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Reg. No. 33-84802
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-2
POST-EFFECTIVE AMENDMENT NO. 5
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
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(I.R.S. Employer Identification No.)
1295 State Street
Springfield, Massachusetts 01111
(413) 744-8411
--------------
(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, 1999
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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Massachusetts Mutual
Life Insurance Company
Fixed Account with Market Value Adjustment
This prospectus describes the fixed account with market value adjustment offered
by Massachusetts Mutual Life Insurance Company ("MassMutual"). The fixed account
is available as an investment option for owners of the LifeTrust variable
annuity contract ("the contract"). You, the contract owner, may allocate
purchase payments or transfer contract values, in accordance with the contract's
transfer rules, to the fixed account. Since the fixed account is available only
through the contract, you should carefully review the discussion of the contract
contained in the attached prospectus for the contract. We limit the focus of
this prospectus to the fixed account's operations and features.
We guarantee specific rates of interest for amounts you allocate to the fixed
account for specific periods of time. The interest rate we guarantee for a
particular period is an annual effective yield. The guaranteed rates will
fluctuate, but we guarantee they will never go below 3%. Our general account
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 from other business of the company. You may make
purchase payments and transfers of contract value among the fixed account and
the funds in the contract.
We will apply a market value adjustment to amounts removed from the fixed
account:
. If you take a full or partial withdrawal;
. If you transfer contract value from the fixed account;
. If we pay a death benefit upon the death of the contract owner who is not
the annuitant; or
. If we begin making annuity payments.
We will not apply a market value adjustment if the amounts are removed from the
fixed account during the 30-day period before the end of the guarantee period.
The market value adjustment may be positive or negative. Therefore you may
experience a negative investment return.
Please read this prospectus before investing in the fixed account. You should
keep it for future reference. It contains important information.
This prospectus must be accompanied by the LifeTrust variable annuity contract
prospectus and the prospectus for the funds underlying the LifeTrust variable
annuity contract.
- --------------------------------------------------------------------------------
The SEC has not approved these contracts or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
- --------------------------------------------------------------------------------
May 1, 1999
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Table of Contents
Index of Special Terms 2
Product Description 3
The Fixed Account and the Market Value
Adjustment Feature 3
Market Value Adjustment 3
Accumulation Phase of a Contract 5
The Guaranteed Rate 5
Contingent Deferred Sales Charge 5
Investments 6
Distribution of Contracts 6
Accounting Practices 7
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
General 8
Results of Operations 9
Statement of Financial Position 17
Liquidity and Capital Resources 18
Year 2000 issue 19
Investments 22
Quantitative and Qualitative Information
about Market Risk 31
Description of the Business 33
Experts and Additional Available
Information 43
Selected Historical Financial Data 44
Audited Statutory Financial Statements FF-1
Index of Special Terms
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. The page that is indicated here is where we believe you will
find the best explanation for the word or term.
Page
Expiration Date 5
Fixed Account 3
Guarantee Period 3
Guaranteed Rate 3
Market Value Adjustment 3
Segment 5
Withdrawal 3
2
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Product Description
The investment option described in this prospectus is a fixed account with
market value adjustment ("MVA") available in conjunction with the Life Trust
variable annuity ("contract"). The contract provides for the accumulation of
values prior to maturity and for the distribution of annuity payments after the
maturity date. Additionally, a death benefit is also available under the
contract.
The earnings on purchase payments or contract value you allocate to the fixed
account will have an impact on your contract's value, its maturity value, its
cash redemption value and the death benefit. We believe that we have adequate
resources to meet our obligations with regard to the fixed account and the
contract.
We have described the contract in greater detail in the attached prospectus for
the contract. You should review that prospectus in conjunction with this
prospectus before deciding whether to invest in the contract or allocate money
to the fixed account. The fixed account is not available in all states.
The Fixed Account and the
Market Value Adjustment
Feature
The fixed account is available during the accumulation phase of the contract.
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
contract value in the fixed account. Please note that amounts credited to a
guarantee period at different times may have different guaranteed rates, current
rates, and expiration dates since we change the current and guaranteed rates
periodically.
You may allocate purchase payments or transfer all or a portion of your contract
value to the fixed account. Amounts credited to the fixed account earn interest
at the guaranteed rate applicable for the guarantee period you select 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 fixed account segment) must be for at
least $1,000. The value of your contract in the fixed account is not guaranteed
against the claims of our creditors.
We may make guarantee periods 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 we issued your contract. 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 our Annuity Service
Center to determine the guarantee periods we are currently offering.
Market Value Adjustment
Any withdrawal of your contract value from the fixed account will be subject to
a market value adjustment ("MVA") unless the effective date of the withdrawal is
within 30 days before 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, we also treat transfers, death benefits based on a contract
owner's death (where the contract owner and the annuitant are different), and
annuity payments as withdrawals.
We will not apply an MVA upon the payment of a death benefit following the death
of the annuitant. We will apply the MVA to the amount being withdrawn, after the
deduction of any applicable administrative charge and before the deduction of
any applicable contingent deferred sales charge. The MVA can be positive or
negative. Therefore, the amount being withdrawn after our application of the MVA
can be greater than or less than the amount withdrawn before our application of
the MVA.
The MVA will reflect the relationship between the current rate (as defined
later) for the contract value 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 our
application of the MVA will result in a lower payment upon withdrawal.
Similarly, if the guaranteed rate is higher than the applicable current rate,
our application of the MVA will
3
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result in a higher payment upon withdrawal.
We determine the market value adjustment which we apply to the amount being
withdrawn by using the following formula:
n
1 + i -----
MVA= Amount x [(-------) 365 - 1]
1 + j
where,
Amount is the amount being withdrawn from a given fixed account segment less any
applicable administrative charges.
i is the guaranteed rate we are crediting to the contract
value subject to the MVA; and
j, the "current rate," is the guaranteed rate, available as of the effective
date of our application of the MVA, for current allocations to the fixed account
segment whose guarantee period equals the number of years remaining, both
partial and full, for the amount being withdrawn; and
n, is the number of days remaining in the guarantee
period of the amount subject to the MVA.
In our determining "j," if we do not currently offer the required segment, we
will base "j" on the rates available for currently offered segments.
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 this 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, you withdraw the full amount 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 the MVA as of May
10, 1998, equals:
4
$1,000 x 1.06 = $1,262.48
(3) The number of days remaining = 365 (n = 365);
(4) The MVA equals $24.28, and is calculated according to the following
formula:
365
1.06 ---
$24.28 = $1,262.48 x [(------) 365 - 1]
1.04
Therefore, a withdrawal on May 10, 1998, of the amount credited to the 5-year
segment on May 10, 1994, is 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%. If the $1,000 is left in that segment until May 10, 1999, it will accumulate
at a 5% effective annual rate of interest to $1,407.10. If, however, you
withdraw the full amount 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:
3
$1,000 x 1.05 = $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
1.05 ----
$-196.56 = $1,157.63 x [(------) 365 - 1]
1.10
Therefore, a withdrawal on May 10, 1995, of the amount credited to the 7-year
segment on May 10, 1992, is equal to $961.07 ($1,157.63 - $196.56 = $961.07).
These examples are hypothetical and are not indicative of future or past
performance.
4
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Accumulation Phase of a
Contract
Variable annuities are designed to permit you to accumulate values over a period
of time. Generally, you will use such contract values for long term needs such
as retirement planning. Accordingly, amounts you allocate to the fixed account
will be subject to several guarantee periods over the life of the contract in
many instances.
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 your contract value in the fixed account segment, we
will inform you of the guaranteed rates we are offering 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 we quoted in such notice.
The guarantee period normally "renews". In the absence of instructions from you
on the expiration date, we will begin crediting interest for a new guarantee
period lasting the same amount of time as the one that just ended. The contract
value in the fixed account segment then earns interest at the new guaranteed
rate applicable at the time of renewal.
At the expiration date for a guarantee period, you may also choose different
guarantee periods from among those we are then offering, or you may transfer all
or a portion of the contract value in the fixed account segment to the funds
underlying the contract.
If your fixed account segment is no longer available to receive new amounts, 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 you have not made a choice at this
point, we will apply your fixed account contract value to the fixed account
segment with the next shorter guarantee period available. If that segment is not
available, we will apply your fixed account contract value to the fixed account
segment with the next longer period.
The Guaranteed Rate
We will make the final determination about future guarantee rates for future
purchase payments, transfers or renewals. Although we cannot predict future
guarantee rates, they will never be less than three percent (3%) per year.
Contingent Deferred Sales
Charge
We will apply an MVA if you partially or fully withdraw contract value from the
fixed account segment unless the effective date of the withdrawal is within 30
days before the end of the guarantee period. When you make a withdrawal, we will
reduce your contract value by the amount you withdraw from the fixed account
segment prior to any MVA.
Any contract value you withdraw may also be subject to a contingent deferred
sales charge under the contract as follows:
Full Years Since Contingent Deferred
Purchase Payment Sales Charge
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7 or more 0%
We assess a contingent deferred sales charge because we do not assess a sales
charge when we receive a purchase payment. We base the amount of the contingent
deferred sales charge on the length of time between the date we receive the
particular payment and the date it is withdrawn.
Purchase payments you withdraw after 7 full years are not subject to a
contingent deferred sales charge. Amounts in the fixed account, however,
continue to be subject to a market value adjustment. We will not assess a
contingent deferred sales charge against transfers, certain annuity payments,
and certain death benefit payments. For more information concerning the
application of the contingent deferred sales charge, please consult the contract
prospectus.
5
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Investments
We must invest our assets in accordance with the requirements established by
applicable state laws regarding the nature and quality of investments that may
be made by life insurance companies and the percentage of their assets that may
be committed to any particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in
federal, state, and municipal obligations, corporate bonds, preferred and common
stocks, real estate mortgages, real estate and certain other investments.
Proceeds from the fixed account will be deposited in a non-unitized segment of
our general account organized as a separate account for accounting purposes. We
will use proceeds to fund our obligations under the contract and amounts not
required to fund such obligations may accrue to us 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 of our general account
assets are available to meet the contract guarantees.
In establishing guaranteed rates, we take into account the yields available on
the instruments in which we intend to invest the contract proceeds. Our
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.
Distribution of Contracts
MML Distributors, LLC ("MML Distributors") serves as principal underwriter for
the contracts. MML Investors Services, Inc. ("MMLISI") serves as co- underwriter
for the contracts. Their purpose as underwriters is to distribute the contracts.
We indirectly wholly-own MML Distributors and MMLISI. Both are located at 1414
Main Street, Springfield, Massachusetts 01144-1013.
We will pay commissions to broker-dealers who sell the contracts. We pay
commissions based on a percentage of purchase payments or a combination
percentage of purchase payments and contract value. Currently, we pay an amount
up to 6.25% of purchase payments. We may pay a commission of up to 0.25% of
contract values each contract year.
From time to time, MML Distributors may enter into special arrangements with
certain broker-dealers. These special arrangements may provide for the payment
of higher compensation to such broker-dealers for selling the contracts.
6
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Accounting Practices
We have prepared the accompanying statutory financial information, included in
this filing, in conformity with the 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 Life Insurance Company
("Connecticut Mutual"), the State of Connecticut Insurance Department
("statutory accounting practices").
The accompanying statutory financial statements are different in some respects
from financial statements prepared to conform with generally accepted accounting
principles ("GAAP"). The more significant differences are as follows:
(a) the financial statements reflect the value of our subsidiaries as
investments, whereas GAAP would require our results to be consolidated with
those of our majority-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, morbidity and interest
requirements without consideration 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 reported 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 income
and changes in reserves, whereas under GAAP, these payments would be
recorded as deposits to policyholders' account balances.
In accordance with the life insurance laws and regulations under which we
operate, we are obligated to carry on our books, as liabilities, actuarially
determined reserves to meet our obligations on outstanding contracts. We develop
policyholders' reserves for life insurance contracts 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 the 1980 Commissioners' Standard Ordinary mortality tables with assumed
interest rates ranging from 2.5% to 6.8%. We develop reserves for individual
annuities based on accepted actuarial methods at interest rates ranging from
2.3% to 11.3%.
We maintain an asset valuation reserve ("AVR") and an Interest Maintenance
Reserve ("IMR"), in compliance with regulatory requirements. The AVR and other
investment reserves stabilize policyholders' contingency reserves against
declines in the value of bonds. The IMR captures after-tax realized capital
gains and losses that result from changes in the overall level of interest
rates, for all types of fixed income investments, and interest related hedging
activities. The IMR amortizes these capital gains and losses into income using
the grouped method over the remaining life of the investment sold or over the
remaining life of the underlying asset. The IMR is included in other liabilities
on the Statutory Statement of Financial Position.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective not later than January 1, 2001. The effect of
adopting Codification shall be reported as an adjustment to policyholders'
contingency reserves on the effective date. We are currently reviewing the
impact of Codification. However, since the Division of Insurance of the
Commonwealth of Massachusetts has not approved Codification, we cannot determine
the ultimate impact at this time.
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, as well
as disclosures of contingent assets and liabilities, as of the date of the
financial statements. We 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 our actual results to differ from the estimates we
used in the financial statements.
We have reclassified certain prior year amounts to conform with the current year
presentation.
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Management's Discussion and Analysis of
Financial Condition and Results of
Operations
GENERAL
You should read the following discussion in conjunction with the Statutory
Financial Statements, Notes to Statutory Financial Statements and Selected
Historical Financial Data.
Our direction and operations are guided by a statement of corporate vision.
Under that vision we manage our operations to maintain a financially strong and
efficient enterprise. Our long-term objectives are to maintain corporate
financial strength, enhance policyholder value, and generate and sustain growth.
We have pursued these objectives by:
. emphasizing profitability through refined product pricing,
. sophisticated asset/liability management,
. rigorous expense control,
. prudent underwriting standards,
. the adoption of efforts to improve persistency and retention levels, and
. continued commitment to the high credit quality of our general account
investment portfolio.
Our efforts have produced strong financial performance, with net income of $366
million in 1998, $257 million in 1997 and $265 million in 1996. At December 31,
1998, we had approximately $62.7 billion in total assets, over 2.5 million
individual policyholders and approximately $201 billion of direct individual
life insurance in force. Our total adjusted capital, as defined by the NAIC, has
grown to $4.7 billion at December 31, 1998, compared to $4.2 billion at December
31, 1997, and $3.8 billion at December 31, 1996.
The following table sets forth the calculation of total adjusted capital, as
defined by the NAIC:
December 31,
------------
1998 1997 1996
---- ---- ----
($ In Millions)
Policyholders' Contingency
Reserves $3,189 $2,873 $2,639
Asset Valuation Reserve 975 864 707
One-half of the Apportioned
Dividend Liability 505 472 438
------ ------ ------
Total Adjusted Capital(1) $4,669 $4,209 $3,784
====== ====== ======
(1) Defined by the NAIC as surplus plus consolidated AVR and one half of the
consolidated apportioned dividend liability.
In our total adjusted capital we include $100 million of surplus notes, issued
in 1994, and $250 million of surplus notes, issued in 1993. We record the
proceeds of the notes, less a reserve of $24 million in 1998, $28 million in
1997 and $32 million in 1996 for contingencies associated with the issuance of
the notes, as a component of our policyholders' contingency reserves. We include
these special surplus note contingency reserves in investment reserves.
In January 1999, we had several changes in our senior management. Chief
Executive Officer, Thomas B. Wheeler relinquished that title, but continues to
be Chairman of the Board of Directors and John J. Pajak retired as President and
Chief Operating Officer. The Board of Directors then appointed Robert J.
O'Connell as President and Chief Executive Officer.
Our financial strength continued to be recognized favorably by the rating
agencies. Our year end 1998 ratings were again among the highest enjoyed by any
company in any industry. Our AAA (Extremely Strong) financial strength rating
from Standard & Poor's, A++ (Superior) financial strength rating from A.M. Best,
and AAA claims-paying rating from Duff & Phelps were the highest possible. Our
Aa1 financial strength rating from
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Moody's Investors Service was the highest in its "Excellent" Category. Each
rating agency independently assigns ratings based on its own separate review and
takes into account a variety of factors, which are subject to change in making
its decision. Accordingly, there can be no assurance of the ratings that will be
afforded us in the future.
On March 1, 1996, we merged with Connecticut Mutual Life Insurance Company
("Connecticut Mutual"). The merger was accounted for under the pooling of
interests method. For the purposes of this presentation, the financial
statements reflect historical amounts giving retroactive effect as if the merger
had occurred on January 1, 1994. This is in conformity with statutory accounting
practices. In 1996, we recorded merger-related expenses totaling $66 million in
our statutory statement of income. On the merger date, we strengthened
policyholder reserves attributable to disability income contracts by $75
million, increased investment reserves for real estate by $50 million and
increased net prepaid pension assets by $10 million.
On March 31, 1996, we sold MassMutual Holding Company Two, Inc., a wholly-owned
subsidiary, and its subsidiaries, including Mirus Life Insurance Company to
WellPoint Health Networks, Inc. Mirus Life Insurance Company was formerly known
as MML Pension Insurance Company and is currently doing business as "UniCARE."
This group of companies comprised our group life and health business. We
received total consideration of $402 million ($340 million in cash and $62
million in notes receivable) and recognized a before tax gain of $188 million in
connection with this sale. We cede all of our group life, accident and health
("GLA&H") business to UniCARE pursuant to a 1994 reinsurance agreement.
Accordingly, our gain from operations since 1994 does not include income
generated by the GLA&H business.
TOTAL COMPANY - RESULTS
OF OPERATIONS
Years Ended December 31, 1998
Compared to Years Ended
December 31, 1997 and 1996
The following table sets forth the components of our net income.
Years Ended December 31,
------------------------
($ In Millions)
1998 1997 1996
---- ---- ----
Revenue:
Premium income $ 7,482 $ 6,765 $ 6,329
Net investment income 2,957 2,870 2,834
Fees and other income 154 127 117
------- ------- -------
10,593 9,762 9,280
------- ------- -------
Benefits and expenses:
Policyholders' benefits
and payments 5,874 6,584 6,048
Addition to policyholders'
reserves and funds 2,300 827 945
Commissions and operating
expenses 809 766 763
State taxes, licenses and fees 88 82 96
Merger restructuring costs -- -- 66
------- ------- -------
9,071 8,259 7,918
------- ------- -------
Net gain before federal
income taxes and dividends 1,522 1,503 1,362
Federal income taxes 199 284 277
------- ------- -------
Net gain from operations
before dividends 1,323 1,219 1,085
Dividends to policyholders 983 919 860
------- ------- -------
Net gain from operations 340 300 225
Net realized capital
gain (loss) 26 (43) 40
------- ------- -------
Net income $ 366 $ 257 $ 265
======= ======= =======
Net income increased $109 million, or 42.4%, to $366 million in 1998 from $257
million in 1997, following a decrease of $8 million, or 3.0%, from $265 million
in 1996. We attribute the increase in 1998 primarily to increases in premium
income, net investment income and net realized capital gains, reductions in
policyholders' benefits and payments and federal income taxes, partially offset
by increased addition to policyholders' reserves and funds and dividends to
policyholders. We attribute the decrease in 1997 primarily to an increase in
policyholders' benefits and payments, net realized capital losses, and an
increase in dividends to policyholders. Partially offsetting these items in 1997
were higher premium income, a reduction in addition to policyholders' reserves
and funds, and cessation of merger restructuring costs.
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Premium income increased $717 million, or 10.6%, to $7,482 million in 1998 from
$6,765 million in 1997, following a $436 million, or 6.9%, increase from $6,329
million in 1996. We attribute these increases to an increase in premium income
from the Individual Line of 7.3% in 1998 following an increase of 0.3% in 1997.
Premium income in the Retirement Services line increased 16.3% in 1998 and 20.7%
in 1997. See "Analysis of Results of Operations by Line of Business."
Net investment income increased $87 million, or 3.0%, to $2,957 million in 1998
from $2,870 million in 1997, following an increase of $36 million, or 1.3%, from
$2,834 million in 1996. We attribute the increase in both years to an increase
in invested assets in our general investment account. Our overall gross
portfolio yield declined slightly to 8.3% in 1998, compared to 8.5% in 1997, as
increased yields on real estate and short-term investments partially offset
declining yields on fixed income investments. Our 1996 overall gross portfolio
yield was 8.5%. The components of net investment income are set forth below:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
($ In Millions)
Gross investment income:
Bonds $ 1,887 $ 1,860 $ 1,837
Common stocks 6 3 4
Mortgage loans 441 446 472
Real estate 336 317 289
Other investments 104 104 63
Policy loans 385 370 350
Cash and short-term
investments 103 73 97
------- ------- -------
Total gross investment
income 3,262 3,173 3,112
Less investment expenses (314) (302) (297)
Less interest expense (33) (35) (34)
Add IMR amortization and
gain from separate account 42 34 53
------- ------- -------
Net investment income $ 2,957 $ 2,870 $ 2,834
======= ======= =======
Gross bond income increased $27 million, or 1.5%, to $1,887 million in 1998 from
$1,860 million in 1997, following a $23 million increase, or 1.3%, from $1,837
million in 1996. We attribute the increase in both years to an increase in our
average investment in bonds. Our overall bond yields remained unchanged in 1998
as private placement interest spreads offset the impact from lower market
interest rates on publicly traded securities. In 1997, a slight decline in bond
yields partially offset the impact of the increase in our average investment in
bonds.
We attribute the decrease in gross mortgage loan income in both years to
declining yields, as older higher yielding loans are replaced with mortgage
loans at lower market rates.
We attribute the increase in gross real estate income in both years to
improvement in occupancy rates and increases in rents charged per square foot.
From 1997 to 1998 there was no change in gross income from other investments. An
increase in earnings on partnerships and joint ventures was offset by a decrease
in earnings on preferred stock, derivative instruments and affiliated common
stock. We attribute the increase in 1997 to an $18 million increase in earnings
on partnerships and joint ventures, a $7 million increase on preferred stock, a
$6 million improvement in returns on derivative instruments and a $10 million
increase in income from affiliated investment funds. Other investments include
dividends received from subsidiaries of $46 million in 1997 and $37 million in
1996.
The 1998 increase in gross income from cash and short-term investments is the
result of an increase in the average short-term holdings to $1,439 million in
1998 from $1,370 million in 1997, and a significant improvement in yields on
these securities. We attribute the 1997 decrease for these same assets to a
lower average short-term position throughout the year, partially offset by a 21
basis point increase in the average yields on commercial paper.
We attribute the 1998 and 1997 increases in investment expenses to normal
growth.
Fees and other income increased $27 million, or 21.3%, to $154 million in 1998
from $127 million in 1997, following an increase of $10 million, or 8.5%, from
$117 million in 1996. We attribute the increase in both years primarily to
higher separate account fees caused by higher asset levels reflecting equity
market appreciation and growth in our blocks of business.
Policyholders' benefits and payments decreased $710 million, or 10.8%, to $5,874
million in 1998 from $6,584 million in 1997, following a $536 million, or 8.9%,
increase from $6,048 million in 1996. We attribute the 1998 decrease to lower
withdrawals from non-participating guaranteed investment contracts and separate
account business and decreases in supplementary and large corporate market
benefits and payments, partially offset by increases in annuity withdrawals and
benefits, and life insurance surrenders and claims. We attribute the 1997
increase to increased withdrawals of individual variable annuities and
participating group pension business and an increase in
10
<PAGE>
death claims paid. Withdrawals and benefits for individual annuity and
supplementary contracts increased by $104 million to $781 million in 1998, from
$677 million in 1997 and $573 million in 1996. Life insurance lapses measured as
a percent of in force business decreased to 5.8% in 1998 from 6.2% in 1997 and
6.1% in 1996.
Addition to policyholders' reserves and funds increased by $1,473 million, or
178.1%, to $2,300 million in 1998 from $827 million in 1997, following a $118
million, or 12.5%, decrease from $945 million in 1996. The increase in 1998 was
primarily the result of a $1,122 million increase in the Retirement Services
line, caused by higher premium income and a reduction in withdrawals of
non-participating guaranteed investment contracts. We attribute the 1997
decrease 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. In
1992, we stopped selling our guaranteed investment contract products.
Withdrawals of these discontinued products have totaled $384 million in 1998,
$891 million in 1997 and $1,025 million in 1996. We may re-enter the guaranteed
investment contract market in the future.
Commissions and operating expenses increased $43 million, or 5.6%, to $809
million in 1998 from $766 million in 1997, following an increase of $3 million,
or 0.4%, from $763 million in 1996. We attribute the increase in 1998 primarily
to our continued investment in technology and a natural increase in general
expense levels as our business grows, partially offset by a $16 million, or
5.1%, decrease in commissions caused by business mix changes. We attribute the
increase in 1997 primarily to a $4 million increase in operating expenses in the
Individual Line reflecting normal growth trends and 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. Commissions do
not correlate to total premium income since commissions are driven by the growth
and changing product sales mix for commission paying business, such as
individual life and annuity products, and Retirement Services sales, which do
not generate significant commissions. Retirement Services' premiums increased by
$402 million in 1998 and $423 million in 1997.
Federal income taxes decreased $85 million, or 29.9%, to $199 million in 1998
from $284 million in 1997, following an increase of $7 million, or 2.5%, from
$277 million in 1996. We attribute the decrease in 1998
primarily to reduced mutual company add-on tax and audit settlements. We
attribute the increase in 1997 primarily 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.
Dividends to policyholders increased $64 million, or 7.0%, to $983 million in
1998 from $919 million in 1997, following an increase of $59 million, or 6.9%,
from $860 million in 1996. We attribute the increases in both years primarily to
growth in the participating in force business and the pass through of favorable
investment, mortality and expense experience, including expense savings that
resulted from the merger. We reflect the new dividend schedule, annually
approved by the Board of Directors in the fourth quarter, in net income in the
year we declare the dividend.
Net realized capital gains increased $69 million to $26 million, from net
realized capital losses of $43 million in 1997, following a decrease of $83
million from $40 million of net realized capital gains in 1996. These amounts
are after transfers to the Interest Maintenance Reserve ("IMR"). Net realized
capital gains (losses) were comprised of the following:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
($ In Millions)
Realized capital gains (losses):
Bonds $ 284 $ 132 $ 110
Common stocks 62 83 78
Mortgage loans 5 (57) (58)
Real estate 34 (6) (74)
Hedging instruments (39) (33) 3
Other investments 33 13 223
Federal and state taxes (155) (73) (160)
----- ----- -----
Net realized capital gains
before transfer to IMR 224 59 122
Transfer to IMR (198) (102) (82)
----- ----- -----
Net realized capital gains (losses) $ 26 $ (43) $ 40
===== ===== =====
We attribute the increase in 1998 net realized capital gains (losses) primarily
to higher realized capital gains related to mortgage loans and real estate,
which are not transferred to the IMR, partially offset by taxes. We attribute
the decrease in 1997 primarily to 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. Fluctuations in market conditions will impact future
investment results.
11
<PAGE>
The realized capital gain (loss) results presented for each year do not reflect
the changes in general investment reserves ("GIR"), which are recorded as a
change in policyholders' contingency reserves. Changes in the GIR were a $30
million decrease in 1998, a $77 million decrease in 1997, and a $20 million
increase for 1996.
The high level of realized capital gains from bonds in 1998, 1997 and 1996 was
caused by sales and hedging activity generally during periods of declining
market interest rates. In 1998, net realized capital gains from the sale of
bonds consisted of $332 million in gross capital gains offset by $48 million in
gross capital losses. In 1997, net realized capital gains from the sale 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 sale of bonds
consisted of $189 million in gross capital gains offset by gross capital losses
of $79 million. We transferred all interest related gains and losses to the IMR.
Transfers to the IMR consisted of $305 million and $158 million in net gains
offset by $107 million and $56 million in taxes for 1998 and 1997, respectively.
In 1996, the amounts transferred to the IMR included $131 million of net
realized capital gains offset by $49 million in taxes.
We attribute the realized capital gains and losses from hedging instruments
primarily to interest and equity related contracts. We utilize interest rate
swaps, options and futures to reduce interest rate exposures arising from
mismatches between assets and liabilities and to modify portfolio profiles to
manage other identified risks. We utilize equity swaps to hedge exposure to
market risk on public and private equity positions. In 1998, losses from hedging
transactions of $39 million were primarily caused by interest related losses of
$15 million and equity related losses of $24 million. In 1997, losses from
hedging transactions of $33 million were primarily caused by interest related
losses of $19 million and equity related losses of $16 million. In 1996, gains
from hedging transactions of $3 million were primarily caused by interest
related gains of $1 million and equity related gains of $2 million.
ANALYSIS OF RESULTS OF
OPERATIONS BY LINE OF
BUSINESS
Individual Line Operations
Year Ended December 31, 1998
Compared to Years Ended December 31,
1997 and 1996
Our Individual Line principally offers whole life, variable, universal and term
life insurance, individual annuity products, and disability income insurance.
The following table sets forth the components of net income for the Individual
Line operations:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
($ In Millions)
Revenue:
Premium income $ 4,614 $ 4,299 $ 4,286
Net investment income 2,298 2,159 2,037
Fees and other income 137 113 99
------- ------- -------
7,049 6,571 6,422
------- ------- -------
Benefits and expenses:
Policyholders' benefits and
payments 2,640 2,547 2,303
Addition to policyholders'
reserves and funds 2,197 1,846 2,006
Commissions and
operating expenses 720 683 694
State taxes, licenses
and fees 85 81 91
Merger restructuring
costs -- -- 61
------- ------- -------
5,642 5,157 5,155
------- ------- -------
Net gain before federal
income taxes and
dividends 1,407 1,414 1,267
Federal income taxes 193 271 247
------- ------- -------
Net gain from
operations before
dividends 1,214 1,143 1,020
Dividends to
policyholders 981 916 854
------- ------- -------
Net gain from
operations 233 227 166
Net realized capital
gain(loss) 24 (11) 59
------- ------- -------
Net income $ 257 $ 216 $ 225
======= ======= =======
12
<PAGE>
Net income increased $41 million, or 19.0%, to $257 million in 1998 from $216
million in 1997, following a $9 million, or 4.0%, decrease from $225 million in
1996. We attribute the 1998 increase primarily to increased premium income,
increased net investment income, increased realized capital gains and decreased
federal income taxes, partially offset by increased addition to policyholders'
reserves and funds, increased policyholders' benefits and payments and increased
dividends to policyholders. We attribute the 1997 decrease primarily to
increased policyholders' benefits and payments, realized capital losses and
increased dividends to policyholders, partially offset by increased net
investment income, decreased addition to policyholders' reserves and funds and
the cessation of merger restructuring costs.
Selected premium and life insurance information is presented below:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
($ In Millions, except average size
and number of policies)
Premium Income:
Whole life $ 2,551 $ 2,514 $ 2,406
Term life 137 138 160
Universal, variable &
corporate owned life 815 379 374
Annuities and
supplemental contracts 820 981 1,012
Disability income 291 286 284
Other -- 1 50
---------- ---------- ----------
Total $ 4,614 $ 4,299 $ 4,286
========== ========== ==========
Life Insurance Sales Face Amount:
Whole life $ 4,556 $ 5,729 $ 6,732
Term life 5,289 5,392 5,828
Universal, variable &
corporate owned life 8,323 2,751 3,400
---------- ---------- ----------
Total $ 18,168 $ 13,872 $ 15,960
========== ========== ==========
Life Insurance In force Face Amount:
Whole life $ 124,336 $ 127,366 $ 127,188
Term life 37,991 42,676 45,218
Universal, variable &
corporate owned life 33,158 29,125 26,975
---------- ---------- ----------
Total $ 195,485 $ 199,167 $ 199,381
========== ========== ==========
Number of Policies In force:
Whole life 1,636,365 1,759,312 1,825,977
Term life 204,882 281,494 364,866
Universal, variable &
corporate owned life 94,052 88,676 88,874
Annuities 322,781 314,189 296,920
Disability income 286,756 288,244 296,776
---------- ---------- ----------
Total 2,544,836 2,731,915 2,873,413
========== ========== ==========
Average Size of New Policies Sold:
Whole life $ 177,568 $ 181,323 $ 172,956
Term life $ 528,915 $ 444,045 $ 347,674
Universal, variable &
corporate owned life $ 441,867 $ 246,624 $ 236,462
Premium income increased $315 million, or 7.3%, to $4,614 million in 1998 from
$4,299 million in 1997, following a $13 million, or 0.3%, increase from $4,286
million in 1996. We attribute the 1998 increase primarily to a 115.0% increase
in universal, variable and corporate owned life premiums, partially offset by a
16.4% decrease in annuity and supplemental contract deposits. The growth in
universal, variable and corporate owned life is primarily the result of
increases in sales of corporate owned life insurance to the banking industry and
increases in variable life, partially offset by a decrease in universal life.
The decrease in universal life is primarily the result of our decision to shift
most sales of these products to our
13
<PAGE>
subsidiary life insurance companies. The decrease in annuities and supplemental
contracts premium is primarily due to a drop in supplemental distribution
channel sales and deposits. We attribute the 1997 increase primarily to a 3.1%
increase in life insurance premiums and a 4.8% increase in annuity premiums,
partially offset by a 40.3% decrease in supplemental contract deposits. The
growth in life insurance premiums occurred primarily in whole life insurance
with a decrease experienced in term life insurance due to an increase in
reinsurance activity. The growth in annuity premiums was relatively modest as we
are directing more sales of annuity products to our life insurance subsidiaries.
Supplemental contracts experienced a decrease as a result of paying a higher
percentage of death claims to beneficiaries in cash rather than retaining them
in the benefit management account.
Net investment income increased $139 million, or 6.4%, to $2,298 million in 1998
from $2,159 million in 1997, following an increase of $122 million, or 6.0%,
from $2,037 million in 1996. We attribute the 1998 increase primarily to a 7.1%
increase in invested assets, partially offset by a slight decline in investment
yields. We attribute the increase in 1997 to a 6.6% increase in general account
invested assets while the portfolio yield remained level with 1996. Investment
income includes amortization of net gains previously transferred to the IMR. IMR
amortization was $34 million in 1998, $27 million in 1997, and $24 million in
1996.
Policyholders' benefits and payments in 1998 increased $93 million, or 3.7%, to
$2,640 million in 1998 from $2,547 million in 1997, following an increase of
$244 million, or 10.6%, from $2,303 million in 1996. We attribute the 1998
increase primarily to increases in annuity withdrawals and benefits of $140
million, higher death claims of $10 million, and higher life insurance
surrenders of $13 million. This increase was partially offset by decreases in
supplementary contract payments of $36 million and large corporate market
benefits and payments of $41 million. The increase in annuity withdrawals is
influenced by the growth of the account values in the business. Actual claims
experience in our life products as a percentage of expected claims was 90.0% in
1998. We attribute the 1997 increase primarily to growth in annuity withdrawals
of $150 million, increased life insurance surrenders of $109 million and
increased death claims of $26 million. This increase was partially offset by a
$46 million decrease in payments made on supplemental contracts. Actual claims
experience in our life products as a percentage of expected claims was 99.0% in
1997. Lapses for our life products, measured as a percent of in force business,
were 5.8% in 1998 compared to 6.2% in 1997 and 6.1% in 1996.
Addition to policyholders' reserves and funds increased $351 million, or 19.0%,
to $2,197 million in 1998 from $1,846 million in 1997, following a decrease of
$160 million, or 8.0%, from $2,006 million in 1996. We attribute the 1998
increase primarily to increased sales of corporate owned life insurance,
partially offset by a decrease in annuity premiums. We attribute the 1997
decrease primarily to slower growth in our variable annuity business and
supplemental contract deposits as discussed in the paragraph on premiums.
Commissions and operating expenses increased $37 million, or 5.4%, to $720
million in 1998 from $683 million in 1997, following a decrease of $11 million,
or 1.6%, from $694 million in 1996. We attribute the 1998 increase primarily to
continued investment in technology, partially offset by lower commissions
related to life insurance products. Our commissions decreased as a result of
lower first year sales of whole and variable life insurance products, partially
offset by increased commissions from sales of corporate owned life insurance
products, which are at lower commission rates. We attribute the 1997 decrease
primarily to an increase in the amount of expenses we allocated and recovered
from our subsidiaries and affiliates through management service contracts, a
reduction for direct commissions paid on the remnants of the GLA&H business,
partially offset by an increase in operating expenses.
State taxes, licenses and fees increased $4 million, or 4.9%, to $85 million in
1998 from $81 million in 1997, following a decrease of $10 million, or 11.0%,
from $91 million in 1996. We attribute the 1998 increase primarily to higher
premium and state income taxes relating to higher premium income and taxable
income. We attribute the decrease in 1997 from 1996 primarily to recoveries of
state income tax and guaranty fund assessments from prior years.
Federal income taxes decreased $78 million, or 28.8%, to $193 million in 1998
from $271 million in 1997, following an increase of $24 million, or 9.7%, from
$247 million in 1996. We attribute the 1998 increase primarily to reduced mutual
company add-on taxes. We attribute the increase in 1997 from 1996 primarily to
higher taxes on operations of $12 million and an increase in the mutual company
add-on tax of $16 million.
Dividends to policyholders in 1998 increased $65 million, or 7.1%, to $981
million from $916 million in 1997, following an increase of $62 million, or
7.3%, from $854 million in 1996. We attribute the increases in both years
primarily to growth in the participating business and the pass through of
favorable investment, mortality and expense experience, including continued
14
<PAGE>
expense savings that resulted from the merger. The new dividend schedule,
annually approved by the Board of Directors in the fourth quarter, is reflected
in the Individual Line's operating results in the year the dividend is declared.
Retirement Services Operations
Year Ended December 31, 1998 Compared return to Years Ended December 31, 1997
and return 1996
Our Retirement Services line provides a variety of guaranteed and non-guaranteed
investment accumulation products and ancillary services to the retirement market
place.
The following table sets forth the components of net income for the Retirement
Services operations:
Years Ended December 31,
1998 1997 1996
---- ---- ----
($ In Millions)
Revenue:
Premium income $ 2,868 $ 2,466 $ 2,043
Net investment income 659 711 797
Fees and other income 17 14 18
------- ------- -------
3,544 3,191 2,858
------- ------- -------
Benefits and expenses:
Policyholders' benefits and payments 3,234 4,037 3,745
Addition (reduction) to policyholders'
reserves and funds 103 (1,019) (1,061)
Commissions and operating expenses 89 83 69
State taxes, licenses and fees 3 1 5
Merger restructuring costs -- -- 5
------- ------- -------
3,429 3,102 2,763
------- ------- -------
Net gain before federal income taxes and
dividends 115 89 95
Federal income taxes 6 13 30
------- ------- -------
Net gain from operations before dividends 109 76 65
Dividends to policyholders 2 3 6
------- ------- -------
Net gain from operations 107 73 59
Net realized capital gain (loss) 2 (32) (19)
------- ------- -------
Net income $ 109 $ 41 $ 40
======= ======= =======
Net income increased $68 million, or 165.9%, to $109 million in 1998 from $41
million in 1997, following an increase of $1 million, or 2.5%, from $40 million
in 1996. We attribute the 1998 increase primarily to net realized capital gains
as compared with a net realized capital loss in the prior year, improved
investment spreads, lower federal income taxes and income resulting from
increased assets under management. We attribute the 1997 increase primarily to
lower federal income taxes, premium growth and cessation of merger costs,
partially offset by increased net capital loss and higher operating expenses due
to large investments in technology.
Selected premium and sales information is presented below:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
($ In Millions)
Premium Income
Superflex $1,440 $1,103 $ 758
Flexinvest 648 523 475
RMAP 193 9 --
Defined Benefit 69 97 75
Interest Guarantee 102 120 107
Participating Guaranteed 25 35 48
Separate Accounts 365 530 473
GIC and Single Premium Annuity Contracts 3 9 8
Governmental Separate Accounts 16 10 48
Other 7 30 51
------ ------ ------
Total $2,868 $2,466 $2,043
====== ====== ======
New Sales
Superflex $ 836 $ 515 $ 304
Flexinvest 229 218 184
RMAP 76 15 --
Defined Benefit 11 9 1
Interest Guarantee 11 10 22
Participating Guaranteed 35 50 39
Separate Accounts 226 241 216
GIC and Single Premium Annuity Contracts -- 1 --
Governmental Separate Accounts 1 10 14
Other 11 1 3
------ ------ ------
Total $1,436 $1,070 $ 783
====== ====== ======
Premium income increased $402 million, or 16.3%, to $2,868 million in 1998 from
$2,466 million in 1997, following an increase of $423 million, or 20.7%, from
$2,043 million in 1996. We attribute the increases in both years primarily to
higher premiums from the growth of our full service defined contribution
business.
15
<PAGE>
Net investment income decreased $52 million, or 7.3%, to $659 million in 1998
from $711 million in 1997, following a decrease of $86 million, or 10.8%, from
$797 million in 1996. We attribute the decreases in both years primarily to a
decrease in the line's general account assets, resulting from the trend of new
deposits favoring separate account options and the scheduled maturities of
non-participating guaranteed investment contracts and withdrawals of
participating business.
Fees and other income increased $3 million, or 21.4%, to $17 million in 1998
from $14 million in 1997, following a decrease of $4 million, or 22.2%, from $18
million in 1996. We attribute the 1998 increase primarily to higher fee income
resulting from increased assets under management. We attribute the 1997
decrease, primarily to a decrease in administrative fees, caused by the
conversion of an older block of business to new contracts which have lower
administrative fees.
Policyholders' benefits and payments decreased $803 million, or 19.9%, to $3,234
million in 1998 from $4,037 million in 1997, following an increase of $292
million, or 7.8%, from $3,745 million in 1996. We attribute the 1998 decrease
primarily to lower withdrawals from non-participating guaranteed investment
contracts and separate account business. In 1992, we stopped selling our
guaranteed investment contract products. Withdrawals of these discontinued
products totaled $384 million in 1998, $891 million in 1997 and $1,025 million
in 1996. We may re-enter the guaranteed investment contract market in the
future. We attribute the 1997 increase primarily to withdrawals of participating
guaranteed investment contracts, 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.
Addition to policyholders' reserves and funds increased $1,122 million, or
110.1%, to $103 million in 1998 from a reduction to policyholders' reserves and
funds of $1,019 million in 1997, following a increase of $42 million, or 4.0%,
from a reduction of $1,061 million in 1996. We attribute the 1998 increase
primarily to higher premium income and lower withdrawals, as discussed under
policyholders' benefits and payments. We attribute the 1997 increase primarily
to an increase in withdrawals, as discussed under policyholders' benefits and
payments, partially offset by a higher level of deposits of full service defined
contribution business.
Commissions and operating expenses increased $6 million, or 7.2%, to $89 million
in 1998 from $83 million in 1997, following an increase of $14 million, or
20.3%, from $69 million in 1996. We attribute the 1998 increase primarily to
higher commissions caused by improved sales and a modest increase in operating
expenses related to the growth in the full-service defined contribution
business. We attribute the 1997 increase primarily 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.
Federal income taxes decreased $7 million, or 53.8%, to $6 million in 1998 from
$13 million in 1997, following a decrease of $17 million, or 56.7%, from $30
million in 1996. We attribute the 1998 decrease primarily to reduced mutual
company add-on tax and audit settlements. We attribute the 1997 decrease
primarily to a decrease in tax on timing differences, which lowered taxes on
gain from operations.
Net realized capital gain (loss) increased $34 million, or 106.3%, to $2 million
in 1998 from a net loss of $32 million in 1997, following a decrease of $13
million, or 68.4%, from a net loss of $19 million in 1996. We attribute the 1998
increase primarily to net gains in mortgage loans, real estate and other assets
compared to losses in 1997. We attribute the 1997 decrease primarily to
increased losses in mortgage loans and real estate.
Life and Health Benefits
Management Operations
On March 31, 1996, we sold MassMutual Holding Company Two, Inc., a wholly-owned
subsidiary, and its subsidiaries, including Mirus Life Insurance Company. Mirus
Life Insurance Company was formerly known as MML Pension Insurance Company and
is currently doing business as "UniCARE". This group of companies comprised our
group life and health business. Accordingly, our gain from operations for 1998,
1997 and 1996 does not include income generated by the GLA&H business.
As a result of reinsurance, we had no net premiums, policyholders' benefits and
payments or addition to policyholders' reserves in this line since 1994. Direct
premium income, prior to reinsurance with UniCARE, was $24 million in 1998, a
decrease of $144 million, or 85.7%, from $168 million in 1997, which in turn was
a decrease of 74.9% from $668 million in 1996. Direct premiums are decreasing
due to the fact that when our contracts come up for renewal, they are being
replaced with UniCARE contracts.
16
<PAGE>
STATEMENT OF FINANCIAL
POSITION
Assets
The following table sets forth our assets:
December 31,
------------
1998 1997
---- ----
($ In Millions)
Bonds $25,216 $23,508
Common stocks 296 355
Mortgage loans 5,917 5,246
Real estate 1,740 1,698
Other investments 2,264 1,964
Policy loans 5,224 4,950
Cash and short-term investments 1,123 1,941
------- -------
41,780 39,662
Other assets 1,306 1,170
------- -------
43,086 40,832
Separate account assets 19,590 16,803
------- -------
Total assets $62,676 $57,635
======= =======
Total assets increased $5,041 million, or 8.7%, to $62,676 million at December
31, 1998, from $57,635 million at December 31, 1997. We attribute much of this
increase to continued growth in our separate account assets. Separate account
assets increased by $2,787 million, or 16.6%, to $19,590 million at December 31,
1998, from $16,803 million at December 31, 1997. We attribute this increase
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. Invested assets in
our general investment account at December 31, 1998, increased by $2,118
million, or 5.3%, to $41,780 million from $39,662 million at December 31, 1997.
Bonds increased $1,708 million, or 7.3%, to $25,216 million at December 31,
1998, from $23,508 million at December 31, 1997. This increase reflects a shift
of funds from short-term investments late in the year, which were hedged to
enhance earnings, partially offset by withdrawals of non-participating
guaranteed investment contracts. Bonds and short-term securities in NAIC classes
1 and 2 were 57.3% of general investment account assets at December 31, 1998, as
compared to 58.1% at December 31, 1997. The percentage of general investment
account assets representing bonds and short-term investments in NAIC Classes 3
through 6 was 5.6% at December 31, 1998, and 5.8% at December 31, 1997.
Common stocks decreased $59 million, or 16.6%, to $296 million at December
31,1998, from $355 million at December 31, 1997. We attribute this decrease to
increased sales of stocks to capture the effects of favorable market conditions.
Investments in subsidiaries and affiliated common stock are not recorded as
common stock, rather these investments are included in other investments.
Mortgage loans increased $671 million, or 12.8%, to $5,917 million at December
31, 1998, from $5,246 million at December 31, 1997. We attribute this increase
primarily to continuation of our strategy of increasing our investments in
mortgage loans. For the year ended December 31, 1998, $1,565 million in new
loans were issued, $883 million were repaid and $11 million were foreclosed.
Real estate increased $42 million, or 2.5%, to $1,740 million at December 31,
1998, from $1,698 million at December 31, 1997. We attribute the increase in
real estate primarily to our choice to increase our investments in hotel and
commercial office buildings, to leverage our expertise in this field, and to
capitalize on enhanced yields on these investments, which are partially offset
by depreciation.
Policy loans increased $274 million, or 5.5%, to $5,224 million at December
31,1998, from $4,950 million at December 31, 1997. We attribute this increase to
natural growth as individual and corporate life policyholders use loan proceeds
to take advantage of other market opportunities such as returns in the equity
market.
Cash and short-term investments at December 31, 1998, were $1,123 million,
representing a decrease of $818 million, or 42.1%, from $1,941 million at
December 31, 1997. We attribute this decrease to an increase in bond investments
late in the year to take advantage of higher yielding private placement bonds.
Liabilities
Total liabilities increased $4,725 million, or 8.6%, to $59,487 million at
December 31, 1998, from $54,762 million at December 31, 1997. As with assets, we
attribute much of this growth to the growth in separate accounts, which
increased $2,786 million, or 16.6%, to $19,589 million at December 31, 1998.
Policyholders' reserves and funds increased $1,494 million, or 4.4%, to $35,277
million from $33,783 million at December 31, 1997. We attribute the increase
primarily to a $1,212 million growth in individual life and disability income
reserves and a $799 million increase in reserves for large corporate life
insurance
17
<PAGE>
clients, partially offset by a $428 million decrease in participating and
non-participating group pension reserves and an $89 million decrease in general
account individual annuity reserves.
Policyholders' dividends liability increased $68 million, or 7.1%, to $1,022
million from $954 million at December 31, 1997. We attribute this increase to
the pass-through of favorable investment, mortality and expense experience,
including expense reductions which resulted from the merger.
Policyholders' Contingency Reserves
Policyholders' contingency reserves increased $316 million, or 11.0%, to $3,189
million at December 31, 1998, from $2,873 million at December 31, 1997. This
increase was composed of:
. 1998 net income of $366 million,
. an increase of $17 million from unrealized capital gains,
. an increase of $8 million from change in prior year policyholders'
reserves,
. an increase of $4 million due to other changes, and
. a decrease of $79 million due to the change in Asset Valuation Reserves and
General Investment Reserves.
Liquidity and Capital
Resources
Liquidity
Net cash provided by operating activities increased $1,216 million, or 198.4%,
to $1,829 million in 1998 from $613 million in 1997, following an increase of
$248 million, or 68.0%, from $365 million in 1996. We attribute the increase in
1998 to higher net income and a $1,473 million increase in addition to
policyholders' reserves. We attribute the increase during 1997 primarily to a
reduction in participating and non-participating group pension contract
maturities and withdrawals from our general investment account. In 1992, we
stopped selling our guaranteed investment contract products. Withdrawals of
these discontinued products have totaled $384 million in 1998, $891 million in
1997 and $1,025 million in 1996. We may re-enter the guaranteed investment
contract market in the future.
Loans and purchases of investments increased $3,688 million, or 30.0%, to
$15,981 million in 1998 from $12,293 million in 1997. Sales and maturities of
investments and receipts from repayments of loans increased $789 million, or
6.3%, to $13,335 million in 1998 from $12,546 million in 1997. We attribute
these increases primarily to increased investing activity as a result of cash
provided by operating activities, a shift from short-term assets to bonds and
increased funding of new affiliated investment funds.
We utilize sophisticated asset/liability analysis techniques in order to set the
investment policy for each liability class and test the adequacy of the
projected cash flows provided by assets to meet all of our future policyholder
and other obligations. We perform these studies using stress tests regarding
future credit and other asset losses, market interest rate fluctuations, claim
losses and other considerations. The result is a complete picture of the
adequacy of the underlying assets, reserves and capital.
We have structured our investment portfolio to ensure we have a strong liquidity
position in order to permit timely payment of policy and contract benefits
without requiring an untimely sale of assets. We manage our liquidity position
by matching our exposure to cash demands with adequate sources of cash and other
liquid assets.
Our principal sources of liquidity are cash flow and holdings of cash, cash
equivalents and other readily marketable assets. Our primary cash flow sources
include investment income, principal repayments on invested assets and life
insurance premiums. Historically, we have consistently experienced net positive
cash flow from operations.
Our liquid assets include U.S. Treasury bond holdings, short-term money market
investments, stocks and marketable long-term fixed income securities. Cash and
short-term investments totaled $1,123 million at December 31, 1998. The carrying
value of highly liquid securities, including NAIC Class 1 and 2 publicly traded
bonds, short-term securities and the common stock portfolio, was approximately
$14.6 billion at December 31, 1998.
We proactively manage our liquidity position on an ongoing basis to meet cash
needs while minimizing adverse impacts on investment returns. We analyze a
variety of scenarios modeling potential demands on liquidity, taking into
account the provisions of our policies and contracts in force, our cash flow
position and the volume of cash and readily marketable securities in our
portfolio.
One of our primary liquidity concerns is the risk of early contractholder and
policyholder withdrawal. The three most affected products are individual life
insurance and individual deferred annuities offered by
18
<PAGE>
the Individual Line and the participating products offered by the Retirement
Services line. Life insurance policies are less susceptible to withdrawal than
annuity contracts because annuities are primarily used as investment vehicles,
while life policies are used to fulfill longer term financial planning needs. A
substantial part of our individual life insurance exposure is focused on a
well-seasoned, mature block of business. We closely evaluate and manage our
liquidity risk by, for example, seeking to include provisions limiting
withdrawal rights from general account products.
Based on our ongoing monitoring and analysis of our liquidity sources and
demands, we believe that we are in a strong liquidity position.
Capital Resources
As of December 31, 1998, our total adjusted capital as defined by the NAIC was
$4,669 million. The NAIC uses a risk-based capital ("RBC") model to compare the
total adjusted capital with a standard designed to reflect an insurance
company's risk profile. Although we believe that there is no single appropriate
means of measuring RBC needs, we feel that the NAIC approach to RBC measurement
is reasonable, and we manage our capital position with significant attention to
maintaining adequate total adjusted capital relative to RBC. Our total adjusted
capital was well in excess of all RBC standards at December 31, 1998 and 1997.
We believe that we enjoy a strong capital position in light of the risks to
which we are subject and that we are well positioned to meet policyholder and
other obligations.
Year 2000 Issue
We prepared the following Year 2000 readiness disclosure under the U. S. "Year
2000 Information and Readiness Disclosure Act" (Public Law No. 105-271).
General
Like other businesses and governments around the world, we would be adversely
affected if our computer systems and those of others with which we do business
do not properly recognize the Year 2000. This is commonly known as the "Year
2000 ("Y2K") issue."
In 1996, we began an enterprise-wide process to address the Y2K issue on our own
behalf and on behalf of certain subsidiaries.
The Y2K issue affects virtually all organizations worldwide. Moreover, the
electronic links between businesses and governments mean that complete Y2K
compliance is beyond the ability of any one entity to achieve. Vigorous and
coordinated Y2K readiness efforts throughout the public and private sectors are
necessary to avoid disruption after 1999.
Risks
We plan to have our computer systems ready for the Year 2000. We have identified
Y2K readiness as one of our highest priorities and have committed extensive
technological, financial and human resources to minimizing the impact of Y2K on
our business. We believe that our Project 2000 program will limit the number and
severity of any Y2K-related disruptions.
We do not have any knowledge of any particular event, trend or uncertainty that
makes us believe that there will be significant Y2K-related disruption to our
business. However, the potential for disruption remains, particularly given the
electronic connections and interdependencies in today's business environment and
the fact that our Y2K readiness is tied to that of third parties.
We do not know and cannot predict the potential impact of Y2K disruptions upon
our business. There are possible consequences if we or the third parties that we
do business with, are not ready for Y2K. These possible consequences may include
the inability to process premiums, to purchase or sell investments or to process
claims and other benefits.
Risks of Litigation
We have no reason to expect any particular Y2K litigation. However, Y2K
litigation is a possibility, given the interdependencies of information systems
and the worldwide magnitude of the Y2K issue. We currently have no reason to
expect that Y2K litigation would materially adversely affect our financial
position, operations or liquidity.
Examination - Massachusetts Division of Insurance
We are legally domiciled in the Commonwealth of Massachusetts. Our primary
regulator is the Commonwealth of Massachusetts Division of Insurance (the
"Division"). The Division is conducting Y2K examinations of most, if not all, of
the insurance companies domiciled in the Commonwealth. In November 1998, as part
of an ongoing examination, the Division conducted an on-site examination of our
readiness for the Year 2000. The Division found no weaknesses in our Project
2000, and recommended no
19
<PAGE>
changes other than an acceleration of contingency planning, which is already
under way.
Project 2000
In 1996, we began an enterprise-wide process of identifying, evaluating and
implementing changes to computer systems, to address the Y2K issue. We
established Project 2000 the following year as the corporate-wide program
responsible for addressing all requirements associated with the century date
change. Project 2000 operates under the direction and accountability of senior
management, and leads and coordinates Y2K activities with representatives from
every information systems and business unit.
Project 2000 addresses both systems compliance and business compliance.
. Systems compliance includes all information technology department-supported
applications, (computer technology hardware and software), and all on-site
physical facilities, such as internal heating, air conditioning,
telecommunications, elevators, security systems, and emergency power for
our data center.
. Business compliance includes end-user computing (such as desktop and
spreadsheet applications) in the business units. It also includes risk
management of any business function dependent upon external systems or
third parties. Contingency planning is a prime component of risk management
activities.
Y2K Compliant Standards
In order for information systems or software applications to be Y2K compliant
according to our standards, the system or application must demonstrate that it
can successfully accommodate the Year 2000 date and beyond. All computer
hardware, operating software and applications systems, whether internally or
vendor-developed, must go through our Y2K certification process. This is
required even if the vendor claims its product is Y2K compliant.
Our certification requires, among other things, multiple levels of testing in
current-date and future-date environments. Testing must successfully
demonstrate:
. Rolling over the century date, from the last processing day in 1999 through
the first processing day in 2000.
. Handling leap year processing in 2000.
. Transitioning from 2000 to 2001, including Julian calendar date processing.
We examine each application for additional dates pertinent to its particular
processing requirements.
Upgrades and changes to certified products must be re-certified according to
our standards before being introduced into the computing environment.
Successful future-date testing, with appropriately dated information, is
important because it mimics the environment, data and application as it will
exist after 1999. Future-date testing occurs in separate, isolated computer
environments. We also conduct full production volume future-date testing
periodically at our disaster-recovery site, a separate location where we have
previously established business and systems recovery plans.
Costs
As of January 15, 1999, we made estimates of the cost of Project 2000. The total
cost of the four year project is estimated to total $92 million enterprise-wide.
We began incurring these costs in 1997 and have already spent approximately $70
million. We estimate that an additional $20 million will be incurred in 1999 and
$2 million will be incurred in 2000. We are expensing these costs when incurred.
When viewed in context of our total financial picture, the costs are not
material to our financial position.
Staffing
As of February 28, 1999, we had approximately 120 full-time equivalent
information systems employees and 70 full-time and part-time consultants working
on Project 2000. In addition, approximately 100 employees from our business
units are working at least part-time on Project 2000. This is down from a high
of 300 employees and 150 consultants. We expect the number of people working on
this project to continually decrease as 1999 progresses and Y2K work is
completed.
State of Readiness
Our Project 2000 manager maintains an enterprise-wide plan that tracks planned
vs. actual completion dates. We have planned for most mission critical systems
to be Y2K compliant by the end of 1998, and for the remainder of our internal
computer systems to be Y2K compliant by June 30, 1999. Project 2000 is on
schedule.
. Computer code conversion of all information technology-department supported
applications was 99% complete by February 28, 1999. We had identified over
52 million lines of mainframe code that needed to be converted.
. We have completed most correction and testing of internal mission critical
systems. We anticipate the
20
<PAGE>
remainder to be completed by June 30, 1999. Of the 309 mission critical
projects, 81% were completed as of December 31, 1998. An additional 43
projects, or 14%, are targeted for completion by the end of March 1999,
bringing the combined percentage to 95%. We plan to complete the remaining
16 projects, or 5%, by June 30, 1999.
. End-user computing such as desktop and spreadsheet applications is well
under way and is targeted to be complete by June 30, 1999.
. The critical core infrastructure for our on-site physical facilities
(internal heating, air conditioning, telecommunications, elevators,
security systems, and emergency power for our data center) was Y2K
compliant by December 31, 1998.
Major activities planned for 1999 include:
. Change Control. We will continue testing our computer technology hardware
--------------
and software throughout 1999. Future-date testing will also continue when
necessary. During the remainder of 1999, we will also focus on keeping
previously tested applications Y2K compliant.
. Enterprise Testing. We will continue to conduct internal, enterprise-wide
------------------
integrated tests, concentrating on major systems and environments.
. "Street" or Industry Testing. We will be joining forces with many of our
----------------------------
service providers and other third parties, to test communication links.
. Awareness and Communication. We will continue to communicate widely, with
---------------------------
policyholders, customers, vendors, service providers, governments and
others about Project 2000.
. Operational Readiness. We will determine what is needed to respond to our
---------------------
policyholders and customers. For example, we will make sure that customer
service centers are adequately staffed should we receive a great number of
year-end Y2K inquiries.
. Readiness of Third Parties. We are assessing the Y2K readiness of others.
--------------------------
. Contingency Planning. We are developing contingency plans as needed.
--------------------
Third Parties
Third parties with which we do business include:
. banks,
. financial service providers,
. mutual funds,
. third party administrators,
. reinsurers,
. telecommunications firms,
. utility companies,
. security and climate control systems companies,
. package transportation carriers, and
. governmental agencies such as
. the state insurance departments,
. the Internal Revenue Service, and
. the Securities and Exchange Commission.
We have identified all of the third parties with which we have a material
business relationship, and have contacted them as to their Y2K compliance. We
have also identified and contacted third parties which are not material to our
business. Third parties are generally not providing guarantees and assurances
about their Y2K compliance, but instead are providing statements about their
approach to the Y2K issue, their progress and target dates.
Given our reliance on third parties, a major focus in 1999 is assessing third
parties' Y2K compliance. Their responses are a key factor in decisions about our
Y2K contingency plans. Y2K readiness by third parties with which we have a
material relationship is most important. If necessary for us to make an
assessment of Y2K readiness of these parties, we ask for additional information.
Our approach with them is to conduct telephone interviews, send more detailed
questionnaires, conduct account manager interviews, and if necessary, make an
on-site visit.
Contingency Plans
Because of the comprehensive requirements of our Project 2000, we believe our
general risk of Y2K- related failure is low. However, we will create detailed
contingency plans as necessary, based upon the expected impact on us and our
judgment, about the level of risk. Risks are presented by both internal computer
systems, those developed and operated by us, and by third parties which provide
services and electronic data to us. We have identified critical business
functions and are developing a watch list of critical service providers and
systems that support these functions.
Contingency planning falls into two broad categories:
business continuity plans and systems recovery plans.
Existing business recovery plans form the foundation for the Y2K business
continuity efforts and will be supplemented with Y2K requirements. Our business
areas are assessing the policies and responses that may be needed, since
potential scenarios are unique to the business areas. In general, however, the
business continuity plans will address failures caused by external sources, and
fall into three situations which include:
21
<PAGE>
. a failure by a third party,
. a failure of an internal system or function due to corrupt data from a
third party, and
. a power outage in our business offices.
Necessary parts of each plan will include a description of failure indicators,
contingency actions, preparation steps necessary to successfully invoke the
contingency actions, timetables for preparatory steps, and guidelines for
resumption of regular activities. Plans will differ according to type and
duration of failure.
Systems recovery plans address our internal systems infrastructure. We will
develop plans by computing platform and will detail information on each system's
product or group of products (such as operating systems.) Each plan will
include:
. a timetable of how and when products will be started on January 1, 2000;
. the individual or unit responsible for each product;
. the recovery plan if the product will not come up or will not work
correctly;
. the steps that will be taken in each event; and
. the vendor contact, if any.
We will conduct tests and walkthroughs of the plans. Our internal auditing
department will be involved with these tests and walkthroughs.
Contingency planning is a high-priority project. We expect to have any needed
contingency plans in place by year-end, 1999.
Inflation
Inflation affects our operating expenses. A large portion of our operating
expenses consist of salaries, which are subject to wage increases that are at
least partially affected by the rate of inflation. Our continuing efforts to
control expenses may reduce the impact of inflation on operating expenses.
Inflation also indirectly affects us. To the extent that the government's
economic policy to control the level of inflation results in changes in interest
rates, our new sales of insurance and retirement products and investment income
are affected. Changes in the level of interest rates also have an effect on
interest spreads, as investment earnings are reinvested.
Investments
At December 31, 1998, we had $41.8 billion of invested assets in our general
investment account. We manage the portfolio of invested assets to support the
liabilities of the lines of business in light of yield, liquidity and
diversification considerations. The general investment account portfolio does
not include our separate account assets.
The following table sets forth our invested assets in the general investment
account and gross investment yield thereon, after deducting real estate
operating expenses and taxes, as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
-------------------------- -------------------------- ----------------------------
Carrying % of Carrying % of Carrying % of
Value Total Yield Value Total Yield Value Total Yield
-------------------------- -------------------------- ----------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds $25,216 60.3% 8.1% $23,508 59.3% 8.1% $24,299 63.0% 8.2%
Common stocks 296 0.7 1.7 355 0.9 1.0 337 0.9 1.1
Mortgage loans 5,917 14.2 8.2 5,246 13.2 9.2 4,853 12.6 9.6
Real estate 1,740 4.2 13.3 1,698 4.3 11.7 1,841 4.8 9.6
Other investments 2,264 5.4 5.1 1,964 4.9 6.3 1,426 3.6 4.4
Policy loans 5,224 12.5 7.9 4,950 12.5 7.9 4,752 12.3 7.9
Cash and short-term
investments 1,123 2.7 7.0 1,941 4.9 4.9 1,075 2.8 5.9
--------- ------ ------ --------- ------ ------ --------- ------ --------
Total investments $41,780 100.0% 8.3% $39,662 100.0% 8.5% $38,583 100.0% 8.5%
</TABLE>
<PAGE>
1998, 1997 and 1996, respectively. If indirect expenses including depreciation
on real estate investments were deducted, net yields would be 7.5%, 7.6% and
7.6%, respectively. We calculate the yield on each investment category, before
federal income taxes, 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.
We record our investments in accordance with methods and values prescribed by
the NAIC and adopted by state insurance authorities. Generally, we value bonds
at amortized cost, preferred stocks in good standing at cost, and common stocks
at fair value. We value mortgage loans at principal less impairments and
unamortized discount. We value real estate at cost less accumulated
depreciation, impairments and mortgage encumbrances. We calculate depreciation
on investment real estate using the straight-line and constant yield methods. We
record policy loans at the outstanding loan balance less amounts unsecured by
the cash surrender value of the policy. We record short-term investments at
amortized cost, which approximates fair value. We value other investments, which
primarily consist of joint ventures, other forms of partnerships and the common
stocks of subsidiaries, using the equity method.
We periodically use standard derivative financial instruments such as options,
interest rate swaps and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies. We use these derivative financial
instruments to protect us from market fluctuations in interest and exchange
rates between the contract date and the date on which the hedged transaction
occurs. We are subject to off-balance sheet risk that the counterparties of the
transactions will fail to perform as contracted. We manage this risk by only
entering into contracts with highly rated institutions and listed exchanges. We
do 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 31,1998
----------------
Carrying % of
Value Total
----- -----
($ In Millions)
Due in one year or less $ 556 2.2%
Due after one year
through five years 4,151 16.5
Due after five years
through ten years 8,623 34.2
Due after ten years 5,320 21.1
Mortgage-backed
securities(1) 6,566 26.0
------- -----
$25,216 100.0%
======= =====
(1) Average life is 5.1 years, including securities guaranteed by the
U.S. Government.
As of December 31, 1998, mortgage-backed securities in the bond portfolio
consisted of $3.7 billion of GNMA, FNMA, FHLMC and FHA mortgage-backed
pass-through securities, and $2.9 billion of government agency-backed
collateralized mortgage obligations.
Substantially all of our publicly traded and privately placed bonds are
evaluated by the NAIC's Securities Valuation Office ("SVO"), which assigns
securities to one of six NAIC investment classes, with Class 1 securities being
the highest quality and Class 6 securities being the lowest quality. Classes 1
and 2 are investment grade, Class 3 is medium quality and Classes 4, 5 and 6 are
non-investment grade. For securities which have not as yet been rated by the
NAIC, we use an internal rating system. We believe that our internal rating
system is similar to that used by the SVO.
The table below sets forth the NAIC SVO ratings for our bond portfolio
(including short-term securities) along with what we believe are the equivalent
public rating agency designations. At December 31, 1998 and 1997, 91.2% and
90.9%, respectively, of the portfolio was invested in NAIC Class 1 and 2
securities.
23
<PAGE>
Bond Credit Quality
(includes short-term securities)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $16,014 61.0% $15,594 61.6%
2 Baa 7,931 30.2 7,434 29.3
3 Ba 1,498 5.7 1,533 6.1
4 B 752 2.9 683 2.7
5 Caa and lower 35 0.1 55 0.2
6 In or near default 35 0.1 37 0.1
------- ----- ------- -----
Total $26,265 100.0% $25,336 100.0%
======= ===== ======= =====
</TABLE>
Of our publicly traded bonds, 95.3% were rated as NAIC Classes 1 and 2 at
December 31, 1998, compared to 96.1% at December 31, 1997. We utilize our
investments in the privately placed bond portfolio to enhance the value of the
overall portfolio, increase diversification and obtain higher yields than are
possible with comparable quality public market securities. To control risk, we
rely upon broader access to management information, strengthened negotiated
protective covenants, call protection features, and a higher level of
collateralization than can customarily be achieved in the public market. The
strength of the privately placed bond portfolio is demonstrated by the
predominance of NAIC Classes 1 and 2 securities.
The tables below set forth the NAIC SVO ratings for our publicly traded and
privately placed bond portfolios (including short-term securities), along with
what we believe are the equivalent public rating agency designations:
Publicly Traded Bond Credit Quality
(includes short-term securities)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $11,921 79.5% $11,632 78.2%
2 Baa 2,374 15.8 2,665 17.9
3 Ba 356 2.4 320 2.2
4 B 328 2.2 247 1.7
5 Caa and lower 17 0.1 5 0.0
6 In or near default 1 0.0 1 0.0
------- ----- ------- -----
Total $14,997 100.0% $14,870 100.0%
======= ===== ======= =====
</TABLE>
24
<PAGE>
Privately Placed Bond Credit Quality
(Includes Short-Term Securities)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1 Aaa/Aa/A $ 4,093 36.3% $ 3,962 37.9%
2 Baa 5,557 49.3 4,769 45.5
3 Ba 1,142 10.1 1,213 11.6
4 B 424 3.8 436 4.2
5 Caa and lower 18 0.2 50 0.5
6 In or near default 34 0.3 36 0.3
------- ----- ------- -----
Total $11,268 100.0% $10,466 100.0%
======= ===== ======= =====
</TABLE>
The following table sets forth by industry category the carrying value and
percent of total of the bond portfolio, including short-term securities, as of
December 31, 1998:
Bond Portfolio By Industry
(includes short-term securities)
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Public Private Total
--------------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Industry Category Value Total Value Total Value Total
--------------------------------------------------------------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C> <C>
Collateralized (1) $ 7,655 51.0% $ 434 3.9% $ 8,089 30.7%
U.S. Government 2,415 16.1 265 2.4 2,680 10.2
Finance 869 5.8 1,094 9.7 1,963 7.5
Producer goods 796 5.3 1,740 15.4 2,536 9.7
Consumer goods 519 3.5 1,291 11.5 1,810 6.9
Natural resources 494 3.3 838 7.4 1,332 5.1
Utilities 866 5.8 606 5.4 1,472 5.6
Other services 175 1.2 867 7.7 1,042 4.0
Media 253 1.7 461 4.1 714 2.7
Transportation 150 1.0 515 4.6 665 2.5
Retail 140 0.9 384 3.4 524 2.0
Health care 165 1.1 285 2.5 450 1.7
Aerospace 105 0.7 229 2.0 334 1.3
Others 395 2.6 2,259 20.0 2,654 10.1
------- ----- ------- ----- ------- -----
Total $14,997 100.0% $11,268 100.0% $26,265 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
(1) These bonds are collateralized by mortgages backed by FNMA, GNMA, FHLMC or
FHA and include collateralized mortgage obligations and pass-through securities.
These amounts also include asset backed securities such as credit card and
automobile securities.
25
<PAGE>
We estimate the fair value of bonds based upon quoted market prices for actively
traded securities. We subscribe to commercial pricing services that provide
estimated fair values of fixed income securities that are not actively traded.
We generally determine fair values for privately placed bonds by applying
interest spreads based on quality and asset type to the appropriate duration on
the U.S. Treasury yield curve.
The tables below set forth the carrying value, gross unrealized gains and
losses, net unrealized gains and losses and estimated fair value of our bond
portfolio (excluding short-term securities) at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain Value
----------------------------------------------------------------------------
($ In Millions)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4,945 $ 473 $ 21 $ 452 $ 5,397
Foreign governments 41 1 1 -- 41
Mortgage-backed securities 3,735 188 14 174 3,909
State and local governments 361 33 8 25 386
Corporate debt securities 14,133 845 118 727 14,860
Utilities 886 103 -- 103 989
Affiliates 1,115 1 1 -- 1,115
------- ------- ------- ------- -------
$25,216 $ 1,644 $ 163 $ 1,481 $26,697
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain Value
----------------------------------------------------------------------------
($ 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
Foreign governments 83 5 3 2 85
Mortgage-backed securities 3,009 188 9 179 3,188
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
------- ------- ------- ------- -------
$23,508 $ 1,555 $ 73 $ 1,482 $24,990
======= ======= ======= ======= =======
</TABLE>
Bond Portfolio Surveillance and Under-
Performing Investments
We review all bonds on a regular basis utilizing the following criteria:
. material declines in revenues or margins,
. significant uncertainty regarding the issuer's industry,
. debt service coverage or cash flow ratios that fall below industry-specific
thresholds,
. violation of financial covenants,
. trading of public securities at a substantial discount due to specific
credit concerns and
. other subjective factors that relate to the issuer.
We actively review the bond portfolio to estimate the likelihood and amount of
financial defaults or write-downs in the portfolio and to make timely decisions
as to the potential sale or re-negotiation of terms of specific investments.
We do not accrue interest income on bonds delinquent more than 90 days or when
we believe the collection of interest is uncertain. Interest not accrued on
bonds was $7 million for the year ended December 31, 1998, and $1 million for
the year ended December 31, 1997.
26
<PAGE>
The NAIC defines under-performing bonds as those whose deferral of interest
and/or principal payments are deemed to be caused by the inability of the
obligor to make such payments as called for in the bond contract.
The following table sets forth bonds in NAIC Classes 5 and 6, split between
performing and under-performing status:
NAIC Class 5 and 6 Bonds
Carrying Value
December 31,
------------
1998 1997
---- ----
($ In Millions)
Performing:
Public $17 $ 5
Private 18 50
--- ---
Total performing 35 55
--- ---
Under-performing:
Public 1 1
Private 34 36
--- ---
Total under-performing 35 37
--- ---
Total $70 $92
=== ===
As a result of our conservative monitoring process, we generate an internal
watch list which includes certain securities that would not be classified as
under-performing under the SVO credit rating system. At December 31, 1998, we
placed bonds having a carrying value of $505 million, 2.0% of the total bond
portfolio, on our internal watch list. Our internal watch list is comprised of
bonds that have the following NAIC ratings: $4 million NAIC Class 1, $102
million NAIC Class 2, $125 million NAIC Class 3, $257 million NAIC Class 4 and
$17 million NAIC Class 5.
Mortgage Loans
Mortgage loans represented 14.2% of the total investments in the general account
at December 31, 1998, compared to 13.2% at December 31, 1997. Mortgage loans
consist of commercial mortgage loans and residential mortgage loan pools. At
December 31, 1998, commercial mortgage loans comprised 77.7%, and at December
31, 1997, 73.0% of the mortgage loan portfolio.
Total gross investment income on mortgage loans for the year ended December 31,
1998, was $441 million, a 1.1% decrease from $446 million in 1997. We attribute
this decrease to high yielding loans leaving the portfolio at maturity, or
through prepayments, being replaced by new loans issued at current market rates
lower than the portfolio average. The average yield on mortgage loans was 8.2%
for the year ending December 31, 1998, and 9.2% for the year ending December 31,
1997. Net realized capital gains (losses) on mortgage loans were $5 million for
the year ended December 31, 1998, compared to a loss of $57 million for the year
ended December 31, 1997. The following table provides certain information
regarding the maturity distribution of mortgage loans:
Mortgage Loan Maturities
December 31, 1998
-----------------
Carrying % of
Value Total
----- -----
($ In Millions)
Due in one year
or less $ 341 5.8%
Due after one year
through five years 1,148 19.4
Due after five years
through ten years 1,610 27.2
Due after ten years 1,496 25.3
------ -----
4,595 77.7
Residential 1,322 22.3
------ -----
Total $5,917 100.0%
====== =====
Expected maturities will differ from contractual maturities because a borrower
may have the right to call or prepay obligations with or without prepayment
penalties.
Residential
The residential mortgage loan portfolio consists of conventional and FHA/VA
mortgage pools. These investments have provided us with excellent loss/risk
experience. We impose rigorous investment standards, including governmental
agency guarantees, seasoned pools and discount pricing as protection against
prepayment risk.
Commercial
Our 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, 1998, 82.7% of the commercial mortgage loan portfolio consisted
of bullet loans (loans that do not fully amortize over their term) compared to
86.0% at December 31, 1997.
We had $181 million of bullet loans scheduled to mature during 1998, of which,
$96 million, or 53.0%, were paid in full at maturity, $6 million, or 3.3%, were
refinanced, $43 million, or 23.8%, were granted short term extensions, and $36
million, or 19.9%, were foreclosed or paid off at a discount.
27
<PAGE>
During 1998, all renewed bullet loans were performing assets prior to renewal
and all loan renewals reflected market conditions. Past experience with regard
to bullet maturities, however, is not necessarily indicative of future results.
We consider the maturities of commercial mortgage loans to be sufficiently
diversified, and we carefully monitor and manage them in light of our liquidity
needs.
The following tables set forth by property type and geographic
distribution the commercial mortgage loan portfolio:
Commercial Mortgage Loans by
Property Type
December 31,
------------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $1,484 32.3% $1,040 27.1%
Industrial and Other 1,152 25.1 468 12.2
Hotels and Motels 706 15.4 647 16.9
Retail 700 15.2 745 19.5
Apartments 552 12.0 928 24.2
Commercial Pools 1 0.0 3 0.1
------ ----- ------ -----
$4,595 100.0% $3,831 100.0%
====== ===== ====== =====
Commercial Mortgage Loans by
Geographic Distribution
December 31,
------------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
West $ 976 21.3% $ 697 18.2%
Northeast 778 16.9 695 18.1
Southwest 764 16.6 685 17.9
Midwest 731 15.9 532 13.9
Southeast 726 15.8 634 16.6
Mid-Atlantic 620 13.5 588 15.3
------ ----- ------ -----
$4,595 100.0% $3,831 100.0%
====== ===== ====== =====
Mortgage Loan Portfolio Surveillance
and Under-Performing Investments
We actively monitor, manage and directly service our commercial mortgage loan
portfolio. Our personnel perform or review all aspects of loan origination and
portfolio management, including:
. lease analysis,
. property transfer analysis,
. economic and financial reviews,
. tenant analysis and
. oversight of default and bankruptcy proceedings.
We re-value all properties each year and re-inspect all properties either each
year or every other year based on internal quality ratings.
We use the following criteria to determine whether a current or potential
problem exists:
. borrower bankruptcies,
. major tenant bankruptcies,
. requests for restructuring,
. delinquent tax payments,
. late payments,
. loan-to-value or debt service coverage deficiencies and
. overall vacancy levels.
Restructured mortgage loans are loans for which current payment terms have been
modified to less than current market rates, at the time of modification and are
currently performing in accordance with such modified terms. We do not classify
loans, which maturities have been extended but on which current payments are
being made at or above market interest rates, as restructured loans.
The carrying values of current and potential problem commercial mortgage loans
as of the dates indicated were as follows:
Current and Potential Problem
Commercial Mortgage Loans
December 31,
------------
1998 1997
---- ----
($ In Millions)
Restructured $127 $193
In Process of Foreclosure 6 48
In Default 14 22
Actively Managed Properties -- 20
---- ----
Total $147 $283
==== ====
The AVR contains a commercial mortgage loan component which totaled $141 million
at the end of 1998. In addition, at December 31, 1998, we maintained a separate
voluntary commercial mortgage loan investment reserve of $42 million for
properties in the process of foreclosure and for other anticipated losses. See
"Write-downs and Investment Reserves."
We do not accrue interest income on mortgage loans which are delinquent more
than 90 days or when we believe the collection of interest is uncertain.
Interest not accrued on mortgage loans totaled $1 million in 1998 and $3 million
in 1997.
28
<PAGE>
The following tables set forth current and potential problem commercial mortgage
loans, excluding residential mortgage pools of $1,322 million, by property type
and geographic region:
Commercial Mortgage Loan Distribution
By Property Type
December 31, 1998
-----------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
------------------------------------
($ In Millions)
Office $1,484 $ 78 5.3%
Industrial & Other 1,152 11 1.0
Hotels & Motels 706 -- 0.0
Retail 700 37 5.3
Apartments 552 21 3.8
Commercial Pools 1 -- 0.0
------ ------ ---
Total $4,595 $ 147 3.2%
====== ====== ===
Commercial Mortgage Loan Distribution
By Geographic Distribution
December 31, 1998
-----------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
--------------------------------------
($ In Millions)
West $ 976 $ 53 5.4%
Northeast 778 30 3.9
Southwest 764 6 0.8
Midwest 731 30 4.1
Southeast 726 -- 0.0
Mid-Atlantic 620 28 4.5
------ ------ ---
Total $4,595 $ 147 3.2%
====== ====== ===
The following is a comparison of our commercial mortgage loan experience against
the latest available industry averages as provided by the American Council of
Life Insurance ("ACLI"). We establish reserves for commercial mortgage loans in
the process of foreclosure, and recognize losses on such commercial mortgage
loans only upon foreclosure.
MassMutual and Life Insurance Industry
Commercial Mortgage Loan Comparisons
December 31, 1998 December 31, 1997
----------------- -----------------
MassMutual ACLI MassMutual ACLI
---------- ---- ---------- ----
Delinquent (1) 0.31% 0.17% 0.56% 0.32%
Restructured (2) 2.76 3.02 5.34 4.61
In foreclosure 0.13 0.31 1.22 0.58
---- ---- ---- ----
Subtotal 3.20 3.50 7.12 5.51
Foreclosed 0.38 0.44 1.08 0.85
---- ---- ---- ----
Total 3.58% 3.99% 8.20% 6.36%
==== ==== ==== ====
(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.
We compare our residential mortgage loan experience to industry averages. At
December 31, 1998, our delinquency rate was 2.35% as compared to the industry
average of 2.49% according to the Mortgage Bankers Survey.
Real Estate
The real estate portfolio includes real estate properties originally acquired as
investments, occupied by us and real estate we acquired through foreclosure.
The following tables illustrate the diversity of the real estate portfolio by
property type and geographic distribution:
Real Estate by
Property Type
December 31,
------------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $ 652 37.4% $ 612 36.0%
Hotels and Motels 572 32.9 549 32.3
Retail 222 12.8 241 14.2
Apartments 170 9.8 156 9.2
Industrial and Other 124 7.1 140 8.3
------ ----- ------ -----
Total $1,740 100.0% $1,698 100.0%
====== ===== ====== =====
Real Estate by
Geographic Distribution
December 31,
------------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Northeast $ 434 24.9% $ 371 21.8%
Southeast 316 18.2 378 22.3
Mid-Atlantic 277 15.9 299 17.6
Midwest 271 15.6 257 15.1
West 258 14.8 193 11.4
Southwest 184 10.6 200 11.8
------ ----- ------ -----
Total $1,740 100.0% $1,698 100.0%
====== ===== ====== =====
At the close of 1998, our real estate portfolio consisted of 137 properties with
a statement value in excess of $1.7 billion. The portfolio is primarily
unleveraged with only $64 million in third party non-recourse debt outstanding
at December 31, 1998.
Real estate produced gross investment income of $336 million for the year ended
December 31, 1998, and $317 million for the year ended December 31, 1997. Net
capital gains and losses from sales transactions and impairments were gains of
$34 million during 1998 and losses of $6 million during 1997.
29
<PAGE>
We record foreclosed real estate 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. We re-value all real estate investments annually and
take write-downs if the revaluation indicates an impairment of value. We manage
foreclosed properties to optimize value and then either sell them or transfer
them to our investment real estate portfolio. Foreclosed real estate had a
carrying value, net of write-downs, of $54 million at December 31, 1998, and
$118 million at December 31, 1997.
We review individual property valuations on a regular basis. Asset managers, at
our regional offices, first establish our real estate valuations using a third
party valuation software projecting income on a lease-by-lease basis. We also
reflect budgeted expenses, leasing assumptions and capital expenditures. The
appraisal section of our real estate investment division reviews these
valuations for technical accuracy, methodology and the appropriateness of the
assumed rates of return. We prepare these valuations on an interim basis between
the months of February and September, with a final valuation prepared for the
end of the year. Additionally, in 1998 external independent appraisers appraised
a sample of properties constituting 28.9% of the portfolio's market value.
We transfer properties acquired by foreclosure or deed in lieu of foreclosure to
investment real estate when the following qualifications have been met:
. We have owned or monitored the property for sufficient time to allow proper
evaluation, including the pendency of foreclosure procedures, receivership
or redemption;
. 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
. there are no unusual circumstances which would have substantial negative
impact on the value of the property or the stability of the income stream,
such as, environmental problems, major tenant vacancies over a short-term
or structural building deficiencies.
At December 31, 1998, our real estate AVR totaled $242 million. In addition, we
maintained a separate GIR of $35 million in respect of properties held for sale
during the upcoming year.
Write-downs and Investment Reserves
When we determine that it is probable that the net realizable value of an
invested asset is less than our carrying value, we establish and record
appropriate write-downs or investment reserves in accordance with statutory
practice. We determine the net realizable value of bonds 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
. our evaluation of the borrower's ability to compete in a relevant market.
In the case of real estate and commercial mortgage loans, we make borrower and
property-specific assessments as well.
In compliance with regulatory requirements, we maintain 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 us in
anticipation of future losses on specific mortgage loans and real estate
holdings, particularly mortgage loans in the process of foreclosure.
Our total investment reserves at December 31, 1998, were $1,053 million, an 8.3%
increase from December 31, 1997, consisting of AVR of $952 million and GIR of
$101 million. GIR comprised $77 million for mortgage loans and real estate and
$24 million for a special investment reserve related to the surplus notes.
30
<PAGE>
The following table presents the change in total investment reserves for the
years 1998 and 1997:
<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, 1996(1) $ 234 $ 141 $ 240 $ 250 $ 32 $ 897
------- ------- ------- ------- ------- -------
Reserve contributions (2) 26 20 (26) (55) (4) (39)
Transfers among categories (35) 35 65 (65) -- --
Net realized capital gains (losses) (3) (6) (44) (9) 50 -- (9)
Unrealized capital gains (4) 29 -- -- 94 -- 123
------- ------- ------- ------- ------- -------
Net change to Policyholders'
Contingency Reserves (5) 14 11 30 24 (4) 75
------- ------- ------- ------- ------- -------
Balance at December 31, 1997(1) $ 248 $ 152 $ 270 $ 274 $ 28 $ 972
------- ------- ------- ------- ------- -------
Reserve contributions (2) 39 34 (46) (19) (4) 4
Transfers among categories (4) 4 -- -- -- --
Net realized capital gains (losses) (3) (8) (7) 53 26 -- 64
Unrealized capital gains (losses) (4) (9) -- -- 22 -- 13
------- ------- ------- ------- ------- -------
Net change to Policyholders'
Contingency Reserves (5) 18 31 7 29 (4) 81
------- ------- ------- ------- ------- -------
Balance at December 31, 1998(1) $ 266 $ 183 $ 277 $ 303 $ 24 $ 1,053
======= ======= ======= ======= ======= =======
</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, 1996 $689 $208 $ 897
Balance at December 31, 1997 $841 $131 $ 972
Balance at December 31, 1998 $952 $101 $1,053
(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. 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
change in Policyholders' Contingency Reserves.
Quantitative and Qualitative
Information about Market Risk
We developed the following discussion of our risk-management activities using
"forward-looking statements." While we believe that the assumptions we have made
are reasonably possible in the near term, actual results could differ materially
from those projected in the forward-looking statements. In addition, we would
likely take certain actions to mitigate the impacts of the assumed market
changes, thereby reducing the negative impact discussed below.
We have excluded all non-guaranteed separate account assets and liabilities from
the following discussion since all market risks associated with those accounts
are assumed by the contract holders, not us.
Our assets, such as bond, stocks, mortgage loans, policy loans and derivatives
are financial instruments and are subject to the risk of market volatility and
potential market disruptions. These risks may reduce the value of our financial
instruments, or impact future cash flows and earnings from those instruments. We
do not hold any financial instruments for the purposes of trading.
31
<PAGE>
Our primary market risk exposure is changes in interest rates, which can cause
changes in the fair value, cash flows and earnings of certain financial
instruments. To manage our exposure to interest rate changes we use
sophisticated quantitative asset/liability management techniques.
Asset/liability management allows us to match the market sensitivity of assets
with the liabilities they support. If these sensitivities are matched perfectly,
the impact of interest rate changes is effectively offset on an economic basis
as the change in value of the asset is offset by a corresponding change in the
value of the supported liability. In addition, we invest a significant portion
of our investment funds in high quality bonds in order to maintain and manage
liquidity and reduce the risk of default in the portfolio.
Based upon the information and assumptions we used in our asset/liability
analysis as of December 31, 1998, we estimate that a hypothetical immediate 10%
increase in interest rates would decrease the net fair value of our financial
instruments by $929 million. A change in interest rates of 10% would not have a
material impact on our future earnings or cash flows. A significant portion of
our liabilities, e.g., insurance policy and claim reserves, are not considered
financial instruments and are excluded from the above analysis. Because of our
asset/liability management, a corresponding change in fair values of these
liabilities, based on the present value of estimated cash flows, would
significantly offset the net decrease in fair value estimated above.
We also use derivative financial instruments to manage our investment risks,
primarily to reduce interest rate and duration imbalances determined in
asset/liability analyses. The fair values of these derivative financial
instruments, which are not recorded in the financial statements, are based upon
market prices or prices obtained from brokers. We do not hold or issue these
financial instruments for trading purposes.
The notional amounts do not represent amounts exchanged by the parties and,
thus, are not a measure of our exposure. 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.
We utilize 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, we agree to an exchange, at specified intervals,
between streams of variable rate and fixed rate interest payments. The amount
exchanged is calculated by reference to an agreed-upon notional principal
amount. We defer and amortize gains and losses realized on the termination of
contracts through the Interest Maintenance Reserve ("IMR") over the remaining
life of the associated contract. We include IMR amortization in net investment
income on the Statutory Statement of Income. Net amounts receivable and payable
are accrued as adjustments to net investment income and included in other assets
in the Statutory Statement of Financial Position. We had outstanding swaps with
notional amounts of $4,382 million at December 31, 1998, and $3,220 million at
December 31, 1997. The fair values of these instruments were $84 million at
December 31, 1998, and $21 million at December 31, 1997.
Options grant us the right to buy or sell a security or enter into a derivative
transaction at a stated price within a stated period. Our option contracts have
terms of up to ten years. We amortize the amounts we pay for options into net
investment income over the life of the contract. We record unamortized costs as
other investments on the Statutory Statement of Financial Position. We record
gains and losses on these contracts at the expiration or termination date and
amortize them through the IMR over the remaining life of the option contract. We
had option contracts with notional amounts of $12,704 million at December 31,
1998, and $5,388 million at December 31, 1997. Our credit risk exposure was
limited to the unamortized costs of $93 million at December 31, 1998, and $59
million at December 31, 1997. Additionally, these contracts had a market value
of $162 million at December 31, 1998, and $100 million at December 31, 1997.
Interest rate cap agreements grant us the right to receive the excess of a
referenced interest rate over a stated rate calculated by reference to an agreed
upon notional amount. Interest rate floor agreements grant us the right to
receive the excess of a stated rate over a referenced interest rate calculated
by reference to an agreed upon notional amount. We amortize the amounts we pay
for interest rate caps and floors into net investment income over the life of
the asset on a straight-line basis. We record unamortized costs as other
investments in the Statutory Statement of Financial Position. We accrue amounts
receivable and
32
<PAGE>
payable as adjustments to net investment income and include them in the
Statutory Statement of Financial Position as other assets. Upon termination of
these contracts, we recognize gains and losses. We defer and amortize these
gains and losses and any unamortized cost through the IMR over the remaining
life of the associated cap or floor agreement. At December 31, 1998, we had
agreements with notional amounts of $4,338 million, and $3,349 million at
December 31, 1997. Our credit risk exposure was limited to the unamortized costs
of $23 million at December 31, 1998, and $18 million at December 31, 1997.
Additionally, these contracts had a market value of $44 million at December 31,
1998, and $23 million at December 31, 1997.
We enter into forward U.S. Treasury, Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") commitments. We
enter into these forward commitments for the purpose of managing interest rate
exposure. We generally do not take delivery on these commitments. Instead of
taking delivery, we settle these commitments with offsetting transactions. We
record gains and losses on these commitments when settled. We amortize these
gains and losses through the IMR over the remaining life of the commitments. We
had outstanding commitments with contractual amounts of $603 million at December
31, 1998, and $1,101 million at December 31, 1997. Additionally, these
commitments had a fair value of $604 million at December 31, 1998, and $1,118
million at December 31, 1997.
We utilize other agreements to reduce exposures to various risks. At December
31, 1998, we had other agreements with notional amounts of $384 million, and
$386 million at December 31, 1997. The fair values of these instruments resulted
in an unrealized gain of $7 million at December 31, 1998, and an unrealized loss
of $7 million at December 31, 1997.
We are 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 $273 million at December 31, 1998, and $147 million at December 31, 1997.
We monitor exposure to ensure counterparties are credit worthy and concentration
of exposure is minimized. Additionally, we have obtained collateral positions
with counterparties when considered prudent.
Description of the Business
We are a mutual life insurance company organized as a Massachusetts corporation.
We were originally chartered in 1851. As a mutual life insurance company, we
have no shareholders. Our primary business is ordinary life insurance. We also
provide, directly or through our subsidiaries, a wide range of annuity and
disability products, and pension and pension-related products and services, as
well as investment services to individuals, corporations and other institutions,
in all 50 states of the United States and the District of Columbia. We, or our
subsidiaries, are also licensed to transact business in Puerto Rico, six
provinces of Canada, Chile, Argentina, Bermuda and Luxembourg, however, these
operations are not material.
Our principal lines of business are
. Individual Line of Business, which includes life, disability, annuities,
large corporate life insurance and investment products and services;
. Retirement Services, which provides group pension investment products and
administrative services, primarily to sponsors of tax qualified retirement
plans;
. MassMutual Investment Group, which provides investment advisory services to
us, our affiliates and various outside individual and institutional
investors through our investment management staff and our subsidiaries:
Oppenheimer Acquisition Corporation, DLB Acquisition Corporation, Antares
Capital Corporation, and Cornerstone Real Estate Advisors, Inc.
MassMutual's Investment Group's ("MMIG") assets under management ("AUM") has
grown substantially in recent years, reaching $176.8 billion at December 31,
1998. The results of operations of MMIG are allocated to and reflected in the
financial results of the other product lines.
33
<PAGE>
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 one of our subsidiaries in December 1994,
and the subsidiary was subsequently sold in March of 1996.
On March 1, 1996, the operations of the former Connecticut Mutual Life Insurance
Company were merged into our operations. The merger was accounted for under the
pooling of interests method of accounting. Our financial information has been
restated to reflect the merger as if it had occurred on January 1, 1994. This is
in conformity with statutory accounting practices.
The following table sets forth financial data for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in Millions)
<S> <C> <C> <C> <C> <C>
Other Data:
Premium Income:
Individual Line Operations $ 4,614 $ 4,299 $ 4,286 $ 3,924 $ 3,878
Retirement Services Operations 2,868 2,466 2,043 1,804 1,566
Life and Health Benefits Management -- -- -- -- 733
-------- -------- -------- -------- --------
Total premium income $ 7,482 $ 6,765 $ 6,329 $ 5,728 $ 6,177
======== ======== ======== ======== ========
Net Investment Income:
Individual Line Operations $ 2,298 $ 2,159 $ 2,037 $ 1,952 $ 1,734
Retirement Services Operations 659 711 797 890 958
Life and Health Benefits Management -- -- -- -- 41
-------- -------- -------- -------- --------
Total net investment income $ 2,957 $ 2,870 $ 2,834 $ 2,842 $ 2,733
======== ======== ======== ======== ========
Net Income:
Individual Line Operations $ 257 $ 216 $ 225 $ 165 $ 60
Retirement Services Operations 109 41 40 25 (25)
Life and Health Benefits Management -- -- -- -- 39
-------- -------- -------- -------- --------
Total net income $ 366 $ 257 $ 265 $ 190 $ 74
======== ======== ======== ======== ========
Total Assets (at period end):
Individual Line Operations $ 43,687 $ 40,072 $ 36,361 $ 33,902 $ 30,278
Retirement Services Operations 18,989 17,563 16,986 16,595 16,060
Life and Health Benefits Management -- -- -- -- 542
-------- -------- -------- -------- --------
Total assets $ 62,676 $ 57,635 $ 53,347 $ 50,497 $ 46,880
======== ======== ======== ======== ========
</TABLE>
The direction and operations of our business are guided by a statement of
corporate vision. Under this vision, our operations are managed so as to
maintain a financially strong and efficient enterprise for the benefit of
policyholders. Our long-term objectives are to maintain corporate financial
strength, enhance policyholder value, and generate and sustain growth.
Individual Line
Our Individual Line provides a wide range of products and services through our
network of general agents, agents and affiliated distributors. Registered
variable contracts, mutual funds, including the Oppenheimer Funds, and other
investment products are distributed through MML Investor's Services, Inc.
("MMLISI"), a registered broker/dealer that we indirectly wholly-own. MMLISI
also provides securities brokerage services. MML Distributors, LLC, also one of
our indirectly wholly-owned, registered broker/dealer subsidiaries acts as the
principal underwriter for many of our registered variable annuity and variable
life insurance products.
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Products
The principal products offered by the Individual Line
include:
. whole life, variable universal and term life insurance products,
. individual annuity products,
. and individual disability income insurance products.
The majority of these products offer 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. 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. We offer several types of whole
life products, including products with premiums due for the life of the insured
and products with guaranteed limited payment periods. We also offer survivorship
whole life, a product that pays a death benefit upon the death of the second of
two insureds.
Universal Life. Universal life insurance provides the policyholder with flexible
premiums and death benefits as well as no lapse guarantees. We credit premiums
in excess of specified sales charges to the account value of the policy, which
are allocated to the fixed account backed by our general investment account.
That account value includes a guaranteed principal with a minimum interest
credit. The policy 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. 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
investment options. We credit premiums in excess of specified sales charges to
the account value of the policy. We apply net premiums, as instructed by the
policyholder, to a guaranteed principal account backed by our general investment
account, or to one or more of our separate accounts. The policyholder bears the
investment risk for cash values in the separate accounts. We deduct the cost of
insurance and administrative charges from the accumulating account value to
which we credit the premiums. We also offer 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. We offer 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 one of our
other insurance products.
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. Individual
deferred annuities provide 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 our general
investment account and credited with interest at a rate which we periodically
reset subject to a minimum guarantee. 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, 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 contract holder.
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
We design the pricing of Individual Line products to produce surplus sufficient
to generate a level of capital consistent with our financial strength
objectives. We achieve long-term value to policyholders 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, we reflect the
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actual experience 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, we reflect the actual experience
in interest, mortality and/or expense rates.
Principal Markets, Marketing
and Distribution
Sales of our Individual line products are primarily targeted to affluent and
emerging affluent market segments including professionals, business owners,
principals and partners. Our products are designed to solve complex financial
concerns including estate planning and business succession planning needs.
We sell our Individual Line products nationwide primarily through approximately
100 general agents who contract with more than 5,000 full-time career agents. In
1998, 80% of Individual Line's premiums were generated by policies sold by our
career agents. The remaining 20% of premiums were generated by policies sold by
other producers, including independent brokers, who contract with the general
agents, consultants and independent broker/dealers. In addition, we issue the
Oppenheimer Fund LifeTrust variable annuity product for marketing and
distribution through the Oppenheimer registered representatives. The LifeTrust
variable annuity product accounted for 16.2% of individual annuity sales in
1998.
Underwriting
We carefully balance the risk assessment process to ensure an evaluation of
relative risks consistent with the issuance of new business and competitive
product performance. We utilize a computerized system in the process of
reviewing and approving applications for life insurance. This system affords us
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 industry, 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, affect the financial services industry, thereby changing the
environment in which we compete.
Competition for large life insurance sales consists of fewer than 50 financially
strong companies. Our clients' advisors, consultants, attorneys and accountants
are 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.
Currently, more insurance companies, banks and mutual fund companies are
entering the annuity business. We effectively compete in this market through our
use of multiple distribution channels, our customer service orientation, variety
of fund options within our family, including Oppenheimer and offering of desired
product features.
In the disability income market, competitor strategies are diverging due to poor
financial results. We believe that we may be better positioned than some
competitors to succeed in this market as a result of the ability of our
distribution system to integrate sales of disability income insurance into total
financial planning.
We believe our financial strength, agent skill and historical product
performance provide competitive advantages for the products we offer in these
markets. Our financial strength continued to be recognized favorably by the
rating agencies. Our year end 1998 ratings were again among the highest enjoyed
by any company in any industry.
Our AAA (Extremely Strong) financial strength rating from Standard & Poor's, A++
(Superior) financial strength rating from A.M. Best, and AAA claims-paying
rating from Duff & Phelps were the highest possible. Our Aa1 financial strength
rating from Moody's Investors Service was the highest in its "Excellent"
category.
We are 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.
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 us in the future.
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Retirement Services
Through our Retirement Services operations, we market a complete line of
retirement investment products and administrative services, primarily to
sponsors of tax-qualified retirement plans.
Products
We offer a variety of guaranteed and non-guaranteed investment accumulation
products and ancillary services to the retirement marketplace.
Set forth below is a description of our principal retirement products:
Superflex. Superflex is a full service (investment, administrative and
consultative) defined contribution product sold to larger plans, generally
involving more than 250 lives. Superflex offers a complete array of separate
account investment options to participants. The guaranteed investment option
provided by Superflex is funded in our general investment account, with minimum
interest rate guarantees being provided up to periods of five years.
Flexinvest. Flexinvest is a full service (investment, administrative and
consultative) defined contribution product typically sold to plans with 50 to
250 lives. Flexinvest offers a complete array of our separate accounts as
investment options to participants. We also offer a guaranteed investment option
funded in our general investment account. One-year interest rate guarantees are
offered, reflecting past experience as well as expected future experience.
Retirement Matters Accumulation Product ("RMAP"). RMAP is a defined contribution
product sold directly by our career agency system which can be either full
service (investment, administrative and consultative), no service or offer a
distributed record keeping capability. The product is typically sold to plans
with 10 to 100 lives. RMAP offers a complete array of our separate accounts as
investment options to participants. We also offer one-year interest rate
guarantees, reflecting past experience as well as expected future experience.
Defined Benefit. Defined Benefit products include the Deposit Administration
contract ("DA"), the Immediate Participation contract ("IP") and the Pension
Funding contract ("PF"). These products are funded in our 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). We offer
separate accounts in conjunction with these products. We also offer full
investment, administrative and consultative services.
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, we began marketing
participating guaranteed products through pooled separate accounts or single
customer separate accounts in 1992. We pass through the investment results of
the separate account assets to the contract holders and we guarantee 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 contract holders. Currently, we offer separate accounts
that invest in large and small capitalization equities, bonds, international
equities and money market instruments. We offer separate accounts without
services to both defined benefit and defined contribution plans, or with
services in conjunction with the Flexinvest, Superflex and Defined Benefit
products. In response to the popularity of mutual funds with plan sponsors due
to the high level of regulatory oversight and disclosure requirements, we have
added an array of mutual funds to our product line, including non-proprietary
funds.
Guaranteed Investment Contracts and Single Premium Annuity Contracts.
Traditional guaranteed investment contracts and single premium annuity contracts
("SPACs") are no longer actively being sold. 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. We may want to re-enter the guaranteed
investment market in the future. 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.
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<PAGE>
Principal Markets, Marketing and Distribution
Our goal in the retirement marketplace is to grow our defined contribution and
defined benefit businesses. Our focus is on the mid-size market, and it has
moved toward the upper end of that market. Currently we administer over 3,000
full-service defined contribution plans, serving in excess of 330,000
participants.
We sell our pension products through 27 pension field employees
("representatives") in 17 offices located in major cities in the United States.
Our representatives distribute products through our agents, brokers, primarily
agents of other companies, and consultants.
Competition
Our Retirement Services operations, with $19.0 billion in statutory assets at
December 31, 1998, is among the top 50 pension asset managers in the United
States in terms of assets under management. In recent years, we have faced
increased competition in the retirement 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 retirement products and services, and the increasing
number of companies entering the market are anticipated to increase price and
investment performance pressures. We believe that our diverse product line,
which includes mutual funds, flexibility in servicing levels, and use of
technology will enhance our position as an experienced retirement services
entity, and that the marketplace 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, we sold MassMutual Holding Company Two, Inc., a wholly-owned
subsidiary, and its subsidiaries, including Mirus Life Insurance Company which
is currently doing business as "UniCARE". This comprised our group life and
health business. We cede our group life, accident and health business to
UniCARE, pursuant to a 1994 reinsurance agreement. Our last outstanding
contract, which is reinsured with UniCARE, is scheduled to expire on April 1,
1999.
MassMutual Investment Group
MassMutual Investment Group ("MMIG") provides investment advisory services to
us, our affiliates, and various unaffilliated individual and institutional
investors through our investment management staff and our subsidiaries:
. Oppenheimer Acquisition Corporation ("OAC"), with $99.1 billion of assets
under management ("AUM") at December 31, 1998, is one of the largest mutual
fund companies in the United States;
. DLB Acquisition Corporation, with $21.3 billion of AUM at December 31,
1998, manages funds for both individual clients and institutional
investors;
. Charter Oak Capital Management, Inc., with $3.4 billion of AUM at December
31, 1998;
. Cornerstone Real Estate Advisors, Inc., with $2.7 billion of AUM at
December 31, 1998, is a manager of and adviser on commercial real estate;
and
. Antares Capital Corporation, a finance company which lends and syndicates
loans to smaller companies.
Through MMIG's management of our general investment account ("GIA"), our GIA's
AUM has grown substantially in recent years, reaching $50.3 billion at December
31, 1998. The results of operations of MMIG, excluding unconsolidated
subsidiaries such as OAC, are allocated to and are reflected in the financial
results of our other product lines.
Our 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 our
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 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. We utilize a wide array of investment instruments to
carry out our portfolio management activities. The investment strategies for the
separate accounts are generally aimed at maximizing the total rate of return
against an agreed upon market benchmark.
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<PAGE>
Reinsurance
We cede all of our group life and health business to UniCARE and have 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. We remain 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 with Connecticut Mutual, we have a modified
coinsurance agreement with our 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's policies.
Effective January 1, 1997, we entered into a stop-loss agreement with our
subsidiary MML Bay State Life Insurance Company ("MML Bay State") on all MML Bay
State policies.
As of December 31, 1998, our maximum retention limit for an individual life was
$12 million. We may issue up to an additional $6 million of coverage on the same
individual in connection with survivorship whole life policies.
We also have catastrophic reinsurance arrangements that provide for
reimbursement of losses in excess of specified deductibles resulting from
catastrophic events.
Unconsolidated Subsidiaries
We provide other financial products and services through our subsidiaries. We
have two primary insurance subsidiaries, C.M. Life, which writes variable
annuities, variable life and universal life insurance, and MML Bay State, which
writes variable life and annuity business.
Our wholly-owned subsidiary MassMutual Holding Company owns numerous
non-insurance subsidiaries, including:
. Oppenheimer Acquisition Corporation and subsidiaries;
. DLB Acquisition Corporation and subsidiaries;
. Cornerstone Real Estate Advisors, Inc; and
. Antares Capital Corporation.
In addition, MassMutual Holding Company owns MassMutual International, with life
insurance operations in Bermuda, Luxembourg, Chile and Argentina, as well as
other affiliates.
We account for the value of our investments in subsidiaries at their underlying
net equity. We reflect operating results for such subsidiaries as unrealized
appreciation or depreciation. We record net investment income to the extent that
the subsidiaries declare dividends. We have a total investment in subsidiaries
at December 31, 1998, of $808.2 million.
Financial information for our unconsolidated subsidiaries as of December 31, and
for the year then ended is summarized below:
1998 1997 1996
(in millions)
Insurance Subsidiaries
Revenues $ 1,151 $ 1,087 $ 1,028
Net income (loss) (3) 1 9
Assets 4,741 3,767 2,619
Non-Insurance Subsidiaries
Revenues 1,137 967 651
Net income 74 75 49
Assets 2,840 2,019 1,410
Regulation
General. We are licensed to transact our insurance business in, and are subject
to regulation and supervision by, all 50 states of the United States, the
District of Columbia, Puerto Rico and six provinces of Canada. Our insurance
subsidiaries are licensed, regulated and supervised in all jurisdictions where
they conduct insurance business. The extent of such regulation varies. However,
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. We, along with each of our insurance subsidiaries,
are required to file detailed annual financial statements with supervisory
agencies in each of the jurisdictions in which we do business. Our operations
and accounts are also subject to examination by such agencies. We are also
subject to federal and state laws and regulations affecting the conduct of our
businesses.
State insurance regulatory authorities may from time to time make
inquiries regarding our compliance with regulations regarding the conduct of our
insurance business. We endeavor to respond to such inquiries in an appropriate
way and to take corrective action if warranted. Based upon regulatory inquiries
which have been made, it is our opinion that any regulatory proceedings which
might be initiated following such inquiries are not likely to have a material
adverse effect on our financial position or results of operations.
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<PAGE>
Holding Company Regulations. We are subject to the Massachusetts Insurance
Holding Company System Regulatory Act. Each of our United States insurance
subsidiaries is subject to similar regulation in their state of domicile. The
act contains certain reporting requirements as well as restrictions on
transactions between an insurer and our subsidiaries and affiliates.
The insurance holding company acts of each state also restrict the payment of
dividends by United States insurance subsidiaries and require prior regulatory
approval for payments of dividends beyond specified levels. Our insurance
subsidiaries do not at present, and are not currently expected to make, dividend
payments to us.
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. Guaranty associations 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 their 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 us by guaranty associations during
each of the past five years have not been material. While we cannot accurately
predict the amount of future assessments, we believe that assessments with
respect to other pending insurance company impairments and insolvencies will not
be material to our financial position.
Policy and Contract Reserve Sufficiency Analysis. Massachusetts and other states
have adopted an 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 we must submit an opinion of a qualified actuary that states that our
reserves, when considered in light of the assets held with respect to the
reserves, make good and sufficient provision for our associated contractual
obligations and related expenses. If an opinion cannot be provided, we must set
up additional reserves by moving funds from surplus. As part of our 1998 Annual
Statement, we provided an actuarial opinion without qualifications regarding
these reserve requirements as of December 31, 1998.
Risk-Based Capital. The NAIC Risk-Based Capital ("RBC") Model Act requires life
insurance companies to submit an annual RBC Report which compares a company's
total adjusted capital with our risk-based capital as calculated by an RBC
formula. The RBC formula takes into account the risk characteristics of an
insurance company's investments and products. The formula is 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. Our RBC at December 31, 1998, 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 our
case, Massachusetts insurance law limits the amount of our surplus to 12% of our
reserves for participating business, unless the Commissioner approves a greater
amount. We distribute amounts of surplus in excess of the maximum allowed under
the Massachusetts insurance law annually in the form of dividends on our
participating policies in accordance with dividend scales approved annually by
our Board of Directors.
Regulation of Investments. We are subject to state laws and regulations that
require diversification of our investment portfolios and limit the amount of
investments in certain investment categories, such as below investment grade
fixed income securities, real estate and equity investments. Failure to comply
with
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<PAGE>
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,
1998, our investments 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, a limited number of states have
approved the defined standard version of the model law. In 1998, the NAIC
adopted a second, "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. We expect that one of these 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. We are
unsure how regulation of investments pursuant to a model law will affect us,
since no legislation has been introduced in Massachusetts to adopt any version
of the NAIC model law. Our investments will not be subject to the model law, in
any form, until such a law is enacted in Massachusetts.
Financial Services Legislation. Congress is now considering legislation
modernizing the financial services industry. Congress is reviewing and modifying
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. 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 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.
Federal Income Taxation. Under the Internal Revenue Code of 1986 as amended
("The Code"), we are taxed on our life insurance company taxable income. In
1990, the Code was amended to require the capitalization and amortization of
certain policy acquisition expenses. Previously, we deducted these expenses as
incurred. In addition, we are subject to a tax on our surplus, commonly known as
mutual company add-on tax.
In addition, existing federal laws and regulations affect the taxation of:
. life insurance products,
. companies or
. their contract holders 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 we offer. If these proposals were adopted,
they would adversely affect our ability to sell such products and could result
in the surrender of existing contracts and policies. We cannot predict whether
future legislation will contain provisions that alter the tax treatment of these
products.
Securities Laws. We, along with certain of our subsidiaries and
certain policies and contracts offered by them, are subject to various levels of
regulation under the Federal securities laws. We, and several of our direct and
indirect subsidiaries are investment advisors registered under the Investment
Advisers Act of 1940. Our investment advisor subsidaries include:
. Cornerstone Real Estate Advisers, Inc.,
. DLB Acquisition Corporation, Incorporated,
. Charter Oak Capital Management, Inc. and
. Oppenheimer Funds, Inc.
In addition, certain of our separate accounts and a variety of our mutual funds
and other pooled investment vehicles are registered under the Investment Company
Act of 1940. These include:
. MML Series Investment Fund,
. Oppenheimer Variable Account Fund,
. Panorama Series Fund, Inc.,
. Oppenheimer Value Stock Fund,
. Oppenheimer Series Fund, Inc.,
. six mutual funds advised by DLB Acquisition Corporation,
. MassMutual Corporate Investors, and
. MassMutual Participation Investors.
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Certain insurance and annuity contracts issued by us, MML Bay State Life
Insurance Company and C.M. Life Insurance Company are registered under the
Securities Act of 1933.
MML Investors Services Inc, MML Distributors, LLC, OppenheimerFunds
Distributors, Inc., and Babson Securities Corporation, and other direct and
indirect subsidiaries, are registered as broker-dealers under the Securities
Exchange Act of 1934.
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. We, and our subsidiaries, may
also be subject to similar laws and regulations in the states and foreign
countries in which we provide investment advisory services, offer the products
described above or conduct other securities related activities.
Environmental Considerations. As owners and operators of real property, we 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. We routinely conduct environmental
assessments for real estate we are acquiring for investment and before taking
title through foreclosure to real property collateralizing mortgages we hold.
Based on these environmental assessments, and compliance with our internal
environmental procedures, we believe that any costs associated with compliance
with environmental laws and regulations or any remediation of such properties
would not be material to our financial position.
We and certain of our subsidiaries hold equity stakes in companies that could
potentially be subject to environmental liabilities. However, We believe, based
on our assessment of the businesses and properties of these companies and our
level of involvement in the operation and management of such companies, we would
not be subject to any material environmental liabilities with respect to these
investments. However, unexpected environmental liabilities can arise.
ERISA Considerations. When we and our insurance subsidiaries act as fiduciaries
for employee benefit plans governed by the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") we 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 an 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. At this time we cannot determine with complete certainty the overall
effect of that opinion on our general account contracts and operations. However,
even if the Supreme Court's decision in Harris Trust were otherwise deemed
applicable to us, 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 DOL 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
this date, proposed regulations have been issued by the DOL ("Transition Policy
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. We intend to
comply with the Transition Policy Regulation at such time as the regulation
becomes effective. We have also taken action to assure that our contracts issued
on or after January 1, 1999, comply with any applicable ERISA requirements.
42
<PAGE>
Properties
We own four buildings located in Springfield, Massachusetts on approximately 70
acres, comprising our North Campus office complex. We occupy all of the
approximately 1 million square feet of space in such buildings. We also own or
lease three buildings in Hartford, Connecticut, comprising our South Campus
office complex.
We have approximately 150 leases for our home office and field office
operations. Such leases typically have terms of three to ten years with renewal
options. Our annual rental obligations under these leases aggregated
approximately $29 million at December 31, 1998.
We believe that such owned and leased properties are suitable and adequate for
our current business operations.
Employees and Agents
As of December 31, 1998, we, and our life insurance subsidiaries, employed
approximately 5,000 people.
Our general agents employ approximately 4,300 full-time agents and 800 retired
agents who continue to be licensed to sell our products. In addition,
approximately 11,000 independent brokers are licensed to sell certain of our
insurance products. Approximately, 3,350 of the full-time agents and 1,300 of
the independent brokers are licensed to sell registered investment products.
None of our employees are represented by a labor union. We believe that our
employee relations are generally good.
Experts and Additional Available Information
Experts
We included our audited statutory financial statements in this prospectus in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing. These
statements include the statement of statutory financial position as of December
31, 1998 and 1997, and the related statutory statements of income, changes in
policyholders' contingency reserves and of cash flows for each of the three
years in the period ended December 31, 1998.
Additional Available Information
We file registration statements, reports and informational statements with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933.
These filings contain information not contained in this Prospectus. You can
review and copy such registration statements, reports, information statements
and other information at the public reference facilities maintained by the SEC.
The SEC is located, at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC's New York and Chicago regional offices are 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.
------------------
43
<PAGE>
Selected Historical Financial Data
We have prepared our financial information on the basis of statutory accounting
practices. For a description of the accounting principles applicable to this
financial information and certain differences between statutory accounting
practices and generally accepted accounting principles, see "Accounting
Practices".
The following statutory information as of and for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 has been derived from our statutory financial
statements. We have restated these financial statements as if the merger with
Connecticut Mutual had occurred on January 1, 1994. The 1998, 1997 and 1996
statutory financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants. PricewaterhouseCoopers LLP did not audit the statutory
financial statements of Connecticut Mutual for the years 1995 and 1994. Those
statements were audited by other auditors whose report has been furnished to
PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP's opinion for 1995 and
1994 insofar as it relates to Connecticut Mutual, is based solely on the report
of other auditors.
The information should be read in conjunction with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and other information
included elsewhere in this prospectus. The results for past accounting periods
are not necessarily indicative of the results to be expected for any future
accounting period.
44
<PAGE>
Massachusetts Mutual Life Insurance Company
Selected Historical Financial Data
(In Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Premium income $ 7,482 $ 6,765 $ 6,329 $ 5,728 $ 6,177
Net Investment income 2,957 2,870 2,834 2,842 2,733
Fees and other income 154 127 117 130 140
-------- -------- -------- -------- --------
Total 10,593 9,762 9,280 8,700 9,050
-------- -------- -------- -------- --------
Benefits and expenses:
Policyholders' benefits and payments 5,874 6,584 6,048 5,152 5,450
Addition to policyholders' reserves and funds 2,300 827 945 1,279 1,332
Commissions, operating expenses and
state taxes 897 848 859 924 1,065
Merger restructuring costs (1) -- -- 66 44 --
-------- -------- -------- -------- --------
Total 9,071 8,259 7,918 7,399 7,847
-------- -------- -------- -------- --------
Net gain before federal income taxes and dividends 1,522 1,503 1,362 1,301 1,203
Federal income taxes 199 284 277 206 140
-------- -------- -------- -------- --------
Net gain from operations before dividends 1,323 1,219 1,085 1,095 1,063
Dividends to policyholders (2) 983 919 860 819 825
-------- -------- -------- -------- --------
Net gain from operations 340 300 225 276 238
Net realized capital gain (loss) 26 (43) 40 (86) (164)
-------- -------- -------- -------- --------
Net income $ 366 $ 257 $ 265 $ 190 $ 74
======== ======== ======== ======== ========
Balance Sheet Data:
Assets:
General account $ 43,086 $ 40,832 $ 39,783 $ 39,187 $ 38,349
Separate account 19,590 16,803 13,564 11,310 8,531
-------- -------- -------- -------- --------
Total assets $ 62,676 $ 57,635 $ 53,347 $ 50,497 $ 46,880
======== ======== ======== ======== ========
Liabilities:
Policyholders' reserves and funds (3) $ 35,277 $ 33,783 $ 33,342 $ 32,893 $ 32,295
Policyholders' dividends (4) 1,022 954 885 833 838
Long-term debt -- -- -- 107 153
Investment reserves 1,053 972 897 755 601
Separate account liabilities 19,589 16,803 13,563 11,310 8,530
Other liabilities 2,546 2,250 2,021 1,998 1,894
-------- -------- -------- -------- --------
Total liabilities 59,487 54,762 50,708 47,896 44,311
-------- -------- -------- -------- --------
Policyholders' contingency reserves:(1)(3)
Outstanding surplus notes (5) 326 322 318 315 315
Designated surplus 3 3 3 38 36
Unassigned funds (6) 2,860 2,548 2,318 2,248 2,218
-------- -------- -------- -------- --------
Total policyholders' contingency reserves 3,189 2,873 2,639 2,601 2,569
-------- -------- -------- -------- --------
Total liabilities and policyholders'
contingency reserves $ 62,676 $ 57,635 $ 53,347 $ 50,497 $ 46,880
======== ======== ======== ======== ========
Total Adjusted Capital Data:(7)
Total policyholders' contingency reserves $ 3,189 $ 2,873 $ 2,639 $ 2,601 $ 2,569
One-half the apportioned dividend liability (4) 505 472 438 411 414
Asset valuation reserve 975 864 707 585 479
-------- -------- -------- -------- --------
Total adjusted capital $ 4,669 $ 4,209 $ 3,784 $ 3,597 $ 3,462
======== ======== ======== ======== ========
</TABLE>
(1) In 1995, charges for employee separation and transaction expenses directly
attributable to our merger with Connecticut Mutual Insurance Company were
$44 million before tax for us and $45 million after tax for Connecticut
Mutual. The expenses we incurred 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, we incurred and
recorded an additional $66 million of merger-related expenses in the
statement of operations.
(2) Dividends to policyholders are discretionary and subject to the approval of
the our Board of Directors.
45
<PAGE>
(3) During 1995 and 1994, we supplemented reserves for certain disability
income contracts. We recorded the effects of these changes, $108 million in
1995 and $51 million in 1994, as decreases to policyholders' contingency
reserves. As a result of the merger, during 1996, we strengthened
policyholder reserves attributable to the disability income line of
business by $75 million, increased the real estate 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 we include this
in the calculation of total adjusted capital.
(5) During 1994, we issued Surplus Notes of $100 million at 7.5 percent and
$250 million at 7.625 percent during 1993. We recorded the proceeds of the
notes, less a special reserve for contingencies of $24 million for 1998,
$28 million for 1997, $32 million for 1996 and $35 million for 1995 and
1994, as a component of our policyholders' contingency reserves.
(6) Pursuant to approval by the Commissioner, any payment of interest on and
principal of the Notes, and any redemption payment, may be made only to the
extent that our Unassigned Funds contain 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.
We have reclassified certain prior year amounts to conform with current year
presentation.
46
<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, 1998 and 1997,
and the related statutory statements of income and changes in policyholders'
contingency reserves, and of cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the Division of Insurance
of the Commonwealth of Massachusetts, 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, are presumed to be
material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements audited by us do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Massachusetts Mutual Life Insurance Company as of December 31, 1998 and 1997,
or the results of its operations or its cash flows for each of the three years
in the period ended December 31, 1998.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of Massachusetts Mutual Life Insurance
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, on the basis of accounting described in Note 1.
PricewaterhouseCoopers LLP
Springfield, Massachusetts
February 25, 1999
FF-1
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION
December 31,
1998 1997
-------- --------
(In Millions)
Assets:
Bonds $ 25,215.8 $ 23,508.2
Common stocks 296.3 354.7
Mortgage loans 5,916.5 5,245.8
Real estate 1,739.8 1,697.7
Other investments 2,263.7 1,963.8
Policy loans 5,224.2 4,950.4
Cash and short-term investments 1,123.3 1,941.2
----------- -----------
41,779.6 39,661.8
Other assets 1,306.2 1,169.7
----------- -----------
43,085.8 40,831.5
Separate account assets 19,589.7 16,803.1
----------- -----------
$ 62,675.5 $ 57,634.6
=========== ===========
See notes to statutory financial statements.
FF-2
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION, Continued
December 31,
1998 1997
-------- --------
(In Millions)
Liabilities:
Policyholders' reserves and funds $ 35,277.0 $ 33,783.2
Policyholders' dividends 1,021.6 954.1
Policyholders' claims and other benefits 332.4 353.4
Federal income taxes 634.9 436.5
Asset valuation and other investment reserves 1,053.4 973.4
Other liabilities 1,578.9 1,457.9
----------- -----------
39,898.2 37,958.5
Separate account liabilities 19,588.5 16,802.8
----------- -----------
59,486.7 54,761.3
Policyholders' contingency reserves 3,188.8 2,873.3
----------- -----------
$ 62,675.5 $ 57,634.6
=========== ===========
See notes to statutory financial statements.
FF-3
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Revenue:
Premium income $ 7,482.2 $ 6,764.8 $ 6,328.6
Net investment income 2,956.8 2,870.2 2,834.4
Fees and other income 154.0 126.7 117.2
--------- --------- ---------
10,593.0 9,761.7 9,280.2
--------- --------- ---------
Benefits and expenses:
Policyholders' benefits and payments 5,873.9 6,583.8 6,048.2
Addition to policyholders' reserves and funds 2,299.6 826.8 945.2
Operating expenses 509.5 450.8 428.0
Commissions 299.3 315.3 335.5
State taxes, licenses and fees 88.1 81.5 96.4
Merger restructuring costs - - 66.1
--------- --------- ---------
9,070.4 8,258.2 7,919.4
--------- --------- ---------
Net gain before federal income taxes and dividends 1,522.6 1,503.5 1,360.8
Federal income taxes 199.3 284.4 276.7
--------- --------- ---------
Net gain from operations before dividends 1,323.3 1,219.1 1,084.1
Dividends to policyholders 982.9 919.5 859.9
--------- --------- ---------
Net gain from operations 340.4 299.6 224.2
Net realized capital gain (loss) 25.4 (42.5) 40.3
--------- --------- ---------
Net income $ 365.8 $ 257.1 $ 264.5
========= ========= =========
</TABLE>
See notes to statutory financial statements.
FF-4
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF CHANGES
IN POLICYHOLDERS' CONTINGENCY RESERVES
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Policyholders' contingency reserves,
beginning of year $2,873.3 $2,638.6 $2,600.9
-------- -------- --------
Increases (decreases) due to:
Net income 365.8 257.1 264.5
Net unrealized capital gain (loss) 17.4 119.1 (1.7)
Change in asset valuation and other investment reserves (81.0) (76.0) (142.4)
Change in prior year policyholders' reserves 8.6 (55.4) (72.2)
Other 4.7 (10.1) (10.5)
-------- -------- --------
315.5 234.7 37.7
-------- -------- --------
Policyholders' contingency reserves,
end of year $3,188.8 $2,873.3 $2,638.6
======== ======== ========
</TABLE>
See notes to statutory financial statements.
FF-5
<PAGE>
Massachusetts Mutual Life Insurance Company
STATUTORY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Operating activities:
Net income $ 365.8 $ 257.1 $ 264.5
Addition to policyholders' reserves and funds,
net of transfers to separate accounts 1,472.8 421.3 426.7
Net realized capital (gain) loss (25.4) 42.5 (40.3)
Other changes 15.4 (108.1) (286.1)
--------- --------- ---------
Net cash provided by operating activities 1,828.6 612.8 364.8
--------- --------- ---------
Investing activities:
Loans and purchases of investments (15,981.2) (12,292.7) (10,171.5)
Sales or maturities of investments and receipts
from repayment of loans 13,334.7 12,545.7 8,539.3
--------- --------- ---------
Net cash provided by (used in) investing activities (2,646.5) 253.0 (1,632.2)
--------- --------- ---------
Increase (decrease) in cash and short-term investments (817.9) 865.8 (1,267.4)
Cash and short-term investments, beginning of year 1,941.2 1,075.4 2,342.8
--------- --------- ---------
Cash and short-term investments, end of year $ 1,123.3 $ 1,941.2 $ 1,075.4
========= ========= =========
</TABLE>
See notes to statutory financial statements.
FF-6
<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 either directly or through its subsidiaries, 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, 1996 in conformity with the 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. In 1996, merger-related expenses totaling
$66.1 million were recorded in the Statutory Statement of Income. 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 charge to
policyholders' contingency reserves.
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.
1. SUMMARY OF ACCOUNTING PRACTICES
The accompanying statutory financial statements, have been prepared in
conformity with the statutory accounting practices of the NAIC and the
accounting practices prescribed or permitted by the Division of Insurance of
the Commonwealth of Massachusetts and are different in some respects from
financial statements prepared in accordance with generally accepted
accounting principles ("GAAP"). 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, morbidity and interest requirements without
consideration of withdrawals, whereas GAAP reserves would be based upon
reasonably conservative estimates of mortality, morbidity, interest and
withdrawals; (c) bonds are generally carried at amortized cost whereas GAAP
generally requires they be reported 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
income and changes in reserves, whereas under GAAP, these payments would be
recorded as deposits to policyholders' account balances.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective no later than January 1, 2001. The effect of
adopting Codification shall be reported as an adjustment to policyholders'
contingency reserves on the effective date. The Company is currently
reviewing the impact of Codification; however, since the Division of
Insurance of the Commonwealth of Massachusetts has not approved
Codification, the ultimate impact cannot be determined at this time.
FF-7
<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.
Certain 1997 and 1996 amounts have been reclassified to conform with the
current year presentation.
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
NAIC. 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 net of unamortized premium or
discount. The Company discontinues the accrual of interest on mortgage loans
which are delinquent more than 90 days or when collection is uncertain. Real
estate is valued at cost less accumulated depreciation, impairment
allowances and mortgage encumbrances. Encumbrances totaled $63.5 million in
1998 and $14.2 million in 1997. 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 ("AVR") and an Interest Maintenance Reserve ("IMR"). The
AVR 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 IMR
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 and interest related hedging activities. 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 $189.1 million
in 1998, $95.4 million in 1997 and $73.1 million in 1996 were charged to the
IMR. Amortization of the IMR into net investment income amounted to $40.3
million in 1998, $31.0 million in 1997, and $26.9 million in 1996.
Realized capital gains and losses, less taxes, not includible in the IMR,
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 contractholders. Assets consist
principally of marketable securities reported at fair value. Premiums,
benefits and expenses of the separate
FF-8
<PAGE>
Notes To Statutory Financial Statements (Continued)
accounts are reported in the Statutory Statement of Income. The Company
receives administrative and investment advisory fees from these accounts.
Net transfers to separate accounts of $821.3 million, $355.7 million and
$636.5 million in 1998, 1997 and 1996, respectively, are included in the
addition of policyholders' reserves and funds.
C. Non-admitted Assets
Assets designated as "non-admitted" (principally certain furniture,
equipment and other receivables) are excluded from the Statutory Statement
of Financial Position by an adjustment to policyholders' contingency
reserves.
D. Policyholders' Reserves and Funds
Policyholders' reserves for life insurance 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 6.75
percent.
Reserves for individual annuities, guaranteed investment contracts and
deposit administration and immediate participation guarantee contracts 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 $7,734.6 million and $8,077.9
million at December 31, 1998 and 1997, respectively with a fair value of
$7,940.6 million and $8,250.0 million at December 31, 1998 and 1997,
respectively, as determined by discounted cash flow projections.
Disability income 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
which increased policyholders' contingency reserves by $8.6 million in 1998
and decreased policyholders' contingency reserves by $55.4 million and $72.2
million in 1997 and 1996, respectively.
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. Disability
income 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.
FF-9
<PAGE>
Notes To Statutory Financial Statements (Continued)
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 short-term investments.
H. 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.
2. SURPLUS NOTES
The Company issued surplus notes of $100.0 million at 7.50 percent and $250.0
million at 7.625 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 1998, 1997 and 1996.
The proceeds of the notes, less a $24.4 million reserve in 1998, and a $28.3
million reserve in 1997 for contingencies associated with the issuance of the
notes, are recorded as a component of the Company's policyholders'
contingency reserves as permitted by the Division of Insurance. These surplus
note reserves are included in asset valuation and other investment reserves
on the Statutory Statement of Financial Position.
3. BENEFIT PLANS
The Company provides multiple benefit plans to employees, agents and retirees
including retirement plans and life and health benefits.
Retirement Plans
The Company has two non-contributory defined benefit plans covering
substantially all of its employees. One plan includes active employees and
retirees previously employed by Connecticut Mutual Life Insurance Company
which merged with MassMutual in 1996; the other plan includes all other
eligible employees and retirees. 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 $216.0 million and $157.4 million at December 31, 1998 and 1997,
respectively. Company policy is to fund pension costs in accordance with the
requirements of the Employee Retirement Income Security Act of 1974 and,
based on such requirements, no funding was required for the years ended
December 31, 1998, and 1997. The assets of the plans are invested in the
Company's general account and separate accounts.
FF-10
<PAGE>
Notes To Statutory Financial Statements (Continued)
The Company also has defined contribution plans for employees and agents. The
Company funds the plans by matching employee contributions, subject to
statutory limits. Company contributions and any earnings on them are vested
based on years of vesting service using a graduated vesting schedule in 20
percent increments over a five-year period.
Life and Health
Life and health insurance benefits are provided to employees and agents
through group insurance contracts. Substantially all of the Company's
employees and agents may become eligible for continuation of certain of these
benefits if they retire as active employees or agents of 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 initial
transition obligation of $137.9 million is being amortized over twenty years
through 2012. During 1998, the Company transferred the administration of the
retiree life and health plan benefit obligations and supporting assets to an
unconsolidated subsidiary.
The status of the defined benefit plans as of December 31 is as follows:
Retirement Life and Health
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
Accumulated benefit obligation
at December 31 $ 822.8 $ 663.1 $ 185.6 $ 145.9
Fair value of plan assets
at December 31 1,160.2 1,154.2 21.0 21.7
--------- --------- -------- --------
Funded status $ 337.4 $ 491.1 $ (164.6) $ (124.2)
========= ========= ======== ========
The following rates were used in determining the actuarial present value of the
accumulated benefit obligations.
<TABLE>
<CAPTION>
Retirement Life and Health
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 6.75% 7.25%
Increase in future compensation
levels 4.00-5.00% 4.00-5.00% 5.00% 5.00-5.50%
Long-term rate of return on assets 9.00-10.00% 9.00-10.00% 6.75% 6.75%
Assumed increases in medical cost
Rates in the first year - - 7.00% 6.25-9.50%
declining to - - 4.25% 4.75-5.00%
within - - 5 years 5 years
</TABLE>
A one percent increase in the annual assumed inflation rate in medical cost
rates would increase the 1998 accumulated postretirement benefit liability and
benefit expense by $9.2 million and $1.1 million, respectively. A one percent
decrease in the annual assumed inflation rate in medical costs rates would
decrease the 1998 accumulated postretirement benefit liability and benefit
expense by $8.5 million and $1.0 million, respectively.
FF-11
<PAGE>
Notes To Statutory Financial Statements (Continued)
The expense charged to operations for all employee benefit plans is $32.1
million in 1998, $23.9 million in 1997 and $38.1 million in 1996. 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.
4. RELATED PARTY TRANSACTIONS
The company has management and service contracts or cost sharing arrangements
with various subsidiaries and affiliates whereby the Company, for a fee, will
furnish a subsidiary or affiliate, as required, operating facilities, human
resources, computer software development and managerial services. Fees earned
under the terms of the contracts or arrangements were $205.0 million and
$137.3 million for 1998 and 1997, respectively.
The Company has reinsurance agreements with its subsidiaries, C.M. Life
Insurance Company and MML Bay State Life Insurance Company, including stop-
loss and modified coinsurance agreements on life insurance products. Total
premiums assumed on these agreements were $38.4 million in 1998, $40.9
million in 1997 and $44.1 million in 1996.
5. FEDERAL INCOME TAXES
Provision for federal income taxes is based upon the Company's 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 miscellaneous temporary differences, such as
reserves, acquisition costs and restructuring costs and of permanent
differences such as the equity tax, resulted in effective tax rates which
differ from the statutory tax rate.
The Company plans to file its 1998 federal income tax return on a
consolidated basis with its eligible life affiliates and non-life affiliates.
C.M. Life Insurance Company, which is not an eligible life affiliate, files a
separate return. The Company and its eligible life insurance 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 affiliates with losses shall be compensated for the
use of their losses and credits by other affiliates.
The Internal Revenue Service has completed examining the Company's income tax
returns through the year 1992 for Massachusetts Mutual and 1995 for
Connecticut Mutual, and is currently examining Massachusetts Mutual for the
years 1993 and 1994. The Company believes adjustments which may result from
such examinations will not materially affect its financial position.
Components of the formula authorized by the Internal Revenue Service for
determining deductible policyholder dividends have not been finalized for
1998 or 1997. The Company records the estimated effects of anticipated
revisions in the Statutory Statement of Income.
Federal tax payments were $152.4 million in 1998, $353.4 million in 1997 and
$330.7 million in 1996.
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.
FF-12
<PAGE>
Notes To Statutory Financial Statements (Continued)
A. Bonds
The carrying value and estimated fair value of bonds are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 4,945.3 $ 473.0 $ 20.4 $ 5,397.9
and obligations of U. S.
government corporations
and agencies
Debt securities issued by 41.2 1.5 1.3 41.4
foreign governments
Mortgage-backed securities 3,734.4 188.0 13.9 3,908.5
State and local governments 360.5 33.2 7.9 385.8
Corporate debt securities 14,133.3 845.3 118.4 14,860.2
Utilities 885.8 102.6 0.3 988.1
Affiliates 1,115.3 0.6 0.9 1,115.0
----------- ---------- -------- -----------
TOTAL $ 25,215.8 $ 1,644.2 $ 163.1 $ 26,696.9
=========== ========== ======== ===========
<CAPTION>
December 31, 1997
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
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 83.5 4.4 3.0 84.9
foreign governments
Mortgage-backed securities 3,008.7 187.9 9.0 3,187.6
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 $ 23,508.2 $ 1,554.8 $ 73.0 $ 24,990.0
=========== ========== ======== ===========
</TABLE>
FF-13
<PAGE>
Notes To Statutory Financial Statements (Continued)
The carrying value and estimated fair value of bonds at December 31, 1998 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 $ 556.5 $ 560.7
Due after one year through five years 4,150.6 4,270.5
Due after five years through ten years 8,622.8 9,045.0
Due after ten years 5,319.5 5,999.6
--------- ---------
18,649.4 19,875.8
Mortgage-backed securities, including
securities guaranteed by the U.S.
Government 6,566.4 6,821.1
--------- ---------
TOTAL $25,215.8 $26,696.9
========= =========
Proceeds from sales of investments in bonds were $11,663.4 million during
1998, $11,427.8 million during 1997 and $6,390.7 million during 1996. Gross
capital gains of $331.8 million in 1998, $200.7 million in 1997 and $188.8
million in 1996 and gross capital losses of $47.3 million in 1998, $68.8
million in 1997 and $255.5 million in 1996 were realized on those sales,
portions of which were included in the IMR. The estimated fair value of non-
publicly traded bonds is determined by the Company using a pricing matrix and
quoted market prices for publicly traded bonds.
B. Stocks
Common stocks, except for unconsolidated subsidiaries, had a cost of $238.4
million in 1998 and $250.3 million in 1997.
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, was $6,178.8 million and $5,039.1 million at December 31,
1998 and 1997, respectively.
The Company had restructured loans with book values of $126.6 million, and
$202.3 million at December 31, 1998 and 1997, respectively. These loans
typically have been modified to defer a portion of the contractual interest
payments to future periods. Interest deferred to future periods totaled $0.1
million in 1998, $5.1 million in 1997 and $2.2 million in 1996. At December
31, 1998, scheduled commercial mortgage loan maturities were as follows:
1999 - $341.0 million; 2000 - $333.0 million; 2001 - $305.2 million; 2002 -
$210.6 million; 2003 - $299.0 million; and $3,106.4 million thereafter.
D. Policy Loans
Policy loans are recorded at cost as it is not practicable to determine the
fair value since they do not have a stated maturity.
E. Other
Preferred stocks in good standing had fair values of $116.0 million in 1998
and $145.5 million in 1997, using a pricing matrix for non-publicly traded
stocks and quoted market prices for publicly traded stocks.
FF-14
<PAGE>
Notes To Statutory Financial Statements (Continued)
The carrying value of investments which were non-income producing for the
preceding twelve months was $13.2 million and $5.7 million at December 31,
1998 and 1997, respectively.
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 financial instruments, described below, which are not
recorded in the financial statements, unless otherwise noted, are based upon
market prices or prices obtained from brokers. The Company does not hold or
issue these financial instruments for trading purposes.
The notional amounts described do not represent amounts exchanged by the
parties and, thus, are not a measure of the exposure of the Company. The
amounts exchanged are calculated on the basis of the notional amounts and the
other terms of the instruments, which relate to interest rates, exchange
rates, security prices or financial or other indexes.
The Company utilizes interest rate swap agreements, 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. Gains and losses realized on the termination of contracts
are deferred and amortized through the IMR over the remaining life of the
associated contract. IMR amortization is included in net investment income on
the Statutory Statement of Income. Net amounts receivable and payable are
accrued as adjustments to investment income and included in other assets on
the Statutory Statement of Financial Position. At December 31, 1998 and 1997,
the Company had swaps with notional amounts of $4,382.0 million and $3,220.2
million, respectively. The fair values of these instruments were $84.1
million at December 31, 1998 and $20.9 million at December 31, 1997.
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 amortized into investment income over the life
of the contract on a straight-line basis. Unamortized costs 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 deferred and amortized through the IMR over the remaining life of the
option contract. At December 31, 1998 and 1997, the Company had option
contracts with notional amounts of $12,704.4 million and $5,388.2 million,
respectively. The Company's credit risk exposure was limited to the
unamortized costs of $92.5 million and $59.0 million, which had fair values
of $161.9 million and $99.6 million at December 31, 1998 and 1997,
respectively.
Interest rate cap agreements grant the purchaser the right to receive the
excess of a referenced interest rate over a stated 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 stated 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
investment 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 investment income and included in the Statutory Statement
of Financial Position as other assets. Gains and losses on these contracts,
including any unamortized cost, are recognized upon termination and are
deferred and amortized through the IMR over the remaining life of the
associated cap or floor agreement. At December 31, 1998 and 1997, the company
had agreements with notional amounts of $4,337.9 million and $3,348.6
million, respectively. The Company's credit risk exposure on these agreements
is limited to the unamortized costs of $22.7 million and $18.2 million at
December 31, 1998 and 1997, respectively. The fair values of these
instruments were $43.9 million and $23.4 million at December 31, 1998 and
1997, respectively.
FF-15
<PAGE>
Notes To Statutory Financial Statements (Continued)
The Company enters into forward U.S. Treasury, and Government National
Mortgage Association ("GNMA") and Federal National Home Mortgage Association
("FNMA") 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 IMR over the remaining life of the asset. At December
31, 1998 and 1997, the Company had U. S. Treasury, GNMA and FNMA purchase
commitments which will settle during the following year with contractual
amounts of $603.4 million and $1,100.7 million, respectively. The fair values
of these commitments were $604.1 million and $1,117.6 million, including net
unrealized gains of $0.7 million and $16.9 million at December 31, 1998 and
1997, respectively.
The Company utilizes other agreements to reduce exposures to various risks.
Notional amounts relating to these agreements totaled $384.2 million and
$385.6 million at December 31, 1998 and 1997, respectively. The fair values
of these instruments resulted in an unrealized gain of $7.2 million at
December 31, 1998 and an unrealized loss of $6.8 million at December 31,
1997.
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 $272.5 million and $146.7 million at
December 31, 1998 and 1997, respectively. The Company monitors exposure to
ensure counterparties are credit worthy and concentration of exposure is
minimized. Additionally, collateral positions have been obtained with
counterparties when considered prudent.
8. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
MassMutual has two primary insurance subsidiaries, C.M. Life, which primarily
writes variable annuities and universal life insurance, and MML Bay State,
which primarily writes variable life and annuity business. MassMutual's
wholly-owned non-insurance subsidiary MassMutual Holding Company, Inc.
("MMHC") owns subsidiaries which include retail and institutional asset
management, registered broker dealer and international life and annuity
operations.
MassMutual accounts for the value of its investments in subsidiaries at their
underlying net equity. Operating results for such subsidiaries are reflected
as net unrealized capital gains in the Statement of Changes in Policyholders'
Contingency Reserves. Net investment income is recorded by MassMutual to the
extent that dividends are declared by the subsidiaries. The Company holds
debt issued by MMHC and its subsidiaries of $1,111.3 million and $792.4
million at December 31, 1998 and 1997, respectively.
Below is summarized financial information for the unconsolidated subsidiaries
as of December 31 and for the year then ended:
1998 1997
-------- --------
(In Millions)
Domestic Life Insurance Subsidiaries:
Total revenue $ 1,151.4 $ 1,086.9
Net income (loss) $ (3.2) $ 1.1
Assets $ 4,741.4 $ 3,766.8
Other Subsidiaries:
Total revenue $ 1,137.4 $ 967.2
Net income $ 73.6 $ 75.4
Assets $ 2,839.5 $ 2,018.8
FF-16
<PAGE>
Notes To Statutory Financial Statements (Continued)
9. REINSURANCE
The Company has reinsurance agreements with other insurance companies in the
normal course of business. In addition, the Company cedes the remainder of
its group life and health business to UniCARE. 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. Total premiums ceded were $183.9 million in 1998, $294.6 million
in 1997 and $793.5 million in 1996.
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.
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. SUBSIDIARIES AND AFFILIATED COMPANIES
A summary of ownership and relationship of the Company and its subsidiaries
and affiliated companies as of December 31, 1998 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
-----------------------------------------------------------
CM Assurance Company
CM Benefit Insurance Company
C.M. Life Insurance Company
MassMutual Holding Company
MassMutual of Ireland, Limited
MML Bay State Life Insurance Company
MML Distributors, LLC
MassMutual Mortgage Finance, LLC
Subsidiaries of MassMutual Holding Company
------------------------------------------
GR Phelps & Co., Inc.
MassMutual Holding Trust I
MassMutual Holding Trust II
MassMutual Holding MSC, Inc.
MassMutual International, Inc.
MML Investor Services, Inc.
FF-17
<PAGE>
Notes To Statutory Financial Statements (Continued)
Subsidiaries of MassMutual Holding Trust I
------------------------------------------
Antares Capital Corporation - 99.4%
Charter Oak Capital Management, Inc. - 80.0%
Cornerstone Real Estate Advisors, Inc.
DLB Acquisition Corporation - 85.8%
Oppenheimer Acquisition Corporation - 89.36%
Subsidiaries of MassMutual Holding Trust II
-------------------------------------------
CM Advantage, Inc.
CM International, Inc.
CM Property Management, Inc.
HYP Management, Inc.
MMHC Investments, Inc.
MML Realty Management
Urban Properties, Inc.
MassMutual Benefits Management, Inc.
Subsidiaries of MassMutual International, Inc.
----------------------------------------------
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 (Luxembourg) S.A.
MassMutual Holding MSC, Inc.
----------------------------
MassMutual Corporate Value Limited - 40.93%
9048 - 5434 Quebec, Inc.
1279342 Ontario Limited
Affiliates of Massachusetts Mutual Life Insurance Company
---------------------------------------------------------
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
FF-18
<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
--------
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 ****
5 Opinion re legality Filed herewith
23(i) Consent of Independent Accountants, Filed herewith
PricewaterhouseCoopers LLP
24(a) Powers of Attorney ***
24(b) Powers of Attorney for: *****
Robert J. O'Connell
Thomas B. Wheeler
27 Financial Data Schedule Filed herewith
* 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.
5
<PAGE>
****Incorporated by reference to Post-Effective Amendment No. 4 the Registration
Statement File No. 33-84802, filed and effective May 1, 1998.
*****Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-65887 filed on Form S-6 on January 28, 1999.
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.
6
<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. 5 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 22nd day of March, 1999.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
(Registrant)
By: /s/ Robert J. O'Connell*
----------------------------
Robert J. O'Connell, President and Chief Executive Officer
Massachusetts Mutual Life Insurance Company
/s/ Richard M. Howe On March 22, 1999, 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. 5 to Registration Statement No. 33-84802 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert J. O'Connell* President and Chief Executive Officer March 22, 1999
- --------------------------
Robert J. O'Connell
/s/ Joseph M. Zubretsky* Executive Vice President, March 22, 1999
- -------------------------- Chief Financial Officer &
Joseph M. Zubretsky Chief Accounting Officer
/s/ Roger G. Ackerman* Director March 22, 1999
- --------------------------
Roger G. Ackerman
/s/ James R. Birle* Director March 22, 1999
- --------------------------
James R. Birle
/s/ Gene Chao* Director March 22, 1999
- --------------------------
Gene Chao, Ph.D.
/s/ Patricia Diaz Dennis* Director March 22, 1999
- --------------------------
Patricia Diaz Dennis
s/ Anthony Downs* Director March 22, 1999
- --------------------------
Anthony Downs
/s/ James L. Dunlap* Director March 22, 1999
- --------------------------
James L. Dunlap
/s/ William B. Ellis* Director March 22, 1999
- --------------------------
William B. Ellis, Ph.D.
/s/ Robert M. Furek* Director March 22, 1999
- --------------------------
Robert M. Furek
/s/ Charles K. Gifford* Director March 22, 1999
- --------------------------
Charles K. Gifford
/s/ William N. Griggs* Director March 22, 1999
- --------------------------
William N. Griggs
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
/s/ George B. Harvey* Director March 22, 1999
- --------------------------
George B. Harvey
/s/ Barbara B. Hauptfuhrer* Director March 22, 1999
- --------------------------
Barbara B. Hauptfuhrer
/s/ Sheldon B. Lubar* Director March 22, 1999
- --------------------------
Sheldon B. Lubar
/s/ William B. Marx, Jr.* Director March 22, 1999
- --------------------------
William B. Marx, Jr.
/s/ John F. Maypole* Director March 22, 1999
- --------------------------
John F. Maypole
/s/ Thomas B. Wheeler* Director March 22, 1999
- --------------------------
Thomas B. Wheeler
/s/ Alfred M. Zeien* Director March 22, 1999
- --------------------------
Alfred M. Zeien
/s/ Richard M. Howe On March 22, 1999, as Attorney-in-Fact pursuant to
- -------------------------- powers of attorney.
* Richard M. Howe
</TABLE>
8
<PAGE>
LIST OF EXHIBITS
Exhibit 5 Opinion re legality
Exhibit 23(i) Consent of Independent Accountants,
PricewaterhouseCoopers LLP
Exhibit 27 Financial Data Schedule
9
<PAGE>
Exhibit 5 Opinion Re Legality
March, 1999
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. 5 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
Massachusetts Mutual Life Insurance Company ("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 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. 5 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
10
<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. 5 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 25, 1999 on our audits of the statutory financial statements of
Massachusetts Mutual Life Insurance Company. We also consent to the reference to
our firm under the caption "Experts" and "Selected Historical Financial Data."
PricewaterhouseCoopers LLP
Springfield, Massachusetts
April 5, 1999
11
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 25,216
<DEBT-CARRYING-VALUE> 25,216
<DEBT-MARKET-VALUE> 26,697
<EQUITIES> 296
<MORTGAGE> 5,917
<REAL-ESTATE> 1,740
<TOTAL-INVEST> 41,780
<CASH> 1,123
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 62,676
<POLICY-LOSSES> 35,277
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,354
<POLICY-HOLDER-FUNDS> 19,588
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 3,189
<TOTAL-LIABILITY-AND-EQUITY> 62,676
7,482
<INVESTMENT-INCOME> 3,111
<INVESTMENT-GAINS> 25
<OTHER-INCOME> 0
<BENEFITS> 8,174
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 897
<INCOME-PRETAX> 1,523
<INCOME-TAX> 199
<INCOME-CONTINUING> 366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366
<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>
