<PAGE>
NEW ENGLAND
RETIREMENT INVESTMENT ACCOUNT
Individual Variable Annuity Contracts
Issued By
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010
Designated Office:
New England Life Insurance Company
501 Boylston Street
Boston, Massachusetts 02116
(617) 578-2000
SUPPLEMENT DATED AUGUST 30, 1996
TO PROSPECTUS DATED MAY 1, 1988
This supplement updates information in and should be read in conjunction
with the prospectus dated May 1, 1988, as supplemented November 10, 1995,
describing individual flexible purchase payment variable annuity contracts
(the "Contracts") funded by New England Retirement Investment Account (the
"Account"). A copy of the May 1, 1988 prospectus, as previously supplemented,
can be obtained by writing to New England Securities Corporation at 399
Boylston Street, Boston, Massachusetts 02116. No new Contracts are being
offered at this time. Holders of existing Contracts, however, may continue to
make purchase payments.
MERGER
On August 30, 1996, New England Mutual Life Insurance Company ("The New
England") merged with and into Metropolitan Life Insurance Company (the
"Company"). Upon consummation of the merger, The New England's separate
corporate existence ceased by operation of law, and the Company assumed legal
ownership of all of the assets of The New England, including the Account and
its assets. As a result of the merger, the Company also has become responsible
for all of The New England's liabilities and obligations, including those
created under the Contracts. The Contracts have thereby become variable
contracts funded by a separate account of the Company, and each Contract Owner
has thereby become a contractholder of the Company. Thus, all references
throughout the May 1, 1988 prospectus to "The New England" and "the Company"
now refer to Metropolitan Life Insurance Company rather than The New England.
The Company does not expect the merger to have any adverse tax consequences on
Contract Owners.
THE COMPANY
The Company is a mutual life insurance company whose principal office is at
One Madison Avenue, New York, New York 10010. The Company was organized in
1866 under the laws of the State of New York and has engaged in the life
insurance business under its present name since 1868. It operates as a life
insurance company in all 50 states, the District of Columbia, Puerto Rico and
all provinces of Canada. The Company has over $177 billion in assets under
management.
SUPP-96-PREF
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The Contracts were initially issued by The New England. On August 30, 1996,
The New England merged with and into the Company, which thereby acquired the
Account and assumed the liabilities and obligations under the Contracts.
New England Life Insurance Company ("NELICO"), which was a subsidiary of The
New England and became a subsidiary of the Company as a result of the Merger,
provides administrative services for the Contracts and the Account pursuant to
an administrative services agreement with the Company. These administrative
services include maintenance of Contract Owner records and accounting,
valuation, regulatory and reporting services. NELICO, located at 501 Boylston
Street, Boston, Massachusetts 02116, is the Company's Designated Office for
receipt of Purchase Payments, requests and elections, and communications
regarding death of the Designated Annuitant.
THE ACCOUNT
The Account was established by The New England pursuant to the provisions of
Massachusetts law on September 16, 1981, and became a separate account of the
Company, subject to New York law, pursuant to the merger of The New England
with and into the Company.
The Account invests in certain portfolios of New England Cash Management
Trust and New England Funds Trust I (collectively, the "Eligible Funds"). The
following six Eligible Funds are currently available under the Contracts:
New England Cash Management Trust New England Funds Trust I
U.S. Government Series New England Balanced Fund
Money Market Series New England Growth Fund
New England Bond Income Fund
New England Value Fund
EXPENSE TABLE
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES(1)
Sales Charge Imposed on Purchase Payments (as a percentage of pur-
chase payments)..................................................... 0%
Maximum Contingent Deferred Sales Charge(2).......................... N/A
Transfer Fee(3)...................................................... $ 0
ANNUAL CONTRACT FEE
Administration Contract Charge (per Contract)(4)..................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES(5)
(as percentage of average net assets)
Expense Risk Charge and Mortality Risk Premium....................... 1.25%
-----
Total Separate Account Annual Expenses........................... 1.25%
</TABLE>
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ELIGIBLE FUNDS
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NEW ENGLAND
CASH MANAGEMENT TRUST NEW ENGLAND FUNDS TRUST I
------------------------ -----------------------------------------------
U.S. MONEY NEW ENGLAND NEW ENGLAND NEW ENGLAND NEW ENGLAND
GOVERNMENT MARKET BALANCED GROWTH BOND INCOME VALUE
SERIES(6) SERIES FUND FUND FUND FUND
------------ ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Management Fees......... 0.43% 0.42% 0.74% 0.68% 0.44% 0.74%
12b-1 Fees.............. 0.00% 0.00% 0.25% 0.25% 0.25% 0.25%
Other Expenses.......... 0.50% 0.48% 0.37% 0.27% 0.45% 0.38%
---------- ---------- ----- ----- ----- -----
Total Fund Operating
Expenses............. 0.93% 0.90% 1.36% 1.20% 1.14% 1.37%
</TABLE>
EXAMPLE (NOTE: The example shown below is entirely hypothetical. Although it
is based on the expenses shown in the expense tables above, the example is not
a representation of past or future performance or expenses. Actual performance
and/or expenses may be more or less than shown.(7)) For purchase payments
allocated to each of the Series indicated:
<TABLE>
<CAPTION>
You would pay the following expenses on a
$1,000 purchase payment assuming 5%
annual return on the underlying Eligible 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Fund: ------ ------- ------- --------
<S> <C> <C> <C> <C>
New England Cash Management Trust--U.S.
Government Series........................ $24.00 $73.86 $126.27 $269.42
New England Cash Management Trust--Money
Market Series............................ 23.70 72.95 124.77 266.43
New England Balanced Fund................. 28.30 86.69 147.56 311.27
New England Growth Fund................... 26.70 81.93 139.69 295.93
New England Bond Income Fund.............. 26.10 80.14 136.73 290.11
New England Value Fund.................... 28.40 86.98 148.04 312.22
</TABLE>
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NOTES:
(1) Premium tax charges are not shown. The amount of the premium tax charge,
if any, is deducted from Purchase Payments or, in any state which so
requires, from the Contract Value on the date of annuitization. Currently,
the Company deducts premium tax from purchase payments in two states and
at annuitization in one state (see "Premium Tax Charge").
(2) The Contracts originally were subject to a contingent deferred sales
charge. However, beginning on May 1, 1992, it was determined to waive the
contingent deferred sales charge beginning in the seventh contract year of
each Contract. No new Contracts have been issued since 1988. Accordingly,
by 1995, there were no longer any Contracts subject to a contingent
deferred sales charge.
(3) The Company reserves the right to charge a transfer fee.
(4) This charge is not imposed after annuitization. As a percentage of the
estimated average Contract Value in the Variable Account, this fee equals
0.19%, based on an estimated average Contract Value of approximately
$15,751.
(5) These charges are not imposed after annuitization if annuity payments are
made on a fixed basis.
(6) Until further notice to the U.S. Government Series, its distributor, New
England Funds, L.P., has agreed to waive accounting and administrative
fees for the Series. Absent this voluntary fee waiver, Total Fund
Operating Expenses for the U.S. Government Series for the year ended June
30, 1996 would have been 0.96%.
(7) In these examples, the average Administration Contract Charge of 0.19% has
been used. (See (4), above.) The examples do not reflect the deduction of
any contingent deferred sales charge (see (2), above).
- -------------------------------------------------------------------------------
The preceding table lists the charges and expenses incurred with respect to
Purchase Payments invested under the Contracts. The items listed include
charges deducted from Purchase Payments, charges assessed against Variable
Account assets, and charges deducted from the assets of each of the Eligible
Funds. The examples assume that the entire Purchase Payment was allocated
initially to a single sub-account without any subsequent transfers. The
purpose of the table is to assist you in understanding the various costs and
expenses you will bear, directly and indirectly, as a Contract Owner.
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FINANCIAL INFORMATION
Financial statements reflecting the historical financial information of the
Account and the Company, as well as pro forma financial information reflecting
the merger of The New England with and into the Company, may be found in the
Statement of Additional Information, a copy of which can be obtained by
writing to New England Securities Corporation at 399 Boylston Street, Boston,
Massachusetts 02116. Condensed financial information for the Account follows.
ACCUMULATION UNIT VALUES
(For an accumulation unit of each sub-account outstanding throughout the
period)
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT
CONDENSED FINANCIAL INFORMATION
SUB-ACCOUNT INVESTING IN NEW ENGLAND CASH MANAGEMENT TRUST
MONEY MARKET SERIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning of
Period ......... 2.003 1.959 1.935 1.894 1.812 1.701 1.581 1.493 1.425 1.356
Accumulation Unit
Value at end of
Period ......... 2.083 2.003 1.959 1.935 1.894 1.812 1.701 1.581 1.493 1.425
Number of
Accumulation Units
Outstanding at
end of Period .. 2,327,221 2,894,465 3,830,155 5,255,278 6,835,380 9,080,627 10,065,225 10,491,248 9,964,827 9,814,170
SUB-ACCOUNT INVESTING IN NEW ENGLAND CASH MANAGEMENT TRUST
U.S. GOVERNMENT SERIES
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning of
Period ......... 1.862 1.823 1.801 1.763 1.689 1.592 1.486 1.410 1.351 1.287
Accumulation Unit
Value at end of
Period ......... 1.934 1.862 1.823 1.801 1.763 1.689 1.592 1.486 1.410 1.351
Number of
Accumulation
Units Outstanding
at end of
Period ......... 111,789 128,776 223,740 280,134 699,934 761,746 901,947 961,097 826,965 326,025
SUB-ACCOUNT INVESTING IN NEW ENGLAND BALANCED FUND (FORMERLY NEW ENGLAND EQUITY INCOME FUND)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning of
Period ......... 3.399 3.536 3.136 2.787 2.184 2.474 2.269 2.089 2.098 1.740
Accumulation Unit
Value at end of
Period ......... 4.240 3.399 3.536 3.136 2.787 2.184 2.474 2.269 2.089 2.098
Number of
Accumulation
Units
outstanding at
end of Period .. 663,963 709,655 745,893 815,059 860,827 1,003,779 1,102,162 1,263,420 1,247,322 982,592
</TABLE>
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SUB-ACCOUNT INVESTING IN NEW ENGLAND GROWTH FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning
of Period....... 5.798 6.316 5.746 6.232 4.026 3.878 3.212 3.206 2.740 2.339
Accumulation Unit
Value at end
of Period....... 7.905 5.798 6.316 5.746 6.232 4.026 3.878 3.212 3.206 2.740
Number of
Accumulation
Units outstanding
at end of
Period.......... 5,042,405 6,023,378 6,889,026 7,546,206 7,839,929 8,326,481 9,013,139 10,610,343 10,853,017 9,947,116
SUB-ACCOUNT INVESTING IN NEW ENGLAND BOND INCOME FUND
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning
of Period....... 3.080 3.254 2.940 2.771 2.375 2.238 2.025 1.910 1.894 1.672
Accumulation Unit
Value at end
of Period....... 3.674 3.080 3.254 2.940 2.771 2.375 2.238 2.025 1.910 1.894
Number of
Accumulation
Units outstanding
at end of
Period.......... 985,495 1,095,959 1,286,175 1,411,318 1,625,939 1,729,478 1,961,185 2,798,666 3,047,460 2,512,732
SUB-ACCOUNT INVESTING IN NEW ENGLAND VALUE FUND (FORMERLY NEW ENGLAND RETIREMENT EQUITY FUND)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- --------- --------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation Unit
Value at
beginning
of Period....... 4.145 4.256 3.684 3.198 2.548 2.987 2.468 2.554 2.317 1.890
Accumulation Unit
Value at end
of Period....... 5.416 4.145 4.256 3.684 3.198 2.548 2.987 2.468 2.554 2.317
Number of
Accumulation
Units
outstanding at
end of Period... 830,895 976,832 1,140,068 1,168,631 1,355,047 1,557,593 1,785,436 2,244,971 2,378,905 1,736,850
</TABLE>
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<PAGE>
INVESTMENTS OF THE ACCOUNT--ELIGIBLE FUNDS
The following paragraphs provide current information concerning the advisers
and subadvisers to the Eligible Funds.
Capital Growth Management Limited Partnership, an affiliate of the Company,
serves as investment adviser for New England Growth Fund. New England Funds
Management, L.P., an indirect subsidiary of the Company, serves as investment
adviser for the other Eligible Funds, each of which also has a subadviser. New
England Cash Management Trust (Money Market Series and U.S. Government Series)
and New England Bond Income Fund receive subadvisory services from Back Bay
Advisors, L.P., an indirect subsidiary of the Company, New England Balanced
Fund and New England Value Fund receive subadvisory services from Loomis
Sayles & Company, L.P., an indirect subsidiary of the Company.
NEW ENGLAND CASH MANAGEMENT TRUST
New England Cash Management Trust offers two series, each having its own
investment objective and policies. Each series is an Eligible Fund under the
Contract.
The U.S. Government Series seeks the highest current income consistent with
maximum safety of capital and liquidity. The U.S. Government Series invests
only in obligations backed by the full faith and credit of the U.S. Government
and in related repurchase agreements.
The Money Market Series seeks the maximum current income consistent with
preservation of capital and liquidity. The Money Market Series invests in a
variety of high quality money market instruments.
NEW ENGLAND FUNDS TRUST I
New England Funds Trust I has multiple series (each a "Fund"). The four
Funds described below are Eligible Funds under the Contract.
New England Balanced Fund (formerly New England Equity Income Fund) seeks a
reasonable long-term investment return from a combination of long-term capital
appreciation and moderate current income. The Fund is "flexibly managed" in
that sometimes it invests more heavily in equity and at other times it invests
more heavily in fixed-income securities, depending on its subadviser's view of
the economic and investment outlook. Most of the Fund's equity investments are
normally in dividend-paying common stocks of recognized investment quality
which are expected to achieve growth in earnings and dividends over the long
term.
New England Growth Fund seeks long-term growth of capital through investment
in equity securities of companies whose earnings are expected to grow at a
faster rate than the United States economy. Most of the Fund's investments are
normally in common stocks, although the Fund may invest in any type of equity
securities.
New England Bond Income Fund seeks a high level of current income consistent
with what the Fund considers reasonable risk. The Fund invests primarily in
corporate and U.S. Government bonds.
New England Value Fund (formerly New England Retirement Equity Fund) seeks a
reasonable long-term investment return from a combination of market
appreciation and dividend income from equity securities. Substantially all of
the Fund's investments are normally in equity securities. In selecting
investments for the Fund, the emphasis is ordinarily placed on undervalued
securities.
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THERE IS NO ASSURANCE THAT ANY OF THE
ELIGIBLE FUNDS WILL ACHIEVE ITS STATED INVESTMENT OBJECTIVE.
More complete information on the Eligible Funds is contained in the Eligible
Funds' Prospectuses and Statements of Additional Information, which may be
obtained free of charge by writing to New England Securities Corporation, 399
Boylston Street, Boston, Massachusetts 02116. You should read the relevant
Prospectuses carefully before investing.
ADMINISTRATIVE CHARGE AND OTHER DEDUCTIONS
The following paragraphs provide current information concerning certain
charges under the Contract.
CONTINGENT DEFERRED SALES CHARGE
The Contracts were issued subject to a contingent deferred sales charge. As
of May 1, 1992, however, it was determined that the contingent deferred sales
charge applicable to the Contracts would be waived beginning in the seventh
contract year. No new Contracts have been issued since 1988, so that by 1995
there were no longer any Contracts subject to a contingent deferred sales
charge.
PREMIUM TAX CHARGE
Various states impose a premium tax on annuity purchase payments received by
insurance companies. The Company may deduct these taxes from purchase payments
and currently does so for Contracts subject to the insurance tax law of
Kentucky and South Dakota. Certain states may require the Company to pay the
premium tax at annuitization rather than when purchase payments are received.
In those states the Company may deduct the premium tax, calculated as a
percentage of Contract Value, on the date when annuity payments are to begin.
Currently, the Company follows this procedure for Contracts subject to the
insurance tax law of North Carolina. The maximum premium tax currently
deducted by the Company is 2%. The Company may in the future deduct premium
taxes under Contracts subject to the insurance tax laws of other states, or
the applicable premium tax rates may change.
Surrender of a Contract may result in a credit against the premium tax
liability of the Company in certain states. In such event, the surrender
proceeds will be increased by the amount of such tax credit.
Premium tax rates are subject to being changed by law, administrative
interpretations or court decisions. Premium tax amounts will depend on, among
other things, the state of residence of the Annuitant and the insurance tax
law of the state.
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NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT
Individual Variable Annuity Contracts
Issued by Metropolitan Life Insurance Company
STATEMENT OF ADDITIONAL INFORMATION (PART B)
August 30, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated August 30, 1996 and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained by writing to New England Securities Corporation ("New England
Securities") 399 Boylston Street, Boston, Massachusetts, 02116.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
History.................................................................... II-3
Services Relating to the Account and the Contracts......................... II-3
Contingent Deferred Sales Charge........................................... II-3
Net Investment Factor...................................................... II-4
Annuity Payments........................................................... II-4
Experts.................................................................... II-5
Legal Matters.............................................................. II-6
Financial Statements....................................................... II-6
</TABLE>
II-2
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HISTORY
New England Retirement Investment Account (the "Account") is a separate
account of Metropolitan Life Insurance Company (the "Company"). The Account
was originally a separate account of New England Mutual Life Insurance Company
("The New England"), and became a separate account of the Company when The New
England merged with and into the Company on August 30, 1996.
SERVICES RELATING TO THE ACCOUNT AND THE CONTRACTS
AUDITORS. Coopers & Lybrand LLP, located at One Post Office Square, Boston,
Massachusetts 02109, conducts an annual audit of the Account's financial
statements.
ADMINISTRATIVE SERVICES AGREEMENT. Pursuant to an administrative services
agreement between New England Life Insurance Company ("NELICO") and the
Company, NELICO serves as the Designated Office for servicing the Contracts
and performs certain other administrative services for the Company relating to
the Account and the Contracts. NELICO is compensated for these services based
on the expenses it incurs in providng them. NELICO was a wholly-owned
subsidiary of The New England before it merged into the Company, and became a
subsidiary of the Company as a result of the merger.
PRINCIPAL UNDERWRITER. New England Securities Corporation ("New England
Securities"), an indirect subsidiary of the Company, serves as principal
underwriter for the Account pursuant to a distribution agreement with the
Company. No new Contracts are being offered at this time, but holders of
existing Contracts may continue to make Purchase Payments. The Company pays
commissions, none of which are retained by New England Securities, to the
registered representatives involved in selling Contracts.
CONTINGENT DEFERRED SALES CHARGE
The Contracts were issued subject to a contingent deferred sales charge. As
of May 1, 1992, however, it was determined that the contingent deferred sales
charge applicable to the Contracts would be waived beginning in the seventh
contract year. No new Contracts have been issued since 1988, so that by 1995
there were no longer any Contracts subject to a contingent deferred sales
charge. Following is a discussion of the contingent deferred sales charge as
described in the Contracts:
The Contracts as issued provide that a Contingent Deferred Sales
Charge will be imposed on certain partial withdrawal, full withdrawal
and maturity transactions. No charge will be imposed for payments made
upon death or under variable life income annuity options (payment
options 2, 3 or 6 as described under "Annuity Options" in the
Prospectus). The Contingent Deferred Sales Charge will be applied upon
the election of other forms of payment, which for this purpose will be
treated as a full withdrawal at the Maturity Date.
The charge will be an amount equal to the lesser of (a) or (b)
below:
(a) (b)
5% of the Purchase 5% of the Contract
Payments subject to Value withdrawn
the charge
Purchase Payments subject to the charge are calculated as all
Purchase Payments made within six years prior to the date of
withdrawal (regardless of the amount of any Purchase Payments made in
any earlier period) less any such
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Purchase Payments with respect to which a Contingent Deferred Sales
Charge was previously imposed. In no event will the charge exceed 5%
of the total Purchase Payments made under the Contract.
Up to 10% of the total Purchase Payments made under the Contract
since issue may be withdrawn in any one Contract year without charge.
However, if an additional withdrawal increases the total amount
withdrawn during the Contract year to more than 10% of such Purchase
Payments, the Contingent Deferred Sales Charge will be applied to all
withdrawals made during such Contract Year. The total charge will be
deducted from the amount of the additional withdrawal.
In the case of a partial withdrawal, the Contingent Deferred Sales
Charge is deducted from the Contract Value remaining after the
Contract Owner has received the amount requested.
NET INVESTMENT FACTOR
The net investment factor for each sub-account is determined on each day on
which the New York Stock Exchange is open for trading as follows:
(1) The net asset value per share of the Eligible Fund held in the sub-
account determined as of the closing of the New York Stock Exchange on a
particular day;
(2) Plus the per share amount of any dividend or capital gains
distribution made by the Eligible Fund since the closing of the New York
Stock Exchange on the preceding trading day;
(3) Is divided by the net asset value per share of the Eligible Fund as
of the closing of the New York Stock Exchange on the preceding trading day;
and
(4) Finally, the daily charges for the Expense Risk Charge and Mortality
Risk Premium that have accumulated since the closing of the New York Stock
Exchange on the preceding trading day are subtracted. (See "Administrative
Charge, Contingent Deferred Sales Charge and Other Deductions" in the
prospectus.) On an annual basis, the total deduction for such charges
equals 1.25% of the daily net asset value of the Account.
ANNUITY PAYMENTS
When a variable payment option is selected, the contract proceeds will be
applied at annuity purchase rates, which vary depending on the particular
option selected and the age of the payee (and, where sex-neutral annuity rates
are not applicable, on the sex of the payee when the payment option selected
involves a life contingency.) The impact of the choice of option and the sex
and age of the payee on the level of annuity payments is described in the
prospectus under "Amount of Variable Annuity Payments."
The amount of the basic payment level is determined by applying the
applicable annuity purchase rate to the amount applied from each sub-account
to provide the annuity. This basic payment level is converted into annuity
units, the number of which remains constant. Each monthly annuity payment is
in an amount equal to that number of annuity units multiplied by the value of
the applicable annuity unit as of the date of payment. The value of an annuity
unit for each sub-account will change from day to day depending upon the
investment performance of the sub-account, which in turn depends upon the
investment performance of the Eligible Fund in which the sub-account invests.
The selection of an Assumed Interest Rate will affect both the basic payment
level and the amount by which subsequent payments increase or decrease. The
basic payment level is calculated on the assumption that the Net Investment
Factors applicable to the contract will be equivalent on an annual basis to a
net investment return at the Assumed Interest Rate. If this assumption is met
following the date any payment is determined, then the amount of the next
payment will be exactly equal to the amount of the preceding payment. If the
actual Net Investment Factors are equivalent to a net investment return
greater than the Assumed Interest Rate, the next payment will be larger than
the preceding one; if the actual Net Investment Factors are equivalent to a
net investment return
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<PAGE>
smaller than the Assumed Interest Rate, then the next payment will be smaller
than the preceding payment. The definition of the Assumed Interest Rate, and
the effect of the level of the Assumed Interest Rate on the amount of monthly
payments is explained in the prospectus under "Amount of Variable Annuity
Payments."
The number of annuity units credited under a variable payment option is
determined as follows:
(1) The proceeds under a deferred contract, or the net purchase payment
under an immediate contract, are applied at the Company's annuity purchase
rates for the selected Assumed Interest Rate to determine the basic payment
level.
(2) The number of annuity units is determined by dividing the amount of
the basic payment level by the applicable annuity unit value(s) next
determined following the date of application of proceeds (in the case of a
deferred contract) or net purchase payment (in the case of an immediate
contract).
The dollar amount of the initial payment will be at the basic payment level
(if, in the case of an immediate contract, the payment is due not later than
14 days after the purchase payment is applied). The dollar amount of each
subsequent payment is determined by multiplying the number of annuity units by
the applicable annuity unit value which is at least 14 days before the payment
is due.
The value of an annuity unit for each sub-account depends on the Assumed
Interest Rate and on the Net Investment Factor applicable at the time of
valuation. The initial annuity unit values were set at $1.00 effective on the
date on which assets were first placed in the Account.
The annuity unit value for each sub-account is equal to the corresponding
annuity unit value for the sub-account previously determined multiplied by the
applicable Net Investment Factor for that sub-account for the New York Stock
Exchange trading day then ended, and further multiplied by the Assumed
Interest Factor for each day of the Valuation Period. At an Assumed Interest
Rate of 3.5% the Assumed Interest Factor is .9999058. Assumed Interest Factors
for other Assumed Interest Rates are computed on a consistent basis.
EXPERTS
The financial statements of the New England Retirement Investment Account
included in this Statement of Additional Information have been included herein
in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing. The financial statements of New England Mutual Life Insurance
Company as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995 included in this Statement of Additional
Information, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing. The financial statements of
Metropolitan Life Insurance Company as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance upon such
reports given upon the authority of such firm as experts in auditing and
accounting. The Selected Pro Forma Financial Information for Metropolitan Life
Insurance Company as of March 31, 1996 and 1995 and December 31, 1995 and 1994
and for the three-month periods ended March 31, 1996 and 1995 and for the
years ended December 31, 1995, 1994 and 1993 has not been audited. The interim
financial statements of New England Mutual Life Insurance Company and
Metropolitan Life Insurance Company as of March 31, 1996 and for the three-
month periods ended March 31, 1996 and 1995 have not been audited.
II-5
<PAGE>
LEGAL MATTERS
Legal matters in connection with the Contracts described in this
registration statement have been passed on by Christopher P. Nicholas,
Associate General Counsel of the Company. Ropes & Gray, Boston, Massachusetts,
have acted as special counsel on certain matters relating to the Federal
securities laws.
FINANCIAL STATEMENTS
The financial statements of Metropolitan Life Insurance Company included
herein should be considered only as bearing upon the ability of Metropolitan
Life Insurance Company to meet its obligations under the Contracts.
The current financial statements of Metropolitan Life Insurance Company are
those as of the end of the first quarter of the most recent fiscal year.
Metropolitan Life Insurance Company generally does not prepare financial
statements for publication more often than annually and believes that any
incremental benefit to prospective Contract Owners that may result from
preparing and delivering more current financial statements, though unaudited,
does not justify the additional cost that would be incurred. In addition,
Metropolitan Life Insurance Company represents that there have been no adverse
changes in its financial condition or operations between the end of the most
current fiscal year and the date of this Statement of Additional Information.
II-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of New England Retirement Investment Account of New
England Mutual Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of New
England Retirement Investment Account (comprised of Money Market Sub-Account,
U. S. Government Sub-Account, Balanced Sub-Account, Growth Sub-Account, Bond
Income Sub-Account and Value Sub-Account) of New England Mutual Life Insurance
Company as of December 31, 1995, and the related statements of operations and
changes in net assets for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the respective
aforementioned sub-accounts comprising New England Retirement Investment
Account of New England Mutual Life Insurance Company as of December 31, 1995,
and the results of their operations and the changes in their net assets for
each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 15, 1996
II-7
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
ASSETS
Investments in sub-accounts, at value (Note
1)
<CAPTION>
SHARES COST
--------- -----------
<S> <C> <C> <C>
New England Cash Management Trust:
Money Market Series........................ 4,850,979 $ 4,850,979 $ 4,850,979
U.S. Government Series..................... 216,306 216,306 216,306
New England Funds Trust I:
Balanced Fund.............................. 214,459 2,355,434 2,817,997
Growth Fund................................ 3,782,105 35,343,512 39,901,212
Bond Income Fund........................... 293,023 3,375,246 3,621,758
Value Fund................................. 513,063 3,796,795 4,504,694
-----------
Total investments in sub-accounts, at value....................... 55,912,946
Dividends receivable.............................................. 5,560
-----------
Total assets................................................... 55,918,506
LIABILITIES
Due New England Mutual Life
Insurance Company (Note 3)........................................ 56,307
-----------
Total liabilities.............................................. 56,307
-----------
NET ASSETS $55,862,199
===========
Net Assets consist of:
Net assets attributable to variable annuity contracts............. $55,289,047
Annuity reserves (Note 1)......................................... 573,152
-----------
NET ASSETS $55,862,199
===========
</TABLE>
See Notes to Financial Statements
II-8
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY U.S. BOND VALUE
MARKET GOVERNMENT BALANCED GROWTH INCOME SUB-
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT TOTAL
----------- ----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME:
Dividends.............. $278,230 $10,780 $216,242 $ 5,699,332 $241,765 $ 394,042 $ 6,840,391
EXPENSES:
Mortality and expense
risk charge........... 66,491 2,638 33,220 479,095 43,871 54,448 679,763
Administrative charge.. 11,309 501 4,390 60,229 4,984 6,991 88,404
-------- ------- -------- ----------- -------- ---------- -----------
Total expenses....... 77,800 3,139 37,610 539,324 48,855 61,439 768,167
-------- ------- -------- ----------- -------- ---------- -----------
Net investment income... 200,430 7,641 178,632 5,160,008 192,910 332,603 6,072,224
Net realized and
unrealized gain (loss)
on investments:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... -- -- 118,436 (947,226) (167,590) 12,264 (984,116)
End of period.......... -- -- 462,563 4,557,700 246,513 707,899 5,974,675
-------- ------- -------- ----------- -------- ---------- -----------
Net change in unrealized
appreciation........... -- -- 344,127 5,504,926 414,103 695,635 6,958,791
Realized gain on
investments............ -- -- 57,817 990,103 7,973 128,559 1,184,452
-------- ------- -------- ----------- -------- ---------- -----------
Net realized and
unrealized gain on
investments............ -- -- 401,944 6,495,029 422,076 824,194 8,143,243
-------- ------- -------- ----------- -------- ---------- -----------
Net increase in net
assets resulting from
operations............. $200,430 $ 7,641 $580,576 $11,655,037 $614,986 $1,156,797 $14,215,467
======== ======= ======== =========== ======== ========== ===========
</TABLE>
See Notes to Financial Statements
II-9
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
BOND
MONEY U.S. INCOME VALUE
MARKET GOVERNMENT BALANCED GROWTH SUB- SUB-
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT ACCOUNT TOTAL
----------- ----------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income:
Dividends.............. $219,312 $9,610 $ 114,087 $ 3,063,852 $ 235,969 $ 257,226 $ 3,900,056
Expenses:
Mortality and expense
risk charge........... 81,385 3,777 32,035 488,534 46,911 56,191 708,833
Administrative charge.. 13,897 652 4,833 68,368 5,728 8,096 101,574
-------- ------ --------- ----------- --------- --------- -----------
Total expenses........ 95,282 4,429 36,868 556,902 52,639 64,287 810,407
-------- ------ --------- ----------- --------- --------- -----------
Net investment income... 124,030 5,181 77,219 2,506,950 183,330 192,939 3,089,649
Net realized and
unrealized gain (loss)
on investments:
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... -- -- 413,140 5,618,253 232,958 410,278 6,674,629
End of period.......... -- -- 118,436 (947,226) (167,590) 12,264 (984,116)
-------- ------ --------- ----------- --------- --------- -----------
Net change in unrealized
appreciation
(depreciation)......... -- -- (294,704) (6,565,479) (400,548) (398,014) (7,658,745)
Realized gain (loss) on
investments............ -- -- 119,295 759,509 (9,571) 80,155 949,388
-------- ------ --------- ----------- --------- --------- -----------
Net realized and
unrealized loss on
investments............ -- -- (175,409) (5,805,970) (410,119) (317,859) (6,709,357)
-------- ------ --------- ----------- --------- --------- -----------
Net increase (decrease)
in net assets resulting
from operations........ $124,030 $5,181 $ (98,190) $(3,299,020) $(226,789) $(124,920) $(3,619,708)
======== ====== ========= =========== ========= ========= ===========
</TABLE>
See Notes to Financial Statements
II-10
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BOND
MONEY U.S. BALANCED INCOME VALUE
MARKET GOVERNMENT SUB- GROWTH SUB- SUB-
SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT ACCOUNT ACCOUNT TOTAL
----------- ----------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From Investment
Activities:
Net investment income.. $ 200,430 $ 7,641 $ 178,632 $ 5,160,008 $ 192,910 $ 332,603 $ 6,072,224
Net realized and
unrealized gain on
investments........... -- -- 401,944 6,495,029 422,076 824,194 8,143,243
----------- -------- ---------- ----------- ---------- ---------- ------------
Increase in net assets
derived from
investment
activities............ 200,430 7,641 580,576 11,655,037 614,986 1,156,797 14,215,467
From Contract-Related
Transactions:
Net premiums transfers
from New England
Mutual Life Insurance
Company............... 149,504 7,502 94,717 767,977 192,193 148,320 1,360,213
Net transfers (to) from
other sub-accounts.... 380,490 23,594 42,334 (411,221) (38,337) 3,140 --
Net premiums transfers
to New England Mutual
Life Insurance Company
Surrenders........... (1,679,311) (62,145) (314,389) (7,071,526) (522,947) (856,652) (10,506,970)
----------- -------- ---------- ----------- ---------- ---------- ------------
Decrease in net assets
derived from contract-
related transactions.. (1,149,317) (31,049) (177,338) (6,714,770) (369,091) (705,192) (9,146,757)
----------- -------- ---------- ----------- ---------- ---------- ------------
Net increase (decrease)
in net assets.......... (948,887) (23,408) 403,238 4,940,267 245,895 451,605 5,068,710
Net assets, at beginning
of the period.......... 5,797,637 239,613 2,411,889 34,920,577 3,375,214 4,048,559 50,793,489
----------- -------- ---------- ----------- ---------- ---------- ------------
Net assets, at end of
the period............. $ 4,848,750 $216,205 $2,815,127 $39,860,844 $3,621,109 $4,500,164 $ 55,862,199
=========== ======== ========== =========== ========== ========== ============
</TABLE>
See Notes to Financial Statements
II-11
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
BOND
MONEY U.S. BALANCED INCOME VALUE
MARKET GOVERNMENT SUB- GROWTH SUB- SUB-
SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT ACCOUNT ACCOUNT TOTAL
----------- ----------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
From Investment
Activities:
Net investment income.. $ 124,030 $ 5,181 $ 77,219 $ 2,506,950 $ 183,330 $ 192,939 $ 3,089,649
Net realized and
unrealized loss on
investments........... -- -- (175,409) (5,805,970) (410,120) (317,859) (6,709,358)
----------- --------- ---------- ----------- ---------- ---------- ------------
Increase (decrease) in
net assets derived
from investment
activities............ 124,030 5,181 (98,190) (3,299,020) (226,790) (124,920) (3,619,709)
From Contract-Related
Transactions:
Net premiums transfers
from New England
Mutual Life Insurance
Company............... 171,434 14,340 70,182 820,499 77,964 156,291 1,310,710
Net transfers (to) from
other sub-accounts.... (291,223) (28,161) 269,819 (16,644) (46,327) 112,536 --
Net premiums transfers
to New England Mutual
Life Insurance Company
Surrenders............ (1,710,708) (159,649) (467,251) (6,092,905) (615,319) (947,395) (9,993,227)
----------- --------- ---------- ----------- ---------- ---------- ------------
Decrease in net assets
derived from contract-
related transactions.. (1,830,497) (173,470) (127,250) (5,289,050) (583,682) (678,568) (8,682,517)
----------- --------- ---------- ----------- ---------- ---------- ------------
Net decrease in net
assets................. (1,706,467) (168,289) (225,440) (8,588,070) (810,472) (803,488) (12,302,226)
Net assets, at beginning
of the period.......... 7,504,104 407,902 2,637,329 43,508,647 4,185,686 4,852,047 63,095,715
----------- --------- ---------- ----------- ---------- ---------- ------------
Net assets, at end of
the period............. $ 5,797,637 $ 239,613 $2,411,889 $34,920,577 $3,375,214 $4,048,559 $ 50,793,489
=========== ========= ========== =========== ========== ========== ============
</TABLE>
See Notes to Financial Statements
II-12
<PAGE>
NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF NEW ENGLAND MUTUAL LIFE INSURANCE
COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Significant accounting policies--New England Retirement Investment
Account (the "Account") of New England Mutual Life Insurance Company (the
"Company"), was established by the Company's Board of Directors on September
16, 1981 in accordance with the provisions of Massachusetts Insurance Law. The
Account is registered as a unit investment trust under the Investment Company
Act of 1940 and is a funding vehicle for individual variable annuity
contracts. The portion of the assets of the Account equal to the reserves and
other contract liabilities of the Account may not be charged with liabilities
that may arise out of any other business the Company may conduct. The Account
has six sub-accounts each of which invests in one series of the New England
Cash Management Trust or one fund of the New England Funds Trust I. The series
of the New England Cash Management Trust and the funds of the New England
Funds Trust I in which the sub-accounts invest are referred to herein as the
"Eligible Funds."
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Security Valuation--The Eligible Funds' shares are valued at the closing net
asset value per share as determined by each fund as of the close of the New
York Stock Exchange (normally 4:00 p.m. E.S.T.) on each day the Exchange is
open for trading.
Security Transactions and Related Investment Income--Security transactions
are accounted for on the trade date (the date the order to buy or sell is
executed) and dividend income is recorded on the ex-dividend date. Realized
gains and losses from sales of investments are computed on the basis of
average cost.
Federal Income Taxes--The operations of the Account are included in the
federal income tax return of the Company, which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code (the Code). Under
the current provisions of the Code, the Company does not expect to incur
federal income taxes on the earnings of the Account to the extent the earnings
are credited under the contracts. Based on this, no charge is being made
currently to the Account for federal income taxes. The Company will review
periodically the status of such decision based on changes in the tax law. Such
a charge may be made in future years for any federal income taxes that would
be attributable to the contracts.
Annuity Reserves--Annuity reserves are computed for currently payable
contracts according to the Progressive Annuity Mortality Table. The assumed
interest rate may be 0%, 3.5% or 5% as elected by the annuitant and as
regulated by laws of the respective states. Adjustments to annuity reserves
are reimbursed to or from the Company.
2. The following table shows the aggregate cost of shares purchased and
proceeds from sales of Eligible Funds for the year ended December 31, 1995.
<TABLE>
<CAPTION>
ELIGIBLE FUND PURCHASES SALES
------------- ---------- ----------
<S> <C> <C>
Money Market......................................... $1,038,925 $1,988,356
Balanced............................................. 396,432 394,754
Growth............................................... 6,553,809 8,103,486
Bond Income.......................................... 333,488 509,251
Value................................................ 549,626 922,574
U.S. Government...................................... 57,014 80,439
</TABLE>
II-13
<PAGE>
THE NEW ENGLAND RETIREMENT INVESTMENT ACCOUNT OF
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Account purchases or redeems shares of the six Eligible Funds based on
the amount of net premiums invested in the Account, transfers among the sub-
accounts, policy loans, surrender payments, and annuity payments.
3. Charges deducted by the Company:
Administrative charge--a fixed administrative charge of $30.00 per contract
year is deducted from the contract value on each contract anniversary.
Risk charge--a charge for mortality/expense risk assumed by the Company
equal to an annual rate of 1.25% of the net assets of the Account is deducted
on a daily basis.
4. The Money Market Series and U. S. Government Series of the New England
Cash Management Trust, and the New England Bond Income Fund receive investment
advice from Back Bay Advisors, Inc. ("Back Bay Advisors"), an indirect wholly-
owned subsidiary of the Company. New England Growth Fund receives investment
advice from Capital Growth Management Limited Partnership ("CGM"), an
affiliate of the Company. New England Balanced Fund and New England Value Fund
receive investment advice from Loomis, Sayles & Company, a majority owned
subsidiary of the company. Back Bay Advisors, CGM and Loomis Sayles were paid
fees of $3,856,699, $7,631,203 and $3,718,232 respectively for rendering such
investment advice.
5. A summary of units outstanding for variable annuity contracts at December
31, 1995:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------------------------------
MONEY BOND
MARKET U.S GOVERNMENT BALANCED GROWTH INCOME VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
-------------- -------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Units Outstanding
1/1/95................. 2,894,465.2833 128,776.0597 709,655.1520 6,023,378.1727 1,095,958.9216 976,832.5175
Units Purchased......... 218,615.0562 16,040.7690 34,690.9173 79,137.4953 15,863.8179 16,204.0082
Units Redeemed.......... (785,859.7241) (33,027.7580) (80,382.5769) (1,060,110.9999) (126,327.7424) (162,141.2025)
Units Outstanding
12/31/95............... 2,327,220.6154 111,789.0707 663,963.4924 5,042,404.6681 985,494.9971 830,895.3232
============== ============ ============ =============== ============== =============
Unit Value 12/31/95..... $ 2.083494 $ 1.934042 $ 4.239883 $ 7.905126 $ 3.674406 $ 5.416042
============== ============ ============ =============== ============== =============
</TABLE>
II-14
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
Set forth in the tables below is selected unaudited pro forma financial
information for the Metropolitan Life Insurance Company giving effect to the
merger of New England Mutual Life Insurance Company ("TNE") with and into the
Metropolitan Life Insurance Company ("MetLife"). These tables include
unaudited pro forma balance sheet data as of December 31, 1995 and 1994 and as
of March 31, 1996 and unaudited selected pro forma statement of operations
data for the years ended December 31, 1995, 1994 and 1993 and for the three-
month periods ended March 31, 1996 and 1995. The selected historical
information for the years ended December 31, 1995, 1994 and 1993 and as of
December 31, 1995 and 1994 have been derived from statutory financial
statements of TNE, which were audited by Coopers & Lybrand L.L.P., independent
auditors, and from statutory financial statements of MetLife, which have been
audited by Deloitte and Touche, LLP, independent auditors. The selected
financial information for the three months ended March 31, 1996 and 1995 have
been derived from TNE's unaudited quarterly statements filed with the
Massachusetts Division of Insurance and from MetLife's unaudited quarterly
statements filed with the New York Department of Insurance. In these tables,
the pro forma information gives effect to the merger of TNE with and into
MetLife (the "Merger") as if the Merger had been effective at December 31,
1994 in the case of the selected pro forma balance sheet data and as of
January 1, 1993 in the case of the selected pro forma statement of operations
data and reflects adjustments to conform accounting practices. The selected
pro forma financial information should be read in conjunction with the
historical financial statements and notes thereto included herein.
The selected pro forma financial information is presented for illustrative
purposes only and does not purport to be indicative of the operating results
or financial position that would have occurred if the Merger had been
consummated on the dates indicated, nor is it necessarily indicative of the
future operating results or financial position of the merged entity.
MetLife expects that it will achieve operating cost savings through
consolidation of certain operations and the elimination of redundant costs.
The extent to which cost savings, which are not expected to be material, will
be achieved will be influenced by many factors, including economic conditions,
inflation and changes in business activities. Accordingly, there can be no
assurance that cost savings will in fact be achieved and, therefore, none have
been included in the unaudited selected pro forma financial information.
After the Merger, the financial statements of TNE and MetLife will be
combined to present the financial position and results of operations of
MetLife. Furthermore, certain adjustments will be made to the historical
carrying value of assets and liabilities of TNE and MetLife in order to apply
consistent accounting policies and practices to the financial statements of
MetLife. These conforming adjustments principally relate to the following: (i)
mortgage reserves will be reclassified from investment valuation reserves to
reduce the carrying value of the related assets, (ii) generally accepted
accounting principles, rather than different statutory practices, will be used
to record the equity in earnings of TNE real estate joint ventures, (iii)
reserve valuation differences resulting from different states of domicile will
be conformed and (iv) there will be a related impact of these adjustments on
the asset valuation reserve.
The unaudited selected pro forma financial information set forth below also
reflects an adjustment related to the Settlement Agreement among TNE, Copley
Real Estate Advisors, Inc. and the Washington State Investment Board, which is
contingent on completion of the Merger (see Note 2 to the Unaudited Interim
Financial Statements of TNE for the three months ended March 31, 1996). Based
on preliminary information, TNE estimates that adjustments related to these
items at March 31, 1996 would have resulted in a decrease to combined surplus
of $284 million and a decrease in the combined investment valuation reserves
of $235 million on a pro forma basis. Actual conforming adjustments will be
determined after the date of the Merger, but are not expected to be materially
different in their combined effect on surplus and investment valuation
reserves.
In addition, MetLife expects to change accounting policies for measuring
impairments of real estate joint ventures and mortgages in 1996 pending
approval by the Massachusetts Division of Insurance and such other regulatory
approvals as may be required. The effect of these accounting changes on the
combined surplus of the merged entity is expected to be an approximately $250
million decrease to surplus and investment valuation reserves.
II-15
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Income:
Premiums, annuity
considerations and
deposit funds (k).... $5,359 $ 467 $-- $ 5,826 $6,748 $ 444 $-- $7,192
Net investment income
(a)(b)(e)............ 1,822 154 (89) 1,887 1,746 178 (6) 1,918
Other income.......... 111 41 (1) 151 43 29 -- 72
------ ----- ---- ------- ------ ----- ---- ------
Total income...... 7,292 662 (90) 7,864 8,537 651 (6) 9,182
------ ----- ---- ------- ------ ----- ---- ------
Benefits and Expenses:
Benefit payments
(other than
dividends)........... 7,024 595 -- 7,619 7,453 611 -- 8,064
Changes to reserves,
deposit funds and
other policy
liabilities (c)...... (907) (125) -- (1,032) (1) (156) (2) (159)
Insurance expenses and
taxes (other than
federal income and
capital gains taxes). 678 98 -- 776 695 102 -- 797
Net transfers to
separate accounts.... 42 34 (1) 75 87 (8) -- 79
------ ----- ---- ------- ------ ----- ---- ------
Total benefits and
expenses before
dividends to
policyholders.... 6,837 602 (1) 7,438 8,234 549 (2) 8,781
------ ----- ---- ------- ------ ----- ---- ------
Net gain from
operations before
dividends to
policyholders and
federal income taxes. 455 60 (89) 426 303 102 (4) 401
Dividends to
policyholders (g).... 404 56 (1) 459 436 55 -- 491
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) gain from
operations before
federal income taxes. 51 4 (88) (33) (133) 47 (4) (90)
Federal income taxes
(excluding tax on
capital gains) (h)... 13 (3) 1 11 91 21 -- 112
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) gain from
operations........... 38 7 (89) (44) (224) 26 (4) (202)
Net realized capital
(losses) gains
(a)(d)(i)............ (74) 1 1 (72) (9) (4) -- (13)
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) income..... $ (36) $ 8 $(88) $ (116) $ (233) $ 22 $ (4) $ (215)
====== ===== ==== ======= ====== ===== ==== ======
</TABLE>
II-16
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------
HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Bonds............................. $ 71,355 $ 6,454 $ -- $ 77,809
Stocks............................ 3,752 842 -- 4,594
Mortgage loans.................... 14,479 1,591 (101) 15,969
Real estate....................... 9,047 301 -- 9,348
Policy loans...................... 3,964 1,342 -- 5,306
Cash and short-term investments... 1,476 256 -- 1,732
Other invested assets............. 2,442 814 (272) 2,984
Premiums deferred and uncollected. 1,530 169 -- 1,699
Investment income due and accrued. 1,545 280 -- 1,825
Separate Account assets........... 31,935 4,286 -- 36,221
Other assets...................... 701 108 -- 809
-------- ------- ----- --------
Total Assets.................... $142,226 $16,443 $(373) $158,296
======== ======= ===== ========
LIABILITIES AND SURPLUS
LIABILITIES
Reserves for life and health
insurance and annuities.......... $ 76,246 $ 8,130 $ 39 $ 84,415
Policy proceeds and dividends left
with the Company................. 4,654 480 -- 5,134
Dividends due to policyholders.... 1,363 210 -- 1,573
Premium deposit funds............. 11,897 1,715 -- 13,612
Interest maintenance reserve...... 1,199 -- -- 1,199
Other policy liabilities.......... 3,940 91 -- 4,031
Investment valuation reserves (f). 1,951 463 (235) 2,179
Separate Account liabilities...... 31,441 4,258 -- 35,699
Other liabilities................. 3,088 486 107 3,681
-------- ------- ----- --------
Total Liabilities............... 135,779 15,833 (89) 151,523
-------- ------- ----- --------
SURPLUS
Special contingency reserves...... 768 50 -- 818
Surplus notes..................... 1,400 148 -- 1,548
Unassigned funds (j).............. 4,279 412 (284) 4,407
-------- ------- ----- --------
Total Surplus................... 6,447 610 (284) 6,773
-------- ------- ----- --------
Total Liabilities and Surplus. $142,226 $16,443 $(373) $158,296
======== ======= ===== ========
</TABLE>
II-17
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Income:
Premiums, annuity
considerations
and deposit funds
(k).............. $22,951 $1,845 $ -- $24,796 $22,760 $1,983 $-- $24,743
Net investment
income (a)(b)(e). 7,825 758 (25) 8,558 7,143 720 (50) 7,813
Other income...... 156 155 -- 311 80 141 -- 221
------- ------ ----- ------- ------- ------ ---- -------
Total income.... 30,932 2,758 (25) 33,665 29,983 2,844 (50) 32,777
------- ------ ----- ------- ------- ------ ---- -------
Benefits and
Expenses:
Benefit payments
(other than
dividends)....... 25,055 2,186 -- 27,241 23,533 2,056 -- 25,589
Changes to
reserves, deposit
funds and other
policy
liabilities (c).. 321 (151) (8) 162 1,619 (182) 1 1,438
Insurance expenses
and taxes (other
than federal
income and
capital gains
taxes)........... 2,762 404 -- 3,166 2,333 429 -- 2,762
Net transfers to
separate
accounts......... 675 (64) -- 611 503 230 -- 733
------- ------ ----- ------- ------- ------ ---- -------
Total benefits
and expenses
before
dividends to
policyholders.. 28,813 2,375 (8) 31,180 27,988 2,533 1 30,522
------- ------ ----- ------- ------- ------ ---- -------
Net gain from
operations before
dividends to
policyholders and
federal income
taxes............ 2,119 383 (17) 2,485 1,995 311 (51) 2,255
Dividends to
policyholders
(g).............. 1,520 211 -- 1,731 1,676 207 -- 1,883
------- ------ ----- ------- ------- ------ ---- -------
Net (loss) gain
from operations
before federal
income taxes..... 599 172 (17) 754 319 104 (51) 372
Federal income
taxes (excluding
tax on capital
gains) (h)....... 398 13 -- 411 159 16 -- 175
------- ------ ----- ------- ------- ------ ---- -------
Net (loss) gain
from operations.. 201 159 (17) 343 160 88 (51) 197
Net realized
capital (losses)
gains (a)(d)(i).. (873) (99) (84) (1,056) (54) (46) 15 (85)
------- ------ ----- ------- ------- ------ ---- -------
Net (loss) income. $ (672) $ 60 $(101) $ (713) $ 106 $ 42 $(36) $ 112
======= ====== ===== ======= ======= ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
---------------------------------
HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Income:
Premiums, annuity
considerations
and deposit funds
(k).............. $21,096 $1,942 $-- $23,038
Net investment
income (a)(b)(e). 7,356 797 (52) 8,101
Other income...... 231 139 -- 370
------- ------ ---- -------
Total income.... 28,683 2,878 (52) 31,509
------- ------ ---- -------
Benefits and
Expenses:
Benefit payments
(other than
dividends)....... 21,417 1,990 -- 23,407
Changes to
reserves, deposit
funds and other
policy
liabilities (c).. (439) (16) (9) (464)
Insurance expenses
and taxes (other
than federal
income and
capital gains
taxes)........... 2,496 448 -- 2,944
Net transfers to
separate
accounts......... 3,239 138 -- 3,377
------- ------ ---- -------
Total benefits
and expenses
before
dividends to
policyholders.. 26,713 2,560 (9) 29,264
------- ------ ---- -------
Net gain from
operations before
dividends to
policyholders and
federal income
taxes............ 1,970 318 (43) 2,245
Dividends to
policyholders
(g).............. 1,606 227 -- 1,833
------- ------ ---- -------
Net (loss) gain
from operations
before federal
income taxes..... 364 91 (43) 412
Federal income
taxes (excluding
tax on capital
gains) (h)....... 99 34 -- 133
------- ------ ---- -------
Net (loss) gain
from operations.. 265 57 (43) 279
Net realized
capital (losses)
gains (a)(d)(i).. (132) 32 -- (100)
------- ------ ---- -------
Net (loss) income. $ 133 $ 89 $(43) $ 179
======= ====== ==== =======
</TABLE>
II-18
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Bonds.................. $ 70,955 $ 6,080 $ -- $ 77,035 $ 65,592 $ 6,275 $ -- $ 71,867
Stocks................. 3,646 815 -- 4,461 3,672 583 -- 4,255
Mortgage loans......... 14,211 1,629 (101) 15,739 14,524 1,998 (88) 16,434
Real estate............ 9,470 302 -- 9,772 10,417 395 -- 10,812
Policy loans........... 3,956 1,350 -- 5,306 3,964 1,342 -- 5,306
Cash and short-term
investments........... 1,923 651 -- 2,574 2,334 265 -- 2,599
Other invested assets.. 2,480 778 (270) 2,988 2,262 930 (235) 2,957
Premiums deferred and
uncollected........... 1,568 191 -- 1,759 1,250 217 -- 1,467
Investment income due
and accrued........... 1,589 282 -- 1,871 1,440 252 -- 1,692
Separate Account
assets................ 31,707 4,092 -- 35,799 25,424 3,388 -- 28,812
Other assets........... 627 91 -- 718 298 108 -- 406
-------- ------- ----- -------- -------- ------- ----- --------
Total Assets.......... $142,132 $16,261 $(371) $158,022 $131,177 $15,753 $(323) $146,607
======== ======= ===== ======== ======== ======= ===== ========
LIABILITIES AND SURPLUS
LIABILITIES
Reserves for life and
health insurance and
annuities............. $ 76,249 $ 8,117 $ 40 $ 84,406 $ 73,204 $ 7,961 $ 48 $ 81,213
Policy proceeds and
dividends left with
the Company........... 4,482 467 -- 4,949 3,534 418 -- 3,952
Dividends due to
policyholders......... 1,371 210 -- 1,581 1,407 208 -- 1,615
Premium deposit funds.. 12,891 1,865 -- 14,756 14,006 2,150 -- 16,156
Interest maintenance
reserve............... 1,148 -- -- 1,148 881 16 -- 897
Other policy
liabilities........... 3,882 90 -- 3,972 3,364 136 -- 3,500
Investment valuation
reserves (f).......... 1,860 429 (235) 2,054 1,981 362 (207) 2,136
Separate Account
liabilities........... 31,226 4,064 -- 35,290 25,159 3,358 -- 28,517
Other liabilities...... 2,459 395 20 2,874 1,337 512 9 1,858
-------- ------- ----- -------- -------- ------- ----- --------
Total Liabilities..... 135,568 15,637 (175) 151,030 124,873 15,121 (150) 139,844
-------- ------- ----- -------- -------- ------- ----- --------
SURPLUS
Special contingency
reserves.............. 754 50 -- 804 682 68 -- 750
Surplus notes.......... 1,400 148 -- 1,548 700 148 -- 848
Unassigned funds (j)... 4,410 426 (196) 4,640 4,922 416 (173) 5,165
-------- ------- ----- -------- -------- ------- ----- --------
Total Surplus......... 6,564 624 (196) 6,992 6,304 632 (173) 6,763
-------- ------- ----- -------- -------- ------- ----- --------
Total Liabilities and
Surplus............. $142,132 $16,261 $(371) $158,022 $131,177 $15,753 $(323) $146,607
======== ======= ===== ======== ======== ======= ===== ========
</TABLE>
II-19
<PAGE>
- --------
(a) Pro forma results include conforming adjustments to eliminate accrued net
interest income from preferred returns on joint venture real estate and to
record losses from those joint ventures in excess of the company's share
when it exercises economic control over the venture or is obligated or
expected to fund losses in its partners' negative capital accounts.
MetLife amortized the cumulative effect of recording losses in excess of
its share in 1993 over the three year period 1993-1995. Accordingly, the
pro forma adjustments include an additional $72 million cumulative effect
relating to TNE's portfolio, amortized over that period. The effect of
these pro forma adjustments is to decrease net investment income by $52
million, $41 million and $15 million in the years ended December 31, 1993,
1994 and 1995, respectively, by $3 million and $4 million for the three
months ended March 31, 1996 and 1995, respectively. In addition, pro forma
net realized capital gains has been increased by $15 million for the year
ended December 31, 1994.
(b) Includes conforming adjustments to recognize certain interest rate swap
losses immediately. Pro forma net investment income has been decreased by
$10 million in each of the years ended December 31, 1994 and 1995. For the
three month periods ended March 31, 1996 and 1995, pro forma net
investment income was increased by $4 million and decreased by $3 million,
respectively.
(c) Pro forma policy reserves have been adjusted to reflect New York reserve
requirements that are different from Massachusetts requirements. As a
result, changes to reserves decreased (increased) by $9 million, $(1)
million and $8 million in the years ended December 31, 1993, 1994 and
1995, respectively, and by $1 million and $2 million for the three months
ended March 31, 1996 and 1995, respectively.
(d) In 1995, MetLife established an allowance for losses on real estate
expected to be disposed of in the near term by recording a realized
capital loss. Previously unrealized loss reserves have been reclassified
to reflect a realized capital loss of $63 million in 1995 for property in
TNE's portfolio that would have been included in a pro forma allowance. In
addition, $20 million is recognized in connection with planned disposals
of joint venture real estate in the near term. Accordingly, pro forma net
realized capital gains has been decreased by $83 million for the year
ended December 31, 1995. A pro forma unrealized capital gain of $63
million has been reflected in the same period.
(e) Pro forma net investment income has been decreased by $90 million for the
three months ended March 31, 1996, to reflect the Settlement Agreement
among TNE, Copley Real Estate Advisors, Inc. and the Washington State
Investment Board (see Note 2 to the Unaudited Financial Statements of TNE
for the three months ended March 31, 1996), which is contingent on
completion of the Merger.
(f) Investment valuation reserves include an AVR (Asset Valuation Reserve) at
March 31, 1996 and 1995, and December 31, 1995 and 1994, and AVR and VIR
(Voluntary Investment Reserve) for December 31, 1993 for MetLife. They
include an AVR and VIR for TNE results for all periods presented. Pro
forma investment valuation reserves have been adjusted to reflect the
reclassification of mortgage loans reserves to an offset against assets
and the recomputation of the AVR taking into account the adjusted asset
balances and adjusted realized and unrealized capital gains. Historical
voluntary contributions to the AVR made by TNE of $124 million have not
been reflected in the pro forma financial information. Pro forma
investment valuation reserves have been decreased by $215 million, $207
million and $235 million as of December 31, 1993, 1994 and 1995,
respectively, and by $235 million and $207 million as of March 31, 1996
and 1995, respectively.
(g) Dividends to policyholders are discretionary and are subject to the
approval of MetLife's Board.
(h) For each of the periods prior to the quarter ended December 31, 1995,
MetLife's surplus tax has been calculated based on the tax liability
expected to be reported on the federal income tax return for each year
presented. For the three months ended March 31, 1996 and the year ended
December 31, 1995 surplus tax was calculated based on the expected final
tax for such periods.
(i) MetLife's results are net of $77 million and $(27) million transfer to the
Interest Maintenance Reserve for the three months ended March 31, 1996 and
1995, respectively, and $339 million, $48 million and $688 million
transfer to the IMR for the years ended December 31, 1995, 1994 and 1993,
respectively. TNE's results are net of $2 million, $(22) million, $(21)
million, $(21) million and $25 million, respectively, for each of the
periods ended March 31, 1996 and 1995, and December 31, 1995, 1994 and
1993.
II-20
<PAGE>
(j) In the opinion of MetLife, unassigned surplus is the source of funds for
payments of interest on and principal of their Surplus Notes (see Note 9
to the Audited Financial Statements of TNE and Note 10 to the Audited
Financial Statements of MetLife). Currently, each such payment requires
specific prior approval of the appropriate state insurance regulator, who
also determines what portion, if any, is available for such payments. Upon
the Merger, TNE Surplus Notes became obligations of MetLife.
(k) MetLife's results for the three months ended March 31, 1996 and 1995 and
the year ended December 31, 1995 include premium income relating to group
life and non-medical health insurance businesses acquired from The
Travelers Insurance Company and certain of its subsidiaries effective
January 1, 1995. MetLife's premium income includes amounts relating to
group health care benefits businesses insurance policies of $1,379 million
and $1,371 million, respectively for the years ended December 31, 1994 and
1993. Effective January 1995, the group health care benefits businesses
were contributed to The MetraHealth Companies, Inc. Premium income of
MetLife subsequent to December 31, 1994 includes group health care
benefits businesses premium income relating to the period prior to policy
or contract renewal date and business for which reinsurance agreements had
not yet received regulatory approval.
II-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of New England Mutual Life
Insurance Company:
We have audited the accompanying balance sheets of New England Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the related statements
of operations, surplus, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New England Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with the accounting practices prescribed or
permitted by the Division of Insurance of The Commonwealth of Massachusetts,
which are considered generally accepted accounting principles for mutual life
insurance companies.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 5, 1996
II-22
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Bonds...................................................... $ 6,079.8 $ 6,274.6
Stocks..................................................... 121.4 98.7
Unconsolidated subsidiaries................................ 693.7 484.1
Mortgage loans............................................. 1,629.3 1,997.9
Real estate................................................ 951.2 1,173.4
Policy loans............................................... 1,350.4 1,341.6
Cash and short-term investments............................ 651.1 264.8
Other invested assets...................................... 128.8 151.9
Premiums deferred and uncollected.......................... 190.8 217.2
Investment income due and accrued.......................... 281.5 252.5
Separate Account assets.................................... 4,091.8 3,388.4
Other assets............................................... 91.3 107.7
--------- ---------
Total Assets............................................. $16,261.1 $15,752.8
========= =========
LIABILITIES
Reserves for life and health insurance and annuities....... $ 8,116.6 $ 7,961.2
Policy proceeds and dividends.............................. 466.8 417.8
Dividends due to policyholders............................. 210.0 208.2
Premium deposit funds...................................... 1,865.0 2,149.9
Other policy liabilities................................... 89.7 135.5
Investment valuation reserves.............................. 429.5 361.9
Separate Account liabilities............................... 4,064.1 3,358.1
Other liabilities.......................................... 395.4 528.0
--------- ---------
Total Liabilities........................................ 15,637.1 15,120.6
SURPLUS
Special contingency reserves............................... 50.0 68.4
Surplus notes.............................................. 147.6 147.6
Unassigned funds........................................... 426.4 416.2
--------- ---------
Total Surplus............................................ 624.0 632.2
--------- ---------
Total Liabilities and Surplus.......................... $16,261.1 $15,752.8
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-23
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME
Premiums, annuity considerations and deposit
funds.......................................... $1,679.0 $1,943.0 $1,881.1
Considerations for supplementary contracts and
dividend accumulations......................... 165.8 39.9 61.0
Net investment income........................... 758.2 720.3 796.6
Other income.................................... 155.2 141.6 139.2
-------- -------- --------
Total......................................... 2,758.2 2,844.8 2,877.9
-------- -------- --------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)......... 2,186.3 2,055.7 1,990.0
Changes to reserves, deposit funds and other
policy liabilities............................. (151.1) (181.7) (17.2)
Insurance expenses and taxes (other than federal
income and capital gains taxes)................ 404.4 429.2 449.1
Net transfers to Separate Accounts.............. (64.2) 230.2 138.3
-------- -------- --------
Total benefits and expenses before dividends
to policyholders............................. 2,375.4 2,533.4 2,560.2
-------- -------- --------
Net gain from operations before dividends to
policyholders and federal income taxes.......... 382.8 311.4 317.7
Dividends to policyholders....................... 211.4 207.6 227.0
-------- -------- --------
Net gain from operations before federal income
taxes........................................... 171.4 103.8 90.7
Federal income taxes (excluding tax on capital
gains).......................................... 12.9 15.7 33.5
-------- -------- --------
Net gain from operations......................... 158.5 88.1 57.2
Net realized capital (loss)...................... (98.7) (45.8) 32.2
-------- -------- --------
Net Income....................................... $ 59.8 $ 42.3 $ 89.4
======== ======== ========
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF SURPLUS
(IN MILLIONS)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Surplus--beginning of year....................... $ 632.2 $ 400.9 $ 605.5
Net Income....................................... 59.8 42.3 89.4
Surplus notes.................................... -- 147.6 --
Other changes to surplus......................... (68.0) 41.4 (294.0)
-------- -------- --------
Surplus--end of year............................. $ 624.0 $ 632.2 $ 400.9
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-24
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
FROM OPERATING ACTIVITIES
Premiums.................................... $ 1,727.7 $ 1,920.5 $ 1,872.6
Net investment income....................... 765.8 728.0 952.3
Benefits.................................... (2,221.0) (2,040.8) (1,999.6)
Net transfers to Separate Accounts.......... 45.3 (226.9) (147.3)
Expenses and taxes.......................... (467.8) (445.2) (447.8)
Policyholder dividends...................... (213.6) (221.0) (255.5)
Net (increase) in policy loans.............. (8.8) (20.3) 44.0
Other income and disbursements, net......... 380.3 (184.7) 139.7
--------- --------- ---------
Net cash flow from operating activities... 7.9 (490.4) 158.4
--------- --------- ---------
FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or
repaid..................................... 3,654.3 3,220.1 5,019.2
Cost of investments acquired................ (3,178.3) (3,307.1) (4,921.5)
--------- --------- ---------
Net cash flow from investing activities... 476.0 (87.0) 97.7
--------- --------- ---------
FROM FINANCING ACTIVITIES
Issuance of surplus notes................... -- 147.6 --
Issuance of floating rate notes payable..... -- 125.0 --
Issuance of 6% demand note payable.......... 26.8 -- --
Repayment of floating rate notes payable.... (124.4) -- --
Repayment of 8% note payable................ -- -- (19.2)
Repayment of 7 3/8% debentures.............. -- -- (12.3)
--------- --------- ---------
Net cash flow from financing activities... (97.6) 272.6 (31.5)
--------- --------- ---------
NET CASH FLOW................................. 386.3 (304.8) 224.6
Cash and short-term investments
Beginning of year........................... 264.8 569.6 345.0
--------- --------- ---------
End of year................................. $ 651.1 $ 264.8 $ 569.6
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-25
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
New England Mutual Life Insurance Company offers a complete line of ordinary
life insurance products, group pension contracts, group life and health
contracts, and, through its affiliates, variable life insurance and annuity
products, mutual funds, and investment management products. Based on sales and
assets, the company's principal market is ordinary and variable life
insurance, which it sells through a network of general agencies located
throughout the United States.
Basis of Presentation
The Company prepares its statutory financial statements, except as to form,
in accordance with accounting practices prescribed or permitted by the
Division of Insurance of The Commonwealth of Massachusetts. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. Permitted and prescribed
statutory accounting practices are currently considered generally accepted
accounting principles (GAAP) for mutual life insurance companies.
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts. The American Institute of Certified Public
Accountants issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. Neither of these
groups has a role in establishing regulatory accounting practices. These
pronouncements will require mutual life insurance companies to modify their
financial statements in order for them to continue to be in accordance with
generally accepted accounting principles, effective for the Company's 1996
financial statements. The manner in which policy reserves, new business
acquisition costs, asset valuations and the related tax effects are recorded
will change. Management has not determined the impact of such changes on its
financial statements.
Certain amounts from the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in accordance with permitted and
prescribed statutory accounting practices requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
Invested Assets
Carrying values of bonds and stocks have been determined in accordance with
methods and values adopted by the National Association of Insurance
Commissioners (NAIC). Bonds are carried primarily at amortized cost, preferred
stocks at cost, and common stocks (other than stocks of non-publicly traded
subsidiaries) at fair value based upon NAIC market prices. The Company carries
its investment in New England Investment Companies, L.P., (NEIC) a 56% owned,
publicly traded Delaware limited partnership, at a 14% discount from quoted
market value. The discount is determined by the NAIC Securities Valuation
Office based on volume of trading, the existence of market overhang, and
similar trading characteristics. At December 31, 1995 and 1994, the Company's
investment in NEIC had a fair value of $439.2 million and $324.8 million,
respectively, and a carrying value of $377.7 million and $279.4 million,
respectively.
Mortgage loans on real estate are carried at outstanding principal balance
or amortized cost. The Company establishes investment valuation reserves equal
to the amount by which the admitted value of each mortgage loan that has been
modified, is delinquent 90 days or more, or is in the process of modification,
exceeds the estimated fair value of its underlying collateral. These
investment valuation reserves are adjusted annually based upon current
valuations.
II-26
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investment real estate is carried at cost less accumulated depreciation and
encumbrances of $65.9 million in 1995 and accumulated depreciation and
encumbrances of $91.4 million in 1994. A loss reserve is established when the
fair value of the real estate is less than the carrying value, and the loss is
considered other than temporary, but not permanent. Losses considered
permanent are realized and any previously established loss reserve is
reversed. Depreciation is computed principally using the straight-line method
over an average life of forty years.
Policy loans are carried at the aggregate of the unpaid balances. Policy
loans are an integral part of insurance products and have no maturity dates.
Consequently it is not practicable to value these instruments. Short-term
investments are carried principally at cost, which approximates fair value,
and include securities with a maturity date at purchase of less than one year.
Investments in real estate joint ventures and unconsolidated subsidiaries,
unless publicly traded, are valued using the equity method. Other long-term
investments are carried principally at cost.
Prepayment assumptions for loan-backed bonds and structured securities were
obtained from investment advisors and are updated on a quarterly basis. These
assumptions are consistent with the current interest rate and economic
environment. The prospective method is used to value loan-backed securities.
Realized gains and losses on the sales of investments are determined on the
specific identification method. Unrealized gains and losses are accounted for
as increases or decreases in surplus.
Risk Management Instruments
Amounts receivable or payable under interest rate swaps used to manage
interest rate exposures from mismatches between assets and liabilities are
recognized as interest income or expense.
Gains and losses on hedges of existing assets or liabilities are deferred
and included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income when resulting premiums or discounts are
amortized or at the time of disposal. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions also are deferred and
are recognized in income, or as adjustments of carrying amounts, when the
hedged transaction occurs. Gains and losses on early termination of contracts
that qualify for hedge accounting are deferred and are amortized through the
Interest Maintenance Reserve or as an adjustment to the yield of the related
asset or liability.
Life, Health and Annuity Reserves
Reserves for life insurance policies are predominantly developed using the
1958 and 1980 Commissioners' Standard Ordinary Mortality Table on the Net
Level Premium Method or the Commissioners' Reserve Valuation Method with
assumed interest rates ranging from 2.5% to 6%.
Reserves for group annuities covering purchased benefits are based on
accepted actuarial methods principally at interest rates ranging from 2.75% to
11%. Where benefits have not as yet been purchased, the deposits represent the
accumulated fund balances (net of expenses and fixed surrender charges) at
various interest rates. Group pension and other deposits have a fair value of
$1.9 billion at December 31, 1995 and $2.2 billion at December 31, 1994 as
determined by applying discount rates consistent with pricing for Guaranteed
Investment Contracts to the projected cash flows for the deposits.
Approximately $5.1 billion or 69.4% of the $7.3 billion of gross annuity
reserves and deposit liabilities in the General and Separate Accounts are
subject to discretionary withdrawal with adjustment for market value or
surrender charges. Another $1.4 billion or 19.7% are not subject to
withdrawal. The balance is subject to discretionary withdrawal without
adjustment.
Recognition of Premium Revenue and Related Expenses
Premium revenue is recognized during the premium paying period. Commissions
and other expenses in connection with acquiring new business are charged to
current operations as incurred.
II-27
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Policyholder Dividends
The Company determines the amount of dividends to be allocated to
participating policies by means of a formula which establishes its dividend
scale for the following year with respect to each group of policies. A
liability for the dividends to be paid or credited to policyholders during the
following year on the anniversary date of the policies is established at each
year-end.
Separate Account
Separate Account assets and liabilities represent funds administered and
invested by the Company for the benefit of certain pension and annuity
contractholders. The values of the funds in the Separate Account are not
guaranteed but reflect the actual investment performance of the respective
accounts. The assets are carried at fair value.
Special Contingency Reserves
The Company has established a special purpose surplus fund for the possible
payment of federal income taxes relating to future disposals of Separate
Account real estate holdings.
Unconsolidated Subsidiaries
The Company records its equity in the earnings of unconsolidated
subsidiaries as unrealized gains or losses, which increases or decreases the
Asset Valuation Reserve, and records dividends that are not considered return
of capital in net investment income.
The Company owns 100% of the outstanding common stock of the following
companies:
Boylston Capital Advisors, Inc. TNE-Y Inc.
COAC Co., Inc. NEL Partnership Investments I,
CRB Co., Inc. Inc.
CRH Companies, Inc. NELRECO Troy, Inc.
Exeter Reassurance Company, Ltd. New England Pension and Annuity
L/C Development Corporation Company
New England Life Mortgage Funding Corporation New England Securities
TNE Advisers, Inc. Corporation
New England Investment Companies, Inc. New England Variable Life
G.A. Holdings Companies, Inc. Insurance Company
LC Park Place Corporation Newbury Insurance Company,
Limited
TNE Information Services, Inc.
TNE Funding Corporation
DPA Holding Corp.
Lyon/Copley Corporation
Summarized financial data for unconsolidated subsidiaries at December 31,
1995 and 1994 is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -----
(IN MILLIONS)
<S> <C> <C> <C>
Total assets at year-end............................ $2,215.9 $1,927.7
Total liabilities at year-end....................... 1,534.1 1,450.6
Net income.......................................... 41.2 9.1 (15.0)
Dividends paid by subsidiaries to the Company....... 36.1 38.6 29.0
</TABLE>
The Company owns 100% of the outstanding voting common stock and 0% of the
outstanding participating common stock of Omega Reinsurance Corporation.
The Company owns 56% of the outstanding partnership units of New England
Investment Companies, L.P.
Many of the Company's real estate joint ventures have mortgage loans with
the Company. The carrying values of such mortgages were $232.7 million and
$392.3 million at December 31, 1995 and 1994, respectively.
II-28
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT RESERVES AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit-related losses on unassigned surplus. The AVR covers all
invested asset classes with risk of loss, including bonds, common stock,
mortgage loans and real estate.
The Interest Maintenance Reserve (IMR) accumulates realized capital gains
and losses on the sale of all types of fixed-income securities that result
from changes in the overall level of interest rates. These gains are amortized
into operating income over the remaining life of each investment sold. The IMR
amounted to $(1.9) million and $16.5 million as of December 31, 1995 and 1994,
respectively. The negative balance of the IMR at December 31, 1995 was treated
as a non-admitted asset. The amortization of the IMR into net income net of
federal income tax for 1995, 1994 and 1993 was $(2.7) million, $3.7 million
and $6.5 million, respectively.
3. INVESTMENTS
The carrying value and estimated fair values of debt securities excluding
Separate Account assets are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAINS LOSSES VALUE
-------- ------ ------- --------- ---
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 321.5 $ 11.0 $ -- $ 332.5
Corporate securities............. 3,997.6 230.8 (32.3) 4,196.1
Mortgage-backed securities....... 1,205.2 26.3 (33.3) 1,198.2
Other debt securities............ 555.5 39.8 (7.4) 587.9
-------- ------ ------- --------
Totals......................... $6,079.8 $307.9 $ (73.0) $6,314.7
======== ====== ======= ========
<CAPTION>
1994
----------------------------------
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAINS LOSSES VALUE
-------- ------ ------- --------- ---
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 462.5 $ 0.7 $ (29.8) $ 433.4
Corporate securities............. 3,727.3 22.8 (172.9) 3,577.2
Mortgage-backed securities....... 1,806.8 4.9 (221.9) 1,589.8
Other debt securities............ 278.0 1.6 (17.7) 261.9
-------- ------ ------- --------
Totals......................... $6,274.6 $ 30.0 $(442.3) $5,862.3
======== ====== ======= ========
</TABLE>
Publicly traded debt securities are valued based upon NAIC market prices.
The estimated fair values of private placement obligations are determined
using an internal matrix based on market interest rates, the credit rating of
the specific security and public prices of similar securities.
II-29
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The carrying value and estimated fair value of debt securities at December
31, 1995 by contractual maturity are shown below. Stated maturities may differ
from contractual maturities because some borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less................................... $ 188.2 $ 188.8
Due after one year through five years..................... 914.6 944.5
Due after five years through ten years.................... 2,079.7 2,184.4
Due after ten years....................................... 1,692.2 1,798.9
Mortgage-backed securities................................ 1,205.1 1,198.1
-------- --------
Totals.................................................. $6,079.8 $6,314.7
======== ========
</TABLE>
Proceeds from sales of investments in debt securities were $2,046.5 million,
$1,489.2 million and $1,569.2 million in 1995, 1994 and 1993, respectively.
Gross realized gains were $39.3 million, $5.8 million and $35.2 million, and
gross realized losses were $33.2 million, $35.6 million and $13.1 million in
1995, 1994 and 1993, respectively. Net realized losses of $(21.0) million,
$(20.9) million and $24.7 million in 1995, 1994 and 1993, respectively, were
transferred to the IMR.
The carrying values and estimated fair values of stocks and mortgage loans
at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------ ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Stocks................................. $ 121.4 $ 121.4 $ 98.7 $ 98.7
Mortgage loans......................... 1,629.3 1,527.4 1,997.9 1,740.6
</TABLE>
The estimated fair value of mortgage loans is determined using an internal
matrix based upon market interest rates and a credit rating system.
There are no significant concentrations of bonds by issuer or by industry.
As of December 31, 1995 and 1994 the Company's mortgage loans and real
estate were distributed as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
-------------- ---------- -------------- ----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Geographic Region
Pacific............... $ 839.4 32.5% $1,139.5 35.9%
South Atlantic........ 495.8 19.2 566.2 17.9
North Central......... 339.7 13.2 374.5 11.8
New England........... 323.7 12.6 380.7 12.0
Middle Atlantic....... 282.7 11.0 343.5 10.8
South Central......... 189.5 7.3 244.5 7.7
Mountain.............. 109.7 4.2 121.6 3.8
Other................. -- -- 0.8 0.1
-------- ----- -------- -----
Total............... $2,580.5 100.0% $3,171.3 100.0%
======== ===== ======== =====
</TABLE>
II-30
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
-------------- ---------- -------------- ----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Property Type
Office................ $1,253.3 48.6% $1,600.9 50.4%
Industrial............ 730.5 28.3 891.2 28.1
Residential........... 350.7 13.6 377.1 11.9
Retail................ 211.6 8.2 268.6 8.5
Hotel................. 34.4 1.3 33.5 1.1
-------- ----- -------- -----
Total............... $2,580.5 100.0% $3,171.3 100.0%
======== ===== ======== =====
</TABLE>
The Company's balance of restructured mortgage loans was $778.0 million and
$868.1 million as of December 31, 1995 and 1994, respectively. Interest income
which would have been recorded in accordance with the original terms of these
loans would have amounted to approximately $69.8 million, $82.1 million and
$69.7 million in 1995, 1994 and 1993, respectively. Total income included in
net investment income for these loans was approximately $36.8 million,
$33.1 million and $24.3 million in 1995, 1994 and 1993, respectively.
4. DERIVATIVES
Interest Rate Swaps
The Company enters into derivatives contracts, particularly interest rate
swaps, to hedge interest rate exposures arising from mismatched assets and
liabilities. Under interest rate swaps, the Company agrees to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated on an agreed-upon notional principal amount.
Because asset durations have historically been shorter than liabilities, the
Company generally agrees to pay a floating rate to lengthen the duration of
its assets. Because the size of swap positions needed to reduce the impact of
market fluctuations on surplus varies over time, the Company may close out
swap positions or enter into swaps in which it receives the floating rate and
pays the fixed rate to reduce its net position.
At December 31, 1995, $646.8 million notional principal amount of such pay-
floating swaps and receive-fixed swaps was in effect. The original term to
maturity for these swaps is typically three to five years. The Company's
current credit exposure on swaps is limited to the value of interest rate
swaps that have become favorable to the Company. At December 31, 1995 and
1994, the market value of interest rate swaps in a favorable position was $0
and $0.5 million, respectively, while the net value of all positions was $31.5
million and $111.7 million unfavorable, respectively.
5. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
The Company's Home Office Retirement Plan and related Select Employees'
Supplemental Retirement Plan (together the "Plan") cover substantially all of
its employees. Retirement benefits are based primarily on years of service and
the employee's final average salary. The Company's funding policy is to
contribute annually an amount that can be deducted for federal income tax
purposes using a different actuarial cost method and different assumptions
from those used for financial reporting purposes. The net pension cost charged
to income in 1995, 1994 and 1993 was $7.6 million, $7.6 million and $7.1
million, respectively.
II-31
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following information for the Plan includes amounts relating to
unconsolidated non-wholly-owned affiliates. Accordingly, the amounts presented
are greater than the Company's share.
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of accumulated plan benefits........ $119.0 $104.0
Projected benefit obligation................................ $168.0 $157.0
Net assets available for plan benefits...................... $116.0 $ 97.0
Unrecognized prior service cost............................. $ 4.0 $ 4.4
Unrecognized net (loss) from past experience different from
that assumed............................................... $(47.3) $(60.9)
Unamortized transition gains................................ $ 5.2 $ 6.4
</TABLE>
The components of net pension cost were:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................... $ 4.8 $ 6.6 $ 6.1
Interest cost......................................... 11.0 10.6 9.9
Actual return on plan assets.......................... (20.9) 2.1 (2.3)
Net amortization and deferral......................... 12.7 (10.0) (5.5)
Costs allocated to affiliates......................... -- (1.7) (1.1)
------ ------ -----
Net periodic pension cost........................... $ 7.6 $ 7.6 $ 7.1
====== ====== =====
</TABLE>
The weighted average discount rate was 8.0%, 7.5% and 8.0% in 1995, 1994 and
1993, respectively. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit was 5.0% for
1995 and 1994 and 5.5% for 1993. Plan assets consist of bonds, stocks, real
estate and insurance contracts and have an assumed long-term rate of return of
8.5% for 1995, 1994 and 1993.
The Company has defined contribution and contributory pension and savings
plans covering substantially all of its employees and full-time agents, and
deferred compensation plans for agents who meet certain service requirements,
for certain senior officers and directors, and general agents. The Company's
contributions to these plans, charged to operations in 1995, 1994 and 1993,
were $15.8 million, $17.3 million and $17.1 million, respectively.
6. OTHER POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all employees become eligible for these benefits if they have met certain age
and service requirements at retirement. The Company intends to fund the
accumulated postretirement benefit obligation as benefits become due.
II-32
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's balance sheet.
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $31.7 $31.4
Fully eligible active plan participants................. 7.1 5.8
----- -----
Total..................................................... 38.8 37.2
less: unrecognized transition obligation 36.1 41.0
plus: unrecognized net gain 4.9 10.0
----- -----
Accrued postretirement benefit liability.................. $ 7.6 $ 6.2
===== =====
The components of net postretirement benefit cost were:
Estimated eligibility cost.............................. $ 0.9 $ 0.9 $1.9
Interest cost........................................... 2.8 2.9 3.7
Amortization of transition obligation over 20 years..... 2.1 2.3 2.3
Amortization of gain over 17 years...................... (0.6) (0.6) --
----- ----- ----
Net postretirement benefit cost........................... $ 5.2 $ 5.5 $7.9
===== ===== ====
</TABLE>
Net postretirement benefit cost for the year ended December 31, 1995
includes the expected cost of such benefits for newly vested employees,
interest cost, gains and losses arising from differences between actuarial
assumptions and actual experience, and amortization of the transition
obligation. The discount rate used to determine the net postretirement benefit
cost was 8.5%, 8.0% and 8.5% in 1995, 1994 and 1993, respectively. The Company
made contributions to the plan of $3.8 million, $3.6 million and $3.6 million
in 1995, 1994 and 1993, respectively, as claims were incurred.
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.25%, 8.5% and 8.5% for 1995, 1994 and 1993, respectively, and
the health care cost trend rate was 8.6% graded to 5.5% over 8 years in 1995,
9% graded to 5.5% over 9 years for 1994 and 12% graded to 6% over 10 years for
1993. The health care cost trend rate assumption has a minimal impact on the
amounts reported, since the Company has capped its contributions at 200% of
1993 levels.
The estimated accumulated benefit obligation for active nonvested employees
was $14.2 million and $13.3 million at December 31, 1995 and 1994,
respectively.
7. FEDERAL INCOME TAXES
Federal income taxes are provided on the basis of amounts estimated to be
payable under the Internal Revenue Code. The Company files a consolidated
federal income tax return with its life insurance subsidiaries and its wholly-
owned non-life insurance subsidiaries.
The Internal Revenue Service has completed its examination of the Company's
income tax returns through 1991 and is currently examining the income tax
returns for 1992 and 1993. The Company is contesting certain issues since
1976. The outcome of these proceedings is not currently determinable but, in
the opinion of management, would not have a materially adverse effect on the
financial statements.
The tax benefit of capital losses was $23.5 million and $16.5 million for
1995 and 1994, respectively. The tax on capital gains was $22.0 million for
1993.
II-33
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
Notes payable (included in other liabilities) consist of:
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1994
----- ------
(IN
MILLIONS)
<S> <C> <C>
6% demand note payable......................................... $26.8 $ --
Floating rate notes payable.................................... -- 124.3
Commercial paper............................................... 6.7 6.7
----- ------
Total........................................................ $33.5 $131.0
===== ======
</TABLE>
The floating rate (one month LIBOR plus .25%) notes were payable solely
from, and were collateralized by, $666.1 million of senior certificates. These
senior certificates were collateralized mortgage obligations included in bonds
on the Company's balance sheet. Interest and principal were paid monthly
solely from the cash flow of the senior certificates. The notes were fully
paid by August 1995. The carrying value of the notes payable approximated
their fair values, which were estimated based upon current market interest
rates for similar debt.
9. SURPLUS NOTES
In February 1994, the Company privately placed $150 million, aggregate
principal amount, of 7 7/8% Surplus Notes (the "Notes"), due February 15,
2024, with semi-annual interest payments. The Notes are expressly subordinate
in right of payment to policy claims and other indebtedness of the Company.
The Notes are not subject to redemption by the Company or through the
operation of a sinking fund prior to maturity. Proceeds of the issuance of the
Notes net of discount and costs of issuance amounted to $145.9 million.
These proceeds were received in cash and have been reflected in surplus.
Each payment of interest on and principal of the Notes may be made only with
the prior approval of the Massachusetts Commissioner of Insurance (the
"Commissioner"). The Company will not accrue any liability for payment of
interest or principal prior to obtaining the Commissioner's approval for
payment. Accrued interest, approved by the Commissioner, as of December 31,
1995 was $4.5 million. Total interest expense on the Notes was $11.8 million
in 1995 and $10.6 million in 1994, respectively.
10. SURPLUS
Other changes to surplus consist of:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Net unrealized capital gains or (losses)........... $ 75.3 $(80.8) $ 55.6
Change in valuation bases of policyholders'
reserves.......................................... (50.8) -- --
Change in investment reserves...................... (67.6) 63.5 (340.9)
Special purpose surplus funds...................... (18.4) 67.7 --
Other changes in surplus........................... (6.5) (9.0) (8.7)
------ ------ -------
Total............................................ $(68.0) $ 41.4 $(294.0)
====== ====== =======
</TABLE>
11. REINSURANCE
The Company's practice on individual products is to retain not more than
$5,000,000 of risk on any person, excluding accidental death benefits. Total
individual life premiums ceded were $150.1 million, $80.5 million and $77.5
million at December 31, 1995, 1994 and 1993, respectively. The Company also
reinsures a portion of its group life business. The group life premiums ceded
were $11.1 million, $12.5 million and $12.5 million at December 31, 1995, 1994
and 1993, respectively.
II-34
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total individual and group life insurance in force ceded was $15.4
billion, $16.0 billion and $12.3 billion at December 31, 1995, 1994 and 1993,
respectively.
In 1994, the Company reinsured, under a traditional reinsurance arrangement,
approximately 24% of a block of ordinary whole life insurance policies issued
between 1979 and 1993 and not otherwise reinsured with a wholly-owned
subsidiary which retroceded half that block with an unaffiliated reinsurer. As
part of the transaction, the Company amortizes the ceding allowance it
received in 1994, producing an increase in net income of $4.4 million in 1995.
As part of joint venture agreements to market group health and individual
disability income products, the Company reinsures with its partners. The
premiums ceded under these agreements were $122.6 million, $115.1 million and
$110.0 million in 1995, 1994 and 1993, respectively. Under a separate
reinsurance arrangement, effective January 1, 1993, the Company reinsures with
its joint venture partners 80% of all small group business. The premiums ceded
under this arrangement were $125.3 million, $108.3 million and $105.5 million
in 1995, 1994 and 1993, respectively.
Business is ceded to reinsurers on the yearly renewable term, coinsurance,
and modified coinsurance bases. The Company is party to a number of
reinsurance agreements with nonaffiliated insurers by means of which,
consistent with usual industry practices, some or all of the mortality or
morbidity risk of the Company is transferred to the other companies. The
Company assumes a small amount of retrocessions from reinsurers and a small
amount of reinsurance from an affiliate.
The Company is contingently liable with respect to ceded insurance should
any reinsurer be unable to meet the obligations assumed by it.
In 1995 the Company recognized a $14.1 million-after tax loss on the
recapture of two surplus relief treaties.
12. COMMITMENTS AND CONTINGENCIES
The Company's obligations with respect to $89.9 million of zero-coupon
Eurobonds due in 1999 issued by an unconsolidated subsidiary in 1985 (and
secured by mortgage loans of the issuer) include obligations to substitute
collateral for any defaulted mortgage loan and to provide sufficient funds to
the issuer to enable redemption as a result of any amendment of United States
tax law which would require the issuer to withhold taxes on interest payments.
The Company's obligations with respect to the bonds are subordinated to
obligations to policyholders. The balance of these Eurobonds, net of
unamortized discount, was $63.3 million as of December 31, 1995.
The Company is guarantor of the obligations arising out of certain financial
instruments issued by a limited partnership in which the Company has an
investment. The financial instruments guaranteed by the Company include
interest rate swap and option contracts between the partnership and other
counterparties. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap and option
contracts. As of December 31, 1995, contracts in a loss position amounted to
$36.0 million and contracts in a gain position amounted to $40.3 million.
A 1985 agreement, under which the Company sold tax-exempt mortgage loans,
obligates the Company to repurchase defaulted loans. As of December 31, 1995,
the principal amount of the tax-exempt loans outstanding was $8.2 million.
In addition, at December 31, 1995, the Company is a guarantor of $272.2
million of outstanding indebtedness and other obligations, lease obligations
of $60.8 million and municipal reinvestment contract obligations of $142.6
million. The Company's obligations with respect to the outstanding
indebtedness, leases and municipal reinvestment contracts are subordinated to
obligations to policyholders. The Company has standby commitments to provide
permanent mortgage financing of $113.6 million as of December 31, 1995.
Management does not anticipate any losses in connection with the above that
would have a material effect on its financial position.
II-35
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company and Copley Real Estate Advisors, Inc. ("Copley"), an indirect,
majority-owned subsidiary of the Company, are parties to lawsuits arising out
of investments made by institutional investors in certain real estate separate
accounts of the Company, which are or were advised by Copley.
There are currently two lawsuits pending.
First, on July 30, 1993, the Washington State Investment Board ("WSIB")
filed suit against the Company and Copley in the Superior Court of the State
of Washington for Thurston County. The WSIB's suit alleges that certain public
employee retirement plans whose funds were invested by the WSIB have lost over
$600.0 million of the $800.0 million they invested in the Prentiss/Copley
Investment Group ("PCIG") and certain other real estate ventures advised by
Copley. The suit seeks rescission of the investments and repayment of the
amounts invested, or alternatively, money damages, plus interest, attorneys'
fees and costs, together with disgorgement of fees and profits received by the
Company and Copley. The Company and Copley have filed an answer denying all
liability to WSIB and raising a number of affirmative defenses. Production of
documents is substantially complete. The Company and Copley have completed a
substantial number of depositions of WSIB witnesses, and WSIB has begun its
depositions of Company and Copley witnesses. The suit is scheduled for trial
beginning on September 9, 1996.
Second, on July 30, 1993, the State Teachers Retirement System of Ohio
("Ohio Board") filed suit against the Company and Copley in the United States
District Court for the Southern District of Ohio. The Ohio Board alleges that
it has lost substantially all of the value of its $50.0 million investment in
PCIG and seeks restoration of that amount, plus interest and disgorgement of
profits made by the Company and Copley, as well as attorneys' fees and costs.
Production of documents is substantially complete. No substantive depositions
have been taken by the Ohio Board, nor has the Company taken any substantive
depositions of Ohio Board witnesses. The court has not set a discovery
schedule, nor has a trial date been set.
In 1995, the Company established a reserve of $10.0 million on its financial
statements with respect to the WSIB lawsuit. The Company has agreed to
indemnify Copley against any and all liability and expense arising out of
these suits or out of other claims or actions relating to the Washington State
retirement plans' or the Ohio Board's investments.
In addition to the two lawsuits described above, the Company is involved in
various litigation in the ordinary course of business. In the opinion of
management, this litigation should not result in judgments or settlements
which, in the aggregate, would have a material adverse effect on the Company's
financial condition.
13. MERGER
The Company and Metropolitan Life Insurance Company (MetLife) have entered
into a definitive agreement, effective as of August 16, 1995, pursuant to
which the Company would be merged with and into MetLife. The closing of the
merger is subject to various conditions, including but not limited to the
obtaining of various regulatory approvals and the approvals of the
policyholders of both companies. It is currently anticipated that the merger
will be consummated during the second quarter of 1996.
The carrying value of the Company's assets is based, in part, on the
assumption that they will be held indefinitely as long-term investments. It is
reasonably possible that MetLife could change the investment objectives of the
portfolio subsequent to the merger and dispose of certain assets, particularly
mortgage and real estate holdings. If so, the realizable value of those assets
could be reduced in the near term.
14. EVENT SUBSEQUENT TO REPORT OF INDEPENDENT ACCOUNTANTS (UNAUDITED)
The litigation with the WSIB described in Note 12 is the subject of a
Settlement Agreement dated as of June 6, 1996 among the Company, Copley and
the WSIB. The settlement is subject to the consummation of the merger between
the Company and MetLife described in Note 13. If the merger has not occurred
by November 5, 1996, the WSIB has the option to void the Settlement Agreement,
in which case the litigation will resume. If the merger has not occurred by
December 31, 1996, the Company has the option to void the Settlement
Agreement, in which case the litigation will resume.
II-36
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Settlement Agreement, MetLife, as successor to the
Company, will make a cash payment and transfer other consideration to WSIB and
WSIB will transfer certain real estate assets to MetLife so as to accomplish
the total disengagement of the real estate relationship between the
Company/Copley and WSIB. MetLife will acquire, for cash, from WSIB certain
real estate at a fair market value of approximately $102.5 million. In
addition, WSIB will receive consideration of approximately $62.5 million from
MetLife and certain real estate interests presently owned by the Company. The
net cost of the settlement to MetLife will be approximately $117 million. Upon
consummation of the settlement, the parties will exchange full releases and
the litigation will be dismissed with full prejudice.
II-37
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- ---------------------
(UNAUDITED) (DERIVED FROM AUDITED
FINANCIAL STATEMENT)
<S> <C> <C>
ASSETS
Bonds.................................... $ 6,453.6 $ 6,079.8
Stocks................................... 126.6 121.4
Unconsolidated subsidiaries.............. 715.9 693.7
Mortgage loans........................... 1,590.6 1,629.3
Real estate.............................. 957.7 951.2
Policy loans............................. 1,342.4 1,350.4
Cash and short-term investments.......... 255.9 651.1
Other invested assets.................... 157.1 128.8
Premiums deferred and uncollected........ 169.4 190.8
Investment income due and accrued........ 280.3 281.5
Separate Account assets.................. 4,285.5 4,091.8
Other assets............................. 107.7 91.3
--------- ---------
Total Assets........................... $16,442.7 $16,261.1
========= =========
LIABILITIES
Reserves for life and health insurance
and annuities........................... $ 8,130.6 $ 8,116.6
Policy proceeds and dividends............ 479.7 466.8
Dividends due to policyholders........... 210.1 210.0
Premium deposit funds.................... 1,714.8 1,865.0
Other policy liabilities................. 91.1 89.7
Investment valuation reserves............ 462.8 429.5
Separate Account liabilities............. 4,258.0 4,064.1
Other liabilities........................ 485.7 395.4
--------- ---------
Total Liabilities...................... 15,832.8 15,637.1
SURPLUS
Special contingency reserves............. 50.0 50.0
Surplus notes............................ 147.6 147.6
Unassigned funds......................... 412.3 426.4
--------- ---------
Total Surplus.......................... 609.9 624.0
--------- ---------
Total Liabilities and Surplus........ $16,442.7 $16,261.1
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-38
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
INCOME
Premiums, annuity considerations and deposit funds..... $ 399.6 $ 429.2
Considerations for supplementary contracts and dividend
accumulations......................................... 67.6 14.9
Net investment income.................................. 154.0 178.2
Other income........................................... 40.3 28.5
--------- ---------
Total................................................ 661.5 650.8
BENEFITS AND EXPENSES
Benefit payments (other than dividends)................ 595.2 610.7
Changes to reserves, deposit funds and other policy
liabilities........................................... (125.0) (155.7)
Insurance expenses and taxes (other than federal income
and capital gains taxes).............................. 97.9 102.4
Net transfers to Separate Accounts..................... 33.9 (8.0)
--------- ---------
Total benefits and expenses before dividends to
policyholders....................................... 602.0 549.4
--------- ---------
Net gain from operations before dividends to
policyholders and federal income taxes................. 59.5 101.4
Dividends to policyholders.............................. 55.1 54.7
--------- ---------
Net gain from operations before federal income taxes.... 4.4 46.7
Federal income taxes (excluding tax on capital gains)... (2.2) 20.5
--------- ---------
Net gain from operations................................ 6.6 26.2
Net realized capital gain (loss)........................ 1.4 (4.4)
--------- ---------
Net Income.............................................. $ 8.0 $ 21.8
========= =========
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF SURPLUS
(IN MILLIONS)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Surplus--beginning of year.............................. $ 624.0 $ 632.2
Net Income.............................................. 8.0 21.8
Other changes to surplus................................ (22.1) (19.4)
--------- ---------
Surplus--end of period.................................. $ 609.9 $ 634.6
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-39
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---------- ---------
(UNAUDITED)
<S> <C> <C>
FROM OPERATING ACTIVITIES
Premiums................................................ $ 419.1 $ 509.4
Net investment income................................... 164.9 177.5
Benefits................................................ (595.2) (645.8)
Net transfers to Separate Accounts...................... 41.4 10.2
Expenses and taxes...................................... (117.3) (104.5)
Policyholder dividends.................................. 52.1 62.8
Net (increase) in policy loans.......................... (8.0) (5.0)
Other income and disbursements, net..................... (27.6) (24.4)
---------- --------
Net cash flow from operating activities............... (70.6) (19.8)
---------- --------
FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid....... 943.9 841.3
Cost of investments acquired............................ (1,273.0) (638.8)
---------- --------
Net cash flow from investing activities............... (329.1) 202.5
---------- --------
FROM FINANCING ACTIVITIES
Issuance of floating rate notes payable................. 11.2 6.7
Repayment of floating rate notes payable................ (6.7) (74.5)
---------- --------
Net cash flow from financing activities............... 4.5 (67.8)
---------- --------
NET CASH FLOW............................................. (395.2) 114.9
Cash and short-term investments
Beginning of year....................................... 651.1 264.7
---------- --------
End of period........................................... $ 255.9 $ 379.6
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-40
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company prepares its statutory financial statements, except as to form,
in accordance with accounting practices prescribed or permitted by the
Division of Insurance of The Commonwealth of Massachusetts. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. Permitted and prescribed
statutory accounting practices were considered generally accepted accounting
principles (GAAP) for mutual life insurance companies for years beginning
before December 15, 1995.
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts. The American Institute of Certified Public
Accountants issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. Neither of these
groups has a role in establishing regulatory accounting practices. These
pronouncements will require mutual life insurance companies to modify their
financial statements in order for them to continue to be in accordance with
generally accepted accounting principles, effective for the Company's 1996
financial statements. The manner in which policy reserves, new business
acquisition costs, asset valuations and the related tax effects are recorded
will change. Management has not determined the impact of such changes on its
financial statements.
The accompanying interim financial statements reflect, in the opinion of the
Company's management, all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation of the interim financial position
and results of operations. Such statements should be read in conjunction with
the audited annual financial statements.
2. CONTINGENCIES
The litigation with the Washington State Investment Board ("WSIB") described
in Note 12 of the 1995 audited financial statements is the subject of a
Settlement Agreement dated as of June 6, 1996 among the Company, Copley Real
Estate Advisors, Inc. and the WSIB. The settlement is subject to the
consummation of the merger between the Company and Metropolitan Life Insurance
Company ("MetLife") described in Note 13 of the 1995 audited financial
statements. If the Merger has not occurred by November 5, 1996, the WSIB has
the option to void the Settlement Agreement, in which case the litigation will
resume. If the merger has not occurred by December 31, 1996, the Company has
the option to void the Settlement Agreement, in which case the litigation will
resume.
Under the terms of the Settlement Agreement, MetLife, as successor to the
Company, will make a cash payment and transfer other consideration to WSIB and
WSIB will transfer certain real estate assets to MetLife so as to accomplish
the total disengagement of the real estate relationship between the
Company/Copley and WSIB. MetLife will acquire, for cash, from WSIB certain
real estate at a fair market value of approximately $102.5 million. In
addition, WSIB will receive consideration of approximately $62.5 million from
MetLife and certain real estate interests presently owned by the Company. The
net cost of the settlement to MetLife will be approximately $117 million. Upon
consummation of the settlement, the parties will exchange full releases and
the litigation will be dismissed with full prejudice.
II-41
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS--(CONTINUED)
3. SUBSEQUENT EVENT
The Company and MetLife have entered into a definitive agreement, effective
as of August 16, 1995, pursuant to which the Company would be merged with and
into MetLife. The closing of the merger is subject to various conditions,
including but not limited to the obtaining of various regulatory approvals and
the approvals of the policyholders of both companies. It is currently
anticipated that the merger will be consummated during the third quarter of
1996.
The carrying value of the Company's assets is based, in part, on the
assumption that they will be held indefinitely as long-term investments. It is
reasonably possible that MetLife could change the investment objectives of the
portfolio subsequent to the merger and dispose of certain assets, particularly
mortgage and real estate holdings. If so, the realizable value of those assets
could be reduced in the near term.
4. ACCOUNTING CHANGE
Subject to the approval of the Massachusetts Division of Insurance, the
Company intends to change the method of accounting it uses to measure
impairments of joint venture real estate. Under the proposed new method, the
Company will carry joint venture real estate at current market values if it
does not expect to recover its book value from future undiscounted cash flows.
The effect of this change is expected to materially decrease unassigned
surplus when the proposed policy is adopted.
II-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metropolitan Life Insurance Company:
We have audited the accompanying balance sheets of Metropolitan Life Insurance
Company (the Company) as of December 31, 1995 and 1994 and the related
statements of operations and surplus and of cash flow for each of the three
years in the period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994
and the results of its operations and its cash flow for each of the three
years in the period ended December 31, 1995 in conformity with accounting
practices prescribed or permitted by insurance regulatory authorities and
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 9, 1996
II-43
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1995 1994
----- ---- ----
<S> <C> <C> <C>
ASSETS
Bonds................................................ 4,11 $ 70,955 $ 65,592
Stocks............................................... 3,4,11 3,646 3,672
Mortgage loans....................................... 3,4,11 14,211 14,524
Real estate.......................................... 9,470 10,417
Policy loans......................................... 11 3,956 3,964
Cash and short-term investments...................... 11 1,923 2,334
Other invested assets................................ 3 2,480 2,262
Premiums deferred and uncollected.................... 1,568 1,250
Investment income due and accrued.................... 1,589 1,440
Separate Account assets.............................. 31,707 25,424
Other assets......................................... 627 298
-------- --------
Total Assets....................................... $142,132 $131,177
======== ========
LIABILITIES AND SURPLUS
Liabilities
Reserves for life and health insurance and annui-
ties................................................ 5,11 $ 76,249 $ 73,204
Policy proceeds and dividends left with the Company.. 11 4,482 3,534
Dividends due to policyholders....................... 1,371 1,407
Premium deposit funds................................ 11 12,891 14,006
Interest maintenance reserve......................... 1,148 881
Other policy liabilities............................. 3,882 3,364
Investment valuation reserves........................ 1,860 1,981
Separate Account liabilities......................... 31,226 25,159
Other liabilities.................................... 2,459 1,337
-------- --------
Total Liabilities.................................. 135,568 124,873
-------- --------
Surplus
Special contingency reserves......................... 754 682
Surplus notes........................................ 10 1,400 700
Unassigned funds..................................... 4,410 4,922
-------- --------
Total Surplus...................................... 6,564 6,304
-------- --------
Total Liabilities and Surplus.................... $142,132 $131,177
======== ========
</TABLE>
See accompanying notes to financial statements.
II-44
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1995 1994 1993
----- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Premiums, annuity considerations and deposit
funds....................................... 5 $19,972 $19,881 $19,442
Considerations for supplementary contracts
and dividend accumulations.................. 2,979 2,879 1,654
Net investment income........................ 7,825 7,143 7,356
Other income................................. 5 156 80 231
------- ------- -------
Total income............................... 30,932 29,983 28,683
------- ------- -------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)...... 25,055 23,533 21,417
Changes to reserves, deposit funds and other
policy liabilities.......................... 321 1,619 (439)
Insurance expenses and taxes (excluding tax
on capital gains)........................... 6 3,160 2,492 2,595
Net transfers to Separate Accounts........... 675 503 3,239
Dividends to policyholders................... 1,520 1,676 1,606
------- ------- -------
Total benefits and expenses................ 30,731 29,823 28,418
------- ------- -------
Net gain from operations...................... 201 160 265
Net realized capital losses................... 3,6 (873) (54) (132)
------- ------- -------
NET (LOSS) INCOME............................. (672) 106 133
SURPLUS ADDITIONS (DEDUCTIONS)
Change in general account net unrealized cap-
ital gains.................................. 3 442 150 131
Change in investment valuation reserves...... 121 (306) (169)
Issuance of surplus notes.................... 10 700 -- 700
Other adjustments--net....................... 1,5 (331) (52) 594
------- ------- -------
NET CHANGE IN SURPLUS......................... 260 (102) 1,389
SURPLUS AT BEGINNING OF YEAR.................. 6,304 6,406 5,017
------- ------- -------
SURPLUS AT END OF YEAR........................ $ 6,564 $ 6,304 $ 6,406
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
II-45
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
---- ---- ----
CASH PROVIDED
Premiums, annuity considerations and deposit funds
received.......................................... $19,662 $19,983 $19,599
Considerations for supplementary contracts and div-
idend
accumulations received............................ 3,051 2,948 1,748
Net investment income received..................... 7,579 6,828 6,931
Other income received.............................. 166 80 134
------- ------- -------
Total receipts................................... 30,458 29,839 28,412
------- ------- -------
Benefits paid (other than dividends)............... 23,939 22,387 20,092
Insurance expenses and taxes paid (excluding tax on
capital gains).................................... 2,337 2,366 2,532
Net cash transfers to Separate Accounts............ 692 524 3,304
Dividends paid to policyholders.................... 1,473 1,684 1,596
Other--net......................................... (1,872) 368 (1,051)
------- ------- -------
Total payments................................... 26,569 27,329 26,473
------- ------- -------
Net cash from operations........................... 3,889 2,510 1,939
Proceeds from long-term investments sold, matured
or repaid after
deducting taxes on capital gains of $102 for 1995,
$60 for 1994
and $546 for 1993................................. 60,790 46,459 55,420
Issuance of surplus notes.......................... 700 -- 700
Other cash provided................................ 370 -- 369
------- ------- -------
TOTAL CASH PROVIDED.............................. 65,749 48,969 58,428
------- ------- -------
CASH APPLIED
Cost of long-term investments acquired............. 65,122 47,845 58,033
Other cash applied................................. 1,038 162 247
------- ------- -------
TOTAL CASH APPLIED............................... 66,160 48,007 58,280
------- ------- -------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS........ (411) 962 148
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF YEAR.................................... 2,334 1,372 1,224
------- ------- -------
END OF YEAR.......................................... $ 1,923 $ 2,334 $ 1,372
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
II-46
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. BUSINESS AND ACCOUNTING POLICIES
Metropolitan Life Insurance Company (the Company) principally provides life
insurance and annuity products and pension, pension-related and investment-
related services to individuals, corporations and other institutions. The
Company and its insurance subsidiaries also provide non-medical health,
disability and property and casualty insurance. Through its non-insurance
subsidiaries, the Company also offers investment management and advisory
services and commercial finance.
The Company's financial statements are prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
New York, which practices currently are considered to be generally accepted
accounting principles for mutual life insurance companies (see Note 12). The
primary interest of insurance regulatory authorities is the ability of the
Company to fulfill its obligations to policyholders; therefore, the financial
statements are oriented to the insured public. Significant accounting policies
applied in preparing the financial statements follow.
INVESTED ASSETS AND RELATED RESERVES
Bonds qualifying for amortization are stated at amortized cost; all other
bonds at prescribed values. Unaffiliated preferred stocks are stated
principally at cost; unaffiliated common stocks are carried at market value.
Mortgage loans are stated principally at their amortized indebtedness. Short-
term investments generally mature within one year and are carried at amortized
cost. Policy loans are stated at unpaid principal balances.
Investments in subsidiaries are stated at equity in net assets and are
included in stocks. Changes in net assets, excluding additional amounts
invested, are included in unrealized capital gains or losses. Dividends from
subsidiaries are reported by the Company as earnings in the year the dividends
are declared. The excess of the purchase prices of non-insurance subsidiaries
over the fair values of the net assets acquired (goodwill) is amortized on a
straight-line basis.
Investment real estate, other than real estate joint ventures and
subsidiaries, is stated at depreciated cost net of non-recourse debt and an
allowance for losses on real estate expected to be disposed of in the near
term. Depreciation is generally calculated by the constant yield method for
real estate purchased prior to December 1990 and the straight-line method if
purchased thereafter. Real estate acquired in satisfaction of debt is valued
at the lower of cost or estimated fair value at date of foreclosure and is
subsequently stated at depreciated cost. Investments in real estate joint
ventures, included in other invested assets, and real estate subsidiaries,
included in stocks, are reported using the equity method and are generally
adjusted to reflect the constant yield method of depreciation for real estate
assets acquired by such entities prior to December 1990.
In 1994, the Company changed to the straight-line method of determining
depreciation on real estate acquired prior to December 1990 if the estimated
fair value of the real estate is less than ninety percent of depreciated cost.
This change had the effect of increasing depreciation expense by approximately
$80 million in 1994.
II-47
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments in non-real estate partnerships are included in other invested
assets and are accounted for using the equity method. The carrying value
generally reflects the Company's share of unrealized gains and losses relating
to the market value of publicly traded common stocks held by the partnerships.
Impairments of individual investments that are considered to be other than
temporary are recognized when incurred.
Mandatory reserves have been established for general account investments in
accordance with guidelines prescribed by insurance regulatory authorities.
Such reserves consist of an Asset Valuation Reserve (AVR) for all invested
assets and an Interest Maintenance Reserve (IMR), which defers the recognition
of realized capital gains and losses (net of income tax) attributable to
interest rate fluctuations on fixed income investments over the estimated
remaining duration of the investments sold. Prior to 1994, the Company also
established voluntary investment valuation reserves for certain general
account investments. Changes to the AVR and voluntary investment reserves are
reported as direct additions to or deductions from surplus. Transfers to the
IMR are deducted from realized capital gains; IMR amortization is included in
net investment income.
Net realized capital gains or losses are presented net of federal capital
gains tax or benefit, respectively, and transfers to the IMR.
POLICY RESERVES
Reserves for permanent plans of individual life insurance sold after 1959,
universal life plans and certain term plans sold after 1982 are computed
principally on the Commissioners' Reserve Valuation Method. Reserves for other
life insurance policies are computed on the net level premium method. Reserves
for individual annuity contracts are computed on the net level premium method,
the net single premium method or the Commissioners' Annuity Reserve Valuation
Method, as appropriate. Reserves for group annuity contracts are computed on
the net single premium method. The reserves are based on mortality, morbidity
and interest rate assumptions prescribed by New York State Insurance Law. Such
reserves are sufficient to provide for contractual surrender values.
Periodically to reflect changes in circumstances, the Company may change the
assumptions, methodologies or procedures used to calculate reserves. During
1993, the Company and certain of its wholly-owned life insurance subsidiaries
made certain changes which increased the Company's surplus by $667 million
(substantially all of which related to interest rate changes).
INCOME AND EXPENSES
Premiums are recognized over the premium-paying period. Investment income is
reported as earned. Expenses, including policy acquisition costs and federal
income taxes, are charged to operations as incurred.
During 1995, the Company recorded a restructuring charge of $72 million
related primarily to the consolidation of office space leased for
administration and agency sales offices. The Company anticipates additional
restructuring charges over the next few years.
SEPARATE ACCOUNT OPERATIONS
Investments held in the Separate Accounts (stated at market value) and
liabilities of the Separate Accounts (including participants' corresponding
equity in the Separate Accounts) are reported separately as assets and
liabilities. The Separate Accounts' operating results are reflected in the
changes to these assets and liabilities.
II-48
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with accounting
practices prescribed or permitted by regulatory authorities and generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
2. NOTE SUBSEQUENT TO INDEPENDENT AUDITOR'S REPORT--MERGER
Effective August 30, 1996, the New England Mutual Life Insurance Company was
merged with and into the Company. The Company is the surviving entity. Pro
forma selected financial information giving effect to the merger are included
in the Statement of Additional Information in the registration statement.
3. UNCONSOLIDATED SUBSIDIARIES AND OTHER AFFILIATES
At December 31, 1995 and for the year then ended, subsidiary assets,
liabilities and revenues were $23,008 million, $20,393 million and $4,588
million, respectively. Comparable amounts for 1994 were $21,476 million,
$18,905 million and $4,715 million, respectively. Subsidiary revenues for 1993
were $4,525 million. Dividends from subsidiaries amounted to $558 million,
$186 million and $175 million in 1995, 1994 and 1993, respectively.
Unamortized goodwill was $129 million at December 31, 1994. There was no
unamortized goodwill at December 31, 1995.
The Company incurs charges on behalf of its subsidiaries which are
reimbursed pursuant to agreements for shared use of property, personnel and
facilities. Charges under such agreements were approximately $194 million,
$307 million and $355 million in 1995, 1994 and 1993, respectively.
The Company's net equity in joint ventures and other partnerships was $2,424
million and $2,250 million at December 31, 1995 and 1994, respectively. The
Company's share of income from such entities was $97 million, $26 million and
$76 million for 1995, 1994 and 1993, respectively.
Many of the Company's real estate joint ventures have loans with the
Company. The carrying values of such mortgages were $1,054 million and $1,372
million at December 31, 1995 and 1994, respectively. The Company had other
loans outstanding to its affiliates with carrying values of $2,599 million and
$2,073 million at December 31, 1995 and 1994, respectively.
In January 1995, the Company and The Travelers Insurance Company (Travelers)
contributed their respective group medical health care benefits businesses to
a corporate joint venture, The MetraHealth Companies, Inc. (MetraHealth). In
October 1995, the Company and Travelers sold their investments in MetraHealth
to a non-affiliated health care management services company. For its interest
in MetraHealth, a subsidiary of the Company received $485 million face amount
of shares of redeemable preferred stock of the purchaser, $276 million in cash
and rights to additional consideration based on the 1995 earnings of
MetraHealth. The transaction resulted in post-tax income of $443 million to
the Company, including an amount based on the 1995 estimated financial results
of
II-49
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MetraHealth. The Company also has the right to receive up to an additional
$169 million in cash for each of 1996 and 1997, based on the consolidated
financial results of the purchaser for each of such years.
During 1995, the Company sold Century 21 Real Estate Corporation (real
estate brokerage operation), Metmor Financial Inc. (mortgage banking) and
Metropolitan Trust Company of Canada (trust operation and mortgage
administration) for $127 million, $56 million and $41 million, respectively,
resulting in pre-tax realized capital losses of $167 million, $247 million and
$86 million, respectively. The sales also resulted in $452 million of
unrealized capital gains representing the reversal of prior period unrealized
losses relating to the subsidiaries.
II-50
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS
DEBT SECURITIES
The carrying value, gross unrealized gain (loss) and estimated fair value of
bonds and redeemable preferred stocks (debt securities), by category, as of
December 31, 1995 and 1994 are shown below.
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAIN (LOSS) VALUE
-------- ------ ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agen-
cies...................................... $12,871 $1,556 $ (2) $14,425
States and political subdivisions.......... 1,865 582 (2) 2,445
Foreign governments........................ 1,871 221 -- 2,092
Corporate.................................. 29,992 1,872 (105) 31,759
Mortgage-backed securities................. 18,888 749 (27) 19,610
Other...................................... 5,468 336 (16) 5,788
------- ------ ------- -------
Total bonds................................ $70,955 $5,316 $ (152) $76,119
======= ====== ======= =======
Redeemable preferred stocks................ $ 39 $ -- $ (3) $ 36
======= ====== ======= =======
DECEMBER 31, 1994:
Bonds:
U. S. Treasury securities and obligations
of U.S. government corporations and agen-
cies...................................... $ 9,807 $ 322 $ (546) $ 9,583
States and political subdivisions.......... 1,483 69 (21) 1,531
Foreign governments........................ 1,931 26 (60) 1,897
Corporate.................................. 31,262 291 (1,682) 29,871
Mortgage-backed securities................. 17,485 251 (851) 16,885
Other...................................... 3,624 18 (215) 3,427
------- ------ ------- -------
Total bonds................................ $65,592 $ 977 $(3,375) $63,194
======= ====== ======= =======
Redeemable preferred stocks................ $ 44 $ -- $ (14) $ 30
======= ====== ======= =======
</TABLE>
The carrying value and estimated fair value of bonds, by contractual
maturity, at December 31, 1995 are shown below. Bonds not due at a single
maturity date have been included in the table in the year of final maturity.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
II-51
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less...................................... $ 2,171 $ 2,191
Due after one year through five years........................ 17,277 17,717
Due after five years through ten years....................... 17,188 18,381
Due after ten years.......................................... 15,431 18,220
------- -------
Subtotal..................................................... 52,067 56,509
Mortgage-backed securities................................... 18,888 19,610
------- -------
Total........................................................ $70,955 $76,119
======= =======
</TABLE>
Proceeds from the sales of debt securities during 1995, 1994 and 1993 were
$50,831 million, $36,401 million and $50,395 million, respectively. During
1995, 1994 and 1993, respectively, gross gains of $814 million, $577 million
and $1,316 million, and gross losses of $352 million, $561 million and $96
million were realized on those sales. Realized investment gains and losses are
determined by specific identification.
MORTGAGE LOANS
Mortgage loans are collateralized by properties located throughout the
United States and Canada. Approximately 15 percent and 9 percent of the
properties are located in California and Illinois, respectively. Generally,
the Company (as the lender) requires that a minimum of one-fourth of the
purchase price of the underlying real estate be paid by the borrower.
As of December 31, 1995 and 1994, the mortgage loan investments were
categorized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Office Buildings............................................... 32% 36%
Retail......................................................... 18% 17%
Residential.................................................... 20% 21%
Agricultural................................................... 20% 18%
Other.......................................................... 10% 8%
--- ---
Total.......................................................... 100% 100%
=== ===
</TABLE>
FINANCIAL INSTRUMENTS
The Company has a securities lending program whereby large blocks of
securities are loaned to third parties, primarily major brokerage firms.
Company policy requires a minimum of 102 percent of the fair value of the
loaned securities to be separately maintained as collateral for the loans. The
collateral is recorded in memorandum records and not reflected in the
accompanying balance sheets. To further minimize the credit risks related to
this lending program, the Company regularly monitors the financial condition
of counterparties to these agreements.
II-52
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During the normal course of business, the Company agrees with independent
parties to purchase or sell bonds over fixed or variable periods of time. The
off-balance sheet risks related to changes in the quality of the underlying
bonds are mitigated by the fact that commitment periods are generally short in
duration and provisions in the agreements release the Company from its
commitments in case of significant changes in the financial condition of the
independent party or the issuer of the bond.
The Company engages in a variety of derivative transactions with respect to
the general account. Those derivatives, such as forwards, futures, options,
foreign exchange agreements and swaps, which do not themselves generate
interest or dividend income, are acquired or sold in order to hedge or reduce
risks applicable to assets held, or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. The Company does not engage
in trading of these derivatives.
In 1995 and 1994, the Company engaged in three primary derivatives
strategies. The Company entered into a number of anticipatory hedges using
forwards to limit the interest rate exposures of investments in debt
securities expected to be acquired within one year. The Company also hedged a
number of investments in debt securities denominated in foreign currencies by
executing swaps and forwards to ensure a United States dollar rate of return.
In addition, the Company purchased a limited number of interest rate caps to
hedge against rising interest rates on a portfolio of assets which the Company
purchased to match the liabilities it incurred.
Income and expenses related to derivatives used to hedge or manage risks are
recorded on the accrual basis as an adjustment to the yield of the related
securities over the periods covered by the derivative contracts. Gains and
losses relating to early terminations of interest rate swaps used to hedge or
manage interest rate risk are deferred and amortized over the remaining period
originally covered by the swap. Gains and losses relating to derivatives used
to hedge the risks associated with anticipated transactions are deferred and
utilized to adjust the basis of the transaction once it has closed. If it is
determined that the transaction will not close, such gains and losses are
included in realized capital gains and losses.
ASSETS ON DEPOSIT
As of December 31, 1995 and 1994, the Company had assets on deposit with
regulatory agencies of $5,281 million and $5,145 million, respectively.
5. REINSURANCE AND OTHER INSURANCE TRANSACTIONS
In the normal course of business, the Company assumes and cedes reinsurance
with other insurance companies.
The Company acquired, in part through reinsurance effective in January 1995,
the group life, dental, disability, accidental death and dismemberment, vision
and long-term care insurance businesses from Travelers and certain of its
subsidiaries for $403 million. Commissions of $142 million and $4 million were
charged to earnings during 1995 and 1994, respectively, and considerations in
excess of commissions of $208 million and $49 million were recorded as a
direct charge to surplus in 1995 and 1994, respectively. In January, 1995, the
Company received assets with a fair market value equal to the $1,565 million
of liabilities assumed under the reinsurance agreements. The reinsured
businesses convert to Company contracts at policy anniversary date.
During 1995, the Company entered into reinsurance agreements with
MetraHealth to facilitate the transfer of certain of its group medical health
care business to MetraHealth.
II-53
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also has reinsurance agreements with certain of its life
insurance subsidiaries. Reserves for insurance assumed pursuant to these
agreements are included in reserves for life and health insurance and
annuities and amounted to $2,143 million and $1,193 million at December 31,
1995 and 1994, respectively.
In 1993, the Company assumed $1,540 million of life insurance and annuity
reserves of a New York life insurance company under rehabilitation and
received assets having a fair value equal to the reserves assumed.
The financial statements are shown net of ceded reinsurance. The amounts
related to reinsurance agreements, including agreements described above but
excluding certain agreements with non-affiliates for which the Company
provides administrative services, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Reinsurance premiums assumed................................. $890 $237 $264
Reinsurance ceded:
Premiums................................................... 457 77 86
Other income............................................... 26 1 3
Reduction in insurance liabilities (at December 31)........ 71 31 28
</TABLE>
A contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations.
Activity in the liability for unpaid group accident and health policy and
contract claims is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1................................. $1,708 $1,588 $1,517
Less reinsurance recoverables...................... 1 1 1
------ ------ ------
Net balance at January 1............................. 1,707 1,587 1,516
------ ------ ------
Incurred related to:
Current year....................................... 2,424 1,780 1,797
Prior years........................................ (23) (7) (40)
------ ------ ------
Total incurred....................................... 2,401 1,773 1,757
------ ------ ------
Paid related to:
Current year....................................... 1,464 1,260 1,306
Prior years........................................ 417 393 380
------ ------ ------
Total paid........................................... 1,881 1,653 1,686
------ ------ ------
Net balance at December 31........................... 2,227 1,707 1,587
Plus reinsurance recoverables...................... 93 1 1
------ ------ ------
Balance at December 31............................... $2,320 $1,708 $1,588
====== ====== ======
</TABLE>
II-54
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with certain
affiliates. The consolidating companies have executed a tax allocation
agreement. Under this agreement, the federal income tax provision is computed
on a separate return basis. Members receive reimbursement to the extent that
their losses and other credits result in a reduction of the current year's
consolidated tax liability.
Federal income tax expense has been calculated in accordance with the
provisions of the Internal Revenue Code, as amended (the Code). Under the
Code, the amount of federal income tax expense includes a tax on the Company's
surplus calculated by a prescribed formula that incorporates a differential
earnings rate between stock and mutual life insurance companies. In 1995, the
Company changed its calculation of surplus tax which resulted in an increase
in 1995 federal income tax expense of $95 million. Had such change occurred
prior to 1993, the Company's insurance expenses and taxes (excluding tax on
capital gains) and net loss for the year ended December 31, 1995 would have
been $2,758 million and $270 million, respectively; the Company's surplus,
insurance expenses and taxes (excluding tax on capital gains) and net loss at
and for the year ended December 31, 1994 would have been $5,902 million,
$2,894 million and $296 million, respectively; and the Company's insurance
expenses and taxes (excluding tax on capital gains) and net income for the
year ended December 31, 1993 would have been $2,702 million and $26 million,
respectively. The change would have had no effect on December 31, 1993 surplus
and surplus at December 31, 1992 would have been $5,124 million.
Total federal income taxes on operations and realized capital gains of $479
million, $192 million and $596 million were incurred in 1995, 1994 and 1993,
respectively.
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has defined benefit pension plans covering all eligible
employees and sales representatives of the Company and certain of its
subsidiaries. The Company is both the sponsor and administrator of these
plans. Retirement benefits are based on years of credited service and final
average earnings' history. The Company's funding policy is to make the minimum
contribution required by the Employee Retirement Income Security Act of 1974.
Components of the net periodic pension (credit) cost for the years ended
December 31, 1995, 1994 and 1993 for the defined benefit qualified and non-
qualified pension plans are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................... $ 58 $ 88 $ 71
Interest cost on projected benefit obligation.......... 215 209 191
Return on assets....................................... (262) 15 (380)
Net amortization and deferrals......................... (33) (298) 110
----- ----- -----
Net periodic pension (credit) cost..................... $ (22) $ 14 $ (8)
===== ===== =====
</TABLE>
II-55
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The assumed long-term rate of return on assets used in determining the net
periodic pension (credit) cost was 9.5 percent in 1995 and 8.5 percent in 1994
and 1993. The Company is recognizing the unrecognized net asset at transition,
attributable to the adoption of Statement of Financial Accounting Standards
No. 87, Employers' Accounting for Pensions, in 1993, over the average
remaining service period at the transition date of employees expected to
receive benefits under the pension plans.
The funded status of the qualified and non-qualified defined benefit pension
plans and a comparison of the accumulated benefit obligation, plan assets and
projected benefit obligation at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested.................................................... $(2,724) $(2,266)
Non vested................................................ (43) (47)
------- -------
Accumulated benefit obligation.............................. $(2,767) $(2,313)
======= =======
Projected benefit obligation................................ $(3,094) $(2,676)
Plan assets at contract value............................... 3,286 2,900
------- -------
Plan assets in excess of projected benefit obligation....... 192 224
Unrecognized prior service cost............................. 73 92
Unrecognized net loss from past experience different from
that assumed............................................... 79 33
Unrecognized net asset at transition........................ (326) (365)
Adjustment required to recognize minimum liability.......... (19) --
------- -------
Accrued pension cost at December 31......................... $ (1) $ (16)
======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25 percent for 1995, 8.5
percent for 1994 and 7.5 percent for 1993 in the United States and 8.0 percent
for 1995, 7.25 percent for 1994 and 7.0 percent for 1993 in Canada. The
weighted average assumed rate of increase in future compensation levels was
4.5 percent in 1995 and 5.0 percent in 1994 and 1993. In addition, several
other factors, such as expected retirement dates and mortality, enter into the
determination of the actuarial present value of the accumulated benefit
obligation.
The pension plans' assets are principally investment contracts issued by the
Company.
During 1995, the Company recognized a pension plan curtailment gain before
income tax of $8 million. This gain relates to the transfer of Company group
medical health care business personnel to MetraHealth.
SAVINGS AND INVESTMENT PLAN
The Company sponsors a savings and investment plan available for
substantially all employees under which the Company matches a portion of
employee contributions. During 1995, 1994 and 1993, the Company contributed
$34 million, $42 million and $48 million, respectively, to the plan.
II-56
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER POSTRETIREMENT BENEFITS
The Company also provides certain postretirement health care and life
insurance benefits for retired employees through insurance contracts.
Substantially all of the Company's employees may, in accordance with the plans
applicable to such benefits, become eligible for these benefits if they attain
retirement age, with sufficient service, while working for the Company.
The costs of non-pension postretirement benefits are recognized on an
accrual basis in accordance with guidelines prescribed by insurance regulatory
authorities. Such guidelines require the recognition of a postretirement
benefit obligation for current retirees and fully eligible or vested
employees. As prescribed by the guidelines, the Company has elected to
recognize over a period of twenty years the unrecognized postretirement
benefit asset and obligation (net asset and obligation at transition) in
existence on January 1, 1993 (effective date of guidelines).
The following table sets forth the postretirement health care and life
insurance plans' combined status reconciled with the amounts included in the
Company's balance sheets at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
---------- ----------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligations of retirees
and fully eligible
participants.................... $(295) $(776) $(262) $(787)
Plan assets (Company insurance
contracts) at contract value.... 397 411 393 358
----- ----- ----- -----
Plan assets in excess of (less
than) accumulated postretirement
benefit obligation.............. 102 (365) 131 (429)
Unrecognized net loss (gain) from
past experience different from
that assumed and from changes in
assumptions..................... 53 (83) (6) (44)
Prior service cost not yet
recognized in net periodic
retirement benefit cost......... (5) -- (5) --
Unrecognized (asset) obligation
at transition................... (102) 438 (108) 464
----- ----- ----- -----
Prepaid (Accrued) non-pension
postretirement benefit cost at
December 31..................... $ 48 $ (10) $ 12 $ (9)
===== ===== ===== =====
</TABLE>
The components of the net periodic non-pension postretirement benefit cost
for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................. $ 26 $ 31 $ 32
Interest cost on accumulated postretirement benefit
obligation.............................................. 74 76 87
Return on plan assets (Company insurance contracts)...... (61) (37) (36)
Amortization of transition asset and obligation.......... 18 18 20
Net amortization and deferrals........................... (4) (10) (17)
---- ---- ----
Net periodic non-pension postretirement benefit cost..... $ 53 $ 78 $ 86
==== ==== ====
</TABLE>
II-57
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The assumed health care cost trend rate used in measuring the accumulated
non-pension postretirement benefit obligation was 10.0 percent in 1995, 11.0
percent in 1994 and 12.0 percent in 1993, gradually decreasing to 5.25
percent, 6.5 percent and 5.5 percent, respectively, over twelve years. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent, 8.5 percent, and 7.5
percent at December 31, 1995, 1994 and 1993, respectively.
If the health care cost trend rate assumptions were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1995,
1994 and 1993 would be increased 9.0 percent, 7.1 percent, and 7.2 percent,
respectively. The effect of this change on the sum of the service and interest
cost components of the net periodic postretirement benefit cost for the years
ended December 31, 1995, 1994 and 1993 would be an increase of 11.0 percent,
7.9 percent and 7.8 percent, respectively.
8. LEASES
LEASE INCOME
During 1995, 1994 and 1993, the Company received $1,742 million, $1,786
million and $1,482 million, respectively, in lease income related to its
investment real estate. In accordance with standard industry practice, certain
of the Company's lease agreements with retail tenants result in income that is
contingent on the level of the tenants' sales revenues.
LEASE EXPENSE
The Company has entered into various lease agreements for office space, data
processing and other equipment. Rental expense under such leases was $171
million, $193 million and $214 million for the years ended December 31, 1995,
1994 and 1993, respectively. Future gross minimum rental payments under non-
cancelable leases, including those leases for which the Company recorded a
restructuring charge in 1995, are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1996............................................. $107
1997............................................. 82
1998............................................. 66
1999............................................. 48
2000............................................. 32
Thereafter....................................... 53
----
Total............................................ $388
====
</TABLE>
9. OTHER COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has entered into certain arrangements in the course of its
business which, under certain circumstances, may impose significant financial
obligations on the Company. The Company has entered into a support agreement
with a subsidiary whereby the Company has agreed to maintain the subsidiary's
net worth at one dollar or more. At December 31, 1995, the subsidiary's
assets, which consist principally of loans to affiliates, amounted to $3,309
million and its net worth amounted to $11 million.
II-58
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company has entered into arrangements with certain of its
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. The Company has also entered into a support arrangement with respect
to the reinsurance obligations of a subsidiary.
No material payments have been made under these arrangements and it is the
opinion of management that any payments required pursuant to these
arrangements would not likely have a material adverse effect on the Company's
financial position.
LITIGATION
In 1994, the Company entered into consent agreements (involving the payment
of fines and policyholder restitution payments) with state authorities,
including the insurance departments of all states, arising out of regulatory
proceedings and investigations relating to alleged improper practices in the
sale of individual life insurance. Litigation relating to the Company's
individual life insurance sales practices (including individual actions and
purported class actions) has also been instituted by or on behalf of
policyholders and others, and additional litigation relating to the Company's
sales practices may be commenced in the future. In addition, an investigation
by the Office of the United States Attorney for the Middle District of
Florida, in conjunction with a grand jury, into certain of the sales practices
that were the focus of the state investigations is ongoing. Various
litigation, claims and assessments against the Company, in addition to the
aforementioned, have arisen in the course of the Company's business,
operations and activities.
In certain of the matters referred to above, including actions with multiple
plaintiffs, very large and/or indeterminate amounts, including punitive and
treble damages, are sought. While it is not feasible to predict or determine
the ultimate outcome of all pending investigations and legal proceedings or to
make a meaningful estimate of the amount or range of loss that could result
from an unfavorable outcome in all such matters, it is the opinion of the
Company's management that their outcome, after consideration of the provisions
made in the Company's financial statements, is not likely to have a material
adverse effect on the Company's financial position.
10. SURPLUS NOTES
The carrying values of surplus notes at December 31, 1995 and 1994 are shown
below:
<TABLE>
<CAPTION>
1995 1994
------- ------
(IN MILLIONS)
<S> <C> <C>
6.30% surplus notes scheduled to mature on November 1,
2003.................................................... $ 400 $ 400
7.00% surplus notes scheduled to mature on November 1,
2005.................................................... 250 --
7.70% surplus notes scheduled to mature on November 1,
2015.................................................... 200 --
7.45% surplus notes scheduled to mature on November 1,
2023.................................................... 300 300
7.80% surplus notes scheduled to mature on November 1,
2025.................................................... 250 --
------- -----
Total.................................................. $ 1,400 $ 700
======= =====
</TABLE>
Interest on the Company's surplus notes is scheduled to be paid semi-
annually; principal payments are scheduled to be paid upon maturity. Such
payments of interest and principal may be made only with the prior approval of
the Superintendent of Insurance of the State of New York (Superintendent).
II-59
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Subject to the prior approval of the Superintendent, the 7.45 percent
surplus notes may be redeemed, as a whole or in part, at the election of the
Company at any time on or after November 1, 2003. During 1995 and 1994, the
Company obtained Superintendent approval for and made total interest payments
of $48 million on the surplus notes.
11. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below
have been determined by the Company using market information available as of
December 31, 1995 and 1994 and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
The estimates presented below are not necessarily indicative of the amounts
the Company could have realized in a market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1995:
ASSETS
Bonds........................................... $70,955 $76,119
Stocks, including subsidiaries.................. 3,646 3,608
Mortgage loans.................................. 14,211 14,818
Policy loans.................................... 3,956 4,023
Cash and short-term investments................. 1,923 1,923
LIABILITIES
Investment contracts included in:
Reserves for life and health insurance and an-
nuities....................................... 18,137 18,211
Policy proceeds and dividends left with the
Company....................................... 4,482 4,488
Premium deposit funds.......................... 12,891 13,322
OTHER FINANCIAL INSTRUMENTS
Bond purchase agreements........................ $ 601 3.3
Bond sales agreements........................... 80 (0.5)
Interest rate swaps............................. 280 1.5
Interest rate caps.............................. 231 --
Foreign currency swaps.......................... 89 4.4
Foreign currency forwards....................... 10 --
Covered call options............................ 25 (1.9) 1.9
Futures contracts............................... 1,402 (19.5) --
Unused lines of credit.......................... 1,600 1.1
</TABLE>
II-60
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1994:
ASSETS
Bonds........................................... $65,592 $63,194
Stocks, including subsidiaries.................. 3,672 3,660
Mortgage loans.................................. 14,524 14,269
Policy loans.................................... 3,964 3,645
Cash and short-term investments................. 2,334 2,334
LIABILITIES
Investment contracts included in:
Reserves for life and health insurance and an-
nuities....................................... 16,354 16,370
Policy proceeds and dividends left with the
Company....................................... 3,534 3,519
Premium deposit funds.......................... 14,006 13,997
OTHER FINANCIAL INSTRUMENTS
Bond purchase agreements........................ $2,755 4.1
Bond sales agreements........................... 1,450 0.8
Interest rate swaps............................. 272 (7.1)
Interest rate caps.............................. 185 (0.1)
Foreign currency swaps.......................... 36 (0.4)
Foreign currency forwards....................... 4 (0.2) (0.1)
Covered call options............................ 25 (1.9) 1.9
Unused lines of credit.......................... 1,450 1.0
</TABLE>
For bonds that are publicly traded, estimated fair value was obtained from
an independent market pricing service. Publicly traded bonds represented
approximately 78 percent of the carrying value and estimated fair value of the
total bonds as of December 31, 1995 and 77 percent of the carrying value and
estimated fair value of the total bonds as of December 31, 1994. For all other
bonds, estimated fair value was determined by management, based on interest
rates, maturity, credit quality and average life. Included in bonds are loaned
securities with estimated fair values of $8,148 million and $5,154 million at
December 31, 1995 and 1994, respectively. Estimated fair values of stocks were
generally based on quoted market prices, except for investments in common
stock of subsidiaries, which are based on equity in net assets of the
subsidiaries. Estimated fair values of mortgage loans were generally based on
discounted projected cash flows using interest rates offered for loans to
borrowers with comparable credit ratings and for the same maturities.
Estimated fair values of policy loans were based on discounted projected cash
flows using U.S. Treasury rates to approximate interest rates and Company
experience to project patterns of loan repayment. For cash and short-term
investments, the carrying amount is a reasonable estimate of fair value.
Included in reserves for life and health insurance and annuities, policy
proceeds and dividends left with the Company and premium deposit funds are
amounts classified as investment contracts representing policies or contracts
that do not incorporate significant insurance risk. The fair values for these
liabilities are estimated using discounted projected cash flows, based on
interest rates being
II-61
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
offered for similar contracts with maturities consistent with those remaining
for the contracts being valued. Policy proceeds and dividends left with the
Company also include other liabilities without defined durations. The
estimated fair value of such liabilities, which generally are of short
duration or have periodic adjustments of interest rates, approximates their
carrying value.
Estimated fair values of bond purchase/sale agreements were based on fees
charged to enter into similar arrangements or on the estimated cost to
terminate the outstanding agreements. For interest rate and foreign currency
swaps, interest rate caps, interest rate futures, foreign currency forwards,
futures contracts and covered call options, estimated fair value is the amount
at which the contracts could be settled based on estimates obtained from
dealers. The Company had unused lines of credit under agreements with various
banks. The estimated fair values of unused lines of credit were based on fees
charged to enter into similar agreements.
12. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR MUTUAL LIFE INSURANCE
COMPANIES
The Company, as a mutual life insurance company, prepares its financial
statements in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of New York (statutory financial
statements) which currently are considered to be generally accepted accounting
principles (GAAP) for mutual life insurance companies. However, the Financial
Accounting Standards Board (FASB) has issued certain pronouncements effective
for 1996 annual financial statements and thereafter. Such pronouncements will
no longer allow statutory financial statements to be described as being
prepared in conformity with GAAP. Upon the effective date of the
pronouncements, in order for their financial statements to be described as
being prepared in conformity with GAAP, mutual life insurance companies will
be required to adopt all applicable accounting principles promulgated by the
FASB in any general purpose financial statements that they may issue. The
Company will issue 1996 general purpose financial statements reflecting the
adoption of all applicable GAAP pronouncements. However, the Company has not
finalized the quantification of the effects of the application of the
pronouncements on its financial statements.
II-62
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Bonds........................................ $ 71,355 $ 70,955
Stocks....................................... 3,752 3,646
Mortgage loans............................... 14,479 14,211
Real estate.................................. 9,047 9,470
Policy loans................................. 3,964 3,956
Cash and short-term investments.............. 1,476 1,923
Other invested assets........................ 2,442 2,480
Premiums deferred and uncollected............ 1,530 1,568
Investment income due and accrued............ 1,545 1,589
Separate Account assets...................... 31,935 31,707
Other assets................................. 701 627
-------- --------
Total Assets............................... $142,226 $142,132
======== ========
LIABILITIES AND SURPLUS
Liabilities
Reserves for life and health insurance and
annuities................................... $ 76,246 $ 76,249
Policy proceeds and dividends left with the
Company..................................... 4,654 4,482
Dividends due to policyholders............... 1,363 1,371
Premium deposit funds........................ 11,897 12,891
Interest maintenance reserve................. 1,199 1,148
Other policy liabilities..................... 3,940 3,882
Investment valuation reserves................ 1,951 1,860
Separate Account liabilities................. 31,441 31,226
Other liabilities............................ 3,088 2,459
-------- --------
Total Liabilities.......................... 135,779 135,568
-------- --------
Surplus
Special contingency reserves................. 768 754
Surplus notes................................ 1,400 1,400
Unassigned funds............................. 4,279 4,410
-------- --------
Total Surplus.............................. 6,447 6,564
-------- --------
Total Liabilities and Surplus............ $142,226 $142,132
======== ========
</TABLE>
See accompanying notes to interim financial statements.
II-63
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------ ------
(UNAUDITED)
<S> <C> <C>
INCOME
Premiums, annuity considerations and deposit funds........... $4,523 $5,986
Considerations for supplementary contracts and dividend accu-
mulations................................................... 836 762
Net investment income........................................ 1,822 1,746
Other income................................................. 111 43
------ ------
Total income............................................... 7,292 8,537
------ ------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)...................... 7,024 7,453
Changes to reserves, deposit funds and other policy liabili-
ties........................................................ (907) (1)
Insurance expenses and taxes (other than federal income and
capital gains taxes)........................................ 678 695
Net transfers to Separate Accounts........................... 42 87
------ ------
Total benefits and expenses before dividends to policyhold-
ers....................................................... 6,837 8,234
------ ------
Net gain from operations before dividends to policyholders and
federal income taxes......................................... 455 303
Dividends to policyholders.................................... 404 436
------ ------
Net gain (loss) from operations before federal income taxes... 51 (133)
Federal income taxes (excluding tax on capital gains)......... 13 91
------ ------
Net gain (loss) from operations............................... 38 (224)
Net realized capital losses................................... (74) (9)
------ ------
NET LOSS...................................................... (36) (233)
Change in general account net unrealized capital gains........ 8 17
Change in investment valuation reserves....................... (91) (77)
Other adjustments--net........................................ 2 (190)
------ ------
NET CHANGE IN SURPLUS......................................... (117) (483)
SURPLUS AT BEGINNING OF PERIOD................................ 6,564 6,304
------ ------
SURPLUS AT END OF PERIOD...................................... $6,447 $5,821
====== ======
</TABLE>
See accompanying notes to interim financial statements.
II-64
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------- -------
(UNAUDITED)
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit funds
received.................................................. $ 4,533 $ 5,693
Considerations for supplementary contracts and dividend
accumulations received.................................... 849 779
Net investment income received............................. 1,780 1,600
Other income received...................................... 102 19
------- -------
Total receipts........................................... 7,264 8,091
------- -------
Benefits paid (other than dividends)....................... 6,789 6,887
Insurance expenses and taxes paid (other than federal
income and capital gains taxes)........................... 641 685
Net cash transfers to Separate Accounts.................... 57 86
Dividends paid to policyholders............................ 373 357
Federal income tax (recoveries) payments (excluding tax on
capital gains)............................................ 272 (29)
Other--net................................................. 278 (1,455)
------- -------
Total payments........................................... 8,410 6,531
------- -------
Net cash (used by) from operations......................... (1,146) 1,560
Proceeds from long-term investments sold, matured or repaid
(after deducting tax (benefit) expense on capital (losses)
gains of $(46) for 1996 and $3 for 1995).................. 20,694 17,497
Other cash provided........................................ 1,072 795
------- -------
TOTAL CASH PROVIDED...................................... 20,620 19,852
------- -------
CASH APPLIED
Cost of long-term investments acquired..................... 20,732 18,597
Other cash applied......................................... 335 683
------- -------
TOTAL CASH APPLIED....................................... 21,067 19,280
------- -------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS................ (447) 572
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF PERIOD........................................ 1,923 2,334
------- -------
END OF PERIOD.............................................. $ 1,476 $ 2,906
======= =======
</TABLE>
See accompanying notes to interim financial statements.
II-65
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim financial statements of Metropolitan Life Insurance
Company (the Company) are prepared on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of New York
(statutory financial statements). The accompanying financial statements do not
include all of the footnote disclosures required for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying interim financial statements should be read in
conjunction with the Company's annual financial statements.
Results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996.
The Financial Accounting Standards Board (FASB) has issued certain
pronouncements relating to mutual life insurance companies effective for years
beginning after December 15, 1995 annual financial statements and thereafter.
Such pronouncements will no longer allow statutory financial statements to be
described as being prepared in conformity with generally accepted accounting
principles (GAAP). Upon the effective date of the pronouncements, in order for
their financial statements to be described as being prepared in conformity
with GAAP, mutual life insurance companies will be required to adopt all
applicable accounting principles promulgated by the FASB in any general
purpose financial statements that they may issue. The Company will issue 1996
general purpose financial statements reflecting the adoption of all applicable
GAAP pronouncements and will retroactively restate prior period financial
statements to give effect to the application of such pronouncements. If the
Company issues general purpose statutory financial statements for 1996 and
reissues statutory financial statements for prior years, the independent
auditor will be able to express an opinion regarding the presentation of any
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Insurance Department of the State of New York
but will be required to issue an adverse or qualified opinion on any statutory
financial statements regarding their presentation in conformity with GAAP. The
Company has not finalized the quantification of the effects of the application
of the GAAP pronouncements on its financial statements.
2. INVESTMENT VALUATION AND INTEREST MAINTENANCE RESERVES
Mandatory reserves have been established for general account investments in
accordance with guidelines prescribed by insurance regulatory authorities.
Such reserves consist of an Asset Valuation Reserve (AVR) for all invested
assets and Interest Maintenance Reserve (IMR), which defers the recognition of
realized capital gains and losses (net of income tax) attributable to interest
rate fluctuations on fixed income investments over the estimated remaining
duration of the investments sold. The AVR and IMR balances reflect the year to
date activity and a pro rata share of the estimated annual contribution and
amortization, respectively.
Evaluation for and recognition of writedowns of investments for other than
temporary impairments are performed annually during the six month period ended
December 31. However, investment valuation reserves at March 31, 1996 were
adequate to provide for existing and probable future losses.
II-66
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITION OF GROUP LIFE AND HEALTH BUSINESSES
The Company acquired, in part through reinsurance effective in January 1995,
the group life, dental, disability, accidental death and dismemberment, vision
and long-term care insurance businesses from Travelers and certain of its
subsidiaries for $403 million, $350 million which was paid during the first
three months of 1995. Commissions of $142 million were charged to earnings
during the three months ended March 31, 1995 and considerations in excess of
commissions of $208 million were recorded as a direct charge to surplus during
the three months ended March 31, 1995. In January, 1995, the Company received
assets with a fair market value equal to the $1,565 million of liabilities
assumed under the reinsurance agreements. The reinsured businesses convert to
Company contracts at policy anniversary date.
4. FEDERAL INCOME TAXES
Federal income tax expense has been calculated in accordance with the
provisions of the Internal Revenue Code, as amended (the "Code"). Under the
Code, the amount of federal income tax expense includes a tax on the Company's
surplus calculated by a prescribed formula that incorporates a differential
earnings rate between stock and mutual life insurance companies. The Company's
surplus tax for the three months ended March 31, 1995 was calculated based on
a pro rata estimate of the tax liability expected to be reported on the
Company's 1995 federal income tax return. The Company's surplus tax for the
three months ended March 31, 1996 was calculated based on a pro rata estimate
of the expected final tax for 1996. See Note 6 to the Company's annual
financial statements for the year ended December 31, 1995 for a description of
the change in 1995 in the calculation of surplus tax.
5. SURPLUS NOTES
Interest on the Company's surplus notes is scheduled to be paid semi-
annually on May 1st and November 1st; principal payments are scheduled to be
paid upon maturity. Such payments of interest and principal may be made only
with the prior approval of the Superintendent of Insurance of the State of New
York (Superintendent). The Company may not accrue any liability for payment of
interest or principal prior to obtaining the Superintendent's approval for
payment. At December 31, 1995, no accrual for surplus note interest expense
was recorded by the Company; at March 31, 1996 and 1995, the Company recorded
a liability for surplus note interest expense of $42 million and $20 million,
respectively.
6. SUBSEQUENT EVENT--MERGER
Effective August 30, 1996, the New England Mutual Life Insurance Company was
merged with and into the Company. The Company is the surviving entity. Pro
forma selected financial information giving effect to the merger are included
elsewhere in the Statement of Additional Information in the registration
statement. Also, in June 1996 The New England entered into a Settlement
Agreement, subject to consummation of the Merger, regarding certain litigation
whereby the litigation will be resolved at a net cost of approximately $117
million to the combined entity.
II-67
