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Reg. No. 33-84802
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-2
POST-EFFECTIVE AMENDMENT NO. 4
TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
-------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
-------------
(State or other jurisdiction of incorporation or organization)
04-1590850
----------
(I.R.S. Employer Identification No.)
1295 State Street
Springfield, Massachusetts 01111
(413) 744-8441
--------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Lawrence V. Burkett, Jr.
Executive Vice President and General Counsel
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
(413) 744-6053
--------------
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: May 1, 1998
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
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MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-2 Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside
Front Cover Page of Prospectus......... Outside Front Cover Page
2. Inside Front and Outside
Back Pages of Prospectus............... Inside Front Cover
3. Summary Information,
Risk Factors and
Ratio of Earnings to
Fixed Charges.......................... Product Description,
Financial Statements
4. Use of Proceeds........................ Investments by MassMutual
5. Determination of
Offering Price......................... Not Applicable
6. Dilution............................... Not Applicable
7. Selling Security Holders............... Not Applicable
8. Plan of Distribution................... Distribution of Contracts
9. Description of Securities
to be Registered....................... Product Description
10. Interests and Named
Experts and Counsel.................... Not Applicable
11. Information with Respect
to the Registrant...................... MassMutual -- Description of the
Business; Management's Discussion
and Analysis; Financial Statements
12. Incorporation of Certain Information
by Reference........................... Not Applicable
13. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities............................ Not Applicable
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PROSPECTUS
May 1, 1998
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" or the "Company") 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. 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 Contract prospectus. The focus of this
Prospectus is limited to the Fixed Account's operations and features.
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.
Purchase payments and transfers of Accumulated Value may be made among the Fixed
Account and the Divisions of Massachusetts Mutual Variable Annuity Separate
Account 3 (the "Separate Account").
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. In certain circumstances, a Contract Owner may
experience a negative investment return.
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.
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 OPPEN-
HEIMERFUNDS LIFETRUST VARIABLE ANNUITY, MML SERIES INVESTMENT FUND, AND
OPPENHEIMER VARIABLE ACCOUNT FUNDS.
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
(413) 744-8441
1
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Table of Contents
Glossary ............................................................. 3
I. Product Description............................................. 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 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
Analysis of Results of Operations by Line of Business........... 11
Statement of Financial Position................................. 14
Liquidity and Capital Resources................................. 15
Inflation....................................................... 15
Year 2000 Issue................................................. 16
Investments..................................................... 17
VII. MassMutual Description of the Business.......................... 26
Individual Line................................................. 27
Retirement Services............................................. 29
Life and Health Benefits Management............................. 30
MassMutual Investment Group..................................... 30
Reinsurance..................................................... 31
Unconsolidated Subsidiaries..................................... 31
Regulation...................................................... 31
VIII. Experts and Additional Available Information.................... 35
IX. Selected Financial Data......................................... 35
2
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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, in which the Divisions of the Separate Account
Invest. MML Series Investment Fund is a no-load, open-end management investment
company and Oppenheimer Variable Account Funds is a diversified open-end
investment company. Both of these investment companies are registered with the
Securities and Exchange Commission.
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. Guaranteed
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.
Prior to July 1, 1998, the Service Center for the Contract will be located at
301 West 11th Street, Kansas City, MO 64105, (800) 258-4511 or P.O. Box
419607, Kansas City, MO 64141-1007. Effective July 1, 1998, the Service Center
will be relocated. After July 1, 1998, please direct all requests and/or
inquiries to: Annuity Service Center
H564
P.O. Box 9067
Springfield, MA 01102-9067
(800) 258-4511
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
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I. Product Description
The investment option described in this Prospectus is a Fixed Account with
Market Value Adjustment ("MVA") available in conjunction with the Contract
offered by Massachusetts Mutual Life Insurance Company ("MassMutual"). 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. 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. The Fixed Account is not
available in all states.
A Market Value Adjustment will be made if sums are withdrawn from the Fixed
Account prior to their Expiration Date.
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 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%. 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.
Guarantee Periods may be available in periods of one to ten years. 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. 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. 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 an annually compounded basis, by
its Guaranteed Rate. 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. An MVA will not
be applied upon the payment of a Death Benefit following the death of the
Annuitant. The MVA will be applied to the amount being withdrawn, 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.
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:
n
---
365
MVA= Amount x [ (1 + i) - 1 ]
-----
(1 + j)
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 by interpolation or
extrapolation of the Guaranteed Rate for the Guarantee Periods then available.
4
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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:
365
---
365
$24.28 = $1,262.48 x [ ( 1.06 ) - 1 ]
----
( 1.04 )
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
4-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:
1460
----
365
- -$196.56 = $1,157.63 x [ ( 1.05 ) - 1 ]
----
( 1.10 )
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
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:
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Year Since Payment Sales Charge Assessed
1st 7%
2nd 6%
3rd 5%
4th 4%
5th 3%
6th 2%
7th 1%
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 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 nonunitized 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 General Account 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 Distributors, LLC ("MML Distributors"), 1414 Main Street, Springfield, MA
01144-1013, a wholly-owned subsidiary of MassMutual, acts as the principal
underwriter of the Contracts. MML Investors Service, Inc. ("MMLISI"), also
located at 1414 Main Street, Springfield, MA 01144-1013, serves as the
co-underwriter of the Contracts. MML Distributors 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 "NASD"). The maximum
commission a broker-dealer will receive for selling a Contract is 6.25%.
MML Distributors may enter into selling agreements with other broker-dealers
which are registered with the Securities and Exchange Commission and are members
of the NASD ("selling brokers"). The Contracts are sold through agents who are
licensed by state insurance officials to sell the Contracts. These agents are
also registered representatives of selling brokers. 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 Funds Distributor, Inc. ("OFDI"). OFDI, Massachusetts Mutual
Variable Annuity Separate Account 3, MassMutual and MML Distributors have
entered into an agreement pursuant to which OFDI 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.
From time to time, OFDI may enter into special arrangements with broker-dealers
which may provide for the payment of higher compensation to such broker-dealers
in connection with the sale of Contracts. Prospective purchasers of the
Contracts will be informed of such arrangements prior to the completion of the
sale of the Contracts.
IV. Federal Taxation Discussion
Please consult the Contract prospectus for a discussion of the tax status of the
Contract.
V. Accounting Practices
The accompanying statutory financial information of MassMutual included in this
filing has been prepared on the basis of Statutory Accounting Practices
prescribed or permitted by the Division, and, for the pre-merger balances of
Connecticut Mutual Life Insurance Company ("Connecticut Mutual"), The Department
of Insurance of the State of Connecticut.
The accompanying statutory financial statements are different in some respects
from GAAP financial statements. The more significant differences are as follows:
(a) the financial statements include the accounts of MassMutual with
subsidiaries reflected as investments, whereas GAAP would require the Company's
results to be consolidated with those of its major-
6
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ity-owned subsidiaries; (b) acquisition costs, such as commissions and other
costs directly related to acquiring new business, are charged to current
operations as incurred, whereas GAAP would require these expenses to be
capitalized and recognized over the life of the policies; (c) policy reserves
are based upon statutory mortality and interest requirements without
considerations of withdrawals, whereas GAAP reserves would be based upon
reasonably conservative estimates of mortality, morbidity, interest and
withdrawals; (d) bonds are generally carried at amortized cost whereas GAAP
generally requires they be valued at fair value; (e) deferred income taxes are
not provided for book-tax timing differences as would be required by GAAP and
(f) payments received for universal and variable life products, variable
annuities and investment related products are reported as premium revenue,
whereas under GAAP, these payments would be recorded as deposits to
policyholders' account balances.
VI. Management's Discussion and Analysis of Financial Condition and Results of
Operations
SUMARY
The information presented below should be read in conjunction with the audited
statutory financial statements and other information included elsewhere in this
filing.
The Company's objective has been to balance financial strength, policyholder
value and growth, with continued 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 after merger restructuring expenses of $300 million, $225 million and
$276 million for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, MassMutual had approximately $57.6 billion in total
assets, over 2,700,000 individual policyholders and approximately $199 billion
of direct individual life insurance in force. In addition, MassMutual's total
adjusted capital as defined by the NAIC has grown to $4.2 billion at December
31, 1997, compared to $3.8 billion and $3.6 billion at December 31, 1996 and
1995, respectively, as set forth below:
December 31,
------------
1997 1996 1995
---- ---- ----
(in millions)
Policyholders' Contingency
Reserves (Surplus) $2,873 $2,639 $2,601
Asset Valuation Reserve 864 707 585
One-half of the Apportioned
Dividend Liability 472 438 411
------ ------ ------
Total Adjusted Capital (1) $4,209 $3,784 $3,597
====== ====== ======
(1) MassMutual utilizes the NAIC's definition of total adjusted capital of
surplus plus consolidated AVR and one-half of the consolidated apportioned
dividend liability.
MassMutual's total adjusted capital was increased by the issuance of $100
million of Surplus Notes due 2024 at an interest rate of 7 1/2% per annum and
$250 million of Surplus Notes due 2023 at an interest rate of 7 5/8% per annum
in 1994 and 1993, respectively. The proceeds of the notes, less a reserve of $28
million in 1997, $32 million in 1996 and $35 million in 1995 for contingencies
associated with the issuance of the notes, are recorded as a component of
MassMutual's policyholders' contingency reserves. The special non-insurance
reserves are included in investment reserves. See "Policyholders' Contingency
Reserves".
During 1997, MassMutual's financial strength continued to be recognized
favorably by the rating agencies. Moody's Investors Service, Inc. has reaffirmed
MassMutual's Aa1 (Excellent) rating; Standard & Poor's Corporation has
reaffirmed MassMutual's AAA (Superior) claims-paying rating; Duff & Phelps
Credit Rating Co. has reaffirmed the AAA (Superior) rating and A.M. Best
Company, Inc. has continued to rate MassMutual as A++ (Superior). Each rating
agency independently assigns ratings based on its own separate review and takes
into account a variety of factors (which are subject to change) in making its
decision. Accordingly, there can be no assurance of the ratings that will be
afforded MassMutual in the future.
With regard to profitability, management believes that net gain from operations,
rather than net income, is the most relevant statutory measure of operating
results for MassMutual. Net gain from operations represents the excess of income
derived from MassMutual'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 MassMutual does not manage its
investment portfolio to realize gains for non-economic purposes. MassMutual has
increased its total adjusted capital from the beginning of 1995 through the end
of 1997 by $747 million. This increase was provided by gains from operations
which totaled $801 million offset by $54 million of decreases from other
sources.
On March 1, 1996, the operations of the former Connecticut Mutual were merged
into MassMutual. The Merger was accounted for under the pooling of interests
method of accounting. For the purposes of this presentation, the financial
statements reflect historical amounts giving retroactive effect
7
<PAGE>
as if the Merger had occurred on January 1, 1993 in conformity with the
practices of the NAIC and the accounting practices prescribed or permitted by
the Division of Insurance of the Commonwealth of Massachusetts (the "Division")
and, for the pre-merger balances of Connecticut Mutual, the Insurance Department
of the State of Connecticut. In 1996, merger-related expenses totaling $66
million were recorded in MassMutual's statutory statement of income. In 1995,
merger-related expenses of $44 million incurred by MassMutual (prior to the
Merger) were recorded in its statutory statement of income, and expenses of $45
million incurred by Connecticut Mutual, net of tax, were recorded as a component
of changes in policyholders' contingency reserves, as permitted by each
company's domiciliary regulatory authority. On the merger date, policyholder
reserves attributable to disability income contracts were strengthened by $75
million, investment reserves for real estate were increased by $50 million and
net prepaid pension assets were increased by $10 million. The separate results
of each company prior to the merger for the year ended December 31, 1995 were as
follows: (a) revenue was $6,444 million for MassMutual and $2,182 million for
Connecticut Mutual; (b) net income was $161 million for MassMutual and $29
million for Connecticut Mutual, and (c) policyholders' contingency reserves
increased by $144 million for MassMutual and decreased by $112 million for
Connecticut Mutual.
On March 31, 1996, MassMutual sold MassMutual Holding Company Two, Inc., a
wholly-owned subsidiary, and its subsidiaries, including Mirus Life Insurance
Company (formerly MML Pension Insurance Company ("MML Pension"), currently doing
business as "UniCARE"), which comprised MassMutual's group life and health
business, to WellPoint Health Networks, Inc. MassMutual received total
consideration of $402 million ($340 million in cash and $62 million in notes
receivable) and recognized a before tax gain of $188 million in connection with
this sale. MassMutual, pursuant to a 1994 reinsurance agreement, cedes all of
its group life, accident and health ("GLA&H") business to UniCARE.
With regard to GLA&H business, MassMutual's gain from operations for 1997 and
1996 does not include income generated by this business. Gain from operations
for 1995 was only affected by a $41 million dividend MassMutual received from
MML Pension. MML Pension's 1995 net gain from operations was $44 million, of
which $41 million was recorded by MassMutual as dividend income, a component of
net investment income in its statutory statement of income. The remaining $3
million was recognized by MassMutual as an unrealized capital gain in the
statutory statement of changes in policyholders' contingency reserves.
To position the subsidiary for the possibility of a sale, MassMutual executed
two reinsurance agreements with MML Pension at the end of 1994 (collectively
"Reinsurance"). Through the first of these contracts, MassMutual assumed all of
the single premium immediate annuity ("SPIA") business written by MML Pension
through either an assumption reinsurance provision or a coinsurance provision.
The second contract ceded MassMutual's GLA&H business to MML Pension.
Additionally, a reinsurance agreement previously in place, ceding all of the
Individual Line's SPIA business to MML Pension, was terminated. These
agreements, collectively referred to as "Reinsurance with MML Pension", became
concurrently effective on December 31, 1994 and were accounted for as bulk
reinsurance transactions. Accordingly, (i) the GLA&H operating results were
ceded to and reflected in MML Pension's results in 1997, 1996 and 1995; and (ii)
the SPIA operating results were assumed by and reflected in MassMutual's results
in 1997, 1996 and 1995.
TOTAL COMPANY - RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Years Ended December 31, 1996 and 1995
The following table sets forth the components of MassMutual's results of
operations. Results prior to the Merger of MassMutual and Connecticut Mutual
have been combined.
Year Ended December 31,
-----------------------
(in millions)
1997 1996 1995
---- ---- ----
Revenue:
Premium income $ 6,765 $ 6,329 $ 5,728
Net investment and other
income 2,904 2,861 2,898
------- ------- -------
9,669 9,190 8,626
------- ------- -------
Benefits and expenses:
Policy benefits and payments 6,597 6,048 5,152
Addition to policyholders'
reserves and funds 721 855 1,206
Commissions and operating
expenses 766 763 834
State taxes, licenses and fees 82 96 89
Merger restructuring costs - 66 44
------- ------- -------
8,166 7,828 7,325
------- ------- -------
Net gain before federal
income taxes and dividends 1,503 1,362 1,301
Federal income taxes 284 277 206
Net gain from operations
before dividends 1,219 1,085 1,095
Dividends to policyholders 919 860 819
------- ------- -------
Net gain from operations 300 225 276
Net realized capital gain (loss) (43) 40 (86)
------- ------- -------
Net income $ 257 $ 265 $ 190
======= ======= =======
Net gain from operations in 1997 was $300 million compared to $225 million in
1996, an increase of $75 million or 33.3%, following a decrease of $51 million
or 18.5% from $276 million in 1995. The $75 million increase in 1997 from 1996
was due to an increase in net investment and other income, lower state taxes,
licenses and fees and cessation of Merger restructuring costs partially offset
by increases in dividends to policyholders, operating expenses and federal
income taxes. The $51 million decrease in 1996 from 1995 was due to a $22
8
<PAGE>
million increase in Merger related restructuring expenses charged to operations,
a $41 million increase in dividends to policyholders, and the cessation of
income generated by the GLA&H line of business which was sold early in 1996,
offset in part by merger related expense savings and earnings on the proceeds
from the GLA&H sale. The GLA&H line did not contribute to MassMutual's income
from operations in 1997 or 1996, but did contribute $41 million in 1995 in the
form of a dividend received from MML Pension.
Premium income in 1997 was $6,765 million compared to $6,329 million for 1996,
representing an increase of $436 million or 6.9%, following a $601 million or
10.5% increase from $5,728 million in 1995. Premium income from the Individual
Line increased 0.3% in 1997 as compared to 1996 and increased 9.2% in 1996 as
compared to 1995. Premium income in the Retirement Services line increased 20.7%
in 1997 as compared to 1996 and increased 13.2% in 1996 as compared to 1995.
GLA&H had no net premium income for 1997, 1996 or 1995. See "Analysis of Results
of Operations by Line of Business"
Net investment and other income in 1997 was $2,904 million compared to $2,861
million in 1996, representing an increase of $43 million or 1.5%, following a
decrease of $37 million or 1.3% from $2,898 million in 1995. The increase in net
investment and other income in 1997 from 1996 was principally due to an increase
in the average invested assets in the Company's general investment account. The
ratio of net investment income to mean invested assets was 7.6% for 1997 and
1996, a decrease from 8.0% in 1995. The overall portfolio yield remained stable,
as increased yields on real estate investments offset declining yields on fixed
income investments. The decrease in 1996 from 1995 resulted from a decrease in
the overall yield of the investment portfolio as higher yielding investments
matured and were replaced with investments with current lower yields, partially
offset by an increase in invested assets and a $26 million dividend received
from MassMutual Holding Company. The components of net investment income are set
forth below:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(in millions)
Gross investment income:
Bonds $1,904 $1,894 $1,892
Common stocks 3 4 6
Mortgage loans 402 415 434
Real estate 317 289 287
Policy loans 370 350 343
Cash and short-term
investments 73 97 107
Other investments 104 63 77
------ ------ ------
Total gross investment
income 3,173 3,112 3,146
Less investment expenses 302 297 270
Less interest expense 35 34 39
------ ------ ------
Net investment income $2,836 $2,781 $2,837
====== ====== ======
Gross bond income increased in 1997 from 1996 following a slight increase from
1995. The $10 million increase in 1997 was the result of an increase in the
average investment in bonds during 1997 from 1996 partially offset by a 20 basis
point decline in the average yield on securities. The $2 million increase in
bond income in 1996 from 1995 was due to a 7.4% increase in funds invested in
the bond portfolio partially offset by a 40 basis point decrease in average bond
yields. The decrease in gross mortgage loan income was the result of older
higher yielding loans being replaced with mortgage loans at lower current market
rates. The increase in gross real estate income was due to improvement in
occupancy rates and increases in rents charged per square foot. Gross income
from cash and short-term investments decreased in 1997 from 1996 as a result of
a lower average short-term position throughout the year partially offset by a 21
basis point increase in the average yields on commercial paper, while the
decrease in 1996 from 1995 resulted from MassMutual shifting short-term funds to
the bond portfolio, partially offset by an increase in short-term yields. The
increase in other investments in 1997 from 1996 was due to an $18 million
increase in earnings on partnership and joint ventures, a $7 million increase on
preferred stock, a $6 million improvement in returns on derivative instruments,
a $10 million increase in income from affiliated investment funds. Other
investments include dividends received from subsidiaries of $24 million in 1997,
$26 million in 1996 and $41 million in 1995. The 1997 increase in investment
expenses represents normal growth, while the 1996 increase in investment
expenses resulted from the increased investment in real estate which generated a
higher level of operating expenses.
Policy benefits and payments in 1997 were $6,597 million compared to $6,048
million in 1996, representing an increase of $549 million or 9.1%, following an
$896 million or 17.4% increase from $5,152 million in 1995. The increase in 1997
from 1996 was principally due to increased withdrawals of individual variable
annuities, participating group pension business and an increase in death claims
paid. The increase in 1996 from 1995 was due principally to an increase in
withdrawals from participating pension business and an increase in individual
surrenders and annuity payments. Benefits and surrender payments for individual
annuity and supplementary contracts increased by $104 million to $677 million in
1997 from $573 million in 1996 and $370 million in 1995. Surrender benefits for
individual life insurance increased in 1997 from 1996, and lapses measured as a
percent of in-force business increased slightly to 6.2% in 1997 from 6.1% in
1996 and 6.5% in 1995.
Addition to policyholders' reserves and funds decreased by $134 million, or
15.7%, to $721 million in 1997 from $855 million in 1996 following a $351
million, or 29.1%, decrease from $1,206 million in 1995. The 1997 decrease was
due to slower growth in variable annuities and supplemental contracts and
withdrawals of participating guaranteed investment contracts partially offset by
increased deposits of full service defined contribution pension business. The
decrease in 1996 from 1995 was primarily due to a $1,077 million reduction in
Retirement Services reserves as a result of increased participating pension
business withdrawals and the scheduled maturities of non-participating
guaranteed investment contracts, offset by increases in individual life and
variable annuities in MassMutual's separate account reserves.
9
<PAGE>
Commissions and operating expenses in 1997 were $766 million, representing an
increase of $3 million or 0.4% from $763 million in 1996, following a decrease
of $71 million or 8.5% from $834 million in 1995. The increase in 1997 was
primarily due to a $4 million increase in operating expenses in the Individual
Line reflecting normal growth trends less amounts recovered from affiliates, a
$14 million increase in operating expenses in the Retirement Services Line
primarily due to large investments in technology, partially offset by a
reduction of $15 million for direct commissions paid on the remnants of the
GLA&H business. The decrease in 1996 as compared to 1995 was due to a $89
million decrease in expenses, primarily due to Merger expense savings, partially
offset by an $18 million increase in commissions. Commissions do not correlate
to total premium income since commissions are driven by the growth and changing
product sales mix for commission paying business (e.g., individual life and
annuity products) and Retirement Services sales, which do not generate
significant commissions. Retirement Services' premiums increased by $423 million
in 1997 and $239 million in 1996.
Federal income taxes on gain from operations before dividends in 1997 were $284
million, representing an increase of $7 million or 2.5% from $277 million in
1996, following an increase of $71 million or 34.5% from $206 million in 1995.
The increase in 1997 from 1996 was due to higher taxes on operations in the
Individual Line and higher mutual company add-on tax offset by a decrease in
taxes on operations in Retirement Services. The increase in 1996 from 1995 was
due to increases in tax on operations for the Individual Line business and
Retirement Services business of $91 million and $25 million, respectively,
offset by a decrease in the mutual company add-on tax of $46 million.
Dividends to policyholders in 1997 were $919 million, representing an increase
of $59 million or 6.9% from $860 million in 1996, following an increase of $41
million or 5.0% from $819 million in 1995. The increases in 1997 from 1996 and
1996 from 1995 were due to growth in the participating in force business and the
pass through of investment, mortality and expense experience, including expense
savings which resulted from the Merger. The new dividend schedule, annually
approved by the Board of Directors in the fourth quarter, is reflected in the
Individual Line's gain from operations in the year the dividend is declared.
Net realized capital losses in 1997 were $43 million, representing a decrease of
$83 million from the net realized capital gains of $40 million in 1996,
following an improvement of $126 million from the net realized capital losses of
$86 million in 1995, after the transfer to the Interest Maintenance Reserve
("IMR"). The IMR captures after-tax realized capital gains and losses due to
changes in interest rates for all types of fixed income investments. Net
realized capital gains (losses) were comprised of the following:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Millions)
Realized capital gains (losses):
Bonds $ 132 $ 110 $ 187
Common stocks 83 78 32
Mortgage loans (57) (58) (86)
Real estate (6) (74) (49)
Hedging instruments (33) 3 52
Other investments 13 223 3
Federal and state taxes (73) (160) (85)
----- ----- -----
Net realized capital gains
before transfer to IMR 59 122 54
Transfer to IMR (102) (82) (140)
----- ----- -----
Net realized capital gains (losses) $ (43) $ 40 $ (86)
===== ===== =====
The $43 million net realized capital loss in 1997 compares unfavorably to the
net realized capital gain of $40 million in 1996. This decrease is the result of
the net realized capital gains in 1996 being bolstered by a $188 million pre-tax
gain realized on the sale of Mirus Life Insurance Company. The realized capital
gain (loss) results presented for each year do not reflect the changes in
general investment reserves ("GIR"). Changes in the GIR were a $75 million
decrease in 1997, a $20 million increase in 1996 and a $21 million decrease for
1995. Net realized capital gains (losses) after consideration of changes in the
GIR were gains of $32 million in 1997 and $20 million in 1996 and a loss of $65
million in 1995. The improvement in 1996 from the net loss in 1995 was due to
the $188 million pre-tax gain realized on the sale of the Mirus Life Insurance
Company and a decrease in losses from commercial mortgage loans offset by an
increase in real estate losses, primarily due to planned sales and write downs
of former Connecticut Mutual properties.
The high level of realized capital gains from bonds in 1997, 1996 and 1995 was
caused by sales and hedging activity generally during periods of declining
interest rates. In 1997, net realized capital gains from the sales of bonds
consisted of $201 million in gross capital gains offset by gross capital losses
of $69 million. In 1996, net realized capital gains from the sales of bonds
consisted of $189 million in gross capital gains offset by gross capital losses
of $79 million. All interest related gains and losses were transferred to the
IMR. Transfers to the IMR consisted of $158 million and $131 million in net
gains offset by $56 million and $49 million in taxes for 1997 and 1996,
respectively. In 1995, the amounts transferred to the IMR included $230 million
of net realized capital gains offset by $90 million in tax.
The realized capital gains from common stock in 1997, 1996 and 1995 resulted
from sales which captured the increased market value of these securities. The
realized capital losses from mortgage loans were $57 million in 1997 and $58
million in 1996, and the losses decreased by $28 million in 1996 as compared to
1995 due to a reduction in foreclosure activity as the commercial real estate
marketplace continued to improve. The realized capital gains and losses from
hedging instruments primarily result from interest and equity related contracts.
Interest rate swaps, options and futures are utilized to reduce in-
10
<PAGE>
terest rate exposures arising from mismatches between assets and liabilities and
to modify portfolio profiles to manage other identified risks. Equity swaps are
utilized to hedge exposure to market risk on public and private equity
positions. In 1997, losses from hedging transactions of $33 million were
primarily generated from interest related losses of $19 million and equity
related losses of $16 million. In 1996, gains from hedging transactions of $3
million were primarily generated from interest related gains of $1 million and
equity related gains of $2 million. In 1995, gains from hedging transactions of
$52 million were primarily generated from interest related gains of $36 million
and equity related gains of $18 million. In establishing the contributions to
the GIR, delays in processing foreclosures were recognized. See "Investments".
As a result of the foregoing factors, net income in 1997 was $257 million
compared to $265 million in 1996, representing a decrease of $8 million, or
3.0%, following a 39.5% increase from $190 million in 1995.
ANALYSIS OF RESULTS OF OPERATIONS BY LINE OF BUSINESS
Individual Line Operations
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Millions, except average size
and number of policies)
Revenue:
Premium income $ 4,299 $ 4,286 $ 3,924
Net investment and
other income 2,187 2,062 1,994
---------- ---------- ----------
6,486 6,348 5,918
---------- ---------- ----------
Benefits and expenses:
Policy benefits and
payments 2,560 2,303 2,028
Addition to policyholders'
reserves and funds 1,748 1,932 1,769
Commissions and
operating expenses 683 694 763
State taxes, licenses
and fees 81 91 92
Merger restructuring
costs -- 61 36
---------- ---------- ----------
5,072 5,081 4,688
---------- ---------- ----------
Net gain before federal
income taxes and
dividends 1,414 1,267 1,230
Federal income taxes 271 247 200
Net gain from
operations before
dividends 1,143 1,020 1,030
Dividends to
policyholders 916 854 813
---------- ---------- ----------
Net gain from
operations $ 227 $ 166 $ 217
========== ========== ==========
Premium Income:
Whole Life $ 2,514 $ 2,406 $ 2,467
Term Life 138 160 161
Universal, Variable &
Corporate Owned Life 379 374 356
Annuities and
supplemental contracts 981 1,012 675
Disability Income 286 284 245
Other 1 50 20
---------- ---------- ----------
Total $ 4,299 $ 4,286 $ 3,924
========== ========== ==========
Life Insurance Sales Face Amount:
Whole Life $ 5,729 $ 6,732 $ 8,378
Term Life 5,392 5,828 8,059
Universal, Variable &
Corporate Owned
Life 2,751 3,400 3,259
---------- ---------- ----------
Total $ 13,872 $ 15,960 $ 19,696
========== ========== ==========
Life Insurance In-Force Face Amount:
Whole Life $ 127,366 $ 127,188 $ 117,334
Term Life 42,676 45,218 56,086
Universal, Variable &
Corporate Owned
Life 29,125 26,975 24,378
---------- ---------- ----------
Total $ 199,167 $ 199,381 $ 197,798
========== ========== ==========
11
<PAGE>
Number of Policies In-Force:
Whole Life 1,759,312 1,825,977 1,820,193
Term Life 281,494 364,866 398,778
Universal, Variable &
Corporate Owned
Life 88,676 88,874 85,107
Annuities 314,189 296,920 293,723
Disability Income 288,244 296,776 299,662
---------- ---------- ----------
Total 2,731,915 2,873,413 2,897,463
========= ========= =========
Average Size of New Policies Sold:
Whole Life $ 181,323 $ 172,956 $ 158,894
Term Life $ 444,045 $ 347,674 $ 317,514
Universal, Variable &
Corporate Owned
Life $ 246,624 $ 236,462 $ 208,296
Individual Line Operations Year Ended December 31, 1997 Compared to Years Ended
December 31, 1996 and 1995
Net gain from operations in 1997 was $227 million compared to $166 million in
1996, representing an increase of $61 million or 36.7%, following a $51 million
or 23.5% decrease from $217 million in 1995. The increase in 1997 from 1996 was
principally due to the cessation of Merger restructuring costs, improved
mortality experience, increased net investment and other income and lower
commission and operating expenses partially offset by an increase in dividends
to policyholders and higher federal income taxes. The decrease in 1996 from 1995
was principally due to an increase in Merger restructuring costs, increased
mortality, and an increase in dividends to policyholders offset by reduced
operating expenses and improved morbidity.
Premium income in 1997 was $4,299 million compared to $4,286 million in 1996,
representing an increase of $13 million or 0.3%, following a $362 million or
9.2% increase from $3,924 million in 1995. The increase in 1997 from 1996 was
the result of a 3.1% increase in life insurance premiums, a 4.8% increase in
annuity deposits offset by a 40.3% decrease in supplemental contract deposits,
with disability income premium remaining stable. The growth in life insurance
premiums was primarily in the whole life insurance product with a drop
experienced in term life insurance. The growth in annuity premiums was
relatively modest as more of the sales generated by MassMutual's distribution
systems are being directed to its life insurance subsidiaries. Supplemental
contracts experienced a decrease as a result of a change in operational
practices where a higher percentage of death claims were paid to beneficiaries
in cash rather than being retained in the benefit management account. The
increase in 1996 from 1995 was the net result of a 49.9% increase in annuity and
supplemental contract premiums, a 15.9% increase in disability income, and a
14.8% increase in corporate owned life insurance premium, with life insurance
premiums stable with the prior year. The increase in whole life premiums during
1996 corresponds with the modest increase in the amount of insurance in-force.
Corporate owned life insurance policy sales represent a small number of
relatively large cases; therefore it is not unusual for premiums to vary from
year-to-year.
Net investment and other income in 1997 were $2,187 million, representing an
increase of $125 million or 6.1% from $2,062 million in 1996, following an
increase of 3.4%, from $1,994 million in 1995. The increase in 1997 from 1996
resulted from a 6.6% increase in general account invested assets and a portfolio
yield which remained level with 1996. The increase in 1996 from 1995 resulted
from a 4.9% growth in the Individual Line's invested assets offset by a decrease
in portfolio yield. Investment and other income reflects amortization of net
gains previously transferred to the IMR. IMR amortization was $26.8 million in
1997, $24 million in 1996, and $12 million in 1995, reflecting the relatively
short average life of MassMutual's hedging program.
Policy benefits and payments in 1997 were $2,560 million, representing an
increase of $257 million or 11.2% from $2,303 million in 1996, following an
increase of $275 million or 13.6%, from $2,028 million in 1995. The increase in
1997 from 1996 was due primarily to growth in annuity withdrawals of $150
million. This increase in annuity withdrawals is influenced by the growth of the
account values in the business. The remainder of the increase is due to life
insurance surrenders which increased $109 million and death claims which
increased $26 million offset by a $46 million decrease in payments made on
supplemental contracts. The increase in 1996 from 1995 was due to individual
annuity and supplementary contract benefits and surrender payments which
increased by $203 million to $573 million in 1996 from $370 million in 1995,
accounting for much of the growth in this item. Actual experience as a
percentage of expected claims was 98% in 1997. Surrender benefits for individual
life insurance increased in 1997 from 1996, and lapses measured as a percent of
in-force business were 6.2% in 1997 compared to 6.1% in 1996 and 6.5% in 1995.
Additions to policyholders' reserves and funds in 1997 were $1,748 million,
representing a decrease of $184 million or 9.5% from $1,932 million in 1996,
following an increase of $163 million or 9.2%, from $1,769 million in 1995. The
decrease in 1997 from 1996 was due primarily to slower growth in variable
annuity business and supplemental contract deposits as discussed in the premium
section above. The increase in 1996 from 1995 was due primarily to the increase
in annuity deposits in MassMutual's separate investment account.
Commissions and operating expenses in 1997 were $683 million, representing a
decrease of $11 million or 1.6% from $694 million in 1996, following a decrease
of $69 million or 9.0%, from $763 million in 1995. The decrease in 1997 from
1996 reflects an increase in the amount of expenses allocated and recovered from
subsidiaries and affiliates through management service contracts of $13 million,
a reduction of $15 million for direct commissions paid on the remnants of the
GLA&H business, partially offset by a $17 million increase in operating expenses
reflecting normal growth trends. The decrease in 1996 from 1995 included a
decrease in operating expense of $66 million reflecting efficiencies realized
from the Merger and management's continuing efforts to control expenses as well
as a decrease in commissions reflecting stable individual life revenue and a
restructuring of the commission program.
State taxes, licenses, and fees in 1997 were $81 million, representing a
decrease of $10 million or 11.0% from $91 mil-
12
<PAGE>
lion in 1996, following a decrease of $1 million or 1.1% from $92 million in
1995.
The decrease in 1997 from 1996 was due to recoveries of state income tax and
guarantee fund assessments from prior years.
Federal income taxes in 1997 were $271 million, representing an increase of $24
million or 9.7% from $247 million in 1996, following an increase of $47 million
or 23.5%, from $200 million in 1995. The increase in 1997 from 1996 was due
primarily to higher taxes on operations of $12 million and an increase in the
mutual company add-on tax of $16 million. The increase in 1996 from 1995 of $47
million was due primarily to higher taxes on operations of $91 million, offset
by a $38 million reduction in the mutual company add-on tax.
Dividends to policyholders in 1997 were $916 million, representing an increase
of $62 million or 7.3% from $854 million in 1996, following an increase of $41
million or 5.0%, from $813 million in 1995. The increases in 1997 from 1996 and
1996 from 1995 were due to growth in the participating in force business and the
pass through of investment, mortality and expense experience, including
continued expense savings which resulted from the Merger. The new dividend
schedule, annually approved by the Board of Directors in the fourth quarter, is
reflected in the Individual Line's operating results in the year the dividend is
declared.
Retirement Services Operations
Years Ended December 31,
1997 1996 1995
---- ---- ----
(In Millions)
Revenue:
Premium income $ 2,466 $ 2,043 $ 1,804
Net investment and
other income 717 799 904
------- ------- -------
3,183 2,842 2,708
------- ------- -------
Benefits and expenses:
Policy benefits and
payments 4,037 3,745 3,124
Reduction to
policyholders' reserves
and funds (1,027) (1,077) (563)
Commissions and
operating expenses 83 69 71
State taxes, licenses
and fees 1 5 (3)
Merger restructuring
costs -- 5 8
------- ------- -------
3,094 2,747 2,637
------- ------- -------
Net gain before federal
income taxes and
dividends 89 95 71
Federal income taxes 13 30 6
------- ------- -------
Net gain from operations
before dividends 76 65 65
Dividends to
policyholders 3 6 6
------- ------- -------
Net gain from operations $ 73 $ 59 $ 59
======= ======= =======
Premium Income
Flexinvest $ 523 $ 475 $ 352
Superflex 1,103 758 696
RMAP 9 -- --
Interest Guarantee 120 107 112
Participating Guaranteed 35 48 125
Separate Accounts 530 473 305
Defined Benefit 97 75 54
GIC and Single Premium
Annuity Contracts 9 8 21
Governmental Separate
Accounts 10 48 67
Other 30 51 72
------- ------- -------
Total $ 2,466 $ 2,043 $ 1,804
======= ======= =======
New Sales
Flexinvest $ 218 $ 184 $ 146
Superflex 515 304 257
RMAP 15 -- --
Interest Guarantee 10 22 38
Participating Guaranteed 50 39 142
Separate Accounts 241 216 140
Defined Benefit 9 1 7
GIC and Single Premium
Annuity Contracts 1 - -
Governmental Separate
Accounts 10 14 45
Other 1 3 10
------- ------- -------
Total $ 1,070 $ 783 $ 785
======= ======= =======
Retirement Services Operations Year Ended December 31, 1997 Compared to Years
Ended December 31, 1996 and 1995
Net gain from operations in 1997 was $73 million, representing an increase of
$14 million or 23.7% from $59 million in 1996, which was unchanged from $59
million in 1995. The increase in 1997 from 1996 was due to higher fees earned on
increased assets under management and lower federal income taxes, partially
offset by higher operating expenses due to large investments in technology. 1996
remained unchanged from 1995 due to lower general expenses and increased
profitability in the Guaranteed Investment Contract deposit business, offset by
higher income taxes.
Premium income in 1997 was $2,466 million, representing an increase of $423
million or 20.7% from $2,043 million in 1996, following an increase of $239
million or 13.2%, from $1,804 million in 1995. The increase in 1997 from 1996
was primarily due to higher premiums from full service defined contribution
business. The increase in 1996 from 1995 was primarily due to a $184 million
increase in defined contribution premium income.
Net investment and other income in 1997 was $717 million, representing a
decrease of $82 million or 10.3% from $799 million in 1996, following a decrease
of $105 million or 11.6%, from $904 million in 1995. The decreases in 1997 from
1996 and 1996 from 1995 were due to a decrease in the lines' general account
assets, resulting from the scheduled maturities of non-participating guaranteed
investment contracts and withdrawals of participating business and the trend of
new deposits favoring separate account options.
Policy benefits and payments in 1997 were $4,037 million, representing an
increase of $292 million or 7.8% from $3,745
13
<PAGE>
million in 1996, following an increase of $621 million or 19.9%, from $3,124
million in 1995. The increase in 1997 from 1996 was due to withdrawals of
participating guaranteed investment contracts, older low margin separate account
business and increased benefit payments for defined contribution contracts
resulting from the growth in this business, partially offset by a reduction in
withdrawals of non-participating guaranteed investment contracts. The increase
in 1996 from 1995 was due to an increase in withdrawals of participating annuity
business.
Reduction in policyholders' reserves and funds in 1997 were $1,027 million,
representing a decrease of $50 million or 4.6% from $1,077 million in 1996,
following an increase of $514 million or 91.3%, from $563 million in 1995. The
decrease in 1997 from 1996 was due to a higher level of deposits of full service
defined contribution business, offset by the increase in withdrawals discussed
above. The increase in 1996 from 1995 was due to the increase in withdrawals of
participating business.
Operating expenses and commissions were $83 million in 1997, representing an
increase of $14 million or 20.3% from $69 million in 1996, following a decrease
of $2 million or 2.8% from $71 million in 1995. The increase in 1997 from 1996
was due to a large investment in technology and business resources needed to
support a rapidly growing defined contribution business and commissions related
to the increased growth in the full service defined contribution business.
During 1996, reductions in operating expenses were partially offset by increases
in commissions.
Federal income taxes in 1997 were $13 million, representing a decrease of $17
million or 56.7% from $30 million in 1996, following an increase of $24 million
or 400.0%, from $6 million in 1995. The decrease in 1997 from 1996 was due
primarily to a decrease in tax on timing differences which lowered taxes on gain
from operations. The increase in 1996 from 1995 of $24 million was due primarily
to an increase in temporary differences in the tax on gain from operations.
Life and Health Benefits
Management Operations
The Company continues to run off its Group Life and Health Benefits Management
business. On March 31, 1996, MassMutual sold MassMutual Holding Company Two,
Inc., and its subsidiaries, including Mirus Life Insurance Company (formerly MML
Pension Insurance Company), to WellPoint Health Networks, Inc. Accordingly,
MassMutual's gain from operations for 1997 and 1996 does not include any income
generated by this business. Gain from operations for 1995 reflected a $41
million dividend MassMutual received from MML Pension. MML Pension's 1995 net
gain from operations was $44 million, of which $41 million was recorded by
MassMutual as dividend income, a component of net investment income. The
remaining $3 million was recognized by MassMutual as an unrealized capital gain
in the statutory statement of changes in policyholders' contingency reserves.
As a result of the Reinsurance with MML Pension, there were no net premiums,
policy benefits and payments and addition to policyholders' reserves in this
line for 1997, 1996 and 1995. Direct premium income prior to the Reinsurance
with MML Pension in 1997 was $168 million, a decrease of $500 million or 74.9%
from $668 million in 1996, which in turn was a decrease of 11.3% from $753
million in 1995. The decrease in 1996 from 1995 was due to this business moving
from MassMutual's contracts and being renewed as UniCARE contracts.
STATEMENT OF FINANCIAL POSITION
The following table sets forth MassMutual's assets.
Assets
December 31,
------------
1997 1996
---- ----
(In Millions)
Bonds $23,890 $24,299
Common stocks 355 337
Mortgage loans 4,864 4,853
Real estate 1,698 1,841
Other investments 1,964 1,426
Policy loans 4,950 4,752
Cash and short-term investments 1,941 1,075
------- -------
39,662 38,583
Investment and insurance amounts
receivable 1,065 1,102
Other assets 105 98
------- -------
40,832 39,783
Separate investment account assets 16,803 13,564
------- -------
Total assets $57,635 $53,347
======= =======
Total assets at December 31, 1997 were $57,635 million, representing an increase
of $4,288 million, or 8.0%, from $53,347 million at December 31, 1996. Much of
this increase was due to continued growth in MassMutual's separate investment
accounts, in which assets increased by $3,239 million, or 23.9%, to $16,803
million at December 31, 1997 from $13,564 million at December 31, 1996. Invested
assets in MassMutual's general investment account at December 31, 1997 increased
by $1,079 million, or 2.8%, to $39,662 million from $38,583 million at December
31, 1996.
Bonds at December 31, 1997 were $23,890 million, representing a decrease of $409
million, or 1.7%, from $24,299 million at December 31, 1996. This reflects a
shift of funds to short-term investments late in the year, which were hedged to
enhance spreads, withdrawals of non-participating guaranteed investment
contracts and participating business, partially offset by normal growth in the
Individual Line. Bonds and short-term securities in NAIC categories 1 and 2 were
59.0% of general investment account assets at December 31, 1997, as compared to
59.4% at December 31, 1996. The percentage of general investment account assets
representing bonds and short-term investments in NAIC categories 3 through 6 was
5.8% and 5.9% at December 31, 1997 and 1996.
Common stocks, which exclude subsidiaries and affiliates, at December 31, 1997
were $355 million, representing an in-
14
<PAGE>
crease of $18 million, or 5.3%, from $337 million at December 31, 1996. This
increase was a result of appreciation in market values. Cash and short-term
investments at December 31, 1997 were $1,941 million, representing an increase
of $866 million, or 80.6%, from $1,075 million at December 31, 1996.
Mortgage loans at December 31, 1997 were $4,864 million, representing an
increase of $11 million, or 0.2%, from $4,853 million at December 31, 1996. This
was principally due to the issuance of $1,048 million in new loans partially
offset by repayments of $922 million, foreclosures of $35 million, losses of $57
million and other items of $23 million.
The decrease in real estate was primarily due to the May 1997 sale and
contribution of $257 million of book value investments in suburban office
properties to a partnership managed by Cornerstone Real Estate Advisors, an
affiliate. At December 31, 1997, the Company had a $138 million investment in
this partnership which is classified as other investments. See "Investments" for
a discussion of investment reserves.
Separate investment account assets increased by $3,239 million or 23.9%, to
$16,803 million at December 31, 1997 from $13,564 million at December 31, 1996.
This increase was due primarily to market appreciation on existing assets, new
deposits of individual variable products and defined contribution pension
products, partially offset by withdrawals of participating guaranteed investment
contracts.
Liabilities
Total liabilities at December 31, 1997 were $54,762 million, representing an
increase of $4,054 million, or 8.0%, from $50,708 million at December 31, 1996.
As with assets, most of this growth occurred in the separate investment
accounts, which increased $3,240 million, or 23.9%, to $16,803 million at
December 31, 1997.
Policyholders' reserves and funds at December 31, 1997 were $33,783 million,
representing an increase of $441 million, or 1.3%, from $33,342 million at
December 31, 1996. The increase at December 31, 1997 from December 31, 1996 was
attributable primarily to the $1,162 million growth in individual life and
disability income reserves, a $311 million increase in reserves for large
corporate clients, partially offset by a $109 million decrease in general
account individual annuity reserves, and a $923 million decrease in
participating and non-participating group pension reserves.
The policyholders' dividend liability was $954 million at December 31, 1997,
representing an increase of $69 million, or 7.8%, from $885 million at December
31, 1996. This increase was due to growth in the participating in-force business
and the pass-through of investment, mortality and expense experience, including
expense reductions which resulted from the merger.
MassMutual utilizes sophisticated asset/liability analysis techniques in order
to set the investment policy for each liability class and test the adequacy of
the projected cash flow provided by assets to meet all of its future
policyholder and other obligations. These studies are performed using stress
tests regarding future credit and other asset losses, market interest rate
fluctuations, claim losses and other considerations. See "Liquidity and Capital
Resources" below for further discussions on this issue.
Policyholders' Contingency Reserves
Policyholders' contingency reserves were $2,873 million at December 31, 1997, an
increase of $234 million, or 8.9%, from December 31, 1996. This increase was
composed of (i) 1997 net income of $257 million, (ii) an increase of $119
million from unrealized capital gains, (iii) a decrease of $76 million due to
the change in AVR and GIR, (iv) a decrease of $55 million from strengthening
policyholders' reserves, and (v) a decrease of $11 million due to other changes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Net cash provided by operating activities was $663 million, $418 million and
$827 million for the years ended 1997, 1996 and 1995, respectively. The increase
during 1997 was due primarily to a reduction in participating and
non-participating group pension contracts, maturities and withdrawals from the
general investment account.
MassMutual 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. MassMutual 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
MassMutual's liquidity position as a significant strength.
MassMutual's principal sources of liquidity are cash flow and holdings of cash,
short-term investments 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,
MassMutual has consistently experienced net positive cash flow from operations.
MassMutual's liquid assets include substantial U.S. Treasury holdings,
short-term money market investments, stocks and marketable long-term fixed
income securities. Cash and short-term investments totaled $1,941 million at
December 31, 1997. The carrying value of other highly liquid securities,
including NAIC Category 1 and 2 publicly traded bonds and the common stock
portfolio, was approximately $14.6 billion at December 31, 1997.
The liquidity position of MassMutual is proactively managed on an ongoing basis
to meet cash needs while minimizing adverse impacts on investment returns. A
variety of scenarios are analyzed modeling potential demands on liquidity,
taking into account the provisions of MassMutual's policies and contracts
inforce, MassMutual's cash flow position and the volume of cash and readily
marketable securities in MassMutual's portfolio.
MassMutual also employs sophisticated quantitative asset/liability cash flow
management techniques to optimize
15
<PAGE>
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 MassMutual is the risk of early contractholder
and policyholder withdrawal. The three most affected products are individual
life insurance and individual deferred annuities offered by the Individual Line
and the participating products offered by the Retirement Services line. Personal
life insurance policies are less susceptible to withdrawal than annuity
contracts because annuities are primarily used as investment vehicles, while
personal life policies are used to fulfill longer term financial planning needs.
A substantial part of MassMutual's individual life insurance exposure is focused
on a well-seasoned, mature block of business. MassMutual 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.
MassMutual's exposure to early withdrawal under the Retirement Services and
Individual Line annuity businesses as of the dates indicated can be described as
follows:
Withdrawal Characteristics of Annuity Actuarial
Reserves and Deposit Fund Liabilities
December 31,
------------
1997 1996
---- ----
% of % of
Amount Total Amount Total
------ ----- ------ -----
($ In Millions)
Subject to discretionary
withdrawal with adjustment:
With market value
adjustment $ 8,235 42.7% $ 8,453 45.0%
At market value 4,099 21.3 2,443 13.0
At book value less
surrender charge 221 1.2 197 1.1
------- ---- ------- ----
Subtotal 12,555 65.2 11,093 59.1
Subject to discretionary
withdrawal without
adjustment:
At book value
(minimal or no charge or
adjustment) 2,911 15.1 3,034 16.2
Not subject to discretionary
withdrawal 3,800 19.7 4,648 24.7
------- ---- ------- ----
Total annuity actuarial
reserves and deposit
fund liabilities (gross) 19,266 100.0% 18,775 100.0%
Less reinsurance - -
------- ------
Total annuity actuarial
reserves and deposit
fund liabilities $19,266 $18,775
------- -------
Based on its ongoing monitoring and analysis of its liquidity sources and
demands, MassMutual believes that it is in a strong liquidity position.
Capital Resources
As of December 31, 1997, MassMutual's total adjusted capital as defined by the
NAIC was $4,209 million. The NAIC uses an RBC model to compare the total
adjusted capital with a standard designed to reflect MassMutual's risk profile.
Although MassMutual believes that there is no single appropriate means of
measuring risk-based capital needs, it feels that the NAIC approach to RBC
measurement is reasonable, and will manage its capital position with significant
attention to maintaining adequate total adjusted capital relative to RBC.
MassMutual's total adjusted capital was well in excess of all RBC standards at
December 31, 1997 and 1996. Management believes that MassMutual 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.
INFLATION
MassMutual's operating expenses are affected by inflation. A large portion of
MassMutual's operating expenses consist of salaries which are subject to wage
increases, at least partially affected by the rate of inflation. MassMutual's
continuing efforts to control expenses may reduce the impact of inflation on
operating expenses.
Inflation also has an indirect effect on MassMutual. To the extent that the
government's economic policy to control the level of inflation results in
changes in interest rates, MassMutual'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.
YEAR 2000 ISSUE
Like other businesses and governments around the world, MassMutual could be
adversely affected if the computer systems used by MassMutual and those with
which it does business do not properly recognize the year 2000. This is commonly
known as the "Year 2000 issue." In 1996, MassMutual began an enterprise-wide
process of identifying, evaluating and implementing changes to computer systems
and applications software to address the Year 2000 issue. This is one of
MassMutual's highest business operational priorities.
MassMutual is addressing the Year 2000 issue internally with modifications to
existing programs and conversions to new programs. The costs related to the Year
2000 issue are being currently expensed, and when measured against net gain from
operations before dividends, are not material. MassMutual is also seeking
assurances from vendors, customers, service providers and others with which
MassMutual conducts business, in order to identify and resolve the Year 2000
issue.
16
<PAGE>
INVESTMENTS
At December 31, 1997, MassMutual had $39.7 billion of invested assets in its
general investment account. The portfolio of invested assets is managed to
support the liabilities of the lines of business in light of yield, liquidity
and diversification considerations. The general investment account portfolio
does not include MassMutual's separate investment account assets.
The following table sets forth MassMutual's invested assets in the general
investment account and gross investment yield thereon (after deducting real
estate operating expenses and taxes) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Yield/(1)/ Value Total Yield/(1)/ Value Total Yield/(1)/
----------------------------- ------------------------------ ------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds $23,890 60.2% 8.2% $24,299 63.0% 8.4% $22,635 59.6% 8.8%
Common stocks 355 0.9 0.9 337 0.9 1.1 416 1.1 1.8
Mortgage loans 4,864 12.3 8.6 4,853 12.6 8.9 4,898 12.9 9.2
Real estate 1,698 4.3 11.7 1,841 4.8 9.8 1,653 4.4 9.8
Other investments 1,964 4.9 6.3 1,426 3.6 4.4 1,490 3.9 5.9
Policy loans 4,950 12.5 7.9 4,752 12.3 7.8 4,518 11.9 8.1
Cash and short-term
investments 1,941 4.9 5.0 1,075 2.8 5.8 2,343 6.2 4.8
------- ----- ---- ------- ----- ---- ------- ----- ----
Total investments $39,662 100.0% 8.5% $38,583 100.0% 8.5% $37,953 100.0% 8.7%
======= ===== ==== ======= ===== ==== ======= ===== ====
</TABLE>
/(1)/ The yield on total investments before indirect expenses was 8.5%, 8.5% and
8.7% for the years ended December 31, 1997, 1996 and 1995, respectively. If
remaining investment expenses including depreciation on real estate investments
were deducted, net yields would be 7.6%, 7.6% and 8.0%, respectively. The yield
on each investment category, before federal income taxes, is calculated as: (a)
two times gross investment income (which for real estate deducts operating
expenses and real estate taxes) divided by (b) the sum of assets at the
beginning of the year and assets at the end of the year, less gross investment
income. This is the formula which was specified by the NAIC for calculating
investment yield when this information was last required to be included in the
annual statement filed with the Division.
17
<PAGE>
MassMutual carries its investments in accordance with methods and values
prescribed by the NAIC and adopted by state insurance authorities. Generally,
bonds are valued at amortized cost, preferred stocks in good standing are valued
at cost, and common stocks are shown at fair value. Mortgage loans are valued at
principal less impairments and unamortized discount. Real estate is valued at
cost less accumulated depreciation, impairments and mortgage encumbrances.
Depreciation on investment real estate is calculated using the straight-line 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 subsidiaries, which are valued using the equity method.
MassMutual periodically uses standard derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies. These derivative financial
instruments are used to protect MassMutual from market fluctuations in interest
and exchange rates between the contract date and the date on which the hedged
transaction occurs. MassMutual is subject to off-balance sheet risk that the
counterparties of the transactions will fail to perform as contracted.
MassMutual manages this risk by only entering into contracts with highly rated
institutions and listed exchanges. MassMutual does not hold or issue derivative
financial instruments for trading purposes.
Bonds
The following table provides certain information regarding the maturity
distribution of bonds (excluding short-term securities):
Bond Maturities
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Due in one year
or less $ 520 2.2% $ 680 2.8%
Due after one year
through five years 3,972 16.6 5,129 21.1
Due after five years
through ten years 7,423 31.1 6,880 28.3
Due after ten years 5,255 22.0 5,195 21.4
Mortgage-backed
securities/(1)/ 6,720 28.1 6,415 26.4
------- ----- ------- -----
$23,890 100.0% $24,299 100.0%
======= ===== ======= =====
/(1)/ Average life is 5.7 years, including securities guaranteed by the
U.S. Government.
The maturities of portfolio bonds are considered by MassMutual to be
sufficiently diversified and are carefully monitored and managed in light of
MassMutual's liquidity needs. See "Liquidity and Capital Resources."
Bonds and short-term securities consist of publicly traded and privately placed
debt securities. At December 31, 1997 and 1996, publicly traded bonds comprised
57.8% and 59.1% of the bond portfolio, respectively, and privately placed bonds
comprised the remainder. Substantially all of the publicly traded and privately
placed bonds held by MassMutual are evaluated by the NAIC's Securities Valuation
Office ("SVO"), which assigns securities to one of six NAIC investment credit
categories, with Category 1 securities being the highest quality and Category 6
securities being the lowest quality. Categories 1 and 2 are investment grade,
Category 3 is medium quality and Categories 4, 5 and 6 are non-investment grade.
The remainder of the securities which have not as yet received NAIC ratings are
rated under an internal system which MassMutual believes to be equivalent to
that used by the SVO.
The table below sets forth, as of the dates indicated, the NAIC ratings for
MassMutual's bond portfolio (including short-term securities) and the equivalent
public rating agency designations. The bond portfolio consists primarily of high
grade securities. At December 31, 1997 and 1996, 91.0% and 90.9%, respectively,
of the portfolio was invested in NAIC Categories 1 and 2 securities.
18
<PAGE>
Bond Credit Quality
(includes short-term securities)
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $15,976 62.1% $16,539 65.6%
2 Baa 7,434 28.9 6,390 25.3
3 Ba 1,533 6.0 1,429 5.7
4 B 683 2.7 747 3.0
5 Caa and lower 55 0.2 63 0.2
6 In or near default 37 0.1 43 0.2
------- ----- ------- -----
Total $25,718 100.0% $25,211 100.0%
======= ===== ======= =====
MassMutual invests a significant portion of its investment funds in high
quality publicly traded bonds in order to maintain and manage liquidity and
reduce the risk of default in the portfolio. As of December 31, 1997, 96.1% of
the publicly traded bonds were rated as NAIC Categories 1 and 2, as illustrated
by the following chart:
Publicly Traded Bond Credit Quality
(includes short-term securities)
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $11,632 78.2% $12,791 85.8%
2 Baa 2,665 17.9 1,537 10.3
3 Ba 320 2.2 326 2.2
4 B 247 1.7 248 1.7
5 Caa and lower 5 0.0 4 0.0
6 In or near default 1 0.0 4 0.0
------- ----- ------- -----
Total $14,870 100.0% $14,910 100.0%
======= ===== ======= =====
MassMutual utilizes its investments in the privately placed bond portfolio to
enhance the value of the overall portfolio, increase diversification and obtain
higher yields than are possible with comparable quality public market
securities. To control risk, MassMutual relies upon broader access to management
information, strengthened negotiated protective covenants, call protection
features, and a higher level of collateralization than can customarily be
achieved in the public market. The strength of the privately placed bond
portfolio is demonstrated by the predominance of NAIC Categories 1 and 2
securities.
19
<PAGE>
Privately Placed Bond Credit Quality
(include short-term securities)
December 31,
------------
1997 1996
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $ 4,344 40.0% $ 3,748 36.4%
2 Baa 4,769 44.0 4,853 47.1
3 Ba 1,213 11.2 1,103 10.7
4 B 436 4.0 499 4.8
5 Caa and lower 50 0.5 59 0.6
6 In or near default 36 0.3 39 0.4
------- ----- ------- -----
Total $10,848 100.0% $10,301 100.0%
======= ===== ======= =====
As of December 31, 1997 and 1996, mortgage-backed securities in the bond
portfolio consisted of $3.4 billion and $3.0 billion, respectively, of GNMA,
FNMA, FHLMC and FHA mortgage-backed pass-through securities, and $3.3 billion
and $3.4 billion, respectively, of government agency-backed collateralized
mortgage obligations.
The following table sets forth by industry category the carrying value and
percent of total of the bond portfolio, including short-term securities, as of
December 31, 1997:
Bond Portfolio By Industry
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Public/(1)/ Private/(1)/ Total
-----------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Industry Category Value Total Value Total Value Total
-----------------------------------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C> <C>
Collateralized/(2)/ $ 6,786 45.6% $ 726 6.7% $ 7,512 29.2%
U.S. Government 3,134 21.1 308 2.8 3,442 13.4
Finance 1,084 7.3 1,367 12.6 2,451 9.5
Producer Goods 596 4.0 1,645 15.2 2,241 8.7
Consumer Goods 453 3.0 1,238 11.4 1,691 6.6
Natural Resources 671 4.5 878 8.1 1,549 6.0
Utilities 856 5.8 622 5.7 1,478 5.8
Other Services 164 1.1 829 7.6 993 3.9
Media 218 1.5 609 5.6 827 3.2
Transportation 269 1.8 518 4.8 787 3.1
Retail 143 1.0 390 3.6 533 2.1
Health Care 267 1.8 262 2.4 529 2.0
Aerospace 72 0.5 256 2.4 328 1.3
Others 157 1.0 1,200 11.1 1,357 5.2
------- ----- ------- ----- ------- -----
Total $14,870 100.0% $10,848 100.0% $25,718 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
/(1)/ Includes short-term securities.
/(2)/ These bonds are collateralized by mortgages backed by FNMA, GNMA, FHLMC
or FHA and include collateralized mortgage obligations and pass-through
securities. These amounts also include asset backed securities such as credit
card, automobile and residential mortgage securities.
20
<PAGE>
The estimated fair value of bonds is based upon quoted market prices for
actively traded securities. MassMutual subscribes to commercial pricing services
that provide estimated fair values of fixed income securities that are not
actively traded. Estimated fair values for privately placed bonds are generally
determined by applying interest spreads based on quality and asset type to the
appropriate duration on the U.S. Treasury yield curve.
The tables below set forth the carrying value, gross unrealized gains and
losses, net unrealized gains and losses and estimated fair value of the bond
portfolio (excluding short-term securities) at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
-------------------------------------------------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $ 6,241 $ 470 $ 10 $ 460 $ 6,701
Debt Securities issued by
Foreign Governments 83 5 3 2 85
Mortgage-backed securities 3,391 188 9 179 3,570
State and local governments 362 24 1 23 385
Corporate debt securities 12,149 765 47 718 12,867
Utilities 872 100 2 98 970
Affiliates 792 3 1 2 794
------- ------- ------- ------- -------
$23,890 $ 1,555 $ 73 $ 1,482 $25,372
======= ======= ======= ======= =======
<CAPTION>
December 31, 1996
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
-------------------------------------------------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government Corporations
and Agencies $ 8,043 $ 344 $ 57 $ 287 $ 8,330
Debt Securities issued by
Foreign Governments 95 10 0 10 105
Mortgage-backed securities 3,014 119 43 76 3,090
State and local governments 173 13 2 11 184
Corporate debt securities 11,675 528 133 395 12,070
Utilities 975 87 19 68 1,043
Affiliates 324 5 4 1 325
------- ------- ------- ------- -------
$24,299 $ 1,106 $ 258 $ 848 $25,147
======= ======= ======= ======= =======
</TABLE>
21
<PAGE>
Mortgage Loans
Mortgage loans represented 12.3% and 12.6% of the total investments in the
general account at December 31, 1997 and 1996 respectively. Mortgage loans
consist of commercial mortgage loans and residential mortgage loan pools. At
December 31, 1997 and 1996, commercial mortgage loans comprised 78.8% and 80.3%
of the mortgage loan portfolio.
Total gross investment income on mortgage loans for the year ended December 31,
1997 was $402 million, a 3.1% decrease from $415 million at December 31, 1996.
This decrease was due to high yielding loans leaving the portfolio at maturity
or through prepayments and new loans being issued at current market rates lower
than the portfolio average. The average yield on mortgage loans was 8.6% and
8.9% for the year ending December 31, 1997 and 1996 respectively. Net realized
capital losses on mortgage loans were $57 million and $58 million for the year
ended December 31, 1997 and 1996.
The following table provides certain information regarding the maturity
distribution of mortgage loans:
Mortgage Loans Maturities
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Due in one year
or less $ 181 3.7% $ 452 9.3%
Due after one year
through five years 1,410 29.0 1,519 31.3
Due after five years
through ten years 1,238 25.5 1,171 24.1
Due after ten years 1,002 20.6 755 15.6
Residential mortgage
pools 1,033 21.2 956 19.7
------ ----- ------ -----
Total $4,864 100.0% $4,853 100.0%
====== ===== ====== =====
Residential
The residential mortgage loan portfolio consists of conventional and FHA/VA
mortgage pools. These investments have provided MassMutual with excellent
loss/risk experience. MassMutual imposes rigorous investment standards,
including governmental agency guarantees, seasoned pools and discount pricing as
protection against prepayment risk.
Commercial
MassMutual's commercial mortgage loan portfolio consists of fixed and floating
rate loans on completed, income producing properties. The majority of the
portfolio is fixed rate mortgages.
At December 31, 1997, 86.0% of the commercial mortgage loan portfolio consisted
of bullet loans (loans that do not fully amortize over their term) compared to
87.6% at December 31, 1996. Scheduled bullet maturities at December 31, 1997 of
$181 million, $355 million, $388 million and $364 million in 1998, 1999, 2000
and 2001 represent 4.7%, 9.3%, 10.1% and 9.5% respectively, of the commercial
mortgage loan portfolio.
MassMutual had $409 million of bullet loans scheduled to mature during 1997 of
which $251 million, or 61.4%, were paid in full at maturity, $81 million, or
19.8%, were refinanced, $77 million, or 18.8%, were foreclosed or paid off at
discount.
During 1997 all renewed bullet loans were performing assets prior to renewal and
all loan renewals reflected market conditions. Past experience with regard to
bullet maturities, however, is not necessarily indicative of future results.
The maturities of commercial mortgage loans are considered by MassMutual to be
sufficiently diversified and are carefully monitored and managed in light of
MassMutual's liquidity needs. See "Liquidity and Capital Resources."
The following tables set forth by property type and geographic distribution of
the commercial mortgage loan portfolio:
Commercial Mortgage Loans by
Property Type
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $1,040 27.1% $1,184 30.4%
Retail 745 19.5 880 22.6
Industrial and Other 468 12.2 539 13.8
Apartments 928 24.2 752 19.3
Hotels and Motels 647 16.9 537 13.8
Commercial Pools 3 0.1 5 0.1
------ ----- ------ -----
$3,831 100.0% $3,897 100.0%
====== ===== ====== =====
Commercial Mortgage Loans by
Geographic Distribution
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
West $ 697 18.2% $ 847 21.7%
Northeast 695 18.1 729 18.7
Mid-Atlantic 588 15.3 622 16.0
Southeast 634 16.6 630 16.2
Midwest 532 13.9 533 13.7
Southwest 685 17.9 536 13.7
------ ----- ------ -----
$3,831 100.0% $3,897 100.0%
====== ===== ====== =====
Equity Real Estate
The real estate portfolio includes real estate properties originally acquired as
investments, occupied by MassMutual and real estate acquired through
foreclosure. At December 31, 1997, office properties constituted the largest
component of the portfolio, representing 36.0% of the aggregate carrying value.
22
<PAGE>
The following tables illustrate the diversity of the equity real estate
portfolio by property category and by region:
Equity Real Estate by
Property Type
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $ 612 36.0% $ 806 43.8%
Hotels and Motels 549 32.3 444 24.1
Retail 241 14.2 269 14.6
Apartments 156 9.2 148 8.0
Industrial and Other 140 8.3 174 9.5
------ ----- ------ -----
Total $1,698 100.0% $1,841 100.0%
====== ===== ====== =====
Equity Real Estate by
Geographic Distribution
December 31,
------------
1997 1996
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Southeast $ 378 22.3% $ 415 22.5%
Mid-Atlantic 299 17.6 304 16.5
Midwest 257 15.1 281 15.3
Northeast 371 21.8 409 22.2
West 193 11.4 242 13.2
Southwest 200 11.8 190 10.3
------ ----- ------ -----
Total $1,698 100.0% $1,841 100.0%
====== ===== ====== =====
MassMutual, through its indirectly wholly-owned subsidiary, Cornerstone Real
Estate Advisers, Inc. ("Cornerstone"), has been active in the real estate
investment market since the 1960s. At the close of 1997, MassMutual's real
estate portfolio consisted of 168 properties with a statement value in excess of
$1.6 billion. The portfolio is primarily unleveraged with only $14 million in
third party non-recourse debt outstanding at December 31, 1997. The decrease in
real estate was primarily due to the May 1997 sale and contributions of $257
million of book value investments in suburban office properties to a partnership
managed by Cornerstone. At December 31, 1997, the Company had a $138 million
investment in this partnership which is classified as other investments.
Real estate produced gross investment income of $317 million for the year ended
December 31, 1997, and $289 million for the year ended December 31, 1996. Net
capital losses from sales transactions and impairments were $6 million and $74
million, respectively, for such periods.
Foreclosed real estate is accounted for at the lower of the property's market
value or the loan balance when acquired, with write-downs at the point of
foreclosure being based on appraisals. All real estate investments are re-valued
annually as described below, and write-downs are taken if the revaluation
indicates an 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
$118 million and $132 million at December 31, 1997 and 1996, respectively.
Individual property valuations are reviewed by management on a regular basis.
Real estate valuations are first established at MassMutual'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 MassMutual'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.
Additionally, in 1997 a sample of properties constituting 22.4% of the
portfolio's market value was appraised by external independent appraisers.
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 MassMutual 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.)
At December 31, 1997, MassMutual's real estate AVR totaled $212 million. In
addition, MassMutual maintained a separate GIR of $58 million in respect of
properties held for sale during the upcoming year. See "Investment Reserves."
Portfolio Management and Under Performing Investments
Bonds
MassMutual 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.
23
<PAGE>
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.
MassMutual 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 $1 million and $24 million for the years ended
December 31, 1997 and 1996, respectively.
The carrying values of NAIC Category 5 and 6 bonds, as of the indicated dates,
were as follows:
NAIC Category 5 and 6 Bonds
Carrying Value
December 31,
------------
1997 1996
---- ----
(In Millions)
Performing:
Public $ 5 $ 3
Private 50 59
---- ----
Total 55 62
---- ----
Under performing:
Public 1 4
Private 36 39
---- ----
Total 37 43
---- ----
Total $ 92 $105
==== ====
As a result of MassMutual's conservative monitoring process, an internal watch
list is generated which includes certain securities which would not be
classified as under-performing under the SVO credit rating system. At December
31, 1997, bonds having a carrying value of $445 million (1.9% of the total bond
portfolio) had been placed on the internal watch list, which is comprised of
bonds that have the following NAIC ratings: $4 million NAIC Category 1, $51
million NAIC Category 2, $72 million NAIC Category 3, $263 million NAIC Category
4 and $55 million NAIC Category 5.
Mortgage Loans
MassMutual actively monitors, manages and directly services its commercial
mortgage loan portfolio. MassMutual personnel perform or review all aspects of
loan origination and portfolio management, including lease analysis, property
transfer analysis, economic and financial reviews, tenant analysis and oversight
of default and bankruptcy proceedings. All properties are re-valued each year
and reinspected either each year or every other year based on internal quality
ratings. MassMutual uses the following criteria to determine whether a current
or potential problem exists: (i) borrower bankruptcies, (ii) major tenant
bankruptcies, (iii) requests for restructuring, (iv) delinquent tax payments,
(v) late payments, (vi) loan-to-value or debt service coverage deficiencies and
(vii) overall vacancy levels.
Restructured mortgage loans are loans for which current payment terms have been
modified to less than current market rates, at the time of modification, and are
currently performing in accordance with such modified terms. Loans on which
maturities have been extended but on which current payments are being made at or
above market interest rates are not classified as restructured loans.
The carrying values of current and potential problem commercial mortgage loans
as of the dates indicated were as follows:
Current and Potential Problem
Commercial Mortgage Loans
December 31,
------------
1997 1996
---- ----
(In Millions)
Restructured $ 193 $ 364
In Process of Foreclosure 48 120
In Default 22 8
Actively Managed Properties 20 99
----- -----
Total $ 283 $ 591
===== =====
The AVR contains a commercial mortgage loan component which totaled $105 million
at the end of 1997. In addition, at December 31, 1997, MassMutual maintained a
GIR of $47 million for properties in the process of foreclosure and for other
anticipated losses. See "Investment Reserves."
MassMutual does not accrue interest income on mortgage loans which are
delinquent more than 90 days or when management believes the collection of
interest is uncertain. Interest not accrued on mortgage loans totaled $3 million
and $12 million for the years ended December 31, 1997 and 1996, respectively.
The following tables set forth current and potential problem commercial mortgage
loans by property type and geographic region:
Commercial Mortgage Loan Distribution
By Property Type
December 31, 1997
-----------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
--------------------------------------
($ In Millions)
Office $1,040 $121 11.6%
Retail 745 72 9.7
Industrial & Other 468 41 8.8
Apartments 928 40 4.3
Hotels & Motels 647 6 0.9
Commercial Pools 3 3 100.0
------ ---- -----
Total $3,831 $283 7.4%
====== ==== =====
Commercial Mortgage Loan Distribution
By Region
December 31, 1997
-----------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
-------------------------------------
($ In Millions)
West $ 697 $ 82 11.8%
Northeast 695 91 13.1
Mid-Atlantic 588 37 6.3
Southeast 634 5 0.8
Midwest 532 46 8.6
Southwest 685 22 3.2
------ ---- ----
Total $3,831 $283 7.4%
====== ==== ====
24
<PAGE>
The following is a comparison of MassMutual commercial mortgage loan experience
against the latest available industry averages as provided by the American
Council of Life Insurance ("ACLI"). MassMutual establishes reserves for
commercial mortgage loans in the process of foreclosure, and recognizes losses
on such commercial mortgage loans only upon foreclosure.
MassMutual and Life Insurance Industry
Commercial Mortgage Loan Comparisons
December 31, 1997 December 31, 1996
----------------- -----------------
MassMutual ACLI MassMutual ACLI
---------- ---- ---------- ----
Delinquent /(1)/ 0.56% 0.32% 0.19% 0.69%
Restructured /(2)/ 5.34 4.61 9.46 6.81
In foreclosure 1.22 0.58 2.95 1.10
---- ---- ----- ----
Subtotal 7.12 5.51 12.60 8.60
Foreclosed 1.08 0.84 1.50 1.02
---- ---- ----- ----
Total 8.20% 6.35% 14.10% 9.62%
==== ==== ===== ====
/(1)/ Commercial mortgage loans are classified as delinquent when two or more
payments are past due.
/(2)/ Commercial mortgage loans are classified as restructured when they are in
good standing, but the basic terms such as interest rate or maturity date have
been modified as a result of an actual or anticipated delinquency.
MassMutual's residential mortgage loan experience is compared regularly to
industry averages. At December 31, 1997, the Company's delinquency rate was 1.3%
as compared to the industry average of 2.5% according to the Mortgage Bankers
Survey.
Write-downs and Investment Reserves
When MassMutual determines that it is probable that the net realizable value of
an invested asset is less than its carrying value, appropriate write-downs or
investment reserves are established and recorded in accordance with statutory
practice.
In the case of bonds, the net realizable value is determined in accordance with
principles established by the SVO using criteria such as the net worth and
capital structure of the borrower, the value of the collateral, the presence of
additional credit support and MassMutual's evaluation of the borrower's ability
to compete in a relevant market.
In the case of real estate and commercial mortgage loans, borrower and
property-specific assessments are also made.
In compliance with regulatory requirements, MassMutual maintains the AVR. The
AVR stabilizes policyholders' contingency reserves against non-interest rate
related fluctuations in the value of stocks, bonds, mortgage loans and real
estate investments. GIR which are not mandated by regulation, are maintained by
MassMutual in anticipation of future losses on specific mortgage loans and real
estate holdings, particularly mortgage loans in the process of foreclosure.
MassMutual's total investment reserves at December 31, 1997 were $974 million, a
8.6% increase from December 31, 1996, consisting of AVR of $841 million and GIR
of $133 million. GIR was comprised of $105 million for mortgage loans and real
estate and $28 million for a special investment reserve related to the surplus
notes issued during 1993 and 1994.
25
<PAGE>
The following table presents the change in total investment reserves for the
years 1997 and 1996:
<TABLE>
<CAPTION>
Total Investment Reserves
Bonds, Preferred Special
Stocks and Real Estate Investment
Short-term Mortgage and Other Common Reserve for
Investments Loans Invested Assets Stock Surplus Notes Total
----------- ----- --------------- ----- ------------- -----
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995/(1)/ $ 210 $ 141 $ 135 $ 234 $ 35 $ 755
----- ----- ----- ----- ----- -----
Reserve contributions/(2)/ 40 37 41 0 (3) 115
Transfers among categories 0 0 154 (154) 0 0
Net realized capital gains (losses)/(3)/ (7) (37) (79) 200 0 77
Unrealized capital gains (losses)/(4)/ (9) 0 (11) (30) 0 (50)
----- ----- ----- ----- ----- -----
Net change to Policyholders'
Contingency Reserves/(5)/ 24 0 105 16 (3) 142
----- ----- ----- ----- ----- -----
Balance at December 31, 1996/(1)/ $ 234 $ 141 $ 240 $ 250 $ 32 $ 897
===== ===== ===== ===== ===== =====
Reserve contributions/(2)/ 28 20 (26) (55) (4) (37)
Transfers among categories (35) 35 65 (65) 0 0
Net realized capital gains (losses)/(3)/ (6) (44) (9) 50 0 (9)
Unrealized capital gains (losses)/(4)/ 29 0 0 94 0 123
----- ----- ----- ----- ----- -----
Net change to Policyholders'
Contingency Reserves/(5)/ 16 11 30 24 (4) 77
----- ----- ----- ----- ----- -----
Balance at December 31, 1997/(1)/ $ 250 $ 152 $ 270 $ 274 $ 28 $ 974
===== ===== ===== ===== ===== =====
</TABLE>
/(1)/The balance is comprised of the AVR and GIR which are recorded separately
as liabilities on the statement of financial position as follows:
AVR GIR Total
--- --- -----
(in millions)
Balance at December 31, 1995 $567 $188 $755
Balance at December 31, 1996 $689 $208 $897
Balance at December 31, 1997 $841 $133 $974
/(2)/Amounts represent contributions calculated on a statutory formula plus
amounts deemed necessary by MassMutual. Represents the net impact on
Policyholders' Contingency Reserves for investment gains and losses not related
to changes in interest rates.
/(3)/These amounts offset realized capital gains (losses), net of tax, that have
been recorded as a component of net income. Amounts include realized capital
gains and losses, net of tax, on sales not related to interest fluctuations,
such as repayments of mortgage loans at a discount, mortgage loan foreclosures
and real estate permanent write-downs.
/(4)/These amounts offset unrealized capital gains (losses), recorded as a
change in Policyholders' Contingency Reserves (Surplus). Amounts include
unrealized losses due to market value reductions of securities with a NAIC
quality rating of 6 and net changes in the undistributed earnings of
subsidiaries.
/(5)/Amounts represent the reserve contribution (note 2) less amounts already
recorded (notes 3 and 4). This net change in reserves is recorded as a charge to
Policyholders' Contingency Reserves.
VII. MassMutual - Description of the Business
MassMutual is a mutual life insurance company organized as a Massachusetts
corporation which was originally chartered in 1851. As a mutual life insurance
company, MassMutual has no shareholders. MassMutual's primary business is
ordinary life insurance. MassMutual also provides, directly or through its
subsidiaries, a wide range of annuity and disability products, and pension and
pension-related products and services, as well as investment services to
individuals, and corporations and other institutions, in all 50 states of the
United States and the District of Columbia. MassMutual, or its subsidiaries,
is also licensed to transact business in Puerto Rico, six provinces of Canada,
Chile, Argentina, Bermuda and Luxembourg, however these operations are not
material.
On March 1, 1996, the operations of the former Connecticut Mutual Life Insurance
Company were merged into MassMutual. The Merger was accounted for under the
pooling of interests method of accounting. For the purposes of the financial
information presented in this filing, such financial information has been
restated to reflect the Merger as if it had occurred on January 1, 1993, in
conformity with the practices of the National Association of Insurance
Commissioners and the accounting practices prescribed or permitted by the
Division and, for the pre-merger balances of Connecticut Mutual, the Insurance
Department of the State of Connecticut.
26
<PAGE>
The principal lines of businesses of MassMutual and its subsidiaries are: (i)
Individual Line Operations, which includes individual protection products,
including life and disability, and individual accumulation products, which
provides annuities, large corporate market and investment products and services;
(ii) Retirement Services Operations, which provides group pension investment
products and administrative services, primarily to sponsors of tax qualified
retirement plans; and (iii) MMIG, which provides investment advisory services to
MassMutual, its affiliates, and various outside individual and institutional
investors through MassMutual's investment management staff and its principal
subsidiaries: Babson, which manages funds for both individual clients and
institutional investors; Cornerstone, a manager of and adviser on commercial
real estate; Oppenheimer, one of the largest mutual fund companies in the United
States; and Antares, a finance company which lends and syndicates loans to
smaller companies. MMIG's Assets Under Management ("AUM") has grown
substantially in recent years, reaching $152.5 billion at December 31, 1997. The
results of operations of MMIG are allocated to and reflected in the financial
results of the other product lines. Prior to March 1996, a fourth line, Life and
Health Benefits Management Operations, which provided group life and health
insurance products and related services to corporations and other institutions,
was also a principal line of business. That line was transferred to a subsidiary
of MassMutual in December 1994, and the subsidiary was subsequently sold in
March of 1996. A description of each line of business follows.
The following table sets forth financial data for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in Millions)
<S> <C> <C> <C> <C> <C>
Other Data:
Premium Income:
Individual Line Operations $ 4,299 $ 4,286 $ 3,924 $ 3,878 $ 3,882
Retirement Services Operations 2,466 2,043 1,804 1,566 1,778
Life and Health Benefits Management - - - 733 748
------- ------- ------- ------- -------
Total premium income $ 6,765 $ 6,329 $ 5,728 $ 6,177 $ 6,408
======= ======= ======= ======= =======
Net Investment and Other Income:
Individual Line Operations $ 2,187 $ 2,062 $ 1,994 $ 1,782 $ 1,725
Retirement Services Operations 717 799 904 967 1,112
Life and Health Benefits Management - - - 55 49
------- ------- ------- ------- -------
Total net investment and other income $ 2,904 $ 2,861 $ 2,898 $ 2,804 $ 2,886
======= ======= ======= ======= =======
Net Gain From Operations:
Individual Line Operations $ 227 $ 166 $ 217 $ 135 $ 143
Retirement Services Operations 73 59 59 60 64
Life and Health Benefits Management - - - 43 45
------- ------- ------- ------- -------
Total net gain from operations $ 300 $ 225 $ 276 $ 238 $ 252
======= ======= ======= ======= =======
Total Assets (at period end):
Individual Line Operations $40,072 $36,361 $33,902 $30,278 $28,216
Retirement Services Operations 17,563 16,986 16,595 16,060 16,710
Life and Health Benefits Management - - - 542 908
------- ------- ------- ------- -------
Total assets $57,635 $53,347 $50,497 $46,880 $45,834
======= ======= ======= ======= =======
</TABLE>
The Company's direction and operations are guided by a statement of corporate
vision. MassMutual's operations are managed so as to maintain a financially
strong and efficient enterprise for the benefit of policyholders. MassMutual's
long-term objectives are to maintain corporate financial strength, enhance
policyholder value, and generate and sustain growth.
INDIVIDUAL LINE
MassMutual's Individual Line provides a wide range of individual protection and
accumulation products and services through its network of general agents, agents
and affiliated distributors. Registered variable contracts, mutual funds,
including the Oppenheimer Funds, unit investment trusts, and other investment
products are distributed through MML Investor's Services, Inc. ("MML Investors
Services"), a registered broker/dealer that is indirectly wholly-owned by
MassMutual. MML Investors Services also provides securities brokerage services.
MML Distributors, LLC, also an indirectly wholly-owned, registered broker/dealer
subsidiary of MassMutual acts as the principal underwriter for many of
MassMutual's registered annuity and insurance products.
27
<PAGE>
Products
The principal products offered by the Individual Line include whole life,
variable universal life and term insurance products, individual annuity products
and individual disability income insurance products. The majority of these
products allow a range of riders that provide such benefits as waiver of
premium, accidental death benefits, paid-up additions of insurance and
accelerated death benefits. See "MassMutual Investment Group" for additional
information on related investment management services.
Set forth below is a description of the Individual Line's principal products:
Whole Life ("WL"). Whole life insurance is a participating product that provides
guaranteed minimum death benefits and guaranteed cash values in return for
periodic premium payments of a fixed amount. MassMutual offers several types of
whole life products, including products with premiums due for the life of the
insured and products with guaranteed limited payment periods. MassMutual also
offers survivorship whole life, a product that pays a death benefit upon the
death of the second of two insureds and is designed primarily to meet estate
planning needs.
Universal Life ("UL"). Universal life insurance provides the policyholder with
flexible premiums and death benefits as well as no lapse guarantees. Premiums in
excess of specified sales charges are credited to the account value of the
policy and allocated to the fixed account backed by the general investment
account of MassMutual. That account value includes a guaranteed principal with a
minimum interest credit. The policy fund value is the net result of the premium
payments plus interest credits minus expense and cost of insurance charges minus
the amount of any partial surrenders.
Variable Universal Life ("VL"). Variable universal life insurance provides the
policyholder, within guidelines established by the terms of the policy, the
ability to select and change premium levels, amounts of death benefits and
account value investment options. Premiums in excess of specified sales charges
are credited to the account value of the policy and allocated to a fixed account
backed by the general investment account of MassMutual, or to one or more
investment divisions of separate investment accounts. For cash values in the
Separate Investment Account ("SIA"), the policyholder bears the investment risk.
The cost of insurance and administrative charges are deducted from the
accumulating account value to which the premiums are credited. MassMutual also
offers various corporate-owned fixed or variable universal life products sold in
connection with corporate benefit plans, including several products designed for
sale to large corporate purchasers for funding deferred compensation and
post-retirement health benefits.
Term Insurance. Term insurance provides life insurance protection for a fixed
period and has no cash value. MassMutual offers a variety of term insurance
products designed to meet varying client needs. Almost all term insurance
products allow conversion within a specified time period to a MassMutual
permanent product.
Annuities. Annuity products provide for the payment of periodic benefits at
regular intervals beginning at a specified date and continuing for a specific
period of time or for life and are offered in a variety of forms. The Individual
Deferred Annuity provides for the accumulation of net premiums at various
guaranteed interest rates. These contracts provide for either single premiums or
flexible premiums and may accumulate indefinitely, or for a specified period of
time. The premium may be deposited in a fixed account backed by MassMutual's
general investment account and credited with interest at a rate which is
periodically reset subject to a minimum guarantee. The Single Premium Immediate
Annuities are individual, non-participating contracts providing a life income to
either one or two lives with the first annuity payment starting any time up to
one year from the issue date. Variable Annuities are individual
non-participating contracts which provide for either a single or periodic
premium, and which may be directed to a fixed guaranteed principal account or to
one of several separate account options for which the investment risk is borne
by the contractholder.
Disability Income Insurance. Disability income insurance provides income
payments to the insured (including payments for business overhead expenses) when
employment or income is interrupted or terminated because of illness, sickness
or accident. The level, timing and duration of payments vary by policy type.
Product Pricing and Management
The pricing of Individual Line products is designed to produce surplus
sufficient to generate a level of capital consistent with MassMutual'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
premiums. For other products, the actual experience is reflected in interest,
mortality and/or expense rates.
Principal Markets, Marketing and Distribution
Sales of MassMutual's Individual Line products are primarily targeted to three
markets: upper income individuals ages 35 and over; moderate income individuals
under age 35; professionals, business owners, principals and partners.
MassMutual sells its Individual Line products nationwide primarily through
approximately 100 general agents who contract with more than 5,000 full-time
career agents. In 1997, 86% of Individual Line's premiums were generated by
policies sold by MassMutual's career agents. The balance was sold by other
producers, including independent
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brokers, who contract with the general agents, consultants and independent
broker/dealers. In addition, MassMutual issues the Oppenheimer Fund LifeTrust
Variable Annuity for marketing and distribution through the Oppenheimer
registered representatives. The LifeTrust Variable Annuity accounted for 26% of
individual annuity sales in 1997.
Underwriting
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. MassMutual utilizes a computerized system in the process of
reviewing and approving applications for life insurance. This system affords
MassMutual 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 1,700
life insurance companies in the United States, many of which offer individual
insurance products similar to those marketed by the Individual Line. 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 MassMutual competes.
Competition for large life insurance sales usually includes fewer than 50
financially strong companies such as MassMutual. 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.
MassMutual's management believes its financial strength, agent skill and
historical product performance provide competitive advantages for the products
it offers in these markets. MassMutual has received the highest ratings from
A.M. Best Company, Inc. (A++), Standard & Poor's Corporation (AAA), and Duff &
Phelps Credit Rating Company (AAA), as well as a rating of Aa1 by Moody's
Investors Service, Inc. (the highest in its "excellent" category). In late 1995
and early 1996, all four of these agencies conducted thorough reviews of
MassMutual's ratings in light of the Merger. In all four cases, the 1995 ratings
for MassMutual were reaffirmed. MassMutual is one of only two companies that has
ranked in the top 10 companies in each of the last 19 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.
Currently, more insurance companies, banks and mutual fund companies are
entering the annuity business. MassMutual effectively competes in this market
through its use of multiple distribution channels, its customer service
orientation, variety of fund options within the MassMutual family (including
Oppenheimer) and offering of desired product features.
In the disability income market, competitor strategies are diverging due to poor
financial results. MassMutual believes that it 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.
RETIREMENT SERVICES
Through its Retirement Services operations, MassMutual markets a complete line
of group pension investment products and administrative services, primarily to
sponsors of tax qualified retirement plans. MassMutual offers a variety of
guaranteed and non-guaranteed investment accumulation products and ancillary
services to both defined benefit and defined contribution plans.
Products
MassMutual offers a variety of guaranteed and nonguaranteed investment
accumulation products and ancillary services to the pension marketplace. See
"MassMutual Investment Group" for additional information on related investment
management services.
Set forth below is a description of MassMutual's principal pension products:
Retirement Matters Accumulation Product ("RMAP"). RMAP is a defined contribution
product sold directly by the MassMutual career agency system which can be either
full service (investment, administrative and consultative), no service or offer
a distributed recordkeeper capability. One year interest rate guarantees are
offered, reflecting past experience as well as expected future experience. RMAP
also offers a complete array of MassMutual's separate investment accounts as
other investment options to participants. The product is typically sold to plans
with 10 to 100 lives.
Flexinvest. Flexinvest is a full service (investment, administrative and
consultative) defined contribution product with a guaranteed investment option
funded in MassMutual's general investment account. One-year interest rate
guarantees are offered, reflecting past experience as well as expected future
experience. Flexinvest also offers a complete array of MassMutual's separate
investment accounts as other investment options to participants. This product is
typically sold to plans with 50 to 250 lives.
Superflex. Superflex is a full service (investment, administrative and
consultative) defined contribution product sold to larger plans, generally
involving more than 250 lives. The guaranteed investment option provided by
Superflex is also funded in MassMutual's general investment account, with
minimum interest rate guarantees being provided up to periods of five years. As
with Flexinvest, a complete array of separate account investment options is also
offered.
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Interest Guarantee. The Interest Guarantee product is a participating general
investment account product with minimum interest rate guarantees being provided
up to periods of five years. It is sold primarily to plans with 100 to 500
lives, and it is offered to both defined contribution and defined benefit plans.
Participating Guaranteed. In response to demands for alternatives to traditional
guaranteed investment contract products, in 1992 MassMutual began marketing
participating guaranteed products through pooled separate accounts or single
customer separate accounts. The investment results of the separate account
assets are passed through to the contractholders and MassMutual guarantees the
return of principal plus accrued interest and future minimum guaranteed interest
over the contract term. Participating Guaranteed products are typically sold to
defined contribution plans.
Separate Accounts. Separate Accounts are non-guaranteed pooled separate accounts
in which the investment results of the assets, net of a management fee, are
passed directly to the contractholders. Currently, MassMutual offers separate
accounts that invest in large and small capitalization equities, bonds,
international equities and money market instruments. Separate accounts are
offered without services to both defined benefit and defined contribution plans,
or with services in conjunction with the Flexinvest, Superflex (discussed above)
and Defined Benefit products (discussed below). In response to the popularity of
mutual funds with plan sponsors due to the high level of regulatory oversight
and disclosure requirements, MassMutual has added an array of mutual funds to
its product line, including nonproprietary funds.
Defined Benefit. Defined Benefit products include the Deposit Administration
contract ("DA"), the Immediate Participation contract ("IP") and the Pension
Funding contract ("PF"). The various products are funded in MassMutual's general
investment account and are participating. Nominal interest rate guarantees are
provided in the DA contract. All three contracts provide for annuity purchases,
on either a participating basis (DA) or non-participating basis (IP and PF).
Separate accounts are offered in conjunction with these products and MassMutual
offers full investment, administrative and consultive services.
GIC and Single Premium Annuity Contracts. Traditional guaranteed investment
contracts and single premium annuity contracts ("SPACs") are no longer offered
by MassMutual. Both are non-participating general investment account products.
The guaranteed investment contract provides a guarantee of principal and a fixed
rate of return for a fixed period of time. A lump sum payment is provided at
contract maturity. Guaranteed investment contracts were offered to both defined
benefit and defined contribution plans. The defined contribution version
typically provides "benefit responsiveness" by permitting withdrawals for the
payment of plan benefits and transfers to other plan options by plan
participants. The SPACs guarantee the payment of monthly pension benefits to
retirees of defined benefit plans in return for a single premium paid by the
plan sponsor.
Principal Markets, Marketing and Distribution
MassMutual's goal in the pension marketplace is to grow its defined contribution
and defined benefit businesses. MassMutual's focus is on small and medium-size
businesses, and it is beginning to penetrate the upper end of the market.
Currently MassMutual administers over 2,500 full-service defined contribution
plans, serving in excess of 280,000 employees.
MassMutual's pension products are sold through 33 pension field employees
("representatives") in 18 offices located in major cities in the United States.
The representatives distribute products through MassMutual's agents, brokers
(primarily agents of other companies) and consultants.
Competition
MassMutual's Retirement Services operations, with $17.6 billion in assets at
December 31, 1997, is among the top 50 pension asset managers in the United
States in terms of assets under management. In recent years, MassMutual 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. MassMutual believes that its diverse product
line, which includes mutual funds, flexibility in servicing levels, and use of
technology are expected to enhance MassMutual's position as an experienced
pension management entity, and that the pension market-place itself is poised
for further expansion due to increased attention focused on retirement planning
and savings.
LIFE AND HEALTH BENEFITS MANAGEMENT
On March 31, 1996, MassMutual sold MassMutual Holding Company Two, Inc., a
wholly-owned subsidiary, and its subsidiaries, including Mirus Life Insurance
Company (formerly MML Pension Insurance Company currently doing business as
"UniCARE"), which comprised MassMutual's group life and health business, to
WellPoint Health Networks, Inc. The Company, pursuant to a 1994 reinsurance
agreement, cedes its group life, accident and health business to UniCare.
MASSMUTUAL INVESTMENT GROUP
MMIG provides investment advisory services to MassMutual, its affiliates, and
various outside individual and institutional investors through MassMutual's
investment management staff and its principal subsidiaries: Babson, with $19.3
billion of AUM, which manages funds for both individual clients and
institutional investors; Charter Oak $3.0 billion of AUM;
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Cornerstone, with $2.1 billion of AUM, is a manager of and adviser on commercial
real estate; Oppenheimer, with $81.1 billion of AUM, is one of the largest
mutual fund companies in the United States; and Antares, a finance company which
lends and syndicates loans to smaller companies. MMIG's AUM has grown
substantially in recent years, reaching $152.5 billion at December 31, 1997. The
results of operations of MMIG are allocated to and reflected in the financial
results of the other product lines.
MassMutual's investment management 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
MassMutual's participating and non-participating insurance and pension products,
is divided into a number of separate 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. MassMutual 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.
REINSURANCE
MassMutual cedes all of its group life and health business to UniCARE and has
other reinsurance agreements with other insurance companies in the normal course
of business. Premiums, benefits to policyholders and provisions for future
benefits are stated net of reinsurance. MassMutual remains liable to the insured
for the payments of benefits if the reinsurer cannot meet its obligations under
the reinsurance agreements.
As a result of the Merger, MassMutual has a modified coinsurance agreement with
its subsidiary C.M. Life Insurance Company ("C.M. Life") on certain Universal
Life policies sold by C.M. Life, as well as a stop-loss reinsurance agreement on
all of C.M. Life policies.
Effective January 1, 1997 MassMutual entered into a stop-loss agreement with its
subsidiary MML Bay State Life Insurance Company ("MML Bay State") on all MML Bay
State policies.
As of December 31, 1997 MassMutual's maximum retention limit for an individual
life was $12 million. Up to an additional $6 million of coverage on the same
individual may be issued in connection with survivorship whole life policies.
MassMutual also has in effect certain catastrophic reinsurance arrangements that
provide for reimbursement of losses in excess of specified deductibles resulting
from catastrophic events.
UNCONSOLIDATED SUBSIDIARIES
MassMutual provides other financial products and services through its
subsidiaries. MassMutual has two primary insurance subsidiaries, C.M. Life,
which writes variable annuities and universal life insurance, and MML Bay State,
which writes variable life and annuity business. MassMutual's wholly-owned
subsidiary MassMutual Holding Company owns numerous non-insurance subsidiaries
including Oppenheimer and subsidiaries, which are engaged in the business of
organizing, managing and distributing registered investment companies; Babson
and subsidiaries, which provide investment management and advisory services to
investors; Cornerstone which provides advisory services on real estate
investment primarily owned by MassMutual; and Antares, which provides senior
debt financing for middle market companies, mezzanine financing and invests in
equity positions. In addition, MassMutual Holding Company owns MassMutual
International, with life insurance operations in Bermuda, Luxembourg, Chile and
Argentina; as well as other affiliates.
MassMutual accounts for the value of its investments in subsidiaries at their
underlying net equity. Operating results for such subsidiaries are reflected as
unrealized appreciation or depreciation. Net investment income is recorded by
MassMutual to the extent that dividends are declared by the subsidiaries. The
Company has a total investment in subsidiaries at December 31, 1997 of $664.6
million.
Below is summarized financial information for MassMutual's subsidiaries as of
December 31st and for the year then ended:
1997 1996 1995 1994
(in millions)
Insurance Subsidiaries
Revenues $1,021 $1,028 $1,244 $ 438
Net Income 1 9 53 23
Assets 3,660 2,619 2,443 2,008
Non-Insurance Subsidiaries
Revenues 903 651 404 391
Net Income (loss) 90 49 33 (1)
Assets 2,019 1,410 1,122 899
REGULATION
General.
MassMutual 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. MassMutual'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. MassMutual and each of its insurance subsidiaries
is 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 ex-
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amination by such agencies. MassMutual and its subsidiaries are also generally
subject to federal and state laws and regulations affecting the conduct of their
businesses.
State insurance regulatory authorities may from time to time make inquiries
regarding compliance by MassMutual with regulations regarding the conduct of its
insurance business. MassMutual endeavors to respond to such inquiries in an
appropriate way and to take corrective action if warranted. Based upon
regulatory inquiries which have been made with MassMutual, it is the opinion of
management that any regulatory proceedings which might be initiated following
such inquiries are not likely to have a material adverse effect on MassMutual's
financial position or results of operations.
The NAIC has embarked on a program of accrediting state insurance departments.
NAIC accreditation permits accredited states to conduct periodic examinations of
insurance companies domiciled in such states. Since 1994, NAIC-accredited states
may refuse to accept reports of examination of insurance companies from
unaccredited states. As a direct result, insurers domiciled in unaccredited
states may be subject to financial examination by accredited states in which
they are licensed, in addition to any examinations conducted by their
domiciliary states. The Massachusetts Division of Insurance, in which MassMutual
is domiciled, is accredited by the NAIC.
Holding Company Regulations. MassMutual is subject to the Massachusetts
Insurance Holding Company System Regulatory Act and each of its United States
insurance subsidiaries is subject to similar regulation in its state of
domicile. These acts contain certain reporting requirements as well as
restrictions on transactions between an insurer and its subsidiaries and
affiliates.
The insurance holding company acts of each state also restrict the payment of
dividends by MassMutual's United States insurance subsidiaries and require prior
regulatory approval for payments of dividends beyond specified levels.
MassMutual's insurance subsidiaries do not at present, and are not currently
expected to make, dividend payments to MassMutual.
Guaranty Funds. All 50 states of the United States, the District of Columbia and
Puerto Rico have insurance guaranty fund laws requiring insurance companies
doing business within those jurisdictions to participate in guaranty
associations which are organized to pay contractual obligations under insurance
policies (and certificates issued under group insurance policies) issued by
impaired or insolvent life insurance companies. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent insurer is
engaged. Some states permit member insurers to recover assessments paid through
full or partial premium tax offsets, usually over a period of years. Assessments
levied against MassMutual during each of the past five years have not been
material. While the amount of future assessments cannot be accurately predicted,
management believes that assessments with respect to other pending insurance
company impairments and insolvencies will not be material to the financial
position of MassMutual.
Policy and Contract Reserve Sufficiency Analysis. Massachusetts and other states
have adopted a NAIC model law and regulation with respect to policy and contract
reserve sufficiency. The law and regulation expand the annual analysis of
reserve sufficiency to include all life and health insurance reserves in
addition to interest sensitive single premium life and annuity reserves. Each
year MassMutual must submit an opinion of a qualified actuary that states that
its reserves, when considered in light of the assets held with respect to the
reserves, make good and sufficient provision for its associated contractual
obligations and related expenses. If an opinion cannot be provided, MassMutual
must set up additional reserves by moving funds from surplus. As part of its
1997 Annual Statement, MassMutual provided an actuarial opinion without
qualifications regarding these reserve requirements as of December 31, 1997.
NAIC IRIS Ratios. On the basis of statutory financial statements filed with
state insurance regulators, the NAIC calculates annually twelve financial ratios
("IRIS Ratios") to assist state regulators in monitoring the financial condition
of insurance companies. A "usual range" of results for each ratio is used as a
benchmark. Departure from the "usual range" on four or more of the ratios may
lead to inquiries from individual state insurance departments. In 1997, 1996 and
1995, no ratios for MassMutual fell outside the usual range.
Statutory Surplus and Capital. The Massachusetts Insurance Law requires
MassMutual, as a domestic mutual life insurance company, to maintain at least
$4.8 million in statutory surplus but limits the amount of surplus that
MassMutual may accumulate. See "Policyholder Dividend Requirements." In
addition, as a licensed insurer in each of the 50 states of the United States,
MassMutual is subject to the supervision of the regulators of each such state,
as are its United States insurance subsidiaries in each state in which they are
licensed to transact business. Such regulators have the discretionary authority,
in connection with the continual licensing of MassMutual and each of its
insurance subsidiaries, to limit or prohibit new issuances of business to
policyholders when, in their judgment, such regulators determine that such
insurer is not maintaining minimum statutory surplus or capital or if further
transaction of business will be hazardous to its policyholders. MassMutual does
not believe the current or anticipated levels of statutory surplus of MassMutual
or its insurance subsidiaries, and the volume of their sales of new life and
annuity policies, present a material risk that the amount of new insurance that
MassMutual or any of such insurance subsidiaries may issue will be limited.
Risk-Based Capital("RBC"). The NAIC Risk-Based Capital ("RBC") Model Act, which
became law in Massachusetts in 1995, requires life insurance companies to submit
an annual RBC Report which compares a company's total adjusted
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capital with its risk-based capital as calculated by an RBC formula, where the
formula takes into account the risk characteristics of the company's investments
and products. The formula is to be used as an early warning tool to identify
possible weakly capitalized companies for purposes of initiating further
regulatory action. The formula is not intended as a means to rank insurers. The
standards 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. Broad
confidentiality requirements have been imposed on those engaged in the insurance
business (including insurers, agents, brokers and others) as to the use and
publication of RBC data. The RBC formula includes capital requirements for four
categories of risk: asset risk, insurance risk, interest rate risk and business
risk. For each category, the capital requirement is determined by applying
specified factors to various asset, premium and reserve and other items, with
the factor being higher for those items with greater underlying risk and lower
for items with less risk. MassMutual's adjusted capital at December 31, 1997 was
substantially in excess of all RBC standards.
Policyholder Dividend Requirements. The Massachusetts Insurance Law limits the
amount of surplus that a domestic life insurance company may accumulate. In the
case of MassMutual, the amount of its surplus is limited to 12% of its reserves
for participating business, unless a greater amount is approved by the
Commissioner. Amounts of surplus in excess of the maximum allowed under the
Massachusetts Insurance Law must be distributed annually in the form of
dividends on its participating policies in accordance with dividend scales
approved annually by MassMutual's Board of Directors.
Regulation of Investments. MassMutual is subject to state laws and regulations
that require diversification of its investment portfolios and limit the amount
of investments in certain investment categories such as below investment grade
fixed income securities, equity real estate and equity investments. Failure to
comply with these laws and regulations would cause investments exceeding
regulatory limitations to be treated as non-admitted assets for purposes of
measuring statutory surplus, and, in some instances, require divestiture. At
December 31, 1997, the investments of MassMutual complied with all such laws and
regulations.
In 1996, the NAIC adopted a model law governing legal investments for life and
non-life insurers in an effort to impose uniform regulatory standards for
insurance company investments. This so-called "defined standards" version of the
model law prescribes permitted classes of legal investments (and certain
prohibited investments) and establishes qualitative and quantitative limitations
for each class of investment. At present, the defined standard version of the
model law has been approved by a limited number of states. In 1998, the NAIC
adopted a second, so-called "defined limits" version of the model law which
relies more on the exercise of prudence by insurers in their investment activity
rather than the establishment of strict quantitative limits on investments. Each
state can approve either the defined standards or defined limits version of
the model law, or a hybrid of both model laws. It is expected that one of the
foregoing versions of the model law would have to be included in each state's
insurance law in order for the state to qualify for or retain its accredited
status with the NAIC. It is uncertain how regulation of investments pursuant to
a model law will affect MassMutual, since no legislation has been introduced in
Massachusetts to adopt any version of the NAIC model law. MassMutual's
investments will not be subject to the model law, in any form, until such a law
is enacted in Massachusetts.
Financial Services Legislation. Legislation modernizing the financial services
industry is now being considered by Congress. Long-standing federal statutory
restrictions on banks engaging in the sale of insurance and financial products
traditionally provided by insurance companies or securities brokerage firms are
undergoing Congressional review and modification. In addition, the U.S. Supreme
Court held in a 1995 decision, Barnett Bank of Marion County v. Nelson, that
state laws prohibiting national banks from selling insurance in small town
locations are preempted by federal laws. The Office of the Comptroller of the
Currency also adopted a ruling in November 1996 that permits national banks,
under certain circumstances, to expand into other financial services. The extent
to which banks can sell insurance and annuities without regulation by state
insurance departments is currently being litigated in various courts in the
United States. Insurance companies such as MassMutual will face increased
competition from banks and securities firms as the regulatory barriers
separating banks, securities firms and insurance companies, and the financial
services they provide, continue to be eroded.
Mutual insurance companies such as MassMutual are under intense competitive
pressure from banks whose capital structures have increased significantly
through mergers and acquisitions, from stock insurance companies which can raise
capital through the issuance of stock offerings, and from mutual fund companies
and securities brokerage firms. MassMutual has endorsed state legislative
efforts to increase access to capital markets by a mutual insurance company
through the creation of a mutual holding company structure. Under the mutual
holding company structure, a mutual insurance company could create a mutual
holding company, of which the insurer would be a wholly-owned subsidiary. An
insurer could raise capital through the public sale of up to 49% of the stock in
the subsidiary. Few states currently permit a domestic insurer to form a mutual
holding company. Legislative initiatives in Massachusetts and other states to
permit the creation of a mutual holding company are pending.
Proposed federal legislation establishing standard guidelines to permit a mutual
insurer to move its state of domicile to a state which permits the formation of
a mutual holding company is being considered by Congress. Standard
"redomestication" guidelines would facilitate the creation of a mutual holding
company by insurers currently domiciled in states which do not permit the
creation of a mutual holding company. The redomestication guidelines are
presently being considered by Congress as part of legislation modernizing the
financial services industry.
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Federal Income Taxation. Under the Internal Revenue Code of 1986 as amended
("The Code"), MassMutual is taxed on its life insurance company taxable income.
In 1990, the Code was amended to require the capitalization and amortization of
certain policy acquisition expenses. Previously, these expenses were deducted as
incurred. In addition, MassMutual is subject to a tax on its surplus.
In addition, existing federal laws and regulations affect the taxation of life
insurance products and companies or their contractholders or policyholders and
the relative desirability of various personal investment vehicles. Congress has
from time to time considered proposals that, if enacted, would have had an
adverse impact on the Federal income tax treatment of certain individual annuity
and life insurance policies offered by MassMutual. If these proposals were
adopted, they would adversely affect the ability of MassMutual to sell such
products and could result in the surrender of existing contracts and policies.
It cannot be predicted whether future legislation will contain provisions that
alter the tax treatment of these products.
Securities Laws. MassMutual, 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. MassMutual and several direct and indirect subsidiaries, including
MML Investors Services, Inc., Cornerstone Real Estate Advisers, Inc., David L.
Babson and Company, Incorporated, Charter Oak Capital Management, Inc. and
OppenheimerFunds, Inc. are investment advisors registered under the Investment
Advisers Act of 1940. In addition, certain separate accounts and a variety of
mutual funds and other pooled investment vehicles, including the MML Series
Investment Fund, Oppenheimer Value Stock Fund, Oppenheimer Series Fund, Inc.,
six mutual funds advised by David L. Babson and Company, Incorporated, and
MassMutual Corporate Investors and MassMutual Participation Investors are
registered under the Investment Company Act of 1940. Certain insurance and
annuity contracts issued by MassMutual, MML Bay State Life Insurance Company and
C.M. Life Insurance Company are registered under the Securities Act, and MML
Investors Services, OppenheimerFunds Distributors, Inc. and Babson Securities
Corporation and other direct and indirect subsidiaries are registered as
broker-dealers under the Exchange Act.
These laws and regulations are primarily intended to benefit investors in the
securities markets and generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. MassMutual and such
subsidiaries may also be subject to similar laws and regulations in the states
and foreign countries in which they provide investment advisory services, offer
the products described above or conduct other securities related activities.
Environmental Considerations. As owners and operators of real property,
MassMutual and certain of its subsidiaries are subject to extensive federal,
state and local environmental laws and regulations. Inherent in such ownership
and operation is the risk that there may be potential environmental liabilities
and costs in connection with any required remediation of such properties.
MassMutual routinely conducts environmental assessments for real estate being
acquired for investment and before taking title through foreclosure to real
property collateralizing mortgages held by MassMutual. Based on these
environmental assessments and compliance with MassMutual's internal
environmental procedures, management believes that any costs associated with
compliance with environmental laws and regulations or any remediation of such
properties would not be material to the consolidated financial position of
MassMutual. Furthermore, although MassMutual and certain of its subsidiaries
hold equity stakes in companies that could potentially be subject to
environmental liabilities, management believes, based on its assessment of the
businesses and properties of these companies and the level of involvement of
MassMutual and its subsidiaries in the operation and management of such
companies, it would not be subject to any material environmental liabilities
with respect to these investments. There can, however, be no assurance that
unexpected environmental liabilities will not arise.
ERISA Considerations. When MassMutual and its insurance subsidiaries act as
fiduciaries for employee benefit plans governed by the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") they are subject to regulation
by the United States Department of Labor (the "DOL"). ERISA restricts the
activities of a fiduciary of an employee benefit plan covered by that law,
including an investment manager or advisor with respect to the plan's assets.
In 1993, the United States Supreme Court issued its opinion in John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank ("Harris Trust"),
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. MassMutual is unable at this time to determine with complete
certainty the overall effect of the opinion on its general account contracts and
operations. However, even if the Supreme Court's decision in Harris Trust were
otherwise deemed applicable to MassMutual, the Department of Labor has granted
Prohibited Transaction Class Exemption 95-60, a class exemption from ERISA's
prohibited transaction provisions which applies to external investments made
with general account assets. Furthermore, The Small Business Job Protection Act
of 1996 provided insurance companies some relief from the effects of the Harris
Trust decision. That law requires the Department of Labor to issue regulations
establishing guidelines and procedures under which insurance company general
account assets will not be considered plan assets on account of contracts issued
on or prior to December 31, 1998. As of the date hereof, proposed regulations
have been issued by the DOL ("Transition Pol-
34
<PAGE>
icy Regulation"). Under the law, if an insurance company complies with those
regulations, no claim may be maintained that the insurance company's general
account contained plan assets subject to fiduciary requirements of ERISA on the
basis of contracts issued on or prior to December 31, 1998. This provision,
however, is not applicable to cases filed before November 7, 1995. MassMutual
intends to comply with the Transition Policy Regulation at such time as the
regulation becomes effective.
Properties
MassMutual owns four buildings located in Springfield, Massachusetts on
approximately 70 acres, comprising its North Campus office complex and occupies
all of the approximately 1 million square feet of space in such buildings.
MassMutual also owns or leases three buildings in Hartford, Connecticut,
comprising its South Campus office complex.
The Company has approximately 150 leases for its home office and field office
operations. Such leases typically have terms of three to ten years with renewal
options. The Company's annual rental obligations under these leases aggregated
approximately $31 million at December 31, 1997.
MassMutual believes that such owned and leased properties are suitable and
adequate for its current business operations.
Employees and Agents
As of December 31, 1997, MassMutual and its subsidiaries employed approximately
7,500 persons.
MassMutual's general agents employ approximately 5,000 full-time agents and 181
retired agents who continue to be licensed to sell MassMutual products. In
addition, approximately 7,600 independent brokers are licensed to sell certain
of MassMutual's insurance products. 4,976 of the full-time agents and 107 of the
independent brokers are licensed to sell registered investment products. None of
MassMutual's employees are represented by a labor union. MassMutual believes
that its employee relations are generally good.
VIII. Experts and Additional Available Information
Experts
The audited statutory financial statements of Massachusetts Mutual Life
Insurance Company as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997 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.
The statutory statements of income, changes in policyholders' contingency
reserves and cash flows of Connecticut Mutual Life Insurance Company for the
year ended December 31, 1995 (not presented separately herein) have been audited
by Arthur Andersen LLP. This prospectus includes their report of independent
public accountants, given upon the authority of said firm as experts in giving
said reports.
Additional Available Information
The Company files registration statements, reports and informational statements
with the SEC under the Securities Act of 1933. These filings contain information
not contained in this Prospectus. Such registration statements, reports,
information statements and other information can be reviewed and copied at the
public reference facilities maintained by the Securities and Exchange
Commission, at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at
the Commission's New York and Chicago regional offices located at the Following
addresses: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York, 10046; and Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The SEC also maintains a Web site that
contains these filings. The SEC's internet address is http://www.sec.gov.
IX. Selected Financial Data
The financial information of MassMutual included in this filing has been
prepared on the basis of Statutory Accounting Practices prescribed or permitted
by the Division, and, for the pre-merger balances of Connecticut Mutual, the
Department of Insurance of the State of Connecticut. The following statutory
information for the years ended and at December 31, 1997, 1996, 1995, 1994 and
1993 has been derived from MassMutual's statutory financial statements which
have been restated as if the Merger had occurred on January 1, 1993, and have
been audited by Coopers & Lybrand L.L.P., independent accountants. Coopers &
Lybrand L.L.P. did not audit the statutory financial statements of Connecticut
Mutual for the years 1995, 1994 and 1993. Those statements were audited by other
auditors whose report has been furnished to Coopers & Lybrand L.L.P., whose
opinion insofar as it relates to Connecticut Mutual, is based solely on the
report of other auditors. The information presented below should be read in
conjunction with, and is qualified in its entirety by, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and other information included elsewhere in this filing. The results
for past accounting periods are not necessarily indicative of the results to be
expected for any future accounting period.
35
<PAGE>
Massachusetts Mutual Life Insurance Company
Selected Statutory Financial Data
(In Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Premium income $ 6,765 $ 6,329 $ 5,728 $ 6,177 $ 6,408
Net investment and other income 2,904 2,861 2,898 2,804 2,886
------- ------- ------- ------- -------
Total 9,669 9,190 8,626 8,981 9,294
------- ------- ------- ------- -------
Benefits and expenses:
Policy benefits and payments 6,597 6,048 5,152 5,450 5,653
Addition to policyholders' reserves and funds 721 855 1,205 1,263 1,291
Commissions, operating expenses and
state taxes 848 859 924 1,065 1,068
Merger restructuring costs /(1)/ - 66 44 - -
------- ------- ------- ------- -------
Total 8,166 7,828 7,325 7,778 8,012
------- ------- ------- ------- -------
Net gain before federal income taxes and dividends 1,503 1,362 1,301 1,203 1,282
Federal income taxes 284 277 206 140 212
------- ------- ------- ------- -------
Net gain from operations before dividends 1,219 1,085 1,095 1,063 1,070
Dividends to policyholders /(2)/ 919 860 819 825 818
------- ------- ------- ------- -------
Net gain from operations 300 225 276 238 252
Net realized capital gain (loss) (43) 40 (86) (164) (96)
------- ------- ------- ------- -------
Net income $ 257 $ 265 $ 190 $ 74 $ 156
======= ======= ======= ======= =======
Balance Sheet Data:
Assets:
General account $40,832 $39,783 $39,187 $38,349 $38,023
Separate account 16,803 13,564 11,310 8,531 7,811
------- ------- ------- ------- -------
Total assets $57,635 $53,347 $50,497 $46,880 $45,834
======= ======= ======= ======= =======
Liabilities:
Policyholders' reserves and funds /(3)/ $33,783 $33,342 $32,893 $32,295 $31,553
Policyholders' dividends /(4)/ 954 885 833 838 825
Long-term debt -- -- 107 153 278
Investment reserves 974 897 755 601 563
Separate account reserves and liabilities 16,803 13,563 11,310 8,530 7,810
Other liabilities 2,248 2,021 1,998 1,894 2,335
------- ------- ------- ------- -------
Total liabilities 54,762 50,708 47,896 44,311 43,364
------- ------- ------- ------- -------
Policyholders' contingency reserves (surplus) /(1)//(3)/:
Outstanding surplus notes /(5)/ 322 318 315 315 225
Designated surplus 3 3 38 36 35
Unassigned funds (surplus) /(6)/ 2,548 2,318 2,248 2,218 2,210
------- ------- ------- ------- -------
Total surplus 2,873 2,639 2,601 2,569 2,470
------- ------- ------- ------- -------
Total liabilities and policyholders'
contingency reserves (surplus) $57,635 $53,347 $50,497 $46,880 $45,834
======= ======= ======= ======= =======
Total Adjusted Capital Data /(7)/:
Total surplus $ 2,873 $ 2,639 $ 2,601 $ 2,569 $ 2,470
One-half the apportioned dividend liability /(4)/ 472 438 411 414 407
Asset Valuation Reserve 864 707 585 479 440
------- ------- ------- ------- -------
Total adjusted capital $ 4,209 $ 3,784 $ 3,597 $ 3,462 $ 3,317
======= ======= ======= ======= =======
</TABLE>
/(1)/ In 1995, charges for employee separation and transaction expenses directly
attributable to the Merger were $44 million for MassMutual (the Company prior to
the Merger) and $45 million, net of tax, for Connecticut Mutual. The expenses
incurred by MassMutual were recorded in the statement of operations and the
expenses incurred by Connecticut Mutual were recorded as a component of changes
in policyholders' contingency reserves, as permitted by each company's
regulatory authority. During 1996, an additional $66 million of merger-related
expenses was incurred and recorded in the statement of operations.
/(2)/ Dividends to policyholders are discretionary and subject to the approval
of the Company's Board of Directors.
/(3)/ During 1995 and 1994, the Company supplemented reserves for certain
disability income contracts. The effects of these changes, $108 million in 1995
and $51 million in 1994, were recorded as decreases to policyholders'
contingency reserves. As a result of the Merger, during 1996, the Company
strengthened policyholder reserves attributable to the disability income line of
business by $75 million, increased the real estate
36
<PAGE>
valuation reserves by $50 million and the prepaid pension asset by $10 million,
with the related charges being reflected in policyholders' contingency reserves.
/(4)/ Statutory accounting practices require that the liability for
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.
/(5)/ During 1994 and 1993, the Company issued Surplus Notes of $100 million at
7 1/2 percent and $250 million at 7 5/8 percent, respectively. The proceeds of
the notes, less a special non-insurance reserve for contingencies of $28 million
for 1997, $32 million for 1996 and $35 million for 1995, 1994 and 1993,
respectively, are recorded as a component of the Company's policyholders'
contingency reserves.
/(6)/ Pursuant to the Approval, any payment of interest on and principal of the
Notes, [and any redemption payment,] as approved by the Commissioner, may be
made only to the extent that MassMutual's Unassigned Funds (Surplus) reflects
sufficient funds to cover the amount of such payment.
/(7)/ Defined by the NAIC as surplus plus consolidated AVR and one-half the
consolidated apportioned dividend liability
37
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Policyholders of
Massachusetts Mutual Life Insurance Company
We have audited the accompanying statutory statements of financial position of
Massachusetts Mutual Life Insurance Company as of December 31, 1997 and 1996,
and the related statutory statements of income, changes in policyholders'
contingency reserves, and cash flows for each of the three years in the period
ended December 31, 1997. 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 did not audit the statutory
financial statements of Connecticut Mutual Life Insurance Company ("Connecticut
Mutual") for the year ended December 31, 1995, which statements reflect total
revenue and net gain from operations constituting 26% and 22% of the related
Company totals after restatement for the merger of the two companies. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Connecticut
Mutual, is based solely on the report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
As described more fully in Note 1, these financial statements were prepared in
conformity with statutory accounting practices of the National Association of
Insurance Commissioners and the accounting practices prescribed or permitted by
the Division of Insurance of the Commonwealth of Massachusetts and, for the
pre-merger balances of Connecticut Mutual, the Department of Insurance of the
State of Connecticut (collectively "statutory accounting practices"), which
practices differ from generally accepted accounting principles. The effects on
the financial statements of the variances between the statutory basis of
accounting and generally accepted accounting principles, although not reasonably
determinable at this time, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Massachusetts Mutual Life Insurance Company at December 31, 1997 and 1996, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1997.
In our opinion, based upon our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Massachusetts Mutual Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, on the
statutory basis of accounting described in Note 1.
Coopers & Lybrand L.L.P.
Springfield, Massachusetts
February 6, 1998
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION
December 31,
1997 1996
---- ----
(In Millions)
Assets:
Bonds............................................. $23,890.3 $24,299.3
Common stocks..................................... 354.7 336.6
Mortgage loans.................................... 4,863.7 4,852.8
Real estate....................................... 1,697.7 1,840.9
Other investments................................. 1,963.8 1,425.6
Policy loans...................................... 4,950.4 4,752.3
Cash and short-term investments................... 1,941.2 1,075.4
--------- ---------
39,661.8 38,582.9
Investment and insurance amounts receivable....... 1,064.9 1,102.4
Other assets...................................... 104.8 97.9
--------- ---------
40,831.5 39,783.2
Separate account assets........................... 16,803.1 13,563.5
--------- ---------
$57,634.6 $53,346.7
========= =========
See notes to statutory financial statements.
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION, Continued
December 31,
1997 1996
---- ----
(In Millions)
Liabilities:
Policyholders' reserves and funds................. $33,783.2 $33,341.5
Policyholders' dividends.......................... 954.1 885.3
Policyholders' claims and other benefits.......... 353.4 373.8
Federal income taxes.............................. 436.5 440.7
Asset valuation reserve........................... 840.6 689.2
Investment reserves............................... 132.8 208.4
Amounts due on investments puchased and
other liabilities................................ 1,457.9 1,206.1
--------- ---------
37,958.5 37,145.0
Separate account reserves and liabilities......... 16,802.8 13,563.1
--------- ---------
54,761.3 50,708.1
Policyholders' contingency reserves............... 2,873.3 2,638.6
--------- ---------
$57,634.6 $53,346.7
========= =========
See notes to statutory financial statements.
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Revenue:
Premium income............................................ $6,764.8 $6,328.6 $5,727.7
Net investment and other income........................... 2,904.4 2,861.1 2,898.4
-------- -------- --------
9,669.2 9,189.7 8,626.1
-------- -------- --------
Benefits and expenses:
Policy benefits and payments.............................. 6,597.3 6,048.2 5,152.2
Addition to policyholder's reserves and funds............. 720.8 854.7 1,205.4
Commissions and operating expenses........................ 766.1 763.5 833.7
State taxes, licenses and fees............................ 81.5 96.4 89.4
Merger restructuring costs................................ - 66.1 44.0
-------- -------- --------
8,165.7 7,828.9 7,324.7
-------- -------- --------
Net gain before federal income taxes and dividends........ 1,503.5 1,360.8 1,301.4
Federal income taxes...................................... 284.4 276.7 206.2
-------- -------- --------
Net gain from operations before dividends................. 1,219.1 1,084.1 1,095.2
Dividends to policyholders................................ 919.5 859.9 819.0
-------- -------- --------
Net gain from operations.................................. 299.6 224.2 276.2
Net realized capital gain (loss).......................... (42.5) 40.3 (85.8)
-------- -------- --------
Net income................................................ $ 257.1 $ 264.5 $ 190.4
======== ======== ========
</TABLE>
See notes to statutory financial statements.
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF CHANGES
IN POLICYHOLDERS' CONTINGENCY RESERVES
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Policyholder's contingency reserves, beginning of year.... $2,638.6 $2,600.9 $2,569.1
-------- -------- --------
Increases (decreases) due to:
Net income............................................... 257.1 264.5 190.4
Net unrealized capital gain (loss)....................... 119.1 (1.7) 88.7
Merger restructuring costs, net of fax................... - - (45.4)
Change in asset valuation and investment reserves........ (76.0) (142.4) (75.6)
Change in prior year policyholders' reserves............. (55.4) (72.2) (108.2)
Change in non-admitted assets and other.................. (10.1) (10.5) (18.1)
-------- -------- --------
234.7 37.7 31.8
-------- -------- --------
Policyholders' contingency reserves, end of year.......... $2,873.3 $2,638.6 $2,600.9
======== ======== ========
</TABLE>
See notes to statutory financial statements.
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Operating acitivites:
Net income............................................... $ 257.1 $ 264.5 $ 190.4
Addition to policyholders' reserves and funds,
net of transfers to separate accounts................... 421.3 426.7 575.8
Net realized capital (gain) loss......................... 42.5 (40.3) 85.8
Other changes............................................ (58.1) (232.8) (25.2)
--------- --------- ---------
Net cash provided by operating activities................ 662.8 418.1 826.8
--------- --------- ---------
Investing activities:
Purchases of investments and loans....................... (12,292.7) (10,171.5) (10,364.2)
Sales or maturities of investments and receipts
from repayment of loans................................. 12,545.7 8,539.3 9,671.1
--------- --------- ---------
Net cash provided by (used in) investing activities...... 253.0 (1,632.2) (693.1)
--------- --------- ---------
Financing activities:
Repayments of long-term debt............................. (50.0) (53.3) (46.4)
--------- --------- ---------
Net cash used by financing activities.................... (50.0) (53.3) (46.4)
--------- --------- ---------
Increase (decrease) in cash and short-term investments... 865.8 (1,267.4) 87.3
Cash and short-term investments, beginning of year....... 1,075.4 2,342.8 2,255.5
--------- --------- ---------
Cash and short-term investments, end of year............. $ 1,941.2 $ 1,075.4 $ 2,342.8
========= ========= =========
</TABLE>
See Notes to Statutory Financial Statements.
<PAGE>
Notes To Statutory Financial Statements
Massachusetts Mutual Life Insurance Company ("the Company") is a mutual life
insurance company and as such has no shareholders. The Company's primary
business is individual life insurance, annuity and disability income products
distributed primarily through career agents. The Company also provides a wide
range of pension products and services, as well as investment services to
individuals, corporations and institutions in all 50 states and the District of
Columbia.
On March 1, 1996, the operations of the former Connecticut Mutual Life Insurance
Company ("Connecticut Mutual") were merged into the Company. This merger was
accounted for under the pooling of interests method of accounting. For the
purposes of this presentation, these financial statements reflect historical
amounts giving retroactive effect as if the merger had occurred on January 1,
1995 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. In 1996,
merger-related expenses totaling $66.1 million were recorded in the Statutory
Statement of Income. In 1995, merger-related expenses incurred by Massachusetts
Mutual (the Company prior to the merger) of $44.0 million, were recorded in the
Statutory Statement of Income and the expenses incurred by Connecticut Mutual of
$45.4 million, net of tax, were recorded as a component of changes in
policyholders' contingency reserves, as permitted by each company's regulatory
authority. On the merger date, policyholders' reserves attributable to
disability income contracts were strengthened by $75.0 million, investment
reserves for real estate were increased by $49.8 million and net prepaid pension
assets were increased by $10.4 million with all adjustments reflected as a
change to policyholders' contingency reserves. The separate results of each
company prior to the merger for the year ended December 31, 1995, were as
follows: (a) revenue was $6,443.8 million for Massachusetts Mutual and $2,182.3
million for Connecticut Mutual; (b) net income was $160.7 million for
Massachusetts Mutual and $29.6 million for Connecticut Mutual and (c)
policyholders' contingency reserves increased by $143.7 million for
Massachusetts Mutual and decreased by $112.0 million for Connecticut Mutual.
On March 31, 1996, the Company sold MassMutual Holding Company Two, Inc., a
wholly-owned subsidiary, and its subsidiaries, including Mirus Life Insurance
Company (formerly the MML Pension Insurance Company; currently doing business as
"UniCARE"), which comprised the Company's group life and health business, to
WellPoint Health Networks, Inc. The Company received total consideration of
$402.2 million ($340.0 million in cash and $62.2 million in notes receivable)
and recognized a before tax gain of $187.9 million. The Company, pursuant to a
1994 reinsurance agreement, cedes its group life, accident and health business
to UniCARE. The Company's investment in MassMutual Holding Company Two, Inc.
amounted to $187.8 million at December 31, 1995; its gain from operations
included a $41.0 million dividend received from MIRUS in 1995. Additionally,
this investment produced an unrealized gain of $13.9 million in 1995.
1. SUMMARY OF ACCOUNTING PRACTICES
The accompanying statutory financial statements, except as to form, have been
prepared in conformity with the statutory accounting practices of the National
Association of Insurance Commissioners ("NAIC") and the accounting practices
prescribed or permitted by the Division of Insurance of the Commonwealth of
Massachusetts and, for the pre-merger balances of Connecticut Mutual, the
Department of Insurance of the State of Connecticut (collectively "statutory
accounting practices"), which practices were at one time also considered to be
in conformity with generally accepted accounting principles ("GAAP").
The accompanying statutory financial statements are different in some respects
from GAAP financial statements. The more significant differences are as follows:
(a) acquisition costs, such as commissions and other costs directly related to
acquiring new business, are charged to current operations as incurred, whereas
GAAP would require these expenses to be capitalized and recognized over the life
of the policies; (b) policy reserves are based upon statutory mortality and
interest requirements without consideration of withdrawals, whereas GAAP
reserves would be based upon reasonably conservative estimates of mortality,
morbidity, interest and withdrawals; (c) bonds are generally carried at
amortized cost whereas GAAP generally requests they be valued at fair value; (d)
deferred income taxes are not provided for book-tax timing differences as would
be required by GAAP, and (e) payments received for universal and variable life
products, variable annuities and investment related products are reported as
premium revenue, whereas under GAAP, these payments would be recorded as
deposits to policyholders' account balances.
The NAIC is currently engaged in an extensive project ("Codification") to codify
statutory accounting principles with a goal of providing a comprehensive guide
of statutory accounting principles for use by insurers in all states. This
comprehensive guide, which has not been approved by the NAIC or any state
insurance department, includes seventy-two Statements of Statutory Accounting
Principles ("SSAPs") and is expected to be effective no earlier than January 1,
1999. The effect of adopting these SSAPs shall be reported as an adjustment to
surplus on the effective date. Management is currently reviewing the impact of
Codification. However, since the SSAPs have not been finalized, the ultimate
impact cannot be determined at this time.
<PAGE>
Notes To Statutory Financial Statements (Continued)
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as disclosures of contingent assets and liabilities at the date of the
financial statements. Management must also make estimates and assumptions that
affect the amounts of revenues and expenses during the reporting period. Future
events, including changes in the levels of mortality, morbidity, interest rates
and asset valuations, could cause actual results to differ from the estimates
used in these financial statements.
The following is a description of the Company's principal accounting policies
and practices.
A. Investments
Bonds and stocks are valued in accordance with rules established by the National
Association of Insurance Commissioners. Generally, bonds are valued at amortized
cost, preferred stocks in good standing at cost, and common stocks, except for
unconsolidated subsidiaries, at fair value.
Mortgage loans are valued at unpaid principal less unamortized discount. Real
estate is valued at cost less accumulated depreciation, impairment allowances
and mortgage encumbrances. Encumbrances totaled $14.2 million in 1997 and $27.3
million in 1996. 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 and affiliates, joint ventures and
other forms of partnerships are included in other investments on the Statutory
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 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 using the grouped method
over the remaining life of the investment sold or over the remaining life of the
underlying asset. Net realized after tax capital gains of $95.4 million in 1997,
$73.1 million in 1996, and net realized after tax capital losses of $130.7
million in 1995 were charged to the Interest Maintenance Reserve. Amortization
of the Interest Maintenance Reserve into net investment income amounted to $31.0
million in 1997, $26.9 million in 1996, and $5.0 million in 1995.
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 Statutory 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 Statutory Statement of Financial Position by an
adjustment to policyholders' contingency reserves.
<PAGE>
Notes To Statutory Financial Statements (Continued)
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 $8,077.9 million and $9,073.8 million at December 31,
1997 and 1996, respectively (fair value of $8,250.0 million and $9,324.6 million
at December 31, 1997 and 1996, respectively 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.
The Company made certain changes in the valuation of policyholders' reserves of
$55.4 million in 1997 and $72.2 million in 1996. The effects of these changes
were recorded as a decrease to policyholders' contingency reserves.
E. Premium and Related Expense Recognition
Life insurance premium revenue is recognized annually on the anniversary date of
the policy. Annuity premium is recognized when received. 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 when incurred.
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. The liability
for policyholders' dividends is equal to the estimated amount of dividends to be
paid in the following calendar year.
G. Cash and Short-term Investments
For purposes of the Statutory Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of twelve months or less to
be cash and short-term investments.
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.
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 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, 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, to holders of record on the
preceding May 1 or November 1, respectively. Interest expense is not recorded
until approval for payment is received from the Commissioner. Interest of $26.6
million was approved and paid in 1997, 1996 and 1995.
<PAGE>
Notes To Statutory Financial Statements (Continued)
The proceeds of the notes, less a $28.3 million reserve in 1997, and a $32.2
million reserve in 1996 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 Statutory
Statement of Financial Position.
3. EMPLOYEE BENEFIT PLANS
The Company's employee benefit plans include plans in place for the employees of
Massachusetts Mutual and Connecticut Mutual prior to the merger. Employees
previously covered by the Connecticut Mutual pension plans will continue
coverage under these plans. All other employees, including employees hired after
the merger date, will be covered by the Massachusetts Mutual benefit plans.
A. Pension
The Company has two non-contributory defined benefit plans covering
substantially all of its employees. One plan includes employees previously
employed by Connecticut Mutual; the other includes all other eligible 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 these plans following Financial Accounting Standards
Board Statement No. 87, "Employers' Accounting for Pensions." Accordingly, as
permitted by the Massachusetts Division of Insurance, the Company has recognized
a pension asset of $157.4 million and $97.2 million at December 31, 1997 and
1996, respectively. On the merger date, the accounting for Connecticut Mutual
pension plans was conformed to the Company's policy of recording pension plan
assets and liabilities, resulting in a $10.4 million increase in policyholders'
contingency reserves. 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, 1997, 1996 and 1995. The assets of the plans are invested in the Company's
general account and separate accounts.
The benefit status of the defined benefit plans as of December 31 is as follows:
1997 1996
---- ----
(In Millions)
Accumulated benefit obligation $ 663.1 $ 611.5
Vested benefit obligation 653.8 606.5
Projected benefit obligation 713.9 665.5
Plan assets at fair value 1,154.2 1,201.7
The following assumptions were used in determining the actuarial present value
of both the accumulated and projected benefit obligations.
MassMutual Connecticut Mutual
Plan Plan
---- ----
Discount rate - 1997 7.25% 7.25%
Discount rate - 1996 7.75 7.75
Increase in future compensation levels 4.00 5.00
Long-term rate of return on assets 10.00 9.00
In 1997, there was a significant reduction in plan participants in the
Connecticut Mutual Plan which resulted in recognition of a pension plan
curtailment gain of $10.7 million.
As a result of the sale of Mirus Life Insurance Company, there was a significant
reduction in plan participants which resulted in recognition of a pension plan
curtailment gain of $15.3 million in 1996.
The Company also has defined contribution plans for employees and agents. The
expense credited to operations for all pension plans is $38.9 million in 1997,
$32.7 million in 1996 and $10.9 million in 1995.
<PAGE>
Notes To Statutory Financial Statements (Continued)
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. The Company adopted the National Association of
Insurance Commissioners' accounting standard for post-retirement life and health
benefit costs, requiring these benefits to be accounted for using the accrual
method for employees and agents eligible to retire and current retirees.
The following assumptions were used in determining the accumulated
postretirement benefit liability.
MassMutual Connecticut Mutual
Plan Plan
---- ----
Discount - 1997 7.25% 7.25%
Discount - 1996 7.75 7.75
Assumed increases in medical cost
rates in the first year 6.25 - 6.75 9.50
declining to 4.75 5.00
within 5 years 5 years
The initial transition obligation of $137.9 million is being amortized over
twenty years through 2012. At December 31, 1997 and 1996, the net unfunded
accumulated benefit obligation was $124.2 million and $124.1 million,
respectively, for employees and agents eligible to retire or currently retired
and $34.7 million and $33.8 million, respectively, 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
$21.7 million and $23.0 million at December 31, 1997 and 1996, respectively.
As a result of the sale of Mirus Life Insurance Company, there was a significant
reduction in plan participants which resulted in recognition of a life and
health plan curtailment loss of $13.9 million in 1996.
The expense for 1997, 1996 and 1995 was $16.5 million, $17.6 million, and $22.9
million, respectively. A one percent increase in the annual assumed increase in
medical cost rates would increase the 1997 accumulated postretirement benefit
liability and benefit expense by $10.9 million and $1.4 million, respectively.
4. RELATED PARTY TRANSACTIONS
Pursuant to two 1994 reinsurance agreements with Mirus Life Insurance Company
(Mirus) whereby the Company assumed all of the single premium immediate annuity
business written by Mirus and ceded all of its group life, accident and health
business to Mirus. A gain from operations of this business was reflected in 1995
as a $41.0 million dividend received from Mirus, which was recorded as net
investment income on the Statutory Statement of Income. As previously discussed,
on March 31, 1996, the Company sold MassMutual Holding Company Two, Inc. a
wholly-owned subsidiary, and its subsidiaries, including Mirus Life Insurance
Company to WellPoint Health Networks, Inc.
The Company has a modified coinsurance quota-share reinsurance agreement with a
wholly-owned subsidiary, C.M. Life Insurance Company, whereby the Company
assumes 75% of the premiums on certain universal life policies issued by C.M.
Life. The Company pays a stipulated expense allowance, death and surrender
benefits, and a modified coinsurance adjustment. Reserves for payment of future
benefits are retained by C.M. Life.
5. FEDERAL INCOME TAXES
Provision for federal income taxes is based upon the Company's best estimate of
its current tax liability. No deferred tax effect is recognized for temporary
differences that may exist between financial reporting and taxable income.
Accordingly, the reporting of equity tax (essentially a reduction in the
deduction for policyholder dividends) and miscellaneous temporary differences,
such as reserves, acquisition costs and restructuring costs, resulted in
effective tax rates which differ from the statutory tax rate.
The Internal Revenue Service has completed examining the Company's income tax
returns through the year 1992 for Massachusetts Mutual and 1991 for Connecticut
Mutual, and is currently examining Massachusetts Mutual for the years 1993 and
1994, and Connecticut Mutual for the years 1992 through 1995. The Company
believes any adjustments resulting from such examinations will not materially
affect its financial statements.
<PAGE>
Notes to Statutory Financial Statements (Continued)
Components of the formula authorized by the Internal Revenue Service for
determining deductible policyholder dividends have not been finalized for 1997
or 1996. The Company records the estimated effects of anticipated revisions in
the Statutory Statement of Income.
The Company plans to file its 1997 federal income tax return on a consolidated
basis with its life and non-life affiliates with the exception of C.M. Life
Insurance Company. The Company and its eligible life and non-life affiliates
are subject to a written tax allocation agreement, which allocates the group's
consolidated tax liability for payment purposes. Generally, the agreement
provides that members with losses shall be compensated for the use of their
losses and credits by other members.
The Company made federal tax payments of $353.4 million in 1997, $330.7 million
in 1996 and $147.3 million in 1995.
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. In the
normal course of business, the Company enters into commitments to purchase
privately placed bonds and to issue mortgage loans.
A. Bonds
The carrying value and estimated fair value of bonds are as follows:
December 31, 1997
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
(In Millions)
U.S. Treasury securities $ 6,241.0 $ 470.5 $10.3 $ 6,701.2
and obligations of U.S.
government corporations
and agencies
Debt securities issued by
foreign governments 83.5 4.4 3.0 84.9
Mortgage-backed securities 3,390.8 187.9 9.0 3,569.7
State and local governments 361.9 23.9 .6 385.2
Corporate debt securities 12,148.9 765.2 46.9 12,867.2
Utilities 871.8 100.1 2.2 969.7
Affiliates 792.4 2.8 1.0 794.2
--------- -------- ----- ---------
TOTAL $23,890.3 $1,554.8 $73.0 $25,372.1
========= ======== ===== =========
December 31, 1996
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
(In Millions)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 8,042.6 $ 344.0 $ 56.3 $ 8,330.3
Debt securities issued by 95.2 10.2 .5 104.9
foreign governments
Mortgage-backed securities 3,014.0 119.0 43.3 3,089.6
State and local governments 173.2 13.1 2.1 184.2
Corporate debt securities 11,675.2 528.0 133.3 12,069.9
Utilities 975.0 87.0 18.5 1,043.5
Affiliates 324.1 4.3 3.5 324.9
--------- -------- ------ ---------
TOTAL $24,299.3 $1,105.6 $257.5 $25,147.3
========= ======== ====== =========
<PAGE>
Notes To Statutory Financial Statements (Continued)
The carrying value and estimated fair value of bonds at December 31, 1997 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Estimated
Carrying Fair
Value Value
----- -----
(In Millions)
Due in one year or less $ 519.7 $ 523.0
Due after one year through five years 3,972.1 4,104.6
Due after five years through ten years 7,423.3 7,838.1
Due after ten years 5,254.9 5,888.1
--------- ---------
17,170.0 18,353.8
Mortgage-backed securities, including
securities guaranteed by the U.S.
Government 6,720.3 7,018.3
--------- ---------
TOTAL $23,890.3 $25,372.1
========= =========
Proceeds from sales of investments in bonds were $11,427.8 million during 1997,
$6,390.7 million during 1996 and $8,068.8 million during 1995. Gross capital
gains of $200.7 million in 1997, $188.8 million in 1996 and $255.5 million in
1995 and gross capital losses of $68.8 million in 1997, $255.5 million in 1996
and $67.1 million in 1995 were realized on those sales, portions 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 $145.5 million in 1997 and
$150.8 million in 1996, 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 $250.3 million in 1997 and $249.2
million in 1996.
C. Mortgages
The fair value of mortgage loans, as determined from a pricing matrix for
performing loans and the estimated underlying real estate value for
non-performing loans, approximated carrying value.
The Company had restructured loans with book values of $202.3 million, and
$383.5 million at December 31, 1997 and 1996, respectively. These loans
typically have been modified to defer a portion of the contracted interest
payments to future periods. Interest deferred to future periods totaled $5.1
million in 1997, $2.2 million in 1996 and $2.5 million in 1995.
D. Other
The carrying value of investments which were non-income producing for the
preceding twelve months was $5.7 million and $23.1 million at December 31, 1997
and 1996, respectively. The Company made voluntary contributions to the Asset
Valuation Reserve of $6.8 million 1996. No additional voluntary contribution to
the Asset Valuation Reserve was made in 1997.
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, primarily to reduce interest rate and
duration imbalances determined in asset/liability analyses. The fair values of
these instruments, described below, which are not recorded in the financial
statements, are based upon market prices or prices obtained from brokers. The
Company does not hold or issue these financial instruments for trading purposes.
<PAGE>
Notes To Statutory Financial Statements (Continued)
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 enters into financial futures contracts for the purpose of managing
interest rate exposure. 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, 1997 and
1996, the Company did not have any open financial futures contracts.
The Company utilizes 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 an exchange, at
specified intervals, between streams of variable rate and fixed rate interest
payments calculated by reference to an agreed-upon notional principal amount.
Net amounts receivable and payable are accrued as adjustments to interest income
and included in investment and insurance amounts receivable on the Statutory
Statement of Financial Position. Gains and losses realized on the termination of
contracts are amortized through the Interest Maintenance Reserve over the
remaining life of the associated contract. At December 31, 1997 and 1996, the
Company had swaps with notional amounts of $3,220.2 million and $2,090.3
million, respectively. The fair values of these instruments were $20.9 million
at December 31, 1997 and $14.8 million at December 31, 1996.
Options grant the purchaser the right to buy or sell a security or enter into a
derivative transaction at a stated price within a stated period. The Company's
option contracts have terms of up to fifteen years. The amounts paid for options
purchased are included in other investments on the Statutory Statement of
Financial Position. Gains and losses on these contracts are recorded at the
expiration or termination date and are amortized through the Interest
Maintenance Reserve over the remaining life of the option contract. At December
31, 1997 and 1996, the Company had option contracts with notional amounts of
$5,388.2 million and $1,928.4 million, respectively. The Company's credit risk
exposure was limited to the unamortized costs of $59.0 million and $18.1
million, which had fair values of $99.6 million and $19.2 million at December
31, 1997 and 1996, respectively.
Interest rate cap agreements grant the purchaser the right to receive the excess
of a referenced interest rate over a given rate calculated by reference to an
agreed upon notional amount. Interest rate floor agreements grant the purchaser
the right to receive the excess of a given rate over a referenced interest rate
calculated by reference to an agreed upon notional amount. Amounts paid for
interest rate caps and floors are amortized into interest income over the life
of the asset on a straight-line basis. Unamortized costs are included in other
investments on the Statutory Statement of Financial Position. Amounts receivable
and payable are accrued as adjustments to interest income and included in the
Statutory Statement of Financial Position as investment and insurance amounts
receivable. Gains and losses on these contracts, including any unamortized cost,
are recognized upon termination and are amortized through the Interest
Maintenance Reserve over the remaining life of the associated cap or floor
agreement. At December 31, 1997 and 1996, the company had agreements with
notional amounts of $3,348.6 million and $3,859.6 million, respectively. The
Company's credit risk exposure on these agreements is limited to the unamortized
costs of $18.2 million and $22.0 million at December 31, 1997 and 1996,
respectively. The fair values of these instruments were $23.4 million and $15.2
million at December 31, 1997 and 1996, respectively.
The Company utilizes asset swap agreements to reduce exposures, such as currency
risk and prepayment risk, built into certain assets acquired. Cross-currency
interest rate swaps allow investment in foreign currencies, increasing access to
additional investment opportunities, while limiting foreign exchange risk. The
net cash flows from asset and currency swaps are recognized as adjustments to
the underlying assets' interest income. Gains and losses realized on the
termination of these contracts adjusts the bases of the underlying asset.
Notional amounts relating to asset and currency swaps totaled $225.6 million and
$364.7 million at December 31, 1997 and 1996, respectively. The fair values of
these instruments were an unrecognized loss of $1.7 million at December 31, 1997
and an unrecognized gain of $7.8 million at December 31, 1996.
<PAGE>
Notes To Statutory Financial Statements (Continued)
Equity swap agreements are utilized to hedge exposure to market risk on public
and private equity positions held in the Company's investment portfolio. Under
equity swaps, the Company agrees to an exchange, at points in time specified in
each contract, between streams of variable or fixed rate interest payments and
the change in an underlying index, equity or basket of equities. The change in
the underlying item is calculated by reference to the level of such item
specified in the agreement. Net amounts receivable and payable are accrued as
adjustments to interest income and included in investment and insurance amounts
receivable on the Statutory Statement of Financial Position. Changes in the
value of these contracts are recorded as realized gains and losses in the
Statutory Statement of Income when contracts are closed. At December 31, 1997
and 1996, the Company had equity swap contracts with notional amounts of $160.0
million and $149.2 million, respectively. The fair values of these instruments
were an unrealized loss of $5.1 million at December 31, 1997 and an unrealized
gain of $11.9 million at December 31, 1996.
The Company enters into forward U.S. Treasury commitments for the purpose of
managing interest rate exposure. The Company generally does not take delivery on
forward commitments. These commitments are instead settled with offsetting
transactions. Gains and losses on forward commitments are recorded when the
commitment is closed and amortized through the Interest Maintenance Reserve over
the remaining life of the asset. At December 31, 1997 and 1996, the Company had
U. S. Treasury purchase commitments which will settle during the following year
with contractual amounts of $1,100.7 million and $1,639.4 million with fair
values of $1,117.6 million and $1,627.4 million, respectively including net
unrealized gains of $16.9 million at December 31, 1997 and net unrealized losses
of $12.0 million at December 31, 1996.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to derivative financial instruments. This exposure is limited
to contracts with a positive fair value. The amounts at risk in a net gain
position were $146.7 million and $53.9 million at December 31, 1997 and 1996,
respectively. The Company monitors exposure to ensure counterparties are credit
worthy and concentration of exposure is minimized. Additionally, contingent
collateral positions have been obtained with counterparties when considered
prudent.
8. REINSURANCE
The Company cedes all of its group life and health business to UniCARE and has
other reinsurance agreements with other insurance companies in the normal course
of business. Premiums, benefits to policyholders and provisions for future
benefits are stated net of reinsurance. The Company remains liable to the
insured for the payment of benefits if the reinsurer cannot meet its obligations
under the reinsurance agreements. Premiums ceded were $294.6 million in 1997,
$793.5 million in 1996 and $904.1 million in 1995.
9. LIQUIDITY
The withdrawal characteristics of the policyholders' reserves and funds,
including separate accounts, and the invested assets which support them at
December 31, 1997 are illustrated below:
(In Millions)
Total policyholders' reserves and funds and
separate account liabilities $50,804.2
Not subject to discretionary withdrawal (5,283.7)
Policy loans (4,950.4)
---------
Subject to discretionary withdrawal $40,570.1
=========
Total invested assets, including separate $56,464.7
Policy loans and other invested assets (14,823.3)
---------
Marketable investments $41,641.4
=========
10. BUSINESS RISKS AND CONTINGENCIES
The Company is subject to insurance guaranty fund laws in the states in which it
does business. These laws assess insurance companies amounts to be used to pay
benefits to policyholders and claimants of insolvent insurance companies. Many
states allow these assessments to be credited against future premium taxes. The
Company believes such assessments in excess of amounts accrued will not
materially affect its financial position, results of operations or liquidity. In
1997 and 1996, the Company elected not to admit $21.4 million and $15.3 million,
respectively, of guaranty fund premium tax offset receivables relating to prior
assessments.
<PAGE>
Notes To Statutory Financial Statements (Continued)
The Company is involved in litigation arising in and out of the normal course of
its business. Management intends to defend these actions vigorously. While the
outcome of litigation cannot be foreseen with certainty, it is the opinion of
management, after consultation with legal counsel, that the ultimate resolution
of these matters will not materially affect its financial position, results of
operations or liquidity.
11. RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with the current
year presentation.
12. SUBSIDIARIES AND AFFILIATED COMPANIES
A summary of ownership and relationship of the Company and its subsidiaries and
affiliated companies as of December 31, 1997 is illustrated below. The Company
provides management or advisory services to these companies. Subsidiaries are
wholly-owned, except as noted.
Parent
- ------
Massachusetts Mutual Life Insurance Company
Subsidiaries of Massachusetts Mutual Life Insurance Company
- -----------------------------------------------------------
C.M. Assurance Company
C.M. Benefit Insurance Company
C.M. Life Insurance Company
MassMutual Holding Company
MassMutual Holding Company Two, Inc. (Sold in March 1996)
MassMutual of Ireland, Limited
MML Bay State Life Insurance Company
MML Distributors, LLC
Subsidiaries of MassMutual Holding Company
------------------------------------------
GR Phelps, Inc.
MassMutual Holding Trust I
MassMutual Holding Trust II
MassMutual Holding MSC, Inc.
MassMutual International, Inc.
MassMutual Reinsurance Bermuda (Sold in December 1996)
MML Investor Services, Inc.
State House One (Liquidated in December 1996)
Subsidiaries of MassMutual Holding Trust I
------------------------------------------
Antares Leveraged Capital Corporation -- 98.5%
Charter Oak Capital Management, Inc. -- 80.0%
Cornerstone Real Estate Advisors, Inc.
DLB Acquisition Corporation -- 84.8%
Oppenheimer Acquisition Corporation -- 88.55%
Subsidiaries of MassMutual Holding Trust II
-------------------------------------------
CM Advantage, Inc. -- (Liquidated in December 1997)
CM International, Inc.
CM Property Management, Inc. -- (Liquidated in December 1997)
High Yield Management, Inc.
MMHC Investments, Inc.
MML Realty Management
Urban Properties, Inc.
Westheimer 335 Suites, Inc.
<PAGE>
Notes To Statutory Financial Statements (Continued)
Subsidiaries of MassMutual International
----------------------------------------
Compensa de Seguros de Vida S.A. -- 33.5%
MassLife Seguros de Vida (Argentina) S. A.
MassMutual International (Bermuda) Ltd.
Mass Seguros de Vida (Chile) S. A. -- 33.5%
MassMutual International (Luxemburg) S. A.
MassMutual Holding MSC, Incorporated
MassMutual/Carlson CBO N. V. -- 100%
MassMutual Corporate Value Limited -- 46%
9048 -- 5434 Quebec, Inc.
Affiliates of Massachusetts Mutual Life Insurance Company
- ---------------------------------------------------------
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
<PAGE>
PART II. INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
-------------------------------------------
Not applicable.
Item 15. Indemnification of Directors and Officers
-----------------------------------------
MassMutual directors and officers are indemnified under its by-laws. No
indemnification is provided with respect to any liability to any entity which
is registered as an investment company under the Investment Company Act of
1940 or to the security holders thereof, where the basis for such liability
is willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of office.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
MassMutual pursuant to the foregoing provisions, or otherwise, MassMutual has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
MassMutual of expenses incurred or paid by a director, officer or controlling
person of MassMutual in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, MassMutual will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
Exhibit Number Description Method of Filing
1(a) Form of Underwriting Agreement *
with MML Investors Services, Inc.
1(b) Form of Underwriting Agreement **
with MML Distributors, LLC
4 Form of Individual Annuity Contract Filed herewith
5 Opinion re legality Filed herewith
23(i) Consent of Coopers & Lybrand L.L.P. Filed herewith
Independent Accountants
Consent of Arthur Andersen LLP Filed herewith
Independent Accountants
23(ii) Financial Statement Schedules Filed herewith
24 Powers of Attorney ***
27 Financial Data Schedule Filed herewith
II-1
<PAGE>
*Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement File No. 33-84802, filed and effective May 1, 1996.
**Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement File No. 33-84802, filed and effective May 1, 1997.
***Incorporated by reference to Registration Statement File No. 333-22557,
filed on February 28, 1997.
Item 17. Undertakings
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement, including (but not limited to) any
addition or deletion of a managing underwriter;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has caused this Post-Effective Amendment
No. 4 to Registration Statement No. 33-84802 to be signed on its behalf by the
undersigned thereunto duly authorized, all in the city of Springfield and the
Commonwealth of Massachusetts, on the 24th day of March, 1998.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: /s/ Thomas B. Wheeler*
-----------------------
Thomas B. Wheeler, Chief Executive
Officer Massachusetts Mutual Life Insurance Company
/s/ Richard M. Howe On March 31, 1998, as Attorney-in-Fact pursuant to
- ------------------- powers of attorney.
*Richard M. Howe
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 4 to Registration Statement No. 33-84802 has been signed by the following
persons in the capacities and on the duties indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas B. Wheeler* Chief Executive Officer and March 31, 1998
- ---------------------- Chairman of the Board
Thomas B. Wheeler
/s/ John J. Pajak* President, Chief Operating Officer March 31, 1998
- ------------------ and Director
John J. Pajak
/s/ Joseph M. Zubretsky* Executive Vice President, March 31, 1998
- ------------------------ Chief Financial Officer &
Joseph M. Zubretsky Chief Accounting Officer
/s/ Roger G. Ackerman Director --
- ---------------------
Roger G. Ackerman
/s/ James R. Birle* Director March 31, 1998
- -------------------
James R. Birle
/s/ Gene Chao* Director March 31, 1998
- --------------
Gene Chao, Ph.D.
/s/ Patricia Diaz Dennis* Director March 31, 1998
- -------------------------
Patricia Diaz Dennis
/s/ Anthony Downs* Director March 31, 1998
- ------------------
Anthony Downs
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
/s/ James L. Dunlap* Director March 31, 1998
- --------------------
James L. Dunlap
/s/ William B. Ellis* Director March 31, 1998
- ---------------------
William B. Ellis, Ph.D.
/s/ Robert M. Furek* Director March 31, 1998
- --------------------
Robert M. Furek
/s/ Charles K. Gifford* Director March 31, 1998
- -----------------------
Charles K. Gifford
/s/ William N. Griggs* Director March 31, 1998
- ----------------------
William N. Griggs
/s/ George B. Harvey* Director March 31, 1998
- ---------------------
George B. Harvey
/s/ Barbara B. Hauptfuhrer* Director March 31, 1998
- ---------------------------
Barbara B. Hauptfuhrer
/s/ Sheldon B. Lubar* Director March 31, 1998
- ---------------------
Sheldon B. Lubar
/s/ William B. Marx, Jr.* Director March 31, 1998
- -------------------------
William B. Marx, Jr.
/s/ John F. Maypole* Director March 31, 1998
- --------------------
John F. Maypole
/s/ Alfred M. Zeien* Director March 31, 1998
- --------------------
Alfred M. Zeien
/s/ Richard M. Howe On March 31, 1998, as Attorney-in-Fact pursuant
- ------------------- to powers of attorney.
*Richard M. Howe
</TABLE>
<PAGE>
LIST OF EXHIBITS
Exhibit 4 Individual Annuity Contract
Exhibit 5 Opinion re legality
Exhibit 23(i) Consent of Coopers & Lybrand L.L.P.
Independent Accountants
Consent of Arthur Andersen LLP
Independent Accountants
Exhibit 23(ii) Financial Statement Schedules
Exhibit 27 Financial Data Schedule
<PAGE>
EXHIBIT 4
[LOGO OF MASS MUTUAL APPEARS HERE]
Massachusetts Mutual Life Insurance Company
Springfield MA 01111-0001
- -----------------
Deferred Variable Annuity
Contract
With Oppenheimer Variable Account Funds
and MML Series Investment Funds - Include
Fixed Interest Account with Market-Value
Adjustment
- --------------------------------------------------------------------------------
Policy Number
Insured
Face Amount
- --------------------------------------------------------------------------------
Dear Contract Owner:
READ YOUR CONTRACT CAREFULLY. We have used examples to explain some of the
provisions. These examples do not reflect the actual amounts or status of this
contract. As you read through the contract, remember the words "we," "us," and
"our" refer to Massachusetts Mutual Life Insurance Company.
We will pay the maturity benefit to the Payee when this contract matures if the
Annuitant and Owner are living at that time. If the Annuitant or Owner dies
before this contract matures, we will pay the death benefit to the Beneficiary
when due proof of the death is received at our Service Center. Either payment is
subject to the terms of this contract, which are contained on this and the
following pages.
For service or information on this contract, contact our Service Center.
YOU HAVE A RIGHT TO RETURN THIS CONTRACT. If you decide not to keep this
contract, return it within ten days after you receive it. It may be returned by
delivering or mailing it to our Service Center. Then, the contract will be as
though it had never been issued. We will promptly refund the accumulated value
of this contract on the date we receive it, plus any deductions made from the
purchase payments.
Signed for Massachusetts Mutual Life Insurance Company at Springfield,
Massachusetts.
Sincerely yours,
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
President Secretary
This Contract provides that: Flexible purchase payments may be made, while the
Annuitant and Owner are living, to the date
this contract matures.
A death benefit is payable if the Annuitant or
Owner dies before this contract matures.
A monthly life income is payable beginning on the
date this contract matures if the Annuitant and
Owner are living at that time.
This Contract is not participating. It does not provide for the payment of
dividends.
All values and payments based on the investment performance of the Separate
Account shown on the Schedule Page are variable and not guaranteed as to dollar
amount. All amounts accumulated in MVA segments of the Fixed Account shown on
the Schedule Page may be subject to market-value adjustment on withdrawal, which
may result in upward or downward adjustments; however, no adjustment is made on
withdrawal during the last 30 days of the guarantee period.
<PAGE>
Contract Summary
This Summary briefly describes some of the major contract provisions. Since it
does not go into detail, the actual provisions will control. See those
provisions for full information and any limits that may apply. The "Where To
Find It" on the inside of the back cover shows where these provisions may be
found.
We will pay a maturity benefit if the Annuitant and Owner are living on the
maturity date and the contract is in force at that time. We will pay a death
benefit if the Annuitant or Owner dies before this contract matures and while it
is in force. "In force" means that the contract has not terminated. Since this
is a variable annuity contract, neither of these benefits is guaranteed as to
dollar amount. Instead, all values and benefits that depend on the investment
performance of the Separate Account shown on the Schedule Page are variable and
not guaranteed as to dollar amount.
Purchase payments for this contract are flexible. Therefore, after the first
purchase payment has been paid, there is no requirement that any specific amount
of purchase payment be made on any date. Instead, within the limits stated in
the contract, any amount may be paid on any date before the maturity date while
the Annuitant and Owner are living.
Rights available under this contract include the rights to:
. Assign this contract;
. Change the Owner, the Payee, or any Beneficiary;
. Redeem this contract;
. Make partial redemptions;
. Change the date this contract matures;
. Allocate purchase payments among the segments of the Fixed Account and
the divisions of the Separate Account; and
. Transfer values among the segments of the Fixed Account and the
divisions of the Separate Account.
This contract also includes a number of Payment Options. These provide
alternative ways to pay the maturity value, the death benefit, or the amount
payable upon redemption of this contract.
<PAGE>
THE SCHEDULE PAGE
This page shows specific information about this contract and is referred to
throughout the contract.
CONTRACT NUMBER 0 000 000
ANNUITANT John A Doe
AMOUNT Monthly Income Provided By Maturity Value
Issue Date JUL 01 1994
Contract Date JUL 01 1994
Maturity Date JUL 01 2024
Annuitant's age on Contract Date 35 MALE
- --------------------------------------------------------------------------------
BASIC CONTRACT INFORMATION
--------------------------
Plan
----
Deferred Variable Annuity
- --------------------------------------------------------------------------------
SERVICE CENTER INFORMATION
--------------------------
Mailing Address: Telephone Number: 1-800-NNN-NNNN
-----------------------
-----------------------
NNNNN-NNNN
---------------
We will send written notice of any change in the mailing address or telephone
number of the Service Center.
- --------------------------------------------------------------------------------
PURCHASE PAYMENT INFORMATION
----------------------------
First Purchase Payment See confirmation notice
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT INFORMATION (See The Separate Account
---------------------------- provision in Part 3.)
The Separate Account referred to in this contract is Massachusetts Mutual
Variable Annuity Separate Account ???.
<TABLE>
<CAPTION>
The divisions of the Separate Account are:
<S> <C> <C>
MML Money Market Division Oppenheimer Money Division Oppenheimer Multiple Strategies Division
MML Managed Bond Division Oppenheimer Bond Division Oppenheimer Growth Division
MML Blend Division Oppenheimer Strategic Bond Division Oppenheimer Capital Appreciation Division
MML Equity Division Oppenheimer High Income Division Oppenheimer Global Securities Division
</TABLE>
Each division invests in a corresponding Fund. The investment strategy and
objectives for each Fund are given in the Prospectus.
- --------------------------------------------------------------------------------
FIXED ACCOUNT INFORMATION (See The Fixed Account provision in Part 3.)
-------------------------
For each segment of the Fixed Account, the guaranteed rate of interest will be
at least 3%.
- --------------------------------------------------------------------------------
OTHER INFORMATION
-----------------
Owner and Beneficiary - see application attached to this contract.
-1-
<PAGE>
Part 1. The Basics Of This Contract
In this Part, we discuss some basic concepts that
are necessary to understand this contract.
The Parties Involved - The Owner is the person who owns this contract, as
Owner, Joint Owner, shown on our records.
Annuitant, Beneficiary,
Irrevocable Beneficiary, A Joint Owner may be named on this contract. In
Payee this case, the Owner and the Joint Owner will have
equal and undivided interest in this contract.
While a Joint Owner is named under this contract:
. All rights and benefits conditioned on the
Owner living are conditioned on both the
Owner and the Joint Owner living;
. Either the Owner or the Joint Owner may
exercise an Owner right with the consent,
satisfactory to us, of the other;
. All notices, any tax forms, and any other
mailings about this contract will be sent
to the Owner's mailing address; and
. Any benefit payable upon the death of the
Owner will be payable upon the death of the
Owner or the Joint Owner, whomever dies
first.
The Annuitant is the person on whose life this
contract is issued. Payment of the maturity benefit
will be made if that person is living when this
contract matures. The Annuitant may be the Owner of
this contract, or someone else may be the Owner; in
the latter case, payment of the maturity benefit
will be made if both the Annuitant and Owner are
living when this contract matures.
Example: You buy a contract on your own life and
name yourself as Owner. In this case, you
are both the Annuitant and Owner. If you
buy a contract on your spouse's life and
name yourself as Owner, then the Annuitant
and Owner are different people.
A Beneficiary is any person named on our records to
receive death proceeds after the Annuitant or Owner
dies. There may be different classes of
Beneficiaries, such as primary and secondary. These
classes set the order of payment. There may be more
than one Beneficiary in a class.
Example: Debbie is named as primary (first)
Beneficiary. Anne and Scott are named as
Beneficiaries in the secondary class. If
Debbie is alive when the Annuitant dies,
she receives any death benefit. But if
Debbie is dead and Anne and Scott are
alive when the Annuitant dies, Anne and
Scott receive any death benefit.
Any Beneficiary may be named an Irrevocable
Beneficiary. An Irrevocable Beneficiary is one
whose consent is needed to change the named
Beneficiary. Also, this Beneficiary must consent to
the exercise of other contract rights.
The Payee is the person named on our records to
receive the maturity benefit when this contract
matures. The Annuitant is the Payee unless the
Owner names another Payee.
Dates - Contract Date, Two important dates shown on the Schedule Page are
Contract Anniversary the Contract Date and the Issue Date.
Date, Contract Year,
Issue Date, Maturity The Contract Date is the starting point for
Date determining Contract Anniversary Dates and Contract
Years. The first Contract Anniversary Date is one
year after the Contract Date. The period from the
Contract Date to the first Contract Anniversary
Date, or from one Contract Anniversary Date to the
next, is called a Contract Year.
Example: The Contract Date is June 10, 19X1. The
first Contract Anniversary Date is June
10, 19X2. The period from June 10, 19X1,
through June 9, 19X2, is a Contract Year.
The Issue Date is used to determine the start of
the contestability period. We discuss
contestability below.
- 2 -
<PAGE>
-3-
Another important date shown on the Schedule Page
is the maturity date. This is the date the maturity
benefit is payable unless an earlier or later
maturity date is elected (see Part 4). The maturity
benefit will be payable only if this contract is in
force and the Annuitant and Owner are living on the
maturity date.
This Is A Legal Contract This annuity is a legal contract between the Owner
and us. The entire contract consists of the
application and the annuity, which includes any
riders. We have issued this contract in return for
the application and the payment of the first
purchase payment. Any change or waiver of its terms
must be in writing and signed by our Secretary or
an Assistant Secretary to be effective.
Trusts And Other We are not responsible for carrying out the terms
Agreements of any trust or other agreement that is not a part
of this contract. Our only responsibility is to
perform according to the terms of this contract.
Representations And We rely on all statements made by or for the
Contestability Annuitant in the application. Legally, these
statements are considered to be representations and
not warranties. We can bring legal action to
contest the validity of this contract for any
material misrepresentation of a fact. To do so,
however, the misrepresentation must have been in
the application for this contract and a copy of the
application must have been attached to this
contract when issued.
In the absence of fraud, we cannot contest the
validity of this contract after it has been in
force during the lifetime of the Annuitant for two
years from its Issue Date.
Misstatement Of Age Or One of the questions in the application concerns
Sex the Annuitant's date of birth; another concerns the
Annuitant's sex. If the sex or date of birth given
is not correct, all benefits and amounts payable
under this contract will be what would have been
provided if the correct sex and date of birth had
been given.
No life income payments will be made until we have
received satisfactory proof of the Annuitant's sex
and date of birth at our Service Center.
Meaning Of In Force "In force" means that this contract has not
terminated. This contract is in force from its
Issue Date or, if later, the date the first
purchase payment is paid. Subject to the Right To
Terminate Contract provision in Part 2, payment of
future purchase payments is not required to
continue this contract in force.
Service Center All service for this contract is provided through
our Service Center. The mailing address and
telephone number of our Service Center are shown on
the Schedule Page. We will send written notice of
any change in this information.
Contract State This contract shall be construed according to the
laws of the state in which it was delivered.
Currency All payments made to us and by us will be in the
lawful currency of the United States of America.
All monetary amounts shown in this contract are in
U.S. dollars.
Contract Is Not This contract is "not participating," which means
Participating that no dividends are payable on this contract.
Part 2. Purchase Payments
Purchase payments are the amounts that may be paid
to us under this contract. Purchase payments for
this contract are discussed in this Part.
The First Purchase The first purchase payment for this contract is due
Payment on the Contract Date. This contract will not be in
force until the first purchase payment has been
paid to us.
<PAGE>
Purchase Payment After the first purchase payment has been paid and
Flexibility subject to the Right To Terminate Contract
provision, payment of additional purchase payments
is not required to continue the contract in force.
Instead, any amount may be paid at any time before
the maturity date while the Annuitant and Owner are
living. However, no purchase payment can be less
than $100 without our consent.
We have the right to set a maximum limit on the
total amount of purchase payments that may be made
under this contract. Any such limit will not be
less than $500,000.
Right To Terminate We have the right to terminate this contract if:
Contract
. No purchase payment has been made for at least
two consecutive years measured from the date
we received the last purchase payment; and
. Each of the following amounts is less than
$2,000 on the date we send notice of our
election to terminate this contract:
(1) The accumulated value of this contract
(see Part 3) less any premium tax we
would deduct on redemptions;
(2) The cash redemption value (see Part 4);
and
(3) The sum of all purchase payments made into
this contract less any partial redemption
amounts.
If we exercise this right, we will mail a written
notice of termination to the Owner at the last
known address shown on our records. This notice
will state that the contract will terminate 30 days
after we have mailed the notice unless we receive a
purchase payment that brings the accumulated value
(less any premium tax) to at least $2,000 before
that time.
If we terminate this contract, we will pay to the
Owner the greater of the amounts in items (1) and
(2) above.
Where To Pay All purchase payments are payable to us at our
Service Center. Upon request, a receipt signed by
our Secretary or an Assistant Secretary will be
given for any purchase payment made.
Net Purchase Payments A net purchase payment is a purchase payment we
receive less any premium tax we deduct at that
time.
Allocation Of Net Each net purchase payment we receive will be
Purchase Payments allocated among the segments of the Fixed Account
and the divisions of the Separate Account, as
directed in the application. This allocation will
remain in effect until changed by any later
election satisfactory to us and received at our
Service Center.
If the allocation of any net purchase payment would
not meet the requirements stated in the MVA
Segments provision (see Part 3), we will promptly
refund the purchase payment made.
Part 3. Accounts, Values, And Charges
This contract provides that certain values
(referred to as variable values) are based on the
investment performance of the Separate Account and
are not guaranteed as to dollar amount. This
contract also provides that other values (referred
to as fixed values and market values) are based on
the value of amounts credited to the Fixed Account.
This Part gives information about these Accounts
and the values and charges connected with them.
The Separate Account And The Fixed Account
The Separate Account The Separate Account shown on the Schedule Page is
a separate investment account we have established
under Massachusetts law. It is subject to the laws
of the state in which this contract was delivered.
-4-
<PAGE>
-5-
The Separate Account has several divisions. Each
division invests in shares of an investment Fund.
The divisions are shown on the Schedule Page.
The values of the assets in the divisions are
variable and are not guaranteed. They depend on the
investment results of the Separate Account shown on
the Schedule Page.
We own the assets of the Separate Account. Those
assets will only be used to support variable
annuities. A portion of the assets equal to the
reserves and other liabilities of the Separate
Account will not be charged with liabilities that
arise from any other business we may conduct.
However, we may transfer assets exceeding the
reserves and other liabilities of the Separate
Account to our general account. The income and
capital gains and losses, whether or not realized,
from each division of the Separate Account are
credited to or charged against that division
without regard to any of our other income and
capital gains or losses. The assets of the Separate
Account are protected from the claims of our
creditors.
Changes In The Separate We have the right to establish both additional
Account divisions of the Separate Account and additional
Separate Accounts from time to time. Amounts
credited to any additional divisions established
would be invested in shares of other Funds. For any
division, we have the right to substitute new
Funds.
Subject to applicable provisions of federal
securities laws, we have the right to change the
investment policy of any division of the Separate
Account with the approval of the Massachusetts
Insurance Commissioner. If required, evidence of
the approval of a material change by the
Massachusetts Insurance Commissioner will be filed
with the insurance supervisory official of the
state where this contract is delivered. We will
notify the Owner if the Massachusetts Insurance
Commissioner approves any material change.
We have the right to withdraw availability of any
division of the Separate Account for future amounts
being credited. We will notify the Owner before we
withdraw any division of the Separate Account.
We have the right to operate the Separate Account
as a unit investment trust under the Investment
Company Act of 1940 or in any other form permitted
by law.
Accumulation Units And Accumulation units are used to measure the variable
Annuity Units values on or before the maturity date of this
contract. Annuity units are used to determine the
amount of each payment of Variable Monthly Income
after those payments have begun. The value of a
unit is determined as of the valuation time on each
valuation date for valuation of the Separate
Account. The value of any unit can vary from
valuation date to valuation date. That value
reflects the investment performance of the division
of the Separate Account applicable to that unit.
The value of accumulation units and annuity units
is discussed further in Part 7.
Valuation Date, A valuation date is any date the New York Stock
Valuation Time, Exchange (or its successor) is open for trading. A
Valuation Period valuation period is the period of time from the end
of one valuation date to the end of the next
valuation date. The valuation time is the time of
day the New York Stock Exchange (or its successor)
closes on a valuation date. All actions to be
performed on a valuation date will be performed as
of the valuation time.
Purchase And Sale Of Amounts may be credited to a division of the
Accumulation Units Separate Account through:
. Allocation of net purchase payments to the
division (see Part 2); and
. Transfers of values to the division from other
divisions or from the Fixed Account (see
Transfers Of Values provision in Part 4).
Amounts may be taken from a division through:
. Maturity of the contract (see Part 5);
. Death of the Annuitant or Owner (see Part 5);
. Full or partial redemption (see Part 4);
<PAGE>
. Transfers of values from the division to any
other divisions or to the Fixed Account (see
Part 4);
. Assessment of an administrative charge from
the division (see Administrative Charge
provision below in this Part); and
. Assessment of a transfer fee from the division
(see Transfer Fee provision below in this
Part).
Amounts are credited to and taken from divisions of
the Separate Account by purchasing and selling
accumulation units. Accumulation units will be
purchased and sold at the unit value as of the
valuation time on the valuation date of purchase or
sale. The number of units purchased or sold will be
the amount of money for purchase or sale divided by
that unit value.
Example: The amount applied is $550. The date of
purchase is June 10, 19X4. The
accumulation unit value on that date is
$10. The number of units purchased would
be 55 ($550 divided by $10 = 55). If,
instead, the unit value was $11, then the
amount applied would purchase 50 units
($550 divided by $11 = 50).
If a purchase payment, or a request that causes us
to purchase or sell accumulation units, is received
by us before the valuation time on a valuation
date, accumulation units will be purchased or sold
as of that valuation date. Otherwise, accumulation
units will be purchased or sold as of the next
following valuation date.
In no case will accumulation units be purchased or
sold before the Contract Date.
The Fixed Account The Fixed Account is part of our general investment
account. It has no connection with, and does not
depend on, the investment performance of the
Separate Account. Unlike the Separate Account,
amounts held in the Fixed Account are not protected
from the claims of our creditors.
The Fixed Account has distinct segments in which
amounts credited earn interest at different rates
and for different periods of time. We have the
right to establish additional segments of the Fixed
Account from time to time. Also, we have the right
to withdraw availability of any segment of the
Fixed Account for future amounts being credited.
The effect of this withdrawal is discussed in the
next provision.
MVA Segments The segments of the Fixed Account are MVA segments.
The "MVA" indicates that amounts taken from these
segments may be subject to a market-value
adjustment (see the Market Value In The MVA
Segments provision below in this Part).
Amounts may be credited to an MVA segment through:
. Allocation of net purchase payments to the MVA
segment (see Part 2);
. The crediting of accumulated amounts that were
left in the MVA segment to the end of the
guarantee period (see below in this
provision); and
. Transfers of values to the segment from other
MVA segments or from divisions of the Separate
Account (see Transfers Of Values provision in
Part 4).
Any amount credited to an MVA segment at any one
time must be at least $1,000.
Amounts credited to an MVA segment will accumulate
at a guaranteed rate of interest if left in the
segment for a stated period of time. We refer to
this period as the "guarantee period" for the MVA
segment. The guaranteed rate of interest is set
when an amount is credited and is the same for all
contracts in this class. Guaranteed rates for
amounts currently being credited to MVA segments
are available by calling the Service Center. The
lowest guaranteed rate we can use is shown on the
Schedule Page.
Guaranteed rates of interest for amounts credited
at various times to the same MVA segment are
subject to change. However, once an amount is
credited to an MVA segment, the guaranteed rate
used to accumulate that amount will be fixed for
the entire guarantee period.
-6-
<PAGE>
-7-
Example: An amount of $1,000 is applied on May 10,
19X1, to an MVA segment with a 5-year
guarantee period. The guaranteed rate for
amounts applied to this segment on May 10,
19X1, is 6%. If the $1,000 is left in
that segment until May 10, 19X6, it will
accumulate at a 6% effective annual rate
of interest for the full 5 years to
$1,338.23.
An amount of $1,000 applied to the same
segment on June 2, 19X1, has a guaranteed
rate of 6.5%. If that amount is left in
the segment until June 2, 19X6, it will
accumulate at a 6.5% effective annual
rate of interest for the full 5 years to
$1,370.09.
Once an amount credited to an MVA segment has
remained in that segment to the end of the
guarantee period, the resulting accumulated amount
is credited as of that date to the same MVA segment
at the guaranteed rate for that segment as of that
date. However, if that MVA segment is no longer
available as of that date, the accumulated amount
will instead be credited to the available MVA
segment with the next shorter guarantee period or,
if none is available, the available MVA segment
with the next longer guarantee period.
Example: Using the example above, if the $1,000
amount applied on May 10, 19X1, is left at
6% until May 10, 19X6, its accumulated
value of $1,338.23 is applied as of that
date for another 5-year period. If the
guaranteed rate for amounts applied to
this segment on May 10, 19X6, is 7%, the
$1,338.23 will then accumulate at 7%.
We will send to the Owner written notice that the
guarantee period for an amount credited to an MVA
segment is about to end. The notice will give:
. The date the amount was credited;
. The amount for that date still left in the
segment;
. The date the guarantee period will end; and
. The accumulated amount as of that date.
The notice will also specify which MVA segment the
accumulated amount will be credited to, and how to
determine the guaranteed rate that will be applied
to it. This notice will be sent 45 to 75 days
before the end of the guarantee period.
Amounts may be taken from an MVA segment through:
. Maturity of the contract (see Part 5);
. Death of the Annuitant or Owner (see Part 5);
. Full or partial redemption (see Part 4);
. Transfers of values from the segment to other
MVA segments or to divisions of the Separate
Account (see Transfers Of Values provision in
Part 4);
. Assessment of an administrative charge (see
Administrative Charge provision below in this
Part); and
. Assessment of a transfer fee (see Transfer Fee
provision below in this Part).
If an amount is taken from an MVA segment before
the end of its guarantee period, its market value
may be higher or lower than its accumulated value.
See the Market Value In The MVA Segments provision
in the next section.
Values Of This Contract
Accumulated Value Of The accumulated value of this contract on any date
Contract is the variable value of this contract plus the
fixed value of this contract, both determined as of
that date.
Variable Value Of The value of the accumulation units credited to
Contract this contract in a division of the Separate Account
is equal to the accumulation unit value in that
division on the date the value is determined,
multiplied by the number of those units in that
division.
<PAGE>
The variable value of this contract on any date is
the total of the values of the accumulation units
credited to this contract in each division of the
Separate Account.
Fixed Value Of Contract The fixed value of this contract on any date is the
sum, over all of the MVA segments of the Fixed
Account, of the amounts credited to this contract
still left in those segments accumulated at
interest to that date. In accumulating each amount,
we use an effective annual rate of interest equal
to the guaranteed rate for that amount.
Example: An amount of $1,000 is applied on May 10,
19X1, to an MVA segment with a 5-year
guarantee period. The guaranteed rate for
amounts applied to this segment on May 10,
19X1, is 6%. If the $1,000 is left in
that segment until May 10, 19X6, it will
accumulate at a 6% effective annual rate
of interest for the full 5 years to
$1,338.23. The value of that $1,000 amount
on May 10, 19X5, at the 6% guaranteed
rate, is $1,262.48 ($1,000 accumulated for
4 years at 6% interest).
An amount of $1,000 applied to the same 5-
year MVA segment on May 10, 19X2, has a
guaranteed rate of 6.5%. If left in the
segment until May 10, 19X7, it will
accumulate to $1,370.09. The value of that
$1,000 amount on May 10, 19X5, at the
6.5% guaranteed rate, is $1,207.95
($1,000 accumulated for 3 years at 6.5%
interest).
If these are the only amounts credited to
your contract in MVA segments that are
still left in those segments, then the
fixed value of the contract on May 10,
19X5, is $2,470.43 ($1,262.48 plus
$1,207.95).
Market Value Of The market value of this contract on any date is
Contract the variable value of this contract plus the market
value in the MVA segments.
Market Value In The The market value in the MVA segments on any date is
MVA Segments the sum, over all of the MVA segments in the Fixed
Account, of the market values of the amounts
credited to this contract still left in those
segments.
The market value of an amount credited to an MVA
segment is based on:
(1) Its accumulated value if left in the MVA
segment to the end of the guarantee period;
(2) The period of time from the current date to
the end of the guarantee period for the
amount; and
(3) The guaranteed rate currently applied to
amounts credited to an MVA segment with a
guarantee period equal in whole years to
the period of time determined in (2) above.
However, if the period of time determined
in (2) above is not a whole number of
years, we will use the guaranteed rate for
the MVA segment for the next higher whole
number of years. (The guaranteed rate
currently applied to amounts credited to
MVA segments is available by calling the
Service Center.)
The market value on any date of an amount credited
to an MVA segment is equal to:
. The amount determined in (1) above; discounted
at
. The effective annual rate of interest equal to
the guaranteed rate determined in (3) above;
for
. The period of time determined in (2) above.
However, if the period of time determined in item
(2) above for an amount in an MVA segment is 30
days or less, that amount will not be subject to
market-value adjustment. Also, any amount taken
from an MVA segment through assessment of an
administrative charge or a transfer fee will not be
subject to a market-value adjustment. In each of
these cases, the market value of that amount will
be the amount accumulated to the current date at an
effective annual rate of interest equal to its
respective guaranteed rate.
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Example 1: An amount of $1,000 is applied on May
10, 19X1, to an MVA segment with a 5-
year guarantee period. The guaranteed
rate for amounts applied to this segment
on May 10, 19X1, is 6%. If the $1,000
is left in that segment until May 10,
19X6, it will accumulate at a 6%
effective annual rate of interest for
the full 5 years to $1,338.23.
The full amount is taken from the MVA
segment on May 10, 19X5:
(1) Its accumulated value at the end
of the guarantee period (5 years)
would be $1,338.23;
(2) The period of time from May 10,
19X5, to May 10, 19X6, is one
year; and
(3) The guaranteed rate applied on May
10, 19X5, to amounts credited to a
1-year MVA segment is 4%.
The market value on May 10, 19X5, of the
amount credited to the 5-year MVA
segment on May 10, 19X1, is $1,338.23
discounted at 4% for one year, or
$1,286.76 ($1,338.23 divided by 1.04 =
$1,286.76). The accumulated value on May
10, 19X5, of that amount is $1,262.48
($1,000 accumulated for 4 years at 6%).
Example 2: An amount of $1,000 applied to a 7-year
MVA segment on May 10, 19X2, with a
guaranteed rate of 5% will accumulate
to $1,407.10 if left in that segment
until May 10, 19X9.
The full amount is taken from the MVA
segment on May 10, 19X5:
(1) Its accumulated value at the end
of the 7-year guarantee period
(May 10, 19X9) would be
$1,407.10;
(2) The period of time from May 10,
19X5, to May 10, 19X9, is four
years; and
(3) The guaranteed rate applied on
May 10, 19X5, to amounts credited
to a 4-year MVA segment is 10%.
The market value on May 10, 19X5, of the
amount credited to the 7-year MVA
segment on May 10, 19X2, is $1,407.10
discounted at 10% for four years, or
$961.07. The accumulated value on May
10, 19X5, of that amount is $1,157.63
($1,000 accumulated for 3 years at 5%).
For each MVA segment, amounts credited to the
contract that are still in the segment are taken in
a certain order until the total market value needed
from the segment is taken. We first take the amount
with the shortest time left in the guarantee
period, then the amount with the next shortest time
left, and so on. However, for transfers and partial
redemptions taken from an MVA segment, the Owner
may choose a different order.
Contract Charges
Administrative Charge An administrative charge will be assessed each year
on the Contract Anniversary Date. An administrative
charge will also be assessed upon full redemption,
death, or maturity. In either case, however, we
will not assess the charge if the accumulated value
of the contract at that time is $50,000 or more.
<PAGE>
The amount of the administrative charge will be
determined each year by us. However, it will not
exceed $50, or any lower limit required by law. Any
administrative charge assessed will be taken:
. First, from all divisions in the Separate
Account on a pro rata basis, based on the
variable value of this contract in each
division; and
. Second, any remainder will be taken from all
MVA segments of the Fixed Account on a pro
rata basis, based on the fixed value of this
contract in each segment.
The administrative charge discussed in this
provision is in addition to any charge for
administrative expenses contained in the asset
charge discussed in the Net Investment Factor
provision in Part 7.
Deductions For Sales Sales charges are not deducted from purchase
Charges payments when received by us. Instead, we may make
deductions for sales charges from amounts payable
upon full or partial redemption of this contract.
We may also make deductions for sales charges from
the death benefit in certain cases. Finally, we may
make deductions for sales charges from the maturity
value on the maturity date of this contract.
In certain situations, however, sales charges will
not apply. Sales charges will not be assessed on
the following amounts of purchase payments:
1. All amounts paid as death benefits due to the
Annuitant's death if the Annuitant's age on
the Contract Date (shown on the Schedule
Page) is 75 or less;
2. The full amount if the Annuitant has not
reached age 59 1/2 and all proceeds from
maturity or full redemption of this contract
are applied under any one, or more than one,
of the following payment options:
a. Variable Monthly Income Option B with
payments for 10 years or more; and
b. Variable Monthly Income Options C, E,
and F;
3. The full amount if the Annuitant has attained
age 59 1/2 and all proceeds from maturity or
full redemption of this contract are applied
under any one, or more than one, of the
following payment options:
a. Fixed Income or Variable Monthly Income
Option B with payments for 10 years or
more; and
b. Fixed Income or Variable Monthly Income
Options C, E, and F;
4. During any Contract Year:
a. Any amounts not yet redeemed for which
the sales charge percentage (see Amount
Of Sales Charge provision below) is
0%; and
b. 10% of the amounts not yet redeemed
for which the sales charge percentage
is 1% or greater.
Amount Of Sales Charge Sales charges are based on the purchase payments
made and the time that has passed since we received
them.
The part of the sales charge related to a purchase
payment is a level percentage of that payment
during each year since it was paid. For each
successive year, the percentage decreases until it
becomes zero. Sales charge percentages for each
purchase payment are shown in the table below.
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Year Since Year Since
Payment Percentage Payment Percentage
---------- ---------- ---------- ----------
1st 7% 5th 3%
2nd 6 6th 2
3rd 5 7th 1
4th 4 8th and later 0
Example: You make a $1,000 purchase payment on May
10, 19X1. The part of the sales charge
related to this purchase payment is:
$70 from May 10, 19X1 through May 9,
19X2;
$60 from May 10, 19X2 through May 9,
19X3;
$10 from May 10, 19X7 through May 9,
19X8; and $0 thereafter.
Subject to the limits stated above in the
Deductions For Sales Charges provision, the sales
charge at any time is based solely on the purchase
payments assumed to be redeemed at that time. In
determining the sales charge, we assume that
purchase payments are redeemed in the order in
which they are paid. Any amounts in excess of
purchase payments are assumed to be redeemed last.
Example: You've made two purchase payments of
$1,000 each, one on May 10, 19X1, and the
other on July 21, 19X4.
You make your first request for a partial
redemption on August 7, 19X5; it is for
$800. The sales charge is based solely on
the first $1,000 purchase payment, made in
19X1, since it exceeds the $800 requested.
Since August 7, 19X5, is during the 5th
year since the purchase payment was made,
the sales charge percentage is 3%. But a
sales charge is assessed only on $600 (all
but 10% of the $2,000 not yet redeemed).
The sales charge is therefore $18 (3% of
$600), and you receive $782.
You request a second partial redemption of
$800 on September 21, 19X8. The sales
charge is based on the remaining $200 from
the first purchase payment and on $600
from the second. The percentage for the
first purchase payment is 0% (8th year
since payment) and for the second is 3%
(5th year since payment). But a sales
charge is assessed only on $500 (none of
the $200 not yet redeemed having a
percentage of 0% and, on the $600, all
but 10% of the $1,000 not yet redeemed
having a percentage of 1% or greater).
The sales charge is then $15 (3% of
$500), and you receive $785.
Transfer Fee We reserve the right to assess a transfer fee of
$20 for each transfer of value in a Contract Year
in excess of four transfers.
If we assess a transfer fee, it will be assessed as
of the date of the transfer. Any transfer fee
assessed will be taken from the divisions of the
Separate Account, and the MVA segments of the Fixed
Account, from which the amounts are transferred.
Part 4. Life Benefits
This variable annuity contract provides a maturity
benefit if the Annuitant and Owner are living on
the maturity date and the contract is in force at
that time. It provides a death benefit if the
Annuitant or Owner dies before the maturity date
while the contract is in force. There are other
rights and benefits available under this contract.
These "Life Benefits" are discussed in this Part.
<PAGE>
Contract Ownership
Rights Of Owner While the Annuitant is living, the Owner may
exercise all rights given by this contract or
allowed by us. These rights include assigning this
contract, changing Beneficiaries, changing
ownership, enjoying all contract benefits, and
exercising all contract options. The consent of any
Irrevocable Beneficiary is needed to exercise any
contract right.
Assigning This Contract This contract may be assigned. But for any
assignment to be binding on us, we must receive a
signed copy of it at our Service Center. We will
not be responsible for the validity of any
assignment.
Once we receive a signed copy, the rights of the
Owner and the interest of any Beneficiary or any
other person will be subject to the assignment.
Changing The Owner, The Owner, the Payee, or the Beneficiary may be
Payee, Or Beneficiary changed while the Annuitant is living. We do not
limit the number of changes that may be made. To
make a change, the Owner's written request,
satisfactory to us, must be received at our Service
Center. The change will take effect as of the date
the request is signed, even if the Annuitant or
Owner dies before we receive it. Each change will
be subject to any payment we made or other action
we took before receiving the request.
Transfers Of Values Transfers of values are subject to the limitations
stated in the Limitations On Transfers provision
below. Subject to those limitations, transfers of
values may be made upon direction, satisfactory to
us, received at our Service Center. These transfers
are:
. Transfers of values between divisions of the
Separate Account. Before any proceeds from
this contract are applied to a payment option,
these transfers will be made by selling all or
part of the accumulation units in a division
and applying the value of the sold units to
purchase units in any other division. While
payments are being made under a Variable
Monthly Income payment option, these transfers
will be made by exchanging all or part of the
annuity units in a division for a number of
annuity units in any other division that give
the same amount of monthly income as of the
date of transfer.
. Transfers of values from one or more divisions
of the Separate Account to one or more MVA
segments of the Fixed Account. These transfers
will be made by selling all or part of the
accumulation units in a division and applying
the value of the sold units to one or more MVA
segments of the Fixed Account.
. Transfers of values from one or more MVA
segments of the Fixed Account to one or more
divisions of the Separate Account. These
transfers will be made by applying all or part
of the market value in an MVA segment to
purchase accumulation units in one or more
divisions of the Separate Account.
. Transfers of values between MVA segments of
the Fixed Account. These transfers will be
made by applying all or part of the market
value in an MVA segment to any other MVA
segment.
An amount transferred from a division of the
Separate Account or from a segment of the Fixed
Account may be expressed in terms of either a
dollar amount or a whole-number percentage.
Transfers involving the Separate Account will be as
of the valuation date specified in the Purchase And
Sale Of Accumulation Units provision in Part 3. All
transfers made on one date will be considered one
transfer.
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Limitations On The smallest amount that can be transferred from a
Transfers division of the Separate Account is $500 or, if less,
the value of the accumulation units or annuity units
credited to this contract in that division. The smallest
accumulated amount that can be transferred from a
segment of the Fixed Account with respect to any amount
credited is $500 or, if less, all of that amount still
left in the segment as of the date of transfer.
Transfers of values are also subject to any limits
stated in the MVA Segments provision in Part 3.
We reserve the right to limit the number and frequency
of transfers allowed during any Contract Year.
Transfers cannot be made during the 30-day period ending
on the maturity date.
While any amounts are applied under a Variable Monthly
Income payment option, transfers of values are allowed
only between divisions of the Separate Account.
Redeeming This Contract
Right To Redeem This contract may be redeemed for its cash redemption
value, while the Annuitant and Owner are living, at any
time before it matures. Redemption will be effective on
the date we receive this contract and a written
redemption request, satisfactory to us, at our Service
Center. A later effective date may be elected in the
redemption request.
Cash Redemption Value The cash redemption value on any date is the market
value of this contract less any deductions for sales and
administrative charges and less any premium tax we
deduct at that time. The market value of this contract
is described in Part 3.
Partial Redemptions Partial redemptions may be made, while the Annuitant and
Owner are living, at any time before this contract
matures. For amounts redeemed from the Separate Account,
the request must state the division (or divisions) from
which redemption will be made. For amounts redeemed from
the Fixed Account, the request must also state the
segment (or segments) from which the redemption will be
made.
Partial redemptions from a division (or divisions) of
the Separate Account will be made by selling a
sufficient number of accumulation units to provide the
partial redemption including any sales charge deduction
that applies to that redemption. Partial redemptions
from an MVA segment of the Fixed Account will be made by
reducing the amounts credited to that segment, in the
order in which they were credited (unless another order
is specified by the Owner), to provide a market value
equal to the partial redemption including any sales
charge deduction that applies to that redemption.
Any partial redemption will be subject to the limits set
forth below.
. Any partial redemption must be for at least $100.
. The accumulated value of the contract remaining
after a partial redemption must be at least $1,000
plus any premium tax we would deduct at that time
on a full redemption.
When And How We Pay Any partial redemption made will be paid in one sum.
However, if the entire contract is redeemed, the cash
redemption value may be paid in one sum or applied under
any payment option. See Part 6.
We will pay all redemptions within seven days after the
written request for the redemption is received by us at
our Service Center. However:
<PAGE>
. For redemptions from the Separate Account, this
time period is subject to any extension permitted
under federal laws, rules, and regulations applying
to redemption of variable annuity contracts; and
. For redemptions from the Fixed Account, we may
delay payment for up to six months from the date
the request is received by us at our Service
Center. If payment is delayed 30 days or more, we
will add interest at the rate payable under our
Option D payment option.
Right To Change The Maturity Date
Electing An Early Before this contract matures and while it is in force,
Maturity Date the maturity date may be changed to any date that is
earlier than the maturity date then in effect. To elect
an earlier maturity date, we require that the Owner's
written election for the change be received at our
Service Center at least 30 days before the early
maturity date wanted.
Electing A Later Before this contract matures and while it is in force,
Maturity Date the maturity date may be changed to any date that is
later than the maturity date then in effect. However,
that later maturity date must be on or before the
Contract Anniversary Date nearest the Annuitant's 90th
birthday. To elect a later maturity date, the Owner must
send us written election to be received at our Service
Center within 90 days before the maturity date then in
effect. Any rider this contract has will be cancelled
when the change is made.
Other Provisions Regarding Life Benefits
Periodic Statements While this contract is in force before the maturity
date, or the Annuitant's or Owner's death if earlier, we
will send a Status Report to the Owner at least
semiannually. This Report will show:
. The number of accumulation units in each division
of the Separate Account;
. The accumulation unit value in each division of the
Separate Account;
. The accumulated amounts in the MVA segments of the
Fixed Account;
. The market value in the MVA segments;
. The accumulated value of this contract;
. The cash redemption value of this contract; and
. Any other information required by applicable law.
All this information will be as of a date not more than
45 days before the date the Status Report is mailed.
We will also give the Owner any other periodic reports,
containing information about this contract, that may be
required by federal or state law.
Receipt Of Information Any directions, requests, or other information received
other than by mail at our Service Center after the time
set for valuation of the Separate Account will be deemed
to have been received the next day.
Part 5. Maturity Benefit And Death Benefit
The maturity benefit is the payment we will make when
this contract matures if the Annuitant and Owner are
living at that time. The death benefit is the amount of
money we will pay when we receive due proof at our
Service Center that the Annuitant, or Owner if the
Annuitant is still living, has died before the contract
matures. These benefits are discussed in this Part.
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Maturity Benefit
Maturity Value The maturity value is the cash redemption value of this
contract on the maturity date.
Monthly Life Income When this contract matures, the maturity value will be
applied to provide a monthly life income under Variable
Monthly Income Payment Option C, as described in Part 6.
This income will be based on the life of the Annuitant
and will be paid for the lifetime of the Annuitant. The
first payment is due on the maturity date. Future
payments will be due on the same day of the month as the
maturity date. The final payment will be the last one
due before the Annuitant's death.
There is a guarantee as to the first 120 income
payments. If the Annuitant dies before all these
payments are made, we will continue to make payments
until 120 income payments have been made.
The Owner may change the payment option at any time,
while the Annuitant is living, up to 30 days before the
maturity date.
Alternate Settlements There are other settlements available when this contract
At Maturity matures. That is, the Owner may elect to have the
maturity value either applied under any other payment
option discussed in Part 6 or paid in one sum.
In any case, if an assignment of this contract is in
effect on the maturity date, we have the right to pay
the maturity value in one sum. Any amount due the
assignee will be paid to the assignee. The balance, if
any, will be paid to the Owner.
Restriction On Rights The Annuitant cannot assign, transfer, or place any
restriction on this contract without the Owner's written
consent. No income payment under this contract can be
assigned, transferred, or taken in advance of its due
date, and the right to receive any income payments
cannot be restricted, without the Owner's written
consent. In any case, the Owner's written consent must
be given before the Annuitant dies and must be received
at our Service Center.
Death Benefit
Amount Of Death The amount of the death benefit is determined as of the
Benefit date we receive due proof of death at our Service
Center.
If the death benefit is payable due to the death of the
Annuitant, the amount of the death benefit is the
greater of:
. The accumulated value of this contract less any
deduction for administrative charge (and any sales
charge if the Annuitant's age on the Contract Date
exceeds 75); and
. The accumulation at interest of all purchase
payments made less any partial redemption amounts,
but not more than twice the sum of purchase
payments less partial redemption amounts. The
effective annual rate of interest used in this
accumulation will be 5% for any period before the
Annuitant's 75th birthday and 0% thereafter .
In all cases, the amount of death benefit due to the
Annuitant's death is reduced by any premium tax we
deduct at that time.
If the Owner is not the Annuitant and the death benefit
is payable due to the death of the Owner, the amount of
the death benefit will be the cash redemption value of
this contract.
<PAGE>
Interest On Maturity Or Death Benefit
Interest Payable If the maturity value is paid in one sum after this
contract matures, we will add interest from the maturity
date to the date of payment. If the death benefit is
paid in one sum, we will add interest from the date
proof of death is received to the date of payment.
If the death benefit is applied under a payment option,
interest will be paid from the valuation date that is on
or next follows the date written notice of death is
received to the effective date of that option. It will
be paid in one sum to the Beneficiary living on the
effective date.
In all cases, the amount of interest payable on the
maturity value or death benefit will be the same as
would be paid under Option D of the payment options for
the applicable period of time. See Part 6 for a
description of Option D.
Part 6. Payment Options
These are Optional Methods of Settlement. They provide
alternate ways in which payment can be made. This
contract provides Fixed Income payment options. It also
provides Variable Monthly Income payment options. These
two types of options are discussed below. Any other
payment option agreed to by us may be elected.
Fixed Income Payment A Fixed Income payment option provides payments that are
Options guaranteed by us under our general account. The amounts
of these payments do not depend on the investment
performance of the Separate Account.
All the payment options described in this Part are
available on a Fixed Income basis. They are described in
terms of monthly payments. However, annual, semiannual,
or quarterly payments may be requested instead. The
amount of these payments will be determined in a way
that is consistent with monthly payments and will be
quoted on request.
Variable Monthly A Variable Monthly Income payment option provides
Income Payment payments that are not guaranteed as to dollar amount.
Options Instead, they are based on the investment performance of
the Separate Account. Payment options B, C, E, and F are
available on a Variable Monthly Income basis. Payment
can only be made monthly. The manner in which the dollar
amounts of Variable Monthly Income payments are computed
is set forth in Part 7.
Availability Of All or part of the death benefit, the maturity value, or
Payment Options the cash redemption value may be applied under any
payment option. If the contract is assigned, any amount
due to the assignee will be paid in one sum. The
balance, if any, may be applied under any payment
option.
If the Schedule Page shows that this contract was issued
on a unisex rate basis, the female rates shown in the
Option C, E, and F Tables apply in all cases. The male
rates in those Tables do not apply to unisex-rate
contracts.
Minimum Amounts If the amount to be applied under any option is less
than $2,000, we may pay that amount in one sum instead.
If payments under a Fixed Income option amount to less
than $20 each, we have the right to make payments at
less frequent intervals. If the first payment under a
Variable Monthly Income option amounts to less than $20,
we have the right to make a one-sum payment.
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Option A Level Income Payment Option (not available as a Variable
Monthly Income option). Monthly payments are level. The
amount of each payment may not be less than $10 for each
$1,000 applied. Interest will be credited each month on
the unpaid balance and added to it. This interest will
be at a rate determined by us, but not less than the
equivalent of 2 1/2% per year. Payments continue until
the amount we hold runs out. The last payment will be
for the balance only.
Option B Fixed Time Payment Option (available as a Fixed Income
option and as a Variable Monthly Income option). For
either option, monthly payments will be made for any
period selected, up to 30 years. For Fixed Income Option
B, the monthly payments are level. They depend on the
total amount applied, the period selected, and the
monthly payment rates we are using when the first
payment is due. The rate for any payment will not be
less than shown in the Fixed Income Option B Table.
For Variable Monthly Income Option B, the payments are
not guaranteed as to amount and may vary during the
period selected. The Variable Income Option B Table
shows the first monthly payment for each $1,000 applied.
- --------------------------------------------------------------------------------
Fixed Income Option B Table
Minimum Monthly Payment Rates For Each $1,000 Applied
Monthly Monthly Monthly
Years Payment Years Payment Years Payment
1 $84.28 11 $8.64 21 $5.08
2 42.66 12 8.02 22 4.90
3 28.79 13 7.49 23 4.74
4 21.86 14 7.03 24 4.60
5 17.70 15 6.64 25 4.46
6 14.93 16 6.30 26 4.34
7 12.95 17 6.00 27 4.22
8 11.47 18 5.73 28 4.12
9 10.32 19 5.49 29 4.02
10 9.39 20 5.27 30 3.93
For quarterly payment, multiply by 2.994. For semiannual payment, multiply by
5.969. For annual payment, multiply by 11.865.
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Variable Monthly Income Option B Table
Monthly Payment Rates For First Payment For Each
$1,000 Applied, Based On 4% Assumed Investment Rate
Monthly Monthly Monthly
Years Payment Years Payment Years Payment
1 $84.84 11 $9.31 21 $5.81
2 43.25 12 8.69 22 5.64
3 29.40 13 8.17 23 5.49
4 22.47 14 7.72 24 5.35
5 18.32 15 7.34 25 5.22
6 15.56 16 7.00 26 5.10
7 13.59 17 6.71 27 5.00
8 12.12 18 6.44 28 4.90
9 10.97 19 6.21 29 4.80
10 10.06 20 6.00 30 4.72
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Option C Lifetime Payment Option. For Fixed Income Option C, the
monthly payments are level. For Variable Income Option
C, the payments are not guaranteed as to amount and may
vary. For either option, the payments are based on the
life of a named person. Payments will continue for the
life of that person. The three variations are:
(1) Payments for life only (available as a Fixed Income
option and as a Variable Monthly Income option). No
specific number of payments is guaranteed. Payments stop
when the named person dies.
(2) Payments guaranteed for amount applied (not
available as a Variable Monthly Income option). Payments
stop when they equal the amount applied or when the
named person dies, whichever is later. "Amount applied"
means the dollar amount used to provide the income.
(3) Payments guaranteed for 5, 10, or 20 years
(available as a Fixed Income option and as a Variable
Monthly Income option). Payments stop at the end of the
selected guaranteed period or when the named person
dies, whichever is later.
The Fixed Income Option C Table shows the minimum
monthly payment for each $1,000 applied. The Variable
Monthly Income Option C Table shows the minimum amount
of the first monthly payment for each $1,000 applied.
The actual payments will be based on the monthly payment
rates we are using when the first payment is due. They
will not be less than shown in the Table.
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Fixed Income Option C Table
Minimum Monthly Payment Rates For Each $1,000 Applied
Payments Payments Guaranteed For
Age* For Life Amount 5 10 20
Male Female Only Applied Years Years Years
35 40 $3.01 $2.95 $3.00 $2.99 $2.97
40 45 3.18 3.11 3.17 3.16 3.14
45 50 3.40 3.30 3.39 3.38 3.34
50 55 3.67 3.53 3.66 3.65 3.58
55 60 4.03 3.82 4.02 3.99 3.86
60 65 4.49 4.18 4.47 4.42 4.18
65 70 5.13 4.63 5.10 4.99 4.51
70 75 6.01 5.21 5.93 5.69 4.82
75 80 7.21 5.94 7.03 6.51 5.06
80 85 8.87 6.89 8.44 7.39 5.20
85 11.18 8.09 10.19 8.21 5.26
*Age on birthday nearest due date of the first payment. Monthly payment rates
for ages not shown will be furnished on request. Monthly payment rates for ages
over 85 are the same as those for 85.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Variable Monthly Income Option C Table
Minimum Monthly Payment Rates For First Payment For Each
$1,000 Applied, Based on 4% Interest Rate
Payments Payments Guaranteed For
Adjusted For Life 5 10
Age* Only Years Years
M F M F M F
40 $4.11 $3.90 $4.10 $3.89 $4.09 $3.88
45 4.31 4.05 4.30 4.04 4.28 4.03
50 4.56 4.24 4.55 4.23 4.52 4.21
55 4.87 4.48 4.85 4.47 4.81 4.45
60 5.28 4.80 5.26 4.79 5.19 4.75
65 5.85 5.22 5.81 5.20 5.67 5.15
70 6.61 5.81 6.52 5.77 6.27 5.66
75 7.62 6.61 7.44 6.54 6.96 6.31
80 8.96 7.75 8.60 7.58 7.72 7.10
85 10.77 9.36 10.02 8.96 8.48 7.94
*Age on birthday nearest the due date of the first payment, adjusted according
to the table in the Basis Of Computation provision in Part 7. Monthly payment
rates for adjusted ages not shown will be furnished on request.
- --------------------------------------------------------------------------------
<PAGE>
Option D Interest Payment Option (not available as a Variable
Monthly Income option). We will hold any amount applied
under this option. Interest on the unpaid balance will
be paid each month at a rate determined by us. This rate
will not be less than the equivalent of 2 1/2% per
year.
Option E Joint Lifetime Payment Option (available as a Fixed
Income option and as a Variable Monthly Income option).
For Fixed Income Option E, the monthly payments are
level. For Variable Income Option E, the payments are
not guaranteed as to amount and may vary. For either
option, the payments are based on the lives of two named
persons. While both are living, one payment will be made
each month. When one dies, payments continue for the
lifetime of the other. The two variations are:
(1) Payments for two lives only. No specific number of
payments is guaranteed. Payments stop when both named
persons have died.
(2) Payments guaranteed for 10 years. Payments stop at
the end of 10 years or when both named persons have
died, whichever is later.
The Fixed Income Option E Table shows the minimum
monthly payment for each $1,000 applied. The Variable
Monthly Income Option E Table shows the minimum amount
of the first monthly payment for each $1,000 applied.
The actual payments will be based on the monthly rates
we are using when the first payment is due. They will
not be less than shown in the Table.
-20-
<PAGE>
-21-
- --------------------------------------------------------------------------------
Fixed Income Option E Table
Minimum Monthly Payment Rates For Each $1,000 Applied
Payments For Two Lives Only
M50 M55 M60 M65 M70 M75
Age* F55 F60 F65 F70 F75 F80
M F
50 55 $3.25 $3.35 $3.45 $3.52 $3.57 $3.61
55 60 3.35 3.50 3.64 3.75 3.84 3.91
60 65 3.45 3.64 3.83 4.00 4.15 4.27
65 70 3.52 3.75 4.00 4.26 4.50 4.70
70 75 3.57 3.84 4.15 4.50 4.85 5.17
75 80 3.61 3.91 4.27 4.70 5.17 5.65
80 85 3.63 3.95 4.36 4.86 5.45 6.10
Payments Guaranteed For 10 Years
M50 M55 M60 M65 M70 M75
Age* F55 F60 F65 F70 F75 F80
M F
50 55 $3.24 $3.34 $3.44 $3.51 $3.56 $3.60
55 60 3.34 3.49 3.63 3.74 3.83 3.90
60 65 3.44 3.63 3.82 3.99 4.14 4.26
65 70 3.51 3.74 3.99 4.25 4.48 4.67
70 75 3.56 3.83 4.14 4.48 4.82 5.12
75 80 3.60 3.90 4.26 4.67 5.12 5.56
80 85 3.62 3.94 4.33 4.82 5.36 5.94
* Age on the birthday nearest the due date of the first payment. Monthly payment
rates for ages not shown will be furnished on request.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Variable Monthly Income Option E Table
Minimum Monthly Payment Rates For First Payment For Each
$1,000 Applied, Based On 4% Assumed Investment Rate
Payments For Two Lives Only - One Male, One Female
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
M 50 $3.98 $4.08 $4.17 $4.26 $4.34 $4.40 $4.45 $4.48
M 55 4.04 4.16 4.29 4.41 4.53 4.62 4.70 4.76
M 60 4.09 4.24 4.40 4.57 4.73 4.88 5.00 5.10
M 65 4.13 4.30 4.50 4.72 4.94 5.16 5.36 5.52
M 70 4.16 4.36 4.59 4.85 5.15 5.46 5.75 6.01
M 75 4.19 4.40 4.65 4.96 5.33 5.74 6.16 6.55
M 80 4.20 4.42 4.70 5.05 5.48 5.98 6.55 7.12
M 85 4.21 4.44 4.73 5.11 5.59 6.19 6.89 7.66
Payments For Two Lives Only - Both Females
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
F 50 $3.91 $3.98 $4.04 $4.09 $4.14 $4.17 $4.19 $4.21
F 55 3.98 4.07 4.16 4.24 4.31 4.36 4.40 4.43
F 60 4.04 4.16 4.29 4.41 4.51 4.60 4.66 4.71
F 65 4.09 4.24 4.41 4.57 4.73 4.87 4.98 5.07
F 70 4.14 4.31 4.51 4.73 4.96 5.17 5.36 5.51
F 75 4.17 4.36 4.60 4.87 5.17 5.49 5.79 6.05
F 80 4.19 4.40 4.66 4.98 5.36 5.79 6.23 6.65
F 85 4.21 4.43 4.71 5.07 5.51 6.05 6.65 7.27
Payments Guaranteed For 10 Years - One Male, One Female
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
M 50 $3.97 $4.07 $4.16 $4.25 $4.33 $4.39 $4.44 $4.47
M 55 4.03 4.15 4.28 4.40 4.52 4.61 4.69 4.74
M 60 4.08 4.23 4.39 4.56 4.72 4.87 4.99 5.07
M 65 4.12 4.29 4.49 4.71 4.93 5.15 5.33 5.47
M 70 4.15 4.35 4.58 4.84 5.13 5.43 5.70 5.93
M 75 4.18 4.39 4.64 4.95 5.31 5.69 6.08 6.41
M 80 4.19 4.41 4.69 5.03 5.44 5.92 6.42 6.87
M 85 4.20 4.43 4.72 5.08 5.54 6.09 6.69 7.28
Payments Guaranteed For 10 Years - Two Females
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
F 50 $3.90 $3.97 $4.03 $4.08 $4.13 $4.16 $4.18 $4.20
F 55 3.97 4.06 4.15 4.23 4.30 4.35 4.39 4.42
F 60 4.03 4.15 4.28 4.40 4.50 4.59 4.65 4.70
F 65 4.08 4.23 4.40 4.56 4.72 4.86 4.97 5.05
F 70 4.13 4.30 4.50 4.72 4.95 5.16 5.34 5.48
F 75 4.16 4.35 4.59 4.86 5.16 5.46 5.75 5.97
F 80 4.18 4.39 4.65 4.97 5.34 5.75 6.15 6.50
F 85 4.20 4.42 4.70 5.05 5.48 5.97 6.50 7.00
(Continued)
-22-
<PAGE>
-23-
*Age on birthday nearest the due date of the first payment, adjusted according
to the table in the Basis Of Computation provision in Part 7. Monthly payment
rates for adjusted ages not shown and for two males will be furnished on
request.
- --------------------------------------------------------------------------------
Option F Joint Lifetime Payment Option With Reduced Payments (available as
a Fixed Income option and as a Variable Monthly Income option).
Monthly payments are based on the lives of two named persons.
Payments will continue while both are living. When one dies,
reduced payments will continue for the lifetime of the other. These
reduced payments will be two-thirds of what they would have been if
both persons had continued to live. Payments stop when both named
persons have died.
The Fixed Income Option F Table shows the minimum monthly payment
for each $1,000 applied. The Variable Monthly Income Option F Table
shows the minimum amount of the first monthly payment for each
$1,000 applied. The actual payments will be based on the rates we
are using when the first payment is due. They will not be less than
shown in the Table.
- --------------------------------------------------------------------------------
Fixed Income Option F Table
Minimum Monthly Payment Rates For Each $1,000 Applied
Payments For Two Lives Only
M50 M55 M60 M65 M70 M75
Age* F55 F60 F65 F70 F75 F80
M F
50 55 $3.51 $3.66 $3.82 $3.99 $4.17 $4.35
55 60 3.66 3.83 4.02 4.22 4.44 4.66
60 65 3.82 4.02 4.24 4.49 4.76 5.04
65 70 3.99 4.22 4.49 4.80 5.14 5.49
70 75 4.17 4.44 4.76 5.14 5.57 6.02
75 80 4.35 4.66 5.04 5.49 6.02 6.60
80 85 4.54 4.88 5.31 5.84 6.48 7.22
* Age on the birthday nearest the due date of the first payment. Monthly payment
rates for ages not shown will be furnished on request. Monthly payment rates
for ages over 85 are the same as those for 85.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Variable Monthly Income Option F Table
Minimum Monthly Payment Rates For First Payment For Each
$1,000 Applied, Based On 4% Assumed Investment Rate
Payments For Two Lives Only - One Male, One Female
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
M 50 4.24 $4.36 $4.49 $4.64 $4.82 $5.01 $5.23 $5.46
M 55 4.35 4.48 4.63 4.81 5.01 5.23 5.48 5.74
M 60 4.47 4.62 4.80 5.00 5.23 5.50 5.79 6.09
M 65 4.62 4.78 4.98 5.22 5.50 5.81 6.16 6.54
M 70 4.78 4.96 5.19 5.47 5.79 6.18 6.61 7.07
M 75 4.94 5.15 5.41 5.72 6.11 6.57 7.10 7.68
M 80 5.12 5.34 5.63 5.99 6.43 6.98 7.63 8.36
M 85 5.29 5.54 5.85 6.25 6.76 7.39 8.17 9.09
Payments For Two Lives Only - Both Females
Adjusted
Age* F 50 F 55 F 60 F 65 F 70 F 75 F 80 F 85
F 50 $4.11 $4.21 $4.33 $4.46 $4.61 $4.78 $4.96 $5.16
F 55 4.21 4.33 4.46 4.61 4.78 4.96 5.17 5.39
F 60 4.33 4.46 4.61 4.78 4.98 5.19 5.43 5.69
F 65 4.46 4.61 4.78 4.98 5.21 5.47 5.76 6.05
F 70 4.61 4.78 4.98 5.21 5.49 5.81 6.15 6.52
F 75 4.78 4.96 5.19 5.47 5.81 6.19 6.62 7.09
F 80 4.96 5.17 5.43 5.76 6.15 6.62 7.17 7.77
F 85 5.16 5.39 5.69 6.05 6.52 7.09 7.77 8.54
*Age on birthday nearest the due date of the first payment, adjusted according
to the table in the Basis Of Computation provision in Part 7. Monthly payment
rates for adjusted ages not shown and for two males will be furnished on
request.
- --------------------------------------------------------------------------------
Electing A Payment To elect any option, we require that a written request,
Option satisfactory to us, be received at our Service Center.
The Owner may elect an option during the Annuitant's
lifetime. If the death benefit is payable in one sum when
the Annuitant dies, the Beneficiary may elect an option
with our consent.
Options for any amount payable to an association,
corporation, partnership, or fiduciary are available with
our consent. However, a corporation or partnership may
apply any amount payable to it under Option C, E, or F if
the option payments are based on the life or lives of the
Annuitant, the Annuitant's spouse, any child of the
Annuitant, or any other person agreed to by us.
-24-
<PAGE>
-25-
Effective Date And The effective date of an option is the date the amount
Payment Date is applied under that option. For a death benefit, this
is the date that due proof of the Annuitant's or Owner's
death is received at our Service Center. For a maturity
value, it is the date the contract matures. For the cash
redemption value, it is the effective date of
redemption.
The first payment is due on the effective date, except
that the first payment under Option D is due one month
later. A later date for the first payment may be
requested in the payment option election. All payment
dates will fall on the same day of the month as the
first one. No payment will become due until a payment
date. No part payment will be made for any period
shorter than the time between payment dates.
Example: Monthly payments are being made to your son on
the 1st of each month. He dies on the 10th. No
part payment is due your son or his estate for
the period between the 1st and the 10th.
Withdrawals And If provided in the payment option election, all or part
Changes of the unpaid balance under Options A and D may be
withdrawn or applied under any other option.
If provided in the payment option election, the commuted
value of the future payments under Variable Monthly
Income Option B may be withdrawn. In this case, the
number of annuity units that Variable Monthly Income
Option B has in each division of the Separate Account
will be commuted at the Assumed Investment Rate. The
commuted units in each division will be multiplied by
the annuity unit value for that division on the date the
commuted value is determined. The commuted value will be
the sum of the values determined for each division less
any deduction for sales charges that applies.
A deduction for sales charges will apply only if:
. No sales charges were deducted when the
redemption or maturity value was applied under
Variable Monthly Income Option B; and
. A deduction for sales charges would be made if
this contract was redeemed or matured in one
sum on the date commutation is made; and
. Commutation is made during the lifetime of the
person receiving the Option B payments.
The amount of the sales charge deduction will be the
same as if this contract was redeemed for an amount
equal to the commuted value (before deduction of the
sales charge) on the date commutation is made.
Income Protection To the extent permitted by law, each option payment and
any withdrawal shall be free from legal process and the
claim of any creditor of the person entitled to them. No
option payment and no amount held under an option can be
taken or assigned in advance of its payment date, unless
the Owner's written consent is given before the
Annuitant dies. This consent must be received at our
Service Center.
Part 7. Notes On Our Computations
This Part covers some technical points about this
contract.
Net Investment Factor For each division of the Separate Account, the Net
Investment Factor for any valuation period is the gross
investment rate for that period plus 1.000000 and minus
an asset charge. This asset charge will be not more than
.0000411 for each day of a valuation period. The Net
Investment Factor may be greater or less than 1.000000.
For each division of the Separate Account, the gross
investment rate for any valuation period is equal to:
<PAGE>
. The net earnings of that division during the
valuation period, divided by
. The value of the total assets of that division
at the beginning of the valuation period.
The net earnings of each division are equal to the
accrued investment income and capital gains and losses
(realized and unrealized) of that division reduced by
any amount charged against that division for taxes paid
or reserved for by us. The gross investment rate will be
determined by us in accordance with generally accepted
accounting principals and applicable laws, rules, and
regulations. This determination shall be conclusive upon
the Owner, the Annuitant, any Beneficiary, and any
assignee and any other person under this contract.
Accumulation Unit The value of an accumulation unit in each division was
Value set at $1.000000 on the first valuation date selected by
us. The value on any date thereafter is equal to the
product of the Net Investment Factor for that division
for the valuation period that includes that date and the
value of the corresponding accumulation unit value on
the preceding valuation date.
Annuity Unit Value All annuity unit values in each division were set at
$1.000000 on the first valuation date selected by us.
The value on any date thereafter is equal to (a) the Net
Investment Factor for that division for the valuation
period that includes that date divided by (b) the sum of
1.000000 and the rate of interest for the number of days
in the valuation period, computed at an effective annual
rate equal to the Assumed Investment Rate, and
multiplied by (c) the corresponding annuity unit value
on the preceding valuation date.
Assumed Investment The Assumed Investment Rate is the annual interest rate
Rate assumed in determining the first payment under each of
the Variable Monthly Income payment options. The amount
of each subsequent payment from each division of the
Separate Account will depend on the relationship between
the Assumed Investment Rate and the actual investment
performance of that division. The Assumed Investment
Rate will be 4%% per annum. If a 4%% rate would result
in a first Variable Monthly Income payment larger than
that permitted under applicable state law, we will
select a lower rate to comply with that law.
Adjustment Of Units We have the right to split or consolidate the number of
And Values accumulation units or annuity units credited to the
contract, with a corresponding increase or decrease in
the unit values. We may exercise this right whenever we
consider an adjustment of units to be desirable.
However, strict equity will be preserved in making any
adjustment. No adjustment will have any material effect
on the benefits, provisions, or investment return of
this contract, or on the Owner, Annuitant, any
Beneficiary, any assignee or other person, or on us.
Payment Calculation Payments under a Variable Monthly Income payment option
Date are calculated on a payment calculation date. That date
is the earliest valuation date that is not more than 10
days before the due date of the payment.
Computing Variable The first payment under a Variable Monthly Income
Monthly Income payment option is computed in the following steps:
Payments (1) As of the due date of the first payment,
the proceeds of this contract in any MVA
segments of the Fixed Account will be
automatically transferred to the MML Money
Market Division of the Separate Account.
(If the MML Money Market Division is not
available under contracts in this class as
of that date, we will transfer such
proceeds to another division of the
Separate Account that we choose.)
(2) For each division, we multiply the proceeds
from the division by the rate we are using
for the payment option as of the date of
the first payment.
(3) For each division, we multiply the result
of step (2) above by the ratio of the
accumulation unit value for the division on
the first payment calculation date (see
Payment Calculation Date provision above)
to the accumulation unit value of the
division on the due date the first payment
is due.
(4) We sum the results of step (3) for all
divisions of the Separate Account; this is
the first payment.
-26-
<PAGE>
-27-
Future payments under a Variable Monthly Income payment
option are measured by annuity units. The number of
annuity units in each division is the portion of the
first payment provided by that division divided by the
annuity unit value for that division on the first
payment calculation date.
For payments after the first one, the annuity units in
each division are multiplied by the annuity unit value
on the payment calculation date that applies. The
payment to be made on the payment due date is the sum of
the amounts provided by each division.
Basis Of Computation In computing the minimum payments under Fixed Income
payment options C, E, and F, we use mortality rates from
the 1983 Table a with Projection Scale G for 30 years
and with female rates set back five years.
The Variable Monthly Income Option C, E, and F Tables
are based on mortality rates from the 1983 Table a, with
Projection Scale G, for annuitants born in 1942. For all
other years of birth, the mortality improvement is
determined by adjusting the annuitant's age according to
the following table:
Adjustment to Adjustment to
Year of Birth Actual Age Year of Birth Actual Age
1905-1909 +7 Years 1955-1959 -3 Years
1910-1914 +6 Years 1960-1964 -4 Years
1915-1919 +5 Years 1965-1969 -5 Years
1920-1924 +4 Years 1970-1974 -6 Years
1925-1929 +3 Years 1975-1979 -7 Years
1930-1934 +2 Years 1980-1984 -8 Years
1935-1939 +1 Year 1985-1989 -9 Years
1940-1944 +0 Years 1990-1994 -10 Years
1945-1949 -1 Year 1995-1999 -11 Years
1950-1954 -2 Years 2000-2004 -12 Years
The annual interest rate used is the Assumed Investment
Rate discussed in this Part.
Guarantees All benefits, payments, and values under this contract
that depend on the investment performance of the
Separate Account may increase or decrease, as discussed
in this Part. However, we guarantee that the dollar
amounts of variable benefits will not be adversely
affected by variations of actual expenses from expense
charges stated in this contract. Also, those benefits
will not be adversely affected by variations in actual
mortality from the mortality assumptions stated in this
contract.
A part of the assets of the Separate Account is the
reserve for variable benefits and liabilities that
depend on the investment performance of that Account.
That part of the assets shall not be charged with any
liabilities we have that arise from any business we
conduct that does not depend on the performance of that
Account.
The values and benefits of the Fixed Account under this
contract are not less than those required by the laws of
the state in which this contract is delivered.
<PAGE>
WHERE TO FIND IT
Page No.
The Schedule Page.................................................... 1
Part 1. - The Basics Of This Contract.................................. 2
The Parties Involved - Owner, Joint Owner, Annuitant,
Beneficiary, Irrevocable Beneficiary, Payee....................... 2
Dates - Contract Date, Contract Anniversary Date,
Contract Year, Issue Date, Maturity Date.......................... 2
This Is A Legal Contract............................................. 3
Trusts And Other Agreements.......................................... 3
Representations And Contestability................................... 3
Misstatement Of Age Or Sex........................................... 3
Meaning Of In Force.................................................. 3
Service Center....................................................... 3
Contract State....................................................... 3
Currency............................................................. 3
Contract Is Not Participating........................................ 3
Part 2. - Purchase Payments............................................ 3
The First Purchase Payment........................................... 3
Purchase Payment Flexibility......................................... 4
Right To Terminate Contract.......................................... 4
Where To Pay......................................................... 4
Net Purchase Payments................................................ 4
Allocation Of Net Purchase Payments.................................. 4
Part 3. - Accounts, Values, And Charges................................ 4
The Separate Account And The Fixed Account........................... 4
The Separate Account................................................ 4
Changes In The Separate Account..................................... 5
Accumulation Units And Annuity Units................................ 5
Valuation Date, Valuation Time, Valuation Period.................... 5
Purchase And Sale Of Accumulation Units............................. 5
The Fixed Account................................................... 6
MVA Segments........................................................ 6
Values Of This Contract.............................................. 7
Accumulated Value Of Contract....................................... 7
Variable Value Of Contract.......................................... 7
Fixed Value Of Contract............................................. 8
Market Value Of Contract............................................ 8
Market Value In The MVA Segments.................................... 8
Contract Charges..................................................... 9
Administrative Charge............................................... 9
Deductions For Sales Charges........................................ 10
Amount Of Sales Charge.............................................. 10
Transfer Fee........................................................ 11
Part 4. - Life Benefits................................................ 11
Contract Ownership................................................... 12
Rights Of Owner..................................................... 12
Assigning This Contract.............................................. 12
Changing The Owner, Payee, Or Beneficiary............................ 12
Transfers Of Values.................................................. 12
Limitations On Transfers............................................. 13
Redeeming This Contract.............................................. 13
Right To Redeem..................................................... 13
Cash Redemption Value............................................... 13
Partial Redemptions................................................. 13
When And How We Pay................................................. 13
Right To Change The Maturity Date.................................... 14
Electing An Early Maturity Date..................................... 14
Electing A Later Maturity Date...................................... 14
Other Provisions Regarding Life Benefits............................. 14
Periodic Statements................................................. 14
Receipt Of Information.............................................. 14
Part 5. - Maturity Benefit And Death Benefit........................... 14
Maturity Benefit..................................................... 15
Maturity Value...................................................... 15
Monthly Life Income................................................. 15
Alternate Settlements At Maturity................................... 15
Restriction On Rights............................................... 15
Death Benefit........................................................ 15
Amount Of Death Benefit............................................. 15
Interest On Maturity Or Death Benefit................................ 16
Interest Payable.................................................... 16
Part 6. - Payment Options.............................................. 16
Fixed Income Payment Options......................................... 16
Variable Monthly Income Payment Options.............................. 16
Availability Of Payment Options...................................... 16
Minimum Amounts...................................................... 16
Electing A Payment Option............................................ 24
Effective Date And Payment Date...................................... 25
Withdrawals And Changes.............................................. 25
Income Protection.................................................... 25
Part 7. - Notes On Our Computations.................................... 25
Net Investment Factor................................................ 25
Accumulation Unit Value.............................................. 26
Annuity Unit Value................................................... 26
Assumed Investment Rate.............................................. 26
Adjustment Of Units And Values....................................... 26
Payment Calculation Date............................................. 26
Computing Variable Monthly Income Payments........................... 26
Basis Of Computation................................................. 27
Guarantees........................................................... 27
Any riders and endorsements, and a copy of the application for the contract,
follow Page 27.
<PAGE>
[LOGO OF MASSMUTUAL(R) APPEARS HERE]
Massachusetts Mutual Life Insurance Company
Springfield MA 01111-0001
- ---------------------------
Deferred Variable Annuity
Contract
With Oppenheimer Variable Account Funds and MML
Series Investment Funds - Includes Fixed Interest Account
with Market-Value Adjustment
This Contract provides that:
Flexible purchase payments may be made, while the Annuitant and Owner are
living, to the date this contract matures.
A death benefit is payable if the Annuitant or Owner dies before this contract
matures.
A monthly life income is payable beginning on the date this contract matures if
the Annuitant and Owner are living at that time.
This Contract is not participating. It does not provide for the payment of
dividends.
Notice Of Annual Meeting
The Owner is hereby notified that, by virtue of this policy he or she is a
member of Massachusetts Mutual Life Insurance Company and is entitled to vote
either in person or by proxy at any and all meetings of said Company. The annual
meetings are held at its Home Office, in Springfield, Massachusetts, on the
second Wednesday in April of each year at 2 o'clock p.m.
<PAGE>
Exhibit 5
Opinion Re Legality
March, 1998
Massachusetts Mutual Life Insurance Company
1295 State Street
Springfield, MA 01111
RE: Massachusetts Mutual Fixed Account with Market Value
Adjustment; Commission File No. 33-84802
Ladies and Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 4 to the Registration Statement on Form S-2 (the "Registration
Statement") under the Securities Act of 1933 for Massachusetts Mutual Fixed
Account with Market Value Adjustment (the "Fixed Account") offered in connection
with OppenheimerFunds LifeTrust Variable Annuity contract, issued by MassMutual.
The Fixed Account offers investors the choice among various guarantee periods to
which account value may be allocated. If such amounts remain in the Fixed
Account for the chosen guarantee period, then a guaranteed rate of interest will
be paid. If, however, amounts are withdrawn prior to the expiration of the
selected guarantee period, such withdrawal will be subject to a market value
adjustment.
As Counsel for Massachusetts Mutual Life Insurance Company, ("MassMutual"), I
provide legal advice to MassMutual in connection with the operation of its
variable products. In such role I have participated in the preparation of
Post-Effective Amendment No. 4 to the Registration Statement for the Fixed
Account.
In so acting, I have made such examination of the law and examined such records
and documents as in my judgment are necessary or appropriate to enable me to
render the opinion expressed below. I am of the following opinion:
1. MassMutual is a valid and subsisting corporation, organized and operated
under Massachusetts law, and subject to regulation by the Massachusetts
Commissioner of Insurance.
2. The securities being registered, when sold will be legally issued, fully paid
and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the Post-Effective
Amendment.
Very truly yours,
/s/ James M. Rodolakis
James M. Rodolakis
Counsel
<PAGE>
Exhibit 23(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Massachusetts Mutual Life Insurance Company
We consent to the inclusion in this Post-Effective Amendment No. 4 to the
registration statement on Form S-2 (File No. 33-84802) of our report, which
includes explanatory paragraphs relating to the use of statutory accounting
practices, which practices differ from generally accepted accounting principles,
dated February 6, 1998 and "Selected Historical Financial Data" on our audits of
the statutory financial statements and statutory financial statement schedules
of Massachusetts Mutual Life Insurance Company. We also consent to the reference
to our Firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Springfield, Massachusetts
March 30, 1998
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Massachusetts Mutual Life Insurance Company
In connection with our audits of the statutory financial statements of
Massachusetts Mutual Life Insurance Company as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, which
financial statements are included in the Post Effective Amendment No. 4 to the
registration statement on Form S-2 (File No. 33-84802), we have also audited the
financial statement schedules listed in Exhibit 23(ii) herein.
In our opinion, these financial statement schedules, when considered in relation
to the basic statutory financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Springfield, Massachusetts
February 6, 1998
2
<PAGE>
Exhibit 23(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement for Massachusetts Mutual Life Insurance Company.
Arthur Andersen LLP
Hartford Connecticut
April 1, 1998
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Policyholders of Connecticut Mutual Life Insurance Company:
We have audited the accompanying statutory statements of income, changes in
policyholders' contingency reserves and cash flows of Connecticut Mutual Life
Insurance Company (the Company) for the year ended December 31, 1995 (not
presented separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our originally issued report dated February 15, 1996, we expressed an opinion
that the 1995 financial statements, prepared using accounting practices
prescribed or permitted by the Insurance Department of the State of Connecticut,
presented fairly, in all material respects, the financial position of the
Company as of December 31, 1995, and the results of its operations and its cash
flows for the year ended December 31, 1995 in conformity with generally accepted
accounting principles. Pursuant to the provisions of Statement of Financial
Accounting Standards No. 120 (SFAS No. 120), Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Contracts, financial statements of mutual life insurance
enterprises for periods ending on or before December 15, 1996, prepared using
accounting practices prescribed or permitted by insurance regulators (statutory
financial statements) are no longer considered presentations in conformity with
generally accepted accounting principles when presented for comparative purposes
with the enterprise's financial statements for periods subsequent to the
effective date SFAS No. 120. Accordingly, our present opinion on the
presentation of the 1995 financial statements in accordance with generally
accepted accounting principles, as present herein, is different from that
expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the results of
operations and cash flows of Connecticut Mutual Life Insurance Company for the
year ended December 31, 1995.
In our opinion, the financial statements referred to above do present fairly, in
all material respects, the results of operations and cash flows of Connecticut
Mutual Life Insurance Company for the year ended December 31, 1995 in conformity
with accounting practices prescribed or permitted by the Insurance Department of
the State of Connecticut.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 15, 1996
4
<PAGE>
Exhibit 23(ii)
FINANCIAL STATEMENT SCHEDULES
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
SCHEDULE I: SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
(In Millions)
<TABLE>
<CAPTION>
Amount
at which
Cost or shown on
Other Fair Balance
Basis Value Sheet
----- ----- -----
<S> <C> <C> <C>
Bonds:
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 6,241 $ 6,701 $ 6,241
Debt Securities issued by Foreign Governments 84 85 84
Mortgage-backed securities 3,391 3,570 3,391
State and local governments 362 385 362
Corporate debt securities 12,149 12,867 12,149
Utilities 872 970 872
Affiliates 792 794 792
------- ------- -------
Total Bonds 23,891 25,372 23,891
------- ------- -------
Common Stock:
Public utilities 2 3 3
Banks, Trusts and Insurance Companies 8 15 15
Industrial, Miscellaneous and Other 240 336 336
------- ------- -------
Subtotal 250 354 354
Other, Including Subsidiaries 711 972 972
------- ------- -------
Total Common Stock 960 $ 1,326 1,326
======= ======= =======
Mortgage Loans on Real Estate 4,865 4,864
Real Estate:
Properties in Satisfaction of Debt 118 118
Investment Real Estate 1,508 1,508
------- -------
Subtotal - Real Estate Investment 1,626 1,626
Real Estate - Other 72 72
------- -------
Total Real Estate 1,698 1,698
------- -------
Policy Loans 4,950 4,950
Cash and Short-term investments 1,941 1,941
Other Investments 992 992
------- -------
Total Investments 39,296 39,662
------- -------
Related Parties:
Bonds 792 $ 794 792
Common Stock 711 972 972
------- ------- -------
Total Related Parties 1,503 $ 1,766 1,764
------- ======= -------
Investments Other than Investments in Related Parties $37,793 $37,897
======= =======
</TABLE>
1
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
SCHEDULE III: SUPPLEMENTARY INSURANCE INFORMATION/(1)(2)/
December 31, 1997
(In Millions)
<TABLE>
<CAPTION>
Policyholders' Net Policy Benefits
Policyholders' Dividends Investment and Payments Other
Reserves and Claims and Premium and Other and Increase Insurance
Segment Funds Other Benefits Income Income(2) in Reserves Commissions Expenses
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Individual line $26,265 $ 1,303 $ 4,299 $ 2,187 $ 4,308 $ 302 $ 462
Pension Management 7,518 5 2,466 717 3,010 14 70
------- ------- ------- ------- ------- ------- -------
$33,783 $ 1,308 $ 6,765 $ 2,904 $ 7,318 $ 316 $ 532
======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1996
Individual line $24,901 $ 1,252 $ 4,286 $ 2,062 $ 4,235 $ 323 $ 523
Pension Management 8,441 7 2,043 799 2,668 12 67
------- ------- ------- ------- ------- ------- -------
$33,342 $ 1,259 $ 6,329 $ 2,861 $ 6,903 $ 335 $ 590
======= ======= ======= ======= ======= ======= =======
Year ended December 31, 1995
Individual line $23,280 $ 1,221 $ 3,925 $ 1,994 $ 3,796 $ 331 $ 562
Pension Management 9,613 7 1,803 904 2,561 9 66
------- ------- ------- ------- ------- ------- -------
$32,893 $ 1,228 $ 5,728 $ 2,898 $ 6,357 $ 340 $ 628
======= ======= ======= ======= ======= ======= =======
</TABLE>
/(1)/ Deferred policy acquisition cost column has been omitted from this
schedule because it does not apply to mutual life insurance companies.
/(2)/ Includes other income of $68 million, $80 million and $61 million for
1997, 1996 and 1995, respectively.
2
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
SCHEDULE IV: REINSURANCE
(In Millions)
<TABLE>
<CAPTION>
Percentage of
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Year ended December 31, 1997 Amount Companies Companies Amount to Net
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Life Insurance in Force $201,560 $ 47,606 $ 968 $154,922 0.6%
======== ======== ======== ======== ===
Premiums and other considerations
Individual life & annuities $ 3,775 $ 101 $ 50 $ 3,724 1.3%
Group life & annuities 2,795 41 - 2,754 -
Accident & health 567 280 - 287 -
-------- -------- -------- -------- ---
Total Premium and other considerations $ 7,137 $ 422 $ 50 $ 6,765 1.3%
======== ======== ======== ======== ===
Year ended December 31, 1996
Life Insurance in Force $202,572 $ 45,012 $ 719 $158,279 0.5%
======== ======== ======== ======== ===
Premiums and other considerations
Individual life & annuities $ 4,663 $ 711 $ 47 $ 3,999 1.2%
Group life & annuities 2,405 75 0 2,330 0.0
-------- -------- -------- -------- ---
Total Premium and other considerations $ 7,068 $ 786 $ 47 $ 6,329 0.7%
======== ======== ======== ======== ===
Year ended December 31, 1995
Life Insurance in Force $200,804 $ 44,331 $ 855 $157,328 0.5%
======== ======== ======== ======== ===
Premiums and other considerations
Individual life & annuities $ 4,472 $ 818 $ 68 $ 3,722 1.8%
Group life & annuities 2,081 85 10 2,006 0.5
-------- -------- -------- -------- ---
Total Premium and other considerations $ 6,553 $ 903 $ 78 $ 5,728 1.4%
======== ======== ======== ======== ===
</TABLE>
3
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY/(1)/
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
<TABLE>
<CAPTION>
Realized Unrealized Net change to Balance
Balance at Additions Transfers Capital Capital Policyholders' at end
beginning of Reserve among Gains Gains Contingency of
Description period Contributions/(1)/ categories (Losses)/(2)/ (Losses)/(3)/ Reserves/(4)/ period/(5)/
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the year ended
December 31, 1997
-----------------
Bonds, Preferred Stocks and Short-
term Investments $ 234 $ 28 $ (35) $ (6) $ 29 $ 16 $ 250
Mortgage Loans 141 20 35 (44) -- 11 152
Real Estate 240 (26) 65 (9) -- 30 270
Other Investments 250 (55) (65) 50 94 24 274
Special investment reserve for
surplus notes 32 (4) -- -- -- (4) 28
----- ----- ----- ----- ----- ----- -----
Total $ 897 $ (37) $ -- $ (9) $ 123 $ 77 $ 974
===== ===== ===== ===== ===== ===== =====
Detail/(6)/:
Asset Valuation Reserve $ 689 $ 841
General Investment Reserves 208 133
----- -----
Total $ 897 $ 974
===== =====
As of and for the year ended
December 31, 1996
-----------------
Bonds, Preferred Stocks and Short-
term Investments $ 210 $ 40 0 $ (7) $ (9) $ 24 $ 234
Mortgage Loans 141 37 0 (37) 0 0 141
Real Estate 135 41 $ 154 (79) (11) 105 240
Other Investments 234 0 (154) 200 (30) 16 250
Special investment reserve for
surplus notes 35 (3) 0 0 0 (3) 32
----- ----- ----- ----- ----- ----- -----
Total $ 755 $ 115 $ 0 $ 77 $ (50) $ 142 $ 897
===== ===== ===== ===== ===== ===== =====
Detail/(6)/:
Asset Valuation Reserve $ 567 $ 689
General Investment Reserves 188 208
----- -----
Total $ 755 $ 897
===== =====
</TABLE>
4
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY (1)
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS (continued)
(In Millions)
<TABLE>
<CAPTION>
Realized Unrealized Net change to Balance
Balance at Additions Transfers Capital Capital Policyholders' at end
beginning of Reserve among Gains Gains Contingency of
Description period Contributions/(1)/ categories (Losses)/(2)/ (Losses)/(3)/ Reserves/(4)/ period/(5)/
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the year ended
December 31, 1995
-----------------
Bonds, Preferred Stocks and Short-
term Investments $ 208 $ 44 (2) $ (1) $ (39) $ 2 $ 210
Mortgage Loans 204 11 2 (70) (6) (63) 141
Real Estate 125 27 27 (42) (2) 10 135
Other Investments 107 5 (27) 18 131 127 234
Special investment reserve for
surplus notes 35 0 0 0 0 0 35
----- ----- ----- ----- ----- ----- -----
Total $ 679 $ 87 $ 0 $ (95) $ 84 $ 76 $ 755
===== ===== ===== ===== ===== ===== =====
Detail/(6)/:
Asset Valuation Reserve $ 470 $ 567
General Investment Reserves 209 188
----- -----
Total $ 679 $ 755
===== =====
</TABLE>
/(1)/ Amounts represent contributions calculated using a statutory formula
plus amounts deemed necessary by the Company. Represents the net impact
on Policyholder' Contingency Reserves for investment gains and losses
not related to changes in interest rates.
/(2)/ These amounts offset realized capital gains and losses, 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. 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 2) less amounts already
recorded (notes 3 and 4). This net change in reserves is recorded as a
charge to Policyholders' Contingency Reserves.
/(5)/ The balance is comprised of the Asset Valuation Reserve and General
Investment Reserves which are recorded separately as liabilities on the
Statement of Financial Position.
/(6)/ The Asset Valuation Reserve is a component of Total Adjusted Capital,
while General Investment Reserves are excluded from Total Adjusted
Capital, according to the NAIC definition.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Massachusetts Mutual Life Insurance Company and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 23,890
<DEBT-CARRYING-VALUE> 23,890
<DEBT-MARKET-VALUE> 25,372
<EQUITIES> 355
<MORTGAGE> 4,864
<REAL-ESTATE> 1,698
<TOTAL-INVEST> 39,662
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 57,635
<POLICY-LOSSES> 33,783
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 353
<POLICY-HOLDER-FUNDS> 16,803
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 2,873
<TOTAL-LIABILITY-AND-EQUITY> 57,635
6,765
<INVESTMENT-INCOME> 2,904
<INVESTMENT-GAINS> 43
<OTHER-INCOME> 0
<BENEFITS> 7,318
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 848
<INCOME-PRETAX> 1,504
<INCOME-TAX> 285
<INCOME-CONTINUING> 1,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,219
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
