<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997 Commission File Number 33-85988
------------------ --------
C.M. LIFE INSURANCE COMPANY
---------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-1041383
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Garden Street, Hartford, Connecticut 06154
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(860) 987-6500
--------------
(Registrant's telephone number, including area code)
None
----
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
Registrant has 12,500 shares of common stock outstanding on September 30, 1997,
all of which are owned by Massachusetts Mutual Life Insurance Company.
The Registrant meets the conditions set forth in General Instruction (1) (a) and
(b) of Form 10Q and is therefore filing this form with the reduced disclosure
format.
<PAGE>
C.M. LIFE INSURANCE COMPANY
INDEX
<TABLE>
<S> <C>
PART I: Financial Information
---------------------
Item 1: Condensed Financial Statements:
Statutory Statement of Financial Position -
September 30, 1997 and December 31, 1996................... 3
Statutory Statement of Income -
Three Months Ended
September 30, 1997 and 1996................................ 4
Statutory Statement of Income -
Nine Months Ended
September 30, 1997 and 1996................................ 5
Statutory Statement of Shareholder's Equity -
Nine Months Ended
September 30, 1997 and 1996................................ 6
Statutory Statement of Cash Flows -
Nine Months Ended
September 30, 1997 and 1996................................ 7
Condensed Notes to Financial Statements...................... 8
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................................... 10
Item 3: Not Applicable
PART II: Other Information
-----------------
Item 1: None.
Item 2: Not applicable.
Item 3: Not applicable.
Item 4: Not applicable.
Item 5: None.
Item 6: Exhibits..................................................... 17
</TABLE>
2
<PAGE>
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENT OF FINANCIAL POSITION (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------ ------
(In Thousands Except for
Share Information)
<S> <C> <C>
Assets:
Bonds $ 687,384 $ 736,524
Common stocks 64,931 55,642
Mortgage loans 87,590 33,791
Policy loans 139,305 132,942
Receivable for investments sold 18,401 0
Cash and short-term instruments 78,980 63,688
---------- ----------
Total invested assets 1,076,591 1,022,587
Investment income and insurance amounts receivable 27,167 32,783
Transfer due from separate account 32,207 24,278
Federal income tax receivable 0 7,094
Other assets 76 87
Separate account assets 1,053,890 779,742
---------- ----------
$2,189,931 $1,866,571
========== ==========
Liabilities:
Policyholders' reserves and funds $ 928,818 $ 907,492
Policy claims and other benefits 6,138 3,843
Payable to parent 15,752 9,654
Federal income tax payable 10,174 0
Asset valuation reserve 22,988 18,475
Investment reserves 4,150 3,329
Other liabilities 27,823 34,292
Separate account reserves and liabilities 1,053,890 779,742
---------- ----------
2,069,733 1,756,827
---------- ----------
Shareholder's equity:
Common stock, $200 par value
50,000 shares authorized
12,500 shares issued and outstanding 2,500 2,500
Paid-in capital and contributed surplus 43,759 43,759
Retained earnings 73,939 63,485
---------- ----------
120,198 109,744
---------- ----------
$2,189,931 $1,866,571
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
<PAGE>
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
----- -----
(In Thousands)
<S> <C> <C>
Income:
Premium income $ 78,176 $ 77,313
Net investment and other income 18,096 13,632
-------- --------
96,272 90,945
-------- --------
Benefits and expenses:
Policy benefits and payments 23,347 26,979
Addition to policyholder's reserves, funds
and separate accounts 36,188 50,688
Operating expenses 9,558 12,699
Commissions 7,891 8,014
State taxes, licenses and fees 453 399
--------- ---------
77,437 98,779
Net gain (loss) from operations before federal
income taxes 18,835 (7,834)
Federal income taxes (benefit) 10,407 (1,984)
--------- ---------
Net gain (loss) from operations 8,428 (5,850)
Net realized capital gain (loss) 345 (1,424)
--------- ---------
Net income (loss) $ 8,773 $ (7,274)
======== =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
<PAGE>
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Income:
Premium income $ 233,038 $ 230,896
Net investment and other income 52,384 53,331
---------- ----------
285,422 284,227
--------- ---------
Benefits and expenses:
Policy benefits and payments 76,884 72,788
Addition to policyholder's reserves, funds
and separate accounts 123,780 158,059
Operating expenses 30,206 24,898
Commissions 20,615 16,617
State taxes, licenses and fees 2,637 2,496
---------- ----------
254,122 274,858
Net gain from operations before federal
income taxes 31,300 9,369
Federal income taxes 20,459 5,561
--------- ---------
Net gain from operations 10,841 3,808
Net realized capital gain 330 846
----------- ----------
Net income $ 11,171 $ 4,654
========== =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
<PAGE>
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Shareholder's equity, beginning of year $109,744 $113,199
Increases (decreases) due to:
Net income 11,171 4,654
Change in asset valuation and investment
reserves (5,334) (982)
Change in non-admitted assets and other (919) (533)
Net changes in unrealized capital gain 5,536 1,038
-------- --------
10,454 4,177
-------- --------
Shareholder's equity, end of period $120,198 $117,376
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
6
<PAGE>
C.M. LIFE INSURANCE COMPANY
STATUTORY STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Operating activities:
Net income $ 11,171 $ 4,654
Additions to policyholder's reserves, funds,
and other benefits 23,621 24,894
Net realized capital gain (330) (846)
Change in payable to parent 6,098 26,370
Other changes 4,113 (2,651)
--------- ---------
Net cash provided by operating activities 44,673 52,421
Investing activities:
Loans and purchases of investments (293,298) (114,521)
Sales or maturities of investments and
receipts from repayment of loans 251,119 114,315
--------- ---------
Net cash used in investing activities (42,179) (206)
Financing and miscellaneous activities:
Changes in remittances and items not allocated, and other 12,798 32,794
--------- ---------
Increase in cash and short-term investments 15,292 85,009
Cash and short-term investments, beginning of
year 63,688 15,069
--------- ---------
Cash and short-term investments, end of period $ 78,980 $ 100,078
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
7
<PAGE>
C.M. Life Insurance Company
Notes to Financial Statements
September 30, 1997
(Unaudited)
1. General:
--------
C.M. Life Insurance Company ("C.M. Life"), 140 Garden Street, Hartford,
Connecticut, 06154, is a stock life insurance company. It was chartered
by a Special Act of the Connecticut General Assembly on April 25, 1980.
It is principally engaged in the sale of life insurance and annuities,
primarily flexible premium universal life insurance and variable annuity
products, and is licensed to sell life insurance and annuities in Puerto
Rico, the District of Columbia and all 50 states except New York.
Effective March 1, 1996, C.M. Life became a wholly owned stock life
insurance subsidiary of Massachusetts Mutual Life Insurance Company
("MassMutual") when the operations of C.M. Life's former parent,
Connecticut Mutual Life Insurance Company were merged with and into
MassMutual.
In the opinion of C.M. Life these financial statements contain all
adjustments, consisting of only normal recurring adjustments, necessary
to present fairly its financial position in accordance with statutory
accounting principles, as of September 30, 1997 and December 31, 1996,
the results of its operations for the three month and nine month periods
ended September 30, 1997 and 1996, and changes in shareholder's equity
and its cash flows for the periods ended September 30, 1997 and 1996.
The accompanying unaudited interim financial statements have been
prepared in accordance with the instructions to Form 10-Q and the rules
and regulations of the Securities and Exchange Commission. These
financial statements have been prepared under the presumption that users
of the interim financial information have either read or have access to
C.M. Life's audited financial statements for the year ended December 31,
1996. Accordingly, footnote disclosures, which would substantially
duplicate the disclosures contained in C.M. Life's December 31, 1996
audited financial statements, have been omitted from these interim
financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
statutory accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations. Although C.M. Life believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these unaudited interim financial
statements be read in conjunction with the audited financial statements
and the notes thereto included in C.M. Life's annual report on Form 10-K
for the year ended December 31, 1996.
The accompanying statutory financial statements, except as to form, have
been prepared in conformity with the practices of the National
Association of Insurance Commissioners and the accounting practices
prescribed or permitted by the Insurance Department of the State of
Connecticut ("statutory accounting practices") which prior to 1996 were
considered to be in conformity with generally accepted accounting
principles ("GAAP"). In 1993, the Financial Accounting Standards Board
("FASB") issued interpretation No. 40 ("Fin. 40"), "Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and
Other Enterprises", which clarified that wholly owned stock life
insurance subsidiaries of mutual life insurance companies issuing
financial statements described as prepared in conformity with GAAP after
1995 are required to apply all applicable GAAP pronouncements in
preparing those financial statements. In January 1995, the FASB issued
Statement No. 120 ("SFAS 120"), "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts," which among other things,
extended the applicability of certain FASB statements to mutual life
insurance companies and deferred the effective date of Fin. 40 to
financial statements issued or reissued after 1996.
The accompanying statutory financial statements are different in some
respects from GAAP financial statements. The more significant
differences are as follows: (a) acquisition costs, such as commissions
and other costs in connection with acquiring new business, are charged
to current operations as incurred, whereas GAAP would require these
expenses to be capitalized and recognized over the life of the policies;
(b) policy reserves are based upon statutory mortality and interest
requirements without consideration of withdrawals, whereas GAAP reserves
would be based upon reasonably conservative estimates of mortality,
morbidity, interest and withdrawals; (c) bonds are generally carried at
amortized cost whereas GAAP would value bonds at fair value and (d)
deferred income taxes are not provided for book-tax timing differences
whereas GAAP would record deferred income taxes. Management has not yet
completed GAAP financial statements, but believes that shareholder's
equity based upon GAAP will be higher than shareholder's equity based
upon statutory accounting practices.
8
<PAGE>
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as disclosures of contingent assets and
liabilities, at the date of the financial statements. Management must
also make estimates and assumptions that affect the amounts of revenues
and expenses during the reporting period. Future events, including
changes in the levels of mortality, morbidity, interest rates and asset
valuations, could cause actual results to differ from the estimates used
in the financial statements.
2. Related Party Transactions:
---------------------------
MassMutual and C.M. Life have an agreement whereby MassMutual, for a
fee, will furnish C.M. Life, as required, operating facilities, human
resources, computer software development and managerial services.
Investment and administrative services are provided to C.M. Life
pursuant to a management services agreement with MassMutual. Fees
incurred under the terms of the agreement were $9,873 thousand and
$30,941 thousand for the three and nine month periods ended September
30, 1997 and $12,615 thousand and $25,187 thousand for the same periods
in 1996. Similar arrangements were in place with Connecticut Mutual Life
Insurance Company, C.M. Life's former parent, prior to its merger with
MassMutual.
C.M. Life cedes a portion of its life insurance business to MassMutual
and other insurers in the normal course of business. C.M. Life's
retention limit per individual insured is $4,000 thousand and the
portion of the risk exceeding the retention limit is reinsured with
other insurers. C.M. Life is contingently liable with respect to ceded
reinsurance in the event any reinsurer is unable to fulfill its
contractual obligations.
C.M. Life has a modified coinsurance quota-share reinsurance agreement
with MassMutual whereby C.M. Life cedes 50% of the premiums on certain
universal life policies issued in 1985 and 75% of the premiums on
certain universal life policies with issue dates on or after January 1,
1986. In return, MassMutual pays C.M. Life a stipulated expense
allowance, death benefits, surrender charges, and a modified coinsurance
reserve adjustment. Reserves for payment of future benefits for the
ceded policies are retained by C.M. Life.
3. Net Investment Income
---------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(in Thousands)
<S> <C> <C> <C> <C>
Gross Investment Income:
Bonds $13,034 $12,963 $40,397 $41,168
Common and preferred stock 286 0 1,114 292
Mortgage loans 1,307 333 3,181 3,203
Policy loans 2,736 2,523 8,036 7,513
Cash and short-term investments 694 1,310 2,079 2,567
Other 59 560 53 395
------- ------- ------- -------
Total gross investment income 18,116 17,689 54,860 55,138
Less: investment expenses 322 297 883 458
------- ------- ------- -------
Net investment income $17,794 $17,392 $53,977 $54,680
======= ======= ======= =======
</TABLE>
4. Recent Accounting Pronouncements
--------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 129,
"Disclosure of information about Capital Structure", and is effective
for financial statements issued for periods ending after December 15,
1997. The adoption of this pronouncement is expected to have no impact
on the financial statements of C. M. Life.
9
<PAGE>
In June of 1997, the FASB issued two pronouncements, Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and
Related Information." and are effective for financial statements issued
for periods beginning after December 15, 1997. The adoption of these
pronouncements is expected to impact the presentation of financial
information only.
5. Other
-----
Certain prior year amounts have been reclassed to conform to 1997
presentation.
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
---------------------
For the Three Months Ended September 30, 1997
---------------------------------------------
Compared to the Three Months Ended September 30, 1996
-----------------------------------------------------
For the three months ended September 30, 1997, C.M. Life had net income
of $8,773 thousand, as compared with a net loss of $7,274 thousand for
the same period in 1996. The increase in net income of $16,047 thousand
is attributable to the implementation of a new reinsurance agreement,
increased fee income due to growth of separate accounts, an increase in
realized capital gains, a decrease in benefit payments and a decrease in
operating expenses and commissions partially offset by an increase in
federal income taxes.
In September 1996, C.M. Life entered into a yearly renewal term
quota-share reinsurance agreement (YRT agreement) whereby it cedes 90%
of the second and later years premiums on certain Universal Life
policies. In return the reinsurer pays C.M. Life a stipulated expense
allowance and death benefits. Reserves for payment of future benefits
for the ceded policies are held by the reinsurer, on a quota-share
basis.
Premium income, net of reinsurance ceded, increased $863 thousand to
$78,176 thousand for the three months ended September 30, 1997 from
$77,313 thousand for the same period during 1996. The 1.1% increase in
premiums is attributable to a decrease in variable annuity products of
8.8% from the prior year, offset by 25.9% increase in Universal Life
premiums. The result is a change in C.M. Life's mix of business in which
Universal and other life products represented 36.0% of total premium
income during 1997 compared to 29.0% for 1996, while annuity products
represented 64.0% during 1997 compared to 71.0% in 1996.
Variable annuity premiums have declined due to lower sales through the
brokerage distribution channel and a shift towards sales of variable
annuity products issued by MassMutual and C.M. Life's affiliate MML
Baystate Insurance Company.
The following table sets forth premium information for C.M. Life's
products.
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Premium income
Universal and other life $ 27,824 36% $ 22,093 29%
Annuities 50,352 64% 55,220 71%
------------- -------------
Total $ 78,176 $ 77,313
============= =============
</TABLE>
10
<PAGE>
Net investment and other income increased $4,466 thousand to $18,096
thousand in 1997 from $13,632 thousand in 1996. Other income which is
comprised of reinsurance expense and commission allowances and modified
co-insurance reserve adjustment increased by $4,062 thousand. The
increase is primarily attributable to a year to date adjustment of the
modified co-insurance reserve adjustment. Net investment income increased
by $402 thousand which is attributable to an increase in invested assets
partially offset by a decline in the gross portfolio yield. The decline
in portfolio yield is attributable to a declining interest rate
environment; over time the portfolio yield is reduced as funds from
maturing investments are reinvested at lower prevailing interest rates.
Policy benefits and payments decreased $3,632 thousand to $23,347
thousand in 1997 from $26,979 thousand in 1996 primarily due to a decline
in death benefits, net of reinsurance of $3,714. The level of death
benefits is within expectations and is not indicative of a trend.
Addition to policyholder reserves, funds and separate accounts decreased
$14,500 thousand to $36,188 thousand in 1997 from $50,688 thousand in
1996. The addition to policyholder reserves, funds and separate accounts
is lower primarily due to the decrease in variable annuity premiums and
the implementation of the YRT agreement, effective starting in September
1996, which provides a reserve credit for certain Universal Life
policies, and increased fee income from separate accounts.
Acquisition costs and operating expenses decreased $3,264 thousand to
$17,449 thousand in 1997 from $20,713 thousand in 1996. The decrease is
primarily due to a nonrecurring adjustment in the third quarter of 1996
whereby the calculation of expenses due to MassMutual under the
management services agreement was modified. The decrease is also
attributable to the modification of C.M. Life's variable annuity
underwriting agreements with G.R. Phelps and Co., Inc. ("G.R. Phelps")
and MML Distributors, both affiliated companies. Effective March 1, 1996,
C.M. Life modified its underwriting agreements such that it would pay all
future commissions relating to variable annuity contracts and would also
retain rights to all future contract fees and charges related to these
contracts. Prior to the contract modification, G.R. Phelps and MML
Distributors paid variable annuity commissions in exchange for the rights
to future contract fees and charges related to these contracts. C.M. Life
expects the future revenue on these contracts to exceed acquisition
costs.
Federal income tax expense increased $12,391 thousand to $10,407 thousand
from tax benefit of $1,984 thousand as a result of increased taxable
income. Taxable income increased $31,119 thousand to $25,430 thousand in
1997 from a tax loss of $5,689 thousand in 1996. The increase in taxable
income is primarily attributable to the difference between statutory and
tax reserves basis and other book tax differences include the timing of
the deductibility of acquisition costs.
Realized capital gains of $345 thousand were recorded for the three
months ended September 30, 1997 as compared to realized capital losses
of $1,424 thousand for the same period in 1996, an increase of $1,769
thousand from the prior year.
Results of Operations
---------------------
For the Nine Months Ended September 30, 1997
--------------------------------------------
Compared to the Nine Months Ended September 30, 1996
----------------------------------------------------
For the Nine months ended September 30, 1997, C.M. Life had net income of
$11,171 thousand, as compared with net income of $4,654 thousand for the
same period in 1996. The increase in net income of $6,517 thousand is
partially attributable to the implementation of a reinsurance agreement
which mitigates the surplus strain normally associated with life
insurance sales in the year of issuance, increase in fee income due to
growth in separate accounts, partially offset by increased operating
expenses and commissions, increased death claims, a decrease in
investment and other income and an increase in federal income tax expense
attributable to taxable income in excess of book income.
In September 1996, C.M. Life entered into a yearly renewal term quota-
share reinsurance agreement (YRT agreement) whereby it cedes 90% of the
second and later years premiums on certain Universal Life policies. In
return the reinsurer pays C.M. Life a stipulated expense allowance and
death benefits. Reserves for payment of future benefits for the ceded
policies are held by the reinsurer, on a quota-share basis.
11
<PAGE>
Premium income, net of reinsurance ceded, increased $2,142 thousand to
$233,038 thousand for the nine months ended September 30, 1997 from
$230,896 thousand for the same period during 1996. The 0.9% increase in
premiums is attributable to a decrease in variable annuity products of
11.4% from the prior year, offset by a 39.7% increase in Universal Life
premiums, the result is a change in C.M. Life's mix of business in which
Universal and other life products represented 33.0% of total premium
income during 1997 compared to 24.0% for 1996, while annuity products
represented 67.0% during 1997 compared to 76.0% in 1996.
Variable annuity premiums have declined due to lower sales through the
brokerage distribution channel and a shift towards sales of variable
annuity products issued by MassMutual and C.M. Life's affiliate MML
Baystate Insurance Company.
The following table sets forth premium information for C.M. Life's
products.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Premium income
Universal and other life $ 77,699 33% $ 55,604 24%
Annuities 155,339 67% 175,292 76%
-------- --------
Total $233,038 $ 230,896
======== ========
</TABLE>
Net investment and other income decreased $947 thousand to $52,384
thousand in 1997 from $53,331 thousand in 1996. Other income from
reinsurance ceded decreased by $221 thousand. Net investment income
decreased by $726 thousand which is attributable a decline in portfolio
yield, partially offset by an increase in invested assets. The decline in
portfolio yield is attributable to a declining interest rate environment;
over time the portfolio yield is reduced as funds from maturing
investments are reinvested at lower prevailing interest rates.
Policy benefits and payments increased $4,096 thousand to $76,884
thousand in 1997 from $72,788 thousand in 1996. Death claims, net of
reinsurance, grew to $19,708 thousand in 1997 from $14,959 thousand in
1996. The increase which was lower than expected, is primarily
attributable to the increase in the life insurance in force. The
fluxuation in death benefits is within expectations and is not indicative
of a trend.
Addition to policyholder reserves, funds and separate accounts decreased
$34,279 thousand to $123,780 thousand in 1997 from $158,059 thousand in
1996. The decrease is primarily attributable to a decrease in annuity
premiums, increased annuity surrenders, increased fee income from
separate accounts and the implementation of the YRT agreement starting in
September 1996.
Acquisition costs and operating expenses increased $9,306 thousand to
$50,821 thousand in 1997 from $41,515 thousand in 1996. The increase is
primarily related to the following factors; increased expenses associated
with the production of new business primarily resulting from the change
in the mix of business towards greater Universal Life sales, increased
fees from C.M. Life's management services agreement with MassMutual, and
the modification of C.M. Life's variable annuity underwriting agreements
with G.R. Phelps and Co., Inc. ("G.R. Phelps") and MML Distributors, both
affiliated companies. Effective March 1, 1996, C.M. Life modified its
underwriting agreements such that it would pay all future commissions
relating to variable annuity contracts and would also retain rights to
all future contract fees and charges related to these contracts. Prior to
the contract modification, G.R. Phelps and MML Distributors paid variable
annuity commissions in exchange for the rights to future contract fees
and charges related to these contracts. C.M. Life expects the future
revenue on these contracts to exceed acquisition costs.
Federal income tax expense increased $14,898 thousand to $20,459 thousand
from $5,561 thousand as a result of increased taxable income. Taxable
income increased $38,255 thousand to $54,050 thousand in 1997 from
$15,795 thousand in 1996. The increase in taxable income is primarily
attributable to the difference between statutory book and tax reserves
basis. Other book tax differences include the timing of the deductibility
of acquisition costs and other items.
Realized capital gains of $330 thousand were recorded for the nine
months ended September 30, 1997 as compared to realized capital gains of
$846 thousand for the same period in 1996. The decrease of $516 thousand
from the prior year is primarily attributable to gains generated during
the first quarter of 1996 on the sale of common stock investments.
12
<PAGE>
Statement of Financial Position
-------------------------------
Total assets increased by $323,360 thousand or 17.3% to $2,189,931
thousand at September 30, 1997 from $1,866,571 thousand at year end
1996. Much of this increase was due to continued growth from new
premiums and appreciation of assets in C.M. Life's separate investment
accounts, which increased by $274,148 thousand.
Mortgage loans increased $53,799 thousand to $87,590 thousand reflecting
a more favorable real estate investment environment. Total liabilities
increased in 1997 by $312,906 thousand or 17.8% to $2,069,733 thousand
from $1,756,827 thousand at year end 1996. As with assets, most of this
growth occurred in the separate investment accounts. Growth in the
separate investment account's assets and liabilities is attributable to
continued variable annuity sales and deposits.
Liquidity
---------
Net cash provided by operating activities was $44,673 thousand and
$52,421 thousand for the nine months ended September 30, 1997 and 1996,
respectively. In 1997, net cash provided by operating activities
declined by $7,748 thousand as compared to 1996, primarily due to
increased surrender and death benefits, sales growth which generates
commissions and acquisition costs in excess of revenues in the first
contract year. Net cash from financing and miscellaneous activities
decreased by $19,996 thousand to $12,798 thousand primarily due to 1996
unremitted reimbursements to MassMutual. The Board of Directors of
MassMutual has authorized the contribution of funds to C.M. Life
sufficient to meet the capital requirements of all states in which C.M.
Life is licensed to do business.
C.M. Life has structured its investment portfolio to ensure a strong
liquidity position in order to permit timely payment of policy and
contract benefits without requiring an untimely sale of assets. C.M.
Life manages its liquidity position by matching its exposure to cash
demands with adequate sources of cash and other liquid assets.
C.M. Life's principal sources of liquidity are cash flow and holdings of
cash, near cash and other readily marketable assets. The primary cash
flow sources are investment income and proceeds from maturities on
invested assets, life insurance premiums, annuity considerations and
deposits.
C.M. Life's liquid assets include substantial Treasury holdings,
short-term money market investments, stocks and marketable long-term
fixed income securities. Cash and short-term investments totaled $78,980
thousand at September 30, 1997.
The liquidity position of C.M. Life is proactively managed on an ongoing
basis to meet cash needs while minimizing adverse impacts on investment
returns. A variety of scenarios are analyzed by modeling potential
demands on liquidity, taking into account the provisions of C.M. Life's
policies and contracts in force, C.M. Life's cash flow position and the
volume of cash and readily marketable securities in C.M. Life's
portfolio.
C.M. Life also employs sophisticated quantitative asset/liability cash
flow management techniques to optimize and control the investment return
and liquidity for each portfolio, taking into account the distinguishing
liability characteristics of each portfolio.
A primary liquidity concern for C.M. Life is the risk of early
contractholder and policyholder withdrawal. The most affected products
are individual life insurance and individual deferred annuities.
Personal life insurance policies are less susceptible to withdrawal than
annuity contracts because annuities are primarily used as investment
vehicles, while personal life policies are used to fulfill longer term
financial planning needs. C.M. Life closely evaluates and manages its
liquidity risk.
Capital Resources
-----------------
As of September 30, 1997, C.M. Life's total adjusted capital as defined
by the NAIC was $143,186 thousand. The NAIC has developed the "Risk
Based Capital" ("RBC") model to compare the total adjusted capital with
a standard design in order to reflect C.M. Life's risk profile. Although
C.M. Life believes that there is no single appropriate means of
measuring risk-based capital needs, it feels that the NAIC approach to
RBC measurement is reasonable, and will manage its capital position with
significant attention to maintaining adequate total adjusted capital
relative to
13
<PAGE>
RBC. C.M. Life's total adjusted capital was well in excess of all RBC
standards at September 30, 1997 and 1996. Management believes that C.M.
Life enjoys a strong capital position in light of the risks to which it
is subject and that it is well positioned to meet policyholder and other
obligations.
Segment Information
-------------------
C.M. Life's operations consisted of one business segment, which was
principally the sale of universal life insurance and annuity products.
C.M. Life is not dependent upon any single customer and no single
customer accounted for more than 10% of revenues for the nine months
ended September 30, 1997 and 1996.
Reserves
--------
In accordance with the life insurance laws and regulations under which
C.M. Life operates, it is obligated to carry on its books, as
liabilities, actuarially determined reserves to meet its obligations on
outstanding contracts. Reserves are based on mortality tables in general
use in the United States and are computed to equal amounts that, with
additions from premiums to be received, and with interest on such
reserves computed annually at certain assumed rates, will be sufficient
to meet C.M. Life's policy obligations at their maturities or in the
event of an insured's death. In the accompanying financial statements,
these reserves are determined in accordance with statutory regulations.
Investments
-----------
September 30, 1997, C.M. Life had $1,076,591 thousand of invested assets
in its general investment account. The portfolio of invested assets is
managed to support the liabilities of the lines of business in light of
yield, liquidity and diversification considerations. The general
investment account portfolio does not include C.M. Life's separate
account investment assets.
Competition
-----------
The life insurance industry is highly competitive. There are more than
1,700 life insurance companies in the United States, many of which offer
insurance products similar to those marketed by C.M. Life. In addition
to competition within the industry, insurers are increasingly facing
competition from non-traditional sources in the financial services
business, including mutual funds, banks, securities brokerage houses and
other financial services entities, many of which provide alternative
investment and savings vehicles for consumers. Legislative initiatives
proposed at the federal level would, if enacted, reorder the financial
services industry, thereby changing the environment in which C.M. Life
competes.
C.M. Life's management believes its financial strength, agent skill and
historical product performance provide competitive advantages for the
products it offers in these markets. In early 1996, after the merger of
MassMutual and Connecticut Mutual Life Insurance Company, C.M. Life
received the following ratings from the various rating agencies, A.M.
Best Company, Inc. (A++), and Duff & Phelps Credit Rating Company (AAA).
In April 1997, Duff & Phelps Credit Rating Company reaffirmed C.M.
Life's AAA rating and in October 1997 Standard and Poor's Corporation
reaffirmed its (AAA) rating.
MassMutual, C.M. Life's parent, has received the highest ratings from
A.M. Best Company, Inc. (A++), Standard & Poor's Corporation (AAA), and
Duff & Phelps Credit Rating Company (AAA), as well as a rating of Aa1 by
Moody's Investors Service, Inc. (the highest in its "excellent"
category). In late 1995 and early 1996, all four of these agencies
conducted thorough reviews of MassMutual's ratings in light of the
Connecticut Mutual Life Insurance Company merger. In all four cases, the
1995 ratings for MassMutual were reaffirmed. In April 1997 Duff & Phelps
Credit Rating Company and Moody's Investor Service, Inc. again
reaffirmed their previous ratings and in October 1997 Standard and
Poor's Corporation reaffirmed its (AAA) rating.
Regulation
----------
C.M. Life is organized as a Connecticut stock life insurance company,
and is subject to Connecticut laws governing insurance companies. C.M.
Life is regulated and supervised by the State of Connecticut Insurance
Commissioner. By March 1 of every year, C.M. Life must prepare and file
an annual statement, in a form prescribed by the State of
14
<PAGE>
Connecticut Insurance Department, as of December 31 of the preceding
year. The Commissioner and his or her agents have the right at all times
to review or examine C.M. Life's books and assets. A full examination of
C.M. Life's operations is conducted periodically according to the rules
and practices of the NAIC. C.M. Life is also subject to the insurance
laws of the states in which it is authorized to do business, to various
federal and state securities laws and regulations, and to regulatory
agencies which administer those laws and regulations.
C.M. Life is licensed to transact its insurance business in, and is
subject to regulation and supervision by the Commonwealth of Puerto
Rico, the District of Columbia and all 50 states of the United States,
except New York. The extent of such regulation varies, but most
jurisdictions have laws and regulations requiring the licensing of
insurers and their agents and setting standards of solvency and business
conduct to be maintained by licensed insurance companies, and may
regulate withdrawal from certain markets. In addition, statutes and
regulations usually require the approval of policy forms and, for
certain lines of insurance, the approval of rates. Such statutes and
regulations also prescribe the permitted types and concentration of
investments. C.M. Life is also subject to regulation of its accounting
methodologies and is required to file detailed annual financial
statements with supervisory agencies in each of the jurisdictions in
which it does business. Each of its operations and accounts is also
subject to examination by such agencies at regular intervals.
C.M. Life is subject to guaranty fund assessments in all states in which
it does business. The guaranty associations are organized to pay
contractual obligations under insurance policies issued by impaired or
insolvent insurers. C.M. Life believes such assessments in excess of
amounts accrued will not materially affect its financial position,
results of operations or liquidity.
In addition to regulation of its insurance business, C.M. Life is
subject to various types of federal and state laws and regulations
affecting the conduct, taxation and other aspects of their businesses.
Certain policies and contracts offered by C.M. Life are subject to
various levels of regulation under the federal securities laws
administered by the Securities and Exchange Commission.
C.M. Life's management believes it is in compliance in all material
respects with all applicable laws and regulations.
New Accounting Pronouncements
-----------------------------
The NAIC is codifing statutory accounting principles, which are
anticipated to be effective January 1, 1999. At this time, the codified
statutory accounting principles have been exposed for public comment but
have not been finalized. C.M. Life has not determined the impact of
changes which may result from these new principles.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
C.M. LIFE INSURANCE COMPANY
(Registrant)
Date: November 13, 1997 By: /s/ Lawrence V. Burkett, Jr.
------------------------------
Lawrence V. Burkett, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1997 By: /s/ John Miller, Jr.
----------------------
John Miller, Jr.
Comptroller
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM C.M. LIFE'S
SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000883232
<NAME> C.M. LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 705,785<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 55,494
<MORTGAGE> 87,590
<REAL-ESTATE> 0
<TOTAL-INVEST> 997,611
<CASH> 78,980
<RECOVER-REINSURE> 1,979
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 2,189,931
<POLICY-LOSSES> 928,818
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 6,138
<POLICY-HOLDER-FUNDS> 1,101,615
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 117,698
<TOTAL-LIABILITY-AND-EQUITY> 2,189,931
233,038
<INVESTMENT-INCOME> 53,977
<INVESTMENT-GAINS> 330
<OTHER-INCOME> (1,593)
<BENEFITS> 200,664
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 53,458
<INCOME-PRETAX> 31,300
<INCOME-TAX> 20,459
<INCOME-CONTINUING> 11,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,171
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> C.M. LIFE'S FINANCIAL STATEMENTS HAVE BEEN PREPARED IN CONFORMITY WITH
ACCOUNTING PRACTICES AND PROCEDURES OF THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS AS PRESCRIBED OR PERMITTED BY THE INSURANCE DEPARTMENT OF THE
STATE OF CONNECTICUT, UNDER THESE ACCOUNTING PRACTICES, FIXED MATURITIES
ELIGIBLE FOR AMORTIZATION ARE REPORTED AT AMORTIZED COST.
</FN>
</TABLE>
