<PAGE>
September 14, 1995
Dear LifeTrust Contract Owner:
The information below supplements Massachusetts Mutual Life Insurance Company's
Fixed Account with Market Value Adjustment Prospectus dated May 15, 1995.
Please place this supplement with your prospectus and retain it for future
reference.
--------------------------------------------------------------------------------
FIXED ACCOUNT WITH MARKET VALUE ADJUSTMENT
Supplement dated September 14, 1995
to the Prospectus dated May 15, 1995
The following should be read in conjunction with the information under the
heading MassMutual - Description of the Business on pages 24 and 25 of the Fixed
Account with Market Value Adjustment Prospectus:
As of September 13, 1995, the Boards of Directors of Massachusetts Mutual Life
Insurance Company and Connecticut Mutual Life Insurance Company had approved the
merger of Connecticut Mutual into MassMutual. The companies plan to execute a
definitive merger agreement in the near future. The merger is subject to
certain conditions, including member and regulatory approvals and is expected to
be completed as soon thereafter as possible. As a result of the merger,
MassMutual would become the nation's fifth largest mutual life insurance company
with estimated consolidated assets of $49 billion and estimated consolidated
contingency reserves of $2.5 billion. The companies believe that the merger of
MassMutual and Connecticut Mutual would be in the best interests of
policyholders because the combined enterprise will enjoy a strong capital
position, a diverse product portfolio and a competitive cost structure. The
merger will not affect any terms of contracts issued by MassMutual.
September 14, 1995
<PAGE>
PROSPECTUS
MAY 15, 1995
Massachusetts Mutual Life Insurance Company
Fixed Account with Market Value Adjustment
Offered through OppenheimerFunds LifeTrust Variable Annuity
This prospectus (the "Prospectus") describes Massachusetts Mutual Life Insurance
Company's ("MassMutual") Fixed Account (the "Fixed Account") with Market Value
Adjustment. The Fixed Account is available for use with OppenheimerFunds
LifeTrust Variable Annuity Contract (the "Contract") issued by MassMutual. The
Fixed Account constitutes an account to which a Contract Owner may allocate
purchase payments or Accumulated Value in accordance with the Contract's
transfer rules. (For a discussion of the transfer restrictions applicable to
the Contract, please consult page 10 of the Contract prospectus).
MassMutual guarantees specified rates of interest for amounts allocated to the
Fixed Account for specified periods of time. The interest rate stipulated for a
particular period (the Guaranteed Rate) is an annual effective yield.
Additionally, although Guaranteed Rates will fluctuate, they will never go below
3%.
MassMutual's assets, including amounts allocated to the Fixed Account are
available to meet the guarantees associated with the Fixed Account. These
assets are chargeable with liabilities arising out of other business of the
Company.
Please note that amounts taken from the Fixed Account by partial or full
redemption, received from payment of a death benefit following the death of the
Contract Owner who is not the Annuitant, and transfers made prior to an
Expiration Date are subject to a Market Value Adjustment. Therefore, a Contract
Owner may experience a negative investment return.
Since the Fixed Account is available only through the Contract, an investor
should carefully review the discussion of the Contract contained in that
prospectus. The focus of this Prospectus is limited to the Fixed Account's
operations and features.
Purchase payments and transfers of Accumulated Value may be made among the Fixed
Account and to the Divisions of Massachusetts Mutual Variable Annuity Separate
Account 3 (the "Separate Account").
The annuity benefits available under the Contract may be either fixed or
variable amounts or a combination of both. The Accumulated Value prior to
maturity and the amount of any variable annuity payments thereafter will vary
with the investment performance of the Divisions selected and the amounts
allocated to the Fixed Account.
THE DATE OF THIS PROSPECTUS IS MAY 15, 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY THE PROSPECTUSES OF MASSMUTUAL'S
OPPENHEIMERFUNDS LIFETRUST VARIABLE ANNUITY, MML SERIES INVESTMENT FUND, AND
OPPENHEIMER VARIABLE ACCOUNTS FUND.
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
(413) 744-8441
<PAGE>
TABLE OF CONTENTS
Section
GLOSSARY ...................................................... 3
<TABLE>
<CAPTION>
<S> <C> <C>
I. PRODUCT DESCRIPTION.................................... 4
The Nature of the Contract and the MVA................. 4
Availability of the MVA................................ 4
The Fixed Account and the Market Value
Adjustment Feature.................................... 4
Market Value Adjustment................................ 4
Accumulation Period of a Contract...................... 5
Establishment of the Guaranteed Rate................... 5
The MVA's Applicability on Redemptions................. 5
II. INVESTMENTS BY MASSMUTUAL.............................. 6
III. DISTRIBUTION OF CONTRACTS.............................. 6
IV. FEDERAL INCOME TAXATION DISCUSSION..................... 6
V. ACCOUNTING PRACTICES................................... 6
VI. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 7
Summary................................................ 7
Total Company Results of Operations.................... 8
Results of Operations by Line of Business.............. 10
Statement of Financial Position........................ 14
Inflation.............................................. 17
Investments............................................ 17
VII. MASSMUTUAL DESCRIPTION OF THE BUSINESS................. 24
MassMutual............................................. 24
Insurance and Financial Management..................... 25
Pension Management..................................... 26
Life and Health Benefits Management.................... 26
Investment Management.................................. 27
Regulation............................................. 27
VIII. EXECUTIVE OFFICERS AND DIRECTORS....................... 28
IX. EXECUTIVE COMPENSATION................................. 31
X. EXPERTS AND LEGAL PROCEEDINGS.......................... 35
Experts................................................ 35
Legal Matters.......................................... 35
XI. SELECTED HISTORICAL FINANCIAL DATA..................... 36
Audited Financial Statements........................... 38
</TABLE>
2
<PAGE>
GLOSSARY
As used in this Prospectus, the following terms mean:
ACCUMULATED AMOUNT: For each amount credited to a Segment of the Fixed Account
the Accumulated Amount on any date is the amount credited to the Segment
accumulated to that date at the Guaranteed Rate for that amount.
ACCUMULATED VALUE: The value of a Contract on or prior to the Maturity Date
equal to the Variable Value plus the Fixed Value.
ACCUMULATION PERIOD: The period prior to the Maturity Date, during the lifetime
of the Annuitant and Owner.
ACCUMULATION UNIT: A unit of measurement used in determining the value of
amounts credited to a Contract in a Division of the Separate Account on or prior
to the Maturity Date.
ANNUITANT: The person on whose life the Contract is issued.
BENEFICIARY: The person(s) or entity(ies) designated by the Contract Owner to
receive a death benefit under the Contract, if any, upon the death of the
Contract Owner or the Annuitant.
CASH REDEMPTION VALUE: The value of a Contract which a Contract Owner will
receive if the Contract is redeemed, equal to Accumulated Value less
Administrative Charges, Sales Charges, premium taxes, and a Market Value
Adjustment, if any such charges are applicable.
CONTRACT: The OppenheimerFunds LifeTrust Variable Annuity contract issued by
MassMutual.
CONTRACT OWNER(S): The owner (and in some instances the owners) of a Contract.
Contract Owners may include the Annuitant, an employer, a trust, or any entity
specified in an employee benefit plan.
DIVISION(S): A sub-account of Massachusetts Mutual Variable Annuity Separate
Account 3, the assets of which consist of shares of a specified Fund of either
the MML Series Investment Fund or the Oppenheimer Variable Account Funds.
EXPIRATION DATE: The Date on which the Guarantee Period for an Accumulated
Amount ends.
FIXED ACCOUNT: An account which pays interest at a Guaranteed Rate. If such
amounts are withdrawn prior to the end of the Guarantee Period, a Market Value
Adjustment will be made. Assets attributable to the Fixed Account are not
included in assets which are allocated to the Divisions of the Separate Account.
FIXED VALUE: On any date, the Fixed Value of the Contract is the sum of the
Accumulated Amounts credited to all Segments of the Fixed Account.
FUNDS: The separate series of shares of Oppenheimer Variable Account Funds and
MML Series Investment Fund, both of which are open-end, diversified management
investment companies, registered with the Securities and Exchange Commission, in
which the Divisions of the Separate Account invest.
GUARANTEE PERIOD: The period for which interest accrues at the Guaranteed Rate
on an amount credited to a Segment. Guarantee Periods range in whole-year
periods from one to ten years.
GUARANTEED RATE: The effective annual interest rate MassMutual uses to accrue
interest on an amount credited to a Segment as of a certain date. Guarantee
Rates are level for the entire Guarantee Period and are fixed at the time an
amount is credited to the Segment.
MARKET VALUE ADJUSTMENT ("MVA"): An adjustment made to the amount that the
Contract Owner will receive if money is taken from an Accumulated Amount prior
to the Expiration Date of its Guarantee Period.
MATURITY DATE: The date designated by the Contract Owner as of which Variable
Monthly Income payments (or, if elected, Fixed Income payments or a payment in
one sum) will begin. This date may be no later than the Annuitant's 90th
birthday (unless an earlier date is required by law.)
PURCHASE PAYMENT: An amount paid to MassMutual by, or on behalf of, the
Annuitant.
SEGMENT: All Guarantee Periods of a given length constitute a Segment.
Segments for all Guarantee Periods may not be available at one time.
SERVICE CENTER: The office at which the administration of the Contract occurs.
VALUATION DATE: A valuation date is any date on which the net asset value of the
shares of the Funds is determined. Generally, this will be any date on which
the New York Stock Exchange (or its successor) is open for trading.
VALUATION PERIOD: The period of time from the end of one Valuation Date to the
end of the next Valuation Date.
VALUATION TIME: The time of the close of the New York Stock Exchange (or its
successor) (currently 4:00 p.m. New York time) on a Valuation Date. All actions
to be performed on a Valuation Date will be performed as of the Valuation Time.
VARIABLE MONTHLY INCOME: A benefit providing for monthly payments that vary
with, and reflect the investment performance of, one or more Divisions of the
Separate Account.
VARIABLE VALUE: On any date, the Variable Value of a Contract is the sum of the
values of the Accumulation Units credited to each Division of the Separate
Account. The value in each Division is equal to the Accumulation Unit Value
multiplied by the number of units in that Division You own.
YOU or YOUR refers to the Contract Owner.
3
<PAGE>
I. PRODUCT DESCRIPTION
THE NATURE OF THE CONTRACT AND THE MVA
The investment option described in this Prospectus is a Fixed Account with
Market Value Adjustment ("MVA") available in conjunction with the Flexible
Premium Variable Annuity Contract (the "Contract") offered by Massachusetts
Mutual Life Insurance Company ("MassMutual"). The Contract is described in
greater detail in its prospectus. Investors should review the Contract
prospectus in conjunction with this prospectus before deciding whether to invest
in the Contract or allocate sums to the Fixed Account.
Allocations may be made to the Fixed Account either at the time a purchase
payment is made or by transferring monies held in an investment division of
MassMutual Variable Annuity Separate Account 3 (the "Separate Account") to the
Fixed Account. Allocations to a Guarantee Period (or Segment) must be for at
least $1,000.
The Accumulated Value of the Fixed Account is not guaranteed against the claims
of the Company's creditors.
When an amount is allocated to the Fixed Account, a corresponding Guarantee
Period is selected. If the allocated amount remains in the Fixed Account until
the applicable Expiration Date, its value will be equal to the amount originally
allocated multiplied, on a annually compounded basis, by its Guaranteed Rate.
A Market Value Adjustment will be made if sums are withdrawn from the Fixed
Account prior to their Expiration Date.
As is also discussed in the Contract prospectus, the Contract provides for the
accumulation of values prior to maturity and for the distribution of annuity
benefits thereafter. Additionally, a death benefit is also available under the
Contract. The earnings on deposits allocated to the Fixed Account will have an
impact on the Contract's Accumulated Value, its Maturity Value, its Cash
Redemption Value and the death benefit.
AVAILABILITY OF THE FIXED ACCOUNT
The Fixed Account is not available in all states.
THE FIXED ACCOUNT AND THE MARKET VALUE ADJUSTMENT FEATURE
The Fixed Account is available during the Accumulation Period of the Contract.
(See, ACCUMULATION PAY-IN PERIOD at page 9 of the Contract prospectus.) The
Fixed Account offers different Guarantee Periods, which provide the option of
earning interest at various Guaranteed Rates on all or a portion of Your
Accumulated Value. Please note that amounts credited to a Guarantee Period at
different times may have different Guaranteed Rates, Current Rates, and
Expiration Dates since MassMutual changes the Current and Guaranteed Rates
periodically.
You may allocate purchase payments or transfer all or a portion of Your
Accumulated Value to the Fixed Account. Amounts credited to the Fixed Account
will earn interest at the Guaranteed Rate applicable for the Guarantee Period
selected on the date the amounts are credited. The applicable Guaranteed Rate
does not change during the Guarantee Period. The Guaranteed Rate may never be
less than 3%.
To the extent permitted by law, we reserve the right at any time to offer
Guarantee Periods that differ from those available when Your Contract was
issued. We also reserve the right, at any time, to stop accepting purchase
payments, transfers, or renewals for a particular Guarantee Period. Guarantee
Periods may be available in periods of one to ten years. Since the specific
Guarantee Periods available may change periodically, please contact the Service
Center to determine the Guarantee Periods currently being offered.
MARKET VALUE ADJUSTMENT
Any withdrawal of Your Accumulated Amount will be subject to a Market Value
Adjustment ("MVA") unless the effective date of the withdrawal is within 30 days
prior to the end of a Guarantee Period. For this purpose, redemptions,
transfers, death benefits based on a Contract Owner's death (where the Contract
Owner and the Annuitant are different), and maturity amounts are treated as
withdrawals. The MVA is an adjustment that will be applied to the amount being
withdrawn which is subject to the MVA, after the deduction of any applicable
Administrative Charge and before the deduction of any applicable Sales Charge.
The MVA can be positive or negative. The amount being withdrawn after
application of the MVA can therefore be greater than or less than the amount
withdrawn before the application of the MVA.
An MVA will not be applied upon the payment of a Death Benefit following the
death of the Annuitant.
The MVA will reflect the relationship between the Current Rate (as defined
below) for the Accumulated Amount being withdrawn and the Guaranteed Rate. It
also reflects the time remaining in the applicable Guarantee Period. Generally,
if the Guaranteed Rate is lower than the applicable Current Rate, then the
application of the MVA will result in a lower payment upon withdrawal.
Similarly, if the Guaranteed Rate is higher than the applicable Current Rate,
the application of the MVA will result in a higher payment upon withdrawal.
The Market Value Adjustment which is applied to the amount being withdrawn is
determined by using the following formula:
1+i / n /
MVA = Amount x [(-----)/---/ - 1]
1+j /365/
where,
Amount is the amount being withdrawn from a given accumulated amount less any
applicable administrative charges.
i, is the Guaranteed Rate being credited to the Accumulated Amount subject to
the MVA; and
j, the "Current Rate," is the Guaranteed Rate, available as of the effective
date of the application of the MVA, for current allocations to the Segment with
a Guarantee Period equal to the time remaining to the Expiration Date for the
amount being withdrawn rounded to the next higher number of complete years; and
n, is the number of days remaining in the Guarantee Period of the amount subject
to the MVA.
In the determination of "j," if the Company currently does not offer the
applicable Segment, we will determine "j" above
4
<PAGE>
by interpolation or extrapolation of the Guaranteed Rate for the Guarantee
Periods then available.
EXAMPLES
The following examples illustrate how the MVA operates on amounts held in a
particular Segment:
EXAMPLE 1
$1,000 is applied on May 10, 1994, into a Segment with a 5 year Guarantee
Period. The Guaranteed Rate for amounts applied to the Segment on May 10, 1994,
is 6%. If the $1,000 is left in that Segment until May 10, 1999, it will
accumulate at a 6% effective annual rate of interest for the full 5 years to
$1,338.23.
If, however, the full amount is taken from the Segment as of May 10, 1998:
(1) The Guaranteed Rate applied on May 10, 1998 to amounts credited to a
1-year Segment is 4%; and
(2) The accumulated amount prior to the application of
MVA as of May 10, 1998 equals:
$1,000 x 1.06/4/ = $1,262.48
(3) The number of days remaining = 365 (n = 365), and
(4) The MVA equals $24.28, and is calculated according to the following
formula:
1.06 /365/
$24.28 = $1,262.48 x [(----)/---/ - 1]
1.04 /365/
The market value for the purposes of surrender on May 10, 1998, of the amount
credited to the 5-year segment on May 10, 1994, is therefore equal to $1,286.76
($1,262.48 + $24.28).
EXAMPLE 2
$1,000 is applied to a 7-year Segment on May 10, 1992, with a Guaranteed Rate of
5% and will accumulate to $1,407.10 if left in the Segment until May 10, 1999.
If, however, the full amount is taken from the Segment as of May 10, 1995:
(1) The Guaranteed Rate applied on May 10, 1995 to amounts credited to a
1-year Segment is 10%; and
(2) The accumulated amount prior to the application of
MVA as of May 10, 1995 equals:
$1,000 x 1.05/3/ = $1,157.63
(3) The period of time from May 10, 1995 to the end of the Guarantee Period is
4 years or 1460 days
(n = 1460);
(4) The MVA equals $ 196.56 and is calculated according to the following
formula:
1.05 /1460/
$ - 196.56 = $1,157.63 x [(----)/----/ - 1]
1.10 / 365/
The market value for purposes of surrender on May 10, 1995, of the amount
credited to the 7-year Segment on May 10, 1992, is therefore equal to $961.07
($1,157.63 - $196.56 = $961.07).
THE EXAMPLES SET FORTH ABOVE ARE HYPOTHETICAL AND ARE NOT INDICATIVE OF FUTURE
OR PAST PERFORMANCE.
ACCUMULATION PERIOD OF A CONTRACT
Variable annuities are designed to permit a Contract Owner to accumulate values
over a period of time. Generally, a Contract Owner will use such accumulated
values for long term needs such as retirement planning. Accordingly, in many
instances, amounts allocated to the Fixed Account will be subject to several
Guarantee Periods over the life of the Contract.
The end of a Guarantee Period for a specific amount credited to a Segment is
called its Expiration Date. At least 45 days, but not more than 75 days, before
the Expiration Date for an Accumulation Amount, we will inform You of the
Guaranteed Rates being offered and the Guarantee Periods available as of the
date of such notice. The Guaranteed Rates on the date of a renewal may be more
or less than the rates quoted in such notice.
The Guarantee Period normally "renews", and in the absence of instructions on
the Expiration Date, we begin crediting interest for a new Guarantee Period
lasting the same amount of time as the one just ended. The Accumulated Amount
then earns interest at the new Guaranteed Rate applicable at the time of
renewal. You may choose different Guarantee Periods from among those we are
then offering, or You may transfer all or a portion of the Accumulated Amount to
the Separate Account.
If Your Accumulated Amount's Segment is no longer available for new amounts
credited, or You choose a different Segment that is no longer available, we will
try to reach You so that You may make another choice.
If a choice is not made at this point, the Segment with the next shorter
Guarantee Period available will be used and if not available, the Segment with
the next longer Period will be used.
ESTABLISHMENT OF THE GUARANTEED RATE
MassMutual will make the final determination concerning future Guarantee Rates
for future deposits, transfers or renewals. Although we cannot predict future
Guarantee Rates, such Guarantee Rates will never be less than three percent (3%)
per annum.
THE MVA'S APPLICABILITY ON REDEMPTIONS
As noted above, an MVA will apply if a partial or full redemption of the
Contract is made prior to an Expiration Date. Where a redemption occurs, the
Accumulated Value of the Contract will be reduced by the amount surrendered from
the Fixed Account prior to any MVA.
The Cash Redemption Value may also be subject to Contingent Deferred Sales
Charges ("Sales Charges") under the Contract pursuant to the schedule which
follows:
5
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<TABLE>
<CAPTION>
YEAR SINCE PAYMENT SALES CHARGE ASSESSED
<S> <C>
1st 7%
2nd 6%
3rd 5%
4th 4%
5th 3%
6th 2%
7th 1%
</TABLE>
We make this adjustment for Sales Charges since we make no deduction for Sales
Charges when a purchase payment is received. The amount of Sales Charges is
computed based on the date the particular payment is received into the Contract.
Purchase Payments received and redeemed after year 7 are not subject to Sales
Charges. Amounts in the Fixed Account, however, continue to be subject to a
Market Value Adjustment. For more information concerning the application of
Sales Charges, please consult the Contract prospectus.
Please note that certain charges are imposed against the Contract, including
mortality and expense risk and administrative charges. For a more detailed
explanation of applicable charges, please see the "Charges and Deductions"
sections of the Contract Prospectus.
II. INVESTMENTS BY MASSMUTUAL
Assets of MassMutual must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
Proceeds from the Fixed Account will be deposited in a non-unitized segment of
MassMutual's general account organized as a Separate Account for accounting
purposes. Proceeds will be used to fund MassMutual's obligations under the
Contract and amounts not required to fund such obligations may accrue to
MassMutual as profit. Obligations under the Contract are also met through the
operation of the Divisions to which a Contract Owner has allocated Accumulated
Value. All assets of MassMutual would be available to meet the guarantees under
the Contracts.
In establishing Guaranteed Rates, MassMutual intends to take into account the
yields available on the instruments in which it intends to invest the proceeds
from the Contracts. MassMutual's investment strategy with respect to the
proceeds attributable to allocations made to the Fixed Account will generally be
to invest in investment-grade debt instruments having durations tending to match
the applicable Guarantee Periods.
III. DISTRIBUTION OF CONTRACTS
MML Investors Services, Inc., 1 Financial Plaza, 1350 Main Street, Springfield,
MA 01103-1686 ("MMLISI"), a wholly-owned subsidiary of MassMutual, acts as the
principal underwriter of the Contracts. MMLISI is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. The maximum commission a broker-dealer
will receive for selling a Contract is 6.25%.
The Contracts are sold by registered representatives of MMLISI who are also
licensed to sell MassMutual insurance products under state insurance law.
Contracts with the Fixed Account are offered in a limited number of states where
MassMutual has received authority to write modified guarantee annuity business
and the Fixed Account and the Contracts have been approved.
Additionally, Contracts are offered through Oppenheimer's distribution network.
Oppenheimer, MassMutual Variable Annuity Separate Account 3, MassMutual and
MMLISI have entered into an agreement pursuant to which Oppenheimer has agreed
to promote sales of the product through wholesale distribution arrangements with
broker-dealers. Registered representatives of the particular broker-dealer, who
are also properly licensed to sell MassMutual products may make such sales.
IV. FEDERAL TAXATION DISCUSSION
Please consult pages 17 through 19 of the Contract prospectus for a discussion
of the tax status of the Contract.
V. ACCOUNTING PRACTICES
Statutory accounting practices differ from those applicable to publicly-held
stock life insurance companies ("stock life GAAP") in that statutory accounting
practices are primarily designed to reflect the ability of the insurer to
satisfy its obligations to policyholders, contract owners and beneficiaries,
whereas stock life GAAP is primarily oriented toward the allocation of revenues,
expenses and costs to financial reporting periods. For example, under statutory
accounting practices, premiums and deposits are taken into income when due and
commissions and other costs incurred in connection with acquiring new business
are charged to operations in the year incurred; under stock life GAAP, revenues,
excluding deposits, are recorded on an accrual basis as earned over the life of
a policy, and expenses and costs are accrued on a basis to match them against
appropriate revenues.
The Financial Accounting Standards Board, which has no role in establishing
regulatory accounting practices, issued Interpretation 40, Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises, and Statement of Financial Accounting Standards No. 120, Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts. The American Institute of
Certified Public Accountants, which also has no role in establishing regulatory
accounting practices, issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. These pronouncements
will require mutual life insurance companies to modify their financial
statements in order to continue to be in accordance with generally accepted
accounting principles, effective for 1996 financial statements. The manner in
which policy reserves, new business acquisition costs, asset valuations and the
related tax effects are recorded will change. Management
6
<PAGE>
has not determined the impact of such changes on the Company's Statements of
Financial Position or Income.
VI. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
MassMutual (or the "Company") is a Massachusetts domiciled mutual life insurance
company established in 1851. The Company provides a broad product portfolio of
individual life and disability income protection insurance, individual
annuities, group life and health insurance, pension products, investment
products and investment advisory services. MassMutual's products are managed by
four lines of business: Insurance and Financial Management ("IFM"), Pension
Management ("PM"), Life and Health Benefits Management ("LHBM") and Investment
Management ("IM").
GENERAL
The information presented below should be read in conjunction with the audited
financial statements and other information included elsewhere in this
prospectus.
The Company's main priority has been to balance financial strength,
policyholders' value and growth with emphasis on financial strength, which has
resulted in the Company's strong capital position and favorable financial
ratings. The Company has pursued this objective 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. These
efforts have produced strong financial performance, with net gain from
operations of $224 million and $211 million for the years ended December 31,
1994 and 1993, respectively. At December 31, 1994, the Company had $35.2
billion in total assets, over 1.4 million policyholders and more than $147
billion of direct life insurance in force. In addition, the Company's total
adjusted capital as defined by the National Association of Insurance
Commissioners (the "NAIC") has grown to $2.5 billion at December 31, 1994,
compared to $2.4 billion and $2.0 billion at December 31, 1993 and 1992, as set
forth below.
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
(in millions)
Policyholders' Contingency
Reserves (Surplus) $1,929 $1,818 $1,524
Asset Valuation Reserves 347 301 254
One-half of the Apportioned
Dividend Liability 266 264 248
------ ------ ------
Total Adjusted Capital (1) $2,542 $2,383 $2,026
====== ====== ======
</TABLE>
(1) The Company adopted the NAIC's definition of total adjusted capital, as
required by 1996, of surplus plus Asset Valuation Reserve ("AVR") and
one-half of the apportioned dividend liability.
The Company's total adjusted capital was increased by the issuance of surplus
notes of $100 million at 7 1/2% and $250 million at 7 5/8% in 1994 and 1993,
respectively. The proceeds of the notes, less a $35 million reserve in 1994 and
a $25 million reserve in 1993 for contingencies associated with the issuance of
the notes, are recorded as a component of the Company's policyholders'
contingency reserves. The surplus note contingency reserves are included in
investment reserves. See "Policyholders' Contingency Reserves".
With regard to profitability, Management believes that net gain from operations,
rather than net income, is the most relevant measure of operating results for
the Company. Net gain from operations represents the excess of income derived
from the Company's lines of business over the costs of operating those lines
(after deducting taxes and policyholder dividends). 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 the Company does not manage its
investment portfolio to realize gains for non-economic purposes. The Company has
increased its total adjusted capital from the beginning of 1990 through the end
of 1994 by $940 million.
At the end of 1994, the Company executed two reinsurance agreements with its
subsidiary, MML Pension Insurance Company ("MML Pension"), an indirectly wholly
owned subsidiary. Through the first of these contracts, the Company assumed all
of the single premium immediate annuity business written by MML Pension through
either an assumption reinsurance provision or a coinsurance provision. The
second contract ceded the Company's group life, accident and health business to
MML Pension. Additionally, a reinsurance agreement previously in place, ceding
all of the Insurance and Financial Management line's single premium immediate
annuity business to MML Pension, was terminated. These agreements became
concurrently effective on December 31, 1994 and were accounted for as a bulk
reinsurance transaction. Accordingly, assets were transferred at fair value and
liabilities were transferred at statutory carrying value. The net effect of
these transactions decreased the Company's assets and liabilities by $175
million in 1994. Following statutory accounting rules for bulk reinsurance,
these transfers did not impact the 1994 Summary of Operations. However, future
gains from operation for the Company's group life, accident and health business
will be reported in MML Pension. The Company will recognize these earnings of
the subsidiary using the equity method of accounting as described in Item 1.
Alternatively, the Company may record the subsidiary's income through
operations, which is a permitted practice under statutory accounting. These
transactions were executed to position MML Pension as an accident and health
insurance company to more easily respond to opportunities for forming alliances
with other health care entities but may include consideration of the sale or
partial sale of the subsidiary. In the future, the Company intends to issue all
of its group life, accident and health business directly through MML Pension.
During 1994, the Company's financial strength continued to be recognized by the
rating agencies. It received the highest ratings of A++ by A.M. Best Company,
Inc., AAA by Standard & Poor's Corporation, AAA by Duff & Phelps Credit Rating
Co., as well as receiving a rating of Aa1 by Moody's Investors Service, Inc.
(the highest in its "excellent" category).
7
<PAGE>
TOTAL COMPANY - RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net gain from operations in 1994 increased by 6.2% to $224 million from $211
million for 1993. This increase was primarily the result of favorable mortality
and persistency, as well as continued expense control.
Premium income decreased to $4,522 million for 1994 from $4,784 million for
1993. Much of this decrease is attributable to a decline in deposit fund
premiums in the Pension Management line which had lower than expected sales of
participating guaranteed investment contract. Premium income from the Insurance
and Financial Management line for 1994 was consistent with 1993, reflecting
strong sales of individual life insurance offset by a decrease in individual
annuity sales. While premiums from the Life and Health Benefits Management line
remained relatively flat in 1994 from 1993, premium equivalency, which places
all funding arrangements on an equal basis, was $2,302 million for 1994 as
compared to $2,063 million for 1993, an increase of 11.6%.
Net investment and other income decreased 3.3% in 1994 compared to 1993,
resulting from a decline in investment yields on the general account's
investment portfolio which was not fully offset by an increase in invested
assets. The ratio of net investment income to mean invested assets declined in
1994 to 7.7% from 8.2% in 1993. The drop in the portfolio yield is a result of
maturing higher yielding securities being replaced by investments with the lower
yields of the current market place and increased expenses attracted by the
increase in real estate investments. The components of net investment income
are set forth below.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1994 1993
------------ -----------
(in millions)
<S> <C> <C>
Gross investment income:
Bonds $1,435 $1,405
Common stocks 3 12
Mortgage loans 304 365
Real estate 207 181
Policy loans 195 188
Cash and short-term investments 94 93
Other investments 14 6
------ ------
Total gross investment income 2,252 2,250
Less investment expenses (212) (171)
------ ------
Net investment income $2,040 $2,079
====== ======
</TABLE>
The increase in gross bond income is due to the increase in the funds invested
in bond securities offset by the reduction in the average yields of these
investments as higher yielding securities mature and are replaced by securities
with the lower yields of the current market place. Gross mortgage loan income
decreased in 1994 reflecting the overall decrease in the investment in
commercial mortgage loans as these investments are repaid, prepaid or foreclosed
and transferred to real estate. The increase in gross investment income on real
estate properties is related to the growth in this asset from the foreclosure of
mortgage loans and an improvement in the operating yields which increased to
9.8% in 1994 from 9.3% in 1993. Investment expenses increased $41 million in
1994 to $212 million due primarily to $23 million of surplus notes interest
payments, additional taxes, depreciation and other expenses related to the real
estate portfolio.
Policy benefits and payments for 1994 increased $151 million, or 3.8% from 1993.
This increase was due principally to an increase in the lapses of participating
pension business. Additionally, in 1994 individual annuity surrenders increased
$18 million and morbidity on the disability income policies increased by $9
million, or 6.0%. Individual life insurance continued to experience better than
expected mortality, which was 88% of expected claims in 1994 and 85% in 1993.
Surrender benefits for this product also continues to be favorable as a result
of the improved persistency of new and in-force business. Management believes
its continued focus on policyholder value and service has contributed to this
improvement in individual life persistency.
Additions to policyholders' reserves and funds decreased by 34.7% to $928
million in 1994 from $1,422 million in 1993. The decrease was primarily due to
Pension Management's reserves decreasing from the release of reserves from
levels of participating pension business offset only in part by a reserve
increase from the lower than expected sales of participating guaranteed
investment contracts recorded in the Company's separate investment accounts.
This decrease was partially offset by an increase in individual life insurance
business resulting from higher sales, improved persistency and lower than
expected mortality experience.
Operating expenses for 1994 increased by $15 million, or 4.2%, compared to 1993.
Approximately $4 million of this increase is attributable to the increase in
staffing in the Life and Health Benefits Management field office service centers
to process the growth in business due primarily from the writing of business
acquired as a result of the Hartford transaction. (See "Life and Health
Benefits Management Operations".) The balance of the increase is modest growth
in expenses which reflects management's continuing effort to control expenses.
Commissions increased by $9 million for 1994 compared to 1993, primarily due to
increases in individual life insurance business and corresponding increases in
first year commission. Sales on participating guaranteed investment contracts,
which do not generate commissions, were $94 million during 1994 and $452 million
during 1993. Consequently, commissions do not correlate to the change in total
premium income. Rather, the increases track the growth and changing product
sales mix for commission paying business (e.g., individual life and annuities
and group life and health products).
Federal income taxes decreased to $145 million in 1994, an 11.6% decrease from
1993. This decrease was primarily due to a lower reported 1993 equity add-on
tax than estimated at December 31, 1993. The tax on gain from operations was
flat from 1993 to 1994.
Dividends to policyholders decreased $4 million, or .8%, to $523 million in 1994
from $527 million in 1993, due to a generally lower dividend schedule effective
for payments on policy anniversaries in 1995 offset by growth in the in-force
business. The new dividend schedule, approved by the Board of Directors in the
fourth quarter of 1994, is reflected in Insurance and Financial Management's
1994 gain from operations.
Net realized capital losses were $135 million for 1994 and $77 million for 1993,
after the transfer to Interest Maintenance Reserve ("IMR"). The IMR captures
after-tax realized capital gains and losses due to changes in interest rates for
all types of
8
<PAGE>
fixed income investments. Net realized capital losses were comprised of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1994 1993
------------ -----------
(in millions)
<S> <C> <C>
Bonds $(110) $ 183
Common stocks 11 69
Mortgage loans (129) (93)
Real estate (30) (50)
Hedging instruments (137) 112
Other investments (9) (5)
Federal and state taxes 117 (129)
----- -----
Net realized capital gains before
transfer to IMR (287) 87
Transfer to IMR 152 (164)
----- -----
Net realized capital gains (loss) $(135) $ (77)
===== =====
</TABLE>
The high level of capital losses in 1994 was caused by bond sales and hedging
activity in an increasing interest rate environment. In 1993, hedging activity
produced a significant portion of gross realized gains in a declining interest
rate environment. In 1994, net realized capital losses from the sales of bonds
consisted of gross capital losses of $189 million offset by $79 million in gross
capital gains. All interest related gains and losses were transferred to the
IMR during 1994. In 1993, 25% of interest related gains and losses from the
sale of U.S. government securities were excluded from the IMR and recognized
immediately. The $152 million transferred to the IMR for 1994 was comprised of
$216 million of net realized capital losses offset by $64 million in taxes
recoverable. In 1993, the amounts transferred to the IMR included $279 million
of net realized capital gains less $115 million in taxes.
The losses from commercial mortgage loans increased by $36 million in 1994 as
compared to 1993 due to the expected increase in completed foreclosure activity
during 1994. In establishing the 1993 contribution to the Voluntary Investment
Reserves (VIR), delays in processing foreclosures were mitigated and properly
recognized. In 1994 additional contributions were made to the VIR for future
anticipated losses. See "Investment Reserves".
As a result of the foregoing factors, net income declined to $89 million for
1994 from $134 million for 1993.
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net gain from operations in 1993 increased by 11.1% to $211 million from $190
million for 1992. This increase was primarily the result of favorable mortality
and persistency as well as expense reductions.
Premium income increased to $4,784 million for 1993 from $4,776 million during
1992. A $313 million increase in premiums from the Insurance and Financial
Management line, reflecting strong sales of individual annuities and corporate
owned life insurance, was offset in part by a $299 million decline in premiums
from the Pension Management line. While premiums from the Life and Health
Benefits Management line remained flat in 1993 from 1992, premium equivalency,
which places all funding arrangements on an equal basis, was $2,063 million for
1993 as compared to $1,991 million for 1992, an increase of 3.6%.
Net investment and other income was virtually unchanged in 1993 compared to
1992, resulting from the increase in invested assets offset by a decline in
investment rates. As a result of the lower interest rates in 1993, the ratio of
net investment income to mean invested assets declined in 1993 to 8.2% from 8.7%
in 1992. The components of net investment income are set forth below.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1993 1992
------------ -----------
(in millions)
<S> <C> <C>
Gross investment income:
Bonds $1,405 $1,355
Common stocks 12 19
Mortgage loans 365 444
Real estate 181 147
Policy loans 188 168
Cash and short-term investments 93 97
Other investments 6 31
------ ------
Total gross investment income 2,250 2,261
Less investment expenses (171) (164)
------ ------
Net investment income $2,079 $2,097
====== ======
</TABLE>
Policy benefits and payments for 1993 decreased $311 million from 1992. This
decrease was due principally to lower maturities of non-participating
guaranteed investment contracts. Additionally, individual life insurance
continued to experience favorable mortality, which was 85% of expected claims
in 1993 compared to 92% in 1992. Surrender benefits for this product have also
been favorable as a result of the improved persistency of new and in-force
business. Management believes its continued focus on policyholder value and
service has contributed to this improvement in persistency.
Additions to policyholders' reserves and funds increased by 19.0% to $1,422
million in 1993 from $1,195 million in 1992. The increase was due primarily to
an increase in individual life insurance business resulting from higher sales,
improved persistency and lower mortality experience. Pension Management's
reserves decreased slightly reflecting the release of reserves from maturing
non-participating guaranteed investment contracts offset in part by a reserve
increase from the sales of participating guaranteed investment contracts
recorded in the Company's separate investment accounts.
Operating expenses for 1993 decreased by $23 million, or 6.0%, compared to 1992.
This reflects management's continuing effort to control expenses and the
one-time cost incurred in the fourth quarter of 1992 of a workforce reduction
program.
Commissions increased by $5 million for 1993 compared to 1992, primarily due to
increases in individual life insurance business. Sales on participating
guaranteed investment contracts, which do not generate commissions, were $452
million during 1993 and $549 million during 1992. Consequently, commissions do
not correlate to the change in total premium income. Rather, the increases
track the growth and changing product sales mix for commission paying business
(e.g., individual life and annuities and group life and health products).
Federal income taxes increased to $164 million in 1993, a 62.0% increase from
1992. This increase was due to increases in income tax on gains from
operations, an increase in federal tax
9
<PAGE>
rates to 35% from 34% from 1992 to 1993 and an increase in the Company's add-on
tax.
Dividends to policyholders increased $40 million, or 8.2%, to $527 million in
1993 from $487 million in 1992, due to growth in the in-force business. A new
dividend schedule, approved by the Board of Directors in the fourth quarter of
1993, is reflected in Insurance and Financial Management's 1993 gain from
operations.
Net realized capital losses were $77 million for 1993 and $80 million for 1992,
after the transfer to IMR, and were comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1993 1992
------------ -----------
(in millions)
<S> <C> <C>
Bonds $ 183 $ 138
Common stocks 69 62
Mortgage loans (93) (118)
Real estate (50) (58)
Hedging instruments 112 48
Other investments (5) (3)
Federal and state taxes (129) (66)
----- -----
Net realized capital gains before
transfer to IMR 87 3
Transfer to IMR (164) (83)
----- -----
Net realized capital gains (loss) $ (77) $ (80)
===== =====
</TABLE>
The high level of capital gains was caused by bond sales and hedging activity in
a declining interest rate environment. In 1993, most of this gain was
transferred to the IMR. The losses from commercial mortgage loans declined by
$25 million in 1993 as compared to 1992 due to delays in completed foreclosure
activity during 1993. In establishing the 1993 contribution to VIR, the timing
delays were properly recognized.
During 1992, the Company adopted the IMR, which captures after-tax realized
capital gains and losses due to changes in interest rates for all types of fixed
income investments. The $164 million transferred to the IMR for 1993 was
comprised of $279 million of net realized capital gains offset by $115 million
in taxes. In 1992, the amounts transferred to the IMR included $142 million of
net realized capital gains less $59 million in taxes.
As a result of the foregoing factors, net income increased to $134 million for
1993 from $110 million for 1992.
RESULTS OF OPERATIONS BY LINE OF BUSINESS
INSURANCE AND FINANCIAL MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
(in millions, except average size
and number of policies)
<S> <C> <C> <C>
Revenue:
Premium income $ 2,482 $ 2,495 $ 2,182
Net investment and
other income 1,200 1,177 1,103
---------- ---------- ----------
Total revenue 3,682 3,672 3,285
---------- ---------- ----------
Disposition of Revenue:
Policy benefits and
payments 1,026 981 965
Additions to
policyholders'
reserves and funds 1,398 1,450 1,162
Operating expenses 233 223 240
Commissions 232 225 222
State taxes, licenses
and fees 51 56 50
---------- ---------- ----------
Total disposition
of revenue 2,940 2,935 2,639
---------- ---------- ----------
Net gain before
dividends and
federal income
taxes 742 737 646
Dividends to
policyholders 518 518 476
---------- ---------- ----------
Net gain from
operations before
federal income
taxes 224 219 170
Federal income
taxes 117 131 88
---------- ---------- ----------
Net gain from
operations $ 107 $ 88 $ 82
========== ========== ==========
PREMIUM INCOME:
Whole Life $ 1,550 $ 1,482 $ 1,431
Term Life 114 109 84
Universal, Variable
& Strategic Life 280 269 97
Annuities 399 501 441
Disability Income 139 134 129
---------- ---------- ----------
Total $ 2,482 $ 2,495 $ 2,182
========== ========== ==========
LIFE INSURANCE SALES--
FACE AMOUNT:
Whole Life $ 7,021 $ 6,956 $ 7,327
Term Life 6,912 7,008 6,938
Universal, Variable
& Strategic Life 1,181 985 501
---------- ---------- ----------
Total $ 15,114 $ 14,949 $ 14,766
========== ========== ==========
LIFE INSURANCE
IN-FORCE FACE
AMOUNT:
Whole Life $ 72,858 $ 68,796 $ 66,751
Term Life 40,030 36,995 32,620
Universal, Variable
& Strategic Life 6,747 5,678 4,864
---------- ---------- ----------
Total $ 119,635 $ 111,469 $ 104,235
========== ========== ==========
NUMBER OF POLICIES
IN-FORCE:
Whole Life 1,200,826 1,225,173 1,233,369
Term Life 174,691 157,797 155,167
Universal, Variable
& Strategic Life 33,524 31,530 29,920
Annuities 204,455 185,252 163,013
DI 156,187 153,501 151,777
---------- ---------- ----------
Total 1,769,683 1,753,253 1,733,246
========== ========== ==========
AVERAGE SIZE OF
NEW POLICIES SOLD:
Whole Life $ 136,914 $ 123,452 $ 111,309
Term Life $ 320,492 $ 296,413 $ 258,412
Universal, Variable
& Strategic Life $ 296,868 $ 262,335 $ 188,398
</TABLE>
10
<PAGE>
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net gain from operations was $107 million for 1994, a 21.6% increase compared to
the $88 million gain in 1993, principally due to a reduction in federal income
taxes, an increase in net investment and other income, continued favorable
mortality experience and low unit expenses.
At the end of 1994, the Insurance and Financial Management line ("IFM")
operations executed a reinsurance agreement with MML Pension assuming all of the
single premium immediate annuity ("SPIA") business written by MML Pension
through either an assumption provision or a coinsurance provision of the
contract. Additionally, a reinsurance agreement ceding all of the IFM's SPIA
business to MML Pension was terminated. The execution of the new contract and
the termination of the old agreement both became effective at the end of
business on December 31, 1994 and were accounted for as a bulk reinsurance
transaction. Accordingly, assets assumed under the new agreement and returned
from the cancelled agreement were transferred at fair value and the
corresponding liabilities were transferred at statutory carrying values.
Following statutory accounting rules for bulk reinsurance, these transfers did
not impact the Summary of Operations. The net effect of these transactions
increased the IFM's assets and liabilities by $262 million in 1994. This
activity was undertaken to remove all individual insurance business from the
subsidiary. (See "Life and Health Benefits Management Operations")
Premium income decreased slightly to $2,482 million for 1994 from $2,495 million
in 1993. This decrease was the net result of an increase of $84 million in
premium income from individual life insurance business less a reduction in
annuity premium income which decreased 20.4% primarily due to a decline in
variable annuity sales. Disability income premiums increased by 3.7% during
1994.
Net investment and other income increased 2.0% for 1994 compared to 1993. This
modest increase resulted primarily from a 4.2% growth in the product line's
invested assets (before the assumption of the MML Pension business on December
31, 1994), offset by a decline in portfolio yield. The increase in market
interest rates during 1994 triggered capital losses, net of tax of $129 million,
due primarily to the Company's interest hedging program. These losses were
transferred to the IMR and will be amortized into income over the remaining
lives of the assets sold. During 1994, $37 million of net gains previously
transferred to the IMR were amortized into IFM's income. This compares to $49
million of net gains amortized in 1993, reflecting the relatively short average
life of the Company's hedging program.
Policy benefits and payments for 1994 increased to $1,026 million from $981
million in 1993, an increase of 4.6%, resulting from the growth of in-force
business and a $27 million increase in death claims where the favorable
mortality has declined from the extremely favorable experience in 1993. In
1994, individual annuity surrenders increased $18 million and morbidity on
disability income products increased by $9 million, or 6.0%. Individual life
insurance continued to experience better than expected mortality, which was 88%
of expected claims in 1994 and 85% in 1993. Surrender experience for this
product also continues to be favorable as a result of the improved persistency
of new and in-force business. Management believes its continued focus on
policyholder value and service has contributed to this improvement in
persistency.
Additions to policyholders' reserves and funds declined to $1,398 million in
1994 from $1,450 million in 1993, or 3.6%. This decrease was due primarily to
the decline in variable annuity deposits offset by higher sales as well as
improved persistency of individual life insurance products.
Operating expenses for 1994 increased 4.5% to $233 million, resulting from
production related expenses which is consistent with the growth in commissions
and reflecting the Company's continuing efforts to control expenses.
Commissions for 1994 increased by 3.1% compared to 1993 in spite of a drop in
premium revenue. This results from an increase in premium income from
individual life products which incur a higher commission percentage, and a
decline of individual annuity premium revenue with a lower commission rate.
Federal income taxes decreased to $117 million in 1994 from $131 million in
1993, primarily due to a decrease in the mutual company equity add-on tax for
1993. IFM's share of the mutual company equity add-on tax during 1994 was $9
million compared to $29 million for 1993. The 1994 tax expense reflected
favorable adjustments to the add-on taxes paid in 1993 and 1992. The 1993 tax
expense, on the other hand, reflected rate increases in both the tax on gains as
well as the mutual company equity add-on tax.
Dividends to policyholders remained flat in 1994 compared to 1993, as a 7%
aggregate dividend schedule reduction adopted by the Company's Board of
Directors in October 1994 was offset by growth of the in-force business. The
reduction was primarily driven by the lower investment returns in company
investment portfolio. (See investment income discussion)
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net gain from operations was $88 million for 1993, a 7.3% increase compared to
the $82 million gain in 1992, principally due to an improvement in mortality
experience, lower unit expenses and an increase in net investment and other
income.
Premium income increased to $2,495 million for 1993 from $2,182 million in 1992.
The increase was due in large part to increased premium income from
corporate-owned life insurance business, which accounted for $231.8 million of
the premium income for 1993 compared to $58.6 million for 1992. Other individual
life premium income increased 4.8% in 1993. Annuity premium income increased
13.6% primarily due to continued growth in variable annuities and disability
income premiums increased by 3.9% during 1993.
Net investment and other income increased 6.7% for 1993 compared to 1992. The
increase resulted primarily from a 15% growth in the product line's invested
assets, offset slightly by a decline in interest rates. During 1993, $48.8
million of gains previously transferred to the IMR were amortized into IFM's
income, reflecting the relatively short average life of a portion of the
Company's hedging program.
Policy benefits and payments for 1993 were virtually unchanged from 1992 despite
the growth of in-force business, which reflected favorable mortality in 1993 of
85% of expected claims compared to 92% during 1992. Individual life surrenders
increased only 1.2% in 1993 as a result of improved persistency. Annuity
surrenders increased by 20.1% during this period, in line with expectations and
the growth experienced by this business.
11
<PAGE>
Additions to policyholders' reserves and funds increased by $288 million, or
24.8%, for 1993 compared to 1992. This increase was due primarily to higher
sales, particularly of corporate-owned life insurance, as well as improved
persistency and mortality rates.
Operating expenses for 1993 decreased by $17 million or 7.1%, compared to 1992.
This reflects management's continuing effort to control expenses and the
one-time costs incurred in the fourth quarter of 1992 as a result of a workforce
reduction program. In 1993, the Company instituted an expert system, which
utilizes artificial intelligence to review and approve new applications for life
insurance and provides the Company substantial savings in underwriting costs.
Commissions for 1993 increased by 1.4% compared to 1992 due to increased premium
income, partially offset by the changing product mix which shifted to a higher
percentage of contracts with lower commission rates, particularly annuities and
corporate-owned life insurance.
Federal income taxes increased to $131 million in 1993 from $88 million during
1992. IFM's share of the mutual company equity add-on tax that was paid by the
Company during 1993 was $29 million, compared to a $4 million tax credit for
1992. The 1992 tax expense reflected favorable adjustments to the add-on taxes
paid in 1990 and 1991. The 1993 tax expense, on the other hand, reflected rate
increases in both the tax on gain as well as the mutual company equity add-on
tax. The balance of the increase in taxable income for 1993 was due to higher
statutory gains and an increase in the federal tax rate to 35%.
Dividends to policyholders increased $42 million, or 8.8%, to $518 million in
1993 from $476 million in 1992 due to growth in the in force business and was
partially offset by a new dividend schedule effective for payments on policy
anniversaries occurring in 1994 was approved by the Board of Directors in the
fourth quarter of 1993.
PENSION MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994 1993 1992
---------- --------- ---------
(in millions)
<S> <C> <C> <C>
Revenue:
Premium income $1,307 $1,541 $1,840
Net investment
and other income 924 1,027 1,084
------ ------ ------
Total revenue 2,231 2,568 2,924
------ ------ ------
Disposition of Revenue:
Policy benefits and
payments 2,556 2,443 2,773
Addition to
policyholders'
reserves and funds (464) (23) 33
Operating expenses 55 54 55
Commissions 4 3 3
State taxes, licenses
and fees 3 1 3
------ ------ ------
Total disposition
of revenue 2,154 2,478 2,867
------ ------ ------
Net gain before
dividends and
federal income
taxes 77 90 57
Dividends to
policyholders 5 9 11
------ ------ ------
Net gain from
operations before
federal income
taxes 72 81 46
Federal income
taxes (2) 3 (13)
------ ------ ------
Net gain from
operations $ 74 $ 78 $ 59
====== ====== ======
PREMIUM INCOME
BY PRODUCT
Flexinvest $ 299 $ 282 $ 244
Superflex 507 413 373
Interest Guarantee 116 139 157
Participating
Guaranteed 132 378 560
Separate Accounts 164 167 151
Defined Benefit 72 81 99
GIC and Single
Premium Annuity
Contracts 7 54 207
Other 10 27 49
------ ------ ------
Total $1,307 $1,541 $1,840
====== ====== ======
WRITTEN SALES
BY PRODUCT
Flexinvest $ 120 $ 96 $ 89
Superflex 257 165 161
Interest Guarantee
Investment Contracts 24 38 60
Participating
Guaranteed 94 452 549
Separate Accounts 182 170 153
Defined Benefit 9 4 7
GIC and Single
Premium Annuity
Contracts 0 5 130
Other 42 9 20
------ ------ ------
Total $ 728 $ 939 $1,169
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net gain from operations for 1994 decreased to $74 million from $78 million for
1993. This decline was primarily due to a decrease in statutorily mandated
reserves that improved 1993 operations more than 1994.
Premium income for 1994 decreased to $1,307 million, or 15.2%, from $1,541
million for 1993, reflecting a significant decline in sales of participating
separate account guaranteed investment contracts which were $94 million in 1994
compared to $452 million in 1993. The decline in the sales of participating
separate account guaranteed investment contracts was somewhat offset in 1994 by
a $92 million increase in sales of defined contribution contracts.
Net investment income and other income decreased $103 million, or 10.0%, to $924
million for 1994 from $1,027 million for 1993, due to a 7.5% decrease in the
line's invested assets and by a decline in portfolio's average yield as maturing
higher yielding securities are replaced with securities yielding lower current
rates.
Policy benefits and payments increased $113 million, or 4.6%, to $2,556 million
for 1994 from $2,443 million for 1993, primarily due to an increase in the
lapses of participating business.
12
<PAGE>
Policyholders' reserves and funds were reduced by $464 million at December 31,
1994 compared to a $23 million reduction at December 31, 1993, as the result of
a decrease in premium income and the increase in policy benefits and payments
discussed above.
Operating expenses increased by $1 million, or 1.9%, to $55 million for 1994
from $54 million for 1993. Reduced production related costs offset by general
cost increases were key contributors to this modest increase.
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net gain from operations for 1993 increased to $78 million from $59 million for
1992 due to reductions in statutorily mandated reserves caused by revised
mortality assumptions and higher fees.
Premium income for 1993 decreased to $1,541 million from $1,840 million for
1992, reflecting sales in 1992 of $560 million of participating separate account
guaranteed investment contracts compared to $378 million in 1993. A few large
sales of these contracts occurred in 1992.
Net investment income and other income decreased $57 million, or 5.3%, to $1,027
million for 1993 from $1,084 million for 1992 as a result of lower new money
rates, lower short-term interest rates and lower income on problem and
non-performing assets.
Policy benefits and payments decreased $330 million, or 11.9%, to $2,443 million
for 1993 from $2,773 million for 1992 primarily due to fewer maturities of
non-participating guaranteed investment contracts.
Policyholders' reserves and funds were reduced by $23 million at December 31,
1993 compared to a $33 million addition at December 31, 1992. The reductions
was due to a decrease in premium income and scheduled maturities of guaranteed
investment contracts and fewer lapses of participating business.
Operating expenses for 1993 were virtually unchanged, reflecting the Company's
efforts to control expenses. Costs associated with implementing strategic
initiatives for new products as well as inflation increased 1993 expenses to a
level consistent with 1992 when a one-time cost was incurred from a workforce
reduction program.
LIFE AND HEALTH BENEFITS MANAGEMENT OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1994 1993 1992
------ ------ -----
(in millions)
<S> <C> <C> <C>
Revenue:
Premium income (1) $ 733 $ 748 $ 754
Net investment and
other income 55 49 44
----- ----- -----
Total revenue 788 797 798
----- ----- -----
Disposition of Revenue:
Policy benefits and
payments 587 594 591
Addition to
policyholders'
reserves and funds (6) (5) 0
Operating expenses 87 83 88
Commissions 26 25 23
State taxes, licenses
and fees 21 25 21
----- ----- -----
Total disposition
of revenue 715 722 723
----- ----- -----
Net gain before
dividends and
federal income
taxes 73 75 75
Dividends to
policyholders 0 0 0
----- ----- -----
Net gain from
operations before
federal income
taxes 73 75 75
Federal income
taxes 30 30 26
----- ----- -----
Net gain from
operations $ 43 $ 45 $ 49
===== ===== =====
</TABLE>
(1) Excludes premium equivalents
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net gain from operations for 1994 decreased to $43 million from $45 million for
1993, due to the cost related to acquiring a block of business from The Hartford
Life Insurance Company ("The Hartford").
At the end of 1994, the Life and Health Benefits Management line ("L&HBM")
executed a reinsurance agreement with MML Pension ceding assets and liabilities
from the line's group life, accident and health business to MML Pension. The
contract became effective at the end of business on December 31, 1994 and was
accounted for as a bulk reinsurance transaction. Accordingly, assets were
transferred at fair value and liabilities were transferred at statutory carrying
value. Following statutory accounting rules for bulk reinsurance, these
transfers did not impact operations. The effect of this transaction decreased
the L&HBM's assets and liabilities by $437 million in 1994. This transaction
was executed to position MML Pension as an accident and health insurance company
to more easily respond to opportunities for forming alliances with other health
care entities but may include considerations of the sale or partial sale of the
subsidiary. In the future, the Company intends to issue all of its group life,
accident and health business directly through MML Pension.
Premium income was relatively stable, decreasing to $733 million for 1994 from
$748 million for 1993. Premium income has remained relatively flat in recent
years, reflecting the continued preference of clients for alternative funding
arrangements, such as Administrative Services Only ("ASO") and Minimum Premium
Plans ("MPP"). Clients who purchase the ASO product self-insure and pay an
administrative fee to the Company. Clients who purchase MPP contracts pay a
reduced premium to the Company in exchange for direct employer funding of a
portion of plan benefits, while the majority of business is fully insured. The
Company expects the trends toward alternative funding among its clients to
continue.
Premium equivalency is an industry standard for measurement of group health
business. For purposes of premium equivalency, fees received from alternative
funding clients exclusive of indemnity premiums are converted to equivalent
in-force amounts as if under full indemnity coverage. This conversion places
all funding arrangements on a comparable basis regard-
13
<PAGE>
less of the approach elected by any employer group. At December 31, 1994 premium
and premium equivalents were estimated at $2,302 million as compared to $2,063
million at December 31, 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993
----------- ----------
(in millions)
<S> <C> <C>
Conventionally Insured (1) $ 672 $ 706
Minimum Premium Plans (2) 507 431
Administrative Services Only (2) 1,123 926
------ ------
Total $2,302 $2,063
====== ======
Medical Lives (in thousands) 525 470
====== ======
</TABLE>
(1) Premium
(2) Premium and premium equivalents
Most of this increase was from the acquisition of medical and dental business
previously underwritten by The Hartford. In December 1993, the Company entered
into an agreement with The Hartford which granted the Company an arrangement for
quoting on The Hartford's group medical and dental contracts. In exchange for
administrative and marketing support from The Hartford's employees, The Hartford
received fees for business written by the Company.
Net investment and other income increased 12.2% to $55 million for 1994 from $49
million for 1993. Much of this increase is attributable to the increased level
of cost containment fees collected on administrative contracts. Net investment
income also increased as this product line increased its allocated share of
earnings from contingency reserves.
Policy benefits and payments and additions to policyholders' reserves and funds
in the aggregate were $581 million for 1994, a reduction of 1.4% compared to
$589 million for 1993, due to a reduction in fully insured plans. This is also
a result of client's continued preference for alternative funding arrangements.
Under these arrangements, benefits are paid from the client's own bank accounts
and are not recorded on the Company's financial statements.
Operating expenses increased to $87 million for 1994 from $83 million for 1993
as a result of the increased staffing in the field office service center and
other costs related to acquiring the block of business from The Hartford. These
costs include fees paid to The Hartford and additional staffing needed to
service this business.
Commissions, which are paid on premiums and premium equivalents, increased 4.0%
to $26 million for 1994 from $25 million for 1993 due to increased premium
equivalency discussed above.
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
Net gain from operations decreased to $45 million for 1993 from $49 million for
1992 due to higher state and federal taxes.
Premium income was relatively stable, decreasing to $748 million for 1993 from
$754 million for 1992. Premium income has remained relatively flat in recent
years, reflecting the continued preference of clients for alternative funding
arrangements, such as ASO and MPP business. The Company expects the trends
toward alternative funding among its clients to continue.
Premiums for conventionally insured clients remain unchanged at approximately
$700 million. At December 31, 1993 premium and premium equivalents were
estimated at $2,063 million as compared to $1,991 million at December 31, 1992.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1993 1992
----------- ----------
(in millions)
<S> <C> <C>
Conventionally Insured (1) $ 706 $ 700
Minimum Premium Plans (2) 431 444
Administrative Services Only (2) 926 847
------ ------
Total $2,063 $1,991
====== ======
Medical Lives (in thousands) 470 466
====== ======
</TABLE>
(1) Premium
(2) Premium and premium equivalents
Net investment and other income incr eased 11.4% to $49 million for 1993 from
$44 million for 1992. This increase re sulted from capital gains on interest
rate changes being included in income through the amortization of the IMR.
Policy benefits and payments and additions to policyholders' reserves and funds
in the aggregate were $589 million for 1993, a reduction of 0.3% compared to
$591 million for 1992, due to moderating health care cost increases.
Operating expenses decreased to $83 million for 1993 from $88 million for 1992
as a result of the workforce reduction program instituted in the fourth quarter
of 1992.
Commissions, which are paid on premiums and premium equivalents, increased 8.7%
to $25 million for 1993 from $23 million for 1992 due to increased sales.
State taxes, licenses and fees and federal income taxes increased by $8 million
to $55 million for 1993 due to a higher provision for the equity add-on tax and
higher state taxes.
STATEMENT OF FINANCIAL POSITION
ASSETS
The following table sets forth the components of the Company's total assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
------- -------
(in millions)
<S> <C> <C>
Bonds $17,684 $16,951
Common stocks 197 143
Mortgage loans 2,980 3,732
Real estate 1,346 1,297
Other investments 741 597
Policy loans 2,701 2,533
Cash and short-term investments 2,190 2,209
Investment and insurance
amounts receivable 752 927
Separate investment account
assets 6,508 5,891
Other assets 75 34
------- -------
Total assets $35,174 $34,314
======= =======
</TABLE>
Total assets increased by $860 million, or 2.5%, to $35,174 million at December
31, 1994 from $34,314 million at year-end 1993. Much of this increase was due
to continued growth in the Company's separate investment accounts, in which
assets increased by $617 million, or 10.5%, from 1993 to $6,508 mil-
14
<PAGE>
lion in 1994. Invested assets in the Company's general investment account
increased in 1994 by $376 million, or 1.4%, to $27,838 million from $27,462
million in 1993.
In the general investment account, the Company increased its investments in
public and private bonds, investments which significantly increased the strength
and liquidity of its investment portfolio. Bonds in NAIC categories 1 and 2
increased to 63.9% of general investment account assets in 1994, as compared to
62.6% for 1993. The percentage of general investment account assets
representing bonds in NAIC categories 3 through 6 increased in 1994 to 5.4% from
4.6% in 1993. All of this increase occurred with category 3 bonds, which
increased from 3.0% of total general account assets in 1993 to 3.8% in 1994. In
1994, the Company did not invest new funds in mortgage loans which is reflected
in a $752 million decrease in this category of investments. Consequently,
mortgage loans as a percentage of general investment account assets decreased to
10.4% in 1994 from 13.1% in 1993. The Company has initiated the commitment of
new commercial mortgage loans in the fourth quarter of 1994 and has funded some
of these commitments in 1995. See "Investments" section for further information
relating to invested assets in the Company's general investment account.
The increase in policy loans is primarily attributable to loans being issued on
the IFM's large corporate product policies and a 4% growth in ordinary life
loans which reflects the growth in the in force block of this business.
Investments and insurance amounts receivable declined by $175 million to $752
million in 1994 due primarily to the ceding of $147 million of insurance
receivables to MML Pension.
LIABILITIES
Total liabilities increased in 1994 by $749 million, or 2.3%, to $33,245 million
from $32,496 million in 1993. As with assets, most of this growth occurred in
the separate investment accounts, which increased $617 million, or 10.5%, to
$6,507 million in 1994. (See discussion of investment reserves in the
"Investment" Section)
Policyholders' reserves and funds increased by $495 million, or 2.1%, from
$23,661 million in 1993 to $24,156 million in 1994. The increase for the year
was attributable primarily to increases in individual life and individual
annuity reserves and reserves for single premium immediate annuities assumed
from MML Pension offset by decreases in the liability for non-participating
guaranteed investment contracts and group life reserves ceded to MML Pension.
Additionally, policy claims and other funds decreased $191 million or 34.4% to
$364 million in 1994, primarily as a result of ceded reserves to MML Pension.
The Company 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 consideration. The result is a complete
picture of the adequacy of reserves, capital and underlying assets. See
liquidity section for further discussions on this issue.
POLICYHOLDERS' CONTINGENCY RESERVES
Policyholders' contingency reserves were $1,929 million at December 31, 1994, an
increase of $111 million, or 6.1%, from December 31, 1993. This increase was
composed of (i) 1994 net income of $89 million, (ii) $23 million from unrealized
capital gains, (iii) $100 million from the issuance of surplus notes in 1994,
(iv) an increase of $45 million from a change in accounting for mortgage backed
securities, (v) a decrease of $46 million due to the change in asset valuation
reserve ("AVR"), VIR, and surplus note contingency reserves, (vi) a decrease of
$57 million resulting from non-admitted assets, which includes $63 million of
IMR in a net loss position, (vii) a decrease of $45 million from reserve
strengthening for disability income products and (viii) an increase of $2
million due to other changes.
The Company issued surplus notes of $100 million at 7 1/2% and $250 million at
7 5/8% in 1994 and 1993, respectively. These notes are unsecured and subordinate
to all present and future indebtedness of the Company, policy claims and prior
claims against the Company as provided by the Massachusetts General Laws.
Issuance was approved by the Commissioner of Insurance of the Commonwealth of
Massachusetts ("the Commissioner"). All payments of interest and principal are
subject to the prior approval of the Commissioner. In accordance with
regulations of the National Association of Insurance Commissioners, interest
expense is not recorded until approval for payment is received from the
Commissioner. In 1994, interest of $22.8 million was approved and paid.
The proceeds of the notes, less a $35 million reserve in 1994 and a $25 million
reserve in 1993 for contingencies associated with the issuance of the notes, are
recorded as a component of the Company's policyholders' contingency reserves, as
approved by the Commissioner. These reserves, as permitted by the Massachusetts
Division of Insurance, are included in investment reserves on the Statement of
Financial Position.
Certain state regulations require a portion of policyholders' contingency
reserves to be designated for the benefit of group life insurance, group annuity
and separate account policyholders. Such designated surplus funds totaled $36
million in 1994, $35 million in 1993 and $33 million in 1992, resulting in
unassigned policyholders' contingency reserves of $1,893 million in 1994, $1,783
million in 1993 and $1,491 million in 1992 (increases of 6.2% in 1994 and 19.6%
in 1993).
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Net cash provided by operating activities was $498 million, $765 million and
$292 million for the years ended 1994, 1993 and 1992, respectively.
Additionally, funds of $250 million and $100 million were provided by the
issuance of surplus notes discussed above and $100 million was used to fund
maturing long-term debt.
The Company 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. The Company manages its liquidity
position by matching its exposure to cash demands with adequate sources of cash
and other liquid assets. Major industry rating services have consistently cited
the Company's liquidity position as a significant strength.
The Company'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. Historically, the
Company has consistently experienced net positive cash flow
15
<PAGE>
from operations, including $498 million for the period ending December 31, 1994
and $765 million and $292 million, 1993 and 1992, respectively.
The Company'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 $2,190 million at December
31, 1994. The market value of other highly liquid securities, including NAIC
Category 1 and 2 publicly traded bonds, and the common stock portfolio exceeded
$9.0 billion at December 31, 1994.
The liquidity position of the Company is proactively managed on an ongoing basis
to meet cash needs while minimizing adverse impacts on investment returns. A
variety of scenarios are analyzed modelling potential demands on liquidity,
taking into account the provisions of the Company's policies and contracts
in-force, the Company's cash flow position and the volume of cash and readily
marketable securities in the Company's portfolio.
The Company also employs sophisticated quantitative asset/liability cash flow
management techniques to optimize and control the investment return and
liquidity for each portfolio, taking into account the distinguishing liability
characteristics of each portfolio.
A primary liquidity concern for the Company is the risk of early contractholder
and policyholder withdrawal. The three most affected products are individual
life insurance and individual deferred annuities offered by IFM and the
participating products offered by the Pension Management line. Personal life
insurance policies are less susceptible to withdrawal than annuity contracts
because these policies include a life insurance element that has value and would
require replacement upon withdrawal. Such replacement would entail underwriting
and new policy acquisition costs. In addition, the policyholder would generally
incur a significant tax liability upon a full withdrawal. A substantial part of
the Company's individual life insurance exposure is focused on a well-seasoned,
mature block of business. The Company closely evaluates and manages its
liquidity risk by, for example, seeking to include provisions limiting
withdrawal rights from general account institutional pension products (generally
group annuities, including guaranteed investment contracts and certain deposit
liabilities) sold to plan sponsors.
The Company's exposure to early withdrawal under the Pension Management and
Insurance and Financial Management annuity businesses as of the dates indicated
can be described as follows:
Withdrawal Characteristics of Annuity Actuarial Reserves
and Deposit Fund Liabilities
<TABLE>
<CAPTION>
December 31,
----------------------------------
1994 1993
---------------- ----------------
% of % of
Amount Total Amount Total
------- ----- ------- ------
<S> <C> <C> <C> <C>
($ in millions)
Subject to discretionary
withdrawal with
adjustment:
With market value
adjustment $ 5,333 28.1% $ 4,886 26.0%
At market value 4,626 24.3 4,365 23.2
At book value less
surrender charge 288 1.5 231 1.2
------- -------
Subtotal 10,247 9,482
Subject to discretionary
withdrawal without
adjustment:
At book value
(minimal or no
charge or
adjustment) 2,756 14.5 2,843 15.1
Not subject to
discretionary
withdrawal 5,997 31.6 6,479 34.5
------- ----- ------- -----
Total annuity actuarial
reserves and deposit
fund liabilities (gross) 19,000 100.0% 18,804 100.0%
Less reinsurance (13) (78)
------- -------
Total annuity actuarial
reserves and deposit
fund liabilities $18,987 $18,726
======= =======
</TABLE>
Based on its ongoing monitoring and analysis of its liquidity sources and
demands, the Company believes that it is in a strong liquidity position.
CAPITAL RESOURCES
As of December 31, 1994, the Company's total adjusted capital as defined by the
NAIC was $2,542 million. The NAIC has developed the "Risk Based Capital"
("RBC") model to compare the total adjusted capital with a standard designed to
reflect the Company's risk profile. Although the Company believes that there is
no single appropriate means of measuring risk-based capital needs, it believes
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. The Company's total adjusted capital was well
in excess of all RBC standards at December 31, 1994 and 1993. Management
believes that the Company 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.
16
<PAGE>
INFLATION
The Company's operating expenses are affected by inflation. A
large portion of the Company's operating expenses consist of
salaries which are subject to wage increases, at least
partially effected by the rate of inflation. The Company's
continuing efforts to control expenses may reduce the impact
of inflation on operating expenses.
Inflation also has an indirect effect on the Company. To the
extent that the government's economic policy to control the
level of inflation results in changes in interest rates, the
Company'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, 1994, the Company had $27,839 million of
invested assets in its general investment account. The
portfolio of invested assets is managed to support the
liabilities of the lines of business in light of yield,
liquidity and diversification considerations. The general
investment account portfolio does not include the Company's
separate investment account assets.
The following table sets forth the Company's invested assets
in the general investment account and gross investment yield
thereon (after deducting operating real estate expenses and
real estate taxes) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1994 1993 1992
-------------------------------- -------------------------- ----------------------
Carrying % of Carrying % of Carrying % of
Value Total Yield Value Total Yield Value Total Yield
-------------- ----- -------- -------- ----- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ in millions)
Bonds $ 17,684 63.5% 8.6% $16,951 61.7% 9.4% $14,416 56.3% 10.2%
Common stocks 197 0.7 1.8 143 0.5 5.3 319 1.2 5.4
Mortgage loans 2,980 10.7 9.5 3,732 13.6 9.5 4,344 17.0 9.8
Real estate - Investment 1,284 4.6 9.8 1,219 4.4 9.3 1,093 4.3 8.0
Real estate - Other 62 0.2 N/A 78 0.3 N/A 78 0.3 N/A
Policy loans 2,701 9.7 7.7 2,533 9.2 8.0 2,327 9.1 7.7
Cash and short-term
investments 2,190 7.9 4.4 2,209 8.0 4.2 2,291 9.0 4.6
Other investments 741 2.7 2.1 597 2.3 0.9 726 2.8 4.2
----------- ----- -------- -------- ----- -------- ------- ----- -----
Total investments $ 27,839 100.0% 8.1% $27,462 100.0% 8.5% $25,594 100.0% 9.0%
----------- ----- -------- -------- ----- -------- ------- ----- -----
</TABLE>
The yield on total investments before indirect expenses was 8.1%, 8.5% and 9.0%
for the years ended December 31, 1994, 1993 and 1992, respectively. If remaining
investment expenses including depreciation on real estate investments were
deducted, net yields would be 7.7%, 8.2% and 8.6%, respectively. The yield on
each investment category before federal income taxes is calculated as: (a) gross
investment income (which for real estate deducts operating expenses and real
estate taxes) divided by (b) the average carrying value, which does not include
investment reserves.
The Company carries its investments in accordance with methods and values
described by the NAIC and adopted by state insurance authorities. Generally,
bonds are valued at amortized cost, preferred stocks in good standing are valued
at cost, and common stocks are shown at fair value. Mortgage loans are valued at
principal less unamortized discount. Real estate is valued at cost less
accumulated depreciation, impairments, and mortgage encumbrances. Depreciation
on investment real estate is calculated using the straight-line and constant
yield methods. Policy loans are carried at the outstanding loan balance less
amounts unsecured by the cash surrender value of the policy. Short-term
investments are stated at amortized cost which approximates fair value. Other
investments primarily consist of joint ventures, other forms of partnerships and
the common stocks of unconsolidated subsidiaries, which are valued using the
equity method.
17
<PAGE>
BONDS
The following table provides certain information regarding the maturity
distribution of bonds (excluding short-term securities):
<TABLE>
<CAPTION>
Bond Maturities
December 31,
--------------------------------------
1994 1993
------------------ -----------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ -------- ------
($ in millions)
<S> <C> <C> <C> <C>
1 year or less $ 2,478 14.0% $ 1,325 7.8%
Over 1 year through
5 years 3,167 17.9 3,417 20.2
Over 5 years through
10 years 3,321 18.8 3,123 18.4
Over 10 years 2,636 14.9 2,282 13.5
Mortgage-backed
securities(1) 6,082 34.4 6,804 40.1
------- ------ ------- ------
$17,684 100.0% $16,951 100.0%
======= ====== ======= ======
(1) Including securities guaranteed by the U.S. Government.
</TABLE>
The maturities of portfolio bonds are considered by the Company to be
sufficiently diversified and are carefully monitored and managed in light of the
Company's liquidity needs. See "Liquidity and Capital Resources."
Bonds consist of publicly traded and privately placed debt securities. At
December 31, 1994 and 1993, publicly traded bonds comprised 55.0% and 51.3% of
the bond portfolio, respectively, and privately placed bonds comprised the
remainder. Substantially all of the publicly traded and privately placed bonds
held by the Company are evaluated by the NAIC's Securities Valuation Office
("SVO"), which assigns securities to one of six NAIC investment credit
categories, with Category 1 securities being the highest quality and Category 6
securities being the lowest quality. Categories 1 and 2 are investment grade,
Category 3 is medium quality and Categories 4, 5 and 6 are non-investment grade.
The remainder of the securities which have not as yet received NAIC ratings are
rated under an internal system which the Company believes to be equivalent to
that used by the SVO.
The table below sets forth, as of the dates indicated, the NAIC ratings for the
Company's bond portfolio (including short-term securities) and the equivalent
public rating agency designations. The bond portfolio consists primarily of
high grade securities. At December 31, 1994 and 1993, 92.3% and 93.2%,
respectively, of the portfolio was invested in NAIC Categories 1 and 2
securities.
Bond Credit Quality
(includes short-term securities)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1993
-------------------- ---------------------
($ in millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
------ ----------------------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 13,266 66.9% $ 12,322 64.5%
2 Baa 5,038 25.4 5,476 28.7
3 Ba 1,084 5.5 846 4.4
4 B 384 1.9 372 1.9
5 Caa and lower 41 0.2 40 0.2
6 In or near default 25 0.1 57 0.3
-------- ------ -------- ------
Total $ 19,838 100.0% $ 19,113 100.0%
======== ====== ======== ======
</TABLE>
The Company 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, 1994, 97.5% 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)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1993
-------------------- ---------------------
($ in millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
------ ----------------------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 9,088 83.4% $7,676 78.2%
2 Baa 1,539 14.4 2,014 20.5
3 Ba 166 1.5 56 0.6
4 B 98 0.9 59 0.6
5 Caa and lower 8 0.1 4 0.0
6 In or near default 3 0.0 5 0.1
------- ----- ------ -----
Total $10,902 100.0% $9,814 100.0%
======= ===== ====== =====
</TABLE>
18
<PAGE>
The Company utilizes its investments in the privately placed bond portfolio to
enhance the value of the overall portfolio, increase diversification and obtain
higher yields than are possible with comparable quality public market
securities. To control risk, the Company relies upon broader access to
management information, strengthened negotiated protective covenants, call
protection features, and a higher level of collateralization. The strength of
the privately placed bond portfolio is demonstrated by the predominance of NAIC
Categories 1 and 2 securities.
Privately Placed Bond Credit Quality
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1994 1993
-------------------- ---------------------
($ in millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
------ ----------------------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $4,178 46.7% $4,646 50.0%
2 Baa 3,499 39.2 3,462 37.2
3 Ba 918 10.3 790 8.5
4 B 286 3.2 313 3.4
5 Caa and lower 33 0.4 36 0.4
6 In or near default 22 0.2 52 0.5
------ ----- ------ -----
Total $8,936 100.0% $9,299 100.0%
====== ===== ====== =====
</TABLE>
Included in the privately placed bond portfolio are residential mortgage
securities which totalled $1.7 billion and $2.2 billion at December 31, 1994 and
1993, respectively, or 19.1% and 23.7%, respectively, of the portfolio. The
residential mortgage securities segment of the privately placed bond portfolio
has provided the Company with quality investments and excellent loss/risk
experience. As of December 31, 1994, this entire segment was rated as NAIC
Categories 1 and 2. The Company imposes rigorous investment standards with
respect to these securities, including governmental agency guarantees, seasoned
pools and discount pricing as protection against prepayment. The Company tracks
problem loans individually and monitors its services closely. As a result,
delinquency rates for these securities were 0.9% as of December 31, 1994, as
compared with the national average, according to the Mortgage Bankers Survey of
delinquencies, of 1.5%.
As of December 31, 1994 and 1993, mortgage-backed securities in the bond
portfolio consisted of $1.9 billion and $2.2 billion, respectively of GNMA, FNMA
and FHLMC mortgage=backed pass-through securities, and $2.3 billion and $2.3
billion, respectively, of government agency-backed collateralized mortgage
obligations.
The following table sets forth by industry category the carrying value and
percent of total of the bond portfolio, including short-term securities, as of
December 31, 1994.
Bond Portfolio By Industry
<TABLE>
<CAPTION>
December 31, 1994
-----------------
Public (1) Private Total
---------- ---------- -----------------
Carrying % of Carrying % of Carrying % of
Industry Category Value Total Value Total Value Total
---------- -------- --------- ------ -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Collateralized (2) $ 4,344 39.8% $1,882 21.1% $ 6,226 31.4%
U. S. Government 3,541 32.5 126 1.4 3,667 18.5
Utilities 1,013 9.3 610 6.8 1,623 8.2
Finance 435 4.0 842 9.4 1,277 6.4
Producer Goods 253 2.3 1,013 11.3 1,266 6.4
Consumer Goods 291 2.7 720 8.1 1,011 5.1
Natural Resources 289 2.7 655 7.3 944 4.8
Other Services 117 1.1 466 5.2 583 2.9
Retail 37 0.3 495 5.5 532 2.7
Transportation 66 0.6 398 4.5 464 2.3
Media 41 0.4 404 4.5 445 2.2
Health Care 100 0.9 197 2.2 297 1.5
Aerospace 9 0.1 220 2.5 229 1.2
Others 366 3.3 908 10.2 1,274 6.4
------- ----- ------ ----- ------- -----
Total $10,902 100.0% $8,936 100.0% $19,838 100.0%
======= ====== ====== ===== ======= =====
</TABLE>
(1) Includes short-term securities.
(2) These bonds are collateralized by mortgages backed by FNMA, GNMA or FHLMC
and include collateralized mortgage obligations and pass-through securities.
These amounts also include asset backed securities such as credit card,
automobile and residential mortgage securities.
19
<PAGE>
The estimated fair value of bonds is based upon quoted market prices for
actively traded securities. The Company subscribes to commercial pricing
services that provide estimated fair values of fixed income securities that are
not actively traded. Estimated fair values for privately placed bonds are
generally determined by applying interest spreads based on quality and asset
type to the appropriate duration on the Treasury yield curve. The tables below
set forth the carrying value, gross unrealized gains and losses, net unrealized
gains and estimated fair value of the bond portfolio (excluding short-term
securities) at December 31, 1994, and 1993.
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
-------- ---------- ---------- ---------- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $ 5,511 $ 147 $253 $ (106) $ 5,405
Debt Securities issued by
Foreign Governments 35 2 2 0 35
Mortgage-backed securities 3,411 55 177 (122) 3,289
State and local governments 124 5 5 0 124
Industrial securities 7,571 166 295 (129) 7,442
Utilities 908 69 18 51 959
Affiliates 124 10 8 2 126
------- ------ ---- ------ -------
$17,684 $ 454 $758 $ (304) $17,380
======= ====== ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
----------------------------------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
-------- ---------- ---------- ---------- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $ 6,497 $ 537 $ 55 $ 482 $ 6,979
Debt Securities issued by
Foreign Governments 92 11 0 11 103
Mortgage-backed securities 1,911 139 1 138 2,049
State and local governments 54 4 1 3 57
Industrial securities 7,386 683 107 576 7,962
Utilities 939 168 3 165 1,104
Affiliates 72 18 2 16 88
------- ------ ---- ------ -------
$16,951 $1,560 $169 $1,391 $18,342
======= ====== ==== ====== =======
</TABLE>
MORTGAGE LOANS
All mortgage loans are fixed rate commercial mortgages on completed, income
producing properties.
The following table provides certain information regarding the maturity
distribution of commercial mortgage loans:
Mortgage Loan Maturities
<TABLE>
<CAPTION>
December 31, 1994
------------------
Carrying % of
Value Total
-------- --------
($ in millions)
<S> <C> <C>
1 year or less $ 624 20.9%
Over 1 year through 5 years 1,629 54.7
Over 5 years through 10 years 428 14.4
Over 10 years 299 10.0
------ ------
Total $2,980 100.0%
====== ======
</TABLE>
At December 31, 1994, 90.9% of the mortgage loan portfolio consisted of bullet
loans (loans that do not fully amortize over their term) compared to 90.1% at
December 31, 1993. Scheduled bullet maturities at December 31, 1994 of $622
million, $416 million, $221 million and $289 million in 1995, 1996, 1997 and
1998 represent 20.9%, 14.0%, 7.4% and 9.7% respectively, of the mortgage loan
portfolio.
The Company had $677 million of bullet loans scheduled to mature during 1994 of
which $107 million, or 16%, were paid in full at maturity, $392 million, or 58%,
were refinanced, $38 million, or 5%, were restructured, $127 million, or 19%,
were foreclosed, and the remaining $13 million, or 2%, are in the process of
negotiating foreclosure, forbearance or in bankruptcy.
During 1994 and 1993, 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.
20
<PAGE>
The maturities of commercial mortgage loans are considered by the Company to be
sufficiently diversified and are carefully monitored and managed in light of the
Company's liquidity needs. See "Liquidity and Capital Resources."
The mortgage loan portfolio comprised 10.7% and 13.6% of the Company's
investments at December 31, 1994 and 1993, respectively. The mortgage loan
average investment yield was 9.5% for the years ending December 31, 1994 and
1993.
Total gross investment income on mortgage loans for the year ended December 31,
1994 was $304 million, a 16.7% decrease from $365 million for 1993. The
decreases in 1994 and 1993 were due to a 20.2% and 14.1% decline, respectively
in the asset base. Net realized capital losses for the years ended December 31,
1994 and 1993 were $129 million and $93 million, respectively.
The following tables set forth by property type the carrying value of mortgage
loan balances as a percentage of the portfolio as of the dates indicated:
Mortgage Loans by
Property Type
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1993
------------------ ------------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ --------- ------
($ in millions)
<S> <C> <C> <C> <C>
Office $ 976 32.7% $1,242 33.3%
Retail 763 25.6 983 26.3
Industrial & Other 457 15.3 567 15.2
Hotels & Motels 420 14.1 432 11.6
Apartments 332 11.2 474 12.7
Commercial Pools 32 1.1 34 0.9
------ ----- ------ -----
$2,980 100.0% $3,732 100.0%
====== ===== ====== =====
</TABLE>
Mortgage Loans by
Geographic Distribution
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1993
------------------ ------------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ --------- ------
($ in millions)
<S> <C> <C> <C> <C>
West $ 827 27.8% $1,020 27.3%
Mid-Atlantic 558 18.7 592 15.9
Southeast 482 16.2 643 17.2
Northeast 478 16.0 671 18.0
Midwest 414 13.9 524 14.0
Southwest 221 7.4 282 7.6
------ ----- ------ -----
$2,980 100.0% $3,732 100.0%
====== ===== ====== =====
</TABLE>
REAL ESTATE
The real estate portfolio includes real estate properties originally acquired as
investments and foreclosed real estate properties. The equity real estate
portfolio consists of office, retail, apartment, hotel and warehouse properties
primarily owned directly by the Company. At December 31, 1994, office
properties constituted the largest component of the portfolio, representing
39.6% of the aggregate carrying value.
The following table illustrates the diversity of the equity real estate
portfolio by region and by property category.
Equity Real Estate by
Property Type
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1993
------------------ ------------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ --------- ------
($ in millions)
<S> <C> <C> <C> <C>
Office $ 508 39.6% $ 452 37.1%
Hotels & Motels 315 24.5 306 25.1
Retail 248 19.3 221 18.1
Apartments 132 10.3 168 13.8
Industrial and Other 81 6.3 72 5.9
------ ----- ------ -----
Total $1,284 100.0% $1,219 100.0%
====== ===== ====== =====
</TABLE>
Equity Real Estate by
Geographic Distribution
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1993
------------------ ------------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------ --------- ------
($ in millions)
<S> <C> <C> <C> <C>
Southeast $ 408 31.8% $ 410 33.6%
Northeast 276 21.5 235 19.3
Mid-Atlantic 202 15.7 209 17.1
Midwest 180 14.0 166 13.6
West 131 10.2 108 8.9
Southwest 87 6.8 91 7.5
------ ----- ------ -----
Total $1,284 100.0% $1,219 100.0%
====== ===== ====== =====
</TABLE>
The Company has been active in the investment real estate market since the
1960's. At the close of 1994, the Company's real estate portfolio consisted of
121 commercial properties with a statement value of $1.3 billion. The portfolio
is primarily unleveraged with only $15 million in third party non-recourse debt
outstanding. All of these properties are income producing. There are no
development transactions.
A milestone in 1994 was the launching of Cornerstone Real Estate Advisers, Inc.
("Cornerstone"). The organization was established to manage the equity
properties owned by the Company. Cornerstone operates through regional offices,
each of which has a fully integrated team of employees. The Company believes
that this organizational structure will enhance real estate investment
performance.
Real estate produced gross investment income of $207 million for the years ended
December 31, 1994, and $181 million for the year ended December 31, 1993. Net
capital losses from sales transactions and impairments were $30 million and $50
million, respectively, for such periods.
21
<PAGE>
Foreclosed Real Estate is accounted for when acquired at the lower of the
property's market value or the loan balance, with write-downs at the point of
foreclosure being based on appraisals performed by an independent appraiser.
All real estate investments are revalued annually as described below, and
write-downs are taken if the revaluation indicates a permanent impairment of
value. Foreclosed properties are managed to optimize value and then either sold
or transferred to the Investment Real Estate portfolio. Foreclosed Real Estate
had a carrying value, net of write-downs, of $244 million and $249 million at
December 31, 1994 and 1993 respectively.
Individual property valuations are reviewed by management on a regular basis.
Real estate valuations are first established at the Company's regional offices
by the asset managers using the ARGUS (TM) software valuation program to project
income on a lease-by-lease basis. Budgeted expenses, leasing assumptions and
capital expenditures are also reflected. The valuations are then reviewed by
the appraisal section of the Company's Real Estate Investment Division for
technical accuracy, methodology and the appropriateness of the assumed rates of
return. The valuations are prepared on an interim basis between the months of
February and September, with a final valuation prepared for the end of the year.
Properties acquired by foreclosure or deed in lieu of foreclosure are
transferred to Investment Real Estate when the following qualifications have
been met: (i) the property has been owned or monitored by the Company for
sufficient time to allow proper evaluation (including the pendency of
foreclosure procedures, receivership or redemption); (ii) the property has
generated an annual net operating income equal to at least 7% of the current
book value for the most recent six month period (12 months for hotels); and
(iii) there are no unusual circumstances which would have substantial negative
impact on the value of the property or the stability of the income stream (e.g.,
environmental problems, major tenant vacancies over a short-term or structural
building deficiencies, etc.) See "VII. MassMutual -- Description of the
Business".
The AVR contains an equity real estate component, which was strengthened with a
voluntary contribution for a total of $30 million at the end of 1994. At
December 31, 1994, the Company had VIR of $26 million in respect of properties
held for sale. See "Investment Reserves."
PORTFOLIO SURVEILLANCE AND UNDER-PERFORMING INVESTMENTS
BONDS
The Company 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 renegotiation 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.
The Company 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 $8 million for the years ended December
31, 1994 and 1993.
The carrying values of NAIC Categories 5 and 6 bonds, as of the indicated dates,
were as follows:
NAIC Categories 5 and 6 Bonds
Carrying Value
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
------ ------
(in millions)
<S> <C> <C>
Performing:
Public $ 8 $ 3
Private 33 35
--- ---
Total 41 38
--- ---
Under-performing:
Public 3 6
Private 22 53
--- ---
Total 25 59
--- ---
Total $66 $97
=== ===
</TABLE>
As a result of the Company's conservative monitoring process, an internal watch
list is generated which includes certain properties which would not be
classified as under-performing under the SVO credit rating system. At December
31, 1994, bonds of issuers having a carrying value of $533 million (3.0% of the
total bond portfolio) had been placed on the internal watch list, which is
comprised of $64 million NAIC Category 1, $144 million NAIC Category 2, $126
million NAIC Category 3, $175 million NAIC Category 4 and $24 million NAIC
Category 5.
MORTGAGE LOANS
The Company actively monitors and manages its mortgage loan portfolio and
directly services the portfolio. Company personnel perform or review all
aspects of loan origination and portfolio management, including lease analysis,
property transfer analysis, economic and financial reviews, tenant analysis and
oversight of default and bankruptcy proceedings. All properties are revalued
each year and reinspected either each year or every other year based on internal
quality ratings. The Company 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 and which 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 as of the
dates indicated were as follows:
22
<PAGE>
<TABLE>
<CAPTION>
Current and Potential Problem Mortgage Loans
December 31,
----------------
1994 1993
----- -----
(in millions)
<S> <C> <C>
Restructured (1) $366 $423
In Process of Foreclosure 74 152
In Default 0 65
Actively Managed 185 304
---- ----
Total $625 $944
==== ====
</TABLE>
(1) Such restructured mortgage loans have average weighted book value yields of
8.7% and 8.6% for December 31, 1994 and 1993, respectively.
Strengthened by a voluntary contribution of $53 million, the AVR contains a
commercial mortgage loan component which totaled $80 million at the end of 1994.
In addition, at December 31, 1994, the Company maintained a separate voluntary
commercial mortgage loan investment reserve of $70 million for properties in the
process of foreclosure and for other specific anticipated losses. See
"Investment Reserves."
The Company does not accrue interest income on mortgage loans delinquent more
than 90 days or when management believes the collection of interest is
uncertain. Interest not accrued on mortgage loans totaled $15 million and $21
million for the years ended December 31, 1994 and 1993, respectively.
The following tables set forth current and potential problem mortgage loans by
property category and geographic region as of December 31, 1994:
Mortgage Loan Distribution By Property Type
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
----------- ------- -------------
($ in millions)
<S> <C> <C> <C>
Office $ 976 $319 32.7%
Retail 763 95 12.5
Industrial & Other 457 84 18.4
Hotels & Motels 420 74 17.6
Apartments 332 22 6.6
Commercial Pools 32 31 97.0
------ ---- ----
Total $2,980 $625 21.0%
====== ==== ====
</TABLE>
Mortgage Loan Distribution By Region
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
----------- ------- -------------
($ in millions)
<S> <C> <C> <C>
West $ 827 $132 16.0%
Mid-Atlantic 558 152 27.2
Southeast 482 38 7.9
Northeast 478 163 34.1
Midwest 414 132 31.9
Southwest 221 8 3.6
------ ---- ----
Total $2,980 $625 21.0%
====== ==== ====
</TABLE>
WRITE-DOWNS AND ALLOWANCES
When the Company determines that it is probable that the net realizable value of
an asset is less than the carrying value of such asset, appropriate write-downs
or allowances 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 the Company'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.
INVESTMENT RESERVES
In compliance with regulatory requirements, the Company adopted the asset
valuation reserves ("AVR") for the year ended December 31, 1992. The AVR
stabilizes policyholders' contingency reserves against non-interest rate related
fluctuations in the value of stocks, bonds, mortgage loans and real estate
investments. Upon adoption of the AVR, the Company allocated the Mandatory
Securities Valuation Reserve ("MSVR") from December 31, 1991 to the four sub-
components of the AVR. In prior years, the MSVR was maintained for fluctuations
only in the value of stocks and bonds. Voluntary investment reserves ("VIR"),
which are not mandated by regulation, were maintained in anticipation of future
losses on specific commercial mortgage loans and real estate holdings,
particularly commercial mortgage loans in the process of foreclosure.
The Company's total investment reserves at December 31, 1994 were $478 million,
a 10.6% increase from December 31, 1993, consisting of AVR of $347 million and
investment reserves of $131 million, comprised of $96 million of VIR and $35
million for a special reserve related to the surplus notes issued during 1993
and 1994. The increase in the AVR reflects increases in the bond, stock,
mortgage loan and real estate categories, and also includes voluntary
contributions to AVR of $53 million for mortgage loans and $5 million for real
estate.
The following table presents the change in total investment reserves for the
years 1994 and 1993:
23
<PAGE>
TOTAL INVESTMENT RESERVES
<TABLE>
<CAPTION>
Bonds, Preferred Special
Stocks and Investment
Short-term Mortgage Other Reserve for
Investments Loans Real Estate Investments Surplus Notes Total
---------------- -------- ----------- ----------- ------------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1992 (5) $ 125 $ 81 $ 56 $ 59 $ 0 $ 321
Reserve contributions (1) 28 117 31 2 25 203
Transfers among categories (14) 14 30 (30) 0 0
Net realized capital gains
(losses) (2) (45) (64) (50) 46 0 (113)
Unrealized capital gains
(losses) (3) 33 0 0 (12) 0 21
------ ---- ------- ---- --- -----
Net change to Policyholders'
Contingency Reserves (4) 2 67 11 6 25 111
------ ---- ------- ---- --- -----
BALANCE AT DECEMBER 31,
1993(5) 127 148 67 65 25 432
------ ---- ------- ---- --- -----
Reserve contributions (1) 32 80 19 3 10 144
Transfers among categories (14) 14 3 (3) 0 0
Net realized capital gains
(losses) (2) (11) (92) (33) 6 0 (130)
Unrealized capital gains
(losses) (3) 25 0 0 7 0 32
------ ---- ------- ---- --- -----
Net change to
Policyholders'
Contingency Reserves (4) 32 2 (11) 13 10 46
------ ---- ------- ---- --- -----
BALANCE AT DECEMBER 31,
1994(5) $ 159 $150 $ 56 $ 78 $35 $ 478
====== ==== ======= ==== === =====
</TABLE>
(1) Amounts represent contributions calculated on a statutory formula plus
amounts deemed necessary by the Company. Represents the net impact on
Policyholders' Contingency Reserves for investment gains and losses not
related to changes in interest rates.
(2) These amounts offset realized capital gains, 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,
repayments of mortgage loans at a discount, mortgage loan foreclosures and
real estate permanent write-downs.
(3) These amounts offset unrealized capital gains, 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.
(4) Amounts represent the reserve contribution (note 1) less amounts already
recorded (notes 2 and 3). This net change in reserves is recorded as a
charge to Policyholders' Contingency Reserves.
(5) The balance is comprised of the Asset Valuation Reserves and Investment
reserves which are recorded separately as liabilities on the statement of
financial position as follows:
<TABLE>
<CAPTION>
Assets
Valuation Investment
Reserves Reserves Total (6)
--------- ---------- ---------
(in millions)
<S> <C> <C> <C>
Balance at December 31, 1992 $254 $ 67 $321
Balance at December 31, 1993 $301 $131 $432
Balance at December 31, 1994 $347 $131 $478
</TABLE>
(6) The Asset Valuation Reserve is a component of Total Adjusted Capital, while
the Investment Reserve is excluded from Total Adjusted Capital, according to
the NAIC definition.
VII. MASSMUTUAL -- DESCRIPTION OF THE BUSINESS
Massachusetts Mutual Life Insurance Company (the "Company") is a mutual life
insurance company organized as a Massachusetts corporation which was originally
chartered in 1851. As a mutual life insurance company, the Company has no
shareholders. The Company's primary business is ordinary life insurance. The
Company also provides, directly or though its subsidiaries, a wide range of
annuity and disability products, traditional and managed care group health
products, and pension and pension-related products and services, as well as
investment services to individuals, and corporations and other institutions in
all 50 states of the United States, and the District of Columbia. The Company is
also licensed to transact business in Puerto Rico, and six provinces of Canada,
but has no export sales.
The Company's principal lines of business are (i) Insurance and Financial
Management, which provides life insurance and investment services to
individuals; (ii) Pension Management, which provides group pension investment
products and administrative services, primarily to sponsors of tax qualified
retirement plans; (iii) Life and Health Benefits Management, which provides
group life and health insurance products and related services to corporations
and other institutions (as of December 31, 1994, this operation is a subsidiary
of the Company); and (iv) Investment Management, which provides advisory
services for the Company's general investment account and separate investment
accounts, as well as for various closed-end and open-end investment companies,
through its own staff and those of Oppenheimer Management Corporation
("Oppenheimer"), in which the Company indirectly owns a controlling interest,
and Concert Capital Management, Inc. ("Concert Capital"), which
24
<PAGE>
is also indirectly owned by the Company. In 1994, the Company established
Cornerstone Real Estate Advisers, Inc. ("Cornerstone"), an indirectly
wholly-owned subsidiary which manages the real estate properties owned by the
Company. A description of the business done by each line of business appears
below. The table appearing at the end of Section VII sets forth financial data
for each of the three insurance lines of business for the periods indicated.
The direction and operations of the Company's four lines of business are guided
by statements of corporate purpose and vision. The Company's operations are
managed so as to maintain a financially strong and efficient enterprise for the
benefit of policyholders.
In recent years, the Company's main priority has been to balance financial
strength, policyholder value, and growth, while emphasizing financial strength.
The Company has pursued this objective by emphasizing profitability through
refined product pricing, active asset/liability management, rigorous expense
control, prudent underwriting, improving persistency and retention levels, and
maintaining the high credit quality of its general investment account portfolio.
INSURANCE AND FINANCIAL MANAGEMENT
The Company's Insurance and Financial Management ("IFM") operations provide a
wide range of individual insurance and investment products and financial
management services through its network of general agents and agents. The
Contracts are administered by the IFM. The principal individual insurance
products offered by the Company's IFM operations include whole life, variable
universal life and term insurance, individual annuities and individual
disability income insurance. The majority of these products allow riders that
provide such benefits as waiver of premium, accidental death benefits, paid-up
additions to insurance coverage and accelerated death benefits.
The Company markets mutual funds and other investment products through MML
Investors Services, Inc.("MML Investors Services"), a registered broker/dealer
that is indirectly wholly-owned by the Company. The Company also indirectly
manages mutual funds through its ownership interest in Oppenheimer. The
Company's agents sell a broad array of investment products through MML Investors
Services, including Oppenheimer mutual funds, unit investment trusts, and public
and private limited partnerships.
PRODUCT PRICING AND MANAGEMENT
The pricing of individual products is designed to produce surplus sufficient to
generate a level of capital consistent with the Company's financial strength
objectives. Long-term value to policyholders is achieved by competitively
managing performance in the key financial fundamentals for each individual
product, including investment returns, expenses, persistency, mortality and
morbidity (the incidence and duration of sickness or injury). The pricing of
most products over time reflects actual experience subject to minimum
guarantees. For whole life products, the actual experience is reflected in
dividends that are, in effect, returns resulting from more favorable interest,
mortality, expense and persistency experiences than those reflected in the
premium. For other products, the actual experience is reflected in interest,
mortality and/or expense rates.
PRINCIPAL MARKETS, MARKETING AND DISTRIBUTION
Sales of the Company's IFM products are primarily targeted to four markets:
upper income individuals of all ages; moderate income individuals under age 45;
professionals and business owners; and owner-operated businesses. Over 90% of
IFM's life insurance premium sales are made in these target markets.
The Company sells its IFM products nationwide primarily through approximately 90
general agents who contract with more than 3,700 full-time career agents. In
1994, 90% of IFM's premiums were generated by policies sold by the Company's
career agents. The balance was sold by other producers, including independent
brokers, who contract with the general agents, and consultants. In 1994, the
Company began to issue the Oppenheimer LifeTrust Variable Annuity for marketing
and distribution by the Oppenheimer distribution system of registered
representatives in addition to the Company's career agents.
UNDERWRITING
All underwriting is centralized at the Company's home office. The risk
assessment process is carefully balanced to ensure an evaluation of relative
risks consistent with the issuance of new business and competitive product
performance. The Company utilizes a computerized system in the process of
reviewing and approving applications for life insurance. This system affords
the Company substantial savings in underwriting time and cost, and lends
consistency to the underwriting process.
COMPETITION
The life insurance industry is highly competitive. There are more than 1,800
life insurance companies in the United States, many of which offer individual
insurance products similar to those marketed by the IFM. 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 the Company competes.
Competition for large life insurance sales usually includes fewer than 50
financially strong companies such as the Company. Clients' advisors,
consultants, attorneys and accountants are often involved in the selling process
for these large cases. There is substantial competition for smaller cases due
to the large number of companies and agents in these markets nationwide.
The Company's management believes its financial strength, agent skill and
historical product performance provide competitive advantages for the individual
products it offers in these markets. In 1994, the Company received the highest
rating from A.M. Best Company, Inc. (A++), Standard & Poor's Corporation (AAA),
and Duff & Phelps Credit Rating Company (AAA), as well as receiving a rating of
Aa1 by Moody's Investors Service, Inc. (the highest in its "excellent"
category). The Company is one of only three companies that has ranked in the
top 10 companies in each of the last 17 years in A.M. Best's Annual Statistical
Study-20 Year Dividend Comparisons. The study is based upon actual dividends
paid over the last 20 years and measures whole life policyholder value using net
surrender cost adjusted for interest.
25
<PAGE>
Currently, more insurance companies, banks and mutual fund companies are
entering the annuity business. The Company competes in this market by using
multiple distribution channels, enhancing its customer service orientation, and
offering desired product features. In 1994, the Company made a key strategic
move in continuing to adapt to this changing market by offering the Oppenheimer
LifeTrust Variable Annuity to be sold through the Oppenheimer distribution
system and by the Company's career agents.
In the disability income market, competitor strategies are diverging due to poor
financial results. The Company may be better positioned than some competitors
to succeed in this market as a result of the ability of its distribution system
to integrate sales of disability income insurance into total financial planning.
PENSION MANAGEMENT
Through its Pension Management ("PM") operations, the Company markets a complete
line of group pension investment products and administrative services, primarily
to sponsors of tax qualified retirement plans. The Company offers a variety of
guaranteed and non-guaranteed investment accumulation products and ancillary
services to both defined benefit and defined contribution plans.
PRINCIPAL MARKETS, MARKETING AND DISTRIBUTION
The Company markets to both defined benefit and defined contribution plans. The
Company's goal in the pension marketplace is to maintain its existing block of
defined benefit business, acquire existing business, and to take advantage of
new business opportunities in the defined contribution market. The Company
focuses on small and medium-size businesses, and currently administers over
2,500 full-service plans serving in excess of 260,000 employees.
The Company's pension products are sold through 30 pension field employees
("representatives") in 17 offices located in major cities in the United States.
The representatives distribute products through the Company's agents, brokers
(primarily agents of other companies) and consultants.
COMPETITION
The Company's PM's operations, with $14 billion in assets, is the 12th largest
asset manager among insurance companies participating in the qualified pension
plan marketplace and is among the top 50 pension asset managers in terms of
assets under management. In recent years, the Company has faced increased
competition in the pension product and services market as a result of the
dissolution of traditional industry boundaries and the entrance of mutual funds
and other non-traditional pension management entities which have significant
name recognition and retail servicing capabilities. The increased diversity in
providers of pension products and services, and the increasing number of
companies entering the market are anticipated to increase price and investment
performance pressures. The Company's diverse product line, which includes
mutual funds, flexibility in servicing levels, and use of technology in
maintaining business are expected to enhance the Company's position as an
experienced pension management entity. The pension marketplace itself may be
poised for expansion due to increased attention focused on retirement planning
and savings.
LIFE AND HEALTH BENEFITS MANAGEMENT
As of December 31, 1994, the economics of Life and Health Benefits Management
("L&HBM") were moved into a stock subsidiary of the Company. Up to that time,
the Company, through L&HBM operations, offered a wide variety of managed care,
group life, health and disability products. The subsidiary continues the
business of L&HBM and provides a range of managed care options as well as more
traditional indemnity products. Funding alternatives are available that range
from conventionally insured programs to programs fully funded by the employer
under which services are provided.
NETWORKS
The Company has contracted with over 80 regional managed care networks
throughout the United States. By employing a network strategy based on joint
ventures and contractual arrangements, L&HBM is able to significantly influence
the local provider community through the aggregate volume of several payors
utilizing the same local managed care organizations. At the end of 1994, L&HBM's
managed care network had grown to more than 130 selected markets nationwide.
PRINCIPAL MARKETS, MARKETING, AND DISTRIBUTION
While L&HBM offers its products to employers of all sizes, its target market is
employers with 100 to 3,000 employees. L&HBM currently has contracts with over
2,000 companies representing over 525,000 employees, and 1,207,500 employees and
dependents. L&HBM emphasizes a bundled medical benefits package with the focus
on managed care and service delivery.
L&HBM products are sold primarily through approximately 65 group representatives
in key markets nationwide. The representatives distribute products through the
Company's agents, independent brokers and benefits consultants. The
representatives and agents are responsible for sales and service functions and
are compensated for new business and business retention.
COMPETITION
L&HBM's competitors vary from region to region due to the dynamics of the
employer and producer communities as well as the health care delivery systems.
In general, L&HBM competes with the largest carriers in the industry, as well as
with mid-sized carriers. HMOs are competitive in some markets, especially in
California, Atlanta and Boston. L&HBM is currently developing HMO capabilities
through joint venture arrangements with managed care network partners and
hospital systems. L&HBM's strategy is to provide integrated services by
continuing to develop a cohesive package of billing, eligibility, reporting and
service functions for the employer community.
L&HBM has historically experienced solid profitability through prudent
underwriting and expense control. Due to the high price sensitivity in the
current market, all carriers are experiencing lower growth performance than they
had in the late 1980s and early 1990s. L&HBM's strategy is to grow its business
to maintain long-term viability.
26
<PAGE>
RECENT DEVELOPMENTS
In 1993, the Company entered into an agreement with The Hartford Life Insurance
Company ("The Hartford"), providing, among other things, that The Hartford's
expiring business would be transferred to the Company if the policyholder so
chose at the end of the policy term. By the end of 1994, $280.5 million
(premium and premium equivalents) of medical and dental business had been
transferred from The Hartford to the Company. In connection with this
transaction, the Company also acquired four of The Hartford's claim paypoints
located in Windsor, CT; Woodbridge, NJ; Fort Scott, KS; and Bolingbrook, IL.
On December 31, 1994, the economics of L&HBM was moved to an indirectly
wholly-owned stock subsidiary of the Company to provide the Company and the
subsidiary with financial and strategic flexibility. The Company considers such
flexibility crucial due to the rapid evolution of the health care marketplace.
Opportunities requiring this flexibility include the possible formation of
alliances with other health care entities, and consideration of the sale or
partial sale of the subsidiary. The subsidiary is currently using a reinsurance
agreement to transfer risk from the Company; however, the Company remains the
issuer of new and in-force contracts. During 1995, the subsidiary will pursue
state authority to offer contract forms and coverage.
INVESTMENT MANAGEMENT
The Company's Investment Management operations ("IM") provide advisory services
for the Company's general investment account and separate investment accounts,
two closed-end investment companies, four open-end investment companies, a
collateralized bond obligation company, pension funds, endowments, and various
subsidiaries. These advisory services are currently performed by the Company,
Concert Capital and Oppenheimer. Cornerstone manages the real estate properties
owned by the Company.
The Company's advisory services focus on supporting the liabilities of the lines
of business in light of yield, liquidity and diversification considerations. The
General Investment Account ("GIA"), which backs most of the Company's
participating and nonparticipating insurance and pension products, is divided
into a number of several portfolios, each of which is structured to meet the
obligations of its particular liabilities. The goal of asset/liability
management for the GIA is to optimize and control, particularly in volatile
financial markets, the investment return and liquidity of a portfolio given the
unique set of liabilities it supports. The Company utilizes a wide array of
investment instruments to carry out its portfolio management activities. The
investment strategies for the separate investment accounts are generally aimed
at maximizing the total rate of return against an agreed upon market benchmark.
REGULATION
The Company is licensed to transact its insurance business in, and is subject to
regulation and supervision by all 50 states of the United States, the District
of Columbia, Puerto Rico and six provinces of Canada. The Company's insurance
subsidiaries are licensed, regulated and supervised in all jurisdictions where
they conduct an insurance business. 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. The Company is also subject to regulation of its
accounting methodologies and practices and the Company and each of its insurance
subsidiaries are required to file detailed annual financial statements with
supervisory agencies in each of the jurisdictions in which it does business.
Each of their operations and accounts is also subject to examination by such
agencies at regular intervals.
Massachusetts insurance law requires the Company, as a domestic mutual life
insurance company, to maintain at least $1.6 million in statutory surplus but
limits the amount of surplus that the Company may accumulate. Additionally,
insurance regulators of other states have the discretionary authority, in
connection with the continual licensing of the Company and each of its insurance
subsidiaries, to limit or prohibit new issuances of business to policyholders
when, in their judgment, they determine that such insurer is not maintaining
minimum statutory surplus or capital or if the further transaction of business
will be hazardous to its policyholders.
The Company is subject to guaranty fund assessments in all states in which it
does business. The guaranty associations are organized to pay contractual
obligations under insurance policies issued by impaired or insolvent insurers.
The Company is also subject to risk-based capital ("RBC") requirements
promulgated by the National Association of Insurance Commissioners, and expected
to be adopted by Massachusetts in 1996. The RBC Model Act will give 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.
In addition to regulation of its insurance business, the Company is subject to
various types of to federal and state laws and regulations affecting the
conduct, taxation and other aspects of their businesses. The Company and
certain of its subsidiaries, and certain policies and contracts offered by them
are subject to various levels of regulation under the federal securities laws
administered by the Securities and Exchange Commission. Also, as owners and
operators of real property, the Company is subject to extensive federal, state
and local environmental laws and regulations. Finally, when the Company and
its insurance subsidiaries act as fiduciaries for employee benefit plans
governed by the Employee Retirement Income Security Act of 1974 ("ERISA"), they
are subject to regulation by the United States Department of Labor.
In 1993, the United States Supreme Court issued its opinion in John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank, holding that certain
contractholder funds held by John Hancock Mutual Life Insurance Company in its
general investment account under a participating group annuity contract were
"plan assets" and therefore subject to ERISA's fiduciary provisions. The
Department of Labor is currently considering a number of requests for exemptive
relief and interpretive advice submitted by the American Council of Life
Insurance on behalf of the insurance industry as a result
27
<PAGE>
of that opinion. The Company is unable at this time to determine with any
certainty the effect of the opinion on its general account contracts and
operations. The Department has already proposed a class exemption from ERISA's
prohibited transaction provisions which would apply to external investments made
with general account assets.
The Company's management believes it is in compliance in all material respects
with all applicable regulations.
PROPERTIES
The Company owns seven buildings located in Springfield, Massachusetts on
approximately 119 acres, comprising its home office complex and occupies all of
the approximately 1.2 million square feet of space in such buildings. The
Company believes that such owned and leased properties are suitable and adequate
for its business operations.
This table sets forth financial data for each of three insurance lines of
business for the periods indicated.
<TABLE>
<CAPTION>
(IN MILLIONS) YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
OTHER DATA: 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREMIUM INCOME:
Insurance and Financial
Management $ 2,482 $ 2,495 $ 2,182 $ 2,016 $ 1,861
Pension Management 1,307 1,541 1,840 1,652 1,895
Life & Health Benefits
Management 733 748 754 755 746
------- ------- ------- ------- -------
Total premium income $ 4,522 $ 4,784 $ 4,776 $ 4,423 $ 4,502
======= ======= ======= ======= =======
NET INVESTMENT AND OTHER
INCOME:
Insurance and Financial
Management $ 1,200 $ 1,177 $ 1,103 $ 1,065 $ 987
Pension Management 924 1,027 1,084 1,127 1,094
Life & Health Benefits
Management 55 49 44 47 42
------- ------- ------- ------- -------
Total net investment
and other income $ 2,179 $ 2,253 $ 2,231 $ 2,239 $ 2,123
======= ======= ======= ======= =======
NET GAIN FROM OPERATIONS:
Insurance and Financial
Management $ 107 $ 88 $ 82 $ 68 $ 20
Pension Management 74 78 59 64 63
Life & Health Benefits
Management 43 45 49 47 44
------- ------- ------- ------- -------
Total net gain from
operations $ 224 $ 211 $ 190 $ 179 $ 127
======= ======= ======= ======= =======
TOTAL ASSETS (AT PERIOD
END):
Insurance and Financial
Management $20,040 $18,442 $15,858 $14,372 $13,063
Pension Management 14,592 14,964 14,533 14,212 13,513
Life & Health Benefits
Management 542 908 773 707 653
------- ------- ------- ------- -------
Total assets $35,174 $34,314 $31,164 $29,291 $27,229
======= ======= ======= ======= =======
</TABLE>
VIII. EXECUTIVE OFFICERS AND DIRECTORS
DIRECTORS
ROGER G. ACKERMAN, 56, Director and Member, Auditing and Compensation Committees
-- President, Chief Operating officer (since 1990) Group President (1987-1990),
Corning Incorporated (manufacturer of specialty materials, communication
equipment and consumer products), Houghton Park, Corning, New York; Director,
The Pittson Company (mining and marketing of coal for electric utility and
steel industries) One Pickwick Plaza, Greenwich, Connecticut; Director, Dow
Corning Corporation.
JACK F. BENNETT, 71, Director and Member, Auditing and Investment Committees --
Retired (since 1989); former Senior Vice President and Director, Exxon
Corporation
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(producer of petroleum products), 1251 Avenue of the Americas, New York, New
York; Director (since 1990) Philips Electronics N.V.; Director, Dean Witter
Mutual Funds, One World Trade Center, New York, New York; and Tandem Computer,
Inc. (designer of computer systems), 19333 Vallco Parkway, Cupertino,
California; Director (1983-1991).
WILLIAM J. CLARK, 71, Chairman of the Board and Member, Investment, Dividend
Policy, and Organization & Operations Committees -- Chairman of the Board of
MassMutual, 1295 State Street, Springfield, Massachusetts.
ANTHONY DOWNS, 64, Director and Member, Investment and Dividend Policy
Committees -- Senior Fellow (since 1977), Brookings Institution; Director
(since 1971), Pittway Corp.; Director (since 1992), Bedford Property Investors,
Inc.; Director (since 1992), General Growth Properties, Inc.; Director (since
1979), The Urban Land Institute; Director (since 1986), NAACP Legal and
Educational Defense Fund, Inc.; Director (since 1991), National Housing
Partnership Foundation.
JAMES L. DUNLAP, 57, Director and Member, Compensation and Organization &
Operations Committees -- Senior Vice President of Texaco, Inc. (producer of
petroleum products), and President, Texaco USA, 1111 Bagby, Houston, Texas.
RICHARD N. FRANK, 71, Director and Member, Dividend Policy and Organization &
Operations Committees -- Chairman, Chief Executive Officer and Director,
Lawry's Restaurants, Inc. (operator of restaurants) 2950 Los Feliz Boulevard,
Los Angeles, California.
CHARLES K. GIFFORD, 52, Director and Member, Auditing and Investment Committees
-- President, The First National Bank of Boston, 100 Federal Street, Boston,
Massachusetts; President, Bank of Boston Corporation (bank holding company),
100 Federal Street, Boston, Massachusetts; Director, Member of Audit and
Compensation Committees, Boston Edison Co. (public utility electric company),
800 Boylston Street, Boston, Massachusetts.
WILLIAM N. GRIGGS, 63, Director, Chairman, Auditing Committee and Member,
Investment Committee -- Managing Director, Griggs & Santow Inc. (business
consultants) Suite 2509, One World Trade Center, New York, New York; Director
(since 1990), T/SF Communications, Inc. (diversified publishing and
communications company), Tulsa, Oklahoma.
JAMES G. HARLOW, JR., 60, Director and Member, Auditing and Policy Committees --
Chairman and President, Oklahoma Gas and Electric Company (electric utility),
321 North Harvey Avenue, Oklahoma City, Oklahoma; Director, Fleming Companies
(wholesale food distributors), 6301 Waterford Boulevard, Oklahoma City,
Oklahoma.
BARBARA B. HAUPTFUHRER, 66, Director, Chairman, Compensation Committee and
Member, Organization and Operations Committee -- Director and Member,
Compensation, Nominating and Audit Committees, The Vanguard Group of Investment
Companies including the following: Windsor Funds, Wellington Fund, Morgan
Growth Fund, Wellesley Income Fund, Gemini Fund, Explorer Fund, Vanguard
Municipal Bond Funds, Vanguard Fixed Income Securities Fund, Vanguard World
Fund, Star Fund, Vanguard Ginnie Mae Fund, Primecap Fund, Vanguard Convertible
Securities Fund, Vanguard Quantitative Fund, Vanguard Index Trust, Trustees
Commingled Equity Fund, Trustees Commingled Fund -- International, Vanguard
Money Market Trust, Windsor II, Vanguard Asset Allocation Fund and Vanguard
Equity Income Fund (principal offices, Drummers Lane, Valley Forge,
Pennsylvania); Director, Chairman of Retirement Benefits Committee and Pension
Fund Investment Review -- USA and Canada and Member, Audit, Finance and
Executive Committees, The Great Atlantic and Pacific Tea Company, Inc.
(operator of retail food stores) 2 Paragon Drive, Montvale, New Jersey;
Director, Chairman of Nominating Committee and Member, Compensation Committee,
Knight-Ridder, Inc. (publisher of daily newspapers and operator of cable
television and business information systems) One Herald Plaza, Miami, Florida;
Director and Member, Compensation Committee, Raytheon Company, (electronics
manufacturer) 141 Spring Street, Lexington, Massachusetts; Director and Member,
Human Resources Committee, Alco Standard Corp. (diversified manufacturer and
distributor) 825 Duportail Road, Valley Forge, Pennsylvania.
SHELDON B. LUBAR, 65, Director, Chairman, Organization & Operations Committee
and Member, Investment Committee -- Chairman, Lubar & Co. Incorporated
(investment management and advisory company) 777 East Wisconsin Avenue,
Milwaukee, Wisconsin; Chairman and Director, The Christiana Companies, Inc.
(real estate development), 777 East Wisconsin Avenue, Milwaukee, Wisconsin;
Director, Firstar Bank and Firstar Corporation (bank holding company), 777 East
Wisconsin Avenue, Milwaukee, Wisconsin; Grey Wolf Drilling Co. (contract oil
and gas drilling), 2000 Post Oak Boulevard, Houston, Texas; Marshall Erdman and
Associates, Inc. (design, engineering, and construction firm), 5117 University
Avenue, Madison, Wisconsin; SLX Energy, Inc. (oil and gas exploration), 777
East Wisconsin Avenue, Milwaukee, Wisconsin; Prideco, Inc. (drill collar
manufacturer), 6039 Thomas Road, Houston, Texas; Briggs & Stratton (small
engine manufacturer) 3300 North 124th Street, Milwaukee, Wisconsin (1989-1994);
Schwitzer, Inc. (holding company for engine parts manufacturers), 1125
Brookside Avenue, Indianapolis, Indiana (1989-1994); Director (since 1991),
Mortgage Guaranty Insurance Corporation; Director (1986-1991), Milwaukee
Insurance Group, Inc., 809 West Michigan Street, Milwaukee, Wisconsin,
(1986-1991); MGIC Investment Corporation (investment company) 111 East
Kilbourne Avenue, Milwaukee, Wisconsin; Ameritech, 305 Wacker Drive, Chicago,
Illinois; Square D Company (manufacturer of electrical equipment and
electronics products), Palatine, Illinois (1986-1991); Milwaukee Insurance
Group, Inc., 809 West Michigan Street, Milwaukee, Wisconsin (1986-1991); Lubar
Man-
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<PAGE>
agement, Inc., President, (investment company), 777 East Wisconsin Avenue,
Milwaukee, Wisconsin (1987-1991); and Member, Advisory Committee, Venture
Capital Fund, L.P., 777 East Wisconsin Avenue, Milwaukee, Wisconsin.
WILLIAM B. MARX, JR., 55, Director and Member, Compensation and Dividend Policy
Committees -- President, AT&T Network Systems (manufacturer and marketer of
network telecommunications equipment), 475 South Street, Morristown, New
Jersey.
DONALD F. MCCULLOUGH, 69, Director and Member, Auditing and Dividend Policy
Committees -- Retired (since 1988); former Chairman and Chief Executive
Officer, Collins & Aikman Corp. (manufacturer of textile products) 210 Madison
Avenue, New York, New York; Director: Bankers Trust New York Corp. (bank
holding company) and Bankers Trust Company (principal offices, 280 Park Avenue,
New York, New York); Melville Corporation (specialty retailer), 1 Theall Road,
Rye, New York.
BARBARA S. PREISKEL, 70, Director, Chairman, Dividend Policy Committee and
Member, Compensation Committee -- Attorney-at-Law, The Bar Building, 36 West
44th Street, New York, New York; Director: Textron, Inc. (diversified
manufacturing company), 40 Westminster Street, Providence, Rhode Island;
General Electric Company (diversified manufacturer electrical products), 3135
Easton Turnpike, Fairfield, Connecticut; The Washington Post Company (publisher
of daily newspaper), Washington, D.C.; American Stores Company (operator of
supermarkets and drugstores), 709 East South Temple, Salt Lake City, Utah.
THOMAS B. WHEELER, 58, President, Director, Chief Executive Officer, Chairman,
Investment Committee and Member, Dividend Policy and Organization & Operations
Committees -- President, Chief Executive Officer and Director of MassMutual;
President and Director (1988-1991), MassMutual Holding Company (wholly-owned
subsidiary of MassMutual) (principal offices 1295 State Street, Springfield,
Massachusetts); Director, The First National Bank of Boston and Bank of Boston
Corporation (bank holding company), 100 Federal Street, Boston, Massachusetts
and Massachusetts Capital Resources Company, Boston, Massachusetts; Chairman
and Director (since 1990), Oppenheimer Acquisition Corp., Two World Trade
Center, New York, New York; Director, Concert Capital Management, Inc. (wholly
owned subsidiary of MassMutual Holding Company); Director, Textron, Inc.
ALFRED M. ZEIEN, 65, Director and Member, Compensation and Organization &
Operations Committees -- Chairman and Chief Executive Officer (since 1991),
President, Chief Operating Officer and Director (1991) and Vice Chairman
(1981-1991), The Gillette Company (manufacturer of personal care products),
Prudential Tower Building, Boston, Massachusetts; Director: Polaroid
Corporation (manufacturer of photographic products), 549 Technology Square,
Cambridge, Massachusetts; Raytheon Company (electronics manufacturer), 141
Spring Street, Lexington, Massachusetts; and Repligen Corporation; Director
(since 1991), Bank of Boston Corporation (bank holding company), 100 Federal
Street, Boston, Massachusetts and Massachusetts; Trustee, University Hospital
of Boston, Massachusetts.
EXECUTIVE OFFICERS (OTHER THAN DIRECTORS)
LAWRENCE V. BURKETT, JR., 49, Executive Vice President and General Counsel
(since 1993) -- Senior Vice President and General Counsel (1992-1993), Senior
Vice President and Deputy General Counsel (1992-1993), Senior Vice President
and Associate General Counsel (1988-1992), Vice President and Associate General
Counsel (1984-1988), MassMutual; Director (since 1993), Vice President -- Law
(since 1993), MML Reinsurance (Bermuda) Ltd.; Director (since 1993), Sargasso
Mutual Insurance Co., Ltd.; Director (since 1993), MassMutual Holding Company;
Director (since 1993), MassMutual of Ireland; Director (since 1994) Cornerstone
Real Estate Advisers, Inc.
JOHN DAVIES, 45, Executive Vice President, (since 1994) -- Assistant Executive
Vice President, (1993). General Agent, MassMutual (1982-1993).
DANIEL J. FITZGERALD, 47, Executive Vice President, (since 1994) -- Senior Vice
President (1991-1994), Vice President and Controller (1986-1991), MassMutual;
Vice President (since 1994) and Director (since 1993), MassMutual Holding
Company; Director (1987-1993) (since 1994), President (1987-1990), Chief
Executive Officer (1991-1993), MML Pension Insurance Company; Director
(1987-1993, 1994), President (1987-1993), President and Chief Executive Officer
(1991-1993), MML Bay State Life Insurance Company; Director (1987-1991),
President (1987-1990), MML Life Insurance Company; Director (1987-1990),
(1992-1993), MML Insurance Agency, Inc.; Director and President (1987-1990),
Bay Colony of Arizona; Director and President (1987-1990), Bay Colony of
Vermont, Inc.; Director and Member, Compensation Committee (since 1994),
Cornerstone Real Estate Advisers, Inc.; Director Concert Capital Management,
Inc.; Director, Member of Compensation Committee and Audit Committee, MML
Investors Services, Inc.; Director, MML Real Estate Corporation; Director, MML
Realty Management Corporation; Director and Vice President, MassMutual Holding
Company Two, Inc.; Director and Vice President, MassMutual Holding Company Two
MSC, Inc.; Director, MassMutual of Ireland, Inc.; and Director and President,
Mass Life Insurance Company of New York (1987-1990).
LAWRENCE L. GRYPP, 46, Executive Vice President -- Executive Vice President
(since 1991), Senior Vice President (1990-1991) and General Agent (1980-1990)
of MassMutual; Chairman (since 1991), MML Investors Services, Inc.
(wholly-owned broker-dealer subsidiary of MassMutual Holding Company); Director
(since 1991), Oppenheimer Acquisition Corp., Two World Trade Center, New York,
New York.
JAMES E. MILLER, 47, Executive Vice President -- Executive Vice President of
MassMutual; Director (since 1990), MassMutual of Ireland Ltd., Knockanrawley,
Tipperary Town, Tipperary County, Ireland; Vice President and Treasurer, Dental
Learning Systems, New York, New York;
30
<PAGE>
Director (since 1990), The Ethix Corporation, Beaverton, Oregon; Director,
Benefit Panel Services, Los Angeles, California and National Capital Preferred
Provider Organization, Washington, DC.
JOHN M. NAUGHTON, 58, Executive Vice President -- Executive Vice President of
MassMutual; Corporator, BayState Health Systems; Director (since 1991),
Springfield Institution for Savings, 1441 Main Street, Springfield,
Massachusetts; Trustee, American International College, Springfield,
Massachusetts.
JOHN J. PAJAK, 59, Executive Vice President -- Operations -- Executive Vice
President of MassMutual, 1295 State Street, Springfield, Massachusetts.
GARY S. WENDLANDT, 44, Executive Vice President -- Chief Investment Officer
(since 1993), Executive Vice President (since 1992), Senior Vice President
(1983-1992), MassMutual; President (since 1983), and Trustee (since 1986),
MassMutual Corporate Investors (closed end investment company); President and
Trustee (since 1988), MassMutual Participation Investors; President and Chief
Executive Officer and Member, Compensation Committee (since 1994), Director
(since 1992) and Vice Chairman (1983-1991), Concert Capital Management, Inc.;
Vice Chairman and Trustee (since 1993), (1988-1993), MML Series Investment Fund
(open end investment company); Vice President -- Investments (1990-1993),
Director (since 1991) President (since 1993) and Chairman and Chief Executive
Officer (since 1994) MassMutual Holding Company; Director (1987-1994), MML
Pension Insurance Company; Director (1987-1994), MML Bay State Life Insurance
Company; Member, Compensation Committee and Audit Committee (since 1994),
Director (since 1990), Oppenheimer Acquisition Corporation; Supervisory
Director (since 1991), MassMutual/Carlson CBO N.V. (collateralized bond fund)
Netherlands Antilles; Director (since 1992), Merrill Lynch Derivative Products,
Inc., World Trade Center, North Tower, New York, New York; Chairman and Chief
Executive Officer; Member, Executive Committee, and Compensation Committee
(since 1994), Cornerstone Real Estate Advisers, Inc.; Chairman (since 1994),
Director (since 1993), MML Real Estate Corporation; Chairman (since 1994),
Director (since 1993), MML Realty Management Corporation; Director (since
1994), MassMutual Corporate Value Partners, Ltd.; Director (since 1994),
MassMutual Corporate Value, Ltd.; Chairman and President (since 1994),
MassMutual Holding Company Two, Inc.; Chairman and President (since 1994),
MassMutual Holding Company Two MSC, Inc.; Chairman and Chief Executive Officer
(since 1994) and Member, Investment Pricing Committee (since 1994), MassMutual
Institutional Funds; Director (since 1992), Merrill Lynch Derivative Products,
Inc.; Director (1985-1990), Crestwood Realty Investors, Inc.
IX. EXECUTIVE COMPENSATION
The compensation that the Chief Executive Officer and the most highly
compensated executive officers (receiving compensation in excess of $100,000)
other than the Chief Executive Officer, is summarized in the tables below. The
footnotes that follow explain the nature of the compensation in greater detail.
31
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-term Compensation (2)
-----------------------------------------------------------------------------------------------------------------------------
Other Restricted All
Annual Stock Options LTIP Other
Name and Principal Position Salary (1) Bonus Compensation Awards SARs (#) Payouts($) Compensation (3)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year 1994
Wheeler, Thomas B.-President & CEO $765,000 $538,000 $0 N/A N/A N/A $509,015
Wendlandt, Gary E.-Exec. Vice President $338,942 $233,700 $0 N/A N/A N/A $161,310
Pajak, John J.-Exec. Vice President $310,850 $179,800 $0 N/A N/A N/A $219,400
Naughton, John M.-Exec. Vice President $278,475 $149,600 $0 N/A N/A N/A $188,753
Miller, James E.-Exec. Vice President $273,150 $148,200 $0 N/A N/A N/A $127,582
Fiscal Year 1993
Wheeler, Thomas B.-President & CEO $745,000 $369,850 $0 N/A N/A N/A $211,837
Wendlandt, Gary E.-Exec. Vice President $279,508 $108,200 $0 N/A N/A N/A $ 70,432
Pajak, John J.-Exec. Vice President $289,425 $122,600 $0 N/A N/A N/A $131,098
Naughton, John M.-Exec. Vice President $267,975 $ 86,200 $0 N/A N/A N/A $105,354
Miller, James E.-Exec. Vice President $266,250 $108,600 $0 N/A N/A N/A $ 73,015
Fiscal Year 1992
Wheeler, Thomas B.-President & CEO $645,000 $324,000 $0 N/A N/A N/A $ 98,575
Wendlandt, Gary E.-Exec. Vice President $228,892 $ 59,800 $0 N/A N/A N/A $ 10,433
Pajak, John J.-Exec. Vice President $253,417 $ 94,800 $0 N/A N/A N/A $ 55,579
Naughton, John M.-Exec. Vice President $257,325 $100,400 $0 N/A N/A N/A $ 46,825
Miller, James E.-Exec. Vice President $231,567 $118,500 $0 N/A N/A N/A $ 25,415
-----------------------------------------------------------------------------------------------------------------------------
Footnotes:
(1) Salary dollars reflect base compensation paid during the fiscal year.
(2) Long-term Incentive Plan--For more information, please see the "Long-term Incentive Plans--Awards in Last Fiscal Year" Table and
attached description.
(3) All Other Compensation--Includes 1993 and 1994 Long-term Incentive Plan accruals, Company contributions made to qualified and
nonqualified defined contribution plans, accrued qualified and nonqualified pension benefit, Regular Split Dollar (and Executive
Split Dollar if applicable) Life Insurance excess cash values due executive officer after reimbursement of Company-paid
premiums (all Regular Split Dollar values based on 1995 dividend schedule), taxable value of fringe benefits, and Executive
Deferred Retirement Plan Company contributions.
</TABLE>
32
<PAGE>
LONG-TERM INCENTIVE PLAN
MassMutual offers a Long Term Incentive Plan to all of its executive officers.
The Chief Executive Officer and the four most highly compensated officers
participate in this Plan.
Compensation received under the Long Term Incentive Plan is determined by a
number of individual and Company performance measures. Specifically, corporate
results in the areas of financial strength, growth and policyholder value are
compared against the performance in these categories by the top ten mutual life
insurance companies (as determined by asset size). Relative performance against
this measure is used to determine the level of payout under the Long Term
Incentive Plan.
Target performance results will provide a payout equal to 100% of the individual
target. Threshold and maximum performance results will yield payouts of 50% and
150% of the individual target, respectively.
The applicable measurement period will be for a term of three years. Each payout
will be based on relative corporate performance (as compared with the top ten
mutual companies) measured at the end of the three year cycle. Individual
targets will be assigned to each participant through a competitive review and
payouts will be based on a year-end salary average for each overlapping three
year cycle.
Set forth below is the compensation received under the Long Term Incentive Plan.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR (1)
-----------------------------------------------------------------------------------------------------------------------------
Estimated Future Payouts Under
Non-stock Price-Based Plans(3)
-----------------------------------------------------------------------------------------------------------------------------
Number of Shares, Performance or
Units, or Other Other Period Until
Name Rights (#) Maturation of Payout (2) Threshold ($) Target ($) Maximum ($)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wheeler, Thomas B.-President & CEO N/A 1993-1995 Perf. Year $231,000 $462,000 $693,000
Wendlandt, Gary E.-Exec. Vice President N/A " " $ 88,100 $176,100 $264,200
Pajak, John J.-Exec. Vice President N/A " " $ 77,500 $155,000 $232,500
Naughton, John M.-Exec. Vice President N/A " " $ 70,400 $140,700 $211,100
Miller, James E.-Exec. Vice President N/A " " $ 69,300 $138,600 $207,900
Footnotes:
(1) Long-term Incentive Plan was incorporated in 1993 with first payment to be made in 1996.
(2) Each "cycle" includes a three-year performance period (first cycle = 1993 through 1995).
(3) Target performance results will provide a payout equal to 100% of the individual target. Threshold and maximum
performance results will yield payouts of 50% and 150% of individual target, respectively.
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
The following table shows the estimated annual pension benefits payable to a
covered participant at normal retirement age under the final pay formula
contained in the MassMutual Defined Benefit Retirement Plan. The Retirement Plan
is a qualified defined benefit plan.
PENSION PLAN TABLE - ANNUAL AGE 62 BENEFIT(1)
<TABLE>
<CAPTION>
YEARS OF SERVICE(3)
----------------------------------------------------
AVERAGE ANNUAL
REMUNERATION(2) 15 20 25 30 35
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $ 33,180 $ 44,240 $ 55,300 $ 59,988 $ 64,675
$150,000 $ 40,680 $ 54,240 $ 67,800 $ 73,425 $ 79,050
$175,000 $ 48,180 $ 64,240 $ 80,300 $ 86,863 $ 93,425
$200,000 $ 55,680 $ 74,240 $ 92,800 $100,300 $107,800
$225,000 $ 63,180 $ 84,240 $105,300 $113,738 $122,175
$250,000 $ 70,680 $ 94,240 $117,800 $127,175 $136,550
$300,000 $ 85,680 $114,240 $142,800 $154,050 $165,300
$400,000 $115,680 $154,240 $192,800 $207,800 $222,800
$500,000 $145,680 $194,240 $242,800 $261,550 $280,300
$800,000 $235,680 $314,240 $392,800 $422,800 $452,800
</TABLE>
(1) Table assumes active associate retires from active employment. MassMutual's
Pension Plan credits participants with 100% of their accrued retirement
benefit at age 62.
(2) Average compensation is based on average monthly salary during the highest
60 consecutive months of the participant's 120 months prior to retirement
(or termination).
(3) Actual pension formula includes the following three factors:
- Benefit Percentages - 1 2/3% for each year of Benefit Service earned prior
to a participant's Pension Date in 1974, 2% for every year earned after
1974, up to a maximum of 25 years, and 3/4% for each year earned after a
participant's 25th service anniversary.
- Average Monthly Compensation - (see above).
- Social Security Reduction (Offset) - A Social Security offset is applied
to the Pension benefit by multiplying 2% for each year of Vesting Service
earned after 1974 up to a maximum of 25 years, times the amount of
estimated Primary Social Security income related to these years in which a
participant earned Benefit Services.
Table assumes all years of service are beyond 1974 and Primary Social Security
income is equal to $1,200 per month.
<PAGE>
COMPENSATION OF DIRECTORS
Directors of MassMutual, other than the Chief Executive Officer, are paid an
annual retainer of $25,000 for serving on the MassMutual Board of Directors.
Directors also receive a per meeting fee of $1,200 for each meeting of the Board
attended. Generally, six meetings of the Board of Directors are held each year.
Directors also serve on various committees including the Compensation, Audit,
Organization and Operations, and Investment Committees. A member of a committee
receives an annual retainer of $2,500 for such service. The Chairperson of each
committee receives a retainer of $3,500. The Chairperson of the Investment
Committee is Thomas Wheeler, who receives no additional compensation for serving
in this capacity. Additionally, members of committees receive a fee of $750 for
each committee meeting attended, while the Chairperson of a committee receives a
per meeting fee of $1,300 for Auditing Committee Chairperson, $1,200 for
Compensation Committee Chairperson, $900 for all other committee chairpersons.
X. EXPERTS AND LEGAL PROCEEDINGS
The Company is a defendant in actions arising out of its insurance and
investment operations and is from time to time involved as a party in various
governmental and administrative proceedings. The Company 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 the Company.
The life insurance industry in recent years has faced increasing exposure to
litigation in which multimillion dollar jury awards of punitive and compensatory
damages have occurred. While the Company cannot predict the outcome of pending
or future litigation with certainty, it does not believe that pending litigation
will have a material impact on the Company's financial position, results of
operations or liquidity.
EXPERTS
The audited financial statements of Massachusetts Mutual Life Insurance Company
as of and for the years ended December 31, 1994, 1993, and 1992 included in
this prospectus have been so included in reliance on the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
LEGAL MATTERS
The law firm of Jorden Burt & Berenson has reviewed legal matters associated
with the development of this Contract, and for compliance with federal
securities laws.
<PAGE>
XI. SELECTED HISTORICAL FINANCIAL DATA
The following summary financial information has been derived from the financial
statements of the Company, which have been audited by Coopers & Lybrand
L.L.P., independent auditors. The results for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.
The information presented below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the audited financial statements and other information included
elsewhere in this prospectus.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1993 1992 1991 1990
------- ------- -------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Premium income $ 4,522 $ 4,784 $ 4,776 $ 4,423 $ 4,502
Net investment and other
income 2,179 2,253 2,231 2,239 2,123
------- ------- ------- ------- -------
Total revenue 6,701 7,037 7,007 6,662 6,625
------- ------- ------- ------- -------
Disposition of revenue:
Policy benefits and payments 4,169 4,018 4,329 3,663 3,340
Addition to policyholders'
reserves and funds 928 1,422 1,195 1,548 1,900
Expenses, commissions and
state taxes 712 695 705 670 647
------- ------- ------- ------- -------
Total disposition of
revenue 5,809 6,135 6,229 5,881 5,887
------- ------- ------- ------- -------
Net gain before dividends and
federal income taxes 892 902 778 781 738
Dividends to policyholders(1) 523 527 487 485 527
------- ------- ------- ------- -------
Net gain from operations
before federal income taxes 369 375 291 296 211
Federal income taxes 145 164 101 117 84
------- ------- ------- ------- -------
Net gain from operations 224 211 190 179 127
Net realized capital gain
(loss) (135) (77) (80) (2) (30)
------- ------- ------- ------- -------
Net income $ 89 $ 134 $ 110 $ 177 $ 97
======= ======= ======= ======= =======
BALANCE SHEET DATA
(AT PERIOD END):
Assets:
General account $28,666 $28,423 $26,516 $25,969 $24,742
Separate account 6,508 5,891 4,648 3,322 2,487
------- ------- ------- ------- -------
Total assets $35,174 $34,314 $31,164 $29,291 $27,229
======= ======= ======= ======= =======
Liabilities:
Policyholders' reserves
and funds $24,156 $23,661 $23,009 $22,803 $21,540
Policyholders' dividends(2) 540 537 505 516 549
Long-term debt 0 0 100 100 100
Investment reserves 478 432 321 301 197
Separate account reserves
and liabilities 6,507 5,890 4,646 3,322 2,487
Other liabilities 1,564 1,976 1,059 890 1,164
------- ------- ------- ------- -------
Total liabilities 33,245 32,496 29,640 27,932 26,037
------- ------- ------- ------- -------
Policyholders' contingency
reserves (surplus):
Designated surplus 36 35 33 31 30
Unassigned funds (surplus) 1,893 1,783 1,491 1,328 1,162
------- ------- ------- ------- -------
Total surplus 1,929 1,818 1,524 1,359 1,192
------- ------- ------- ------- -------
Total liabilities and
policyholders' contingency
reserves $35,174 $34,314 $31,164 $29,291 $27,229
======= ======= ======= ======= =======
TOTAL ADJUSTED CAPITAL DATA
(AT PERIOD END) (3):
Total surplus $ 1,929 $ 1,818 $ 1,524 $ 1,359 $ 1,192
One-half the apportioned
dividend liability(2) 266 264 248 251 269
Asset Valuation Reserve 347 301 254 241 161
------- ------- ------- ------- -------
Total adjusted capital $ 2,542 $ 2,383 $ 2,026 $ 1,851 $ 1,622
======= ======= ======= ======= =======
</TABLE>
(1) Dividends to policyholders are discretionary and subject to the approval of
the Company's Board of Directors.
(2) Statutory accounting requires that policyholders' dividends include
dividends currently payable and the full amount of dividends apportioned for
payment over the 12 months following the date of the applicable financial
statement. One-half of such apportioned dividends is unearned at any point
in time and is included in the calculation of total adjusted capital.
(3) Defined by the NAIC as surplus plus AVR/MSVR and one-half the apportioned
dividend liability.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND POLICYHOLDERS OF
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
We have audited the accompanying statement of financial position of
Massachusetts Mutual Life Insurance Company as of December 31, 1994 and 1993,
and the related statements of income, changes in policyholders' contingency
reserves, and cash flows for the years ended December 31, 1994, 1993 and 1992.
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.
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Massachusetts Mutual Life
Insurance Company at December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years ended December 31, 1994, 1993 and
1992 in conformity with generally accepted accounting principles.
Springfield, Massachusetts
February 6, 1995
37
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS:
Bonds...................................................... $17,684.4 $16,950.7
Common stocks.............................................. 197.0 142.8
Mortgage loans............................................. 2,979.6 3,732.4
Real estate:
Investment................................................ 1,283.6 1,218.7
Other..................................................... 62.2 78.4
Other investments.......................................... 741.5 596.6
Policy loans............................................... 2,700.8 2,532.8
Cash and short-term investments............................ 2,189.6 2,209.2
Investment and insurance amounts receivable................ 751.8 927.2
Separate account assets.................................... 6,507.7 5,891.5
Other assets............................................... 75.9 34.0
--------- ---------
TOTAL ASSETS............................................... $35,174.1 $34,314.3
========= =========
LIABILITIES:
Policyholders' reserves and funds.......................... $24,156.3 $23,661.0
Policyholders' dividends................................... 540.2 537.1
Policy claims and other benefits........................... 363.9 555.5
Federal income taxes....................................... 229.9 208.1
Asset valuation reserve.................................... 347.5 301.0
Investment reserves........................................ 130.8 130.9
Separate account reserves and liabilities.................. 6,506.7 5,890.1
Amounts due on investments purchased and other
liabilities.............................................. 969.5 1,213.0
--------- ---------
TOTAL LIABILITIES.......................................... 33,244.8 32,496.7
--------- ---------
Policyholders' contingency reserves........................ 1,929.3 1,817.6
--------- ---------
TOTAL LIABILITIES AND POLICYHOLDERS' CONTINGENCY RESERVES.. $35,174.1 $34,314.3
========= =========
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUE:
Premium income........................................ $4,522.3 $4,784.4 $4,776.0
Net investment and other income....................... 2,179.1 2,252.6 2,231.2
-------- -------- --------
TOTAL REVENUE......................................... 6,701.4 7,037.0 7,007.2
-------- -------- --------
DISPOSITION OF REVENUE:
Policy benefits and payments.......................... 4,169.4 4,017.9 4,329.3
Addition to policyholders' reserves and funds......... 927.8 1,421.5 1,195.5
Operating expenses.................................... 375.5 360.5 382.6
Commissions........................................... 261.6 253.2 248.1
State taxes, licenses and fees........................ 75.1 82.3 74.0
-------- -------- --------
TOTAL DISPOSITION OF REVENUE.......................... 5,809.4 6,135.4 6,229.5
-------- -------- --------
Net gain before dividends and federal income taxes.... 892.0 901.6 777.7
Dividends to policyholders............................ 523.5 526.9 486.6
-------- -------- --------
Net gain from operations before federal income taxes.. 368.5 374.7 291.1
Federal income taxes.................................. 144.7 164.4 100.9
-------- -------- --------
NET GAIN FROM OPERATIONS.............................. 223.8 210.3 190.2
NET REALIZED CAPITAL LOSS............................. (135.1) (76.7) (80.4)
-------- -------- --------
NET INCOME............................................ $ 88.7 $ 133.6 $ 109.8
======== ======== ========
See Notes to Financial Statements.
39
</TABLE>
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN POLICYHOLDERS' CONTINGENCY RESERVES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Policyholders' contingency reserves, beginning of year.. $1,817.6 $1,524.3 $1,359.3
-------- -------- --------
Increases (decreases) due to:
Net income............................................. 88.7 133.6 109.8
Net unrealized capital gain............................ 22.7 22.2 12.6
Surplus notes.......................................... 100.0 250.0 0.0
Change in asset valuation and investment reserves...... (46.4) (110.5) (20.0)
Change in valuation bases of policyholders' reserves... (45.3) 0.0 32.6
Change in non-admitted assets.......................... (57.1) (2.8) 24.1
Change in accounting for mortgage backed securities.... 44.5 0.0 0.0
Other.................................................. 4.6 0.8 5.9
-------- -------- --------
Net increase.......................................... 111.7 293.3 165.0
-------- -------- --------
Policyholders' contingency reserves, end of year........ $1,929.3 $1,817.6 $1,524.3
======== ======== ========
</TABLE>
See Notes to Financial Statements.
40
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
-------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 88.7 $ 133.6 $ 109.8
Addition to policyholders' reserves and funds,
net of transfers to separate accounts.............. 303.7 652.3 239.0
Net realized capital loss........................... 135.1 76.7 80.4
Other changes....................................... (29.3) (97.5) (136.9)
-------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 498.2 765.1 292.3
-------- -------- ---------
INVESTING ACTIVITIES:
Loans and purchases of investments.................. 6,667.8 6,668.1 10,152.9
Sales or maturities of investments and receipts
from repayment of loans............................ 6,050.0 5,671.3 10,101.3
-------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES............... 617.8 996.8 51.6
-------- -------- ---------
FINANCING ACTIVITIES:
Issuance of surplus notes........................... 100.0 250.0 0.0
Repayments of long-term debt........................ 0.0 (100.0) 0.0
-------- -------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 100.0 150.0 0.0
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS............................. (19.6) (81.7) 240.7
Cash and short-term investments, beginning of year... 2,209.2 2,290.9 2,050.2
-------- -------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR......... $2,189.6 $2,209.2 $ 2,290.9
======== ======== =========
See Notes to Financial Statements.
41
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING PRACTICES
The accompanying financial statements of Massachusetts Mutual Life Insurance
Company, except as to form, have been prepared in conformity with the practices
of the National Association of Insurance Commissioners and the accounting
practices prescribed or permitted by the Division of Insurance of the
Commonwealth of Massachusetts ("the Division of Insurance") which are currently
considered generally accepted accounting principles for mutual life insurance
companies and their life insurance subsidiaries.
The Financial Accounting Standards Board, which has no role in establishing
regulatory accounting practices, issued Interpretation 40, Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises, and Statement of Financial Accounting Standards No. 120, Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts. The American Institute of
Certified Public Accountants, which also has no role in establishing regulatory
accounting practices, issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. These pronouncements
will require mutual life insurance companies to modify their financial
statements in order to continue to be in accordance with generally accepted
accounting principles, effective for 1996 financial statements. The manner in
which policy reserves, new business acquisition costs, asset valuations and the
related tax effects are recorded will change. Management has not determined the
impact of such changes on the Company's Statements of Financial Position or
Income.
The following is a description of the Company's current 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,
except for unconsolidated subsidiaries, at fair value. Premium and discount on
bonds are amortized into investment income over the stated lives of the
securities through December 31, 1994.
As promulgated by the National Association of Insurance Commissioners, the
Company adopted the retrospective method of accounting for amortization of
premium and discount on mortgage backed securities as of December 31, 1994.
Prepayment assumptions for mortgage backed securities were obtained from a
prepayment model, which factors in mortgage type, seasoning, coupon, current
interest rate and the economic environment. The effect of this change, $44.5
million, is recorded as an increase to policyholders' contingency reserves.
Mortgage loans are valued at principal less unamortized discount. Real estate
is valued at cost less accumulated depreciation, impairments and mortgage
encumbrances. Encumbrances totaled $14.8 million in 1994 and $15.7 million in
1993. Depreciation on investment real estate is calculated using the
straight-line and constant yield methods.
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.
Investments in unconsolidated subsidiaries, joint ventures and other forms of
partnerships are included in other investments on the Statement of Financial
Position and are accounted for using the equity method.
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, as prescribed and permitted by the
Division of Insurance, stabilize the policyholders' contingency reserves against
fluctuations in the value of stocks, as well as declines in the value of bonds,
mortgage loans and real estate investments.
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,
interest rate swaps, interest rate caps and interest rate floors. These
interest rate related gains and losses are amortized into income over the
remaining life of the investment sold or over the remaining life of the
underlying asset. Net realized after-tax capital losses of $155.6 million in
1994 and net realized after-tax capital gains of $152.6 million in 1993 and
$82.5 million in 1992 were charged to the Interest Maintenance Reserve. The
gains credited for certain government securities were limited by regulation to
75 percent of the gains realized in 1993 and 50 percent of the gains realized in
1992. The remaining portion of the realized capital gains and losses on other
financial instruments relating to income earned during the year is fully
recognized. Amortization of the Interest Maintenance Reserve into net income
amounted to $45.0 million in 1994, $66.6 million in 1993 and $27.4 million in
1992. In 1993, the Interest Maintenance Reserve resulted in a net gain deferral
which was included in other liabilities on the Statement of Financial Position.
In 1994, the Interest Maintenance Reserve resulted in a net loss deferral. In
accordance with the practices of the National Association of Insurance
Commissioners, the 1994 balance was recorded as a reduction of policyholders'
contingency reserves.
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
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 policyholders' contingency reserves.
B. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of pension, variable annuity and
variable life insurance contract holders. Assets consist principally of
marketable securities reported at fair value. Premiums, benefits and expenses
of the separate accounts are reported in the Statement of Income. The Company
receives administrative and investment advisory fees from these accounts.
C. NON-ADMITTED ASSETS
Assets designated as "non-admitted" (principally certain fixed assets,
receivables and Interest Maintenance Reserve, when in a net loss deferral
position) are excluded from the Statement of Financial Position by an adjustment
to policyholders' contingency reserves. In accordance with provisions permitted
by the Commonwealth of Massachusetts, the Company elected to admit electronic
data processing equipment totalling $20.0 million in 1992.
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
the 1941, 1958 and 1980 Commissioners' Standard Ordinary mortality tables with
assumed interest rates ranging from 2.5 to 6.0 percent.
Reserves for individual annuities, guaranteed investment contracts and deposit
administration and immediate participation guarantee funds are based on accepted
actuarial methods principally at interest rates ranging from 2.25 to 11.25
percent. Reserves for policies and contracts considered investment contracts
have a carrying value of $10,001.8 million (fair value of $9,672.3 million as
determined by discounted cash flow projections). Accident and health policy
reserves are generally calculated using the two-year preliminary term, net level
premium and fixed net premium methods and various morbidity tables.
During 1994, the Company changed its valuation basis for certain contracts. The
effect on the beginning of the year reserves, $45.3 million, was recorded as a
decrease to policyholders' contingency reserves. The effect of changes in
valuation bases for previously established policyholders' reserves, approved by
the Division of Insurance were included as adjustments to policyholders'
contingency reserves as of January 1, 1992.
E. PREMIUM AND RELATED EXPENSE RECOGNITION
Life premium revenue is recognized annually on the anniversary date of the
policy. Annuity premium is recognized when received. Accident and health
premiums are recognized as revenue when due. Commissions and other costs
related to issuance of new policies, maintenance and settlement costs are
charged to current operations.
F. POLICYHOLDERS' DIVIDENDS
The Board of Directors annually approves dividends to be paid in the following
year. These dividends are allocated to reflect the relative contribution of each
group of policies to policyholders' contingency reserves and consider investment
and mortality experience, expenses and federal income tax charges.
G. CASH AND SHORT-TERM INVESTMENTS
For purposes of the 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 equivalents.
2. POLICYHOLDERS' CONTINGENCY RESERVES
Policyholders' contingency reserves represent surplus of the Company as reported
to regulatory authorities and are intended to protect policyholders against
possible adverse experience.
A. SURPLUS NOTES
The Company issued surplus notes of $100.0 million at 7 1/2 percent and $250.0
million at 7 5/8 percent in 1994 and 1993, respectively. These notes are
unsecured and subordinate to all present and future indebtedness of the Company,
policy claims
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
and prior claims against the Company as provided by the Massachusetts General
Laws. Issuance was approved by the Commissioner of Insurance of the
Commonwealth of Massachusetts ("the Commissioner").
All payments of interest and principal are subject to the prior approval of the
Commissioner. Sinking fund payments are due as follows: $62.5 million in 2021,
$87.5 million in 2022, $150.0 million in 2023 and $50.0 million in 2024.
Interest on the notes issued in 1994 is scheduled to be paid on March 1 and
September 1 of each year, beginning on September 1, 1994, to holders of record
on the preceding February 15 or August 15, respectively. Interest on the notes
issued in 1993 is scheduled to be paid on May 15 and November 15 of each year,
beginning on May 15, 1994, to holders of record on the preceding May 1 or
November 1, respectively. In accordance with regulations of the National
Association of Insurance Commissioners, interest expense is not recorded until
approval for payment is received from the Commissioner. In 1994, interest of
$22.8 million was approved and paid.
The proceeds of the notes, less a $35 million reserve in 1994 and a $25 million
reserve in 1993 for contingencies associated with the issuance of the notes, are
recorded as a component of the Company's policyholders' contingency reserves as
approved by the Commissioner. These reserves, as permitted by the Division of
Insurance, are included in investment reserves on the Statement of Financial
Position.
B. OTHER POLICYHOLDERS' CONTINGENCY RESERVES
As required by regulatory authorities, contingency reserves established to
protect group life and annuity policyholders are $36.3 million in 1994 and $34.7
million in 1993.
3. EMPLOYEE BENEFIT PLANS
A. PENSION
The Company has a non-contributory defined benefit plan covering substantially
all of its employees. Benefits are based on the employees' years of service,
compensation during the last five years of employment and estimated social
security retirement benefits. The Company accounts for this plan following
Financial Accounting Standards Board Statement No. 87, Employers' Accounting for
Pensions. Accordingly, as permitted by the Division of Insurance, the Company
has recognized a pension asset of $25.3 million and $31.0 million in 1994 and
1993, respectively. Company policy is to fund pension costs in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 and,
based on such requirements, no funding was required for the years ended December
31, 1994, 1993 and 1992. The assets of the Plan are invested in the Company's
general account and separate accounts.
The benefit status of the defined benefit plan as of December 31 is as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated benefit obligation $271.1 $261.9
Projected benefit obligation 321.1 316.0
Plan assets at fair value 421.7 430.5
</TABLE>
The discount rate used in determining the actuarial present value of both the
accumulated and projected benefit obligation was 8.0 percent and 7.5 percent at
December 31, 1994 and 1993, respectively. The increase in future compensation
levels used was 5.0 percent. The long-term rate of return on assets is
projected to be 10.0 percent.
The Company also has defined contribution plans for employees and agents. The
expense charged to operations for all pension plans is $10.8 million in 1994, as
compared to $5.5 million in 1993 and $6.9 million in 1992.
B. LIFE AND HEALTH
Certain life and health insurance benefits are provided to retired employees and
agents through group insurance contracts. Substantially all of the Company's
employees may become eligible for these benefits if they reach retirement age
while working for the Company. In 1993, the Company adopted the National
Association of Insurance Commissioners' accounting standard for postretirement
benefit costs, requiring these benefits to be accounted for using the accrual
method for employees and agents eligible to retire and current retirees. The
discount rate used to determine the accumulated postretirement benefit liability
was 8.0 percent in 1994 and 7.5 percent in 1993. The assumed increases in
medical cost rates were 8.0 percent for the first year, declining to 5.0 percent
within 6 years at December 31, 1994 and 13.0 percent for the first year,
declining to 6.0 percent within 7 years at December 31, 1993. The net unfunded
accumulated benefit obligation for these benefits was $97.2 million and $87.5
million at January 1, 1994 and 1993, respectively. The initial transition
obligation of $100.4 million is being amortized over twenty years through 2012.
At December 31, 1994, the net unfunded accumulated benefit obligation was $66.8
million for
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
employees and agents eligible to retire or currently retired and $24.0 million
for participants not eligible to retire. A Retired Lives Reserve Trust was
funded to pay life insurance premiums for certain retired employees. Trust
assets available for benefits were $12.9 million in 1994.
The expense for 1994 and 1993 under the new standard was $12.2 million and $15.8
million, respectively. In 1992, $4.3 million of retiree life and health
benefits were charged to income when paid. A one percent increase in the annual
assumed increase in medical cost rates would increase the 1994 accumulated
postretirement benefit liability and benefit expense by $4.9 million and $0.7
million, respectively.
4. RELATED PARTY TRANSACTIONS
At the end of 1994, the Company executed two reinsurance agreements with its
subsidiary, MML Pension Insurance Company ("MML Pension"). In the first of
these contracts, the Company assumed all of the single premium immediate annuity
business written by MML Pension through either an assumption provision or a
coinsurance provision. The second contract ceded the Company's group life,
accident and health business to MML Pension. Additionally, a reinsurance
agreement previously in place, ceding all of the Company's single premium
annuity business, was terminated. These contracts were concurrently executed at
the end of business on December 31, 1994 and were accounted for as a bulk
reinsurance transaction. Accordingly, assets were transferred at fair value and
liabilities were transferred at statutory carrying value. These transfers did
not impact the Summary of Operations of either company. The net effect of these
transactions decreased the Company's assets and liabilities by $174.6 million in
1994.
5. FEDERAL INCOME TAXES
Provision for unpaid federal income taxes is based upon the Company's best
estimate of its tax liability. The Internal Revenue Service has completed
examining the Company's income tax returns through the year 1989, and is
currently examining the years 1990 through 1992. The Company believes any
adjustments resulting from such examinations will not materially affect its
financial statements.
Components of the formula authorized by the Internal Revenue Service for
determining deductible policyholder dividends have not been finalized for 1993
and 1994. The Company records the estimated effects of anticipated revisions in
the Statement of Income.
The Company intends to file its 1994 federal income tax return on a consolidated
basis with its life and non-life affiliates. The Company and its life and
non-life affiliates are subject to a written tax allocation agreement which
allocates tax liability in a manner permitted under Treasury regulations and
provides that loss members shall be compensated for the use of their losses and
credits by other members.
No deferred tax effect is recognized for temporary differences that may exist
between financial reporting and taxable income. The Company made federal tax
payments of $13.3 million in 1994, $206.6 million in 1993 and $119.3 million in
1992. At December 31, 1994 and 1993, the Company established a liability for
federal income taxes of $229.9 and $208.1 million, 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 bonds are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 5,511.2 $147.3 $253.3 $ 5,405.2
Debt Securities issued by Foreign Governments 35.0 1.7 2.2 34.5
Mortgage-backed securities 3,410.5 55.6 176.7 3,289.4
State and local governments 124.1 4.9 5.3 123.7
Industrial securities 7,570.7 165.9 294.6 7,442.0
Utilities 908.5 68.9 17.8 959.6
Affiliates 124.4 9.7 8.6 125.5
--------- ------ ------ ---------
TOTAL $17,684.4 $454.0 $758.5 $17,379.9
</TABLE>
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 6,496.4 $ 537.4 $ 55.3 $ 6,978.5
Debt Securities issued by Foreign Governments 91.9 11.4 0.0 103.3
Mortgage-backed securities 1,911.2 138.6 0.7 2,049.1
State and local governments 53.9 4.1 1.1 56.9
Industrial securities 7,386.4 683.1 107.2 7,962.3
Utilities 938.9 168.4 3.1 1,104.2
Affiliates 72.0 17.7 1.7 88.0
--------- -------- ------ ---------
TOTAL $16,950.7 $1,560.7 $169.1 $18,342.3
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1994 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.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less $ 2,477.6 $ 2,467.8
Due after one year through five years 3,167.3 3,140.9
Due after five years through ten years 3,320.5 3,274.4
Due after ten years 2,636.3 2,518.7
--------- ---------
11,601.7 11,401.8
Mortgage-backed securities, including securities guaranteed
by the U.S. Government 6,082.7 5,978.1
--------- ---------
TOTAL $17,684.4 $17,379.9
</TABLE>
Proceeds from sales of investments in bonds were $4,880.2 million during 1994,
$4,136.6 million during 1993 and $9,026.4 million during 1992. Gross capital
gains of $78.9 million in 1994, $271.1 million in 1993 and $231.1 million in
1992 and gross capital losses of $189.3 million in 1994, $88.3 million in 1993
and $92.9 million in 1992 were realized on those sales, a portion of which were
included in the Interest Maintenance Reserve. The estimated fair value of
non-publicly traded bonds is determined by the Company using a pricing matrix.
B. STOCKS
Preferred stocks in good standing had fair values of $136.3 million in 1994,
$121.1 million in 1993, using a pricing matrix for non-publicly traded stocks
and quoted market prices for publicly traded stocks. Common stocks, except for
unconsolidated subsidiaries, had a cost of $181.1 million in 1994, $122.6
million in 1993.
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 less valuation reserves held.
The Company acts as mortgage servicing agent and guarantor for $91.3 million of
mortgage loans sold in 1985. As guarantor, the Company is obligated to advance
unpaid principal and interest on any delinquent loans and to repurchase mortgage
loans under certain circumstances including mortgagor default.
D. OTHER
The carrying value of investments which were non-income producing for the
preceding twelve months was $82.9 million and $96.1 million at December 31, 1994
and 1993, respectively. The Company had restructured loans with book values of
$371.0 million and $437.1 million at December 31, 1994 and 1993, respectively.
The Company made voluntary contributions to the Asset Valuation Reserve of $52.7
million in 1994, $51.5 million in 1993 and $38.4 million in 1992 for these
restructured loans.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
The loans typically have been modified to defer a portion of the contracted
interest payments to future periods. Interest deferred to future periods
totaled $2.2 million in 1994, $3.0 million in 1993 and $4.8 million in 1992.
It is not practicable to determine the fair value of policy loans as they do not
have a stated maturity.
7. PORTFOLIO RISK MANAGEMENT
The Company manages its investment risks 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 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 is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments. This exposure is limited to
contracts with a positive fair value. The amounts at risk in a net gain
position were $88.4 million and $120.1 million at December 31, 1994 and 1993,
respectively. The Company monitors exposure to ensure counterparties are credit
worthy and concentration of exposure is minimized.
The Company enters into financial futures contracts for the purpose of managing
interest rate exposure. The Company's futures contracts are exchange traded
with minimal credit risk. Margin requirements are met with the deposit of
securities. Futures contracts are generally settled with offsetting
transactions. Gains and losses on financial futures contracts are recorded when
the contract is closed and amortized through the Interest Maintenance Reserve
over the remaining life of the underlying asset. As of December 31, 1994, the
Company had entered into financial futures contracts with contractual amounts of
$558.9 million and a fair value of $559.1 million.
The Company enters into interest rate swap agreements, options, and purchased
caps and floors 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 Statement of
Financial Position. At December 31, 1994 and 1993, the Company had swaps with
notional amounts of $2,799.1 million and $1,910.1 million, respectively. The
fair values of these instruments were $49.6 million and $9.9 million at December
31, 1994 and 1993, respectively.
Options grant the purchaser the right to buy or sell a security at a stated
price within a stated period. The Company's option contracts have terms of up
to two years. The amounts paid for options purchased are included in other
investments on the 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
underlying asset. At December 31, 1994 and 1993, the Company had option
contracts with notional amounts of $2,187.5 million and $2,647.5 million,
respectively. The Company's exposure was limited to the unamortized costs of
$24.4 million and $30.0 million, which had fair values of $10.4 million and
$73.3 million at December 31, 1994 and 1993, respectively.
Interest rate cap agreements grant the purchaser the right to receive the excess
of a referenced interest rate over a given rate. Interest rate floor agreements
grant the purchaser the right to receive the excess of a given rate over a
referenced interest rate. Amounts paid for interest rate caps and floors are
amortized into interest income over the life of the asset on a straight-line
basis. Unamortized costs are included in other investments on the Statement of
Financial Position. Amounts receivable and payable are accrued as adjustments
to interest income and included in the Statement of Financial Position as
investment and insurance amounts receivable. Gains and losses on these
contracts, including any unamortized cost, are recognized upon termination and
are amortized through the Interest Maintenance Reserve over the remaining life
of the associated cap or floor agreement. The company has agreements with
notional amounts of $2,617.0 million and $1,712.0 million at December 31, 1994
and 1993, respectively. The Company's exposure on these agreements is limited
to the unamortized costs of $12.1 million and $10.1 million at December 31, 1994
and 1993, respectively. The fair values of these instruments were $6.0 million
and $29.0 million at December 31, 1994 and 1993, respectively.
The Company enters into 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. Notional amounts relating to asset and currency swaps totalled
$220.0 million and $249.8 million at December 31, 1994 and 1993, respectively.
The fair values of these instruments were an unrecognized gain of $2.8 million
at December 31, 1994 and an unrecognized loss of $14.9 million at December 31,
1993.
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
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, 1994 and 1993, the Company had
U. S. Treasury purchase commitments which will settle during the following year
with contractual amounts of $1,000.0 million and $1,161.8 million and fair
values of $989.2 million and $1,159.1 million, respectively.
8. LIQUIDITY
The withdrawal characteristics of the policyholders' reserves and funds,
including separate accounts, and the invested assets which support them at
December 31, 1994 are illustrated below:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C> <C>
Total policyholders' reserves and funds and separate
account liabilities $30,933.9
Not subject to discretionary withdrawal (6,462.2)
Policy loans (2,700.8)
---------
Subject to discretionary withdrawal $21,770.9
---------
Total invested assets, including separate investment accounts $34,346.4
Policy loans and other invested assets (8,983.7)
---------
Readily marketable investments $25,362.7
---------
</TABLE>
9. COMMITMENTS 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 is involved in litigation arising 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. RECLASSIFICATION
Certain 1993 and 1992 balances have been reclassified to conform to current year
presentation.
11. SUBSIDIARY AND AFFILIATED COMPANIES
Summary of ownership and relationship of the Company and its subsidiaries and
affiliated companies as of December 31, 1994 is illustrated below. The Company
provides management or advisory services to these companies.
Subsidiaries
------------
MML Bay State Life Insurance Company
MassMutual Holding Company
MassMutual Holding Company Two, Inc.
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
Oppenheimer Investment Grade Bond Fund
48
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Subsidiaries of MassMutual Holding Company
------------------------------------------
Concert Capital Management, Inc.
Cornerstone Real Estate Advisors, Inc.
MML Investors Services, Inc.
MML Real Estate Corporation
MML Realty Management Corporation
Oppenheimer Acquisition Corporation
MML Reinsurance (Bermuda) Ltd.
MassMutual/Carlson CBO N.V.
MassMutual Corporate Value Limited
Subsidiaries of MassMutual Corporate Value Limited
--------------------------------------------------
MassMutual Corporate Value Partners Limited
Subsidiaries of MassMutual Holding Company Two, Inc.
----------------------------------------------------
MassMutual Holding Company Two MSC, Inc.
Subsidiaries of MassMutual Holding Company Two MSC, Inc.
--------------------------------------------------------
MML Pension Insurance Company
MassMutual of Ireland, Limited
Sloan's Lake Management Corporation
Affiliates
----------
MassMutual Corporate Investors
MassMutual Participation Investors
49
