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PROSPECTUS
NEW ENGLAND VARIABLE ANNUITY FUND I
Individual Variable Annuity Contracts
-----------------------------------------------------
Issued by
Metropolitan Life Insurance Company
One Madison Avenue, New York, New York 10010
Designated Office:
New England Life Insurance Company
501 Boylston Street, Boston, Massachusetts 02116
(617) 578-2000
AUGUST 30, 1996
This prospectus describes individual variable annuity contracts for use with
various retirement plans that qualify for tax-benefited treatment under the
Internal Revenue Code (the "Code"), for individual use and for use with plans
and trusts not qualifying under the Code for tax-benefited treatment. Deferred
contracts can be purchased with either a single payment or flexible payments,
and immediate contracts can be purchased with a single payment. Net purchase
payments with respect to the contracts are invested in New England Variable
Annuity Fund I (the "Fund"), a separate investment account of Metropolitan
Life Insurance Company (the "Company"). The investment objective of the Fund
is to obtain growth of capital through investment principally in equity
securities of a diversified group of companies and industries.
The contracts were initially issued by New England Mutual Life Insurance
Company ("The New England") which has merged with and into the Company, with
the Company surviving.
Although this prospectus describes the terms of the contracts, no new
contracts are being offered at this time. However, holders of existing
flexible payment deferred contracts may continue to make purchase payments.
This prospectus should be read carefully and retained for future reference.
It sets forth information about the Fund that a prospective investor ought to
know before investing. Additional information about the Fund is contained in a
Statement of Additional Information dated August 30, 1996, which has been
filed with the Securities and Exchange Commission and is incorporated herein
by reference. The Table of Contents of the Statement of Additional Information
appears on page 23 of this prospectus. The Statement of Additional Information
is available without charge and may be obtained by writing to New England
Securities Corporation ("New England Securities"), 399 Boylston Street,
Boston, Massachusetts 02116.
New England Securities, an indirect subsidiary of the Company, serves as
principal underwriter for the Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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SPECIAL TERMS
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As used in this prospectus, the following terms have the indicated meanings:
Annuitant: the person on whose life the variable annuity contract is issued.
Fund: a separate investment account of the Company through which amounts at-
tributable to the variable annuity contracts offered hereby are set aside and
invested.
Payee: any person entitled to receive payment in one sum or under a payment
option. The term includes (i) an Annuitant, (ii) a beneficiary or contingent
beneficiary who becomes entitled to payments upon death of the Annuitant, and
(iii) in the event of surrender or partial surrender of the contract, the
Contractholder.
Contractholder: the person or entity with legal rights of ownership in a
variable annuity contract.
Deferred Contract: a variable annuity contract in which annuity payments are
to commence on a selected future maturity date.
Immediate Contract: a variable annuity contract in which annuity payments are
to commence at a date agreed upon by the Company and the Contractholder, which
date is normally the date the purchase payment is applied.
Purchase Payments: amounts paid to the Company by or on behalf of the Annui-
tant to purchase a variable annuity.
After-tax Purchase Payments: the balance of purchase payments remaining after
deducting any applicable state premium taxes.
Net Purchase Payments: the balance of purchase payments remaining after first
deducting any applicable state premium taxes and after further deducting sales
and administrative expenses.
Accumulation Period: the period during which amounts are accumulated under a
deferred annuity contract prior to application under a payment option.
Annuity Period: the period commencing when amounts accumulated under a de-
ferred annuity contract are applied under a payment option. An immediate annu-
ity contract is always in the annuity period.
Accumulation Unit: an accounting device used to measure the value of a con-
tract before annuity payments begin.
Annuity Unit: an accounting device used to calculate the dollar amount of an-
nuity payments.
Maturity Date: the date on which annuity payments are scheduled to commence.
Designated Office: The Company's Designated Office for receipt of Purchase
Payments, requests and elections, and communications regarding death of the
Annuitant is New England Life Insurance Company, located at 501 Boylston
Street, Boston, Massachusetts 02116, (617) 578-2000.
2
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HIGHLIGHTS
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VARIABLE ANNUITY CONTRACTS -- This prospectus describes individual variable
annuity contracts for individual use and for use with retirement plans,
including the following plans that qualify for tax-benefited treatment: (1)
retirement plans qualified under Section 401(a), 401(k), or 403(a) of the Code
("Qualified Plans"); (2) annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of the
Code ("TSA Plans"); (3) individual retirement accounts adopted by or on behalf
of individuals pursuant to Section 408(a) of the Code and individual
retirement annuities purchased pursuant to Section 408(b) of the Code (both of
which may be referred to as "IRAs"), including simplified employee pension
plans and salary reduction simplified employee pension plans which are
specialized IRAs that meet the requirements of Section 408(k) of the Code
("SEPs" and "SARSEPs"); (4) eligible deferred compensation plans (within the
meaning of Section 457 of the Code) for employees of state and local
governments and tax-exempt organizations ("Section 457 Plans"); and (5)
governmental plans (within the meaning of Section 414(d) of the Code) for
governmental employees, including Federal employees ("Governmental Plans").
The basic objective of the contracts is to provide annuity payments that
will tend to conform more closely than a fixed annuity would to changes in the
cost of living. To this end, annuity payments under the contracts are based on
the changing values of the assets held in the Fund.
THE COMPANY -- The contracts were initially issued by New England Mutual
Life Insurance Company ("The New England"). On August 30, 1996, The New
England merged with and into the Company. Upon consummation of the merger, The
New England's separate corporate existence ceased by operation of law, and the
Company assumed legal ownership of all of the assets of The New England,
including the Fund and its assets. As a result of the merger, the Company also
has become responsible for all of The New England's liabilities and
obligations, including those created under the contracts. The contracts have
thereby become variable contracts funded by a separate account of the Company,
and each contractholder has thereby become a policyholder of the Company. The
merger is not expected to have any adverse tax consequences on
Contractholders.
THE FUND'S ADVISER -- Capital Growth Management Limited Partnership serves
as investment adviser to the Fund for a fee equal to an annual rate of .3066
of 1% of the Fund's average daily net assets. (See "Investment Advisory
Services and Deductions.")
PURCHASE OF VARIABLE ANNUITY CONTRACTS -- No new contracts are being offered
at this time, but holders of existing flexible payment deferred contracts may
continue to make purchase payments. From each purchase payment there are first
deducted any applicable state premium taxes, which currently range up to 2%.
Deductions are then made from each after-tax purchase payment for sales and
administrative expenses. Such expenses may aggregate up to 9.9% of the net
purchase payment (9% of the after-tax purchase payment) for flexible payment
deferred contracts and 8.7% of the net purchase payment (8% of the after-tax
purchase payment) for single purchase payment deferred or immediate contracts.
The deduction from any purchase payment for sales expenses will not exceed 6%
of the after-tax payment. Reduced sales charges are applicable in certain
cases. (See "Deductions from Purchase Payments for Sales and Administrative
Services and Premium Taxes.")
OTHER DEDUCTIONS -- The Company is compensated for the mortality and expense
risks associated with the contracts by daily deductions from the Fund's net
assets equal, on an annual basis, to a maximum of .9490 of 1% for deferred
contracts and .6935 of 1% for immediate contracts. (See "Mortality and Expense
Risks and Deductions.")
SURRENDER OF CONTRACT -- Before annuity payments are to commence,
Contractholders may surrender their contracts without charge, for their cash
value or for other types of early payment. (See "Surrender (Redemption)
Proceeds" under "Accumulation Period (Deferred Contracts).")
3
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EXPENSE TABLE
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The following table lists the charges and expenses incurred with respect to
purchase payments invested under the contracts. The items listed include
charges deducted from purchase payments and charges assessed against the
Fund's assets. The purpose of the table is to assist you in understanding the
various costs and expenses which you will bear, directly and indirectly, as a
Contractholder.(1)
CONTRACTHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
FLEXIBLE PURCHASE SINGLE PURCHASE
PAYMENT CONTRACTS PAYMENT CONTRACTS
----------------- ---------------------
<S> <C> <C>
Sales Load Imposed on Purchases (as a
percentage of purchase payments after
deduction of any applicable premium
tax)................................. 6% 6% of first $5,000
3.75% of next $95,000
1.75% of excess
Administrative Charge Imposed on
Purchases (as a percentage of
purchase payments after deduction of
any applicable premium tax).......... 3% of first $46 2% of first $5,000
2% of excess 0.25% of excess
Maximum Premium Tax Charge Imposed on
Purchases (as a percentage of
purchase payments)(2)................ 2.0% 2.0%
</TABLE>
ANNUAL EXPENSES
(as a percentage of average net assets)(3)
<TABLE>
<S> <C>
Management Fee......................................................... 0.31%
Expense Risk Fee....................................................... 0.11%
Mortality Risk Fee(4).................................................. 0.84%
Other Expenses......................................................... 0.09%
----
TOTAL ANNUAL EXPENSES................................................ 1.35%
</TABLE>
EXAMPLE (5)
There are no extra expenses if you surrender or annuitize your contract. At
the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
For a flexible purchase payment deferred con-
tract: $93 $120 $148 $229
For a single purchase payment deferred con-
tract(6): $93 $119 $148 $229
</TABLE>
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NOTES:
(1) All charges and expenses apply for the duration of the contracts, except
that the mortality and expense risk fees do not apply during the annuity
period if the Contractholder elects to transfer the proceeds of the
contract from the Fund to the Company's general assets. (See "Fixed
Payment Options.")
(2) Premium taxes are not charged in all states and vary in amount from state
to state. The maximum premium tax currently deducted by the Company is 2%.
In certain states, the premium tax may be deducted from the contract value
when the contractholder elects to commence annuity benefits rather than
from purchase payments as they are received. (See "Deductions from
Purchase Payments for Sales and Administrative Services and Premium
Taxes.")
(3) The percentages shown in the Annual Expenses portion of the table have
been rounded off to the nearest hundredth of a percent. (See "Deductions
from Fund Assets.")
(4) The fee shown is for a deferred contract. The mortality risk fee for an
immediate contract is 0.58% of the Fund's average net assets. Therefore,
total annual expenses for such a contract would be lower than for a
deferred contract. (See "Mortality and Expense Risks and Deductions.")
(5) The Example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The
figures assume that no premium tax has been deducted from purchase
payments. Also, all expense amounts have been rounded off to the nearest
dollar.
(6) The minimum purchase payment for a single purchase payment contract is
$2,000. However, no new contracts are being offered at this time.
4
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PER UNIT INCOME AND CAPITAL CHANGES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
(The information in this table relating to the five most recent fiscal
years has been derived from financial statements audited by Coopers &
Lybrand L.L.P., independent accountants, whose report thereon accompanies
the financial statements of the Fund.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income and expenses:
Total investment
income................ $ .24 $ .29 $ .16 $ .25 $ .24 $ .16 $ .22 $ .32 $ .12 $ .12
Operating expenses..... .19 .16 .15 .14 .13 .10 .09 .09 .10 .07
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income.. $ .05 $ .13 $ .01 $ .11 $ .11 $ .06 $ .13 $ .23 $ .02 $ .05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Capital changes:
Net investment income.. $ .05 $ .13 $ .01 $ .11 $ .11 $ .06 $ .13 $ .23 $ .02 $ .05
Net realized and
unrealized gains
(losses) on
investments........... 4.57 (1.08) 1.26 (.37) 3.35 .34 1.10 (.50) .84 1.29
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease)
in
accumulation unit
value................. 4.62 (.95) 1.27 (.26) 3.46 .40 1.23 (.27) .86 1.34
Accumulation unit value
at
beginning of period.... 11.90 12.85 11.58 11.84 8.38 7.98 6.75 7.02 6.16 4.82
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Accumulation unit value
at end of period....... $16.52 $11.90 $12.85 $11.58 $11.84 $ 8.38 $ 7.98 $ 6.75 $ 7.02 $ 6.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of operating
expenses to
average net assets (%). 1.35 1.26 1.26 1.25 1.26 1.26 1.26 1.26 1.26 1.25
Ratio of net investment
income to
average net assets (%). .34 1.06 .11 .98 1.11 .69 1.72 3.39 .36 .82
Portfolio turnover (%).. 228.26 139.43 154.15 171.55 157.43 136.52 206.90 259.70 139.77 120.98
Number of accumulation
units
outstanding at end of
period
(in thousands)......... 3,399 4,038 4,411 5,104 5,499 5,961 6,958 8,657 9,219 8,534
</TABLE>
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FINANCIAL STATEMENTS
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The financial statements of the Fund and of the Company may be found in
the Statement of Additional Information.
5
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FUND PERFORMANCE
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The average annual total return of the Fund illustrated below is based upon
accumulation unit values for the 1, 5 and 10 year periods ending December 31,
1995. Calculations are based on a single investment of $1,000 assumed to be
made at the beginning of each period shown. One illustration deducts the
maximum premium tax of 2% and then deducts the maximum sales and
administrative load of 9% of the first $46 and 8% of the balance. The other
illustration does not deduct any premium tax but does deduct the maximum sales
and administrative load of 9% of the first $46 and 8% of the balance. The net
amount (the Net Purchase Payment) is divided by the accumulation unit value at
the beginning of each of the 1, 5 and 10 year periods to arrive at the number
of accumulation units held during each period. The units held are multiplied
by the accumulation unit value on December 31, 1995 to arrive at the contract
value. The average annual total return is the annual compounded rate of return
which would produce the contract value on December 31, 1995.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
ASSUMING MAXIMUM
PREMIUM TAX
OF 2.0%
----------------
<S> <C>
Period Ending December 31, 1995
1 Year................... 25.1%
5 Years.................. 12.2%
10 Years.................. 11.9%
</TABLE>
<TABLE>
<CAPTION>
ASSUMING NO
PREMIUM TAX
-----------
<S> <C>
Period Ending December 31, 1995
1 Year................................. 27.7%
5 Years................................ 12.6%
10 Years................................ 12.2%
</TABLE>
Historical investment performance is also illustrated in the Fund's Annual
and Semi-Annual Reports (the "Reports") by showing the percentage change in
the unit value without reflecting the impact of any sales and administrative
charges. The average annual total returns shown above are lower than the
historical investment performance for the same periods because average annual
total returns reflect sales and administrative charges. The percent change in
unit value represents what the increase in contract value would be for a
Contractholder who did not make any purchase payments or surrenders during the
year. The Reports show the percent change in unit value for every calendar
year since inception of the Fund. Additionally, the Reports show the percent
change in unit value from inception of the Fund to the date of the report and
for the 15, 10, 5, and 1 year periods ending with the date of the report. The
percentage change is calculated by dividing the difference in unit values at
the beginning and end of the period by the beginning unit value.
6
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DESCRIPTION OF THE COMPANY AND THE FUND
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The Company is a mutual life insurance company whose principal office is at
One Madison Avenue, New York, N.Y. 10010. The Company was organized in 1866
under the laws of the State of New York and has engaged in the life insurance
business under its present name since 1868. It operates as a life insurance
company in all 50 states, the District of Columbia, Puerto Rico and all prov-
inces of Canada. The Company has over $177 billion in assets under management.
The contracts were initially issued by The New England. On August 30, 1996,
The New England merged with and into the Company, which thereby acquired the
Fund and assumed the liabilities and obligations under the contracts.
New England Life Insurance Company ("NELICO"), which was a subsidiary of The
New England and became a subsidiary of the Company as a result of the merger,
provides administrative services for the contracts and the Fund pursuant to an
administrative services agreement with the Company. These administrative serv-
ices include maintenance of Contractholder records and accounting, valuation,
regulatory and reporting services. NELICO, located at 501 Boylston Street,
Boston, Massachusetts 02116, is the Company's Designated Office for receipt of
Purchase Payments, requests and elections, and communications regarding death
of the Annuitant, as further described below.
The Fund was established in 1969 by The New England as a separate investment
account in accordance with Massachusetts law and is currently a separate in-
vestment account of the Company, subject to New York law. The Fund is regis-
tered as an open-end diversified management investment company under the In-
vestment Company Act of 1940 (the "1940 Act"). The Fund meets the definition
of a "separate account" under Federal securities laws.
The variable annuity contracts provide that the assets in the Fund shall not
be chargeable with liabilities arising out of any other business the Company
may conduct and that the income and realized and unrealized capital gains or
losses of the Fund must be credited to or charged against the Fund without re-
gard to other income and capital gains or losses of the Company. The obliga-
tions arising under the variable annuity contracts are general corporate obli-
gations of the Company.
The Fund is managed by its Board of Managers, which is elected by the
Contractholders in accordance with the 1940 Act. The affairs of the Fund are
conducted in accordance with Rules and Regulations adopted by the Board.
The Rules and Regulations of the Fund permit it to reorganize and qualify as
a unit investment trust or to terminate registration under the 1940 Act, in
each case upon approval by a majority vote of the Contractholders and subject
to any necessary approval of the Securities and Exchange Commission (the
"SEC").
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THE VARIABLE ANNUITY CONTRACTS
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Each Contractholder makes one or more Purchase Payments to the Company. In
the case of deferred contracts each Net Purchase Payment is credited in the
form of Accumulation Units, while in the case of immediate contracts the Net
Purchase Payment is credited in the form of Annuity Units. The value of these
Units fluctuates in accordance with the net investment results of the Fund.
A. HOW CONTRACT PURCHASE PAYMENTS MAY BE MADE
The initial Purchase Payment for a flexible payment deferred contract must be
at least $10. Thereafter, Purchase Payments of $10 or more may be made at any
time. The Company may, however, limit the amount of Purchase Payments made in
any contract year to three times the anticipated annual contribution specified
by the Contractholder in the contract application. After the first Purchase
Payment is made, no further payments are required to keep the contract in
force.
B. ACCUMULATION UNIT VALUES, ANNUITY UNIT VALUES AND NET INVESTMENT FACTORS
Accumulation Unit Values (which are used to value deferred contracts during
the Accumulation Period, as described below in C. 2 of this section under the
caption "Accumulation Period (Deferred Contracts)--Contract Value") and Annu-
ity Unit Values (which are used to determine the number of Annuity Units cred-
ited under a variable payment option upon annuitization and the amounts of
payments made pursuant to a variable payment option during the Annuity Period)
are determined as of the close of
7
<PAGE>
regular trading on the New York Stock Exchange (the "Exchange") on each day on
which the Exchange is open for trading (a "Trading Day") by multiplying the
then current Accumulation Unit Value or Annuity Unit Value, as the case may be,
by the appropriate Net Investment Factor determined as of the closing of the
Exchange on that day. In determining a Net Investment Factor, the Fund takes
into account (i) the investment income paid or accrued on its assets since the
previous determination of such Net Investment Factor, plus or minus realized
and unrealized capital gains or losses, respectively, during such period, and
(ii) deductions for taxes, if any, paid or reserved against and arising from
the income and realized and unrealized capital gains on assets of the Fund,
other expenses paid by the Fund, expense risk charge and mortality risk charge.
The formulas for determining Net Investment Factors are described under the
caption "Net Investment Factor" in the Statement of Additional Information. The
Net Investment Factor used to determine current Annuity Unit Values for immedi-
ate contracts will be different from the Net Investment Factor used to deter-
mine current Accumulation Unit Values during the Accumulation Period and Annu-
ity Unit Values during the Annuity Period for deferred contracts because dif-
ferent deductions attributable to mortality risk assumptions are made in re-
spect of each type of contract.
In determining the value of the assets of the Fund, each security traded on a
national securities exchange is valued at the last reported sale price on the
principal exchange on each Trading Day. If there has been no reported sale on
such day, then the value of such security is taken to be the last reported bid
price on such day. Any security not traded on a securities exchange but traded
in the over-the-counter market is valued at the last reported sale price. Any
securities or other assets for which current market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Managers or persons acting at their direction.
C. ACCUMULATION PERIOD (DEFERRED CONTRACTS)
1. Basis Upon Which Accumulation Units are Credited
During the Accumulation Period each Net Purchase Payment is credited in the
form of Accumulation Units. The number of Accumulation Units credited will be
equal to the Net Purchase Payment divided by the value of an Accumulation Unit
next determined following receipt of the Purchase Payment at the Company's Des-
ignated Office.
2. Contract Value
The value of a contract during the Accumulation Period is determined by multi-
plying the total number of Accumulation Units then credited to the contract by
the current value of an Accumulation Unit (the "Accumulation Unit Value").
3. Surrender (Redemption) Proceeds
During the Accumulation Period while the Annuitant is living, the
Contractholder may surrender the contract for its value in cash or apply the
value under a fixed or variable payment option. (See "Annuity Payment Options
Available" and "General Limitations on Options.") The request for surrender
must be in writing and must be received at the Company's Designated Office
prior to the earlier of the Maturity Date or the death of the Annuitant. Pay-
ment of surrender proceeds normally will be made within seven days, subject to
the Company's right to suspend payments under certain circumstances described
below. A partial surrender or withdrawal may also be made in the same manner.
The Company is not required to permit a partial surrender or withdrawal which
would reduce the contract value to less than $200. Further, the Federal tax
laws impose penalties upon, and in some cases prohibit, certain premature dis-
tributions from the Contracts before or after the date on which annuity pay-
ments are to begin. (See "Federal Income Tax Status.")
On receipt of a request for surrender, the Company will cancel the number of
Accumulation Units necessary to equal the dollar amount of the withdrawal. Sur-
renders will be based on Accumulation Unit Values next determined after the
surrender request is received at the Company's Designated Office or, if payment
is to be made under a payment option, such later date as may be specified in
the surrender request.
Surrender proceeds will be increased accordingly if surrender of a contract
results in a credit against the premium tax liability of the Company.
The Fund may suspend the right of surrender or redemption and may postpone
payment when the Exchange is closed for other than weekends or holidays, or if
permitted by the rules of the SEC during periods when trading on the Exchange
is restricted or during an emergency which makes it impracticable for the Fund
to dispose of its securities or fairly to determine the value of its net as-
sets, or
8
<PAGE>
during any other period permitted by the SEC for the protection of investors.
No redemption is permitted in connection with a contract issued pursuant to
the Optional Retirement Program of The University of Texas System prior to the
Annuitant's death, retirement, or termination of employment in all institu-
tions of higher education.
If contracts offered by this prospectus are issued in connection with retire-
ment plans, reference should be made to each variable annuity contract and the
terms of the applicable plan or trust with respect to limitations or restric-
tions on surrender for cash or other forms of early settlement, and careful
attention should be paid to tax consequences. (See "Federal Income Tax Sta-
tus.")
4. Death Proceeds
In the event that the Annuitant dies during the Accumulation Period under a
deferred contract, the Company will pay to the beneficiary, upon receipt of
due proof of death of the Annuitant, the contract's death proceeds equal to
the greater of (i) the sum of all Purchase Payments made, without interest,
adjusted for any partial surrenders, and (ii) the value of the contract next
determined after the later of the date on which due proof of death is received
at the Company's Designated Office and the date on which written election of
payment in one sum or under a payment option is received at the Company's Des-
ignated Office. (See restrictions on payment options imposed by Section 72(s)
of the Code, discussed below.)
The death proceeds will be paid in cash or will be applied to provide one or
more of the fixed or variable methods of payment available (see "Annuity Pay-
ment Options Available"), depending upon the election made by the
Contractholder during the life of the Annuitant. Such an election, particu-
larly in the case of contracts issued in connection with retirement plans
qualifying for tax-benefited treatment, would be subject to any applicable re-
quirements of Federal tax law. If the Contractholder has not made such an
election, payment will be in a single sum, unless the beneficiary elects an
annuity payment option within 90 days after receipt by the Company of due
proof of the death of the Annuitant. Whether and when such an election is made
could affect when the contract's death proceeds are deemed to be received un-
der the tax laws.
Section 72(s) of the Code requires that, in order to qualify as annuities un-
der Section 72 of the Code, all contracts (i) issued after January 18, 1985
and (ii) not for use with various retirement plans qualifying for tax-
benefited treatment under the Code, must contain certain limitations on the
period over which payments from the contract may be made upon the death of the
Contractholder. Reference should be made to the contract for a description of
these limitations. There are comparable rules to Section 72(s) that govern the
timing of payments after the death of the Annuitant in the case of tax-bene-
fited retirement plans. (See discussion under heading "Distributions from the
Contract" on page 19 of this prospectus.)
Deferred contracts subject to the law of Texas issued prior to May 1, 1978
contain a special death benefit provision. Reference should be made to such
contracts for a description of this provision.
D. ANNUITY PERIOD (DEFERRED AND IMMEDIATE CONTRACTS)
The Annuity Period, in the case of a deferred contract, commences when
amounts accumulated under the contract are applied under an annuity payment
option. An immediate contract is always in the Annuity Period.
1. Choice of Retirement Date and Annuity Payment Option
If contracts offered by this prospectus are used in connection with retire-
ment plans qualifying for tax-benefited treatment, reference should be made to
the terms of the particular plan under which a contract is purchased. Such
plan will ordinarily provide for a time by which benefits must commence, the
period over which such payments may be made, the payment options that may be
selected, and the minimum annual amounts of such payments.
A. DEFERRED CONTRACTS
In applying for a deferred contract the Contractholder ordinarily selects a
retirement date (Maturity Date) on which annuity payments are to begin, and a
form of payment option. (See "Annuity Payment Options Available.") Each of the
annuity payment options may be selected on either a fixed or a variable basis
or a combination thereof. The Contractholder may (within the limits of the re-
tirement plan, if the contract is issued in connection with such a plan) defer
9
<PAGE>
the Maturity Date or change the annuity payment form up to the date on which
annuity payments would otherwise have begun and may surrender the contract in
whole or in part on any date up to and including the Maturity Date.
B. IMMEDIATE CONTRACTS
Under immediate contracts annuity payments begin on a date mutually agreed
upon by the Company and the Contractholder. That date is normally the date the
Purchase Payment is applied. Under these contracts, only the Single Life Annu-
ity and Joint Life Annuity Options (see "Annuity Payment Options Available")
are available and only on a variable payment basis. The purchaser of an imme-
diate contract may, at any time prior to the first annuity payment, surrender
the contract for the surrender proceeds, which would be the amount of assets
established in the Fund to meet the obligation for future annuity payments un-
der the contract. Payment of surrender proceeds will be made in the same man-
ner as under deferred contracts. (See "Surrender (Redemption) Proceeds.")
2. Sex-Neutral Contracts
In 1983, the United States Supreme Court ruled that annuity benefits derived
from contributions made to certain employer-sponsored plans on or after August
1, 1983 must be determined on a sex-neutral basis. Under the decision, bene-
fits derived from contributions made prior to August 1, 1983 can continue to
be calculated on a sex-distinct basis. The Court's decision does not affect
nonemployer-related individual retirement accounts funded through the purchase
of individual variable annuity contracts.
Except as described below, the contracts use sex-neutral annuity rates ("Sex-
Neutral Contracts"), including contracts purchased prior to the time when Sex-
Neutral Contracts were first made available if annuity payments with respect
to such contracts commenced after August 1, 1983. Sex-neutral annuity rates
are the applicable male rates, whether the Payee is male or female. Sex-dis-
tinct annuity rates continue to apply only to contracts for which annuity pay-
ments commenced prior to August 1, 1983. (See "Variable Payment Options.")
With respect to contracts issued in New York or Oregon for use in situations
not involving an employer-sponsored plan, benefits will be calculated on a
sex-distinct basis.
3. Fixed and Variable Payment Options
When a Contractholder selects an annuity payment option (see "Annuity Payment
Options Available" below), he or she may also choose to apply annuity proceeds
to a fixed payment option, a variable payment option or a combination thereof.
If the Contractholder does not select a payment option by the Maturity Date,
variable payments will be made while the Payee is living but for at least ten
years. (See "Annuity Payment Options Available" below.)
A.FIXED PAYMENT OPTIONS
Fixed payment options are available only under deferred contracts. All pro-
ceeds applied under fixed payment options will be transferred from the Fund to
the Company's general assets, and will no longer participate in or be affected
by the investment performance of the Fund.
The applicable annuity purchase rates vary depending on the particular annu-
ity payment option selected and on the age of the Payee (and, where sex-neu-
tral annuity rates are not applicable, on the sex of the Payee) when the annu-
ity payment option selected involves a life contingency.
B.VARIABLE PAYMENT OPTIONS
When a variable payment option has been elected under a deferred contract,
the proceeds (or the selected portion thereof) will be applied at annuity pur-
chase rates then in use by the Company for immediate contracts, or at the an-
nuity purchase rates stated in the contract, whichever are more favorable to
the Payee. In the case of immediate contracts, the Net Purchase Payment is ap-
plied at current Company variable annuity purchase rates.
As in the case of fixed payment options, the applicable annuity purchase
rates vary depending on the particular annuity payment option selected and the
age of the Payee (and where sex-neutral annuity rates are not applicable, on
the sex of the Payee) when the annuity payment option selected involves a life
contingency. Under the variable payment options, however, payments will be
subject to variation from month to month, depending upon the investment per-
formance of the Fund.
The amount of the basic payment level is determined by applying the applica-
ble annuity purchase rates to the proceeds applied to provide the annuity. The
dollar amount of
10
<PAGE>
the initial variable annuity payment will be at the basic payment level unless
the contract is an immediate contract and the initial payment is due more than
14 days after the Net Purchase Payment is applied. The higher the age of the
Payee, the greater the basic payment level, because the Payee's life expec-
tancy and thus the period of anticipated income payments will be shorter. Un-
der contracts with sex-distinct purchase rates, a given contract value will
purchase a higher basic payment for a male Payee than for a female Payee, re-
flecting the greater life expectancy of the female Payee. If the
Contractholder has selected a payment option which provides for a refund at
death of the Payee or which guarantees that payments will be made for the bal-
ance of a period of a certain number of years after the death of the Payee,
the contract value will produce a lower basic payment level.
The selection of an assumed interest rate will affect both the basic payment
level and the amount by which subsequent payments to the Payee increase or de-
crease. If the net investment performance of the Fund is the same as the as-
sumed interest rate, the monthly payments will remain level. If the net in-
vestment performance exceeds the assumed interest rate the monthly payments
will increase, and conversely, if it is less than the assumed interest rate
the payments will decrease.
Unless otherwise provided, the assumed interest rate will be at an annual
rate of 3.5%. If a 3.5% rate would result in a first payment larger than per-
mitted under applicable state law or regulation, then the Company will select
a lower rate. Subject to the consent of the Company and if permitted under ap-
plicable state law, a different annual assumed interest rate not in excess of
5% may be elected by the Contractholder.
Election of a higher assumed interest rate produces a larger initial payment,
a more slowly rising series of subsequent payments when the actual net invest-
ment performance exceeds the assumed interest rate, and a more rapid drop in
subsequent payments when the actual net investment performance is less than
the assumed interest rate.
The Company continues to deduct "expense risk" and "mortality risk" charges
from the Fund's assets after the Maturity Date if annuity payments are made
under any variable payment option, including an option not involving a life
contingency and under which the Company bears no mortality risk. (See "Mortal-
ity and Expense Risks and Deductions" below for an explanation of these risk
charges.)
4. Annuity Payment Options Available
A. PAYMENTS FOR SPECIFIED PERIOD (DEFERRED CONTRACTS ONLY)
The proceeds may be paid in monthly payments for any definite number of years
selected, not exceeding 30.
B. SINGLE LIFE ANNUITY
This option and the Joint Life Annuity option (see below) involve life con-
tingencies since they provide that payments will be made during the continua-
tion of one or more lives.
i. With No Period Certain
The proceeds are paid in monthly payments during the lifetime of the Payee.
This form of Single Life Annuity option offers the maximum level of monthly
payments under an option payable over the entire lifetime of the Payee. UNDER
THIS FORM, IT WOULD BE POSSIBLE TO RECEIVE ONLY ONE ANNUITY PAYMENT IF THE
PAYEE SHOULD DIE PRIOR TO THE DUE DATE OF THE SECOND ANNUITY PAYMENT, TWO AN-
NUITY PAYMENTS IF THE PAYEE SHOULD DIE PRIOR TO THE DUE DATE OF THE THIRD AN-
NUITY PAYMENT, AND SO ON.
ii. With Period Certain
This form of Single Life Annuity option is similar to the form described un-
der i. above except that payments are guaranteed during the period certain
elected. If the Payee should die prior to the end of that period, annuity
payments will be continued during the remainder of the period to the desig-
nated beneficiary. The period certain elected may be 120 months; 240 months;
or, under variable payment options only, the nearest whole number of months
equal to the amount applied to this option divided by the dollar amount of
the basic payment level.
C. JOINT LIFE ANNUITY
i. With No Period Certain
The proceeds are paid in monthly payments during the joint lifetime of the
Payee and a designated joint Payee, and thereafter during the remaining life-
time of the survivor. UNDER THIS FORM OF JOINT LIFE ANNUITY OPTION, IT WOULD
BE POSSIBLE TO RECEIVE ONLY ONE ANNUITY PAYMENT IF BOTH PAYEES SHOULD DIE
PRIOR TO THE DUE DATE OF THE SECOND ANNUITY PAYMENT, TWO ANNUITY PAYMENTS IF
BOTH SHOULD DIE PRIOR TO THE DUE DATE OF THE THIRD ANNUITY PAYMENT, AND SO
ON.
11
<PAGE>
ii. With 120 Months Certain
This form of Joint Life Annuity option is similar to the form described un-
der i. above, except that the
payments are guaranteed for a period certain of 120 months. If both the Payee
and the joint Payee should die before the end of that period, annuity pay-
ments will be continued during the remainder of such period to the designated
beneficiary.
iii. With Reduced Payments to Survivor (No Period Certain)
This form of Joint Life Annuity option is similar to the form described un-
der i. above except that the payments to the survivor, which continue for the
survivor's remaining lifetime, are reduced to two-thirds of the amount that
would have been payable if both Payees were still living. UNDER THIS FORM OF
JOINT LIFE ANNUITY OPTION, IT WOULD BE POSSIBLE TO RECEIVE ONLY ONE ANNUITY
PAYMENT IF BOTH PAYEES SHOULD DIE PRIOR TO THE DUE DATE OF THE SECOND ANNUITY
PAYMENT, TWO ANNUITY PAYMENTS IF BOTH SHOULD DIE PRIOR TO THE DUE DATE OF THE
THIRD ANNUITY PAYMENT, AND SO ON.
D.OTHER METHODS OF PAYMENT
In addition to the annuity payment options described above, other methods of
payment may be selected which are agreed to by the Company.
5.General Limitations on Options
In order to qualify as annuities under Section 72 of the Code, all contracts
(a) issued after January 18, 1985 and (b) not for use with various retirement
plans qualifying for tax-benefited treatment under the Code, limit the period
over which payments from the contracts may be made upon the death of the
Contractholder. There are comparable rules that govern the timing of payments
after the death of the Annuitant in the case of tax-benefited retirement
plans. Please refer to the discussion under "Death Proceeds."
After an option involving life contingencies becomes operative it may not be
changed to another option unless agreed to by the Company. Once annuity pay-
ments under such options have begun, the contract cannot be surrendered for a
single sum cash payment, except that in the case of any such option involving
a period certain, the successor Payee may, at any time after the death of the
Annuitant (or both Annuitants in the case of a Joint Life Annuity), elect to
surrender the contract for a single cash payment equal to the commuted value
(which is calculated based on the Assumed Interest Rate) of all remaining un-
paid certain payments. Under variable options which do not involve life con-
tingencies (such as the Payments for Specified Period option) the contract may
be surrendered for the current value in cash of the Accumulation Units stand-
ing to its credit; alternatively, if the amounts involved are adequate, they
may be applied to any other payment option. Payment or application of surren-
der proceeds during the Annuity Period shall be in accordance with the proce-
dures applicable to surrenders during the Accumulation Period. (See "Surrender
(Redemption) Proceeds.") The election of any option, particularly in connec-
tion with contracts issued to retirement plans qualifying for tax-benefited
treatment, is subject to applicable requirements of Federal tax law, which may
restrict both selection of beneficiaries and manner of payment. Consultation
in this case with a qualified tax adviser is recommended prior to the election
of any option.
Options shall be available only with the consent of the Company if the amount
to be applied is less than $2,000. If necessary to bring the amount of each
periodic payment to at least $20, the Company may change the frequency of pay-
ments to quarterly, semiannually or annually.
E. OWNERSHIP RIGHTS UNDER THE CONTRACT
During the Annuitant's lifetime, all rights under the contract are vested
solely in the Contractholder unless otherwise provided. Such rights include
the right to change the beneficiary, to change the payment option, to assign
the contract (subject to the restrictions referred to below), and to exercise
all other rights, benefits, options and privileges conferred by the contract
or allowed by the Company. Transfer of ownership of the contract from a "pen-
sion plan" under the Employee Retirement Income Security Act of 1974 ("ERISA")
to a non-spousal beneficiary may require spousal consent.
Qualified Plans and certain TSA Plans with sufficient employer involvement
are deemed to be "pension plans" under ERISA, and are, therefore, subject to
rules under the Retirement Equity Act of 1984. These rules require that bene-
fits from annuity contracts purchased by a pension plan and distributed to or
owned by a participant be provided in accordance with certain spousal consent,
present value and
12
<PAGE>
other requirements which are not enumerated in the contract. Thus, the tax
consequences of the purchase of the contracts by pension plans should be con-
sidered carefully.
Those contracts described by this prospectus which are used with retirement
plans qualifying for tax-benefited treatment (such plans are defined below un-
der "Retirement Plans Offering Federal Tax Benefits") contain restrictions on
transfer or assignment, reflecting requirements of the Code which must be sat-
isfied in order to assure continued eligibility for the favorable tax treat-
ment accorded these plans. Such favorable tax treatment is described below un-
der "Federal Income Tax Status." In accordance with such requirements, owner-
ship of such a contract may not be changed and the contract may not be sold,
assigned or pledged as collateral for a loan or for any other purpose except
under certain limited circumstances. A Contractholder contemplating a sale,
assignment or pledge of the contract should carefully review its provisions
and consult a qualified tax adviser.
If contracts described by this prospectus are used in connection with retire-
ment plans not qualifying for tax-benefited treatment, such plans may also re-
strict the exercise of rights by the Contractholder.
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
- -------------------------------------------------------------------------------
A. OBJECTIVE AND POLICIES
The investment objective of the Fund is growth of capital through investment
principally in equity securities of a diversified group of companies and in-
dustries. The investment objective will not be changed in any material way
without approval by a majority of the votes attributable to outstanding con-
tracts.
The Fund will invest primarily in seasoned issues which trade on national or
regional stock exchanges or in the over-the-counter market. Current income
will not be an important factor in the selection of equity securities. Income
and realized capital gains will be reinvested.
The Fund's portfolio will normally consist principally of common stocks and
securities convertible into or carrying rights to purchase common stocks. How-
ever, during periods when management considers that economic or market condi-
tions make it advisable, a substantial portion of the Fund's assets may be
held temporarily in cash or fixed income securities (including long-term fixed
income securities) whether or not convertible or carrying such rights. No es-
timate can be made as to when or for how long the Fund will employ such a de-
fensive strategy. Also, as a matter of operational policy the Fund will keep
sufficient amounts of cash and United States Government or other high-grade
liquid securities on hand to meet current expenses and variable annuity con-
tract obligations, and such assets may also be kept on hand for limited peri-
ods pending investment in accordance with the Fund's investment policies.
In furtherance of its investment objective, primary emphasis in the selection
of issues for the Fund's portfolio will be given to those securities believed
by management to offer a potential for long-term appreciation. However, this
emphasis will not preclude occasional investment for short-term appreciation.
In the years 1994 and 1995, the Fund's portfolio turnover rate was approxi-
mately 139% and 228%, respectively. The variation in the portfolio turnover
rate during this period reflects strategic shifts in portfolio holdings de-
signed to maintain an optimum portfolio structure in view of general market
conditions and movements in individual stock prices. The rate of the Fund's
portfolio turnover may vary significantly from time to time depending on the
volatility of prevailing or anticipated economic and market conditions. Higher
levels of portfolio turnover may result in higher brokerage costs to the Fund.
The Fund may change the foregoing investment policies without Contractholder
approval.
It must be recognized that there are risks inherent in the ownership of any
security and that there can be no assurance that the investment objective of
the Fund will be achieved. Equity securities are subject to price declines as
well as advances, and the prices of such securities can decline while the cost
of living is rising. Fixed income securities are subject to credit risk (the
risk that the obligor will default in the payment of principal and/or inter-
est) and to market risk (the risk that the market value of the securities will
change as a result of changes in market rates of interest). The value of the
Fund's investments is subject to risks of changing economic conditions and the
risk inherent in management's ability to anticipate such changes and, to the
extent consistent with the Fund's investment objective and policies, to make
appropriate changes in the Fund's portfolio.
13
<PAGE>
The Fund may invest in repurchase agreements. Under these agreements the Fund
purchases a security subject to the agreement of the seller to repurchase the
security at an agreed upon price and date. The resale price is in excess of
the purchase price and reflects an agreed upon market rate unrelated to the
coupon rate on the purchased security. Repurchase agreements can be regarded
as loans by the Fund to the seller, collateralized by the securities that are
the subject of the agreement. Repurchase agreements afford the Fund the oppor-
tunity to earn a return on temporarily available cash at relatively low market
risk. While the underlying security may be a bill, certificate of indebted-
ness, note or bond issued by an agency, authority or instrumentality of the
U.S. Government, the obligation of the seller is not guaranteed by the U.S.
Government and there is a risk that the seller may fail to repurchase the un-
derlying security. In such event, the Fund would attempt to exercise rights
with respect to the underlying security, including possible disposition in the
market. However, the Fund may be subject to various delays and risks of loss,
including (a) possible declines in the value of the underlying security during
the period while the Fund seeks to enforce rights thereto, (b) possible re-
duced levels of income and lack of access to income during this period, and
(c) inability to enforce rights and expenses of attempted enforcement.
B. RESTRICTIONS
The investment restrictions set forth below are fundamental policies and may
not be changed without approval by a majority vote of the Contractholders.
Reference should be made to the Statement of Additional Information for a de-
scription of other investment restrictions applicable to the Fund. Some of
those restrictions are fundamental policies which may not be changed without
Contractholder approval, and some may be changed by the Board of Managers
without Contractholder approval.
The Fund will not:
1. Purchase any security (other than United States Government obligations)
if as a result more than 5% of the Fund's total assets (taken at current val-
ue) would be invested in securities of any one issuer or more than 10% of the
outstanding voting securities of any one issuer would be held by the Fund;
2. Concentrate its investments in particular industries, but it may invest
up to 25% of its total assets (taken at current value) in a single industry;
3. Borrow money, except as a temporary measure for extraordinary or emer-
gency purposes, but not for investment purposes, and in an amount not in ex-
cess of 5% of its total assets (taken at current value) at the time of such
borrowing.
In addition, Section 817(h) of the Code requires the investments of the Fund
to be "adequately diversified" in accordance with Treasury Regulations. To the
extent of any conflict between the restrictions listed above and the regula-
tions under Section 817(h), the regulations will control. (See discussion of
the Section 817(h) regulations under "Special Rules for Annuities Used by In-
dividuals or With Plans and Trusts Not Qualifying Under the Code for Tax-Bene-
fited Treatment," below.)
- -------------------------------------------------------------------------------
DEDUCTIONS AND EXPENSES
- -------------------------------------------------------------------------------
A. DEDUCTIONS FROM PURCHASE PAYMENTS FOR SALES AND ADMINISTRATIVE SERVICES AND
PREMIUM TAXES
New England Securities serves as principal underwriter for the Fund pursuant
to a distribution agreement among the Fund, the Company and New England Secu-
rities. The Company retains the deductions for sales expenses described below
except for amounts paid to New England Securities for services it performs and
expenses it incurs as principal underwriter. New England Securities registered
representatives receive commissions on the sale of flexible purchase payment
contracts at a maximum rate of 5% of purchase payments.
Under the terms of an administrative agreement between the Fund and the Com-
pany, the Company furnishes or bears the expense of all legal, actuarial and
accounting services, office space, facilities and equipment, services of exec-
utive and other personnel and all other administrative services necessary or
appropriate to carry on the various functions of the Fund, but not including
expenses attributable to sales activities, which are covered by the distribu-
tion agreement. To cover the cost of providing these services, the Company re-
tains the deduction for administrative expenses described below.
Under the provisions of the administrative agreement and the contracts, the
following items are payable directly by the Fund (see "Accumulation Unit Val-
ues, Annuity
14
<PAGE>
Unit Values and Net Investment Factors"): (a) any taxes paid or reserved for,
arising from the income and realized and unrealized capital gains on assets of
the Fund, (b) fees for mortality and expense risks assumed and for investment
advisory services, (c) brokerage commissions and taxes, if any, in connection
with the purchase or sale of the Fund's portfolio securities, and (d) fees and
expenses of the Board of Managers, including the auditing of Fund assets.
Various states impose a premium tax on annuity purchase payments received by
insurance companies. The Company may deduct these taxes from Purchase Payments
and currently does so for Contracts subject to the insurance tax law of Ken-
tucky and South Dakota. Certain states may require the Company to pay the pre-
mium tax when the Contractholder elects to commence annuity benefits rather
than when Purchase Payments are received. In those states the Company may de-
duct the premium tax on the date when annuity payments are to begin. Current-
ly, the Company follows this procedure for contracts subject to the insurance
tax law of North Carolina. The maximum premium tax currently deducted by the
Company is 2%. The Company may in the future deduct premium taxes under
contracts subject to the insurance tax laws of other states, or the applicable
premium tax rates may change.
Surrender of a contract may result in a credit against the premium tax lia-
bility of the Company in certain states. In such event, the surrender proceeds
will be increased accordingly.
Premium tax rates are subject to being changed by law, administrative inter-
pretations or court decisions. Premium tax amounts will depend on, among other
things, the state of residence of the Annuitant and the insurance tax law of
the state.
Sales and administrative expenses are deducted from each After-tax Purchase
Payment. The resulting amount is the Net Purchase Payment. It is expected that
the deductions for sales expenses will cover sales expenses over the life of
the contracts. To the extent sales expenses are not covered by the deduction
for sales expenses, they will be recovered from the general account of the
Company, including any income derived from the mortality and expense risk de-
ductions (see "Mortality and Expense Risks and Deductions").
The applicable deductions from each After-tax Purchase Payment for sales and
administrative expenses are set out in the tables below:
Deductions Applicable to Flexible Purchase Payment Contracts
<TABLE>
<CAPTION>
Deduction for
Sales Expenses
Portion of Deduction Deduction for as a Percentage of
Total After-Tax for Sales Administrative Total Portion of Net
Purchase Payment Expenses Expenses Deduction Purchase Payment
<S> <C> <C> <C> <C>
First $46 6.0% 3.0% 9.0% 6.6%
Balance 6.0% 2.0% 8.0% 6.5%
Deductions Applicable to Single Purchase Payment Contracts
<CAPTION>
Deduction for
Sales Expenses
Portion of Deduction Deduction for as a Percentage of
Total After-Tax for Sales Administrative Total Portion of Net
Purchase Payment Expenses Expenses Deduction Purchase Payment
<S> <C> <C> <C> <C>
First $ 5,000 6.00% 2.00% 8.0% 6.5%
Next 95,000 3.75% 0.25 4.0 3.9%
Balance 1.75 0.25 2.0 1.8%
</TABLE>
15
<PAGE>
Under Contracts that have been sold to the following persons, purchase pay-
ments will be subject to the usual deductions for administrative expenses and
premium taxes, if any, but will not be subject to any deductions for sales ex-
penses: certain present and retired employees and certain current and former
directors and trustees (including members of the Board of Managers of the
Fund) of The New England and NELICO and mutual funds sponsored by NELICO; cur-
rent and retired agents and general agents of The New England and NELICO and
their insurance company subsidiaries; certain current and retired employees of
such agents and general agents; the surviving spouses of the employees, agents
and general agents listed above; and any retirement plan or trust for the ben-
efit of the persons listed above.
B. DEDUCTIONS FROM FUND ASSETS
1.Investment Advisory Services and Deductions
Capital Growth Management Limited Partnership ("CGM"), One International
Place, Boston, Massachusetts 02110, serves as investment adviser to the Fund
under an advisory agreement dated August 30, 1996, which provides that CGM
will manage, subject to the supervision of the Fund's Board of Managers, the
investment and reinvestment of the assets of the Fund. For providing such
services the Fund pays CGM an annual fee of .3066% of the average net assets
of the Fund. This fee is computed on a daily basis and is payable monthly.
The general partner of CGM is a corporation controlled equally by Robert L.
Kemp and G. Kenneth Heebner. New England Investment Companies, L.P., an affil-
iate of the Company, owns a 50% limited partnership investment in CGM. CGM
provides discretionary investment services to advisory clients, including
other investment company portfolios.
2.Mortality and Expense Risks and Deductions
Variable annuity payments will not be affected by mortality or expense expe-
rience adverse to the Company because the Company assumes the "expense risk"
and the "mortality risk" under the contracts, for which assumptions it re-
ceives deductions from Fund assets.
The "expense risk" assumed by the Company is the risk that the deductions for
sales and administrative expenses, and the deductions for investment advisory
services, provided for in the variable annuity contract may be insufficient to
cover the actual cost of such items.
The "mortality risk" assumed by the Company has two elements: a "life annuity
mortality risk" and, in the case of deferred contracts, a "minimum death re-
fund risk."
The "life annuity mortality risk" assumed is that the Company agrees to make
annuity payments under options involving life contingencies regardless of how
long a particular Annuitant or other Payee lives and regardless of how long
all Annuitants or other Payees as a class live.
Under deferred contracts the Company also assumes a "minimum death refund
risk" by providing that a death benefit will be payable upon death of the
Annuitant during the Accumulation Period. (See "Death Proceeds" for a
description of the death benefit payable.)
For assuming these risks the Company makes the following daily deductions
from the Fund's net assets:
i. For deferred contracts: .00260% (.9490% on an annual basis consisting of
.8395% for mortality risk assumptions and .1095% for expense risk
assumptions).
ii. For immediate contracts: .00190% (.6935% on an annual basis consisting of
.5840% for mortality risk assumptions and .1095% for expense risk
assumptions).
The percentage of these deductions will not increase over the life of a
contract.
C. TOTAL EXPENSES
For the year ended December 31, 1995, the Fund's total expenses equalled
1.35% of its average net assets.
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RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS
- -------------------------------------------------------------------------------
The Federal tax laws provide for a variety of retirement plans offering tax
benefits. These plans, which may be funded through the purchase of the
individual variable annuity contracts described in this prospectus, include:
1. Plans qualified under Section 401(a), 401(k) or 403(a) of the Code
("Qualified Plans");
2. Annuity purchase plans adopted by public school systems and certain tax-
exempt organizations
16
<PAGE>
pursuant to Section 403(b) of the Code ("TSA Plans");
3. Individual retirement accounts adopted by or on behalf of individuals
pursuant to Section 408(a) of the Code and individual retirement
annuities purchased pursuant to Section 408(b) of the Code (both of which
may be referred to as "IRAs"), including simplified employee pension
plans and salary reduction simplified employee pension plans ("SEPs" and
"SARSEPs"), which are specialized IRAs that meet the requirements of
Section 408(k) of the Code ("SEPs" and "SARSEPs");
4. Eligible deferred compensation plans (within the meaning of Section 457
of the Code) for employees of state and local governments and tax-exempt
organizations ("Section 457 Plans"); and
5. Governmental plans (within the meaning of Section 414(d) of the Code) for
governmental employees, including Federal employees ("Governmental
Plans").
An investor should consult a qualified tax or other adviser as to the suit-
ability of the contracts as a funding vehicle for retirement plans qualifying
for tax-benefited treatment, as to the rules underlying such plans, and as to
state and Federal tax aspects of such plans.
A summary of the Federal tax laws regarding contributions to, and distribu-
tions from, the above tax-benefited retirement plans may be found below under
the heading "Special Rules for Annuities Purchased for Annuitants under Re-
tirement Plans Qualifying for Tax-Benefited Treatment." It should be under-
stood that should a tax-benefited retirement plan lose its qualification for
tax-exempt status, employees will lose some of the tax benefits described
herein.
In the case of most TSA Plans under Section 403(b)(1) of the Code, and in the
case of IRAs purchased under Section 408(b) of the Code, the individual vari-
able annuity contracts described in this prospectus comprise the retirement
"plan" itself. These contracts will be endorsed, if necessary, to comply with
Federal and state legislation governing such plans, and such endorsements may
alter certain contract provisions described in this prospectus. Reference
should be made to the contracts and any endorsements for more complete infor-
mation.
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX STATUS
- -------------------------------------------------------------------------------
The following discussion is intended as a general description of the Federal
income tax aspects of the variable annuity contracts. It is not intended as
tax advice. For more complete information, you should consult a qualified tax
adviser.
A. TAX STATUS OF THE COMPANY AND THE FUND
The Company is taxed as a life insurance company under the Code. The Fund and
its operations are part of the Company's total operations and are not taxed
separately. Under current law no taxes are payable on the investment income
and capital gains of the Fund. Such income and gains will be retained in the
Fund and will not be taxable until received by the Annuitant or the
Annuitant's beneficiary in the form of annuity payments or other distribu-
tions.
If under future law the assets, investment income or capital gains of the
Fund are subject to taxes, the contracts provide that the Company may make an
appropriate charge or reserve against the assets of the Fund for such taxes.
B. TAXATION OF THE CONTRACTS
The variable annuity contracts described in this prospectus are considered
annuity contracts the taxation of which is governed by the provisions of Sec-
tion 72 of the Code. As a general proposition, Section 72 provides that
Contractholders are not subject to current taxation on increases in the value
of the contracts until they are received by the Annuitant or beneficiary in
the form of annuity payments. (Exceptions to this rule are discussed below un-
der "Special Rules for Annuities Used by Individuals or with Plans and Trusts
Not Qualifying Under the Code for Tax-Benefited Treatment.")
Under the general rule of Section 72, to the extent there is an "investment"
in an annuity contract, a portion of each annuity payment is excluded from
gross income as a return of such investment. The balance of each annuity pay-
ment is includible in gross income and taxable as ordinary income. In general,
contributions made to an annuity contract which are deductible by the contrib-
utor and earnings on all contributions to the annuity contract will not con-
stitute an "investment" in the annuity contract under Section 72.
17
<PAGE>
1. Special Rules for Annuities Purchased for Annuitants Under Retirement Plans
Qualifying for Tax-Benefited Treatment
Set forth below is a summary of the Federal tax laws applicable to contribu-
tions to, and distributions from, retirement plans that qualify for Federal
tax benefits. Such plans are defined above under the heading "Retirement Plans
Offering Federal Tax Benefits." You should understand that the following sum-
mary does not include everything you need to know regarding such tax laws. The
Code provisions and the rules and regulations thereunder regarding retirement
trusts and plans, the documents which must be prepared and executed, and the
requirements which must be met to obtain favorable tax treatment for them are
very complex. A person contemplating the purchase of a contract for use with a
retirement plan qualifying for tax-benefited treatment under the Code should
consult a qualified tax adviser as to all applicable Federal and state tax as-
pects of the contracts and, if applicable, as to the suitability of the con-
tracts as investments under ERISA.
A. PLAN CONTRIBUTION LIMITATIONS
i. Qualified Plans, SEPs, SARSEPs and Governmental Plans
Statutory limitations on contributions to Qualified Plans, SEPs, SARSEPs and
Governmental Plans may limit the amount of money that may be contributed to
the contract in any contract year. Any purchase payments attributable to such
contributions are tax deductible to the employer and are not currently tax-
able to the Annuitants for whom the contracts are purchased. The contribu-
tions to the contract and any increase in contract value attributable to such
contributions are not subject to taxation until payments from the contract
are made to the Annuitant or his/her beneficiaries.
ii. TSA Plans
Purchase payments attributable to contributions to TSA Plans are not includ-
ible within the Annuitant's income to the extent such purchase payments do
not exceed the lesser of $9,500 or the "exclusion allowance." The exclusion
allowance is a calculation which takes into consideration the Annuitant's in-
cludible compensation, number of years of service, and prior years of contri-
butions. For more information, the Annuitant should obtain a copy of IRS Pub-
lication 571 on TSA Programs for Employees of Public Schools and Certain Tax-
Exempt Organizations which will better assist the Annuitant in calculating
the exclusion allowance to which he or she may be entitled for any given tax
year. Any purchase payments attributable to permissible contributions under
Code Section 403(b) (and earnings thereon) are not taxable to the Annuitant
until amounts are distributed from the contract.
iii. IRAs
The maximum tax deductible purchase payment which may be contributed each
year to an IRA is the lesser of $2,000 or 100 percent of includible compensa-
tion if the taxpayer is not covered under an employer plan. A spousal IRA is
available if the taxpayer and spouse file a joint return and the spouse earns
no compensation (or elects to be treated as earning no compensation) and is
not yet age 70 1/2. In the case of a spousal IRA, the maximum tax deductible
purchase payment which may be deducted is the lesser of $2,250 or 100 percent
of compensation of the working spouse. If covered under an employer plan,
taxpayers are permitted to make deductible purchase payments; however, the
deductions are phased out and eventually eliminated, on a pro rata basis, for
adjusted gross income between $25,000 and $35,000 for an individual, between
$40,000 and $50,000 for a married couple filing jointly and between $0 and
$10,000 for a married person filing separately. A taxpayer may also make non-
deductible purchase payments. However, the total of deductible and nondeduct-
ible purchase payments may not exceed the limits described above for deduct-
ible payments. For more information concerning contributions to IRAs, you
should obtain a copy of IRS Publication 590 on Individual Retirement Ac-
counts.
iv. Section 457 Plans
Generally, under a Section 457 Plan, an employee or executive may defer in-
come under a written agreement in an amount equal to the lesser of 33 1/3% of
includible compensation or $7,500. The amounts so deferred (including earn-
ings thereon) by an employee or executive electing to contribute to a Section
457 Plan are includible in gross income only in the tax year in which such
amounts are paid or made available to the employee or executive or his/her
beneficiary. Once contributed to the
18
<PAGE>
plan, any contracts purchased with employee contributions remain the sole
property of the employer and may be subject to the general creditors of the
employer. The employer retains all ownership rights to the contract including
voting and redemption rights which may accrue to the contract(s) issued under
the plan.
B. DISTRIBUTIONS FROM THE CONTRACT
Mandatory Withholding on Certain Distributions
Many distributions called "eligible rollover distributions" from Qualified
Plans and from many TSA Plans are subject to automatic withholding by the plan
or payor at the rate of 20%. Withholding can be avoided by arranging a direct
transfer of the eligible rollover distribution to a Qualified Plan, TSA or
IRA.
i. Qualified Plans, TSA Plans, IRAs, SEPs, SARSEPs and Governmental Plans
Payments made from the contracts held under a Qualified Plan, TSA Plan, IRA,
SEP, SARSEP or Governmental Plan are taxable under Section 72 of the Code as
ordinary income, in the year of receipt. Any amount received in surrender of
all or part of the contract value prior to annuitization will, subject to re-
strictions and penalties discussed below, also be included in income in the
year of receipt. If there is any "investment" in the contract, a portion of
each amount received is excluded from gross income as a return of such in-
vestment. Distributions or withdrawals prior to age 59 1/2 may be subject to
a penalty tax of 10% of the amount includible in income. This penalty tax
does not apply (i) to distributions of excess contributions or deferrals;
(ii) to distributions made on account of the Annuitant's death, retirement,
disability or early retirement at or after age 55; (iii) when distribution
from the contract is in the form of an annuity over the life or life expec-
tancy of the Annuitant (or joint lives or life expectancies of the Annuitant
and his or her beneficiary); or (iv) when distribution is made pursuant to a
qualified domestic relations order. In the case of IRAs, the exceptions for
distributions on account of early retirement at or after age 55 or made pur-
suant to a qualified domestic relations order do not apply.
If the Annuitant dies before distributions begin, distributions must be com-
pleted within five years after death, unless payments begin within one year
after death and are made over the life (or life expectancy) of the beneficia-
ry. If the Annuitant's spouse is the beneficiary, distributions need not be-
gin until the Annuitant would have reached age 70 1/2. If the Annuitant dies
after annuity payments have begun, payments must continue to be made at least
as rapidly as payments made before death.
With respect to TSA Plans, contributions to the contract made after December
31, 1988 and any increases in contract value after that date may not be dis-
tributed prior to attaining age 59 1/2, termination of employment, death or
disability. Contributions (but not earnings) made after December 31, 1988 may
also be distributed by reason of financial hardship. These restrictions on
withdrawal will not apply to the contract value as of December 31, 1988.
These restrictions are not expected to change the circumstances under which
transfers to other investments which qualify for tax-free treatment under
Section 403(b) of the Code may be made.
Annuity payments, periodic payments or annual distributions must commence by
April 1 of the calendar year following the year in which the Annuitant at-
tains age 70 1/2. In the case of a Governmental Plan, these distributions
must begin by the later of the date determined by the preceding sentence or
April 1 of the calendar year following the year in which the Annuitant re-
tires. Each annual distribution must equal or exceed a "minimum distribution
amount" which is determined by minimum distribution rules under the plan. A
penalty tax of up to 50% of the amount which should be distributed may be im-
posed by the Internal Revenue Service for failure to distribute the required
minimum distribution amount.
ii. Section 457 Plans
When a distribution under a contract held under a Section 457 Plan is made
to the Annuitant, such amounts are taxed as ordinary income in the year in
which received. The plan must not permit distributions prior to the
Annuitant's separation from service (except in the case of unforeseen emer-
gency). In addition, a distribution prior to age 59 1/2 may be subject to an
additional penalty tax of 10% of the amount included in income unless other-
wise exempt.
Generally, annuity payments, periodic payments or annual distributions must
commence by April 1 of the calendar year following the year in which the An-
nuitant
19
<PAGE>
attains age 70 1/2. Minimum distributions under a Section 457 Plan may be
further deferred if the Annuitant remains employed with the sponsoring em-
ployer. Each annual distribution must equal or exceed a "minimum distribution
amount" which is determined by distribution rules under the plan. A penalty
tax of up to 50% of the amount which should be distributed may be imposed by
the Internal Revenue Service for failure to distribute the required minimum
distribution amount. If the Annuitant dies before distributions begin, the
same special distribution rules apply in the case of Section 457 Plans as ap-
ply in the case of Qualified Plans, TSA Plans, IRAs, SEPs, SARSEPs and Gov-
ernmental Plans. These rules are discussed above in the immediately preceding
section of this prospectus.
2. Special Rules for Annuities Used by Individuals or With Plans and Trusts
Not Qualifying Under the Code for Tax-Benefited Treatment
For an annuity held by an individual, any increase in the accumulated value
of the contract is not taxable until amounts are received, either in the form
of annuity payments as contemplated by the contract or in a full or partial
lump sum settlement of the Company's obligations to the Contractholder.
Under Section 72(u) of the Code, however, contracts, including the contracts
described herein, held by other than a natural person (i.e., those held by a
corporation or certain trusts) will generally not be treated as an annuity
contract for Federal tax purposes. This means an annuity contractholder who is
not a natural person will have to include in income any increase during the
taxable year in the accumulated value over the investment in the contract.
Section 817(h) of the Code requires the investments of the Fund to be "ade-
quately diversified" in accordance with Treasury Regulations. Failure to do so
means the variable annuity contracts described herein would cease to qualify
as annuities for Federal tax purposes. Regulations specifying the diversifica-
tion requirements have been issued by the Department of Treasury, and the Com-
pany believes that the Fund complies fully with these requirements.
Any amount received in a surrender of all or part of the contract value prior
to annuitization will be included in gross income to the extent of any in-
creases in the value of the contract resulting from earnings or gains of the
Fund.
The Code also imposes a ten percent penalty tax on amounts received under a
contract, before or after the annuity starting date, which are includible in
gross income. The penalty tax will not apply to any amount received under the
contract (1) after the Contractholder has attained age 59 1/2, (2) after the
death of the Contractholder, (3) after the Contractholder has become totally
and permanently disabled, (4) as one of a series of substantially equal peri-
odic payments made for the life (or life expectancy) of the Contractholder or
the joint lives (or life expectancies) of the Contractholder and a beneficia-
ry, (5) if the contract is purchased under certain types of retirement plans
or arrangements, (6) allocable to investments in the contract before August
14, 1982, or (7) if the contract is an immediate annuity contract.
In the calculation of any increase in value for contracts entered into after
October 4, 1988, all annuity contracts issued by the Company or its affiliates
to the same Contractholder within a calendar year will be treated as one con-
tract.
If the Contractholder dies, the tax law requires certain distributions from
the contract. (See "Death Proceeds.")
3. Tax Withholding
The Code and the laws of certain states require tax withholding on distribu-
tions made under annuity contracts, unless the recipient has made an election
not to have any amount withheld. The Company provides recipients with an op-
portunity to instruct it as to whether taxes are to be withheld.
- -------------------------------------------------------------------------------
VOTING RIGHTS
- -------------------------------------------------------------------------------
All Contractholders have the right to vote at any meeting of Contractholders.
The number of votes which each Contractholder may cast at any meeting is de-
termined as of the record date chosen by the Board of Managers which must be
within 90 days before the date of the meeting. At least 20 days' written no-
tice of the meeting must be given. The number of votes which a Contractholder
may cast on a contract in the Accumulation Period is equal to the number of
Accumulation Units credited to the contract. During the Annuity Period a
Contractholder may cast the number of votes equal to (i) the amount of assets
established in the
20
<PAGE>
Fund to meet the obligation for future payments under variable options elected
under the contract divided by (ii) the value of an Accumulation Unit. The num-
ber of votes attributable to a contract during the Annuity Period will tend to
decrease over time.
Although the Contractholder has the sole right to cast all votes attributable
to the contract, during the Accumulation Period an Annuitant has the right to
instruct the Contractholder as to how such votes shall be cast in the follow-
ing circumstances: (i) if the Annuitant is covered by a contract issued in
connection with an individual retirement account established pursuant to Sec-
tion 408(a) of the Code or (ii) if the Annuitant is an employee covered by a
contract issued in connection with a Qualified Plan or a retirement plan not
qualifying for favorable Federal tax treatment, in which case the Annuitant
may instruct the Contractholder (a) as to votes attributable to the
Annuitant's own Purchase Payments (voluntary contributions) and (b) to the ex-
tent authorized by the plan, as to any other votes under the contract. Simi-
larly, during the annuity period, every Annuitant or other Payee has the right
to instruct the Contractholder with respect to all votes attributable to the
amount of assets established in the Fund to meet the obligations for future
payments.
If a Contractholder receives instructions from less than all the persons en-
titled to instruct it, it is required to cast the votes for which it receives
no instructions for or against each proposal only in the same proportion as
votes for which instructions have been received. If no instructions are re-
ceived by the Contractholder from any person entitled to instruct it, it may
vote in its sole discretion.
In the case of a contract issued pursuant to Section 403(b) of the Code (an-
nuity purchase plan adopted by a public school system or certain other tax-ex-
empt organizations) or Section 408(b) of the Code (individual retirement annu-
ity), the Annuitant is the Contractholder for voting and all other purposes
during both the Accumulation and Annuity Periods.
If the Company should maintain assets in the Fund which are not attributable
to Contractholders, it will cast the votes attributable to such assets in the
same manner and proportion in which the votes attributable to Contractholders
are cast.
Each Annuitant or other Payee, if any, having the right to instruct the
Contractholders with respect to any votes is entitled to receive from the
Contractholder a notice of that right and of the number of votes to which such
right is applicable. All notices and proxy materials will be provided to the
Contractholders in sufficient number for distribution to all such Annuitants
and other Payees.
The Fund does not hold regular annual meetings of Contractholders. Rather,
meetings of Contractholders are held only when required by the 1940 Act or as
otherwise deemed appropriate by the Fund's Board of Managers.
21
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SPECIAL TERMS............................................................ 2
HIGHLIGHTS............................................................... 3
EXPENSE TABLE............................................................ 4
PER UNIT INCOME AND CAPITAL CHANGES...................................... 5
FINANCIAL STATEMENTS..................................................... 5
FUND PERFORMANCE......................................................... 6
DESCRIPTION OF THE COMPANY AND THE FUND.................................. 7
THE VARIABLE ANNUITY CONTRACTS........................................... 7
A. How Contract Purchase Payments May be Made............................ 7
B. Accumulation Unit Values, Annuity Unit Values and Net Investment
Factors............................................................... 7
C. Accumulation Period (Deferred Contracts).............................. 8
1. Basis Upon Which Accumulation Units are Credited..................... 8
2. Contract Value....................................................... 8
3. Surrender (Redemption) Proceeds...................................... 8
4. Death Proceeds....................................................... 9
D. Annuity Period (Deferred and Immediate Contracts)..................... 9
1. Choice of Retirement Date and Annuity Payment Option................. 9
2. Sex-Neutral Contracts................................................ 10
3. Fixed and Variable Payment Options................................... 10
4. Annuity Payment Options Available.................................... 11
5. General Limitations on Options....................................... 12
E. Ownership Rights Under the Contract................................... 12
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS........................... 13
A. Objective and Policies................................................. 13
B. Restrictions........................................................... 14
DEDUCTIONS AND EXPENSES................................................... 14
A. Deductions from Purchase Payments for Sales and Administrative Services
and Premium Taxes...................................................... 14
B. Deductions from Fund Assets............................................ 16
1. Investment Advisory Services and Deductions........................... 16
2. Mortality and Expense Risks and Deductions............................ 16
C. Total Expenses......................................................... 16
RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS............................ 16
FEDERAL INCOME TAX STATUS................................................. 17
A. Tax Status of the Company and the Fund................................. 17
B. Taxation of the Contracts.............................................. 17
1. Special Rules for Annuities Purchased for Annuitants Under Retirement
Plans Qualifying for Tax-Benefited Treatment.......................... 18
2. Special Rules for Annuities Used by Individuals or With Plans and
Trusts Not Qualifying Under the Code for Tax-Benefited Treatment...... 20
3. Tax Withholding....................................................... 20
VOTING RIGHTS............................................................. 20
</TABLE>
22
<PAGE>
---------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
---------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HISTORY............................................................. II-3
INVESTMENT OBJECTIVE AND POLICIES................................... II-3
MANAGEMENT OF THE FUND.............................................. II-4
INVESTMENT ADVISORY AND OTHER SERVICES.............................. II-6
Advisory Agreement................................................ II-6
Administrative Agreement.......................................... II-7
Distribution Agreement............................................ II-7
Safekeeping of Securities......................................... II-8
Independent Accountants........................................... II-8
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS.................... II-8
DISTRIBUTION OF CONTRACTS........................................... II-9
CALCULATION OF PERFORMANCE DATA..................................... II-9
ANNUITY PAYMENTS.................................................... II-10
NET INVESTMENT FACTOR............................................... II-12
EXPERTS............................................................. II-12
FINANCIAL STATEMENTS................................................ II-13
</TABLE>
---------------------------------------
If you would like to obtain a copy of the Statement of Additional
Information of the Fund, please complete the request form below and mail it
to:
New England Securities Corporation
399 Boylston Street
Boston, Massachusetts 02116
Please send a copy of the Statement of Additional
Information of New England Variable Annuity Fund I to:
----------------------------------------------------
Name
----------------------------------------------------
Street
----------------------------------------------------
City State Zip
23
<PAGE>
INVESTMENT ADVISER
Capital Growth Management Limited Partnership
Boston, Massachusetts
DISTRIBUTOR
New England Securities Corporation
Boston, Massachusetts
LEGAL COUNSEL
Ropes & Gray
Boston, Massachusetts
AUDITORS
Coopers & Lybrand L.L.P.
Boston, Massachusetts
Designated Office:
501 Boylston Street
Boston, Massachusetts 02116
617-578-2000
- -------------------------------------------------------------------------------
EQUAL OPPORTUNITY EMPLOYER M/F
VAP-1036P-96
[Logo]
- -------------------------------------------------------------------------------
New England
Variable Annuity
Fund I
Prospectus
August 30, 1996
<PAGE>
NEW ENGLAND VARIABLE ANNUITY FUND I
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
---------------------------------------------------
Issued by
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
(PART B)
AUGUST 30, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated August 30, 1996 and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained by writing to New England Securities Corporation ("New England
Securities"), 399 Boylston Street, Boston, Massachusetts 02116.
II-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
HISTORY................................................................... II-3
INVESTMENT OBJECTIVE AND POLICIES ........................................ II-3
MANAGEMENT OF THE FUND ................................................... II-4
INVESTMENT ADVISORY AND OTHER SERVICES ................................... II-6
Advisory Agreement ..................................................... II-6
Administrative Agreement ............................................... II-7
Distribution Agreement ................................................. II-7
Safekeeping of Securities............................................... II-8
Independent Accountants ................................................ II-8
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS ......................... II-8
DISTRIBUTION OF CONTRACTS ................................................ II-9
CALCULATION OF PERFORMANCE DATA .......................................... II-9
ANNUITY PAYMENTS ......................................................... II-10
NET INVESTMENT FACTOR .................................................... II-12
EXPERTS .................................................................. II-12
FINANCIAL STATEMENTS ..................................................... II-13
</TABLE>
II-2
<PAGE>
HISTORY
New England Variable Annuity Fund I (the "Fund") is a separate account of
Metropolitan Life Insurance Company ("MetLife" or the "Company"). The Fund was
originally a separate account of New England Mutual Life Insurance Company
("The New England"), and became a separate account of the Company when The New
England merged with and into the Company on August 30, 1996.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are summarized on the
front page of the Prospectus and in the text of the Prospectus under the
heading "Investment Objective, Policies and Restrictions."
As disclosed in the Prospectus, the Fund invests primarily in equity
securities such as common stocks and securities convertible into or carrying
rights to purchase common stocks. However, when management considers that
economic or market conditions make it advisable, the Fund may take a defensive
position by investing a substantial portion of its assets in cash or fixed
income securities (including long-term fixed income securities) whether or not
convertible or carrying such rights. No estimate can be made as to when or for
how long the Fund will employ such defensive strategies; however, in the past,
such periods have approached one year in length.
The investment restrictions set forth in paragraphs 1 through 5 below are
fundamental policies and may not be changed without approval by a majority
vote of the Contractholders.
The Fund will not:
1. Underwrite the securities of other issuers except that it may acquire
portfolio securities under circumstances where, upon the subsequent sale of
such securities, the Fund might be deemed to be an underwriter for purposes
of the Securities Act of 1933;
2. Purchase or sell commodities or commodity contracts;
3. Purchase or sell interests in real estate except such as are
represented by marketable securities of companies, including real estate
trusts, whose assets consist substantially of mortgages and other liens on
real property and interests therein and which therefore may represent
indirect interests in real estate;
4. Make loans. Neither the purchase of a portion of an issue of publicly-
distributed bonds, debentures, corporate notes or other evidences of
indebtedness, nor the purchase of short-term debt securities issued by a
company whose equity securities are listed on the New York Stock Exchange,
nor the entering into of a repurchase agreement shall constitute the making
of a loan for purposes of this investment restriction;
5. Purchase any security restricted as to disposition under Federal
securities laws, or otherwise not readily transferable.
The investment restrictions set forth in paragraphs 1 through 6 below may be
changed by the Board of Managers of the Fund without Contractholder approval.
The Fund will not:
1. Make investments for the purpose of exercising control or management;
2. Acquire securities of other investment companies except through
purchases in the open market involving only customary broker's commissions
and only if after any such acquisition not more than 5% of the total assets
of the Fund (taken at current value) would be so invested and not more than
3% of the total outstanding voting stock of any one investment company
would be held;
3. Purchase securities on margin (except that it may obtain such short-
term credits as are necessary for the clearance of transactions);
4. Make short sales;
5. Participate on a joint or joint and several basis in any trading
account in securities;
6. Write, purchase or sell puts, calls or combinations thereof or write
warrants.
II-3
<PAGE>
MANAGEMENT OF THE FUND
The Board of Managers and the officers of the Fund and their addresses, ages
and principal occupations during the past five years are as follows:
JOHN J. ARENA, Manager, (60).
330 Beacon Street, Boston MA 02116.
Retired; formerly, Vice Chairman of the Board of Directors and President of
BayBank Investment Management, BayBanks, Inc., 1992-1994.
JOHN W. FLYNN, Manager, (57).
791 Main Street, Warren, RI 02885.
Retired; formerly, Vice Chairman, Chief Financial Officer, Fleet Financial
Group, 1990-1993.
ANNE M. GOGGIN*, Manager, (47).
New England Life Insurance Company ("NELICO"), 501 Boylston Street, Boston, MA
02117.
Vice President and Counsel, NELICO, since 1996; Vice President and Counsel,
The New England, 1994-1996; Vice President, General Counsel, Secretary and
Clerk, New England Securities, since 1993. Previously, Second Vice President
and Counsel, The New England.
NANCY HAWTHORNE, Manager, (44).
Continental Cablevision, Inc., Pilot House, Lewis Wharf, Boston, MA 02110.
Senior Vice President and Chief Financial Officer, Continental Cablevision,
Inc.
JOSEPH M. HINCHEY, Manager, (70).
193 Wamphassuc Road, Stonington, CT 06378.
Retired; formerly, Senior Vice President--Finance, Analog Devices, Inc.
(manufacturer of electronic devices). Trustee, Union College and Citizens
Scholarship Foundation of America, Inc.; Director, New England Security
Insurance and Chemet Corporation (manufacturer of metallurgical products).
RICHARD S. HUMPHREY, JR., Manager, (70).
217 Waterways Avenue, P.O. Box 518, Boca Grande, FL 33921.
Retired; formerly, Chairman of the Board, HBM/Creamer (advertising agency).
Director, RYKA, Inc. (manufacturer of athletic footwear for women).
ROBERT B. KITTREDGE, Manager, (75).
21 Sturdivant Street, Cumberland Foreside, ME 04110.
Retired; formerly, Vice President, General Counsel and Director, Loomis,
Sayles & Company, Incorporated. Trustee, CGM Trust and CGM Capital
Development Fund.
JOHN T. LUDES, Manager, (60).
President and Chief Operating Officer, American Brands, 1700 E. Putnam Avenue,
Old Greenwich, CT 06870.
President & Chief Operating Officer since 1995. Formerly, President, Acushnet
Company 1982-1995.
LAURENS MACLURE, Manager, (70).
183 Sohier Street, Cohasset, MA 02025.
Retired; formerly, President and Chief Executive Office, New England
Deaconess Hospital and President, NEDH Corp. (health care holding company).
Trustee, CGM Trust and CGM Capital Development Fund.
DALE ROGERS MARSHALL, Manager, (58).
Wheaton College, 26 East Main Street, Norton, MA 02766.
President, Wheaton College.
MARIE C. SWIFT*, Secretary, (42).
NELICO, 501 Boylston Street, Boston, MA 02117
Counsel, NELICO, since 1992; Assistant Secretary, NELICO, 1992-1996; and
Counsel and Assistant Secretary, The New England, until 1996.
- -------
*Indicates a Board member or officer who is deemed an "interested person" as
defined by the Investment Company Act of 1940 (the "1940 Act").
II-4
<PAGE>
JOSEPH F. TURLEY, Manager, (70).
5680 N. A1A, #304, Indian River Shores, FL 32963.
Retired; formerly President and Chief Operating Officer, The Gillette Company
(manufacturers of personal care products). Director, The Gillette Company and
EG&G, Inc. (diversified technical company).
FREDERICK K. ZIMMERMANN*, Manager and Chairman, (43).
NELICO, 501 Boylston Street, Boston, MA 02117.
Executive Vice President and Chief Investment Officer, NELICO, since 1996;
Chairman of the Board and President, TNE Advisers, Inc.; Chairman of the
Board and President, New England Pension and Annuity Company; Director and
Vice President--Investments, NELICO, until 1996; Executive Vice President
(1993-1996) and Chief Investment Officer (1992-1996), The New England.
- -------
*Indicates a Board member or officer who is deemed an "interested person" as
defined by the Investment Company Act of 1940 (the "1940 Act").
COMMITTEES OF THE BOARD. The Managers have delegated certain functions to
two committees, each of which consists of Managers who are not interested
persons of the Fund. The two committees currently have the same members (Mses.
Hawthorne and Marshall and Messrs. Arena, Flynn, Hinchey, Humphrey, Kittredge,
Ludes, MacLure and Turley).
The Audit Committee's responsibilities include review of financial and
accounting controls and procedures; recommendations as to the selection of the
independent accountants; review of the scope of the audit; review of financial
statements and audit reports; and review of the independence of the
independent accountants and approval of fees and assignments relating to both
audit and non-audit activities of the independent accountants. Mr. Hinchey
currently serves as chairman of the Audit Committee.
The Contract Review and Governance Committee reviews and makes
recommendations to the Board as to contracts requiring approval of a majority
of the Managers who are not interested persons of the Fund and any other
contracts which may be referred to it by the Board. The Committee also
recommends to the Board nominees for election as Managers of the Fund and
recommends the compensation of the Managers who are not interested persons of
the Fund. Mr. MacLure currently serves as chairman of the Contract Review and
Governance Committee.
BOARD COMPENSATION. The Fund does not pay any remuneration to officers or
Managers who are interested persons of the Fund. Until May 1, 1995, each
Manager who was not an interested person of the Fund received, in the
aggregate for serving on the boards of the Fund, New England Zenith Fund
("Zenith") and the 22 mutual funds in the New England group of mutual funds
(the "New England Funds"), a retainer fee at the annual rate of $40,000 and
meeting attendance fees of $2,500 for each meeting of the boards he or she
attended and $1,500 for each meeting he or she attended of a committee of the
board of which he or she is a member. Each committee chairman received an
additional retainer fee at the annual rate of $2,500. The fees described in
this paragraph were allocated among the Fund, the series of Zenith, and the
New England Funds based on a formula that took into account, among other
factors, the net assets of each fund.
Beginning May 1, 1995, each Manager who is not an "interested person"
receives a retainer fee at the annual rate of $20,000, an attendance fee of
$2,000 for each board meeting attended. In addition, the chairman of the
Contract Review and Governance Committee receives a retainer at the annual
rate of $3,000, and the chairman of the Audit Committee receives a retainer at
the annual rate of $2,000. Also in 1995, each Manager who is not an interested
person received a special, one-time fee of $5,000 relating to the services of
the board in conjunction with the restructuring of the boards of the Fund,
Zenith and the New England Funds. These fees are allocated among the Fund and
the series of Zenith based on a formula that takes into account, among other
factors, the net assets of each fund.
II-5
<PAGE>
During the fiscal year ended December 31, 1995, the persons who were then
Managers of the Fund received the amounts set forth below for serving as a
Manager of the Fund and for also serving on the governing boards of Zenith and
the New England Funds. As of December 31, 1995, there were a total of 14
series of Zenith and 21 New England Funds.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM THE FUND, ZENITH
AGGREGATE COMPENSATION AND THE NEW ENGLAND
NAME OF MANAGER FROM THE FUND IN 1995 FUNDS IN 1995
--------------- ---------------------- ---------------------
<S> <C> <C>
Kenneth J. Cowan.................. $ 554 $69,292
Nancy Hawthorne................... 2,026 26,333
Joseph M. Hinchey................. 2,792 50,125
Richard S. Humphrey, Jr........... 2,663 48,167
Robert B. Kittredge............... 2,621 78,667(a)
Laurens MacLure................... 2,801 81,500(a)
Dale Rogers Marshall.............. 2,026 26,333
Sandra O. Moose................... 495 56,250
James H. Scott.................... 537 59,000
John A. Shane..................... 495 63,000
Joseph F. Turley.................. 2,663 48,167
Pendleton P. White................ 495 63,000
</TABLE>
- -------
(a) Also includes compensation paid by the 5 CGM Funds, a group of mutual
funds for which Capital Growth Management Limited Partnership, the
investment adviser of the Fund, serves as investment adviser.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY AGREEMENT. Capital Growth Management Limited Partnership ("CGM"),
One International Place, Boston, Massachusetts, serves as investment adviser
to the Fund under an advisory agreement dated August 30, 1996. CGM has served
as investment advisor since March 1, 1990. Prior to March 1, 1990, the Fund
was managed by Loomis Sayles & Company, Incorporated ("Loomis Sayles"), whose
Capital Growth Management Division was reorganized into CGM on that date. CGM
is a limited partnership whose sole general partner is Kenbob, Inc., a
corporation controlled equally by Robert L. Kemp and G. Kenneth Heebner. CGM
provides discretionary investment management services to mutual funds and
other clients.
CGM, subject to the supervision of the Fund's Board of Managers, manages the
investment and reinvestment of Fund assets. For providing such services, the
Fund pays CGM an annual fee of .3066% of the average net assets of the Fund
(which excludes any accrued tax liabilities and reserves for taxes arising
from the income and realized and unrealized capital gains on the assets of the
Fund). This is the same fee that Loomis Sayles received under the previous
advisory agreement. This fee is computed on a daily basis and is payable
monthly. During the years ended December 31, 1993, 1994 and 1995, the Fund
paid CGM advisory fees of $184,658, $173,070 and $175,101.
The advisory agreement provides that it shall continue in effect for an
initial term of two years from the date of its execution and thereafter from
year to year so long as its continuance is approved at least annually by (i)
the Board of Managers of the Fund or by the affirmative vote of a majority of
the votes which may be cast by all Contractholders ("majority vote of the
Contractholders") and (ii) by the vote of a majority of the Board of Managers
who are not interested persons of the Fund or of CGM, cast at a meeting called
for that purpose. (Majority vote of the Contractholders means 67% or more of
the votes present (in person or by proxy) and entitled to be cast if
Contractholders entitled to cast more than 50% of the outstanding votes of the
Fund are present (in person or by proxy), or more than 50% of all votes which
are entitled to be cast by all Contractholders of the Fund, whichever is
less.) Any
II-6
<PAGE>
amendment to the advisory agreement must be approved by majority vote of the
Contractholders and by vote of a majority of the Managers who are not such
interested persons. The agreement may be terminated without penalty by the
Board of Managers or the Contractholders upon 60 days' written notice to CGM
or by CGM upon 90 days' written notice to the Fund, and it terminates
automatically in the event of its assignment. In addition, the agreement will
automatically terminate if the Fund shall at any time be required by the
Company to eliminate all reference to the phrase "New England" in its name,
unless the continuance of the agreement after such change of name is approved
by majority vote of the Contractholders and by a majority of the Managers who
are not interested persons of the Fund or CGM. The agreement also provides
that CGM shall not be subject to any liability in connection with the
performance of its services thereunder in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or
duties.
CGM has individual and institutional clients besides the Fund, including
other investment company portfolios, CGM American Tax Free Fund, CGM Capital
Development Fund, the CGM Mutual Fund and the CGM Fixed Income Fund, the CGM
Realty Fund, the New England Growth Fund, a series of New England Funds Trust
I and the Capital Growth Series of New England Zenith Fund.
Managers of the Fund may also serve as officers, directors, or trustees of
other investment companies advised by CGM or of other corporate or fiduciary
clients of CGM. Such clients may include some accounts of MetLife and its
affiliates ("MetLife accounts"). The other investment companies and clients
served by CGM sometimes invest in securities in which the Fund also invests.
If the Fund and such other investment companies, or clients advised by CGM
(including MetLife accounts) desire to buy or sell the same portfolio
securities at about the same time, purchases and sales will be allocated to
the extent practicable on a pro rata basis in proportion to the amounts
desired to be purchased or sold for each. It is recognized that in some cases
the practices described in this paragraph could have a detrimental effect on
the price or amount of the securities which the Fund purchases or sells. In
other cases, however, it is believed that these practices may benefit the
Fund. It is the opinion of the Board of Managers that the desirability of
retaining CGM as adviser to the Fund outweighs the disadvantages, if any,
which might result from these practices.
New England Investment Companies, L.P. ("NEIC, L.P."), owns a 50% limited
partnership interest in CGM. The Company owns (indirectly, through its wholly-
owned subsidiary, MetLife New England Holdings, Inc.) a majority limited
partnership interest in NEIC L.P. and a 100% interest in NEIC, L.P.'s sole
general partner, New England Investment Companies, Inc.
ADMINISTRATIVE AGREEMENT. Under the terms of an administrative agreement
between the Fund and the Company, the Company furnishes or bears the expense
of all legal, actuarial and accounting services, office space, facilities and
equipment, services of executive and other personnel and all other
administrative services necessary or appropriate to carry on the various
functions of the Fund, but not including expenses attributable to sales
activities, which are covered by the distribution agreement among the Fund,
the Company and New England Securities. As compensation, the Company retains
the deduction for administrative expenses described in the prospectus under
the heading "Deductions from Purchase Payments for Sales and Administrative
Services and Premium Taxes." For the years 1993, 1994 and 1995 this deduction
amounted to $16,679, $12,468, and $8,245, respectively.
Under the provisions of the administrative agreement and the contracts, the
following items are payable directly by the Fund: (a) any taxes paid or
reserved for, arising from the income and realized and unrealized capital
gains and assets of the Fund, (b) fees for mortality and expense risks assumed
and for investment advisory services, (c) brokerage commissions and taxes, if
any, in connection with the purchase or sale of the Fund's portfolio
securities, and (d) fees and expenses of the Board of Managers, including the
auditing of Fund assets.
DISTRIBUTION AGREEMENT. New England Securities serves as principal
underwriter for the Fund pursuant to a distribution agreement among the Fund,
the Company and New England Securities. The agreement does not obligate
II-7
<PAGE>
New England Securities to sell a specific number of contracts. The Company
retains the deduction for sales expenses described in the prospectus under the
heading "Deductions from Purchase Payments for Sales and Administrative
Services and Premium Taxes". For the years 1993, 1994 and 1995, these
deductions amounted to $50,146, $33,847, and $21,952, respectively.
New England Securities also serves as principal underwriter to New England
Retirement Investment Account, The New England Variable Account, New England
Variable Life Separate Account, New England Variable Annuity Separate Account
and New England Zenith Fund.
SAFEKEEPING OF SECURITIES. The Fund maintains custody of its securities
pursuant to a safekeeping and services agreement with State Street Bank and
Trust Company ("State Street Bank"), 225 Franklin Street, Boston,
Massachusetts 02110. Eligible securities of the Fund are held on deposit with
The Depository Trust Company. The safekeeping agreement differs from the
typical forms of mutual fund custodian agreements in that the responsibilities
of the bank are less. For example, the Company, under its administrative
agreement with the Fund, retains substantially more flexibility in dealing
with cash balances and has much greater responsibility for pricing in the
context of contract sales and redemptions. The Company bears State Street
Bank's costs under the safekeeping and services agreement in accordance with
the terms of the administrative agreement with the Fund.
INDEPENDENT ACCOUNTANTS. The Fund's independent accountants are Coopers &
Lybrand L.L.P., One International Place, Boston, Massachusetts 02110. Coopers
& Lybrand L.L.P. conducts an annual audit of the Fund's financial statements,
conducts an examination of securities owned by the Fund and held pursuant to
the safekeeping agreement, and consults with the Company's financial personnel
on current accounting and financial matters relating to the Fund.
ADMINISTRATIVE SERVICES AGREEMENT. Pursuant to an administrative services
agreement between NELICO and the Company, NELICO serves as the Designated
Office for servicing the Contracts and performs certain other administrative
services for the Company relating to the Fund and the Contracts. NEVLICO is
compensated for these services based on the expenses it incurs in providing
them. NELICO was a wholly-owned subsidiary of The New England before it merged
into the Company, and became a subsidiary of the Company as a result of the
merger.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
In buying and selling portfolio securities for the Fund, CGM always seeks
the best price and execution. Transactions in unlisted securities are carried
out through brokers or dealers who make the primary market for such securities
unless, in the judgment of CGM, a more favorable price can be obtained by
carrying out such transactions through other brokers or dealers.
CGM selects only brokers which it believes are financially responsible, will
provide efficient and effective services in executing, clearing and settling
the order and will charge commission rates which, when combined with the
quality of the foregoing services, will produce the best price and execution
for the transaction. This does not necessarily mean that the lowest available
brokerage commissions will be paid. However, the commissions are believed to
be competitive with generally prevailing rates. CGM will use its best efforts
to obtain information as to the general level of commission rates being
charged by the brokerage community from time to time and will evaluate the
overall reasonableness of brokerage commissions paid on transactions by
reference to such data. In making such evaluation, all factors affecting
liquidity and execution of the order, as well as the amount of the capital
commitment by the brokers in connection with the order, are taken into
account. The Fund will not pay a broker a commission at a higher rate than
otherwise available for the same transaction in recognition of the value of
research services provided by the broker or in recognition of the value of any
other services provided by the broker which do not contribute to the best
price and execution of the transaction.
II-8
<PAGE>
Receipt of research services from brokers may sometimes be a factor in
selecting a broker which CGM believes will provide best price and execution
for a transaction. These research services include not only a wide variety of
reports on such matters as economic and political developments, industries,
companies, securities, portfolio strategy, account performance, daily prices
of securities, stock and bond market conditions and projections, asset
allocation and portfolio structure, but also meetings with management
representatives of issuers and with other analysts and specialists. Although
it is not possible to assign an exact dollar value to these services, they
may, to the extent used, tend to reduce CGM's expenses. These services may be
used by CGM in servicing other client accounts and in some cases may not be
used with respect to the Fund. Receipt of services or products other than
research from brokers is not a factor in the selection of brokers.
In 1995, brokerage transactions for the Fund aggregating $220,836,003 were
allocated to brokers providing research services and $279,085 in commissions
were paid on these transactions. During 1994 and 1995 the Fund paid total
brokerage fees of $227,203 and $317,889, respectively.
DISTRIBUTION OF CONTRACTS
New England Securities Corporation, a subsidiary of the Company, is the
principal underwriter of the contracts. The contracts are no longer offered
for sale, but contractholders may make on-going purchase payments under the
Fund's flexible purchase payment contracts. NELICO's life insurance agents and
insurance brokers who are registered representatives of New England Securities
service the contracts. The Company pays commissions, none of which are
retained by New England Securities, to the registered representatives who have
sold the contracts. In 1993, 1994, and 1995 The New England paid commissions
to those registered representatives with respect to ongoing purchase payments
under the contracts in the amounts of $83,565, $42,665, and $39,551,
respectively.
CALCULATION OF PERFORMANCE DATA
As set forth in the prospectus under "Fund Performance," the Fund's Annual
and Semi-Annual Reports show the percentage change in unit value of the Fund
without reflecting the impact of any sales and administrative charges. (The
Annual and Semi-Annual Reports also illustrate the Fund's Average Annual Total
Return, which does reflect the deduction of sales and administration charges.)
The percent change in unit value represents what the increase in contract
value would be for a Contractholder who did not make any Purchase Payments or
surrenders during the year. The percentage change in unit value is shown for
every calendar year since inception of the Fund to the date of the report and
for 15, 10, 5 and 1 year periods ending with the date of the report. The
percentage change is calculated by dividing the difference in unit values at
the beginning and end of the period by the beginning unit value.
The following percentage change in unit value figures appear in the Fund's
Annual Report for the year ended December 31, 1995.
<TABLE>
<CAPTION>
PERCENT CHANGE IN UNIT VALUE
- ----------------------------
<S> <C>
24 years, 9 months ended December 31, 1995............................. 1,327.7%
15 years ended December 31, 1995....................................... 766.1%
10 years ended December 31, 1995....................................... 242.5%
5 years ended December 31, 1995........................................ 97.1%
1 year ended December 31, 1995......................................... 38.9%
</TABLE>
II-9
<PAGE>
ANNUAL PERCENT CHANGE IN UNIT VALUE
SINCE FUND INCEPTION
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
March 25, 1971........................................ $ 1.157298 --
December 31, 1971..................................... 1.180085 +2.0
December 31, 1972..................................... 1.324345 +12.2
December 31, 1973..................................... 1.144645 -13.6
December 31, 1974..................................... 0.786512 -31.3
December 31, 1975..................................... 0.981727 +24.8
December 31, 1976..................................... 1.147484 +16.9
December 31, 1977..................................... 1.077867 -6.1
December 31, 1978..................................... 1.180390 +9.5
December 31, 1979..................................... 1.356685 +14.9
December 31, 1980..................................... 1.907809 +40.6
December 31, 1981..................................... 2.046992 +7.3
December 31, 1982..................................... 3.254033 +59.0
December 31, 1983..................................... 3.943886 +21.2
December 31, 1984..................................... 3.572709 -9.4
December 31, 1985..................................... 4.823900 +35.0
December 31, 1986..................................... 6.156190 +27.6
December 31, 1987..................................... 7.017161 +14.0
December 31, 1988..................................... 6.745649 -3.9
December 31, 1989..................................... 7.984578 +18.4
December 31, 1990..................................... 8.383448 +5.0
December 31, 1991..................................... 11.835525 +41.2
December 31, 1992..................................... 11.576959 -2.2
December 31, 1993..................................... 12.850577 +11.0
December 31, 1994..................................... 11.899473 -7.4
December 31, 1995..................................... 16.523266 +38.9
</TABLE>
ANNUITY PAYMENTS
When a variable payment option is selected, the contract proceeds will be
applied at annuity purchase rates, which vary depending on the particular
option selected and the age of the payee (and, where sex-neutral annuity rates
are not applicable, on the sex of the payee when the payment option selected
involves a life contingency). The impact of the choice of option and the sex
and age of the payee on the level of annuity payments is described in the
prospectus under "Variable Payment Options."
The amount of the basic payment level is determined by applying the
applicable annuity purchase rate to the amount applied to provide the annuity.
This basic payment level is converted into annuity units, the number of which
remains constant. Each monthly annuity payment is in an amount equal to that
number of annuity units multiplied by the value of the applicable annuity unit
as of the date of payment. The values of annuity units will change from day to
day, depending upon the investment performance of the Fund.
The selection of an assumed interest rate will affect both the basic payment
level and the amount by which subsequent payments increase or decrease. The
basic payment level is calculated on the assumption that the Net
II-10
<PAGE>
Investment Factors (discussed below) applicable to the contract will be
equivalent on an annual basis to a net investment return at the assumed
interest rate. If this assumption is met following the date any payment is
determined, then the amount of the next payment will be exactly equal to the
amount of the preceding payment. If the actual Net Investment Factors are
equivalent to a net investment return greater than the assumed interest rate,
the next payment will be larger than the preceding one; if the actual Net
Investment Factors are equivalent to a net investment return smaller than the
assumed interest rate, then the next payment will be smaller than the
preceding payment. The definition of the assumed interest rate, and the effect
of the level of the assumed interest rate on the amount of monthly payments,
is explained in the prospectus under "Variable Payment Options."
The number of annuity units credited under a variable payment option is
determined as follows:
(1) The proceeds under a deferred contract, or the Net Purchase Payment
under an immediate contract, are applied at the Company's annuity purchase
rates for the selected assumed interest rate to determine the basic payment
level.
(2) The number of annuity units is determined by dividing the amount of
the basic payment level by the applicable annuity unit value next
determined following the application of proceeds (in the case of a deferred
contract) or Net Purchase Payment (in the case of an immediate contract).
The dollar amount of the initial payment will be at the basic payment level
(if, in the case of an immediate contract, the payment is due not later than
14 days after the Net Purchase Payment is applied). The dollar amount of each
subsequent payment is determined by multiplying the number of annuity units by
the applicable annuity unit value which is determined at least 14 days before
the payment is due.
The value of an annuity unit depends on the assumed interest rate and on the
Net Investment Factor applicable at the time of valuation. The Net Investment
Factor, and thus changes in the value of an annuity unit under a variable
payment option, reflect daily deductions for investment advisory services and
mortality and expense risks. (See "Net Investment Factor" below). The initial
annuity unit values were set at $1.00 effective on the date on which assets
were first placed in the Fund.
The annuity unit value for any day is equal to the corresponding annuity
unit value previously determined multiplied by the applicable Net Investment
Factor for the New York Stock Exchange trading day then ended, and further
multiplied by the assumed interest factor for each day since the annuity unit
value was last determined. The assumed interest factor represents the daily
equivalent of the contract's annual assumed interest rate. In the calculation
of annuity unit values, the assumed interest factor has the effect of reducing
the Net Investment Factor by an amount equal to the daily equivalent of the
contract's assumed interest rate. The result of this adjustment is that if the
Net Investment Factor for a valuation period is greater (when expressed as an
annual net investment return) than the assumed interest rate, the annuity unit
value will increase. If the Net Investment Factor for the period is less (when
expressed as an annual net investment return) than the assumed interest rate,
the annuity unit value will decrease. At an assumed interest rate of 3.5% the
assumed interest factor is .9999058. Assumed interest factors for other
assumed interest rates are computed on a consistent basis.
II-11
<PAGE>
NET INVESTMENT FACTOR
The Net Investment Factor for the Fund is determined on each day on which
the New York Stock Exchange is open for trading (a "Trading Day") as follows.
On each Trading Day a Gross Investment Rate is determined from the
investment performance of the Fund since the close of regular trading on the
New York Stock Exchange on the preceding Trading Day. This rate may be
positive or negative and is equal to:
i. The investment income since the close of regular trading on the New
York Stock Exchange on the preceding Trading Day, plus capital gains minus
capital losses for the same period, whether realized or unrealized, less
deductions for: (a) any taxes paid or reserved for, arising from the income
and realized and unrealized capital gains on assets of the Fund, (b)
brokerage commissions and taxes, if any, in connection with the purchase or
sale of the Fund's portfolio securities, and (c) fees and expenses of the
Board of Managers, divided by
ii. The value of the total assets of the Fund as of the close of regular
trading on the New York Stock Exchange on the preceding Trading Day less
any assets set aside as a provision for taxes and accrued expenses
described in i. above.
The Net Investment Factor is equal to the sum of this Gross Investment Rate
and 1.0000000, less the following deductions from net assets for each day
since the close of regular trading on the New York Stock Exchange on the
preceding Trading Day:
i. For deferred contracts: .00344% (1.2556% on an annual basis consisting
of .3066% for investment advisory services and .8395% for mortality risk
assumptions plus .1095% for expense risk assumptions made by the Company).
ii. For immediate contracts: .00274% (1.0001% on an annual basis
consisting of .3066% for investment advisory services and .5840% for
mortality risk assumptions plus .1095% for expense risk assumptions made by
the Company).
The Net Investment Factor may be less than 1.0000000.
EXPERTS
The financial statements of New England Variable Annuity Fund I included in
this Statement of Additional Information and the information in the Prospectus
concerning selected per unit data and ratios have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing. The
financial statements of New England Mutual Life Insurance Company as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 included in this Statement of Additional Information, have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. The Financial Statements of Metropolitan Life
Insurance Company as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
and have been so included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting. The Selected Pro
Forma Financial Information for Metropolitan Life Insurance Company as of
March 31, 1996 and 1995 and December 31, 1995 and 1994 and for the three-month
periods ended March 31, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993 has not been audited. The interim financial statements of
New England Mutual Life Insurance Company and Metropolitan Life Insurance
Company as of March 31, 1996 and for the three-month periods ended March 31,
1996 and 1995 have not been audited.
II-12
<PAGE>
FINANCIAL STATEMENTS
The financial statements of Metropolitan Life Insurance Company included
herein should be considered only as bearing upon the ability of Metropolitan
Life Insurance Company to meet its obligations under the Contracts.
The current financial statements of Metropolitan Life Insurance Company are
those as of the end of the first quarter of the most recent fiscal year.
Metropolitan Life Insurance Company generally does not prepare financial
statements for publication more often than annually and believes that any
incremental benefit to prospective Contract Owners that may result from
preparing and delivering more current financial statements, though unaudited,
does not justify the additional cost that would be incurred. In addition,
Metropolitan Life Insurance Company represents that there have been no adverse
changes in its financial condition or operations between the end of the most
current fiscal year and the date of this Statement of Additional Information.
II-13
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Managers and the Contract Owners of New England Variable
Annuity Fund I
We have audited the accompanying statement of assets and liabilities of New
England Variable Annuity Fund I, including the schedule of portfolio invest-
ments, as of December 31, 1995, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and selected per unit data and ratios for
each of the five years in the period then ended. These financial statements
and selected per unit data and ratios are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and selected per unit data and ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected per
unit data and ratios are free of material misstatement. An audit includes ex-
amining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995, by correspondence with the custodian and bro-
kers. An audit also includes assessing the accounting principles used and sig-
nificant estimates made by management, as well as evaluating the overall fi-
nancial statement presentation. We believe that our audits provide a reason-
able basis for our opinion.
In our opinion, the financial statements and selected per unit data and ra-
tios referred to above present fairly, in all material respects, the financial
position of New England Variable Annuity Fund I as of December 31, 1995, the
results of its operations for the year then ended, the changes in its net as-
sets for each of the two years in the period then ended, and selected per unit
data and ratios for each of the five years in the period then ended, in con-
formity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1996
II-14
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF
ASSETS AND LIABILITIES
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in common stocks at market (average cost
$51,531,314)(Note 1)........................................... $ 60,125,763
------------
Total investments............................................ 60,125,763
------------
Receivable for investments sold................................. 1,847,293
Dividends and interest receivable............................... 97,719
Receivable from contractholders................................. 297
------------
Total assets................................................. 62,071,072
------------
LIABILITIES
Payable for investments purchased............................... 1,065,223
Payable for investment advisory fees (Note 3)................... 15,126
Payable for mortality and expense risks (Note 4)................ 46,386
Payable for other direct expenses............................... 34,823
Payable to contractholders...................................... 3,800
Payable to bank................................................. 322,469
------------
Total liabilities............................................ 1,487,827
------------
NET ASSETS....................................................... $60,583,245
============
Net assets attributable to
variable annuity contractholders 3,399,132 accumulation units at
$16.52 per unit................................................. $56,164,756
Annuity reserves (Note 1)....................................... 4,418,489
------------
$ 60,583,245
============
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 1)
INCOME
Dividends....................................................... $ 921,123
Interest........................................................ 41,431
------------
Total income.................................................. 962,554
------------
EXPENSES
Mortality and expense risks (Notes 1 and 4)..................... 537,004
Investment advisory fee
(Note 3)....................................................... 175,101
Other direct expenses
(Note 3)....................................................... 52,649
------------
Total expenses................................................ 764,754
------------
INVESTMENT INCOME-NET............................................ 197,800
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 2)
Realized net gain from investments sold....................... 10,912,465
Change in unrealized appreciation of investments................ 7,289,902
------------
Net gain on investments....................................... 18,202,367
------------
Net increase in net assets resulting from operations.............. $18,400,167
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-15
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income--net.............................. $ 197,800 $ 605,310
Realized net gain from investments sold............. 10,912,465 3,522,339
Change in unrealized appreciation or depreciation of
investments........................................ 7,289,902 (8,335,515)
----------- -----------
Net increase (decrease) in net assets resulting from
operations......................................... 18,400,167 (4,207,866)
----------- -----------
CHANGES FROM PRINCIPAL TRANSACTIONS
Purchase payments, less sales and administrative
expenses and applicable premium taxes (Note 3)..... 312,538 533,058
Contract terminations............................... (8,858,774) (5,037,786)
Annuity payments.................................... (537,648) (431,578)
Adjustments to annuity reserves (Note 1)............ 11,172 79,368
----------- -----------
Decrease in net assets derived from principal
transactions....................................... (9,072,712) (4,856,938)
----------- -----------
Total increase (decrease)........................... 9,327,455 (9,064,804)
NET ASSETS
Beginning of year................................... 51,255,790 60,320,594
----------- -----------
End of year......................................... $60,583,245 $51,255,790
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-16
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
SUPPLEMENTARY INFORMATION --
SELECTED PER UNIT DATA AND RATIOS
- --------------------------------------------------------------------------------
Selected data for an accumulation unit outstanding throughout each year and
ratios are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of period................. $11.90 $12.85 $11.58 $11.84 $ 8.38
--------- --------- --------- --------- ---------
Per unit data
Investment income......... .24 .29 .16 .25 .24
Expenses.................. .19 .16 .15 .14 .13
--------- --------- --------- --------- ---------
Investment income-net..... .05 .13 .01 .11 .11
Net realized and
unrealized gain (loss) on
investments.............. 4.57 (1.08) 1.26 (.37) 3.35
--------- --------- --------- --------- ---------
Net increase (decrease) in
net asset value.......... 4.62 (.95) 1.27 (.26) 3.46
--------- --------- --------- --------- ---------
Net Asset Value, end of
period................... $16.52 $11.90 $12.85 $11.58 $11.84
========= ========= ========= ========= =========
Total Return (%)........... 38.9 (7.4) 11.0 (2.2) 41.2
Ratios
Ratio of operating
expenses to average net
assets (%)............... 1.35 1.26 1.26 1.25 1.26
Ratio of investment
income-net to average net
assets (%)............... .34 1.06 .11 .98 1.11
Portfolio turnover (%)..... 228.26 139.43 154.15 171.55 157.43
Number of accumulation
units outstanding at end
of period................. 3,399,132 4,038,331 4,410,741 5,103,553 5,499,204
</TABLE>
II-17
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
New England Variable Annuity Fund I (the "Fund") is registered under the In-
vestment Company Act of 1940, as amended, as a diversified, open-end manage-
ment investment company. The Fund is sold for use with various retirement
plans that are qualified under the Internal Revenue Code, for individual use,
and for use with plans and trusts that are not qualified under the Internal
Revenue Code. The operations of the Fund are part of New England Mutual Life
Insurance Company (the "Insurance Company"). The following is a summary of
significant accounting policies consistently followed by the Fund.
A. Security valuation. Investments in common stocks traded on a national se-
curities exchange or on the NASDAQ national market system are valued at their
last reported sales prices on the principal exchange, on December 31, 1995, or
if there was no reported sale during the day and for over-the-counter securi-
ties not so listed, at the last reported bid prices on that date. Corporate
short-term notes are stated at cost, which approximates fair market value.
B. Security transactions and related investment income. Security transactions
are accounted for on the trade date (the date the order to buy or sell is exe-
cuted), and dividend income is recorded on the ex-dividend date. Interest in-
come is recorded on the accrual basis. Net investment income and net realized
and unrealized gain (loss) on investments are allocated to the contracts on
each valuation date based on each contract's pro rata share of the net assets
of the Fund as of the beginning of the valuation period.
C. Federal income taxes. The Fund is not taxed separately because the opera-
tions of the Fund are part of the total operations of the Insurance Company.
The Insurance Company is taxed as a life insurance company under the Internal
Revenue Code. The Fund will not be taxed as a regulated investment company un-
der subchapter M of the Code. Under existing federal income tax law, no taxes
are payable on the investment income or on the capital gains of the Fund.
D. Annuity reserves. Annuity reserves are computed for currently payable con-
tracts according to the Progressive Annuity Mortality Table. The assumed in-
terest rate is 3.5% unless the annuitant elects otherwise, in which case the
rate may vary from 0-5%, as regulated by the laws of the respective states.
Charges to annuity reserves for mortality and expense risks experience are re-
imbursed to the Insurance Company if the reserves required are less than orig-
inally estimated. If additional reserves are required, the Insurance Company
reimburses the variable annuity account.
2. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments (other
than short-term securities) for the year ended December 31, 1995 were
$127,880,425 and $136,039,230, respectively. Gains and losses from sales of
investments are computed on the basis of average cost.
3. ADVISORY AND SERVICE FEES WITH AFFILIATES
During the year ended December 31, 1995, the Fund incurred investment manage-
ment fees of $175,101, payable to the Fund's investment adviser, Capital
Growth Management Limited Partnership, an affiliate of the Insurance Company.
The advisory agreement provides for a fee at the annual rate of 0.3066% of the
average net assets of the Fund. Deductions from purchase payments for sales
and administrative expenses, which for the year ended December 31, 1995,
amounted to $21,952 and $8,245, respectively, were retained by the Insurance
Company.
Commencing January 1, 1995, the audit and trustee fees are no longer borne by
the Insurance Company, these expenses amounted to $52,649 for the year ended
December 31, 1995.
II-18
<PAGE>
- -------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
- -------------------------------------------------------------------------------
4. MORTALITY AND EXPENSE RISKS AND DEDUCTIONS
Although variable annuity payments differ according to the investment perfor-
mance of the Fund, they are not affected by mortality or expense experience
because the Insurance Company assumes the expense risk and the mortality risk
under the contracts. The Insurance Company charges the Fund assets for assum-
ing those risks. During 1995, the mortality and expense risk charges totaled
$537,004.
The expense risk assumed by the Insurance Company is the risk that the deduc-
tions for sales and administrative expenses and for investment advisory serv-
ices provided for in the variable annuity contract may prove insufficient to
cover the cost of those items.
The mortality risk assumed by the Insurance Company has two elements: a life
annuity mortality risk and, for deferred annuity contracts, a minimum death
refund risk.
The life annuity mortality risk results from a provision in the contract in
which the Insurance Company agrees to make annuity payments regardless of how
long a particular annuitant or other payee lives and how long all annuitants
or other payees as a class live if payment options involving life contingen-
cies are chosen. Those annuity payments are determined in accordance with an-
nuity purchase rate provisions established at the time the contracts are is-
sued.
Under deferred annuity contracts, the Insurance Company also assumes a mini-
mum death refund risk by providing that there will be payable, on the death of
the annuitant during the accumulation period, an amount equal to the greater
of (1) the aggregate purchase payments made, without interest, reduced by any
partial surrender, and (2) the value of the contract as of the death valuation
date.
If those deductions are insufficient to cover the cost of the expense and
mortality risks assumed by the Insurance Company, the Insurance Company ab-
sorbs the resulting losses and makes sufficient transfers to the Fund from its
general assets. Conversely, if those deductions are more than sufficient after
the establishment of any contingency reserves deemed prudent or required by
law, the excess is transferred to the Insurance Company.
5. RELATED PARTIES
Two members of the Board of Managers of the Fund are officers of the Insur-
ance Company and one of those is an officer of the principal underwriter.
6. INCREASE (DECREASE) IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Units purchased.......................................... 23,935 42,915
Units redeemed........................................... (663,134) (415,325)
--------- ---------
Net decrease............................................ (639,199) (372,410)
Units at beginning of year................................ 4,038,331 4,410,741
--------- ---------
Units at end of year...................................... 3,399,132 4,038,331
========= =========
</TABLE>
II-19
<PAGE>
- --------------------------------------------------------------------------------
NEW ENGLAND VARIABLE ANNUITY FUND I
INVESTMENTS AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
COMMON STOCKS--99.2% OF TOTAL NET ASSETS
<CAPTION>
VALUE
SHARES (NOTE 1)
------ ----------
<C> <S> <C>
AEROSPACE--5.9%
46,000 Boeing Co.................................................. $3,605,250
----------
AEROSPACE/DEFENSE--2.0%
15,000 Lockheed Martin Corp....................................... 1,185,000
----------
AIRLINES--10.1%
9,500 AMR Corp.*................................................. 705,375
46,000 Northwest Airlines Corp.*.................................. 2,346,000
17,200 UAL Corp.*................................................. 3,070,200
----------
6,121,575
----------
BANKS--MONEY CENTER--13.2%
65,000 Chemical Banking Corp...................................... 3,818,750
62,000 Citicorp................................................... 4,169,500
----------
7,988,250
----------
BEVERAGES & TOBACCO--4.6%
50,000 PepsiCo, Inc............................................... 2,793,750
----------
CHEMICALS--MAJOR--2.2%
25,000 Air Products and Chemicals, Inc............................ 1,318,750
----------
COMPUTER SOFTWARE & SERVICES--4.6%
33,000 Computer Associates International, Inc..................... 1,876,875
13,000 Computer Sciences Corp.*................................... 913,250
----------
2,790,125
----------
DRUGS & MEDICINE--13.1%
59,200 Eli Lilly & Company........................................ 3,330,000
51,000 Merck & Co., Inc........................................... 3,353,250
20,000 Pfizer, Inc................................................ 1,260,000
----------
7,943,250
----------
FINANCIAL SERVICES--1.9%
17,300 First Data Corp............................................ 1,156,938
----------
FOOD--RETAILERS/WHOLESALERS--5.5%
37,000 Philip Morris Companies, Inc............................... 3,348,500
----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ -----------
<C> <S> <C>
FREIGHT--TRANSPORTATION--5.0%
38,500 Burlington Northern Santa Fe Corp........................ $ 3,003,000
-----------
HOME PRODUCTS & COSMETIC--4.0%
29,000 Procter & Gamble Co...................................... 2,407,000
-----------
INSURANCE--11.8%
80,000 Allstate Corp............................................ 3,290,000
41,700 American International Group, Inc........................ 3,857,250
-----------
7,147,250
-----------
MACHINERY--1.7%
30,000 Deere & Co............................................... 1,057,500
-----------
MISCELLANEOUS--5.6%
36,000 United Technologies Corp................................. 3,415,500
-----------
RETAIL--8.0%
56,500 May Department Stores Co................................. 2,387,125
63,000 Sears, Roebuck & Co...................................... 2,457,000
-----------
4,844,125
-----------
TOTAL COMMON STOCKS
(average cost $51,531,314)............................... 60,125,763
-----------
TOTAL INVESTMENTS--99.2%
(average cost $51,531,314)............................... 60,125,763
-----------
Receivable for investments sold.......................... 1,847,293
Dividends and interest receivable........................ 97,719
Receivable from contractholders.......................... 297
Liabilities.............................................. (1,487,827)
-----------
TOTAL NET ASSETS--100%................................... $60,583,245
===========
* Non-income producing security.
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-20
<PAGE>
SELECTED PRO FORMA FINANCIAL INFORMATION
Set forth in the tables below is selected unaudited pro forma financial
information for the Metropolitan Life Insurance Company giving effect to the
merger of New England Mutual Life Insurance Company ("TNE") with and into the
Metropolitan Life Insurance Company ("MetLife"). These tables include
unaudited pro forma balance sheet data as of December 31, 1995 and 1994 and as
of March 31, 1996 and unaudited selected pro forma statement of operations
data for the years ended December 31, 1995, 1994 and 1993 and for the three-
month periods ended March 31, 1996 and 1995. The selected historical
information for the years ended December 31, 1995, 1994 and 1993 and as of
December 31, 1995 and 1994 have been derived from statutory financial
statements of TNE, which were audited by Coopers & Lybrand L.L.P., independent
auditors, and from statutory financial statements of MetLife, which have been
audited by Deloitte and Touche, LLP, independent auditors. The selected
financial information for the three months ended March 31, 1996 and 1995 have
been derived from TNE's unaudited quarterly statements filed with the
Massachusetts Division of Insurance and from MetLife's unaudited quarterly
statements filed with the New York Department of Insurance. In these tables,
the pro forma information gives effect to the merger of TNE with and into
MetLife (the "Merger") as if the Merger had been effective at December 31,
1994 in the case of the selected pro forma balance sheet data and as of
January 1, 1993 in the case of the selected pro forma statement of operations
data and reflects adjustments to conform accounting practices. The selected
pro forma financial information should be read in conjunction with the
historical financial statements and notes thereto included herein.
The selected pro forma financial information is presented for illustrative
purposes only and does not purport to be indicative of the operating results
or financial position that would have occurred if the Merger had been
consummated on the dates indicated, nor is it necessarily indicative of the
future operating results or financial position of the merged entity.
MetLife expects that it will achieve operating cost savings through
consolidation of certain operations and the elimination of redundant costs.
The extent to which cost savings, which are not expected to be material, will
be achieved will be influenced by many factors, including economic conditions,
inflation and changes in business activities. Accordingly, there can be no
assurance that cost savings will in fact be achieved and, therefore, none have
been included in the unaudited selected pro forma financial information.
After the Merger, the financial statements of TNE and MetLife will be
combined to present the financial position and results of operations of
MetLife. Furthermore, certain adjustments will be made to the historical
carrying value of assets and liabilities of TNE and MetLife in order to apply
consistent accounting policies and practices to the financial statements of
MetLife. These conforming adjustments principally relate to the following: (i)
mortgage reserves will be reclassified from investment valuation reserves to
reduce the carrying value of the related assets, (ii) generally accepted
accounting principles, rather than different statutory practices, will be used
to record the equity in earnings of TNE real estate joint ventures, (iii)
reserve valuation differences resulting from different states of domicile will
be conformed and (iv) there will be a related impact of these adjustments on
the asset valuation reserve.
The unaudited selected pro forma financial information set forth below also
reflects an adjustment related to the Settlement Agreement among TNE, Copley
Real Estate Advisors, Inc. and the Washington State Investment Board, which is
contingent on completion of the Merger (see Note 2 to the Unaudited Interim
Financial Statements of TNE for the three months ended March 31, 1996). Based
on preliminary information, TNE estimates that adjustments related to these
items at March 31, 1996 would have resulted in a decrease to combined surplus
of $284 million and a decrease in the combined investment valuation reserves
of $235 million on a pro forma basis. Actual conforming adjustments will be
determined after the date of the Merger, but are not expected to be materially
different in their combined effect on surplus and investment valuation
reserves.
In addition, MetLife expects to change accounting policies for measuring
impairments of real estate joint ventures and mortgages in 1996 pending
approval by the Massachusetts Division of Insurance and such other regulatory
approvals as may be required. The effect of these accounting changes on the
combined surplus of the merged entity is expected to be an approximately $250
million decrease to surplus and investment valuation reserves.
II-21
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Income:
Premiums, annuity
considerations and
deposit funds (k).... $5,359 $ 467 $-- $ 5,826 $6,748 $ 444 $-- $7,192
Net investment income
(a)(b)(e)............ 1,822 154 (89) 1,887 1,746 178 (6) 1,918
Other income.......... 111 41 (1) 151 43 29 -- 72
------ ----- ---- ------- ------ ----- ---- ------
Total income...... 7,292 662 (90) 7,864 8,537 651 (6) 9,182
------ ----- ---- ------- ------ ----- ---- ------
Benefits and Expenses:
Benefit payments
(other than
dividends)........... 7,024 595 -- 7,619 7,453 611 -- 8,064
Changes to reserves,
deposit funds and
other policy
liabilities (c)...... (907) (125) -- (1,032) (1) (156) (2) (159)
Insurance expenses and
taxes (other than
federal income and
capital gains taxes). 678 98 -- 776 695 102 -- 797
Net transfers to
separate accounts.... 42 34 (1) 75 87 (8) -- 79
------ ----- ---- ------- ------ ----- ---- ------
Total benefits and
expenses before
dividends to
policyholders.... 6,837 602 (1) 7,438 8,234 549 (2) 8,781
------ ----- ---- ------- ------ ----- ---- ------
Net gain from
operations before
dividends to
policyholders and
federal income taxes. 455 60 (89) 426 303 102 (4) 401
Dividends to
policyholders (g).... 404 56 (1) 459 436 55 -- 491
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) gain from
operations before
federal income taxes. 51 4 (88) (33) (133) 47 (4) (90)
Federal income taxes
(excluding tax on
capital gains) (h)... 13 (3) 1 11 91 21 -- 112
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) gain from
operations........... 38 7 (89) (44) (224) 26 (4) (202)
Net realized capital
(losses) gains
(a)(d)(i)............ (74) 1 1 (72) (9) (4) -- (13)
------ ----- ---- ------- ------ ----- ---- ------
Net (loss) income..... $ (36) $ 8 $(88) $ (116) $ (233) $ 22 $ (4) $ (215)
====== ===== ==== ======= ====== ===== ==== ======
</TABLE>
II-22
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------
HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Bonds............................. $ 71,355 $ 6,454 $ -- $ 77,809
Stocks............................ 3,752 842 -- 4,594
Mortgage loans.................... 14,479 1,591 (101) 15,969
Real estate....................... 9,047 301 -- 9,348
Policy loans...................... 3,964 1,342 -- 5,306
Cash and short-term investments... 1,476 256 -- 1,732
Other invested assets............. 2,442 814 (272) 2,984
Premiums deferred and uncollected. 1,530 169 -- 1,699
Investment income due and accrued. 1,545 280 -- 1,825
Separate Account assets........... 31,935 4,286 -- 36,221
Other assets...................... 701 108 -- 809
-------- ------- ----- --------
Total Assets.................... $142,226 $16,443 $(373) $158,296
======== ======= ===== ========
LIABILITIES AND SURPLUS
LIABILITIES
Reserves for life and health
insurance and annuities.......... $ 76,246 $ 8,130 $ 39 $ 84,415
Policy proceeds and dividends left
with the Company................. 4,654 480 -- 5,134
Dividends due to policyholders.... 1,363 210 -- 1,573
Premium deposit funds............. 11,897 1,715 -- 13,612
Interest maintenance reserve...... 1,199 -- -- 1,199
Other policy liabilities.......... 3,940 91 -- 4,031
Investment valuation reserves(f).. 1,951 463 (235) 2,179
Separate Account liabilities...... 31,441 4,258 -- 35,699
Other liabilities................. 3,088 486 107 3,681
-------- ------- ----- --------
Total Liabilities............... 135,779 15,833 (89) 151,523
-------- ------- ----- --------
SURPLUS
Special contingency reserves...... 768 50 -- 818
Surplus notes..................... 1,400 148 -- 1,548
Unassigned funds(j)............... 4,279 412 (284) 4,407
-------- ------- ----- --------
Total Surplus................... 6,447 610 (284) 6,773
-------- ------- ----- --------
Total Liabilities and Surplus. $142,226 $16,443 $(373) $158,296
======== ======= ===== ========
</TABLE>
II-23
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS
---------- ---------- ----------- --------- ---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Income:
Premiums, annuity
considerations
and deposit funds
(k).............. $22,951 $1,845 $ -- $24,796 $22,760 $1,983 $--
Net investment
income (a)(b)(e). 7,825 758 (25) 8,558 7,143 720 (50)
Other income...... 156 155 -- 311 80 141 --
------- ------ ----- ------- ------- ------ ----
Total income.... 30,932 2,758 (25) 33,665 29,983 2,844 (50)
------- ------ ----- ------- ------- ------ ----
Benefits and
Expenses:
Benefit payments
(other than
dividends)....... 25,055 2,186 -- 27,241 23,533 2,056 --
Changes to
reserves, deposit
funds and other
policy
liabilities (c).. 321 (151) (8) 162 1,619 (182) 1
Insurance expenses
and taxes (other
than federal
income and
capital gains
taxes)........... 2,762 404 -- 3,166 2,333 429 --
Net transfers to
separate
accounts......... 675 (64) -- 611 503 230 --
------- ------ ----- ------- ------- ------ ----
Total benefits
and expenses
before
dividends to
policyholders.. 28,813 2,375 (8) 31,180 27,988 2,533 1
------- ------ ----- ------- ------- ------ ----
Net gain from
operations before
dividends to
policyholders and
federal income
taxes............ 2,119 383 (17) 2,485 1,995 311 (51)
Dividends to
policyholders
(g).............. 1,520 211 -- 1,731 1,676 207 --
------- ------ ----- ------- ------- ------ ----
Net (loss) gain
from operations
before federal
income taxes..... 599 172 (17) 754 319 104 (51)
Federal income
taxes (excluding
tax on capital
gains) (h)....... 398 13 -- 411 159 16 --
------- ------ ----- ------- ------- ------ ----
Net (loss) gain
from operations.. 201 159 (17) 343 160 88 (51)
Net realized
capital (losses)
gains (a)(d)(i).. (873) (99) (84) (1,056) (54) (46) 15
------- ------ ----- ------- ------- ------ ----
Net (loss) income. $ (672) $ 60 $(101) $ (713) $ 106 $ 42 $(36)
======= ====== ===== ======= ======= ====== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
---------------------------------
PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE METLIFE TNE ADJUSTMENTS METLIFE
--------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Income:
Premiums, annuity
considerations
and deposit funds
(k).............. $24,743 $21,096 $1,942 $-- $23,038
Net investment
income (a)(b)(e). 7,813 7,356 797 (52) 8,101
Other income...... 221 231 139 -- 370
------- ------- ------ ---- -------
Total income.... 32,777 28,683 2,878 (52) 31,509
------- ------- ------ ---- -------
Benefits and
Expenses:
Benefit payments
(other than
dividends)....... 25,589 21,417 1,990 -- 23,407
Changes to
reserves, deposit
funds and other
policy
liabilities (c).. 1,438 (439) (16) (9) (464)
Insurance expenses
and taxes (other
than federal
income and
capital gains
taxes)........... 2,762 2,496 448 -- 2,944
Net transfers to
separate
accounts......... 733 3,239 138 -- 3,377
------- ------- ------ ---- -------
Total benefits
and expenses
before
dividends to
policyholders.. 30,522 26,713 2,560 (9) 29,264
------- ------- ------ ---- -------
Net gain from
operations before
dividends to
policyholders and
federal income
taxes............ 2,255 1,970 318 (43) 2,245
Dividends to
policyholders
(g).............. 1,883 1,606 227 -- 1,833
------- ------- ------ ---- -------
Net (loss) gain
from operations
before federal
income taxes..... 372 364 91 (43) 412
Federal income
taxes (excluding
tax on capital
gains) (h)....... 175 99 34 -- 133
------- ------- ------ ---- -------
Net (loss) gain
from operations.. 197 265 57 (43) 279
Net realized
capital (losses)
gains (a)(d)(i).. (85) (132) 32 -- (100)
------- ------- ------ ---- -------
Net (loss) income. $ 112 $ 133 $ 89 $(43) $ 179
======= ======= ====== ==== =======
</TABLE>
II-24
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
SELECTED FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------- ---------------------------------
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
METLIFE TNE ADJUSTMENTS METLIFE METLIFE TNE ADJUSTMENTS METLIFE
---------- ---------- ----------- --------- ---------- ---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Bonds.................. $ 70,955 $ 6,080 $ -- $ 77,035 $ 65,592 $ 6,275 $ -- $ 71,867
Stocks................. 3,646 815 -- 4,461 3,672 583 -- 4,255
Mortgage loans......... 14,211 1,629 (101) 15,739 14,524 1,998 (88) 16,434
Real estate............ 9,470 302 -- 9,772 10,417 395 -- 10,812
Policy loans........... 3,956 1,350 -- 5,306 3,964 1,342 -- 5,306
Cash and short-term
investments........... 1,923 651 -- 2,574 2,334 265 -- 2,599
Other invested assets.. 2,480 778 (270) 2,988 2,262 930 (235) 2,957
Premiums deferred and
uncollected........... 1,568 191 -- 1,759 1,250 217 -- 1,467
Investment income due
and accrued........... 1,589 282 -- 1,871 1,440 252 -- 1,692
Separate Account
assets................ 31,707 4,092 -- 35,799 25,424 3,388 -- 28,812
Other assets........... 627 91 -- 718 298 108 -- 406
-------- ------- ----- -------- -------- ------- ----- --------
Total Assets.......... $142,132 $16,261 $(371) $158,022 $131,177 $15,753 $(323) $146,607
======== ======= ===== ======== ======== ======= ===== ========
LIABILITIES AND SURPLUS
LIABILITIES
Reserves for life and
health insurance and
annuities............. $ 76,249 $ 8,117 $ 40 $ 84,406 $ 73,204 $ 7,961 $ 48 $ 81,213
Policy proceeds and
dividends left with
the Company........... 4,482 467 -- 4,949 3,534 418 -- 3,952
Dividends due to
policyholders......... 1,371 210 -- 1,581 1,407 208 -- 1,615
Premium deposit funds.. 12,891 1,865 -- 14,756 14,006 2,150 -- 16,156
Interest maintenance
reserve............... 1,148 -- -- 1,148 881 16 -- 897
Other policy
liabilities........... 3,882 90 -- 3,972 3,364 136 -- 3,500
Investment valuation
reserves(f)........... 1,860 429 (235) 2,054 1,981 362 (207) 2,136
Separate Account
liabilities........... 31,226 4,064 -- 35,290 25,159 3,358 -- 28,517
Other liabilities...... 2,459 395 20 2,874 1,337 512 9 1,858
-------- ------- ----- -------- -------- ------- ----- --------
Total Liabilities..... 135,568 15,637 (175) 151,030 124,873 15,121 (150) 139,844
-------- ------- ----- -------- -------- ------- ----- --------
SURPLUS
Special contingency
reserves.............. 754 50 -- 804 682 68 -- 750
Surplus notes.......... 1,400 148 -- 1,548 700 148 -- 848
Unassigned funds(j).... 4,410 426 (196) 4,640 4,922 416 (173) 5,165
-------- ------- ----- -------- -------- ------- ----- --------
Total Surplus......... 6,564 624 (196) 6,992 6,304 632 (173) 6,763
-------- ------- ----- -------- -------- ------- ----- --------
Total Liabilities and
Surplus............. $142,132 $16,261 $(371) $158,022 $131,177 $15,753 $(323) $146,607
======== ======= ===== ======== ======== ======= ===== ========
</TABLE>
II-25
<PAGE>
- --------
(a) Pro forma results include conforming adjustments to eliminate accrued net
interest income from preferred returns on joint venture real estate and to
record losses from those joint ventures in excess of the company's share
when it exercises economic control over the venture or is obligated or
expected to fund losses in its partners' negative capital accounts.
MetLife amortized the cumulative effect of recording losses in excess of
its share in 1993 over the three year period 1993-1995. Accordingly, the
pro forma adjustments include an additional $72 million cumulative effect
relating to TNE's portfolio, amortized over that period. The effect of
these pro forma adjustments is to decrease net investment income by $52
million, $41 million and $15 million in the years ended December 31, 1993,
1994 and 1995, respectively, by $3 million and $4 million for the three
months ended March 31, 1996 and 1995, respectively. In addition, pro forma
net realized capital gains has been increased by $15 million for the year
ended December 31, 1994.
(b) Includes conforming adjustments to recognize certain interest rate swap
losses immediately. Pro forma net investment income has been decreased by
$10 million in each of the years ended December 31, 1994 and 1995. For the
three month periods ended March 31, 1996 and 1995, pro forma net
investment income was increased by $4 million and decreased by $3 million,
respectively.
(c) Pro forma policy reserves have been adjusted to reflect New York reserve
requirements that are different from Massachusetts requirements. As a
result, changes to reserves decreased (increased) by $9 million, $(1)
million and $8 million in the years ended December 31, 1993, 1994 and
1995, respectively, and by $1 million and $2 million for the three months
ended March 31, 1996 and 1995, respectively.
(d) In 1995, MetLife established an allowance for losses on real estate
expected to be disposed of in the near term by recording a realized
capital loss. Previously unrealized loss reserves have been reclassified
to reflect a realized capital loss of $63 million in 1995 for property in
TNE's portfolio that would have been included in a pro forma allowance. In
addition, $20 million is recognized in connection with planned disposals
of joint venture real estate in the near term. Accordingly, pro forma net
realized capital gains has been decreased by $83 million for the year
ended December 31, 1995. A pro forma unrealized capital gain of $63
million has been reflected in the same period.
(e) Pro forma net investment income has been decreased by $90 million for the
three months ended March 31, 1996, to reflect the Settlement Agreement
among TNE, Copley Real Estate Advisors, Inc. and the Washington State
Investment Board (see Note 2 to the Unaudited Financial Statements of TNE
for the three months ended March 31, 1996), which is contingent on
completion of the Merger.
(f) Investment valuation reserves include an AVR (Asset Valuation Reserve) at
March 31, 1996 and 1995, and December 31, 1995 and 1994, and AVR and VIR
(Voluntary Investment Reserve) for December 31, 1993 for MetLife. They
include an AVR and VIR for TNE results for all periods presented. Pro
forma investment valuation reserves have been adjusted to reflect the
reclassification of mortgage loans reserves to an offset against assets
and the recomputation of the AVR taking into account the adjusted asset
balances and adjusted realized and unrealized capital gains. Historical
voluntary contributions to the AVR made by TNE of $124 million have not
been reflected in the pro forma financial information. Pro forma
investment valuation reserves have been decreased by $215 million, $207
million and $235 million as of December 31, 1993, 1994 and 1995,
respectively, and by $235 million and $207 million as of March 31, 1996
and 1995, respectively.
(g) Dividends to policyholders are discretionary and are subject to the
approval of MetLife's Board.
(h) For each of the periods prior to the quarter ended December 31, 1995,
MetLife's surplus tax has been calculated based on the tax liability
expected to be reported on the federal income tax return for each year
presented. For the three months ended March 31, 1996 and the year ended
December 31, 1995 surplus tax was calculated based on the expected final
tax for such periods.
(i) MetLife's results are net of $77 million and $(27) million transfer to the
Interest Maintenance Reserve for the three months ended March 31, 1996 and
1995, respectively, and $339 million, $48 million and $688 million
transfer to the IMR for the years ended December 31, 1995, 1994 and 1993,
respectively. TNE's results are net of $2 million, $(22) million, $(21)
million, $(21) million and $25 million, respectively, for each of the
periods ended March 31, 1996 and 1995, and December 31, 1995, 1994 and
1993.
II-26
<PAGE>
(j) In the opinion of MetLife, unassigned surplus is the source of funds for
payments of interest on and principal of their Surplus Notes (see Note 9
to the Audited Financial Statements of TNE and Note 10 to the Audited
Financial Statements of MetLife). Currently, each such payment requires
specific prior approval of the appropriate state insurance regulator, who
also determines what portion, if any, is available for such payments. Upon
the Merger, TNE Surplus Notes became obligations of MetLife.
(k) MetLife's results for the three months ended March 31, 1996 and 1995 and
the year ended December 31, 1995 include premium income relating to group
life and non-medical health insurance businesses acquired from The
Travelers Insurance Company and certain of its subsidiaries effective
January 1, 1995. MetLife's premium income includes amounts relating to
group health care benefits businesses insurance policies of $1,379 million
and $1,371 million, respectively, for the years ended December 31, 1994
and 1993. Effective January 1995, the group health care benefits
businesses were contributed to The MetraHealth Companies, Inc. Premium
income of MetLife subsequent to December 31, 1994 includes group health
care benefits businesses premium income relating to the period prior to
policy or contract renewal date and business for which reinsurance
agreements had not yet received regulatory approval.
II-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of New England Mutual Life
Insurance Company:
We have audited the accompanying balance sheets of New England Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the related statements
of operations, surplus, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New England Mutual Life
Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with the accounting practices prescribed or
permitted by the Division of Insurance of The Commonwealth of Massachusetts,
which are considered generally accepted accounting principles for mutual life
insurance companies.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 5, 1996
II-28
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Bonds...................................................... $ 6,079.8 $ 6,274.6
Stocks..................................................... 121.4 98.7
Unconsolidated subsidiaries................................ 693.7 484.1
Mortgage loans............................................. 1,629.3 1,997.9
Real estate................................................ 951.2 1,173.4
Policy loans............................................... 1,350.4 1,341.6
Cash and short-term investments............................ 651.1 264.8
Other invested assets...................................... 128.8 151.9
Premiums deferred and uncollected.......................... 190.8 217.2
Investment income due and accrued.......................... 281.5 252.5
Separate Account assets.................................... 4,091.8 3,388.4
Other assets............................................... 91.3 107.7
--------- ---------
Total Assets............................................. $16,261.1 $15,752.8
========= =========
LIABILITIES
Reserves for life and health insurance and annuities....... $ 8,116.6 $ 7,961.2
Policy proceeds and dividends.............................. 466.8 417.8
Dividends due to policyholders............................. 210.0 208.2
Premium deposit funds...................................... 1,865.0 2,149.9
Other policy liabilities................................... 89.7 135.5
Investment valuation reserves.............................. 429.5 361.9
Separate Account liabilities............................... 4,064.1 3,358.1
Other liabilities.......................................... 395.4 528.0
--------- ---------
Total Liabilities........................................ 15,637.1 15,120.6
SURPLUS
Special contingency reserves............................... 50.0 68.4
Surplus notes.............................................. 147.6 147.6
Unassigned funds........................................... 426.4 416.2
--------- ---------
Total Surplus............................................ 624.0 632.2
--------- ---------
Total Liabilities and Surplus.......................... $16,261.1 $15,752.8
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-29
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME
Premiums, annuity considerations and deposit
funds.......................................... $1,679.0 $1,943.0 $1,881.1
Considerations for supplementary contracts and
dividend accumulations......................... 165.8 39.9 61.0
Net investment income........................... 758.2 720.3 796.6
Other income.................................... 155.2 141.6 139.2
-------- -------- --------
Total......................................... 2,758.2 2,844.8 2,877.9
-------- -------- --------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)......... 2,186.3 2,055.7 1,990.0
Changes to reserves, deposit funds and other
policy liabilities............................. (151.1) (181.7) (17.2)
Insurance expenses and taxes (other than federal
income and capital gains taxes)................ 404.4 429.2 449.1
Net transfers to Separate Accounts.............. (64.2) 230.2 138.3
-------- -------- --------
Total benefits and expenses before dividends
to policyholders............................. 2,375.4 2,533.4 2,560.2
-------- -------- --------
Net gain from operations before dividends to
policyholders and federal income taxes.......... 382.8 311.4 317.7
Dividends to policyholders....................... 211.4 207.6 227.0
-------- -------- --------
Net gain from operations before federal income
taxes........................................... 171.4 103.8 90.7
Federal income taxes (excluding tax on capital
gains).......................................... 12.9 15.7 33.5
-------- -------- --------
Net gain from operations......................... 158.5 88.1 57.2
Net realized capital (loss)...................... (98.7) (45.8) 32.2
-------- -------- --------
Net Income....................................... $ 59.8 $ 42.3 $ 89.4
======== ======== ========
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF SURPLUS
(IN MILLIONS)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Surplus--beginning of year....................... $ 632.2 $ 400.9 $ 605.5
Net Income....................................... 59.8 42.3 89.4
Surplus notes.................................... -- 147.6 --
Other changes to surplus......................... (68.0) 41.4 (294.0)
-------- -------- --------
Surplus--end of year............................. $ 624.0 $ 632.2 $ 400.9
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-30
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
FROM OPERATING ACTIVITIES
Premiums.................................... $ 1,727.7 $ 1,920.5 $ 1,872.6
Net investment income....................... 765.8 728.0 952.3
Benefits.................................... (2,221.0) (2,040.8) (1,999.6)
Net transfers to Separate Accounts.......... 45.3 (226.9) (147.3)
Expenses and taxes.......................... (467.8) (445.2) (447.8)
Policyholder dividends...................... (213.6) (221.0) (255.5)
Net (increase) in policy loans.............. (8.8) (20.3) 44.0
Other income and disbursements, net......... 380.3 (184.7) 139.7
--------- --------- ---------
Net cash flow from operating activities... 7.9 (490.4) 158.4
--------- --------- ---------
FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or
repaid..................................... 3,654.3 3,220.1 5,019.2
Cost of investments acquired................ (3,178.3) (3,307.1) (4,921.5)
--------- --------- ---------
Net cash flow from investing activities... 476.0 (87.0) 97.7
--------- --------- ---------
FROM FINANCING ACTIVITIES
Issuance of surplus notes................... -- 147.6 --
Issuance of floating rate notes payable..... -- 125.0 --
Issuance of 6% demand note payable.......... 26.8 -- --
Repayment of floating rate notes payable.... (124.4) -- --
Repayment of 8% note payable................ -- -- (19.2)
Repayment of 7 3/8% debentures.............. -- -- (12.3)
--------- --------- ---------
Net cash flow from financing activities... (97.6) 272.6 (31.5)
--------- --------- ---------
NET CASH FLOW................................. 386.3 (304.8) 224.6
Cash and short-term investments
Beginning of year........................... 264.8 569.6 345.0
--------- --------- ---------
End of year................................. $ 651.1 $ 264.8 $ 569.6
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-31
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
New England Mutual Life Insurance Company offers a complete line of ordinary
life insurance products, group pension contracts, group life and health
contracts, and, through its affiliates, variable life insurance and annuity
products, mutual funds, and investment management products. Based on sales and
assets, the company's principal market is ordinary and variable life insurance,
which it sells through a network of general agencies located throughout the
United States.
Basis of Presentation
The Company prepares its statutory financial statements, except as to form,
in accordance with accounting practices prescribed or permitted by the Division
of Insurance of The Commonwealth of Massachusetts. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. Permitted and prescribed
statutory accounting practices are currently considered generally accepted
accounting principles (GAAP) for mutual life insurance companies.
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts. The American Institute of Certified Public Accountants
issued Statement of Position 95-1, Accounting for Certain Insurance Activities
of Mutual Life Insurance Enterprises. Neither of these groups has a role in
establishing regulatory accounting practices. These pronouncements will require
mutual life insurance companies to modify their financial statements in order
for them to continue to be in accordance with generally accepted accounting
principles, effective for the Company's 1996 financial statements. The manner
in which policy reserves, new business acquisition costs, asset valuations and
the related tax effects are recorded will change. Management has not determined
the impact of such changes on its financial statements.
Certain amounts from the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in accordance with permitted and
prescribed statutory accounting practices requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Invested Assets
Carrying values of bonds and stocks have been determined in accordance with
methods and values adopted by the National Association of Insurance
Commissioners (NAIC). Bonds are carried primarily at amortized cost, preferred
stocks at cost, and common stocks (other than stocks of non-publicly traded
subsidiaries) at fair value based upon NAIC market prices. The Company carries
its investment in New England Investment Companies, L.P., (NEIC) a 56% owned,
publicly traded Delaware limited partnership, at a 14% discount from quoted
market value. The discount is determined by the NAIC Securities Valuation
Office based on volume of trading, the existence of market overhang, and
similar trading characteristics. At December 31, 1995 and 1994, the Company's
investment in NEIC had a fair value of $439.2 million and $324.8 million,
respectively, and a carrying value of $377.7 million and $279.4 million,
respectively.
Mortgage loans on real estate are carried at outstanding principal balance or
amortized cost. The Company establishes investment valuation reserves equal to
the amount by which the admitted value of each mortgage loan that has been
modified, is delinquent 90 days or more, or is in the process of modification,
exceeds the estimated fair value of its underlying collateral. These investment
valuation reserves are adjusted annually based upon current valuations.
II-32
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investment real estate is carried at cost less accumulated depreciation and
encumbrances of $65.9 million in 1995 and accumulated depreciation and
encumbrances of $91.4 million in 1994. A loss reserve is established when the
fair value of the real estate is less than the carrying value, and the loss is
considered other than temporary, but not permanent. Losses considered permanent
are realized and any previously established loss reserve is reversed.
Depreciation is computed principally using the straight-line method over an
average life of forty years.
Policy loans are carried at the aggregate of the unpaid balances. Policy
loans are an integral part of insurance products and have no maturity dates.
Consequently it is not practicable to value these instruments. Short-term
investments are carried principally at cost, which approximates fair value, and
include securities with a maturity date at purchase of less than one year.
Investments in real estate joint ventures and unconsolidated subsidiaries,
unless publicly traded, are valued using the equity method. Other long-term
investments are carried principally at cost.
Prepayment assumptions for loan-backed bonds and structured securities were
obtained from investment advisors and are updated on a quarterly basis. These
assumptions are consistent with the current interest rate and economic
environment. The prospective method is used to value loan-backed securities.
Realized gains and losses on the sales of investments are determined on the
specific identification method. Unrealized gains and losses are accounted for
as increases or decreases in surplus.
Risk Management Instruments
Amounts receivable or payable under interest rate swaps used to manage
interest rate exposures from mismatches between assets and liabilities are
recognized as interest income or expense.
Gains and losses on hedges of existing assets or liabilities are deferred and
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income when resulting premiums or discounts are
amortized or at the time of disposal. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions also are deferred and
are recognized in income, or as adjustments of carrying amounts, when the
hedged transaction occurs. Gains and losses on early termination of contracts
that qualify for hedge accounting are deferred and are amortized through the
Interest Maintenance Reserve or as an adjustment to the yield of the related
asset or liability.
Life, Health and Annuity Reserves
Reserves for life insurance policies are predominantly developed using the
1958 and 1980 Commissioners' Standard Ordinary Mortality Table on the Net Level
Premium Method or the Commissioners' Reserve Valuation Method with assumed
interest rates ranging from 2.5% to 6%.
Reserves for group annuities covering purchased benefits are based on
accepted actuarial methods principally at interest rates ranging from 2.75% to
11%. Where benefits have not as yet been purchased, the deposits represent the
accumulated fund balances (net of expenses and fixed surrender charges) at
various interest rates. Group pension and other deposits have a fair value of
$1.9 billion at December 31, 1995 and $2.2 billion at December 31, 1994 as
determined by applying discount rates consistent with pricing for Guaranteed
Investment Contracts to the projected cash flows for the deposits.
Approximately $5.1 billion or 69.4% of the $7.3 billion of gross annuity
reserves and deposit liabilities in the General and Separate Accounts are
subject to discretionary withdrawal with adjustment for market value or
surrender charges. Another $1.4 billion or 19.7% are not subject to withdrawal.
The balance is subject to discretionary withdrawal without adjustment.
Recognition of Premium Revenue and Related Expenses
Premium revenue is recognized during the premium paying period. Commissions
and other expenses in connection with acquiring new business are charged to
current operations as incurred.
II-33
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Policyholder Dividends
The Company determines the amount of dividends to be allocated to
participating policies by means of a formula which establishes its dividend
scale for the following year with respect to each group of policies. A
liability for the dividends to be paid or credited to policyholders during the
following year on the anniversary date of the policies is established at each
year-end.
Separate Account
Separate Account assets and liabilities represent funds administered and
invested by the Company for the benefit of certain pension and annuity
contractholders. The values of the funds in the Separate Account are not
guaranteed but reflect the actual investment performance of the respective
accounts. The assets are carried at fair value.
Special Contingency Reserves
The Company has established a special purpose surplus fund for the possible
payment of federal income taxes relating to future disposals of Separate
Account real estate holdings.
Unconsolidated Subsidiaries
The Company records its equity in the earnings of unconsolidated subsidiaries
as unrealized gains or losses, which increases or decreases the Asset Valuation
Reserve, and records dividends that are not considered return of capital in net
investment income.
The Company owns 100% of the outstanding common stock of the following
companies:
Boylston Capital Advisors, Inc. TNE-Y Inc.
COAC Co., Inc. NEL Partnership Investments I,
CRB Co., Inc. Inc.
CRH Companies, Inc. NELRECO Troy, Inc.
Exeter Reassurance Company, Ltd. New England Pension and Annuity
L/C Development Corporation Company
New England Life Mortgage Funding Corporation New England Securities
TNE Advisers, Inc. Corporation
New England Investment Companies, Inc. New England Variable Life
G.A. Holdings Companies, Inc. Insurance Company
LC Park Place Corporation Newbury Insurance Company,
Limited
TNE Information Services, Inc.
TNE Funding Corporation
DPA Holding Corp.
Lyon/Copley Corporation
Summarized financial data for unconsolidated subsidiaries at December 31,
1995 and 1994 is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -----
(IN MILLIONS)
<S> <C> <C> <C>
Total assets at year-end............................ $2,215.9 $1,927.7
Total liabilities at year-end....................... 1,534.1 1,450.6
Net income.......................................... 41.2 9.1 (15.0)
Dividends paid by subsidiaries to the Company....... 36.1 38.6 29.0
</TABLE>
The Company owns 100% of the outstanding voting common stock and 0% of the
outstanding participating common stock of Omega Reinsurance Corporation.
The Company owns 56% of the outstanding partnership units of New England
Investment Companies, L.P.
Many of the Company's real estate joint ventures have mortgage loans with the
Company. The carrying values of such mortgages were $232.7 million and $392.3
million at December 31, 1995 and 1994, respectively.
II-34
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT RESERVES AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit-related losses on unassigned surplus. The AVR covers all
invested asset classes with risk of loss, including bonds, common stock,
mortgage loans and real estate.
The Interest Maintenance Reserve (IMR) accumulates realized capital gains and
losses on the sale of all types of fixed-income securities that result from
changes in the overall level of interest rates. These gains are amortized into
operating income over the remaining life of each investment sold. The IMR
amounted to $(1.9) million and $16.5 million as of December 31, 1995 and 1994,
respectively. The negative balance of the IMR at December 31, 1995 was treated
as a non-admitted asset. The amortization of the IMR into net income net of
federal income tax for 1995, 1994 and 1993 was $(2.7) million, $3.7 million and
$6.5 million, respectively.
3. INVESTMENTS
The carrying value and estimated fair values of debt securities excluding
Separate Account assets are as follows:
<TABLE>
<CAPTION>
1995
----------------------------------
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAINS LOSSES VALUE
-------- ------ ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 321.5 $ 11.0 $ -- $ 332.5
Corporate securities............. 3,997.6 230.8 (32.3) 4,196.1
Mortgage-backed securities....... 1,205.2 26.3 (33.3) 1,198.2
Other debt securities............ 555.5 39.8 (7.4) 587.9
-------- ------ ------- --------
Totals......................... $6,079.8 $307.9 $ (73.0) $6,314.7
======== ====== ======= ========
<CAPTION>
1994
----------------------------------
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAINS LOSSES VALUE
-------- ------ ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 462.5 $ 0.7 $ (29.8) $ 433.4
Corporate securities............. 3,727.3 22.8 (172.9) 3,577.2
Mortgage-backed securities....... 1,806.8 4.9 (221.9) 1,589.8
Other debt securities............ 278.0 1.6 (17.7) 261.9
-------- ------ ------- --------
Totals......................... $6,274.6 $ 30.0 $(442.3) $5,862.3
======== ====== ======= ========
</TABLE>
Publicly traded debt securities are valued based upon NAIC market prices. The
estimated fair values of private placement obligations are determined using an
internal matrix based on market interest rates, the credit rating of the
specific security and public prices of similar securities.
II-35
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The carrying value and estimated fair value of debt securities at December
31, 1995 by contractual maturity are shown below. Stated maturities may differ
from contractual maturities because some borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less................................... $ 188.2 $ 188.8
Due after one year through five years..................... 914.6 944.5
Due after five years through ten years.................... 2,079.7 2,184.4
Due after ten years....................................... 1,692.2 1,798.9
Mortgage-backed securities................................ 1,205.1 1,198.1
-------- --------
Totals.................................................. $6,079.8 $6,314.7
======== ========
</TABLE>
Proceeds from sales of investments in debt securities were $2,046.5 million,
$1,489.2 million and $1,569.2 million in 1995, 1994 and 1993, respectively.
Gross realized gains were $39.3 million, $5.8 million and $35.2 million, and
gross realized losses were $33.2 million, $35.6 million and $13.1 million in
1995, 1994 and 1993, respectively. Net realized losses of $(21.0) million,
$(20.9) million and $24.7 million in 1995, 1994 and 1993, respectively, were
transferred to the IMR.
The carrying values and estimated fair values of stocks and mortgage loans at
December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------ ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Stocks................................. $ 121.4 $ 121.4 $ 98.7 $ 98.7
Mortgage loans......................... 1,629.3 1,527.4 1,997.9 1,740.6
</TABLE>
The estimated fair value of mortgage loans is determined using an internal
matrix based upon market interest rates and a credit rating system.
There are no significant concentrations of bonds by issuer or by industry.
As of December 31, 1995 and 1994 the Company's mortgage loans and real estate
were distributed as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
-------------- ---------- -------------- ----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Geographic Region
Pacific............... $ 839.4 32.5% $1,139.5 35.9%
South Atlantic........ 495.8 19.2 566.2 17.9
North Central......... 339.7 13.2 374.5 11.8
New England........... 323.7 12.6 380.7 12.0
Middle Atlantic....... 282.7 11.0 343.5 10.8
South Central......... 189.5 7.3 244.5 7.7
Mountain.............. 109.7 4.2 121.6 3.8
Other................. -- -- 0.8 0.1
-------- ----- -------- -----
Total............... $2,580.5 100.0% $3,171.3 100.0%
======== ===== ======== =====
</TABLE>
II-36
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
-------------- ---------- -------------- ----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Property Type
Office................ $1,253.3 48.6% $1,600.9 50.4%
Industrial............ 730.5 28.3 891.2 28.1
Residential........... 350.7 13.6 377.1 11.9
Retail................ 211.6 8.2 268.6 8.5
Hotel................. 34.4 1.3 33.5 1.1
-------- ----- -------- -----
Total............... $2,580.5 100.0% $3,171.3 100.0%
======== ===== ======== =====
</TABLE>
The Company's balance of restructured mortgage loans was $778.0 million and
$868.1 million as of December 31, 1995 and 1994, respectively. Interest income
which would have been recorded in accordance with the original terms of these
loans would have amounted to approximately $69.8 million, $82.1 million and
$69.7 million in 1995, 1994 and 1993, respectively. Total income included in
net investment income for these loans was approximately $36.8 million,
$33.1 million and $24.3 million in 1995, 1994 and 1993, respectively.
4. DERIVATIVES
Interest Rate Swaps
The Company enters into derivatives contracts, particularly interest rate
swaps, to hedge interest rate exposures arising from mismatched assets and
liabilities. Under interest rate swaps, the Company agrees to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated on an agreed-upon notional principal amount.
Because asset durations have historically been shorter than liabilities, the
Company generally agrees to pay a floating rate to lengthen the duration of its
assets. Because the size of swap positions needed to reduce the impact of
market fluctuations on surplus varies over time, the Company may close out swap
positions or enter into swaps in which it receives the floating rate and pays
the fixed rate to reduce its net position.
At December 31, 1995, $646.8 million notional principal amount of such pay-
floating swaps and receive-fixed swaps was in effect. The original term to
maturity for these swaps is typically three to five years. The Company's
current credit exposure on swaps is limited to the value of interest rate swaps
that have become favorable to the Company. At December 31, 1995 and 1994, the
market value of interest rate swaps in a favorable position was $0 and $0.5
million, respectively, while the net value of all positions was $31.5 million
and $111.7 million unfavorable, respectively.
5. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
The Company's Home Office Retirement Plan and related Select Employees'
Supplemental Retirement Plan (together the "Plan") cover substantially all of
its employees. Retirement benefits are based primarily on years of service and
the employee's final average salary. The Company's funding policy is to
contribute annually an amount that can be deducted for federal income tax
purposes using a different actuarial cost method and different assumptions from
those used for financial reporting purposes. The net pension cost charged to
income in 1995, 1994 and 1993 was $7.6 million, $7.6 million and $7.1 million,
respectively.
II-37
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following information for the Plan includes amounts relating to
unconsolidated non-wholly-owned affiliates. Accordingly, the amounts presented
are greater than the Company's share.
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of accumulated plan benefits........ $119.0 $104.0
Projected benefit obligation................................ $168.0 $157.0
Net assets available for plan benefits...................... $116.0 $ 97.0
Unrecognized prior service cost............................. $ 4.0 $ 4.4
Unrecognized net (loss) from past experience different from
that assumed............................................... $(47.3) $(60.9)
Unamortized transition gains................................ $ 5.2 $ 6.4
</TABLE>
The components of net pension cost were:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................... $ 4.8 $ 6.6 $ 6.1
Interest cost......................................... 11.0 10.6 9.9
Actual return on plan assets.......................... (20.9) 2.1 (2.3)
Net amortization and deferral......................... 12.7 (10.0) (5.5)
Costs allocated to affiliates......................... -- (1.7) (1.1)
------ ------ -----
Net periodic pension cost........................... $ 7.6 $ 7.6 $ 7.1
====== ====== =====
</TABLE>
The weighted average discount rate was 8.0%, 7.5% and 8.0% in 1995, 1994 and
1993, respectively. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit was 5.0% for
1995 and 1994 and 5.5% for 1993. Plan assets consist of bonds, stocks, real
estate and insurance contracts and have an assumed long-term rate of return of
8.5% for 1995, 1994 and 1993.
The Company has defined contribution and contributory pension and savings
plans covering substantially all of its employees and full-time agents, and
deferred compensation plans for agents who meet certain service requirements,
for certain senior officers and directors, and general agents. The Company's
contributions to these plans, charged to operations in 1995, 1994 and 1993,
were $15.8 million, $17.3 million and $17.1 million, respectively.
6. OTHER POSTRETIREMENT BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all employees become eligible for these benefits if they have met certain age
and service requirements at retirement. The Company intends to fund the
accumulated postretirement benefit obligation as benefits become due.
II-38
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth the plan's funded status reconciled with amounts
reported in the Company's balance sheet.
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $31.7 $31.4
Fully eligible active plan participants................. 7.1 5.8
----- -----
Total..................................................... 38.8 37.2
less: unrecognized transition obligation 36.1 41.0
plus: unrecognized net gain 4.9 10.0
----- -----
Accrued postretirement benefit liability.................. $ 7.6 $ 6.2
===== =====
The components of net postretirement benefit cost were:
Estimated eligibility cost.............................. $ 0.9 $ 0.9 $1.9
Interest cost........................................... 2.8 2.9 3.7
Amortization of transition obligation over 20 years..... 2.1 2.3 2.3
Amortization of gain over 17 years...................... (0.6) (0.6) --
----- ----- ----
Net postretirement benefit cost........................... $ 5.2 $ 5.5 $7.9
===== ===== ====
</TABLE>
Net postretirement benefit cost for the year ended December 31, 1995 includes
the expected cost of such benefits for newly vested employees, interest cost,
gains and losses arising from differences between actuarial assumptions and
actual experience, and amortization of the transition obligation. The discount
rate used to determine the net postretirement benefit cost was 8.5%, 8.0% and
8.5% in 1995, 1994 and 1993, respectively. The Company made contributions to
the plan of $3.8 million, $3.6 million and $3.6 million in 1995, 1994 and 1993,
respectively, as claims were incurred.
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.25%, 8.5% and 8.5% for 1995, 1994 and 1993, respectively, and
the health care cost trend rate was 8.6% graded to 5.5% over 8 years in 1995,
9% graded to 5.5% over 9 years for 1994 and 12% graded to 6% over 10 years for
1993. The health care cost trend rate assumption has a minimal impact on the
amounts reported, since the Company has capped its contributions at 200% of
1993 levels.
The estimated accumulated benefit obligation for active nonvested employees
was $14.2 million and $13.3 million at December 31, 1995 and 1994,
respectively.
7. FEDERAL INCOME TAXES
Federal income taxes are provided on the basis of amounts estimated to be
payable under the Internal Revenue Code. The Company files a consolidated
federal income tax return with its life insurance subsidiaries and its wholly-
owned non-life insurance subsidiaries.
The Internal Revenue Service has completed its examination of the Company's
income tax returns through 1991 and is currently examining the income tax
returns for 1992 and 1993. The Company is contesting certain issues since 1976.
The outcome of these proceedings is not currently determinable but, in the
opinion of management, would not have a materially adverse effect on the
financial statements.
The tax benefit of capital losses was $23.5 million and $16.5 million for
1995 and 1994, respectively. The tax on capital gains was $22.0 million for
1993.
II-39
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE
Notes payable (included in other liabilities) consist of:
<TABLE>
<CAPTION>
DECEMBER 31
------------
1995 1994
----- ------
(IN
MILLIONS)
<S> <C> <C>
6% demand note payable......................................... $26.8 $ --
Floating rate notes payable.................................... -- 124.3
Commercial paper............................................... 6.7 6.7
----- ------
Total........................................................ $33.5 $131.0
===== ======
</TABLE>
The floating rate (one month LIBOR plus .25%) notes were payable solely from,
and were collateralized by, $666.1 million of senior certificates. These senior
certificates were collateralized mortgage obligations included in bonds on the
Company's balance sheet. Interest and principal were paid monthly solely from
the cash flow of the senior certificates. The notes were fully paid by August
1995. The carrying value of the notes payable approximated their fair values,
which were estimated based upon current market interest rates for similar debt.
9. SURPLUS NOTES
In February 1994, the Company privately placed $150 million, aggregate
principal amount, of 7 7/8% Surplus Notes (the "Notes"), due February 15, 2024,
with semi-annual interest payments. The Notes are expressly subordinate in
right of payment to policy claims and other indebtedness of the Company. The
Notes are not subject to redemption by the Company or through the operation of
a sinking fund prior to maturity. Proceeds of the issuance of the Notes net of
discount and costs of issuance amounted to $145.9 million.
These proceeds were received in cash and have been reflected in surplus. Each
payment of interest on and principal of the Notes may be made only with the
prior approval of the Massachusetts Commissioner of Insurance (the
"Commissioner"). The Company will not accrue any liability for payment of
interest or principal prior to obtaining the Commissioner's approval for
payment. Accrued interest, approved by the Commissioner, as of December 31,
1995 was $4.5 million. Total interest expense on the Notes was $11.8 million in
1995 and $10.6 million in 1994, respectively.
10. SURPLUS
Other changes to surplus consist of:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Net unrealized capital gains or (losses)........... $ 75.3 $(80.8) $ 55.6
Change in valuation bases of policyholders'
reserves.......................................... (50.8) -- --
Change in investment reserves...................... (67.6) 63.5 (340.9)
Special purpose surplus funds...................... (18.4) 67.7 --
Other changes in surplus........................... (6.5) (9.0) (8.7)
------ ------ -------
Total............................................ $(68.0) $ 41.4 $(294.0)
====== ====== =======
</TABLE>
11. REINSURANCE
The Company's practice on individual products is to retain not more than
$5,000,000 of risk on any person, excluding accidental death benefits. Total
individual life premiums ceded were $150.1 million, $80.5 million and $77.5
million at December 31, 1995, 1994 and 1993, respectively. The Company also
reinsures a portion of its group life business. The group life premiums ceded
were $11.1 million, $12.5 million and $12.5 million at December 31, 1995, 1994
and 1993, respectively.
II-40
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total individual and group life insurance in force ceded was $15.4
billion, $16.0 billion and $12.3 billion at December 31, 1995, 1994 and 1993,
respectively.
In 1994, the Company reinsured, under a traditional reinsurance arrangement,
approximately 24% of a block of ordinary whole life insurance policies issued
between 1979 and 1993 and not otherwise reinsured with a wholly-owned
subsidiary which retroceded half that block with an unaffiliated reinsurer. As
part of the transaction, the Company amortizes the ceding allowance it received
in 1994, producing an increase in net income of $4.4 million in 1995.
As part of joint venture agreements to market group health and individual
disability income products, the Company reinsures with its partners. The
premiums ceded under these agreements were $122.6 million, $115.1 million and
$110.0 million in 1995, 1994 and 1993, respectively. Under a separate
reinsurance arrangement, effective January 1, 1993, the Company reinsures with
its joint venture partners 80% of all small group business. The premiums ceded
under this arrangement were $125.3 million, $108.3 million and $105.5 million
in 1995, 1994 and 1993, respectively.
Business is ceded to reinsurers on the yearly renewable term, coinsurance,
and modified coinsurance bases. The Company is party to a number of reinsurance
agreements with nonaffiliated insurers by means of which, consistent with usual
industry practices, some or all of the mortality or morbidity risk of the
Company is transferred to the other companies. The Company assumes a small
amount of retrocessions from reinsurers and a small amount of reinsurance from
an affiliate.
The Company is contingently liable with respect to ceded insurance should any
reinsurer be unable to meet the obligations assumed by it.
In 1995 the Company recognized a $14.1 million-after tax loss on the
recapture of two surplus relief treaties.
12. COMMITMENTS AND CONTINGENCIES
The Company's obligations with respect to $89.9 million of zero-coupon
Eurobonds due in 1999 issued by an unconsolidated subsidiary in 1985 (and
secured by mortgage loans of the issuer) include obligations to substitute
collateral for any defaulted mortgage loan and to provide sufficient funds to
the issuer to enable redemption as a result of any amendment of United States
tax law which would require the issuer to withhold taxes on interest payments.
The Company's obligations with respect to the bonds are subordinated to
obligations to policyholders. The balance of these Eurobonds, net of
unamortized discount, was $63.3 million as of December 31, 1995.
The Company is guarantor of the obligations arising out of certain financial
instruments issued by a limited partnership in which the Company has an
investment. The financial instruments guaranteed by the Company include
interest rate swap and option contracts between the partnership and other
counterparties. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap and option
contracts. As of December 31, 1995, contracts in a loss position amounted to
$36.0 million and contracts in a gain position amounted to $40.3 million.
A 1985 agreement, under which the Company sold tax-exempt mortgage loans,
obligates the Company to repurchase defaulted loans. As of December 31, 1995,
the principal amount of the tax-exempt loans outstanding was $8.2 million.
In addition, at December 31, 1995, the Company is a guarantor of $272.2
million of outstanding indebtedness and other obligations, lease obligations of
$60.8 million and municipal reinvestment contract obligations of $142.6
million. The Company's obligations with respect to the outstanding
indebtedness, leases and municipal reinvestment contracts are subordinated to
obligations to policyholders. The Company has standby commitments to provide
permanent mortgage financing of $113.6 million as of December 31, 1995.
Management does not anticipate any losses in connection with the above that
would have a material effect on its financial position.
II-41
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company and Copley Real Estate Advisors, Inc. ("Copley"), an indirect,
majority-owned subsidiary of the Company, are parties to lawsuits arising out
of investments made by institutional investors in certain real estate separate
accounts of the Company, which are or were advised by Copley.
There are currently two lawsuits pending.
First, on July 30, 1993, the Washington State Investment Board ("WSIB") filed
suit against the Company and Copley in the Superior Court of the State of
Washington for Thurston County. The WSIB's suit alleges that certain public
employee retirement plans whose funds were invested by the WSIB have lost over
$600.0 million of the $800.0 million they invested in the Prentiss/Copley
Investment Group ("PCIG") and certain other real estate ventures advised by
Copley. The suit seeks rescission of the investments and repayment of the
amounts invested, or alternatively, money damages, plus interest, attorneys'
fees and costs, together with disgorgement of fees and profits received by the
Company and Copley. The Company and Copley have filed an answer denying all
liability to WSIB and raising a number of affirmative defenses. Production of
documents is substantially complete. The Company and Copley have completed a
substantial number of depositions of WSIB witnesses, and WSIB has begun its
depositions of Company and Copley witnesses. The suit is scheduled for trial
beginning on September 9, 1996.
Second, on July 30, 1993, the State Teachers Retirement System of Ohio ("Ohio
Board") filed suit against the Company and Copley in the United States District
Court for the Southern District of Ohio. The Ohio Board alleges that it has
lost substantially all of the value of its $50.0 million investment in PCIG and
seeks restoration of that amount, plus interest and disgorgement of profits
made by the Company and Copley, as well as attorneys' fees and costs.
Production of documents is substantially complete. No substantive depositions
have been taken by the Ohio Board, nor has the Company taken any substantive
depositions of Ohio Board witnesses. The court has not set a discovery
schedule, nor has a trial date been set.
In 1995, the Company established a reserve of $10.0 million on its financial
statements with respect to the WSIB lawsuit. The Company has agreed to
indemnify Copley against any and all liability and expense arising out of these
suits or out of other claims or actions relating to the Washington State
retirement plans' or the Ohio Board's investments.
In addition to the two lawsuits described above, the Company is involved in
various litigation in the ordinary course of business. In the opinion of
management, this litigation should not result in judgments or settlements
which, in the aggregate, would have a material adverse effect on the Company's
financial condition.
13. MERGER
The Company and Metropolitan Life Insurance Company (MetLife) have entered
into a definitive agreement, effective as of August 16, 1995, pursuant to which
the Company would be merged with and into MetLife. The closing of the merger is
subject to various conditions, including but not limited to the obtaining of
various regulatory approvals and the approvals of the policyholders of both
companies. It is currently anticipated that the merger will be consummated
during the second quarter of 1996.
The carrying value of the Company's assets is based, in part, on the
assumption that they will be held indefinitely as long-term investments. It is
reasonably possible that MetLife could change the investment objectives of the
portfolio subsequent to the merger and dispose of certain assets, particularly
mortgage and real estate holdings. If so, the realizable value of those assets
could be reduced in the near term.
14. EVENT SUBSEQUENT TO REPORT OF INDEPENDENT ACCOUNTANTS (UNAUDITED)
The litigation with the WSIB described in Note 12 is the subject of a
Settlement Agreement dated as of June 6, 1996 among the Company, Copley and the
WSIB. The settlement is subject to the consummation of the merger between the
Company and MetLife described in Note 13. If the merger has not occurred by
November 5, 1996, the WSIB has the option to void the Settlement Agreement, in
which case the litigation will resume. If the merger has not occurred by
December 31, 1996, the Company has the option to void the Settlement Agreement,
in which case the litigation will resume.
II-42
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Settlement Agreement, MetLife, as successor to the
Company, will make a cash payment and transfer other consideration to WSIB and
WSIB will transfer certain real estate assets to MetLife so as to accomplish
the total disengagement of the real estate relationship between the
Company/Copley and WSIB. MetLife will acquire, for cash, from WSIB certain real
estate at a fair market value of approximately $102.5 million. In addition,
WSIB will receive consideration of approximately $62.5 million from MetLife and
certain real estate interests presently owned by the Company. The net cost of
the settlement to MetLife will be approximately $117 million. Upon consummation
of the settlement, the parties will exchange full releases and the litigation
will be dismissed with full prejudice.
II-43
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- ---------------------
(UNAUDITED) (DERIVED FROM AUDITED
FINANCIAL STATEMENT)
<S> <C> <C>
ASSETS
Bonds.................................... $ 6,453.6 $ 6,079.8
Stocks................................... 126.6 121.4
Unconsolidated subsidiaries.............. 715.9 693.7
Mortgage loans........................... 1,590.6 1,629.3
Real estate.............................. 957.7 951.2
Policy loans............................. 1,342.4 1,350.4
Cash and short-term investments.......... 255.9 651.1
Other invested assets.................... 157.1 128.8
Premiums deferred and uncollected........ 169.4 190.8
Investment income due and accrued........ 280.3 281.5
Separate Account assets.................. 4,285.5 4,091.8
Other assets............................. 107.7 91.3
--------- ---------
Total Assets........................... $16,442.7 $16,261.1
========= =========
LIABILITIES
Reserves for life and health insurance
and annuities........................... $ 8,130.6 $ 8,116.6
Policy proceeds and dividends............ 479.7 466.8
Dividends due to policyholders........... 210.1 210.0
Premium deposit funds.................... 1,714.8 1,865.0
Other policy liabilities................. 91.1 89.7
Investment valuation reserves............ 462.8 429.5
Separate Account liabilities............. 4,258.0 4,064.1
Other liabilities........................ 485.7 395.4
--------- ---------
Total Liabilities...................... 15,832.8 15,637.1
SURPLUS
Special contingency reserves............. 50.0 50.0
Surplus notes............................ 147.6 147.6
Unassigned funds......................... 412.3 426.4
--------- ---------
Total Surplus.......................... 609.9 624.0
--------- ---------
Total Liabilities and Surplus........ $16,442.7 $16,261.1
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-44
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
INCOME
Premiums, annuity considerations and deposit funds..... $ 399.6 $ 429.2
Considerations for supplementary contracts and dividend
accumulations......................................... 67.6 14.9
Net investment income.................................. 154.0 178.2
Other income........................................... 40.3 28.5
--------- ---------
Total................................................ 661.5 650.8
BENEFITS AND EXPENSES
Benefit payments (other than dividends)................ 595.2 610.7
Changes to reserves, deposit funds and other policy
liabilities........................................... (125.0) (155.7)
Insurance expenses and taxes (other than federal income
and capital gains taxes).............................. 97.9 102.4
Net transfers to Separate Accounts..................... 33.9 (8.0)
--------- ---------
Total benefits and expenses before dividends to
policyholders....................................... 602.0 549.4
--------- ---------
Net gain from operations before dividends to
policyholders and federal income taxes................. 59.5 101.4
Dividends to policyholders.............................. 55.1 54.7
--------- ---------
Net gain from operations before federal income taxes.... 4.4 46.7
Federal income taxes (excluding tax on capital gains)... (2.2) 20.5
--------- ---------
Net gain from operations................................ 6.6 26.2
Net realized capital gain (loss)........................ 1.4 (4.4)
--------- ---------
Net Income.............................................. $ 8.0 $ 21.8
========= =========
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF SURPLUS
(IN MILLIONS)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Surplus--beginning of year.............................. $ 624.0 $ 632.2
Net Income.............................................. 8.0 21.8
Other changes to surplus................................ (22.1) (19.4)
--------- ---------
Surplus--end of period.................................. $ 609.9 $ 634.6
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-45
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
INTERIM STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---------- ---------
(UNAUDITED)
<S> <C> <C>
FROM OPERATING ACTIVITIES
Premiums................................................ $ 419.1 $ 509.4
Net investment income................................... 164.9 177.5
Benefits................................................ (595.2) (645.8)
Net transfers to Separate Accounts...................... 41.4 10.2
Expenses and taxes...................................... (117.3) (104.5)
Policyholder dividends.................................. 52.1 62.8
Net (increase) in policy loans.......................... (8.0) (5.0)
Other income and disbursements, net..................... (27.6) (24.4)
---------- --------
Net cash flow from operating activities............... (70.6) (19.8)
---------- --------
FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid....... 943.9 841.3
Cost of investments acquired............................ (1,273.0) (638.8)
---------- --------
Net cash flow from investing activities............... (329.1) 202.5
---------- --------
FROM FINANCING ACTIVITIES
Issuance of floating rate notes payable................. 11.2 6.7
Repayment of floating rate notes payable................ (6.7) (74.5)
---------- --------
Net cash flow from financing activities............... 4.5 (67.8)
---------- --------
NET CASH FLOW............................................. (395.2) 114.9
Cash and short-term investments
Beginning of year....................................... 651.1 264.7
---------- --------
End of period........................................... $ 255.9 $ 379.6
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
II-46
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company prepares its statutory financial statements, except as to form,
in accordance with accounting practices prescribed or permitted by the Division
of Insurance of The Commonwealth of Massachusetts. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. Permitted and prescribed
statutory accounting practices were considered generally accepted accounting
principles (GAAP) for mutual life insurance companies for years beginning
before December 15, 1995.
The Financial Accounting Standards Board issued Interpretation 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts. The American Institute of Certified Public Accountants
issued Statement of Position 95-1, Accounting for Certain Insurance Activities
of Mutual Life Insurance Enterprises. Neither of these groups has a role in
establishing regulatory accounting practices. These pronouncements will require
mutual life insurance companies to modify their financial statements in order
for them to continue to be in accordance with generally accepted accounting
principles, effective for the Company's 1996 financial statements. The manner
in which policy reserves, new business acquisition costs, asset valuations and
the related tax effects are recorded will change. Management has not determined
the impact of such changes on its financial statements.
The accompanying interim financial statements reflect, in the opinion of the
Company's management, all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation of the interim financial position
and results of operations. Such statements should be read in conjunction with
the audited annual financial statements.
2. CONTINGENCIES
The litigation with the Washington State Investment Board ("WSIB") described
in Note 12 of the 1995 audited financial statements is the subject of a
Settlement Agreement dated as of June 6, 1996 among the Company, Copley Real
Estate Advisors, Inc. and the WSIB. The settlement is subject to the
consummation of the merger between the Company and Metropolitan Life Insurance
Company ("MetLife") described in Note 13 of the 1995 audited financial
statements. If the Merger has not occurred by November 5, 1996, the WSIB has
the option to void the Settlement Agreement, in which case the litigation will
resume. If the merger has not occurred by December 31, 1996, the Company has
the option to void the Settlement Agreement, in which case the litigation will
resume.
Under the terms of the Settlement Agreement, MetLife, as successor to the
Company, will make a cash payment and transfer other consideration to WSIB and
WSIB will transfer certain real estate assets to MetLife so as to accomplish
the total disengagement of the real estate relationship between the
Company/Copley and WSIB. MetLife will acquire, for cash, from WSIB certain real
estate at a fair market value of approximately $102.5 million. In addition,
WSIB will receive consideration of approximately $62.5 million from MetLife and
certain real estate interests presently owned by the Company. The net cost of
the settlement to MetLife will be approximately $117 million. Upon consummation
of the settlement, the parties will exchange full releases and the litigation
will be dismissed with full prejudice.
3. SUBSEQUENT EVENT
The Company and MetLife have entered into a definitive agreement, effective
as of August 16, 1995, pursuant to which the Company would be merged with and
into MetLife. The closing of the merger is subject to various conditions,
including but not limited to the obtaining of various regulatory approvals and
the approvals of the policyholders of both companies. It is currently
anticipated that the merger will be consummated during the third quarter of
1996.
The carrying value of the Company's assets is based, in part, on the
assumption that they will be held indefinitely as long-term investments. It is
reasonably possible that MetLife could change the investment objectives of the
portfolio subsequent to the merger and dispose of certain assets, particularly
mortgage and real estate holdings. If so, the realizable value of those assets
could be reduced in the near term.
II-47
<PAGE>
NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTING CHANGE
Subject to the approval of the Massachusetts Division of Insurance, the
Company intends to change the method of accounting it uses to measure
impairments of joint venture real estate. Under the proposed new method, the
Company will carry joint venture real estate at current market values if it
does not expect to recover its book value from future undiscounted cash flows.
The effect of this change is expected to materially decrease unassigned surplus
when the proposed policy is adopted.
II-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metropolitan Life Insurance Company:
We have audited the accompanying balance sheets of Metropolitan Life Insurance
Company (the Company) as of December 31, 1995 and 1994 and the related
statements of operations and surplus and of cash flow for each of the three
years in the period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994
and the results of its operations and its cash flow for each of the three
years in the period ended December 31, 1995 in conformity with accounting
practices prescribed or permitted by insurance regulatory authorities and
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 9, 1996
II-49
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1995 1994
----- ---- ----
<S> <C> <C> <C>
ASSETS
Bonds.................................................. 4,11 $ 70,955 $ 65,592
Stocks................................................. 3,4,11 3,646 3,672
Mortgage loans......................................... 3,4,11 14,211 14,524
Real estate............................................ 9,470 10,417
Policy loans........................................... 11 3,956 3,964
Cash and short-term investments........................ 11 1,923 2,334
Other invested assets.................................. 3 2,480 2,262
Premiums deferred and uncollected...................... 1,568 1,250
Investment income due and accrued...................... 1,589 1,440
Separate Account assets................................ 31,707 25,424
Other assets........................................... 627 298
-------- --------
Total Assets........................................... $142,132 $131,177
======== ========
LIABILITIES AND SURPLUS
Liabilities
Reserves for life and health insurance and annuities... 5,11 $ 76,249 $ 73,204
Policy proceeds and dividends left with the Company.... 11 4,482 3,534
Dividends due to policyholders......................... 1,371 1,407
Premium deposit funds.................................. 11 12,891 14,006
Interest maintenance reserve........................... 1,148 881
Other policy liabilities............................... 3,882 3,364
Investment valuation reserves.......................... 1,860 1,981
Separate Account liabilities........................... 31,226 25,159
Other liabilities...................................... 2,459 1,337
-------- --------
Total Liabilities...................................... 135,568 124,873
-------- --------
Surplus
Special contingency reserves........................... 754 682
Surplus notes.......................................... 10 1,400 700
Unassigned funds....................................... 4,410 4,922
-------- --------
Total Surplus.......................................... 6,564 6,304
-------- --------
Total Liabilities and Surplus.......................... $142,132 $131,177
======== ========
</TABLE>
See accompanying notes to financial statements.
II-50
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES 1995 1994 1993
----- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Premiums, annuity considerations and deposit
funds........................................ 5 $19,972 $19,881 $19,442
<CAPTION>
Considerations for supplementary contracts and
dividend accumulations........................ 2,979 2,879 1,654
<S> <C> <C> <C> <C>
Net investment income......................... 7,825 7,143 7,356
Other income.................................. 5 156 80 231
------- ------- -------
Total income.................................. 30,932 29,983 28,683
------- ------- -------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)....... 25,055 23,533 21,417
Changes to reserves, deposit funds and other
policy liabilities........................... 321 1,619 (439)
Insurance expenses and taxes (excluding tax on
capital gains)............................... 6 3,160 2,492 2,595
Net transfers to Separate Accounts............ 675 503 3,239
Dividends to policyholders.................... 1,520 1,676 1,606
------- ------- -------
Total benefits and expenses................... 30,731 29,823 28,418
------- ------- -------
Net gain from operations...................... 201 160 265
Net realized capital losses................... 3,6 (873) (54) (132)
------- ------- -------
NET (LOSS) INCOME............................. (672) 106 133
SURPLUS ADDITIONS (DEDUCTIONS)
Change in general account net unrealized capi-
tal gains.................................... 3 442 150 131
Change in investment valuation reserves....... 121 (306) (169)
Issuance of surplus notes..................... 10 700 -- 700
Other adjustments--net........................ 1,5 (331) (52) 594
------- ------- -------
NET CHANGE IN SURPLUS......................... 260 (102) 1,389
SURPLUS AT BEGINNING OF YEAR.................. 6,304 6,406 5,017
------- ------- -------
SURPLUS AT END OF YEAR........................ $ 6,564 $ 6,304 $ 6,406
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
II-51
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN MILLIONS)
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
---- ---- ----
CASH PROVIDED
Premiums, annuity considerations and deposit funds
received............................................ $19,662 $19,983 $19,599
Considerations for supplementary contracts and
dividend
accumulations received.............................. 3,051 2,948 1,748
Net investment income received....................... 7,579 6,828 6,931
Other income received................................ 166 80 134
------- ------- -------
Total receipts....................................... 30,458 29,839 28,412
------- ------- -------
Benefits paid (other than dividends)................. 23,939 22,387 20,092
Insurance expenses and taxes paid (excluding tax on
capital gains)...................................... 2,337 2,366 2,532
Net cash transfers to Separate Accounts.............. 692 524 3,304
Dividends paid to policyholders...................... 1,473 1,684 1,596
Other--net........................................... (1,872) 368 (1,051)
------- ------- -------
Total payments....................................... 26,569 27,329 26,473
------- ------- -------
Net cash from operations............................. 3,889 2,510 1,939
Proceeds from long-term investments sold, matured or
repaid after
deducting taxes on capital gains of $102 for 1995,
$60 for 1994
and $546 for 1993................................... 60,790 46,459 55,420
Issuance of surplus notes............................ 700 -- 700
Other cash provided.................................. 370 -- 369
------- ------- -------
Total cash provided.................................. 65,749 48,969 58,428
------- ------- -------
CASH APPLIED
Cost of long-term investments acquired............... 65,122 47,845 58,033
Other cash applied................................... 1,038 162 247
------- ------- -------
Total cash applied................................... 66,160 48,007 58,280
------- ------- -------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS........ (411) 962 148
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF YEAR.................................... 2,334 1,372 1,224
------- ------- -------
END OF YEAR.......................................... $ 1,923 $ 2,334 $ 1,372
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
II-52
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. BUSINESS AND ACCOUNTING POLICIES
Metropolitan Life Insurance Company (the Company) principally provides life
insurance and annuity products and pension, pension-related and investment-
related services to individuals, corporations and other institutions. The
Company and its insurance subsidiaries also provide non-medical health,
disability and property and casualty insurance. Through its non-insurance
subsidiaries, the Company also offers investment management and advisory
services and commercial finance.
The Company's financial statements are prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
New York, which practices currently are considered to be generally accepted
accounting principles for mutual life insurance companies (see Note 12). The
primary interest of insurance regulatory authorities is the ability of the
Company to fulfill its obligations to policyholders; therefore, the financial
statements are oriented to the insured public. Significant accounting policies
applied in preparing the financial statements follow.
INVESTED ASSETS AND RELATED RESERVES
Bonds qualifying for amortization are stated at amortized cost; all other
bonds at prescribed values. Unaffiliated preferred stocks are stated
principally at cost; unaffiliated common stocks are carried at market value.
Mortgage loans are stated principally at their amortized indebtedness. Short-
term investments generally mature within one year and are carried at amortized
cost. Policy loans are stated at unpaid principal balances.
Investments in subsidiaries are stated at equity in net assets and are
included in stocks. Changes in net assets, excluding additional amounts
invested, are included in unrealized capital gains or losses. Dividends from
subsidiaries are reported by the Company as earnings in the year the dividends
are declared. The excess of the purchase prices of non-insurance subsidiaries
over the fair values of the net assets acquired (goodwill) is amortized on a
straight-line basis.
Investment real estate, other than real estate joint ventures and
subsidiaries, is stated at depreciated cost net of non-recourse debt and an
allowance for losses on real estate expected to be disposed of in the near
term. Depreciation is generally calculated by the constant yield method for
real estate purchased prior to December 1990 and the straight-line method if
purchased thereafter. Real estate acquired in satisfaction of debt is valued
at the lower of cost or estimated fair value at date of foreclosure and is
subsequently stated at depreciated cost. Investments in real estate joint
ventures, included in other invested assets, and real estate subsidiaries,
included in stocks, are reported using the equity method and are generally
adjusted to reflect the constant yield method of depreciation for real estate
assets acquired by such entities prior to December 1990.
In 1994, the Company changed to the straight-line method of determining
depreciation on real estate acquired prior to December 1990 if the estimated
fair value of the real estate is less than ninety percent of depreciated cost.
This change had the effect of increasing depreciation expense by approximately
$80 million in 1994.
Investments in non-real estate partnerships are included in other invested
assets and are accounted for using the equity method. The carrying value
generally reflects the Company's share of unrealized gains and losses relating
to the market value of publicly traded common stocks held by the partnerships.
Impairments of individual investments that are considered to be other than
temporary are recognized when incurred.
Mandatory reserves have been established for general account investments in
accordance with guidelines prescribed by insurance regulatory authorities.
Such reserves consist of an Asset Valuation Reserve (AVR) for all invested
assets and an Interest Maintenance Reserve (IMR), which defers the recognition
of realized capital gains and losses (net of income tax) attributable to
interest rate fluctuations on fixed income investments over the estimated
remaining duration of the investments sold. Prior to 1994, the Company also
established voluntary investment valuation
II-53
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
reserves for certain general account investments. Changes to the AVR and
voluntary investment reserves are reported as direct additions to or
deductions from surplus. Transfers to the IMR are deducted from realized
capital gains; IMR amortization is included in net investment income.
Net realized capital gains or losses are presented net of federal capital
gains tax or benefit, respectively, and transfers to the IMR.
POLICY RESERVES
Reserves for permanent plans of individual life insurance sold after 1959,
universal life plans and certain term plans sold after 1982 are computed
principally on the Commissioners' Reserve Valuation Method. Reserves for other
life insurance policies are computed on the net level premium method. Reserves
for individual annuity contracts are computed on the net level premium method,
the net single premium method or the Commissioners' Annuity Reserve Valuation
Method, as appropriate. Reserves for group annuity contracts are computed on
the net single premium method. The reserves are based on mortality, morbidity
and interest rate assumptions prescribed by New York State Insurance Law. Such
reserves are sufficient to provide for contractual surrender values.
Periodically to reflect changes in circumstances, the Company may change the
assumptions, methodologies or procedures used to calculate reserves. During
1993, the Company and certain of its wholly-owned life insurance subsidiaries
made certain changes which increased the Company's surplus by $667 million
(substantially all of which related to interest rate changes).
INCOME AND EXPENSES
Premiums are recognized over the premium-paying period. Investment income is
reported as earned. Expenses, including policy acquisition costs and federal
income taxes, are charged to operations as incurred.
During 1995, the Company recorded a restructuring charge of $72 million
related primarily to the consolidation of office space leased for
administration and agency sales offices. The Company anticipates additional
restructuring charges over the next few years.
SEPARATE ACCOUNT OPERATIONS
Investments held in the Separate Accounts (stated at market value) and
liabilities of the Separate Accounts (including participants' corresponding
equity in the Separate Accounts) are reported separately as assets and
liabilities. The Separate Accounts' operating results are reflected in the
changes to these assets and liabilities.
ESTIMATES
The preparation of financial statements in conformity with accounting
practices prescribed or permitted by regulatory authorities and generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
2. NOTE SUBSEQUENT TO INDEPENDENT AUDITOR'S REPORT--MERGER
Effective August 30, 1996, the New England Mutual Life Insurance Company was
merged into the Company. The Company is the surviving entity. Pro forma
selected financial information giving effect to the merger are included in the
Statement of Additional Information in the registration statement.
3. UNCONSOLIDATED SUBSIDIARIES AND OTHER AFFILIATES
At December 31, 1995 and for the year then ended, subsidiary assets,
liabilities and revenues were $23,008 million, $20,393 million and $4,588
million, respectively. Comparable amounts for 1994 were $21,476 million,
$18,905 million and $4,715 million, respectively. Subsidiary revenues for 1993
were $4,525 million. Dividends from subsidiaries amounted to $558 million,
$186 million and $175 million in 1995, 1994 and 1993, respectively.
II-54
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Unamortized goodwill was $129 million at December 31, 1994. There was no
unamortized goodwill at December 31, 1995.
The Company incurs charges on behalf of its subsidiaries which are
reimbursed pursuant to agreements for shared use of property, personnel and
facilities. Charges under such agreements were approximately $194 million,
$307 million and $355 million in 1995, 1994 and 1993, respectively.
The Company's net equity in joint ventures and other partnerships was $2,424
million and $2,250 million at December 31, 1995 and 1994, respectively. The
Company's share of income from such entities was $97 million, $26 million and
$76 million for 1995, 1994 and 1993, respectively.
Many of the Company's real estate joint ventures have loans with the
Company. The carrying values of such mortgages were $1,054 million and $1,372
million at December 31, 1995 and 1994, respectively. The Company had other
loans outstanding to its affiliates with carrying values of $2,599 million and
$2,073 million at December 31, 1995 and 1994, respectively.
In January 1995, the Company and The Travelers Insurance Company (Travelers)
contributed their respective group medical health care benefits businesses to
a corporate joint venture, The MetraHealth Companies, Inc. (MetraHealth). In
October 1995, the Company and Travelers sold their investments in MetraHealth
to a non-affiliated health care management services company. For its interest
in MetraHealth, a subsidiary of the Company received $485 million face amount
of shares of redeemable preferred stock of the purchaser, $276 million in cash
and rights to additional consideration based on the 1995 earnings of
MetraHealth. The transaction resulted in post-tax income of $443 million to
the Company, including an amount based on the 1995 estimated financial results
of MetraHealth. The Company also has the right to receive up to an additional
$169 million in cash for each of 1996 and 1997, based on the consolidated
financial results of the purchaser for each of such years.
During 1995, the Company sold Century 21 Real Estate Corporation (real
estate brokerage operation), Metmor Financial Inc. (mortgage banking) and
Metropolitan Trust Company of Canada (trust operation and mortgage
administration) for $127 million, $56 million and $41 million, respectively,
resulting in pre-tax realized capital losses of $167 million, $247 million and
$86 million, respectively. The sales also resulted in $452 million of
unrealized capital gains representing the reversal of prior period unrealized
losses relating to the subsidiaries.
II-55
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS
DEBT SECURITIES
The carrying value, gross unrealized gain (loss) and estimated fair value of
bonds and redeemable preferred stocks (debt securities), by category, as of
December 31, 1995 and 1994 are shown below.
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
CARRYING -------------- FAIR
VALUE GAIN (LOSS) VALUE
-------- ------ ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies.. $12,871 $1,556 $ (2) $14,425
States and political subdivisions........... 1,865 582 (2) 2,445
Foreign governments......................... 1,871 221 -- 2,092
Corporate................................... 29,992 1,872 (105) 31,759
Mortgage-backed securities.................. 18,888 749 (27) 19,610
Other....................................... 5,468 336 (16) 5,788
------- ------ ------- -------
Total bonds................................. $70,955 $5,316 $ (152) $76,119
======= ====== ======= =======
Redeemable preferred stocks................. $ 39 $ -- $ (3) $ 36
======= ====== ======= =======
DECEMBER 31, 1994:
Bonds:
U. S. Treasury securities and obligations of
U.S. government corporations and agencies.. $ 9,807 $ 322 $ (546) $ 9,583
States and political subdivisions........... 1,483 69 (21) 1,531
Foreign governments......................... 1,931 26 (60) 1,897
Corporate................................... 31,262 291 (1,682) 29,871
Mortgage-backed securities.................. 17,485 251 (851) 16,885
Other....................................... 3,624 18 (215) 3,427
------- ------ ------- -------
Total bonds................................. $65,592 $ 977 $(3,375) $63,194
======= ====== ======= =======
Redeemable preferred stocks................. $ 44 $ -- $ (14) $ 30
======= ====== ======= =======
</TABLE>
The carrying value and estimated fair value of bonds, by contractual
maturity, at December 31, 1995 are shown below. Bonds not due at a single
maturity date have been included in the table in the year of final maturity.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less...................................... $ 2,171 $ 2,191
Due after one year through five years........................ 17,277 17,717
Due after five years through ten years....................... 17,188 18,381
Due after ten years.......................................... 15,431 18,220
------- -------
Subtotal..................................................... 52,067 56,509
Mortgage-backed securities................................... 18,888 19,610
------- -------
Total........................................................ $70,955 $76,119
======= =======
</TABLE>
II-56
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Proceeds from the sales of debt securities during 1995, 1994 and 1993 were
$50,831 million, $36,401 million and $50,395 million, respectively. During
1995, 1994 and 1993, respectively, gross gains of $814 million, $577 million
and $1,316 million, and gross losses of $352 million, $561 million and $96
million were realized on those sales. Realized investment gains and losses are
determined by specific identification.
MORTGAGE LOANS
Mortgage loans are collateralized by properties located throughout the United
States and Canada. Approximately 15 percent and 9 percent of the properties are
located in California and Illinois, respectively. Generally, the Company (as
the lender) requires that a minimum of one-fourth of the purchase price of the
underlying real estate be paid by the borrower.
As of December 31, 1995 and 1994, the mortgage loan investments were
categorized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Office Buildings.......................................... 32% 36%
Retail.................................................... 18% 17%
Residential............................................... 20% 21%
Agricultural.............................................. 20% 18%
Other..................................................... 10% 8%
--- ---
Total..................................................... 100% 100%
=== ===
</TABLE>
FINANCIAL INSTRUMENTS
The Company has a securities lending program whereby large blocks of
securities are loaned to third parties, primarily major brokerage firms.
Company policy requires a minimum of 102 percent of the fair value of the
loaned securities to be separately maintained as collateral for the loans. The
collateral is recorded in memorandum records and not reflected in the
accompanying balance sheets. To further minimize the credit risks related to
this lending program, the Company regularly monitors the financial condition of
counterparties to these agreements.
During the normal course of business, the Company agrees with independent
parties to purchase or sell bonds over fixed or variable periods of time. The
off-balance sheet risks related to changes in the quality of the underlying
bonds are mitigated by the fact that commitment periods are generally short in
duration and provisions in the agreements release the Company from its
commitments in case of significant changes in the financial condition of the
independent party or the issuer of the bond.
The Company engages in a variety of derivative transactions with respect to
the general account. Those derivatives, such as forwards, futures, options,
foreign exchange agreements and swaps, which do not themselves generate
interest or dividend income, are acquired or sold in order to hedge or reduce
risks applicable to assets held, or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. The Company does not engage in
trading of these derivatives.
In 1995 and 1994, the Company engaged in three primary derivatives
strategies. The Company entered into a number of anticipatory hedges using
forwards to limit the interest rate exposures of investments in debt securities
expected to be acquired within one year. The Company also hedged a number of
investments in debt securities denominated in foreign currencies by executing
swaps and forwards to ensure a United States dollar rate of return. In
addition, the Company purchased a limited number of interest rate caps to hedge
against rising interest rates on a portfolio of assets which the Company
purchased to match the liabilities it incurred.
Income and expenses related to derivatives used to hedge or manage risks are
recorded on the accrual basis as an adjustment to the yield of the related
securities over the periods covered by the derivative contracts. Gains and
losses relating to early terminations of interest rate swaps used to hedge or
manage interest rate risk are deferred and amortized over the remaining period
originally covered by the swap. Gains and losses relating to derivatives used
to
II-57
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
hedge the risks associated with anticipated transactions are deferred and
utilized to adjust the basis of the transaction once it has closed. If it is
determined that the transaction will not close, such gains and losses are
included in realized capital gains and losses.
ASSETS ON DEPOSIT
As of December 31, 1995 and 1994, the Company had assets on deposit with
regulatory agencies of $5,281 million and $5,145 million, respectively.
5. REINSURANCE AND OTHER INSURANCE TRANSACTIONS
In the normal course of business, the Company assumes and cedes reinsurance
with other insurance companies.
The Company acquired, in part through reinsurance effective in January 1995,
the group life, dental, disability, accidental death and dismemberment, vision
and long-term care insurance businesses from Travelers and certain of its
subsidiaries for $403 million. Commissions of $142 million and $4 million were
charged to earnings during 1995 and 1994, respectively, and considerations in
excess of commissions of $208 million and $49 million were recorded as a direct
charge to surplus in 1995 and 1994, respectively. In January, 1995, the Company
received assets with a fair market value equal to the $1,565 million of
liabilities assumed under the reinsurance agreements. The reinsured businesses
convert to Company contracts at policy anniversary date.
During 1995, the Company entered into reinsurance agreements with MetraHealth
to facilitate the transfer of certain of its group medical health care business
to MetraHealth.
The Company also has reinsurance agreements with certain of its life
insurance subsidiaries. Reserves for insurance assumed pursuant to these
agreements are included in reserves for life and health insurance and annuities
and amounted to $2,143 million and $1,193 million at December 31, 1995 and
1994, respectively.
In 1993, the Company assumed $1,540 million of life insurance and annuity
reserves of a New York life insurance company under rehabilitation and received
assets having a fair value equal to the reserves assumed.
The financial statements are shown net of ceded reinsurance. The amounts
related to reinsurance agreements, including agreements described above but
excluding certain agreements with non-affiliates for which the Company provides
administrative services, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Reinsurance premiums assumed.............................. $890 $237 $264
Reinsurance ceded:
Premiums................................................ 457 77 86
Other income............................................ 26 1 3
Reduction in insurance liabilities (at December 31)..... 71 31 28
</TABLE>
A contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations.
II-58
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity in the liability for unpaid group accident and health policy and
contract claims is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1............................. $1,708 $1,588 $1,517
Less reinsurance recoverables.................. 1 1 1
------ ------ ------
Net balance at January 1......................... 1,707 1,587 1,516
------ ------ ------
Incurred related to:
Current year................................... 2,424 1,780 1,797
Prior years.................................... (23) (7) (40)
------ ------ ------
Total incurred................................... 2,401 1,773 1,757
------ ------ ------
Paid related to:
Current year................................... 1,464 1,260 1,306
Prior years.................................... 417 393 380
------ ------ ------
Total paid....................................... 1,881 1,653 1,686
------ ------ ------
Net balance at December 31....................... 2,227 1,707 1,587
Plus reinsurance recoverables.................. 93 1 1
------ ------ ------
Balance at December 31........................... $2,320 $1,708 $1,588
====== ====== ======
</TABLE>
6. FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with certain
affiliates. The consolidating companies have executed a tax allocation
agreement. Under this agreement, the federal income tax provision is computed
on a separate return basis. Members receive reimbursement to the extent that
their losses and other credits result in a reduction of the current year's
consolidated tax liability.
Federal income tax expense has been calculated in accordance with the
provisions of the Internal Revenue Code, as amended (the Code). Under the Code,
the amount of federal income tax expense includes a tax on the Company's
surplus calculated by a prescribed formula that incorporates a differential
earnings rate between stock and mutual life insurance companies. In 1995, the
Company changed its calculation of surplus tax which resulted in an increase in
1995 federal income tax expense of $95 million. Had such change occurred prior
to 1993, the Company's insurance expenses and taxes (excluding tax on capital
gains) and net loss for the year ended December 31, 1995 would have been $2,758
million and $270 million, respectively; the Company's surplus, insurance
expenses and taxes (excluding tax on capital gains) and net loss at and for the
year ended December 31, 1994 would have been $5,902 million, $2,894 million and
$296 million, respectively; and the Company's insurance expenses and taxes
(excluding tax on capital gains) and net income for the year ended December 31,
1993 would have been $2,702 million and $26 million, respectively. The change
would have had no effect on December 31, 1993 surplus and surplus at December
31, 1992 would have been $5,124 million.
Total federal income taxes on operations and realized capital gains of $479
million, $192 million and $596 million were incurred in 1995, 1994 and 1993,
respectively.
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has defined benefit pension plans covering all eligible employees
and sales representatives of the Company and certain of its subsidiaries. The
Company is both the sponsor and administrator of these plans. Retirement
benefits are based on years of credited service and final average earnings'
history. The Company's funding policy is to make the minimum contribution
required by the Employee Retirement Income Security Act of 1974.
II-59
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Components of the net periodic pension (credit) cost for the years ended
December 31, 1995, 1994 and 1993 for the defined benefit qualified and non-
qualified pension plans are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost....................................... $ 58 $ 88 $ 71
Interest cost on projected benefit obligation...... 215 209 191
Return on assets................................... (262) 15 (380)
Net amortization and deferrals..................... (33) (298) 110
----- ----- -----
Net periodic pension (credit) cost................. $ (22) $ 14 $ (8)
===== ===== =====
</TABLE>
The assumed long-term rate of return on assets used in determining the net
periodic pension (credit) cost was 9.5 percent in 1995 and 8.5 percent in 1994
and 1993. The Company is recognizing the unrecognized net asset at transition,
attributable to the adoption of Statement of Financial Accounting Standards No.
87, Employers' Accounting for Pensions, in 1993, over the average remaining
service period at the transition date of employees expected to receive benefits
under the pension plans.
The funded status of the qualified and non-qualified defined benefit pension
plans and a comparison of the accumulated benefit obligation, plan assets and
projected benefit obligation at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of obligations:
Vested..................................................... $(2,724) $(2,266)
Non vested................................................. (43) (47)
------- -------
Accumulated benefit obligation............................... $(2,767) $(2,313)
======= =======
Projected benefit obligation................................. $(3,094) $(2,676)
Plan assets at contract value................................ 3,286 2,900
------- -------
Plan assets in excess of projected benefit obligation........ 192 224
Unrecognized prior service cost.............................. 73 92
Unrecognized net loss from past experience different from
that assumed................................................ 79 33
Unrecognized net asset at transition......................... (326) (365)
Adjustment required to recognize minimum liability........... (19) --
------- -------
Accrued pension cost at December 31.......................... $ (1) $ (16)
======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25 percent for 1995, 8.5
percent for 1994 and 7.5 percent for 1993 in the United States and 8.0 percent
for 1995, 7.25 percent for 1994 and 7.0 percent for 1993 in Canada. The
weighted average assumed rate of increase in future compensation levels was 4.5
percent in 1995 and 5.0 percent in 1994 and 1993. In addition, several other
factors, such as expected retirement dates and mortality, enter into the
determination of the actuarial present value of the accumulated benefit
obligation.
The pension plans' assets are principally investment contracts issued by the
Company.
During 1995, the Company recognized a pension plan curtailment gain before
income tax of $8 million. This gain relates to the transfer of Company group
medical health care business personnel to MetraHealth.
SAVINGS AND INVESTMENT PLAN
The Company sponsors a savings and investment plan available for
substantially all employees under which the Company matches a portion of
employee contributions. During 1995, 1994 and 1993, the Company contributed $34
million, $42 million and $48 million, respectively, to the plan.
II-60
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER POSTRETIREMENT BENEFITS
The Company also provides certain postretirement health care and life
insurance benefits for retired employees through insurance contracts.
Substantially all of the Company's employees may, in accordance with the plans
applicable to such benefits, become eligible for these benefits if they attain
retirement age, with sufficient service, while working for the Company.
The costs of non-pension postretirement benefits are recognized on an accrual
basis in accordance with guidelines prescribed by insurance regulatory
authorities. Such guidelines require the recognition of a postretirement
benefit obligation for current retirees and fully eligible or vested employees.
As prescribed by the guidelines, the Company has elected to recognize over a
period of twenty years the unrecognized postretirement benefit asset and
obligation (net asset and obligation at transition) in existence on January 1,
1993 (effective date of guidelines).
The following table sets forth the postretirement health care and life
insurance plans' combined status reconciled with the amounts included in the
Company's balance sheets at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
---------- ----------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligations of retirees
and fully eligible
participants................... $(295) $(776) $(262) $(787)
Plan assets (Company insurance 397 411 393 358
contracts) at contract value... ----- ----- ----- -----
Plan assets in excess of (less
than) accumulated
postretirement benefit
obligation..................... 102 (365) 131 (429)
Unrecognized net loss (gain)
from past experience different
from that assumed and from
changes in assumptions......... 53 (83) (6) (44)
Prior service cost not yet
recognized in net periodic
retirement benefit cost........ (5) -- (5) --
Unrecognized (asset) obligation (102) 438 (108) 464
at transition.................. ----- ----- ----- -----
Prepaid (Accrued) non-pension
postretirement benefit cost at $ 48 $ (10) $ 12 $ (9)
December 31.................... ===== ===== ===== =====
</TABLE>
The components of the net periodic non-pension postretirement benefit cost
for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................... $ 26 $ 31 $ 32
Interest cost on accumulated postretirement benefit
obligation........................................... 74 76 87
Return on plan assets (Company insurance contracts)... (61) (37) (36)
Amortization of transition asset and obligation....... 18 18 20
Net amortization and deferrals........................ (4) (10) (17)
---- ---- ----
Net periodic non-pension postretirement benefit cost.. $ 53 $ 78 $ 86
==== ==== ====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
non-pension postretirement benefit obligation was 10.0 percent in 1995, 11.0
percent in 1994 and 12.0 percent in 1993, gradually decreasing to 5.25 percent,
6.5 percent and 5.5 percent, respectively, over twelve years. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.25 percent, 8.5 percent, and 7.5 percent at December
31, 1995, 1994 and 1993, respectively.
If the health care cost trend rate assumptions were increased 1.0 percent,
the accumulated postretirement benefit obligation as of December 31, 1995, 1994
and 1993 would be increased 9.0 percent, 7.1 percent, and 7.2 percent,
respectively. The effect of this change on the sum of the service and interest
cost components of the net periodic postretirement benefit cost for the years
ended December 31, 1995, 1994 and 1993 would be an increase of 11.0 percent,
7.9 percent and 7.8 percent, respectively.
II-61
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. LEASES
LEASE INCOME
During 1995, 1994 and 1993, the Company received $1,742 million, $1,786
million and $1,482 million, respectively, in lease income related to its
investment real estate. In accordance with standard industry practice, certain
of the Company's lease agreements with retail tenants result in income that is
contingent on the level of the tenants' sales revenues.
LEASE EXPENSE
The Company has entered into various lease agreements for office space, data
processing and other equipment. Rental expense under such leases was $171
million, $193 million and $214 million for the years ended December 31, 1995,
1994 and 1993, respectively. Future gross minimum rental payments under non-
cancelable leases, including those leases for which the Company recorded a
restructuring charge in 1995, are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1996............................................. $107
1997............................................. 82
1998............................................. 66
1999............................................. 48
2000............................................. 32
Thereafter....................................... 53
----
Total.......................................... $388
====
</TABLE>
9. OTHER COMMITMENTS AND CONTINGENCIES
GUARANTEES
The Company has entered into certain arrangements in the course of its
business which, under certain circumstances, may impose significant financial
obligations on the Company. The Company has entered into a support agreement
with a subsidiary whereby the Company has agreed to maintain the subsidiary's
net worth at one dollar or more. At December 31, 1995, the subsidiary's assets,
which consist principally of loans to affiliates, amounted to $3,309 million
and its net worth amounted to $11 million.
In addition, the Company has entered into arrangements with certain of its
subsidiaries and affiliates to assist such subsidiaries and affiliates in
meeting various jurisdictions' regulatory requirements regarding capital and
surplus. The Company has also entered into a support arrangement with respect
to the reinsurance obligations of a subsidiary.
No material payments have been made under these arrangements and it is the
opinion of management that any payments required pursuant to these arrangements
would not likely have a material adverse effect on the Company's financial
position.
LITIGATION
In 1994, the Company entered into consent agreements (involving the payment
of fines and policyholder restitution payments) with state authorities,
including the insurance departments of all states, arising out of regulatory
proceedings and investigations relating to alleged improper practices in the
sale of individual life insurance. Litigation relating to the Company's
individual life insurance sales practices (including individual actions and
purported class actions) has also been instituted by or on behalf of
policyholders and others, and additional litigation relating to the Company's
sales practices may be commenced in the future. In addition, an investigation
by the Office of the United States Attorney for the Middle District of Florida,
in conjunction with a grand jury, into certain of the sales practices that were
the focus of the state investigations is ongoing. Various litigation, claims
and assessments against the Company, in addition to the aforementioned, have
arisen in the course of the Company's business, operations and activities.
In certain of the matters referred to above, including actions with multiple
plaintiffs, very large and/or indeterminate amounts, including punitive and
treble damages, are sought. While it is not feasible to predict or determine
the ultimate
II-62
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
outcome of all pending investigations and legal proceedings or to make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome in all such matters, it is the opinion of the Company's
management that their outcome, after consideration of the provisions made in
the Company's financial statements, is not likely to have a material adverse
effect on the Company's financial position.
10. SURPLUS NOTES
The carrying values of surplus notes at December 31, 1995 and 1994 are shown
below:
<TABLE>
<CAPTION>
1995 1994
------- ------
(IN MILLIONS)
<S> <C> <C>
6.30% surplus notes scheduled to mature on November 1,
2003..................................................... $ 400 $ 400
7.00% surplus notes scheduled to mature on November 1,
2005..................................................... 250 --
7.70% surplus notes scheduled to mature on November 1,
2015..................................................... 200 --
7.45% surplus notes scheduled to mature on November 1,
2023..................................................... 300 300
7.80% surplus notes scheduled to mature on November 1, 250 --
2025..................................................... ------- -----
Total................................................... $ 1,400 $ 700
======= =====
</TABLE>
Interest on the Company's surplus notes is scheduled to be paid semi-
annually; principal payments are scheduled to be paid upon maturity. Such
payments of interest and principal may be made only with the prior approval of
the Superintendent of Insurance of the State of New York (Superintendent).
Subject to the prior approval of the Superintendent, the 7.45 percent surplus
notes may be redeemed, as a whole or in part, at the election of the Company at
any time on or after November 1, 2003. During 1995 and 1994, the Company
obtained Superintendent approval for and made total interest payments of $48
million on the surplus notes.
11. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below
have been determined by the Company using market information available as of
December 31, 1995 and 1994 and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
The estimates presented below are not necessarily indicative of the amounts
the Company could have realized in a market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1995:
ASSETS
Bonds........................................... $70,955 $76,119
Stocks, including subsidiaries.................. 3,646 3,608
Mortgage loans.................................. 14,211 14,818
Policy loans.................................... 3,956 4,023
Cash and short-term investments................. 1,923 1,923
LIABILITIES
Investment contracts included in:
Reserves for life and health insurance and an-
nuities....................................... 18,137 18,211
Policy proceeds and dividends left with the
Company....................................... 4,482 4,488
Premium deposit funds.......................... 12,891 13,322
OTHER FINANCIAL INSTRUMENTS
Bond purchase agreements........................ $ 601 3.3
Bond sales agreements........................... 80 (0.5)
Interest rate swaps............................. 280 1.5
Interest rate caps.............................. 231 --
Foreign currency swaps.......................... 89 4.4
Foreign currency forwards....................... 10 --
Covered call options............................ 25 (1.9) 1.9
Futures contracts............................... 1,402 (19.5) --
Unused lines of credit.......................... 1,600 1.1
</TABLE>
II-63
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL CARRYING ESTIMATED
AMOUNT VALUE FAIR VALUE
-------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1994:
ASSETS
Bonds........................................... $65,592 $63,194
Stocks, including subsidiaries.................. 3,672 3,660
Mortgage loans.................................. 14,524 14,269
Policy loans.................................... 3,964 3,645
Cash and short-term investments................. 2,334 2,334
LIABILITIES
Investment contracts included in:
Reserves for life and health insurance and an-
nuities....................................... 16,354 16,370
Policy proceeds and dividends left with the
Company....................................... 3,534 3,519
Premium deposit funds.......................... 14,006 13,997
OTHER FINANCIAL INSTRUMENTS
Bond purchase agreements........................ $2,755 4.1
Bond sales agreements........................... 1,450 0.8
Interest rate swaps............................. 272 (7.1)
Interest rate caps.............................. 185 (0.1)
Foreign currency swaps.......................... 36 (0.4)
Foreign currency forwards....................... 4 (0.2) (0.1)
Covered call options............................ 25 (1.9) 1.9
Unused lines of credit.......................... 1,450 1.0
</TABLE>
For bonds that are publicly traded, estimated fair value was obtained from an
independent market pricing service. Publicly traded bonds represented
approximately 78 percent of the carrying value and estimated fair value of the
total bonds as of December 31, 1995 and 77 percent of the carrying value and
estimated fair value of the total bonds as of December 31, 1994. For all other
bonds, estimated fair value was determined by management, based on interest
rates, maturity, credit quality and average life. Included in bonds are loaned
securities with estimated fair values of $8,148 million and $5,154 million at
December 31, 1995 and 1994, respectively. Estimated fair values of stocks were
generally based on quoted market prices, except for investments in common stock
of subsidiaries, which are based on equity in net assets of the subsidiaries.
Estimated fair values of mortgage loans were generally based on discounted
projected cash flows using interest rates offered for loans to borrowers with
comparable credit ratings and for the same maturities. Estimated fair values of
policy loans were based on discounted projected cash flows using U.S. Treasury
rates to approximate interest rates and Company experience to project patterns
of loan repayment. For cash and short-term investments, the carrying amount is
a reasonable estimate of fair value.
Included in reserves for life and health insurance and annuities, policy
proceeds and dividends left with the Company and premium deposit funds are
amounts classified as investment contracts representing policies or contracts
that do not incorporate significant insurance risk. The fair values for these
liabilities are estimated using discounted projected cash flows, based on
interest rates being offered for similar contracts with maturities consistent
with those remaining for the contracts being valued. Policy proceeds and
dividends left with the Company also include other liabilities without defined
durations. The estimated fair value of such liabilities, which generally are of
short duration or have periodic adjustments of interest rates, approximates
their carrying value.
Estimated fair values of bond purchase/sale agreements were based on fees
charged to enter into similar arrangements or on the estimated cost to
terminate the outstanding agreements. For interest rate and foreign currency
swaps, interest rate caps, interest rate futures, foreign currency forwards,
futures contracts and covered call options, estimated fair value is the amount
at which the contracts could be settled based on estimates obtained from
dealers. The Company had unused lines of credit under agreements with various
banks. The estimated fair values of unused lines of credit were based on fees
charged to enter into similar agreements.
II-64
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
12. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR MUTUAL LIFE INSURANCE
COMPANIES
The Company, as a mutual life insurance company, prepares its financial
statements in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of New York (statutory financial
statements) which currently are considered to be generally accepted accounting
principles (GAAP) for mutual life insurance companies. However, the Financial
Accounting Standards Board (FASB) has issued certain pronouncements effective
for 1996 annual financial statements and thereafter. Such pronouncements will
no longer allow statutory financial statements to be described as being
prepared in conformity with GAAP. Upon the effective date of the
pronouncements, in order for their financial statements to be described as
being prepared in conformity with GAAP, mutual life insurance companies will be
required to adopt all applicable accounting principles promulgated by the FASB
in any general purpose financial statements that they may issue. The Company
will issue 1996 general purpose financial statements reflecting the adoption of
all applicable GAAP pronouncements. However, the Company has not finalized the
quantification of the effects of the application of the pronouncements on its
financial statements.
II-65
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Bonds........................................ $ 71,355 $ 70,955
Stocks....................................... 3,752 3,646
Mortgage loans............................... 14,479 14,211
Real estate.................................. 9,047 9,470
Policy loans................................. 3,964 3,956
Cash and short-term investments.............. 1,476 1,923
Other invested assets........................ 2,442 2,480
Premiums deferred and uncollected............ 1,530 1,568
Investment income due and accrued............ 1,545 1,589
Separate Account assets...................... 31,935 31,707
Other assets................................. 701 627
-------- --------
Total Assets............................... $142,226 $142,132
======== ========
LIABILITIES AND SURPLUS
Liabilities
Reserves for life and health insurance and
annuities................................... $ 76,246 $ 76,249
Policy proceeds and dividends left with the
Company..................................... 4,654 4,482
Dividends due to policyholders............... 1,363 1,371
Premium deposit funds........................ 11,897 12,891
Interest maintenance reserve................. 1,199 1,148
Other policy liabilities..................... 3,940 3,882
Investment valuation reserves................ 1,951 1,860
Separate Account liabilities................. 31,441 31,226
Other liabilities............................ 3,088 2,459
-------- --------
Total Liabilities.......................... 135,779 135,568
-------- --------
Surplus
Special contingency reserves................. 768 754
Surplus notes................................ 1,400 1,400
Unassigned funds............................. 4,279 4,410
-------- --------
Total Surplus.............................. 6,447 6,564
-------- --------
Total Liabilities and Surplus.............. $142,226 $142,132
======== ========
</TABLE>
See accompanying notes to interim financial statements.
II-66
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND SURPLUS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------ ------
(UNAUDITED)
<S> <C> <C>
INCOME
Premiums, annuity considerations and deposit funds........... $4,523 $5,986
Considerations for supplementary contracts and dividend accu-
mulations................................................... 836 762
Net investment income........................................ 1,822 1,746
Other income................................................. 111 43
------ ------
Total income............................................... 7,292 8,537
------ ------
BENEFITS AND EXPENSES
Benefit payments (other than dividends)...................... 7,024 7,453
Changes to reserves, deposit funds and other policy liabili-
ties........................................................ (907) (1)
Insurance expenses and taxes (other than federal income and
capital gains taxes)........................................ 678 695
Net transfers to Separate Accounts........................... 42 87
------ ------
Total benefits and expenses before dividends to policyhold-
ers....................................................... 6,837 8,234
------ ------
Net gain from operations before dividends to policyholders and
federal income taxes......................................... 455 303
Dividends to policyholders.................................... 404 436
------ ------
Net gain (loss) from operations before federal income taxes... 51 (133)
Federal income taxes (excluding tax on capital gains)......... 13 91
------ ------
Net gain (loss) from operations............................... 38 (224)
Net realized capital losses................................... (74) (9)
------ ------
NET LOSS...................................................... (36) (233)
Change in general account net unrealized capital gains........ 8 17
Change in investment valuation reserves....................... (91) (77)
Other adjustments--net........................................ 2 (190)
------ ------
NET CHANGE IN SURPLUS......................................... (117) (483)
SURPLUS AT BEGINNING OF PERIOD................................ 6,564 6,304
------ ------
SURPLUS AT END OF PERIOD...................................... $6,447 $5,821
====== ======
</TABLE>
See accompanying notes to interim financial statements.
II-67
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
------- -------
(UNAUDITED)
<S> <C> <C>
CASH PROVIDED
Premiums, annuity considerations and deposit funds
received.................................................. $ 4,533 $ 5,693
Considerations for supplementary contracts and dividend
accumulations received.................................... 849 779
Net investment income received............................. 1,780 1,600
Other income received...................................... 102 19
------- -------
Total receipts........................................... 7,264 8,091
------- -------
Benefits paid (other than dividends)....................... 6,789 6,887
Insurance expenses and taxes paid (other than federal
income and capital gains taxes)........................... 641 685
Net cash transfers to Separate Accounts.................... 57 86
Dividends paid to policyholders............................ 373 357
Federal income tax (recoveries) payments (excluding tax on
capital gains)............................................ 272 (29)
Other--net................................................. 278 (1,455)
------- -------
Total payments........................................... 8,410 6,531
------- -------
Net cash (used by) from operations......................... (1,146) 1,560
Proceeds from long-term investments sold, matured or repaid
(after deducting tax (benefit) expense on capital (losses)
gains of $(46) for 1996 and $3 for 1995).................. 20,694 17,497
Other cash provided........................................ 1,072 795
------- -------
TOTAL CASH PROVIDED...................................... 20,620 19,852
------- -------
CASH APPLIED
Cost of long-term investments acquired..................... 20,732 18,597
Other cash applied......................................... 335 683
------- -------
TOTAL CASH APPLIED....................................... 21,067 19,280
------- -------
NET CHANGE IN CASH AND SHORT-TERM INVESTMENTS................ (447) 572
CASH AND SHORT-TERM INVESTMENTS:
BEGINNING OF PERIOD........................................ 1,923 2,334
------- -------
END OF PERIOD.............................................. $ 1,476 $ 2,906
======= =======
</TABLE>
See accompanying notes to interim financial statements.
II-68
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim financial statements of Metropolitan Life Insurance
Company (the Company) are prepared on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of New York
(statutory financial statements). The accompanying financial statements do not
include all of the footnote disclosures required for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The accompanying interim financial statements should be read in
conjunction with the Company's annual financial statements.
Results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
The Financial Accounting Standards Board (FASB) has issued certain
pronouncements relating to mutual life insurance companies effective for years
beginning after December 15, 1995 annual financial statements and thereafter.
Such pronouncements will no longer allow statutory financial statements to be
described as being prepared in conformity with generally accepted accounting
principles (GAAP). Upon the effective date of the pronouncements, in order for
their financial statements to be described as being prepared in conformity with
GAAP, mutual life insurance companies will be required to adopt all applicable
accounting principles promulgated by the FASB in any general purpose financial
statements that they may issue. The Company will issue 1996 general purpose
financial statements reflecting the adoption of all applicable GAAP
pronouncements and will retroactively restate prior period financial statements
to give effect to the application of such pronouncements. If the Company issues
general purpose statutory financial statements for 1996 and reissues statutory
financial statements for prior years, the independent auditor will be able to
express an opinion regarding the presentation of any statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Insurance Department of the State of New York but will be required to issue
an adverse or qualified opinion on any statutory financial statements regarding
their presentation in conformity with GAAP. The Company has not finalized the
quantification of the effects of the application of the GAAP pronouncements on
its financial statements.
2. INVESTMENT VALUATION AND INTEREST MAINTENANCE RESERVES
Mandatory reserves have been established for general account investments in
accordance with guidelines prescribed by insurance regulatory authorities. Such
reserves consist of an Asset Valuation Reserve (AVR) for all invested assets
and Interest Maintenance Reserve (IMR), which defers the recognition of
realized capital gains and losses (net of income tax) attributable to interest
rate fluctuations on fixed income investments over the estimated remaining
duration of the investments sold. The AVR and IMR balances reflect the year to
date activity and a pro rata share of the estimated annual contribution and
amortization, respectively.
Evaluation for and recognition of writedowns of investments for other than
temporary impairments are performed annually during the six month period ended
December 31. However, investment valuation reserves at March 31, 1996 were
adequate to provide for existing and probable future losses.
3. ACQUISITION OF GROUP LIFE AND HEALTH BUSINESSES
The Company acquired, in part through reinsurance effective in January 1995,
the group life, dental, disability, accidental death and dismemberment, vision
and long-term care insurance businesses from Travelers and certain of its
subsidiaries for $403 million, $350 million which was paid during the first
three months of 1995. Commissions of $142 million were charged to earnings
during the three months ended March 31, 1995 and considerations in excess of
commissions of $208 million were recorded as a direct charge to surplus during
the three months ended March 31, 1995. In January, 1995, the Company received
assets with a fair market value equal to the $1,565 million of liabilities
assumed under the reinsurance agreements. The reinsured businesses convert to
Company contracts at policy anniversary date.
II-69
<PAGE>
METROPOLITAN LIFE INSURANCE COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
4. FEDERAL INCOME TAXES
Federal income tax expense has been calculated in accordance with the
provisions of the Internal Revenue Code, as amended (the "Code"). Under the
Code, the amount of federal income tax expense includes a tax on the Company's
surplus calculated by a prescribed formula that incorporates a differential
earnings rate between stock and mutual life insurance companies. The Company's
surplus tax for the three months ended March 31, 1995 was calculated based on
a pro rata estimate of the tax liability expected to be reported on the
Company's 1995 federal income tax return. The Company's surplus tax for the
three months ended March 31, 1996 was calculated based on a pro rata estimate
of the expected final tax for 1996. See Note 6 to the Company's annual
financial statements for the year ended December 31, 1995 for a description of
the change in 1995 in the calculation of surplus tax.
5. SURPLUS NOTES
Interest on the Company's surplus notes is scheduled to be paid semi-
annually on May 1st and November 1st; principal payments are scheduled to be
paid upon maturity. Such payments of interest and principal may be made only
with the prior approval of the Superintendent of Insurance of the State of New
York (Superintendent). The Company may not accrue any liability for payment of
interest or principal prior to obtaining the Superintendent's approval for
payment. At December 31, 1995, no accrual for surplus note interest expense
was recorded by the Company; at March 31, 1996 and 1995, the Company recorded
a liability for surplus note interest expense of $42 million and $20 million,
respectively.
6. SUBSEQUENT EVENT--MERGER
Effective August 30, 1996, the New England Mutual Life Insurance Company was
merged with and into the Company. The Company is the surviving entity. Pro
forma selected financial information giving effect to the merger are included
in the Statement of Additional Information in the registration statement.
Also, in June 1996 The New England entered into a Settlement Agreement,
subject to consummation of the Merger, regarding certain litigation whereby
the litigation will be resolved at a net cost of approximately $117 million to
the combined entity.
II-70
