<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT
OF ADDITIONAL INFORMATION
<PAGE>
Minnesota Mutual Variable Fund D
Cross Reference Sheet to Statement of Additional Information
Form N-4
Item Number Caption in Statement of Additional Information
15. Cover Page
16. Table of Contents
17. Minnesota Mutual Variable Fund D
18. Not Applicable
19. Not Applicable
20. Distribution of Contracts
21. Performance Data
22. Annuity Payments
23. Financial Statements
<PAGE>
Minnesota Mutual Variable Fund D
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 1997
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands upon
subjects discussed in the Prospectus. Therefore, this Statement should be read
in conjunction with the Variable Fund D's current Prospectus, bearing the same
date, which may be obtained by calling the Variable Fund D at (612) 665-3500, or
writing the Variable Fund D at Minnesota Mutual Life Center, 400 Robert Street
North, St. Paul, Minnesota 55101-2098.
TABLE OF CONTENTS
Variable Fund D
Trustees and Principal Management Officers of Minnesota Mutual
Other Contracts
Distribution of Contracts
Performance Data
Annuity Payments
Auditors
Financial Statements
Appendix A - Calculation of Unit Values
<PAGE>
VARIABLE FUND D
Minnesota Mutual Variable Fund D ("Variable Fund D") is a separate account of
The Minnesota Mutual Life Insurance Company ("Minnesota Mutual"). The Variable
Fund D is registered as a unit investment trust. Prior to the Reorganization of
the Fund in October of 1990 and the establishment of its several sub-accounts,
the Fund was a open-end, diversified, management investment company investing in
a diversified portfolio of equity securities, mainly common stocks.
TRUSTEES AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA MUTUAL
Trustees Principal Occupation
Giulio Agostini Senior Vice President, Finance and Administrative
Services, Minnesota Mining and Manufacturing
Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller Company, St.
Paul, Minnesota, since June 1995, prior thereto for
more than five years President and Chief Executive
Officer, H. B. Fuller Company (Adhesive Products)
John F. Grundhofer Chairman of the Board, President and Chief Executive
Officer, First Bank System, Inc., Minneapolis,
Minnesota (Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for more
than five years Chairman of the Board, President
and Chief Executive Officer, Deluxe Corporation,
Shoreview, Minnesota (Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Ph.D. Prior to March 1996, and for more than five years,
President, Northwest Area Foundation, St. Paul,
Minnesota (Private Regional Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual Life
Insurance Company, since August 1995; prior
thereto for more than five years Vice President
and Actuary, The Minnesota Mutual Life Insurance
Company
Michael E. Shannon Chairman, Chief Financial and Administrative
Officer, Ecolab, Inc., St. Paul, Minnesota, since
August 1992, prior thereto President, Residential
Services Group, Ecolab, Inc., St. Paul, Minnesota
from October 1990 to July 1992 (Develops and
Markets Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Chairman, Clearwater Investment Trust since May
1996, prior thereto for more than five years,
Chairman, Clearwater Management Company, St.
Paul, Minnesota (Financial Management)
2
<PAGE>
Principal Officers (other than Trustees)
Name Position
John F. Bruder Senior Vice President
Keith M. Campbell Vice President
Paul H. Gooding Vice President and Treasurer
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Richard D. Lee Vice President
Joel W. Mahle Vice President
Dennis E. Prohofsky Senior Vice President, General
Counsel and Secretary
Gregory S. Strong Vice President and Actuary
Terrence S. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Mutual have been employed by Minnesota Mutual for at
least five years.
OTHER CONTRACTS
In addition to the contracts described in the Prospectus, Minnesota Mutual
continually offers two types of Variable Fund D variable annuity contracts, both
incorporating a deferred sales charge. These contracts are the Single Premium
Deferred Variable Annuity Contract and the Flexible Payment Deferred Variable
Annuity Contract.
DISTRIBUTION OF CONTRACTS
The contracts will be continuously sold by Minnesota Mutual life insurance
agents who are also registered representatives of MIMLIC Sales Corporation or
other broker-dealers who have entered into selling agreements with MIMLIC
Sales. MIMLIC Sales acts as the principal underwriter of the contracts.
MIMLIC Sales Corporation is a wholly-owned subsidiary of MIMLIC Asset
Management Company, which is a wholly-owned subsidiary of Minnesota Mutual.
MIMLIC Asset Management Company is also the sole owner of the shares of
Advantus Capital Management, Inc., the investment adviser for the Variable
Fund D. MIMLIC Sales is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc.
Amounts paid by Minnesota Mutual for payment to the underwriter for 1996 was
$109,175. These include payments made by Minnesota Mutual on behalf of the
underwriter, as agents of Minnesota Mutual who are also registered
representatives of MIMLIC Sales are compensated directly by Minnesota Mutual.
3
<PAGE>
PERFORMANCE DATA
CURRENT YIELD FIGURES FOR MONEY MARKET SUB-ACCOUNT
Current annualized yield quotations for the Money Market Sub-Account are based
on the sub-account's net investment income for a seven-day or other specified
period and exclude any realized or unrealized gains or losses on sub-account
securities. Current annualized yield is computed by determining the net change
(exclusive of realized gains and losses from the sale of securities and
unrealized appreciation and depreciation) in the value of a hypothetical account
having a balance of one accumulation unit at the beginning of the specified
period, dividing such net change in account value by the value of the account at
the beginning of the period, and annualizing this quotient on a 365-day basis.
The Variable Fund D may also quote the effective yield of the Money Market Sub-
Account for a seven-day or other specified period for which the current
annualized yield is computed by expressing the unannualized return on a
compounded, annualized basis. The yield and effective yield of the Money Market
Sub-Account for the seven-day period ended December 31, 1996 were 4.20% and
4.29%, respectively.
TOTAL RETURN FIGURES FOR ALL SUB-ACCOUNTS
Cumulative total return quotations for sub-accounts represent the total return
for the period since the sub-account became available pursuant to the Variable
Fund D's registration statement. Cumulative total return is equal to the
percentage change between the net asset value of a hypothetical $1,000
investment at the beginning of the period and the net asset value of that same
investment at the end of the period.
Prior to May 3, 1993, several of the sub-accounts were known by different names.
The Growth Sub-Account was the Stock Sub-Account, the Asset Allocation Sub-
Account was the Managed Sub-Account and the Index 500 Sub-Account was the Index
Sub-Account.
The cumulative total return figures published by the Variable Fund D relating to
the contracts described in the Prospectus will reflect Minnesota Mutual's
voluntary absorption of certain Fund expenses described below. The cumulative
total returns for the sub-accounts for the specified periods ended December 31,
1994 are shown in the table below. The figures in parentheses show what the
cumulative total returns would have been had Minnesota Mutual not absorbed Fund
expenses as described above.
4
<PAGE>
Cumulative Total Return Figures
<TABLE>
<CAPTION>
7% Sales Load No Sales Load
Ten Years Cumulative Ten Years Cumulative
Ended 12/31/96* Ended 12/31/96* Ended 12/31/96* Ended 12/31/96*
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account 203.06% (203.06%) 218.35% (218.35%)
Bond Sub-Account 49.17% (49.07%) 60.40% (60.28%)
Money Market
Sub-Account 15.11% (14.88%) 23.78% (23.40%)
Asset Allocation
Sub-Account 90.48% (90.48%) 104.82% (104.82%)
Mortgage Securities
Sub-Account 43.41% (4.34%) 54.20% (54.12%)
Index 500
Sub-Account 141.45% (141.31%) 159.62% (159.46%)
Small Company
Sub-Account 51.12% (51.12%) 62.50% (62.49%)
<FN>
* Ten year cumulative total return figures are not available for the Bond Sub-
Account, the Money Market Sub-Account, the Asset Allocation Sub-Account, the
Mortgage Securities Sub-Account, the Index 500 Sub-Account, and the Small
Company Sub-Account as these sub-accounts first became available as a result of
the Variable Fund D reorganization in October 1990. The column above entitled
"Cumulative Ended 12/31/96" for these specified sub-accounts illustrates the
cumulative total return figures since the Variable Fund D reorganization.
</TABLE>
5
<PAGE>
Cumulative total return quotations for sub-accounts will be accompanied by
average annual total return figures for a one-year period, five-year period
and for the period since the sub-account became available pursuant to the
Variable Fund D's registration statement. Average annual total return
figures are the average annual compounded rates of return required for an
initial investment of $1,000 to equal the surrender value of that same
investment at the end of the period. The average annual total return figures
published by the Variable Fund D will reflect Minnesota Mutual's voluntary
absorption of certain Fund expenses. Prior to January 1, 1986, the Fund
incurred no expenses. During 1986 and from January 1 to March 8, 1987
Minnesota Mutual voluntarily absorbed all fees and expenses of any Fund
portfolio that exceeded .75% of the average daily net assets of such Fund
portfolio. For the period subsequent to March 9, 1987, Minnesota Mutual is
voluntarily absorbing the fees and expenses that exceed .65% of the average
daily net assets of the Growth, Bond, Money Market, Asset Allocation and
Mortgage Securities Portfolios of the Fund, .55% of the average daily net
assets of the Index 500 Portfolio of the Fund, and .90% of the average daily
net assets of the Small Company Portfolio. There is no specified or minimum
period of time during which Minnesota Mutual has agreed to continue its
voluntary absorption of these expenses, and Minnesota Mutual may in its
discretion cease its absorption of expenses at any time. Should Minnesota
Mutual cease absorbing expenses the effect would be to increase Fund
expenses and thereby reduce investment return.
6
<PAGE>
The average annual total return figures described above may be accompanied by
other average annual total return quotations for the same or other periods.
Such other average annual total return figures will be calculated as described
above. The average annual rates of return, as thus calculated, for the sub-
accounts of the contracts described in the Prospectus for the specified periods
ended December 31, 1996 are shown in the tables below. They are the same for
the individual accumulation annuity, group accumulation annuity and group
deposit administration contracts. The figures in parentheses show what the
average annual rates of return would have been had Minnesota Mutual not absorbed
Fund expenses as described above.
<TABLE>
<CAPTION>
Average Annual Total Return
7% Sales Load
One Year Five Years Ten Years Since Inception
Ended 12/31/96 Ended 12/31/96* Ended 12/31/96* Ended 12/31/96*
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account 8.40% (8.40%) 7.90% (7.90%) 11.46% (11.46%) -- --
Bond Sub-Account -4.78% (-4.78%) 4.59% (4.20%) -- -- 6.68% (6.65%)
Money Market
Sub-Account -2.94% (-2.94%) 1.92% (1.70%) -- -- 2.30% (2.08%)
Asset Allocation
Sub-Account 4.04% (4.04%) 7.45% (7.45%) -- -- 10.98% (10.98%)
Mortgage Securities
Sub-Account -2.66% (-2.66%) 4.75% (4.73%) -- -- 6.00% (5.98%)
Index 500
Sub-Account 12.38% (12.38%) 12.29% (12.27%) -- -- 15.32% (15.31%)
Small Company
Sub-Account -1.56% (-1.56%) -- -- -- -- 11.92% (11.92%)
<FN>
*Ten year average annual total return figures are not available for the Bond
Sub-Account the Money Market Sub-Account, the Asset Allocation Sub-Account,
the Mortgage Securities Sub-Account and the Index 500 Sub-Account as these
sub-accounts first became available as a result of the Variable Fund D
reorganization in October 1990. The five and ten year average annual total
return figures are not available for the Small Company Sub-Account as this
sub-account's inception date is May 3, 1993. The column above entitled "Since
Inception Ended 12/31/96" for these specified sub-accounts illustrates the
average annual total return figures since the Variable Fund D reorganization.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
No Sales Load
One Year Five Years Ten Years Since Inception
Ended 12/31/96 Ended 12/31/96* Ended 12/31/96* Ended 12/31/96*
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Growth Sub-Account 16.56% (16.56%) 9.48% (9.48%) 12.28% (12.28%) -- --
Bond Sub-Account 2.39% (2.39%) 6.12% (6.09%) -- -- 7.94% (7.91%)
Money Market
Sub-Account 4.39% (4.37%) 3.41% (3.19%) -- -- 3.51% (3.29%)
Asset Allocation
Sub-Account 11.87% (11.87%) 9.02% (9.02%) -- -- 12.29% (12.29%)
Mortgage Securities
Sub-Account 4.67% (4.67%) 6.29% (6.27%) -- -- 7.25% (7.23%)
Index 500
Sub-Account 20.84% (20.84%) 13.93% (13.91%) -- -- 16.68% (16.67%)
Small Company
Sub-Account 5.85% (5.85%) -- -- -- -- 14.16% (14.16%)
<FN>
*Ten year average annual total return figures are not available for the Bond
Sub-Account the Money Market Sub-Account, the Asset Allocation Sub-Account,
the Mortgage Securities Sub-Account and the Index 500 Sub-Account as these
sub-accounts first became available as a result of the Variable Fund D
reorganization in October 1990. The five and ten year average annual total
return figures are not available for the Small Company Sub-Accounts as this
sub-account's inception date is May 3, 1995. The column above entitled "Since
Inception Ended 12/31/96" for these specified sub-accounts illustrates the
average annual total return figures since the Variable Fund D reorganization.
</TABLE>
8
<PAGE>
ANNUITY PAYMENTS
Please see Appendix A to this Statement of Additional Information for an
illustration of the calculation of annuity unit values and of a variable annuity
payment, showing the method used for the calculation of both the initial and
subsequent payments.
AUDITORS
The financial statements of Minnesota Mutual Variable Fund D and The Minnesota
Mutual Life Insurance Company included in this Statement of Additional
Information have been audited by KPMG Peat Marwick LLP, 4200 Norwest Center, 90
South Seventh Street, Minneapolis, Minnesota 55402, independent auditors, as
indicated in their reports in this Statement of Additional Information, and are
included herein in reliance upon such reports and upon the authority of such
firm as experts in accounting and auditing.
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Contract Owners of Minnesota Mutual Variable Fund D:
We have audited the accompanying statements of assets and liabilities of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500 and
Small Company Segregated Sub-Accounts of Minnesota Mutual Variable Fund D (the
Account) as of December 31, 1996 and the related statements of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for periods
presented in footnote (6). These financial statements and the financial
highlights are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights 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 and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investments owned at December 31, 1996 were verified by examination
of the underlying portfolios of MIMLIC Series Fund, Inc. 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 Growth, Bond, Money Market,
Asset Allocation, Mortgage Securities, Index 500 and Small Company Segregated
Sub-Account of Minnesota Mutual Variable Fund D at December 31, 1996, the
results of their operations for the year then ended and changes in their net
assets and the financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
<PAGE>
MINNESOTA MUTUAL VARIABLE FUND D
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------------
MONEY ASSET MORTGAGE
ASSETS GROWTH BOND MARKET ALLOCATION SECURITIES
- ------------------------------------------------------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investments in shares of MIMLIC Series Fund, Inc.:
Growth Portfolio, 27,916,914 shares at net asset value of
$2.343 per share (cost $44,638,303)...................... $65,417,150 -- -- -- --
Bond Portfolio, 371,302 shares at net asset value of $1.283
per share (cost $471,590)................................ -- 476,486 -- -- --
Money Market Portfolio, 489,652 shares at net asset value
of $1.000 per share (cost $489,652)...................... -- -- 489,652 -- --
Asset Allocation Portfolio, 3,080,843 shares at net asset
value of $1.865 per share (cost $4,899,487).............. -- -- -- 5,745,482 --
Mortgage Securities Portfolio, 227,444 shares at net asset
value of $1.187 per share (cost $262,646)................ -- -- -- -- 269,885
Index 500 Portfolio, 995,833 shares at net asset value of
$2.409 per share (cost $1,754,836)....................... -- -- -- -- --
Small Company Portfolio, 120,873 shares at net asset value
of $1.535 per share (cost $194,435)...................... -- -- -- -- --
----------- --------- ----------- ----------- -----------
65,417,150 476,486 489,652 5,745,482 269,885
Receivable from MIMLIC Series Fund, Inc. for investments
sold....................................................... 2,095 11 2,219 128 65,007
Receivable from Minnesota Mutual for contract purchase
payments................................................... 26,631 79 -- 4,945 --
----------- --------- ----------- ----------- -----------
Total assets........................................... 65,445,876 476,576 491,871 5,750,555 334,892
----------- --------- ----------- ----------- -----------
LIABILITIES
- -------------------------------------------------------------
Payable to MIMLIC Series Fund, Inc. for investments
purchased.................................................. 26,631 79 -- 4,945 --
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges.............................. 2,095 11 2,219 128 65,007
----------- --------- ----------- ----------- -----------
Total liabilities...................................... 28,726 90 2,219 5,073 65,007
----------- --------- ----------- ----------- -----------
Net assets applicable to annuity contract owners....... $65,417,150 476,486 489,652 5,745,482 269,885
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
CONTRACT OWNERS' EQUITY
- -------------------------------------------------------------
Contracts in accumulation period, accumulation units
outstanding of 4,666,243 for Growth; 296,978 for Bond;
395,596 for Money Market; 2,804,901 for Asset Allocation;
175,022 for Mortgage Securities; 923,905 for Index 500 and
114,187 for Small Company.................................. $64,577,971 476,486 489,652 5,745,482 269,885
Contracts in annuity payment period (note 2)................. 839,179 -- -- -- --
----------- --------- ----------- ----------- -----------
Total contract owners' equity.......................... $65,417,150 476,486 489,652 5,745,482 269,885
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT........................ $ 13.839 1.604 1.238 2.048 1.542
----------- --------- ----------- ----------- -----------
----------- --------- ----------- ----------- -----------
<CAPTION>
INDEX SMALL
ASSETS 500 COMPANY
- ------------------------------------------------------------- --------- -----------
<S> <C> <C>
Investments in shares of MIMLIC Series Fund, Inc.:
Growth Portfolio, 27,916,914 shares at net asset value of
$2.343 per share (cost $44,638,303)...................... -- --
Bond Portfolio, 371,302 shares at net asset value of $1.283
per share (cost $471,590)................................ -- --
Money Market Portfolio, 489,652 shares at net asset value
of $1.000 per share (cost $489,652)...................... -- --
Asset Allocation Portfolio, 3,080,843 shares at net asset
value of $1.865 per share (cost $4,899,487).............. -- --
Mortgage Securities Portfolio, 227,444 shares at net asset
value of $1.187 per share (cost $262,646)................ -- --
Index 500 Portfolio, 995,833 shares at net asset value of
$2.409 per share (cost $1,754,836)....................... 2,398,674 --
Small Company Portfolio, 120,873 shares at net asset value
of $1.535 per share (cost $194,435)...................... -- 185,521
--------- -----------
2,398,674 185,521
Receivable from MIMLIC Series Fund, Inc. for investments
sold....................................................... 64 3
Receivable from Minnesota Mutual for contract purchase
payments................................................... 635 65,178
--------- -----------
Total assets........................................... 2,399,373 250,702
--------- -----------
LIABILITIES
- -------------------------------------------------------------
Payable to MIMLIC Series Fund, Inc. for investments
purchased.................................................. 635 65,178
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges.............................. 64 3
--------- -----------
Total liabilities...................................... 699 65,181
--------- -----------
Net assets applicable to annuity contract owners....... 2,398,674 185,521
--------- -----------
--------- -----------
CONTRACT OWNERS' EQUITY
- -------------------------------------------------------------
Contracts in accumulation period, accumulation units
outstanding of 4,666,243 for Growth; 296,978 for Bond;
395,596 for Money Market; 2,804,901 for Asset Allocation;
175,022 for Mortgage Securities; 923,905 for Index 500 and
114,187 for Small Company.................................. 2,398,674 185,521
Contracts in annuity payment period (note 2)................. -- --
--------- -----------
Total contract owners' equity.......................... 2,398,674 185,521
--------- -----------
--------- -----------
NET ASSET VALUE PER ACCUMULATION UNIT........................ 2.596 1.624
--------- -----------
--------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE FUND D
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------------
MONEY ASSET MORTGAGE
GROWTH BOND MARKET ALLOCATION SECURITIES INDEX 500
------------ --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying mutual
fund (note 5)......................................... $ 542,019 25,694 22,653 182,931 12,622 31,146
Reimbursement from Minnesota Mutual for excess expense
charges (note 4)...................................... 183,716 1,155 1,105 13,502 621 3,009
Mortality and expense charges (note 3).................. (501,360) (3,907) (3,739) (45,678) (2,099) (17,721)
------------ --------- --------- ----------- ----------- ---------
Investment income (loss) -- net....................... 224,375 22,942 20,019 150,755 11,144 16,434
------------ --------- --------- ----------- ----------- ---------
Realized and unrealized gains (losses) on investments --
net:
Realized gain distributions from underlying mutual fund
(note 5).............................................. 5,093,360 4,632 -- 334,941 -- 16,123
------------ --------- --------- ----------- ----------- ---------
Realized gains on sales of investments:
Proceeds from sales................................... 6,572,569 283,205 749,890 1,094,745 914,466 857,151
Cost of investments sold.............................. (4,575,983) (278,098) (749,890) (975,369) (913,850) (671,087)
------------ --------- --------- ----------- ----------- ---------
1,996,586 5,107 -- 119,376 616 186,064
------------ --------- --------- ----------- ----------- ---------
Net realized gains on investments..................... 7,089,946 9,739 -- 454,317 616 202,187
------------ --------- --------- ----------- ----------- ---------
Net change in unrealized appreciation or depreciation of
investments............................................. 2,291,349 (22,377) -- 36,511 (383) 204,033
------------ --------- --------- ----------- ----------- ---------
Net gains (losses) on investments..................... 9,381,295 (12,638) -- 490,828 233 406,220
------------ --------- --------- ----------- ----------- ---------
Net increase in net assets resulting from operations...... $ 9,605,670 10,304 20,019 641,583 11,377 422,654
------------ --------- --------- ----------- ----------- ---------
------------ --------- --------- ----------- ----------- ---------
<CAPTION>
SMALL
COMPANY
-----------
<S> <C>
Investment income (loss):
Investment income distributions from underlying mutual
fund (note 5)......................................... 254
Reimbursement from Minnesota Mutual for excess expense
charges (note 4)...................................... 353
Mortality and expense charges (note 3).................. (1,195)
-----------
Investment income (loss) -- net....................... (588)
-----------
Realized and unrealized gains (losses) on investments --
net:
Realized gain distributions from underlying mutual fund
(note 5).............................................. 13,014
-----------
Realized gains on sales of investments:
Proceeds from sales................................... 915,201
Cost of investments sold.............................. (894,481)
-----------
20,720
-----------
Net realized gains on investments..................... 33,734
-----------
Net change in unrealized appreciation or depreciation of
investments............................................. (25,097)
-----------
Net gains (losses) on investments..................... 8,637
-----------
Net increase in net assets resulting from operations...... 8,049
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE FUND D
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX SMALL
GROWTH BOND MARKET ALLOCATION SECURITIES 500 COMPANY
----------- -------- -------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income (loss) --
net......................... $ 224,375 22,942 20,019 150,755 11,144 16,434 (588)
Net realized gains on
investments................. 7,089,946 9,739 -- 454,317 616 202,187 33,734
Net change in unrealized
appreciation or depreciation
of investments.............. 2,291,349 (22,377) -- 36,511 (383) 204,033 (25,097)
----------- -------- -------- ----------- ---------- --------- ----------
Net increase in net assets
resulting from operations..... 9,605,670 10,304 20,019 641,583 11,377 422,654 8,049
----------- -------- -------- ----------- ---------- --------- ----------
Contract transactions (notes 2,
3, 5 and 6):
Contract purchase payments.... 2,830,496 242,861 798,453 746,516 969,611 774,721 900,039
Contract terminations and
withdrawal payments......... (6,150,876) (280,453) (747,256) (1,062,569) (912,988) (842,439) (914,359)
Actuarial adjustments for
mortality experience on
annuities in payment
period...................... 18,500 -- -- -- -- -- --
Annuity benefit payments...... (122,548) -- -- -- -- -- --
----------- -------- -------- ----------- ---------- --------- ----------
Increase (decrease) in net
assets from contract
transactions.................. (3,424,428) (37,592) 51,197 (316,053) 56,623 (67,718) (14,320)
----------- -------- -------- ----------- ---------- --------- ----------
Increase (decrease) in net
assets........................ 6,181,242 (27,288) 71,216 325,530 68,000 354,936 (6,271)
Net assets at the beginning of
year.......................... 59,235,908 503,774 418,436 5,419,952 201,885 2,043,738 191,792
----------- -------- -------- ----------- ---------- --------- ----------
Net assets at the end of year... $65,417,150 476,486 489,652 5,745,482 269,885 2,398,674 185,521
----------- -------- -------- ----------- ---------- --------- ----------
----------- -------- -------- ----------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE FUND D
STATEMENTS OF CHANGES IN NET ASSETS -- CONTINUED
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX SMALL
GROWTH BOND MARKET ALLOCATION SECURITIES 500 COMPANY
----------- -------- -------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income (loss) --
net......................... $ 252,409 15,601 36,092 114,255 20,750 15,439 (400)
Net realized gains on
investments................. 4,044,747 6,628 -- 101,904 1,419 77,814 18,175
Net change in unrealized
appreciation or depreciation
of investments.............. 7,585,720 67,418 -- 853,553 19,637 384,075 12,593
----------- -------- -------- ----------- ---------- --------- ----------
Net increase in net assets
resulting from operations..... 11,882,876 89,647 36,092 1,069,712 41,806 477,328 30,368
----------- -------- -------- ----------- ---------- --------- ----------
Contract transactions (notes 2,
3, 5 and 6):
Contract purchase payments.... 2,227,245 285,425 647,179 678,249 400,199 690,349 222,170
Contract terminations and
withdrawal payments......... (7,444,132) (380,190) (781,908) (1,005,491) (442,206) (525,202) (145,230)
Actuarial adjustments for
mortality experience on
annuities in payment
period...................... 20,797 -- -- -- -- -- --
Annuity benefit payments...... (107,858) -- -- -- -- -- --
----------- -------- -------- ----------- ---------- --------- ----------
Increase (decrease) in net
assets from contract
transactions.................. (5,303,948) (94,765) (134,729) (327,242) (42,007) 165,147 76,940
----------- -------- -------- ----------- ---------- --------- ----------
Increase (decrease) in net
assets........................ 6,578,928 (5,118) (98,637) 742,470 (201) 642,475 107,308
Net assets at the beginning of
year.......................... 52,656,980 508,892 517,073 4,677,482 202,086 1,401,263 84,484
----------- -------- -------- ----------- ---------- --------- ----------
Net assets at the end of year... $59,235,908 503,774 418,436 5,419,952 201,885 2,043,738 191,792
----------- -------- -------- ----------- ---------- --------- ----------
----------- -------- -------- ----------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
MINNESOTA MUTUAL VARIABLE FUND D
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
Minnesota Mutual Variable Fund D (the Account) is organized as a segregated
asset account of The Minnesota Mutual Life Insurance Company (Minnesota Mutual)
under Minnesota law and is registered as a unit investment trust under the
Investment Company Act of 1940 (as amended).
The assets of each segregated sub-account are held for the exclusive benefit
of the variable annuity contract owners and are not chargeable with liabilities
arising out of the business conducted by any other account or by Minnesota
Mutual. Contract owners allocate their variable annuity payments to one or more
of the seven segregated sub-accounts. Such payments are then invested in shares
of MIMLIC Series Fund, Inc. (the Fund) organized by Minnesota Mutual as the
investment vehicle for its variable annuity contracts and variable life
policies. The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. Payments
allocated to the Growth, Bond, Money Market, Asset Allocation, Mortgage
Securities, Index 500 and Small Company segregated sub-accounts are invested in
shares of the Growth, Bond, Money Market, Asset Allocation, Mortgage Securities,
Index 500 and Small Company Portfolios of the Fund, respectively.
MIMLIC Sales Corporation acts as the underwriter for the Account. MIMLIC Asset
Management Company acts as the investment adviser for the Fund. MIMLIC Sales
Corporation is a wholly-owned subsidiary of MIMLIC Asset Management Company.
MIMLIC Asset Management Company is a wholly-owned subsidiary of Minnesota
Mutual.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF 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 increases and decreases in net assets resulting from
operations during the period. Actual results could differ from those estimates.
INVESTMENTS IN MIMLIC SERIES FUND, INC.
Investments in shares of the Fund portfolios are stated at market value which
is the net asset value per share as determined daily by the Fund. Investment
transactions are accounted for on the date the shares are purchased or sold. The
cost of investments sold is determined on the average cost method. All dividend
distributions received from the Fund are reinvested in additional shares of the
Fund and are recorded by the sub-accounts on the ex-dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Mutual for federal income tax
purposes. Under current interpretations of existing federal income tax law, no
income taxes are payable on investment income or capital gain distributions
received by the Account from the Fund.
CONTRACTS IN ANNUITY PAYMENT PERIOD
Annuity reserves are computed for contracts currently payable using the
Progressive Annuity Mortality Table and an assumed interest rate of 3.5 percent.
Charges to annuity reserves for mortality and risk expense are reimbursed to
Minnesota Mutual if the reserves required are less than originally estimated. If
additional reserves are required, Minnesota Mutual reimburses the Account.
(3) MORTALITY AND EXPENSE AND SALES AND ADMINISTRATIVE SERVICE CHARGES
The mortality and expense charge paid to Minnesota Mutual is computed daily
and is equal, on an annual basis, to .795 percent of the average daily net
assets of the Account.
Sales and administrative service charges, depending upon the type of contract,
may be deducted from the contract owner's contract purchase payment or contract
withdrawal. Total sales and administrative charges deducted from contract
purchase payments or contract withdrawal proceeds for the years ended December
31, 1996 and 1995 amounted to $3,111 and $44,403, respectively.
(4) REIMBURSEMENT FROM MINNESOTA MUTUAL FOR EXCESS EXPENSES
Effective October 26, 1990, the contract owners of the Account voted to
reorganize as a unit investment trust under the Investment Company Act of 1940
(as amended). Prior to the reorganization, the Account invested directly in a
diversified portfolio of equity securities. The Account has seven segregated
sub-accounts to which contract owners may allocate their payments.
Under the Plan of Reorganization, Minnesota Mutual agreed to reimburse the
Account for any increase in expenses paid by the Account as a result of the
reorganization. Prior to the reorganization, the Account was charged an
investment advisory fee equal, on an annual basis, to .265 percent of the
average daily net assets. After the reorganization, the
<PAGE>
2
MINNESOTA MUTUAL VARIABLE FUND D
(4) REIMBURSEMENT FROM MINNESOTA MUTUAL FOR EXCESS EXPENSES (CONTINUED)
Account no longer pays an investment advisory fee since it no longer invests
directly in a portfolio of securities. However, contract values that are
allocated to the segregated sub-accounts after the reorganization are invested
in Fund portfolios that pay investment advisory fees as well as other operating
expenses. Investment advisory fees are based on the average daily net assets of
the Fund portfolios at the annual rate of .50 percent for the Growth, Bond,
Money Market, Asset Allocation and Mortgage Securities Portfolios, .40 percent
for the Index 500 Portfolio and .75 percent for the Small Company Portfolio.
In calculating the accumulation unit value for the Growth segregated
sub-account, Minnesota Mutual has agreed to make an adjustment that will have
the effect of reimbursing the excess of any expenses indirectly incurred as a
result of the investment advisory fee and the operating expenses incurred by the
Growth Portfolio over the .265 percent investment advisory paid prior to the
reorganization. In calculating the accumulation unit value for the segregated
sub-accounts other than Growth, Minnesota Mutual will make adjustments that, in
effect, reimburse the excess of the investment advisory fees incurred through
indirect investment in the Fund over the .265 percent investment management fee
paid prior to the reorganization. No adjustment will be made for the additional
operating expenses charged to those portfolios. However, in the past nine years
Minnesota Mutual has voluntarily absorbed other operating expenses that exceed
.15 percent on an annual basis for each Fund portfolio.
(5) INVESTMENT TRANSACTIONS
The Account's purchases of Fund shares, including reinvestment of dividend
distributions, were as follows during the year ended December 31, 1996:
<TABLE>
<S> <C>
Growth Portfolio.............................................................. $8,465,876
Bond Portfolio................................................................ 273,187
Money Market Portfolio........................................................ 821,221
Asset Allocation Portfolio.................................................... 1,264,388
Mortgage Securities Portfolio................................................. 982,233
Index 500 Portfolio........................................................... 821,990
Small Company Portfolio....................................................... 913,307
</TABLE>
<PAGE>
3
MINNESOTA MUTUAL VARIABLE FUND D
(6) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the years ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------
MONEY
GROWTH BOND MARKET
----------- ---------- ----------
<S> <C> <C> <C>
Units outstanding at December 31, 1994............................................. 5,406,377 386,750 457,011
Contract purchase payments......................................................... 199,989 189,477 567,847
Deductions for contract terminations and withdrawal payments....................... (687,507) (254,615) (672,123)
----------- ---------- ----------
Units outstanding at December 31, 1995............................................. 4,918,859 321,612 352,735
Contract purchase payments......................................................... 220,706 157,141 658,856
Deductions for contract terminations and withdrawal payments....................... (473,322) (181,775) (615,995)
----------- ---------- ----------
Units outstanding at December 31, 1996............................................. 4,666,243 296,978 395,596
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------
ASSET MORTGAGE INDEX SMALL
ALLOCATION SECURITIES 500 COMPANY
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Units outstanding at December 31, 1994................................ 3,175,751 160,939 886,632 72,272
Contract purchase payments............................................ 411,886 289,664 359,706 154,531
Deductions for contract terminations and withdrawal payments.......... (627,510) (313,616) (295,035) (101,921)
----------- ----------- ---------- ----------
Units outstanding at December 31, 1995................................ 2,960,127 136,987 951,303 124,882
Contract purchase payments............................................ 394,756 658,136 333,682 556,186
Deductions for contract terminations and withdrawal payments.......... (549,982) (620,101) (361,080) (566,881)
----------- ----------- ---------- ----------
Units outstanding at December 31, 1996................................ 2,804,901 175,022 923,905 114,187
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
<PAGE>
4
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for an
accumulation unit outstanding during the periods indicated:
GROWTH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year...................................................... $ 11.877 9.604 9.573 9.196
--------- --------- --------- ---------
Income from investment operations:
Net investment income............................................................ .047 .049 .053 .086
Net gains or losses on securities (both realized and unrealized)................. 1.915 2.224 (.022) .291
--------- --------- --------- ---------
Total from investment operations............................................... 1.962 2.273 .031 .377
--------- --------- --------- ---------
Unit value, end of year............................................................ $ 13.839 11.877 9.604 9.573
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year...................................................... 8.803
---------
Income from investment operations:
Net investment income............................................................ .109
Net gains or losses on securities (both realized and unrealized)................. .284
---------
Total from investment operations............................................... .393
---------
Unit value, end of year............................................................ 9.196
---------
---------
</TABLE>
<PAGE>
5
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
BOND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year........................................................ $ 1.567 1.316 1.386 1.264
--------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income.............................................................. .072 .044 .051 .030
Net gains or losses on securities (both realized and unrealized)................... (.035) .207 (.121) .092
--------- --------- --------- ---------
Total from investment operations................................................. .037 .251 (.070) .122
--------- --------- --------- ---------
Unit value, end of year.............................................................. $ 1.604 1.567 1.316 1.386
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year........................................................ 1.191
---------
Income (loss) from investment operations:
Net investment income.............................................................. .035
Net gains or losses on securities (both realized and unrealized)................... .038
---------
Total from investment operations................................................. .073
---------
Unit value, end of year.............................................................. 1.264
---------
---------
</TABLE>
<PAGE>
6
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
MONEY MARKET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year........................................................ $ 1.186 1.131 1.097 1.074
--------- --------- --------- ---------
Income from investment operations:
Net investment income.............................................................. .052 .055 .034 .023
--------- --------- --------- ---------
Total from investment operations................................................. .052 .055 .034 .023
--------- --------- --------- ---------
Unit value, end of year.............................................................. $ 1.238 1.186 1.131 1.097
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year........................................................ 1.047
---------
Income from investment operations:
Net investment income.............................................................. .027
---------
Total from investment operations................................................. .027
---------
Unit value, end of year.............................................................. 1.074
---------
---------
</TABLE>
<PAGE>
7
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
ASSET ALLOCATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year........................................................ $ 1.831 1.473 1.502 1.419
--------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income.............................................................. .051 .039 .024 .019
Net gains or losses on securities (both realized and unrealized)................... .166 .319 (.053) .064
--------- --------- --------- ---------
Total from investment operations................................................. .217 .358 (.029) .083
--------- --------- --------- ---------
Unit value, end of year.............................................................. $ 2.048 1.831 1.473 1.502
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year........................................................ 1.330
---------
Income (loss) from investment operations:
Net investment income.............................................................. .020
Net gains or losses on securities (both realized and unrealized)................... .069
---------
Total from investment operations................................................. .089
---------
Unit value, end of year.............................................................. 1.419
---------
---------
</TABLE>
<PAGE>
8
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
MORTGAGE SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year........................................................ $ 1.473 1.255 1.307 1.203
--------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income.............................................................. .063 .106 .055 .044
Net gains or losses on securities (both realized and unrealized)................... .006 .112 (.107) .060
--------- --------- --------- ---------
Total from investment operations................................................. .069 .218 (.052) .104
--------- --------- --------- ---------
Unit value, end of year.............................................................. $ 1.542 1.473 1.255 1.307
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year........................................................ 1.137
---------
Income (loss) from investment operations:
Net investment income.............................................................. .008
Net gains or losses on securities (both realized and unrealized)................... .058
---------
Total from investment operations................................................. .066
---------
Unit value, end of year.............................................................. 1.203
---------
---------
</TABLE>
<PAGE>
9
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
INDEX 500
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of year........................................................ $ 2.148 1.580 1.572 1.442
--------- --------- --------- ---------
Income from investment operations:
Net investment income.............................................................. .017 .019 .014 .010
Net gains or losses on securities (both realized and unrealized)................... .431 .549 (.006) .120
--------- --------- --------- ---------
Total from investment operations................................................. .448 .568 .008 .130
--------- --------- --------- ---------
Unit value, end of year.............................................................. $ 2.596 2.148 1.580 1.572
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Unit value, beginning of year........................................................ 1.352
---------
Income from investment operations:
Net investment income.............................................................. .011
Net gains or losses on securities (both realized and unrealized)................... .079
---------
Total from investment operations................................................. .090
---------
Unit value, end of year.............................................................. 1.442
---------
---------
</TABLE>
<PAGE>
10
MINNESOTA MUTUAL VARIABLE FUND D
(7) FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL COMPANY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Unit value, beginning of period..................................................... $ 1.535 1.169 1.107
--------- --------- ---------
Income from investment operations:
Net investment loss............................................................... (.006) (.005) (.004)
Net gains on securities (both realized and unrealized)............................ .095 .371 .066
--------- --------- ---------
Total from investment operations................................................ .089 .366 .062
--------- --------- ---------
Unit value, end of period........................................................... $ 1.624 1.535 1.169
--------- --------- ---------
--------- --------- ---------
<CAPTION>
PERIOD FROM MAY 3,
1993*
TO DECEMBER 31,
1993
-------------------
<S> <C>
Unit value, beginning of period..................................................... 1.000
-----
Income from investment operations:
Net investment loss............................................................... (.002)
Net gains on securities (both realized and unrealized)............................ .109
-----
Total from investment operations................................................ .107
-----
Unit value, end of period........................................................... 1.107
-----
-----
</TABLE>
* Commencement of the segregated sub-account's operations.
<PAGE>
APPENDIX A
CALCULATION OF ACCUMULATION UNIT VALUES
Calculation of the net investment factor and the accumulation unit value may be
illustrated by the following hypothetical example. Assume the accumulation unit
value of the Variable Fund D Growth Sub-Account on the immediately preceding
valuation period was $6.499041. Assume the following about the Series Fund
Growth Portfolio: (a) the net asset value per share of the Growth Portfolio was
$1.394438 at the end of the current valuation period; (2) the Growth Portfolio
declared a per share dividend and capital gain distribution in the amount of
$.037162 during the current valuation period; and (3) the net asset value per
share of the Growth Portfolio was $1.426879 at the end of the preceding
valuation period.
The gross investment rate for the valuation period would be equal to 1.0033086
(1.394438 plus .037162 divided by 1.426879). The net investment rate for the
valuation period is determined by deducting the total Growth Sub-Account
expenses from the gross investment rate. Total Growth Sub-Account expenses of
.0000162 is equal to .0000315 for mortality and risk expense (the daily
equivalent of .795% assuming 252 valuation dates per year) less .0000093 for the
investment management fee reimbursement (the daily equivalent of .235% assuming
252 valuation dates per year) less .0000060 for the other expense reimbursement
(the daily equivalent of .150% assuming 252 valuation dates per year). The net
investment rate equals 1.0032924 (1.0033086 minus .0000162).
The accumulation unit value at the end of the valuation period would be equal to
the value on the immediately preceding valuation date ($6.499041) multiplied by
the net investment factor for the current valuation period (1.003294), which
produces $6.520438.
CALCULATION OF ANNUITY UNIT VALUES AND VARIABLE ANNUITY PAYMENT
The determination of the annuity unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume that the contract has
been in force for more than ten years so that no deferred sales charge will
apply and that there is no deduction for annuity premium taxes. Assume further
that at the date of his or her retirement, the annuitant has credited to his or
her account 30,000 accumulation units, and that the value of an accumulation
unit on the valuation date next following the fourteenth day of the preceding
month was $1.150000, producing a total value of $34,500. Assume also that the
annuitant elects an option for which the table in the contract indicates the
first monthly payment is $6.57 per $1,000 of value applied; the annuitant's
first monthly payment would thus be 34.500 multiplied by $6.57, or $226.67.
Assume that the annuity unit value on the due date of the first payment was
$1.100000. When this is divided into the first monthly payment, the number of
annuity units represented by that payment is determined to be 206.064. The
value of this same number of annuity units will be paid in each subsequent
month.
Assume further that the accumulation unit value on the valuation date next
following the fourteenth day of the succeeding month is $1.160000. This is
divided by the accumulation unit value on the preceding monthly valuation date
($1.150000) to produce a ratio of 1.008696. Multiplying this ratio by .997137
to neutralize the assumed investment rate of 3.5% per annum already taken into
account in determining annuity units as described above, produces a result of
1.005808. This is then multiplied by the preceding annuity unit value
($1.100000) to produce a current annuity value of $1.106390.
<PAGE>
The second monthly payment is then determined by multiplying the fixed number of
annuity units (206.064) by the current annuity unit value ($1.106390), which
produces a second monthly annuity payment of $227.99.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Minnesota Mutual Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles. As discussed in Note
2 to the consolidated financial statements, the Company adopted 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," in 1996.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 10, 1997
53
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,558,975 and $4,525,352) $ 4,674,082 $ 4,761,561
Held-to-maturity, at amortized cost (fair value
$1,179,112 and $1,281,523) 1,125,638 1,180,654
Equity securities, at fair value (cost $429,509 and
$277,554) 549,797 384,882
Mortgage loans, net 608,808 608,537
Real estate, net 43,082 47,256
Policy loans 204,178 198,716
Short-term investments 122,772 72,841
Other invested assets 98,247 91,530
----------- -----------
Total investments 7,426,604 7,345,977
Cash 57,140 48,358
Finance receivables, net 259,192 226,720
Deferred policy acquisition costs 589,517 539,732
Accrued investment income 90,996 98,373
Premiums receivable 77,140 85,247
Property and equipment, net 55,050 50,809
Reinsurance recoverables 126,629 102,198
Other assets 54,798 46,530
Separate account assets 3,706,256 2,609,460
----------- -----------
Total assets $12,443,322 $11,153,404
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,310,015 $ 4,287,083
Future policy and contract benefits 1,638,720 1,554,898
Pending policy and contract claims 70,577 55,812
Other policyowner funds 396,848 371,537
Policyowner dividends payable 49,899 50,450
Unearned premiums and fees 207,111 210,494
Federal income tax liability:
Current 25,643 39,516
Deferred 149,665 173,905
Other liabilities 286,042 320,607
Notes payable 319,000 279,967
Separate account liabilities 3,691,374 2,596,285
----------- -----------
Total liabilities 11,144,894 9,940,554
Policyowners' surplus:
Unassigned surplus 1,190,116 1,059,598
Net unrealized investment gains 108,312 153,252
----------- -----------
Total policyowners' surplus 1,298,428 1,212,850
----------- -----------
Total liabilities and policyowners' surplus $12,443,322 $11,153,404
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 612,359 $ 603,770 $ 562,018
Policy and contract fees 245,966 214,203 188,115
Net investment income 530,987 515,047 486,101
Net realized investment gains 59,546 66,643 25,769
Finance charge income 46,932 39,937 34,258
Other income 51,630 40,250 30,106
---------- ---------- ---------
Total revenues 1,547,420 1,479,850 1,326,367
---------- ---------- ---------
Benefits and expenses:
Policyowner benefits 541,520 517,771 498,424
Interest credited to policies and con-
tracts 288,967 297,145 283,626
General operating expenses 302,618 273,425 253,317
Commissions 103,370 93,465 87,631
Administrative and sponsorship fees 79,360 76,223 71,143
Dividends to policyowners 24,804 27,282 26,672
Interest on notes payable 22,798 11,128 7,295
Increase in deferred policy acquisition
costs (15,312) (29,822) (43,974)
---------- ---------- ---------
Total benefits and expenses 1,348,125 1,266,617 1,184,134
---------- ---------- ---------
Income from operations before taxes 199,295 213,233 142,233
Federal income tax expense:
Current 68,033 71,379 63,641
Deferred 744 11,995 (1,511)
---------- ---------- ---------
Total federal income tax expense 68,777 83,374 62,130
Net income $ 130,518 $ 129,859 $ 80,103
========== ========== =========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,212,850 $ 874,577 $ 892,510
Net income 130,518 129,859 80,103
Change in net unrealized investment
gains and losses (44,940) 208,414 (98,036)
---------- ---------- ---------
Policyowners' surplus, end of year $1,298,428 $1,212,850 $ 874,577
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,518 $ 129,859 $ 80,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to annuity and insur-
ance contracts 275,968 288,218 277,863
Fees deducted from policy and contract
balances (206,780) (201,575) (188,226)
Change in future policy benefits 84,389 100,025 63,328
Change in other policyowner liabilities 16,099 (4,762) (16,794)
Change in deferred policy acquisition
costs (15,312) (29,822) (43,974)
Change in premiums due and other receiv-
ables (26,142) (18,039) 38,166
Change in federal income tax liabilities (12,055) 18,376 17,854
Net realized investment gains (59,546) (66,643) (25,769)
Other, net 29,987 36,561 28,958
---------- ---------- ----------
Net cash provided by operating activi-
ties 217,126 252,198 231,509
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 877,682 1,349,348 653,498
Equity securities 352,901 203,493 88,645
Mortgage loans 15,567 4,315 20,912
Real estate 11,678 15,948 17,571
Other invested assets 12,280 10,775 28,305
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 329,550 253,576 327,337
Fixed maturity securities, held-to-matu-
rity 114,222 127,617 75,648
Mortgage loans 94,703 104,730 126,134
Cost of purchases of:
Fixed maturity securities, available-
for-sale (1,228,048) (1,975,130) (1,123,125)
Fixed maturity securities, held-to-matu-
rity (60,612) (140,763) (131,820)
Equity securities (446,599) (212,142) (131,483)
Mortgage loans (108,691) (209,399) (145,964)
Real estate (3,786) (16,554) (10,985)
Other invested assets (29,271) (20,517) (12,732)
Finance receivable originations or pur-
chases (175,876) (167,298) (134,867)
Finance receivable principal payments 142,723 123,515 104,539
Other, net (43,662) (19,292) 15,309
---------- ---------- ----------
Net cash used for investing activities (145,239) (567,778) (233,078)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insurance
contracts 657,405 710,525 647,237
Withdrawals from annuity and insurance
contracts (702,681) (563,569) (645,969)
Proceeds from issuance of surplus notes -- 124,967 --
Proceeds from issuance of debt by subsidi-
ary 60,000 50,000 30,000
Payments on debt by subsidiary (21,000) (10,000) (9,100)
Other, net (6,898) (3,801) (5,940)
---------- ---------- ----------
Net cash provided by (used for) fi-
nancing activities (13,174) 308,122 16,228
---------- ---------- ----------
Net increase (decrease) in cash and short-
term investments 58,713 (7,458) 14,659
Cash and short-term investments, beginning
of year 121,199 128,657 113,998
---------- ---------- ----------
Cash and short-term investments, end of
year $ 179,912 $ 121,199 $ 128,657
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues reported in 1996 by these business units were
$780,250,000, $279,554,000, $213,461,000 and $104,059,000, respectively.
Additional revenues of $170,096,000 were reported by the Company's
subsidiaries.
At December 31, 1996, the Company was one of the 11 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). All material intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from management's estimates.
New Accounting Principles
In 1995 and prior years, the Company prepared its financial statements
according to statutory accounting practices prescribed or permitted by the
Commerce Department of the State of Minnesota (Department of Commerce), and
these accounting practices were considered GAAP for mutual life insurance
companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 40 (the Interpretation), "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises."
The Interpretation was supposed to become effective for fiscal years beginning
after December 15, 1994 and stated that financial statements prepared in
accordance with statutory accounting practices would no longer be considered to
be in conformity with GAAP. The Interpretation requires all mutual life
insurance companies that report their financial statements in conformity with
GAAP to apply all applicable authoritative GAAP pronouncements, with the
exception of Statements of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long Duration Contracts and
Realized Gains and Losses from the Sale of Investments," and No. 113,
"Accounting for Reinsurance of Short-Duration and Long-Duration Contracts."
In January 1995, the FASB issued SFAS 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Contracts." This statement deferred the implementation
of the Interpretation to fiscal years beginning after December 15, 1995 and
extended the requirements of SFAS Nos. 60, 97 and 113 to mutual life insurance
enterprises.
SFAS No. 120 also requires mutual life insurance enterprises to adopt
Statement of Position 95-1, "Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises," which was issued by the American Institute
of Certified Public Accountants.
57
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 120 on January 1, 1996, and the accompanying
1994 and 1995 financial statements and related notes have been restated to
conform with the presentation of the 1996 GAAP financial statements.
The Company will continue to prepare financial statements according to
statutory accounting practices prescribed or permitted by the Department of
Commerce for purposes of filing with the Department of Commerce, the National
Association of Insurance Commissioners and states in which the Company is
licensed to do business. The significant differences between statutory and GAAP
financial results are presented in Note 12.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to gross margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated premium revenues.
The ultimate premium revenues are estimated based upon the same assumptions
used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred acquisition
costs are amortized over the estimated lives of the contracts in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins.
Deferred acquisition costs amortized were $125,978,000, $104,940,000 and
$86,477,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest is suspended when a loan is contractually delinquent for more than 60
days and is subsequently recognized when received. Accrual is resumed when the
loan is contractually less than 60 days past due. An allowance for
uncollectible amounts is maintained by direct charges to operations at an
amount which management believes, based upon historical losses and economic
conditions, is adequate to absorb probable losses on existing receivables that
may become uncollectible. The reported receivables are net of this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities which may be sold prior to maturity are classified as available-for-
sale and carried at fair value.
58
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1996 and 1995, was $5,968,000 and $8,342,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps are used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps are based upon
certain stock indices, and settlement with the counterparties will take place
in January 1998. If, at the time of settlement for a particular swap, the
designated stock index has fallen below a specified level, the counterparty
will pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index has risen, the Company will pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap.
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely affected by changes in the
market) and credit risk (that the counterparty will not perform according to
the contract terms). To reduce credit risk, the swap contracts require that the
counterparties maintain sufficient credit ratings and provide collateral under
certain circumstances.
The swaps are carried at fair value, which is based upon dealer quotes.
Changes in fair value are recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses are recognized in income.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of policyowners'
surplus, net of taxes and related adjustments to deferred policy acquisition
costs and unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$81,962,000 and $75,507,000 at December 31, 1996 and 1995, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expense for the years ended December 31, 1996,
1995 and 1994, was $6,454,000, $5,941,000 and $8,136,000, respectively.
59
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of certain policyowners
and contractholders. The Company receives administrative and investment
advisory fees for services rendered on behalf of these funds. Separate account
assets and liabilities are carried at fair value, based upon the market value
of the investments held in the segregated funds.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $14,882,000 and $13,175,000 as of December 31, 1996 and 1995, respectively.
Policyowner Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees based upon actuarial determinations which take into
consideration current mortality, interest earnings, expense factors and federal
income taxes. Dividends are recognized as expenses consistent with the
recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $433,985 $426,114 $417,698
Equity securities 14,275 8,883 4,485
Mortgage loans 63,865 58,943 49,676
Real estate (475) 497 648
Policy loans 13,828 12,821 11,800
Short-term investments 6,535 6,716 4,262
Other invested assets 4,901 5,168 3,212
-------- -------- --------
Gross investment income 536,914 519,142 491,781
Investment expenses (5,927) (4,095) (5,680)
-------- -------- --------
Total $530,987 $515,047 $486,101
======== ======== ========
</TABLE>
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $(6,536) $24,025 $(2,528)
Equity securities 57,770 36,374 11,268
Mortgage loans (721) (207) (82)
Real estate 7,088 2,436 3,915
Other invested assets 1,945 4,015 13,196
------- ------- -------
Total $59,546 $66,643 $25,769
======= ======= =======
</TABLE>
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 19,750 $ 34,898 $ 13,375
Gross realized losses (26,286) (10,873) (15,903)
Equity securities:
Gross realized gains 79,982 52,670 21,538
Gross realized losses (22,212) (16,296) (10,270)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $314,576 $358,877
Gross unrealized losses (77,337) (13,713)
Adjustment to deferred policy acquisition costs (65,260) (99,732)
Adjustment to unearned policy and contract fees (8,192) (11,665)
Deferred federal income taxes (55,475) (80,515)
-------- --------
Net unrealized gains $108,312 $153,252
======== ========
</TABLE>
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
States, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- ------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- ------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- ------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to-maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- ------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- ------- ----------
Total $6,114,122 $367,312 $78,443 $6,402,991
========== ======== ======= ==========
DECEMBER 31, 1995
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 261,669 $ 10,911 $ 440 $ 272,140
States, municipalities, and polit-
ical subdivisions 26,317 3,262 -- 29,579
Foreign governments 1,704 223 -- 1,927
Corporate securities 2,523,889 169,329 6,098 2,687,120
Mortgage-backed securities 1,711,773 62,510 3,488 1,770,795
---------- -------- ------- ----------
Total fixed maturities 4,525,352 246,235 10,026 4,761,561
Equity securities--unaffiliated 196,355 91,269 1,590 286,034
Equity securities--affiliated 81,199 17,649 -- 98,848
---------- -------- ------- ----------
Total equity securities 277,554 108,918 1,590 384,882
---------- -------- ------- ----------
Total available-for-sale 4,802,906 355,153 11,616 5,146,443
Held-to-maturity:
United States government and gov-
ernment agencies and authorities 250 3 -- 253
States, municipalities, and polit-
ical subdivisions 525 6 -- 531
Corporate securities 953,511 89,962 525 1,042,948
Mortgage-backed securities 226,368 11,540 117 237,791
---------- -------- ------- ----------
Total held-to-maturity 1,180,654 101,511 642 1,281,523
---------- -------- ------- ----------
Total $5,983,560 $456,664 $12,258 $6,427,966
========== ======== ======= ==========
</TABLE>
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 33,390 $ 33,429 $ 4,889 $ 4,948
Due after one year through five
years 435,040 459,870 163,206 168,527
Due after five years through ten
years 1,383,954 1,429,460 223,848 235,754
Due after ten years 913,784 936,047 513,051 542,822
---------- ---------- ---------- ----------
2,766,168 2,858,806 904,994 952,051
Mortgage-backed securities 1,792,807 1,815,276 220,644 227,061
---------- ---------- ---------- ----------
Total $4,558,975 $4,674,082 $1,125,638 $1,179,112
========== ========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, bonds and certificates of deposit with a
carrying value of $12,934,000 and $15,296,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,895 $ 1,711
Foreclosed real estate 535 400
Investment real estate 2,529 2,565
------- -------
Total $ 4,959 $ 4,676
======= =======
</TABLE>
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000, and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
At December 31, 1995, the recorded investment in mortgage loans that were
considered to be impaired was $12,232,000 before allowance for credit losses.
Included in this amount is $3,256,000 of impaired loans, for which the related
allowance for credit losses is $211,000, and $8,976,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, a
general allowance for credit losses was established for potential impairments
in the remainder of the mortgage loan portfolio. The general allowance was
$1,500,000 at December 31, 1996, 1995 and 1994.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,711 $2,449 $2,412
Provision for credit losses 381 127 622
Charge-offs (197) (865) (585)
------ ------ ------
Balance at end of year $1,895 $1,711 $2,449
====== ====== ======
</TABLE>
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $9,375 $15,845 $20,236
Interest income on impaired mortgage loans--contractual 1,796 1,590 2,103
Interest income on impaired mortgage loans--collected 1,742 1,515 1,963
</TABLE>
(4) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $204,038 $178,262
Retail installment notes 30,843 32,345
Retail revolving credit 24,863 14,864
Credit card receivables 3,541 4,479
Accrued interest 3,404 3,147
-------- --------
Gross receivables 266,689 233,097
Allowance for uncollectible amounts (7,497) (6,377)
-------- --------
Finance receivables, net $259,192 $226,720
======== ========
</TABLE>
Direct installment loans at December 31, 1996 consisted of $93,127,000 of
discount basis loans (net of unearned finance charges) and $110,911,000 of
interest-bearing loans. As of December 31, 1995, discount basis loans amounted
to $92,351,000 and interest-bearing loans amounted to $85,911,000. Direct
installment loans generally have a maximum term of 84 months. Retail
installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Experience has shown that a substantial portion of
finance receivables will be renewed, converted or paid in full prior to
maturity.
Principal cash collections of direct installment loans amounted to
$92,438,000, $75,865,000 and $70,941,000, and the percentage of these cash
collections to average net balances was 48%, 47% and 55% for the years ended
December 31, 1996, 1995 and 1994, respectively.
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 6,377 $5,360 $4,801
Provision for credit losses 10,086 6,140 4,652
Charge-offs (11,036) (6,585) (5,305)
Recoveries 2,070 1,462 1,212
------- ------ ------
Balance at end of year $ 7,497 $6,377 $5,360
======= ====== ======
</TABLE>
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $69,753 $74,631 $49,781
Differences between
computed and actual tax
expense:
Dividends received
deduction (2,534) (1,710) (1,293)
Special tax on mutual
life insurance
companies 2,760 10,134 9,880
Tax credits (3,475) (1,840) (1,150)
Expense adjustments and
other 2,273 2,159 4,912
------- ------- -------
Total tax expense $68,777 $83,374 $62,130
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 15,854 $ 22,151
Unearned fee income 43,232 43,576
Pension and post-retirement benefits 21,815 20,187
Tax deferred policy acquisition costs 58,732 47,228
Net realized capital losses 8,275 7,881
Other 19,229 17,997
-------- --------
Gross deferred tax assets 167,137 159,020
Deferred tax liabilities:
Deferred policy acquisition costs 206,331 188,906
Real estate and property and equipment depreciation 10,089 9,049
Basis difference on investments 8,605 7,402
Net unrealized capital gains 81,339 119,604
Other 10,438 7,964
-------- --------
Gross deferred tax liabilities 316,802 332,925
-------- --------
Net deferred tax liability $149,665 $173,905
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1996 and 1995, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1996, 1995 and 1994, were
$79,026,000, $64,390,000 and $45,268,000, respectively.
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $377,302 $349,311 $323,304
Less: reinsurance recoverable 80,333 61,624 51,549
-------- -------- --------
Net balance at January 1 296,969 287,687 271,755
-------- -------- --------
Incurred related to:
Current year 134,727 129,896 129,028
Prior years 4,821 (4,014) 860
-------- -------- --------
Total incurred 139,548 125,882 129,888
-------- -------- --------
Paid related to:
Current year 51,695 47,620 46,270
Prior years 70,073 68,980 67,686
-------- -------- --------
Total paid 121,768 116,600 113,956
-------- -------- --------
Net balance at December 31 314,749 296,969 287,687
Plus: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Balance at December 31 $416,910 $377,302 $349,311
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in future policy and contract benefits and pending policy
and contract claims on the consolidated balance sheets.
Incurred claims related to prior years are due to the differences between
actual and estimated claims incurred as of the end of the prior year and
interest credited to future policy and contract benefits.
(7) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan which provides certain employees with benefits
in excess of limits for qualified retirement plans.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 6,019 $ 5,294 $ 4,880
Interest accrued on projected benefit obligation 8,541 7,935 7,382
Actual return on plan assets (12,619) (18,061) (1,331)
Net amortization and deferral 4,698 11,811 (5,094)
-------- -------- -------
Net periodic pension cost $ 6,639 $ 6,979 $ 5,837
======== ======== =======
</TABLE>
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLAN
------------------ ----------------
1996 1995 1996 1995
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 61,328 $ 56,428 $ -- $ --
Non-vested benefit obligation 19,119 16,599 5,912 4,539
-------- -------- ------- -------
Accumulated benefit obligation $ 80,447 $ 73,027 $ 5,912 $ 4,539
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $117,836 $105,180 $12,576 $10,430
Plan assets at fair value 115,107 102,594 -- --
-------- -------- ------- -------
Plan assets less than projected bene-
fit obligation 2,729 2,586 12,576 10,430
Unrecognized net gain (loss) 3,633 2,095 (2,332) (1,187)
Unrecognized prior service cost (364) (213) -- --
Unamortized transition asset (obliga-
tion) 2,422 2,643 (8,451) (9,219)
Additional minimum liability -- -- 4,119 4,515
-------- -------- ------- -------
Net pension liability $ 8,420 $ 7,111 $ 5,912 $ 4,539
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.8% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1996 and 1995. The assumed long-term rate of return on plan assets was either
7.5% or 8.5%, depending on the plan.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the trustees of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1996, 1995 and 1994 of $6,092,000, $6,595,000 and $6,866,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
The Company also has unfunded postretirement plans that provide certain health
care and life insurance benefits to substantially all retired employees and
agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $1,011 $1,276 $1,760
Interest accrued on projected benefit obligation 2,041 2,452 2,298
Amortization of prior service cost (513) (513) (223)
Amortization of net gain (177) -- --
------ ------ ------
Net periodic postretirement benefit cost $2,362 $3,215 $3,835
====== ====== ======
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $10,238 $11,875
Other fully eligible plan participants 4,594 5,535
Other active plan participants 9,514 9,809
------- -------
Total accumulated postretirement benefit obligation 24,346 27,219
Unrecognized prior service cost 4,107 4,620
Unrecognized net gain 9,880 4,743
------- -------
Accrued postretirement benefit liability $38,333 $36,582
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1996 and 1995 was 7.5%. The 1996 net health care cost trend rate
was 9.0%, graded to 5.5% over 7 years, and the 1995 rate was 11.0%, graded to
5.5% over 11 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1996 and 1995. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31, 1996 by
$4,262,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1996 by $583,000.
(8) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $615,098 $600,841 $558,066
Reinsurance assumed 64,489 64,792 60,939
Reinsurance ceded (67,228) (61,863) (56,987)
-------- -------- --------
Net premiums $612,359 $603,770 $562,018
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $72,330,000,
$58,338,000 and $60,970,000 during 1996, 1995 and 1994, respectively.
68
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgment is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short term investments and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1996 and 1995, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1996 and 1995, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts, and other
fund deposits, which have guaranteed interest rates and surrender charges, are
estimated to be the amount payable on demand as of December 31, 1996 and 1995.
The amount payable on demand equates to the account balance less applicable
surrender charges. Contracts without guaranteed interest rates and surrender
charges have fair values equal to their accumulation values plus applicable
market value adjustments. The fair values of guaranteed investment contracts
and supplementary contracts without life contingencies are calculated using
discounted cash flows, based on interest rates currently offered for similar
products with maturities consistent with those remaining for the contracts
being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
The carrying amounts and fair values of the Company's financial instruments
which were classified as assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,674,082 $4,674,082 $4,761,561 $4,761,561
Held-to-maturity 1,125,638 1,179,112 1,180,654 1,281,523
Equity securities 549,797 549,797 384,882 384,882
Mortgage loans:
Commercial 432,198 445,976 373,897 391,089
Residential 176,610 180,736 234,640 239,723
Policy loans 204,178 204,178 198,716 198,716
Short-term investments 122,772 122,772 72,841 72,841
Cash 57,140 57,140 48,358 48,358
Finance receivables, net 259,192 259,192 226,720 226,720
Derivatives 1,197 1,197 -- --
---------- ---------- ---------- ----------
Total financial assets $7,602,804 $7,674,182 $7,482,269 $7,605,413
========== ========== ========== ==========
</TABLE>
69
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
which were classified as liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,178,355 $2,152,636 $2,178,223 $2,156,886
Annuity certain contracts 52,636 53,962 48,492 50,732
Other fund deposits 808,592 805,709 856,535 847,975
Guaranteed investment contracts 18,770 18,866 47,426 47,987
Supplementary contracts without
life contingencies 47,966 47,536 41,431 39,962
Notes payable 319,000 325,974 279,967 294,103
---------- ---------- ---------- ----------
Total financial liabilities $3,425,319 $3,404,683 $3,452,074 $3,437,645
========== ========== ========== ==========
</TABLE>
(10) NOTES PAYABLE
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyowners' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1996 and 1995. The issuance costs of
$1,403,000 are deferred and amortized over 30 years on a straight-line basis.
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate--surplus notes, 8.25%, 2025 $125,000 $124,967
Consumer finance subsidiary--senior, 6.53%--8.77%, through
2003 194,000 155,000
-------- --------
Total notes payable $319,000 $279,967
======== ========
</TABLE>
At December 31, 1996, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1997, $21,000,000; 1998, $31,000,000;
1999, $49,000,000; 2000, $33,000,000; 2001, $26,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth.
As of December 31, 1996, the consumer finance subsidiary was required to have a
minimum liquid net worth of $41,354,000. Liquid net worth at that date was
$51,803,000.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994,
was $21,849,000, $6,504,000 and $5,378,000, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
The Company has issued certain participating group annuity and life insurance
contracts jointly with another life insurance company. The joint contract
issuer has liabilities related to these contracts of
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$328,346,000 as of December 31, 1996. To the extent the joint contract issuer
is unable to meet its obligation under the agreement, the Company remains
liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $142,469,000 as of December 31, 1996. The Company
estimates that $35,000,000 of these commitments will be invested in 1997, with
the remaining $107,469,000 invested over the next four years.
As of December 31, 1996, the Company had committed to purchase bonds and
mortgage loans totaling $74,123,000 but had not completed the purchase
transactions.
At December 31, 1996, the Company had guaranteed the payment of $68,700,000
in policyowner dividends and discretionary amounts payable in 1997. The Company
has pledged bonds, valued at $70,336,000, to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Associations. An asset is held for the amount of guaranty fund assessments paid
which can be recovered through future premium tax credits.
(12) STATUTORY FINANCIAL DATA
Statutory accounting is primarily focused on solvency and surplus adequacy.
Therefore, fundamental differences exist between statutory and GAAP accounting,
and their effects on income and policyowners' surplus are illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1996 1995 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 682,886 $ 601,565 $115,797 $ 88,706 $ 65,123
Adjustments:
Deferred policy acquisi-
tion costs 589,517 539,732 15,312 29,822 43,974
Net unrealized invest-
ment gains 111,575 235,143 -- -- --
Statutory asset valua-
tion reserve 240,474 201,721 -- -- --
Statutory interest main-
tenance reserve 24,707 32,899 (8,192) 12,976 (4,426)
Premiums and fees de-
ferred or receivable (75,716) (77,444) 1,587 497 (2,310)
Change in reserve basis 98,406 77,464 20,114 12,382 (1,444)
Separate accounts (40,755) (36,010) (6,304) (854) (5,837)
Unearned policy and con-
tract fees (121,843) (122,786) (2,530) (4,410) (10,406)
Surplus notes (125,000) (124,967) -- -- --
Net deferred taxes (149,665) (173,905) 744 (11,995) 1,511
Nonadmitted assets 31,531 28,211 -- -- --
Policyowner dividends 57,765 57,263 502 4,660 2,446
Other (25,454) (26,036) (6,512) (1,925) (8,528)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,298,428 $1,212,850 $130,518 $129,859 $ 80,103
========== ========== ======== ======== ========
</TABLE>
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 302,820 $ 298,461 $ 298,461
States, municipalities and political
subdivisions 11,296 12,055 12,055
Foreign governments 1,926 1,872 1,872
Public utilities 547,228 590,445 573,030
Mortgage-backed securities 2,013,451 2,042,337 2,035,920
All other corporate bonds 2,807,892 2,908,024 2,878,382
---------- ---------- ----------
Total bonds 5,684,613 5,853,194 5,799,720
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 510 611 611
Banks, trusts and insurance companies 12,824 21,484 21,484
Industrial, miscellaneous and all
other 329,792 422,401 422,401
Nonredeemable preferred stocks 10,857 11,491 11,491
---------- ---------- ----------
Total equity securities 353,983 455,987 455,987
---------- ---------- ----------
Mortgage loans on real estate 608,808 xxxxxx 608,808
Real estate (2) 43,082 xxxxxx 43,082
Policy loans 204,178 xxxxxx 204,178
Other long-term investments 98,247 xxxxxx 98,247
Short-term investments 122,772 xxxxxx 122,772
---------- ----------
Total $1,077,087 xxxxxx $1,077,087
---------- ----------
Total investments $7,115,683 xxxxxx $7,332,794
========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $1,810,000.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments.
72
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------- ------------------------------------------------------------
FUTURE POLICY AMORTIZATION
DEFERRED BENEFITS OTHER POLICY BENEFITS, OF DEFERRED
POLICY LOSSES, CLAIMS CLAIMS AND NET CLAIMS, LOSSES POLICY OTHER
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE REVENUE(3) INCOME EXPENSES COSTS EXPENSES
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212 $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 55,888 400,950 34,847 14,567 153,505 33,358 93,482 11,448 83,345
Annuity 53,015 3,401,760 -- 33 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance -- 30,117 23,783 -- 49,216 5,703 33,563 -- 18,090
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$539,732 $5,841,981 $210,494 $55,812 $817,973 $515,047 $842,198 $104,940 $454,241
======== ========== ======== ======= ======== ======== ======== ======== ========
1994:
Life insurance $510,117 $1,867,170 $133,221 $47,099 $505,300 $192,141 $443,233 $ 59,351 $245,791
Accident and
health insurance 46,506 352,955 36,529 17,142 136,619 30,119 93,359 12,401 75,380
Annuity 92,664 3,263,042 -- 12 60,479 258,196 238,301 14,725 79,498
Property and
liability
insurance -- 32,807 21,865 -- 47,735 5,645 33,829 -- 18,717
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$649,287 $5,515,974 $191,615 $64,253 $750,133 $486,101 $808,722 $ 86,477 $419,386
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
PREMIUMS
SEGMENT WRITTEN(4)
- ------- ----------
(IN THOUSANDS)
<S> <C>
1996:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 50,515
-------
$50,515
=======
1995:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 51,133
-------
$51,133
=======
1994:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 47,073
-------
$47,073
=======
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
1994:
Life insurance in force $ 99,220,067 $13,570,369 $23,520,616 $109,170,314 21.5%
============ =========== =========== ============
Premiums:
Life insurance $ 322,799 $ 38,088 $ 59,064 $ 343,775 17.2%
Accident and health
insurance 145,333 10,007 1,293 136,619 0.9%
Annuity 33,889 -- -- 33,889 --
Property and liability
insurance 56,045 8,892 582 47,735 1.2%
------------ ----------- ----------- ------------
Total premiums $ 558,066 $ 56,987 $ 60,939 $ 562,018 10.8%
============ =========== =========== ============
</TABLE>
74
