common stocks had a cost of $50.2 million in 1997 and $47.2 million in
1996.
c. Mortgages
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.
The Company had restructured loans with book values of $17.3 million
and $21.9 million at December 31, 1997 and 1996, 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 $0.2 million in 1997, 1996 and 1995.
d. Other
The carrying value of investments which were non-income producing for
the preceding twelve months was $0.4 million and $2.8 million at
December 31, 1997 and 1996, respectively.
It is not practicable to determine the fair value of policy loans as
they do not have a stated maturity.
38
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
7. Portfolio Risk Management
The Company manages its investment risks primarily to reduce interest
rate and duration imbalances determined in asset/liability analyses. The
fair values of these instruments, which are not recorded in the financial
statements, are based upon market prices or prices obtained from brokers.
The Company does not hold or issue these financial instruments for trading
purposes.
The notional amounts described do not represent amounts exchanged by the
parties and, thus, are not a measure of the exposure of the Company. The
amounts exchanged are calculated on the basis of the notional amounts and
the other terms of the instruments, which relate to interest rates,
exchange rates, security prices or financial or other indexes.
The Company utilizes 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. Under interest rate swaps, the Company agrees to exchange, at
specified intervals, the difference between fixed and floating interest
rates calculated by reference to an agreed-upon notional principal amount.
Net amounts receivable and payable are accrued as adjustments to interest
income and included in investment and insurance amounts receivable on the
Statutory Statement of Financial Position. Gains and losses realized on
the termination of contracts are amortized through the Interest Maintenance
Reserve over the remaining life of the associated contract. At December
31, 1997 and 1996, the Company had swaps outstanding with notional amounts
of $46.5 million and $13.0 million, respectively. The fair value of these
instruments was $0.2 million at December 31, 1997 and $0.1 million at
December 31, 1996.
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 five years. The amounts
paid for options purchased 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
amortized through the Interest Maintenance Reserve over the remaining life
of the option contract. At December 31, 1997 and 1996, the Company had
option contracts with notional amounts of $111.3 million and $34.7 million,
respectively. The Company's credit risk exposure was limited to the
unamortized costs of $2.2 million and $0.1 million which had fair values of
$2.3 million and $0.1 million at December 31, 1997 and 1996, respectively.
The Company utilizes asset swap agreements to reduce exposures, such as
currency risk and prepayment risk, built into certain assets acquired.
Cross-currency interest rate swaps allow investment in foreign currencies,
increasing access to additional investment opportunities, while limiting
foreign exchange risk. The net cash flows from asset and currency swaps
are recognized as adjustments to the underlying assets' interest income.
Gains and losses realized on the termination of these contracts adjusts the
bases of the underlying asset. Notional amounts relating to asset and
currency swaps totaled $1.0 million at December 31, 1997 and 1996. The
fair values of these instruments were an unrealized gain of $0.1 million
and an unrealized loss of $0.1 million at December 31, 1997 and 1996,
respectively.
The Company enters into forward U.S. Treasury commitments for the purpose
of managing interest rate exposure. The Company generally does not take
delivery on forward commitments. These commitments are instead settled
with offsetting transactions. Gains and losses on forward commitments are
recorded when the commitment is closed and amortized through the Interest
Maintenance Reserve over the remaining life of the asset. At December 31,
1997 and 1996, the Company had U. S. Treasury purchase commitments which
will settle during the following year with contractual amounts of $3.0
million and $2.0 million, respectively.
39
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments. This
exposure is limited to contracts with a positive fair value. The amounts at
risk in a net gain position were $2.6 million and $0.1 million at December
31, 1997 and 1996, respectively. The Company monitors exposure to ensure
counterparties are credit worthy and concentration of exposure is
minimized. Additionally, contingent collateral positions have been
obtained with counterparties when considered prudent.
8. Liquidity
The withdrawal characteristics of the policyholder's reserves and funds,
including separate accounts, and the invested assets which support them at
December 31, 1997 are illustrated below:
(In Millions)
Total policyholders' reserves and funds and,
separate account liabilities $2,047.5
Not subject to discretionary withdrawal (1.4)
Policy loans (142.5)
--------
Subject to discretionary withdrawal $1,903.6
========
Total invested assets, including separate
investment accounts $2,157.1
Policy loans and other invested assets (295.3)
--------
Marketable investments $1,861.8
========
9. Business Risks and Contingencies
The Company 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. The Company believes such assessments in excess of
amounts accrued will not materially affect its financial position, results
of operations or liquidity. The Company elected not to admit $1.3 million
and $1.6 million of guaranty fund premium tax offset receivable relating to
prior assessments in 1997 and 1996, respectively.
The Company is involved in litigation arising in and out of the normal
course of its business. Management intends to defend these actions
vigorously. While the outcome of litigation cannot be foreseen with
certainty, it is the opinion of management, after consultation with legal
counsel, that the ultimate resolution of these matters will not materially
affect its financial position, results of operations or liquidity.
10. Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform with the
current year presentation.
40
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
11. Affiliated Companies
The relationship of the Company, its parent and affiliated companies as of
December 31, 1997 is illustrated below. Subsidiaries are wholly-owned by
the parent, except as noted.
Parent
------
Massachusetts Mutual Life Insurance Company
Subsidiaries of Massachusetts Mutual Life Insurance Company
-----------------------------------------------------------
C.M. Assurance Company
C.M. Benefit Insurance Company
C.M. Life Insurance Company
MassMutual Holding Company
MassMutual Holding Company Two, Inc. (Sold in March 1996)
MassMutual of Ireland, Limited
MML Bay State Life Insurance Company
MML Distributors, LLC
Subsidiaries of MassMutual Holding Company
------------------------------------------
GR Phelps, Inc.
MassMutual Holding Trust I
MassMutual Holding Trust II
MassMutual Holding MSC, Inc.
MassMutual International, Inc.
MassMutual Reinsurance Bermuda (Sold in December 1996)
MML Investor Services, Inc.
State House One (Liquidated in December 1996)
Subsidiaries of MassMutual Holding Trust I
------------------------------------------
Antares Leveraged Capital Corporation - 98.5%
Charter Oak Capital Management, Inc. - 80.0%
Cornerstone Real Estate Advisors, Inc.
DLB Acquisition Corporation - 84.8%
Oppenheimer Acquisition Corporation - 88.55%
Subsidiaries of MassMutual Holding Trust II
-------------------------------------------
CM Advantage, Inc. - (Liquidated in December 1997)
CM International, Inc.
CM Property Management, Inc. - (Liquidated in December 1997)
High Yield Management, Inc.
MMHC Investments, Inc.
MML Realty Management
Urban Properties, Inc.
Westheimer 335 Suites, Inc.
41
NOTES TO STATUTORY FINANCIAL STATEMENTS, Continued
Subsidiaries of MassMutual International
----------------------------------------
MassLife Seguros de Vida (Argentina) S. A.
MassMutual International (Bermuda) Ltd.
Mass Seguros de Vida (Chile) S. A.
MassMutual International (Luxembourg) S. A.
MassMutual Holding MSC, Incorporated
-------------------------------------
MassMutual/Carlson CBO N. V. - 100%
MassMutual Corporate Value Limited - 46%
9048 - 5434 Quebec, Inc.
Affiliates of Massachusetts Mutual Life Insurance Company
---------------------------------------------------------
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
42
REPORT OF INDEPENDENT ACCOUNTANT
To the Board of Directors and Policyholders of
C.M. Life Insurance Company
We have audited the 1997 and 1996 statutory financial statements and the related
financial statement schedules of C.M. Life Insurance Company listed in Item
14(a) 1 and 2 of this Form 10-K. These financial statements and 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles, used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
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
("statutory accounting principles"), 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 at this time, are
presumed to be material.
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 at December 31, 1997, or the results of its
operations or its cash flows for the year then ended.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of C.M. Life Insurance Company
at December 31, 1997, and the results of its operations and its cash flows for
the year then ended, on the statutory basis of accounting described in Note 1.
In addition, in our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
February 6, 1998
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
C.M. Life Insurance Company
We have audited the accompanying statutory statements of income, changes in
capital stock and surplus and cash flows of C.M. Life Insurance Company (a
Connecticut corporation and a wholly owned subsidiary of Connecticut Mutual Life
Insurance Company) for the year ended December 31, 1995. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financials statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
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,
presented 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 the year ended December 31, 1995 in conformity with generally
accepted accounting principles. 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 Contracts, financial statements of mutual life insurance
enterprises for periods ending on or before December 15, 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 present 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 results of
operations and cash flows of C.M. Life Insurance Company for the year ended
December 31, 1995.
In our opinion, the financial statements referred to above do present fairly, in
all material respects, the results of operations and cash flows of C.M. Life
Insurance Company for the year ended December 31, 1995 in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Connecticut.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedules III and IV are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements, and
in our opinion, fairly state in all material respects the financial data
required to be set forth therein for the year ended December 31, 1995 in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 15, 1996
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
No items on Form 8-K as required by Item 304 of Regulation S-K were filed during
1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Position with
C.M. Life; Year Other Positions During
Name (Age at 12/31/97) Commenced the Past Five Years
- ---------------------- --------------- -------------------
Lawrence V. Burkett, Jr. (52) Director, President and Executive Vice President and
Chief Executive Officer, General Counsel, since 1993,
since 1996 Senior Vice President and Deputy
General Counsel, MassMutual 1992-1993.
John B. Davies (48) Director, since 1996 Executive Vice President, since 1994,
Associate Executive Vice
President, 1994-1994,
General Agent, 1982-1993,
MassMutual.
Stuart H. Reese (42) Director and Senior Vice Chief Executive Director-Investment
President - Investments, Management, since 1997, Senior Vice
since 1996 President, 1993-1997, MassMutual;
Investment Manager, 1979-1993, Aetna
Life and Casualty and Affiliates.
Paul D. Adornato (59) Senior Vice President - Senior Vice President, since 1986,
Operations, since 1996 MassMutual.
Anne Melissa Dowling (39) Senior Vice President - Senior Vice President, since 1996,
Large Corporate Marketing MassMutual; Chief Investment
since 1996 Officer, 1994-1996, Connecticut
Mutual Life Insurance Company; Senior Vice
President - International, 1987-1993,
Travelers Insurance Co.
Maureen R. Ford (42) Senior Vice President - Senior Vice President, since 1996,
Annuity Marketing, MassMutual; Marketing Officer,
since 1996 1989-1996, Connecticut Mutual Life
Insurance Company.
Isadore Jermyn (47) Senior Vice President Senior Vice President and Chief
and Actuary, since 1996 Actuary since 1997, Senior Vice
President and Actuary, 1995-1997,
Vice President and Actuary, 1987-
1995, MassMutual.
Edward M. Kline (54) Treasurer, since 1997 Vice President, since 1989, Treasurer,
Since 1997, MassMutual.
45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, CONTINUED
- -----------------------------------------------------------------------
Ann F. Lomeli (41) Secretary, since 1988 Vice President, Secretary and
Associate General Counsel, since
1998, Vice President, Associate
Secretary and Associate General
Counsel, 1996-1998, MassMutual;
Corporate Secretary and Counsel,
1988-1996, Connecticut Mutual
Life Insurance Company.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
All of the executive officers of C.M. Life also serve as officers of MassMutual
and receive no compensation directly from C.M. Life. Allocations have been made
as to such officer's time devoted to duties as executive officers of C.M. Life.
No officer or Director of C.M. Life received allocated compensation in excess of
$100,000.
No shares of C.M. Life are owned by any executive officer or director. C.M.
Life is a wholly-owned subsidiary of MassMutual.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
This item is not applicable since the Registrant is wholly owned by MassMutual.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Reinsurance and other related party transactions
- ------------------------------------------------
As discussed in Item 1 and in the Notes to the Audited Financial Statements,
C.M. Life had reinsurance and related party transactions. C.M. Life cedes a
portion of its life insurance business to MassMutual and other insurers under
various reinsurance agreements. In addition, C.M. Life has an agreement with
its parent, MassMutual, whereby MassMutual, for a fee, provides various
management services to C.M. Life.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements (set forth in Item 8.):
- Statutory Statements of Financial Position as of December 31,
1997 and 1996.
- Statutory Statements of Income for each of the years ended
December 31, 1997, 1996 and 1995.
- Statutory Statements of Changes in Capital Stock and Surplus for
each of the years ended December 31, 1997, 1996 and 1995.
- Statutory Statements of Cash Flows for each of the years ended
December 31, 1997, 1996 and 1995.
- Notes to Statutory Financial Statements.
- Report of Independent Public Accountants.
2. Financial Statement Schedules (set forth below):
- Schedule I - Summary of Investments - Other than Investments in
Related Parties as of December 31, 1997.
- Schedule III - Supplementary Insurance Information as of December
31, 1997.
- Schedule IV - Reinsurance for the years ended December 31, 1997,
1996 and 1995
All other schedules are omitted because of the absence of conditions
under which they are required or because the information is shown in the
financial statements or notes thereto.
3. Exhibit Number
Per Item 601 of Description
Regulation S-K of Exhibits
--------------- -----------
3(a) Charter of C.M. Life Insurance Company.*
3(b) By Laws of C.M. Life Insurance Company.*
4(a) Form of Individual Contract for the Panorama Plus Annuity.**
(i) Form of IRA Endorsement for the Panorama Plus
Annuity Individual Contract.**
(ii) Form of Terminal Illness Endorsement for the
Panorama Plus Annuity Individual Contract.**
(iii) Form of Tax-Sheltered Annuity Endorsement for the
Panorama Plus Annuity Individual Contract.**
(iv) Form of Qualified Plan Endorsement for the
Panorama Plus Annuity Individual Contract.**
(v) Form of Unisex Endorsement for the Panorama Plus
Annuity Individual Contract.**
4(b) Form of Group Contract for the Panorama Plus Annuity.**
(i) Form of IRA Endorsement for the Panorama Plus
Annuity Group Contract.**
(ii) Form of Terminal Illness Endorsement for the
Panorama Plus Annuity Group Contract.**
(iii) Form of Tax-Sheltered Annuity Endorsement for the
Panorama Plus Annuity Group Contract.**
(iv) Form of Qualified Plan Endorsement for the
Panorama Plus Annuity Group Contract.**
47
(v) Form of Unisex Endorsement for the Panorama Plus
Annuity Group Contract.**
4(c) Form of Individual Certificate for the Panorama Plus
Annuity.**
(i) Form of IRA Endorsement for the Panorama Plus
Annuity Individual Certificate.**
(ii) Form of Terminal Illness Endorsement for the
Panorama Plus Annuity Individual Certificate.**
(iii) Form of Tax-Sheltered Annuity Endorsement for the
Panorama Plus Annuity Individual Certificate.**
(iv) Form of Qualified Plan Endorsement for the
Panorama Plus Annuity Individual Certificate.**
(v) Form of Unisex Endorsement for the Panorama Plus
Annuity Individual Certificate.**
4(d) Form of Application for the Individual Panorama Plus
Annuity.**
4(e) Form of Application for the Group Panorama Plus Annuity.**
4(f) Form of Application Supplement for Panorama Plus Tax
Sheltered Annuity.**
4(g) Form of Certificate Application Supplement for Panorama Plus
Tax Sheltered Annuity.**
5 Opinion Regarding Legality (filed as Exhibit 5 to Pre-
Effective Amendment No. 1 to Registration Statement filed
April 13, 1992 on Form S-1 (Reg. No. 33-45123))
10 Agreement to Purchase Shares by and between C.M. Life
Insurance Company and Connecticut Mutual Financial Services
Series Fund I, Inc.**
16 Change of independent accountant - Incorporate by reference
Form 8-K filed October 4, 1996.
23 Financial Statement Schedules***
24(a) Power of Attorney***
24(b) Consent of Counsel (filed as Exhibit 24(b) to Pre-Effective
Amendment No. 1 to Registration Statement filed April 13,
1992 on Form S-1 (Reg. No. 33-45123)).
27 Financial Data Schedule***
* Incorporated by reference to the initial registration statement on
Form N-4 for the Contracts and Panorama Plus Separate Account (File
No. 33-45122) as filed with the Securities and Exchange Commission on
January 16, 1992.
** Incorporated by reference to Pre-Effective Amendment No. 1 to the
registration statement on Form N-4 for the Contracts and Panorama Plus
Separate Account (File No. 33-45122) as filed with the Securities and
Exchange Commission on April 13, 1992.
*** Filed herewith
(b) No additional financial statements are required to be filed.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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)
By: /s/ Lawrence V. Burkett, Jr.
----------------------------
Lawrence V. Burkett, Jr.*
Director, President and Chief Executive
Officer (Principal Executive Officer)
Date: March 25, 1998
----------------
/s/ Richard M. Howe
- -----------------
*Richard M. Howe
On March 25, 1998 as Attorney in Fact,
pursuant to Power of Attorney, filed
herewith.
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Lawrence V. Burkett, Jr.* Director and President and Chief March 25, 1998
- ---------------------------------------------------- --------------------------
Lawrence V. Burkett, Jr. Executive Officer
(Principal Executive Officer
/s/ Edward M. Kline* Treasurer March 25, 1998
- ---------------------------------------------------- --------------------------
Edward M. Kline (Principal Financial Officer)
/s/ John Miller, Jr* Second Vice President and March 25, 1998
- ---------------------------------------------------- --------------------------
John Miller, Jr. Comptroller
(Chief Accounting Officer)
/s/ John B. Davies* Director March 25, 1998
- ---------------------------------------------------- --------------------------
John B. Davies
/s/ Stuart H. Reese* Director March 25, 1998
- ---------------------------------------------------- --------------------------
Stuart H. Reese
/s/ Richard M. Howe On March 25, 1998, As Attorney-in-fact,
- -------------------
*Richard M. Howe pursuant to Powers of Attorney, filed herewith
49