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Reg No. 333-2347
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-2
POST-EFFECTIVE AMENDMENT NO. 5
TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
C.M. LIFE INSURANCE COMPANY
---------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT
-----------
(State or other jurisdiction of incorporation or organization)
06-101383
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(I.R.S. Employer Identification No.)
140 Garden Street
Hartford, Connecticut 06154
(800) 234-5606
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Ann F. Lomeli
Secretary
C.M. Life Insurance Company
140 Garden Street
Hartford, CT 06154
(800) 234-5606
--------------
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: May 1, 1999
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
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C.M. LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-2 Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside
Front Cover Page of Prospectus ............ Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus ................. Summary; Table of Contents
3. Summary Information,
Risk Factors and
Ratio of Earnings to
Fixed Charges ............................. Outside Front Cover Page;
Summary
4. Use of Proceeds ........................... Investments
5. Determination of
Offering Price ............................ Not Applicable
6. Dilution .................................. Not Applicable
7. Selling Security Holders .................. Not Applicable
8. Plan of Distribution ...................... Distributor of the Contracts
9. Description of Securities
to be Registered .......................... Product Description; Interest
Rate Factor Adjustment
Calculation; Interest Rate
Factor Adjustment's
Applicability on Withdrawal;
Distributor of the Contracts
10. Interest of Named Experts
and Counsel ............................... Not Applicable
11. Information with Respect
to be Registrant .......................... Description of the Business;
Management's Discussion and
Analysis; Financial Statements
12. Incorporation of Certain Information
by Reference .............................. Not Applicable
13. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities ............................... Not Applicable
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C.M. Life Insurance Company
Fixed Account with Interest Rate Factor Adjustment
This prospectus describes the fixed account with interest rate factor adjustment
offered by C.M. Life Insurance Company. The fixed account is available as an
investment option for owners of the Panorama Plus variable annuity contract
("the contract"). You, the contract owner, may allocate purchase payments or
transfer contract values, in accordance with the contract's transfer rules, to
the fixed account. Since the fixed account is available only through the
contract, you should carefully review the discussion of the contract contained
in the attached prospectus for the contract. We limit the focus of this
prospectus to the fixed account's operations and features.
We guarantee specific rates of interest for amounts you allocate to the fixed
account for specific periods of time. The interest rate we guarantee for a
particular period is an annual effective yield. The guaranteed rates will
fluctuate, but we guarantee they will never go below 3%. Our assets, including
amounts allocated to the fixed account, are available to meet the guarantees
associated with the fixed account. These assets are chargeable with liabilities
arising from other business of the company. You may make purchase payments and
transfers of contract value among the fixed account and to the funds in the
Panorama Plus contract.
If you take a full or partial withdrawal from the fixed account, other than
during the window period, the amounts you withdraw are subject to an interest
rate factor adjustment. The interest rate factor adjustment may be positive or
negative. Therefore, you may experience a negative investment return.
Please read this prospectus before investing in the fixed account. You should
keep it for future reference. It contains important information.
This prospectus must be accompanied by the Panorama Plus variable annuity
contract prospectus and the prospectus for the funds underlying the Panorama
Plus variable annuity contract.
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The SEC has not approved these contracts or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
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MAY 1, 1999
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Table of Contents
Index of Special Terms .................................................. 2
Product Description ..................................................... 3
The general account ................................................... 3
Transfers ............................................................. 4
Withdrawals ........................................................... 4
Surrender Charge ...................................................... 4
Free Withdrawals ................................................... 5
Window Period ...................................................... 5
Interest Rate Factor Adjustment Calculation ............................. 5
The Interest Rate Factor Adjustment's Applicability on Withdrawal ....... 8
Investments ............................................................. 9
Distributor of the Contracts ............................................ 9
Accounting Practices .................................................... 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 11
General ............................................................... 11
Results of Operations ................................................. 11
Statement of Financial Position ....................................... 15
Liquidity and Capital Resources ....................................... 16
Year 2000 Issue ....................................................... 17
Inflation ............................................................. 20
Investments ........................................................... 20
Quantitative and Qualitative Information about Market Risk ............ 27
Description of the Business ............................................. 29
Competition ........................................................... 29
Regulation ............................................................ 30
Experts and Additional Available
Information ............................................................. 30
Selected Historical Financial Data ...................................... 31
Audited Statutory Financial Statements ................................ FF-1
Index of Special Terms
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. The page that is indicated here is where we believe you will
find the best explanation for the word or term.
Page
----
General Account 3
Guaranteed Interest Rate 3
Interest Rate Factor Adjustment 5
Treasury Index Rates 5
Window Period 5
2
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Product Description
This prospectus describes a fixed account with interest rate factor adjustment
that is available as an investment option with C. M. Life Insurance Company's
Panorama Plus variable annuity contract ("the contract"). You may allocate
initial or subsequent purchase payments to the fixed account during the
accumulation phase of your contract. You may also transfer your contract value
in the funds to the fixed account. Any purchase payments or contract value
allocated to the fixed account become part of the C. M. Life Insurance Company's
general account.
We have described the contract in more detail in the attached prospectus for the
contract. You should review the prospectus for the contract in conjunction with
this prospectus before you decide whether to invest in the contract or allocate
purchase payments or contract value to the fixed account.
The General Account
The general account is made up of all of our assets except those allocated to
separate accounts. General account assets are available to fund the claims of
all classes of customers, policy owners and our other creditors. Interests under
the contract relating to the general account are registered under the Securities
Act of 1933, as amended, ("1933 Act") but the general account is not registered
under the Investment Company Act of 1940.
Contract values in the general account will not share in the investment
performance of the general account. Instead, we will pay a specified rate of
interest on these values. The interest rate we credit to general account values
will vary at our discretion. We guarantee this rate will be at least 3% per
year. We may also credit a higher rate of interest at our discretion. You should
check with your registered representative or our Annuity Service Center for the
availability of the guarantee periods and interest rates we are currently
crediting.
We do not apply a specific formula in determining the interest rate. Some of the
factors we may consider are:
. general economic trends;
. rates of return currently available and anticipated on our investments;
. expected investment yields;
. regulatory and tax requirements; and
. competitive factors.
The interest we credit to amounts allocated to the general account in excess of
3% per year will be determined at our sole discretion. You assume the risk that
the interest we credit on amounts you allocate to the general account may not
exceed 3% per year. We currently reset the rate quarterly, but in the future we
may reset the rate more or less frequently. You also assume the risk that the
withdrawal value of amounts allocated to the general account will be less than
your general account value, and less than the net purchase payments you
allocated to the general account.
We are not obligated to invest amounts allocated to the general account
according to any particular strategy, except as may be required by state law. We
intend to invest assets of the general account primarily in debt instruments as
follows:
1. securities issued by the United States Government or its agencies or
instrumentalities. These may or may not be guaranteed by the United States
Government;
2. debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investors Service, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or
any other nationally recognized rating service;
3. other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and corporations;
4. private placements; and
5. below investment grade debt instruments. Instruments rated below "Baa"
and/or "BBB" normally involve a higher risk of default and are less liquid
than higher rated instruments.
We may use a "segregated account" within our general account in connection with
the general account contract values. Nevertheless, you do not share in the
investment performance of that segregated account or any other portion of our
assets. Accordingly, in contrast to the Panorama Plus Separate Account, there
are no "units" or calculation of "unit values" to measure the investment
performance of the general account.
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Any contract value that you withdraw from the general account may be subject to
an interest rate factor adjustment, as well as a surrender charge. Therefore,
withdrawal proceeds may be less than your purchase payments. We may also apply
the interest rate factor adjustment to your value in the general account that
you apply to variable annuity income payments during the income phase of your
contract. The interest rate factor adjustment does not apply to contracts we
issue to Pennsylvania residents.
Transfers
You may transfer contract value to or from the general account and/or funds,
within certain limits during the accumulation phase of your contract. Please
refer to the attached prospectus for the contract for more information regarding
transfers.
Withdrawals
During the accumulation phase you may make either partial or total withdrawals
of your contract value. Your withdrawal request is effective on the business day
we receive your written request at our Annuity Service Center. If we receive
your request at our Annuity Service Center on a non-business day or after our
business day closes, your withdrawal request will be effective on the next
business day. We will pay any withdrawal amount within 7 days of our receipt of
your fully completed written request at our Annuity Service Center unless we are
required to suspend or postpone withdrawal payments.
Unless you instruct us otherwise, we will take any partial withdrawal
proportionally from your contract value in the funds and the general account.
The minimum amount that you may withdraw from the separate account or general
account is $100. We require that after you make a partial withdrawal you keep at
least $250 in the contract. Partial withdrawals are subject to a surrender
charge.
When you make a total withdrawal you will receive your contract value:
. less any applicable surrender charge;
. less any applicable premium tax;
. less any contract maintenance fee, and
. less any purchase payments we credited to your contract that have not
cleared the bank, until they clear the bank.
We also apply an interest rate factor adjustment to partial and full withdrawals
from your value in the general account, unless you make the withdrawal during
the window period.
We will allocate any surrender charge or contract maintenance fee imposed on
withdrawal among the general account and the funds in the same manner (pro rata)
as the contract value subject to withdrawal is allocated among the general
account and the funds. For contracts issued to Pennsylvania residents, the
contract maintenance fee will be allocated pro rata among the funds.
You assume the entire investment risk with respect to purchase payments and
transfers allocated to the funds and certain risks with respect to amounts
allocated to the general account. Since withdrawals from the general account may
be subject to a surrender charge and an interest rate factor adjustment, a
contract maintenance fee and possibly premium taxes, the total amount we pay you
upon a full withdrawal of your contract may be more or less than your total
purchase payments.
Surrender Charge
We do not deduct a sales charge when we receive a purchase payment. However, if
you withdraw all of or any part of the contract value during the first 5
contract years, we may assess a surrender charge on the amount that you withdraw
that exceeds the free withdrawal amount. The surrender charge is 5% of the
amount withdrawn. We use this charge to cover certain expenses relating to the
sale of the contract. We will deduct any surrender charge as of the business day
we receive your written request.
If you withdraw:
. from more than one investment choice, we will deduct the surrender charge
proportionately from the amounts remaining in the investment choice(s) you
elected.
. the total value from an investment choice, we will deduct the surrender
charge proportionately from amounts remaining in the investment choices
that still have value.
. your entire contract value, we will deduct the surrender charge from the
contract value. You will receive a check for the net amount.
4
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Free Withdrawals
Beginning in the second contract year, you may withdraw an amount without
incurring a surrender charge or an interest rate factor adjustment. The maximum
you may withdraw without penalty is 10% of your contract value as of the end of
the previous contract year. You may take this 10% in multiple withdrawals each
contract year.
Window Period
The window period is the last 30 days of each 5-year period. During this window
period, you may withdraw or transfer to any fund, part or all of your contract
value in the general account without incurring a surrender charge or an interest
rate factor adjustment. During the window period you may also withdraw all or
part of your contract value in the separate account without incurring a
surrender charge.
Interest Rate Factor Adjustment Calculation
Except during the window period, we will apply an interest rate factor
adjustment:
. to any amount that you partially or fully withdraw from the general account
during the accumulation phase, or
. to any amount from the general account that you apply to a variable annuity
option at the beginning of the income phase.
We base the interest rate factor adjustment on the interest rates payable on
U.S. Treasury securities. This means that generally, if rates on U.S. Treasury
securities are higher when you withdraw than when you made the payment, a
negative adjustment will be applied to the amount you withdraw. This could
result in your receiving an amount lower than the amount of your purchase
payment(s). If rates on U.S. Treasury securities are lower when you withdraw
than when you made the payment, a positive adjustment will be applied to the
amount you withdraw. This could result in your receiving an amount higher than
the amount of your purchase payment(s).
The interest rate factor adjustment will reflect the relationship between:
1. the weighted average of U.S. Treasury Index Rates corresponding to
aggregate purchase payments and transfers into the general account during
the current five-year period (as adjusted for partial withdrawals or
transfers out of the general account),
2. the U.S. Treasury Index Rate which would be applicable during the time
remaining in the current five-year period on the date of the withdrawal,
and
3. the time remaining in the current five-year period.
In general, if the weighted average of U.S. Treasury Index Rates corresponding
to purchase payments and transfers during the current five-year period is lower
than the U.S.Treasury Index Rate which would be applicable during the time
remaining in the current five-year period, then the application of the interest
rate factor adjustment will result in a lower payment upon withdrawal.
We do not apply the interest rate factor adjustment during the window period or
to free withdrawal amounts. Also, we do not apply the interest rate factor
adjustment to contracts we issue to Pennsylvania residents.
The partial withdrawal interest rate factor adjustment formula is:
(1 - 1/IRF) x (GAPW - GAF + GAPWC) = IRFA.
If you make a partial withdrawal, we do not apply an interest rate factor
adjustment if the general account free withdrawal amount exceeds the general
account portion of the partial withdrawal.
The full withdrawal interest rate factor adjustment formula is:
(IRF - 1) x (GAFW - GAF) = IRFA.
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Where:
(GAPW) is the general account Partial Withdrawal Amount.
(GAFW) is the general account Full Withdrawal Amount.
(GAF) is the general account Free Withdrawal Amount.
(GAPSC) is the general account portion of the Partial
Surrender Charge Amount determined as follows:
GAPSC = (GAPW - GAF) x 5%/95%, but not less than zero.
(IRF) is the Interest Rate Factor.
(IRFA) is the Interest Rate Factor Adjustment.
The interest rate factor is determined by the following formula:
(N/12)
(1 + Ta)
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(N/12) = IRF
(1.003 + Tb)
Where:
(Ta) is the weighted average of the U.S. Treasury Index Rates which
correspond to the purchase payments and/or transfers allocated to the
general account during the current five-year period
We determine the U.S. Treasury Index Rate corresponding to each such
allocation by the number of full years and fractions thereof (but not
less than 1 year) remaining from the date of the allocation until the
end of the current five-year period. For purposes of determining the
average of these rates, each U.S. Treasury Index Rate is weighted by
the amount of the corresponding allocation (as adjusted to reflect any
partial withdrawal and/or transfers from the general account subsequent
to such allocation). We will treat the general account balance at the
beginning of any five-year period as a new allocation for purposes of
this calculation..
We shall adjust each allocation made prior to a partial withdrawal
and/or transfer from the general account (other than the current
withdrawal) by multiplying such allocation by the following fraction:
1 - PW/GAB
Where:
(PW) Is the amount of the partial withdrawal and/or transfer from the
general account made subsequent to the allocation,
(GAB) is the beginning general account balance on the date of the partial
withdrawal and/or transfer from the general account, We will calculate
a separate adjustment for each prior partial withdrawal and/or
transfer from the general account.
(Tb) is the U.S. Treasury Index Rate with a maturity equal to the number of
full years and fractions thereof (but not less than 1 year) remaining
in the current five-year period on the date of the partial or full
withdrawal,
(N) is the number of whole months remaining in the current five-year
period as of the date of the partial or full withdrawal (rounded
down),
1.003 builds into the formula a factor representing our direct and indirect
costs associated with liquidating general account assets in order to
satisfy withdrawal requests or to begin making annuity income payments
(to the extent the general account balance is applied to purchase a
variable annuity). We have added this adjustment of .30% to the
denominator of the formula because we anticipate that a substantial
portion (more than half) of applicable general account portfolio
assets will be in relatively illiquid private placement securities.
Thus, in addition to direct transaction costs, if we must sell such
securities (e.g., because of withdrawals), the market price may be
lower because they are not registered securities. Accordingly, even if
interest rates decline, there will not be a positive adjustment until
this factor is overcome, and then any adjustment will be lower than
otherwise, to compensate for this factor. Similarly, if interest rates
rise, any negative adjustment will be greater than otherwise, to
compensate for this factor. If interest rates stay the same, this
factor will result in a small but negative interest rate factor
adjustment.
(IRF) is the interest rate factor.
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Examples
The following examples illustrate the calculation of the interest rate factor
and the interest rate factor adjustment.
In the following examples, we apply the interest rate factor adjustment formula
so as to produce only positive numbers, which we then add to, or subtract from,
the withdrawal proceeds (for full general account balance withdrawals) or the
remaining general account balance (for partial general account balance
withdrawals). For example, if the interest rate factor is .7, then the interest
rate factor adjustment calculation illustrated below will show 1-.7, rather than
.7-1, to result in a positive number.
For examples 1 and 2, assume no change in interest rates.
1) Assume a $50,000 general account balance at the beginning of the second five-
year period, and a full withdrawal at that time.
Also, assume the U.S. Treasury Index Rate at that time is 7%.
(5)
(1.07)
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(5) = .9861
THEN: IRF = (1.073)
Interest Rate Factor Adjustment
[deducted from proceeds] =
(1 - .9861) x ($50,000 - $5,000) = $625.50.
2) Assume a $50,000 general account balance at the beginning of the tenth
contract year with a full withdrawal at that time.
Also, assume the U.S. Treasury Index Rate remains at 7% for all maturities:
1.07
THEN: IRF = ------ = .9972
1.073
Interest Rate Factor Adjustment
[deducted from proceeds] =
(1 - .9972) x ($50,000 - $5,000) = $126.00.
For examples 3 and 4, assume a general account balance of $50,000 at the
beginning of the seventh contract year.
3) Assume a full withdrawal at the beginning of the seventh contract year:
a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current
U.S. Treasury Index Rate is 5.40%.
(This is a decrease in rates of 1.60%). Then the IRF = 1.05
Interest Rate Factor Adjustment = (1.05 - 1) x ($50,000 - $5,000) = $2,250.
Thus, the actual amount of withdrawal proceeds paid = $50,000 + $2,250 - $30
= $52,220.
b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current
U.S. Treasury Index Rate is 8.08%.
(This is an increase in rates of 1.08%). Then the IRF = .95
Interest Rate Factor Adjustment = (1 - .95) x ($50,000 - $5,000) = $2,250.
Thus, the actual amount of withdrawal proceeds paid = $50,000 - $2,250 - $30
= $47,720.
Note: The contract maintenance fee ($30) applies to full withdrawals.
4) Assume a partial withdrawal of $10,000 at the beginning of the seventh
contract year:
a)Assume that the beginning U.S. Treasury Index Rate was 7%, and the
current U.S. Treasury Index Rate is 5.40%.
(This is a decrease in rates of 1.60%). Then the IRF = 1.05
Interest Rate Factor Adjustment =
1
{ 1 - ---- }x ($10,000 - $5,000) = $238.10.
1.05
Thus, the general account balance would be reduced by $10,000 - $238.10 =
$9,761.90.
b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the
current U.S. Treasury Index Rate is 8.08%.
(This is an increase in rates of 1.08%). Then the IRF = .95.
Interest Rate Factor Adjustment =
1
{ 1 - --- }x ($10,000 - $5,000) = $263.16.
.95
Thus, the general account balance would be increased by $10,000 + $263.16
= $10,263.16.
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The Interest Rate Factor Adjustment's
Applicability on Withdrawal
The following examples illustrate the impact of the interest rate factor
adjustment together with the surrender charge on withdrawal proceeds. For
examples 1 and 2, assume a general account balance of $50,000 at the beginning
of the second contract year.
1) Assume a full withdrawal at the beginning of the second contract year.
a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the
current U.S. Treasury Index Rate is 4.18%.
(This is a decrease in rates of 2.82%). Then the IRF = 1.10
Surrender Charge = ($50,000 - $5,000) x .05 = $2,250
Interest Rate Factor Adjustment = (1.10 - 1) x ($50,000 - $5,000) = $4,500
Thus, the actual amount of withdrawal
proceeds paid = $50,000 - $2,250 + $4,500 - $30 = $52,220
b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current
U.S. Treasury Index Rate is 9.56%.
(This is an increase in rates of 2.56%). Then the IRF = .9
Surrender Charge = ($50,000 - $5,000) x .05 = $2,250
Interest Rate Factor Adjustment = (1 - .9) x ($50,000 - $5,000) = $4,500
Thus, the actual amount of withdrawal
proceeds paid = $50,000 - $2,250 - $4,500 - $30 =$43,220
Note: The contract maintenance fee ($30) applies to full withdrawals.
2) Assume a partial withdrawal of $10,000 at the beginning of the second
contract year.
a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current
U.S. Treasury Index Rate is 4.18%.
(This is a decrease in rates of 2.82%.) Then the IRF = 1.10.
Surrender Charge = ($10,000 - $5,000) x .05/.95 = $263.16.
Interest Rate Factor Adjustment =
1
{ 1 - ---- } x ($10,000 - $5,000) = $478.47
1.10
Thus, the general account balance will be
reduced by: $10,000 + $263.16 - $478.47 = $9,784.69
b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current
U.S. Treasury Index Rate is 9.56%.
(This is an increase in rates of 2.56%.) Then the IRF = .9
Surrender Charge = ($10,000 - $5,000) x .05/.95 = $263.16
Interest Rate Factor Adjustment =
(1 - 1.9) x ($10,000 - $5,000 + $263.16) = $584.80
Thus, the general account balance will be reduced by:
$10,000 + $263.16 + $584.80 = $10,847.96
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Investments
We must invest our assets in accordance with the requirements established by
applicable state laws regarding the nature and quality of investments that may
be made by life insurance companies and the percentage of their assets that may
be committed to any particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in
federal, state, and municipal obligations, corporate bonds, preferred and common
stocks, real estate mortgages, real estate and certain other investments.
In establishing guaranteed rates, we intend to take into account the yields
available on the instruments in which we intend to invest the proceeds from the
contracts. Our investment strategy with respect to the proceeds attributable to
allocations made to the fixed account will generally be to invest in
investment-grade debt instruments having durations tending to match the
applicable guarantee periods.
Distributor Of The Contracts
MML Distributors, LLC (MML Distributors) serves as principal underwriter for the
contracts. MML Investors Services, Inc. (MMLISI) serves as counderwriter for the
contracts. Their purpose as underwriters is to distribute the contracts. MML
Distributors and MMLISI are wholly-owned subsidiaries of Massachusetts Mutual
Life Insurance Company ("MassMutual"). Both are located at 1414 Main Street,
Springfield, Massachusetts 01144-1013.
We will pay commissions to broker-dealers who sell the contracts. Commissions
are a combination percentage of purchase payments and contract value. Currently,
we pay an amount up to 4.5% of purchase payments. In addition, we pay a maximum
commission of .50% of contract values each contract year.
From time to time, MML Distributors may enter into special arrangements with
certain broker-dealers. These special arrangements may provide for the payment
of higher compensation to such broker-dealers for selling the contracts.
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Accounting Practices
We have prepared the accompanying statutory financial information, included in
this filing, in conformity with the practices of the National Association of
Insurance Commissioners ("NAIC") and the accounting practices prescribed or
permitted by the Insurance Department of the State of Connecticut ("statutory
accounting practices").
The accompanying statutory financial statements are different in some respects
from financial statements prepared to conform with generally accepted accounting
principles ("GAAP"). The more significant differences are as follows:
(a) acquisition costs, such as commissions and other costs directly related to
acquiring new business, are charged to current operations as incurred,
whereas GAAP would require these expenses to be capitalized and recognized
over the life of the policies;
(b) policy reserves are based upon statutory mortality and interest requirements
without consideration of withdrawals, whereas GAAP reserves would be based
upon reasonably conservative estimates of mortality, morbidity, interest and
withdrawals;
(c) bonds are generally carried at amortized cost whereas GAAP generally
requires they be reported at fair value;
(d) deferred income taxes are not provided for book-tax timing differences as
would be required by GAAP; and
(e) payments received for universal life, variable life and variable annuities
are reported as premium revenue, whereas under GAAP, these payments would be
recorded as deposits to policyholders' account balances.
In accordance with the life insurance laws and regulations under which we
operate, we are obligated to carry on our books, as liabilities, actuarially
determined reserves to meet our obligations on outstanding contracts. We develop
reserves for life insurance contracts using accepted actuarial methods computed
principally on the net level premium, the Commissioners' Reserve Valuation
Method and the California Method bases using the 1980 Commissioners' Standard
Ordinary mortality tables with assumed interest rates ranging from 3.0 to 4.5
percent. We develop reserves for individual annuities based on accepted
actuarial methods, principally, the Commissioner's Annuity Reserve Valuation
Method at interest rates ranging from 5.3 to 9.0 percent.
We maintain an asset valuation reserve ("AVR") and an Interest Maintenance
Reserve ("IMR"), in compliance with regulatory requirements. The AVR and other
investment reserves stabilize shareholder's equity against declines in the value
of bonds. The IMR captures after-tax realized capital gains and losses that
result from changes in the overall level of interest rates, for all types of
fixed income investments. The IMR amortizes these capital gains and losses into
income using the grouped method over the remaining life of the investment sold
or over the remaining life of the underlying asset. We have included the IMR in
other liabilities on the Statutory Statement of Financial Position.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective not later than January 1, 2001. The effect of
adopting Codification shall be reported as an adjustment to shareholder's equity
on the effective date. We are currently reviewing the impact of Codification.
However, since the Department of Insurance of the State of Connecticut has not
approved Codification, we cannot determine the ultimate impact at this time.
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, as well
as disclosures of contingent assets and liabilities, as of the date of the
financial statements. We must also make estimates and assumptions that affect
the amounts of revenues and expenses during the reporting period. Future events,
including changes in the levels of mortality, morbidity, interest rates and
asset valuations, could cause our actual results to differ from the estimates we
used in the financial statements.
We have reclassified certain prior year amounts to conform with the current year
presentation.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
You should read the following discussion in conjunction with the Statutory
Financial Statements, Notes to Statutory Financial Statements and Selected
Historical Financial Data.
Our direction and operations are guided by a statement of corporate vision.
Under that vision we manage our operations to maintain a financially strong and
efficient enterprise. Our long-term objectives are to maintain corporate
financial strength, enhance policyholder value, and generate and sustain growth.
We have pursued these objectives by:
(a) emphasizing profitability through refined product
pricing,
(b) sophisticated asset/liability management,
(c) rigorous expense control,
(d) prudent underwriting standards,
(e) the adoption of efforts to improve persistency and
retention levels, and
(f) continued commitment to the high credit quality of
our general account investment portfolio.
Results of Operations
For the Year Ended December 31, 1998 Compared to the Year Ended December 31,
1997
The following table sets forth the components of our net income:
Years Ended December 31,
------------------------
1998 1997
---- ----
(In Millions)
Revenue:
Premium income $ 406 $ 331
Net investment income 82 75
Fees and other income 6 8
----- -----
Total revenue 494 414
----- -----
Benefits and expenses:
Policyholders' benefits and
payments 185 100
Addition to policyholders'
reserves and funds 169 201
Expenses, commissions and
state taxes 129 86
----- -----
Total benefits and expenses 483 387
----- -----
Net gain from operations
before federal income taxes 11 27
Federal income taxes 7 19
----- -----
Net gain from operations 4 8
Net realized capital loss (1) --
----- -----
Net income $ 3 $ 8
===== =====
Net income decreased $5 million, or 62.5%, to $3 million in 1998 from $8 million
in 1997. We attribute this decrease primarily to the continued growth in our
business, which resulted in increased policyholders' benefits and payments,
commissions and expenses, partially offset by increased premium income.
11
<PAGE>
The following table sets forth premium, sales, and other information for our
products:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
($ In Millions)
Gross Ceded Net Gross Ceded Net
<S> <C> <C> <C> <C> <C> <C>
Premium income
Universal and other life $204 $(59) $ 145 $164 $(47) $ 117
Annuities 261 -- 261 214 -- 214
---- ---- ------- ---- ----- -------
Total $465 $(59) $ 406 $378 $(47) $ 331
==== ===== ======= ==== ===== =======
Universal and other life insurance sales - face amount $14,863 $14,189
Universal and other life insurance in force - face amount $47,088 $36,148
Universal and other life insurance - number of policies
in force (in whole units) 159,684 136,794
</TABLE>
Premium income, net of reinsurance ceded, increased $75 million, or 22.7%, to
$406 million in 1998 from $331 million in 1997. We attribute this increase
primarily to a 23.9% increase in premiums of universal and other life products
and a 22.0% increase in premiums of variable annuity products over the prior
year. The increase in premium for life insurance products is largely
attributable to continued growth in sales of universal and term life products,
and the introduction of a new variable life product. Variable annuity premiums
have also increased due to the continuing strong growth in sales of these
products. The increase in sales comes from MassMutual's career agency system,
partially offset by a decrease in sales from brokers. Our business mix remained
stable. Universal and other life products comprised 35.7% of total premium
income during 1998, compared to 35.3% in 1997. Annuity products were 64.3% of
total premium income in 1998, compared to 64.7% in 1997.
Net investment income increased $7 million, or 9.3%, to $82 million in 1998 from
$75 million in 1997. We attribute this increase primarily to a 7.6% increase in
average invested assets and an increase in the gross yield for the investment
portfolio to 7.9% in 1998 from 7.6% in 1997.
The components of net investment income are set forth in the table below:
Years Ended December 31,
1998 1997
---- ----
(In Millions)
Gross Investment Income
Bonds $48 $53
Mortgage loans 8 5
Other investments 10 4
Policy loans 12 11
Cash and short-term investments 6 4
--- ---
Total gross investment income 84 77
Less: investment expenses 2 2
--- ---
Net investment income $82 $75
=== ===
The decrease in gross investment income from bonds is due to declining portfolio
yields. Bond yields are declining as older, higher yielding bonds mature and are
replaced with new bonds that have lower yields. The increase in income from
mortgage loans is due to an increase in the size of the mortgage portfolio. The
increase in gross investment income on other investments results from increased
investment in financial options as a result of favorable market conditions and a
second quarter dividend received from an affiliated mutual fund. Fluctuations in
market conditions will impact future investment results.
Fees and other income decreased $2 million, or 25.0%, to $6 million in 1998 from
$8 million in 1997. We attribute this decrease primarily to reinsurance activity
with MassMutual, partially offset by higher fees collected from separate
accounts. The components of fees and other income are primarily commissions and
expense allowances on reinsurance ceded, which decreased $1 million, or 7.1%, to
$13 million in 1998 from $14 million in 1997. The decrease resulted from credits
we received on our modified coinsurance agreement with MassMutual, and a reserve
adjustment on reinsurance ceded (recorded as a charge to other income) which
increased $4 million, or 23.5%, to $21 million in 1998 from $17 million in 1997.
This impact from reinsurance activity was partially offset by an increase in
separate account fees of $3 million, or 27.3%, to $14 million in 1998 from $11
million in 1997. The increase in separate account fees is due to an increase in
administration fees, which is consistent with an increase in the number of
policies and amount of insurance in force.
Policyholders' benefits and payments increased $85 million, or 85.0%, to $185
million in 1998 from $100 million in 1997. We attribute this increase primarily
to surrender benefits, which increased $87 million, or 138.1%, to $150 million
in 1998 from $63 million in
12
<PAGE>
1997, due to increased variable and fixed annuity withdrawals and contract
surrenders. This increase reflects the growth in the block of business and
market volatility. The life insurance lapse rate, which is based upon the amount
of insurance in force, increased to 6.7% for 1998 compared to 6.5% for 1997.
Addition to policyholders' reserves and funds decreased $32 million, or 15.9%,
to $169 million in 1998 from $201 million in 1997. We attribute this decrease
primarily to slower growth in 1998 compared to 1997 in separate account deposits
and an increase in separate account withdrawals.
Expenses, commissions and state taxes increased $43 million, or 50.0%, to $129
million in 1998 from $86 million in 1997. We attribute this increase primarily
to increased commissions and other acquisition expenses associated with the
production of new business.
Federal income tax expense decreased $12 million, or 63.2%, to $7 million in
1998 from $19 million in 1997. Taxable income, which can differ significantly
from statutory book income, decreased $24 million, or 48.0%, to $26 million in
1998 from $50 million in 1997. We attribute the decrease in taxable income
primarily to the difference between statutory insurance reserves and tax
reserves.
Realized capital losses, after the transfer to the Interest Maintenance Reserve
("IMR"), were $1 million in 1998, while there were no net realized capital gains
or losses in 1997. We attribute the current year loss primarily to credit
related mortgage loan losses, which are not transferred to the IMR.
Net realized capital gains (losses) were comprised of the following:
Years Ended December 31,
1998 1997
---- ----
(In Millions)
Bonds $ 4 $ 3
Mortgage loans (1) --
Other investments 1 --
Federal income taxes (2) (1)
---- ----
Net realized capital gains
before transfer to IMR 2 2
Transfer to IMR (3) (2)
---- ----
Net realized capital gain (loss) $(1) $--
==== ====
For the Year Ended December 31, 1997
Compared to the Year Ended December
31, 1996
The following table sets forth the components of our net income:
Years Ended December 31,
------------------------
1997 1996
---- ----
(In Millions)
Revenue:
Premium income $331 $314
Net investment income 75 75
Fees and other income 8 9
---- ----
Total revenue 414 398
---- ----
Benefits and expenses:
Policyholders' benefits and
payments 100 99
Addition to policyholders'
reserves and funds 201 218
Expenses, commissions and
state taxes 86 73
---- ----
Total benefits and expenses 387 390
---- ----
Net gain from operations
before federal income taxes 27 8
Federal income taxes 19 6
---- ----
Net gain from operations 8 2
Net realized capital gain (loss) -- --
---- ----
Net income $ 8 $ 2
==== ====
For the year ended December 31, 1997, we had net income of $8 million, as
compared with net income of $2 million in 1996. We attribute this $6 million
increase primarily to increased sales of universal and other life products and a
reduction in addition to policyholders' reserves and funds. This was partially
offset by increased commissions, increased expenses associated with management
services provided by MassMutual and increased federal income taxes attributable
to taxable income in excess of book income. The increase in commissions is
primarily attributable to the modification of an underwriting agreement,
discussed below.
Effective March 1, 1996, we modified our underwriting agreements with our
brokers such that we will pay all future commissions relating to variable
annuity contracts and in return, we will retain rights to all future contract
fees and charges related to these contracts. Prior to the contract modification,
our brokers paid variable annuity commissions in exchange for the rights to
future contract fees and charges related to these contracts. We expect the
future revenue on these contracts to exceed acquisition costs.
13
<PAGE>
The following table sets forth premium, sales, and other information for our
products:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
---- ----
($ In Millions)
Gross Ceded Net Gross Ceded Net
<S> <C> <C> <C> <C> <C> <C>
Premium income
Universal and other life $164 $(47) $ 117 $134 $(47) $ 87
Annuities 214 -- 214 227 -- 227
---- ----- ---- ---- ----- ----
Total $378 $(47) $ 331 $361 $(47) $ 314
==== ===== ==== ==== ===== ====
Universal and other life insurance sales - face amount $14,189 $ 7,113
Universal and other life insurance in force - face amount $36,148 $24,358
Universal and other life insurance - number of policies
in force (in whole units) 136,794 111,138
</TABLE>
Premium income, net of reinsurance ceded, increased $17 million to $331 million
in 1997 from $314 million in 1996. We attribute this 5.4% growth in premiums to
increased sales of universal and other life products, partially offset by a
decrease in variable annuity products of 5.7% from the prior year. The result
reflects a change in our business mix in which universal and other life products
comprised 35.3% of total premium income during 1997 compared to 27.7% in 1996,
while annuity products were 64.7% in 1997 compared to 72.3% in 1996. Variable
annuity premiums have declined due to lower sales through the brokerage
distribution channel and a shift in sales through MassMutual's distribution
channels away from variable annuity products issued by us to variable annuity
products issued by our affiliate, MML Bay State Life Insurance Company.
Net investment income was $75 million in both 1997 and 1996, as a result of a
3.7% increase in invested assets, offset by a decrease in the average gross
yield for the portfolio, which was 7.6% in 1997 compared to 7.9% in 1996.
The components of net investment income are set forth below.
Years Ended December 31,
1997 1996
---- ----
(In Millions)
Gross Investment Income
Bonds $53 $55
Mortgage loans 5 4
Other investments 4 3
Policy loans 11 10
Cash and short-term investments 4 4
--- ---
Total gross investment income 77 76
Less: investment expenses 2 1
--- ---
Net investment income $75 $75
=== ===
The decrease in gross investment income from bonds and the increase in mortgage
loans reflects a shift in investment strategy toward mortgage loan assets. The
increase in gross investment income from other investments reflects enhanced
yield on investments in affiliated mutual funds.
Fees and other income decreased $1 million, to $8 million in 1997 from $9
million in 1996. We attribute this decrease primarily to reinsurance activity.
The components of fees and other income are primarily commissions and expense
allowances on reinsurance ceded, a reserve adjustment on reinsurance ceded and
fees from separate accounts. The commission and expense allowance on reinsurance
ceded decreased $1 million to $14 million in 1997 from $15 million in 1996.
Commissions and expense allowances on reinsurance ceded represents charges
incurred on our modified coinsurance agreement with MassMutual. The reserve
adjustment on reinsurance ceded, which is a charge to other income, increased $3
million to $17 million in 1997 from $14 million in 1996. Fees from separate
accounts have increased due to an increase in administration fees, which is
consistent with an increase in the number of policies and amount of insurance in
force.
Policyholders' benefits and payments increased $1 million, to $100 million in
1997 from $99 million in 1996. Annuity benefits increased $1 million,
essentially due to increased variable and fixed annuity withdrawals. The life
insurance lapse rate, which is based upon the amount of insurance in force,
decreased to 6.5% for 1997 compared to 7.1% for 1996. Death claims, net of
reinsurance, remained consistent between both years at $25 million.
Addition to policyholders' reserves and funds decreased $17 million to $201
million in 1997 from $218 million in 1996. Addition to policyholders' reserves
and funds
14
<PAGE>
includes transfers (to) from the separate accounts based upon policyholder
elections. We attribute the decrease primarily to a reduction in the growth of
separate account deposits and an increase in separate account withdrawals.
Expenses, commissions, and state taxes increased $13 million, to $86 million in
1997 from $73 million in 1996. We attribute this increase primarily to increased
expenses and commissions associated with the production of new business and the
modification of our variable annuity underwriting agreements with our brokers.
Federal income tax expense increased $13 million, to $19 million in 1997 from $6
million in 1996. Taxable income increased $31 million, to $50 million in 1997
from $19 million in 1996. We attribute this increase in taxable income primarily
to the difference between statutory insurance reserves and tax reserves and the
timing of the tax deductibility of acquisition costs.
Net realized capital gains (losses) were comprised of the following:
Years Ended December 31,
1997 1996
---- ----
(In Millions)
Bonds $ 3 $ 1
Mortgage loans -- (2)
Other investments 4
Federal income taxes (1) (2)
--- ---
Net realized capital gain
before transfer to IMR 2 1
Transfer to IMR (2) (1)
--- ---
Net realized capital gain (loss) $-- $--
=== ===
The 1997 gain of $3 million from bonds was primarily interest related and was
transferred to IMR net of tax, while in 1996, the $4 million gain from other
investments was primarily generated by the sale of common stock.
Statement of Financial Position
Assets
Total assets increased $312 million, or 14.1%, to $2,531 million at December 31,
1998, from $2,219 million at December 31, 1997. We attribute this increase
primarily to continued growth in our separate accounts, which increased by $223
million, or 20.3%, to $1,319 million at December 31, 1998, from $1,096 million
at December 31, 1997. We attribute this increase primarily to significant market
appreciation and continued deposits of variable products, partially offset by
withdrawals.
General account assets increased $89 million, or 7.9%, to $1,212 million as of
December 31, 1998, from $1,123 million as of December 31, 1997. We attribute
this increase primarily to increases in mortgage loans, bonds, cash and
short-term investments, and other investments. These increases were primarily
the result of our continued growth.
Bonds increased $18 million, or 2.7%, to $683 million at December 31, 1998, from
$665 million at December 31, 1997. While U. S. Treasury and other government
holdings decreased as of December 31, 1998, they were more than offset by
increases in both mortgage-backed and corporate securities holdings as compared
with December 31, 1997. Bonds and short-term securities in NAIC classes 1 and
2 were 61.0% of general account invested assets at December 31, 1998, as
compared to 64.9% at December 31, 1997. The percentage of our general account
invested assets representing bonds and short-term investments in NAIC classes
3 through 6 was 8.0% at December 31, 1998, and 5.9% at December 31, 1997.
Mortgage loans increased $24 million, or 23.5%, to $126 million at December 31,
1998, from $102 million at December 31, 1997. We attribute this increase
primarily to continuation of our strategy of increasing our investments in
mortgage loans. For the year ended December 31, 1998, $53 million of new loans
were issued and $27 million were retired. See "Investments" for discussion of
investment reserves.
Other investments consisting of derivatives, preferred stocks and affiliated
common stocks increased $12 million, or 18.8%, to $76 million at December 31,
1998, from $64 million at December 31, 1997. Of this increase, financial options
increased $6 million, or 300.0%, to $8 million from $2 million at December 31,
1997. We have increased our investment in a combination of cash and derivatives
as a result of favorable market conditions in these investments as compared to
other investment alternatives. See the quantitative and qualitative section for
a discussion of our use of derivative instruments.
Policy loans increased $9 million, or 6.3%, to $151 million at December 31,
1998, from $142 million at December 31, 1997, due to continued natural growth in
universal and other life insurance products.
Cash and short-term investments increased $18 million, or 20.5%, to $106 million
at December 31, 1998, from $88 million at December 31, 1997, as a result of
increased funds available for investment provided by operating activities and a
$25 million capital infusion from MassMutual.
15
<PAGE>
Liabilities
Total liabilities increased $284 million, or 13.5%, to $2,390 million at
December 31, 1998, from $2,106 million at December 31, 1997. As with assets,
most of this growth occurred in the separate accounts as discussed earlier.
Policyholders' reserves and funds increased $45 million, or 4.7%, to $996
million at December 31, 1998 from $951 million at December 31, 1997. We
attribute this increase primarily to universal and other life products, which is
consistent with increased sales of these products.
Shareholder's Equity
Shareholder's equity was $141 million at December 31, 1998, an increase of $28
million, or 24.8%, from December 31, 1997. This increase was composed of:
. additional paid in capital contributed by MassMutual of $25 million,
. 1998 net income of $3 million,
. an increase of $3 million due to the change in Asset Valuation Reserve
("AVR") and General Investment Reserve ("GIR"), and
. a decrease of $3 million primarily due to unrealized capital losses,
partially offset by a change in the valuation of policyholders' reserves.
Liquidity and Capital
Resources
Liquidity
Net cash provided by operating activities increased $4 million, or 7.7%, to $56
million in 1998 from $52 million in 1997. We attribute this increase primarily
to increased sales, investment income, and fees from separate accounts. This
increase was partially offset by increased surrender benefits, withdrawals,
death benefits, general expenses and commissions.
Loans and purchases of investments increased $130 million, or 29.6%, to $569
million in 1998 from $439 million in 1997. Sales and maturities of investments
and receipts from repayments of loans increased $94 million, or 22.9%, to $505
million in 1998 from $411 million in 1997. We attribute these increases
primarily to increased investing activity as a result of market conditions and
natural growth.
Additionally, in the second quarter of 1998, MassMutual made a $25 million
surplus contribution to supply us with cash flow and the capital needed to
support our continued business growth. The Board of Directors of MassMutual has
authorized, if needed, the contribution of funds to us sufficient to meet the
capital requirements of all states in which we are licensed to do business.
We utilize sophisticated asset/liability analysis techniques in order to set the
investment policy for each liability class. Additionally, we test the adequacy
of the projected cash flow provided by assets to meet all of our future
policyholder and other obligations. We perform these studies using stress tests
regarding future credit and other asset losses, market interest rate
fluctuations, claim losses and other considerations. The result is a complete
picture of the adequacy of our underlying assets, reserves and capital.
We have structured our 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. We manage our liquidity position
by matching our exposure to cash demands with adequate sources of cash and other
liquid assets.
Our principal sources of liquidity are cash flow and holdings of cash, cash
equivalents and other readily marketable assets. Our primary cash flow sources
are investment income, principal repayments on invested assets and life
insurance premiums.
Our liquid assets include Treasury bond holdings, short-term money market
investments, stocks, and marketable long-term fixed income securities. Cash and
short-term investments totaled $106 million at December 31, 1998.
Based on our ongoing monitoring and analysis of our liquidity sources and
demands, we believe that we are in a strong liquidity position.
Capital Resources
As of December 31, 1998, our total adjusted capital as defined by the NAIC was
$163 million. The NAIC developed the Risk Based Capital ("RBC") model to compare
the total adjusted capital with a standard design in order to reflect an
insurance company's risk profile. Although we believe that there is no single
appropriate means of measuring RBC needs, we feel that the NAIC approach to RBC
measurement is reasonable, and we will manage our capital position with
significant attention to maintaining adequate total adjusted capital relative to
RBC. Our total adjusted capital was well in
16
<PAGE>
excess of all RBC standards at December 31, 1998 and 1997. We believe we enjoy a
strong capital position in light of the risks to which we are subject and we are
well positioned to meet policyholder and other obligations.
Year 2000 Issue
We prepared the following Year 2000 readiness disclosure under the U.S. "Year
2000 Information and Readiness Disclosure Act" (Public Law No. 105-271).
General
Like other businesses and governments around the world, we would be adversely
affected if our computer systems and those of others with which we do business
do not properly recognize the Year 2000. This is commonly known as the "Year
2000 ("Y2K") issue."
In 1996, our parent company, MassMutual, began an enterprise-wide process to
address the Y2K issue on its own behalf and on behalf of certain subsidiaries,
including us. MassMutual operates each insurance subsidiary pursuant to a
management services agreement. In accordance with the management services
agreement, MassMutual's project 2000 incorporates our Year 2000 accommodations.
The Y2K issue affects virtually all organizations worldwide. Moreover, the
electronic links between businesses and governments mean that complete Y2K
compliance is beyond the ability of any one entity to achieve. Vigorous and
coordinated Y2K readiness efforts throughout the public and private sectors are
necessary to avoid disruption after 1999.
Risks
MassMutual plans to have its computer systems, including those operated for us,
ready for the Year 2000. MassMutual has identified Y2K readiness as one of its
highest priorities and has committed extensive technological, financial and
human resources to minimizing the impact of Y2K on our business. MassMutual
believes that its Project 2000 program, described below, will limit the number
and severity of any Y2K-related disruptions.
We do not have any knowledge of any particular event, trend or uncertainty that
makes us believe that there will be significant Y2K-related disruption to our
business. However, the potential for disruption remains, particularly given the
electronic connections and interdependencies in today's business environment and
the fact that our Y2K readiness is tied to that of third parties.
We do not know and cannot predict the potential impact of Y2K disruptions upon
our business. There are possible consequences if we or the third parties that we
do business with, are not ready for Y2K. These possible consequences may include
the inability to process premiums, to purchase or sell investments or to process
claims and other benefits.
Risks of Litigation
We have no reason to expect any particular Y2K litigation. However, Y2K
litigation is a possibility given the interdependencies of information systems
and the worldwide magnitude of the Y2K issue. We currently have no reason to
expect that Y2K litigation would materially adversely affect our financial
position, operations or liquidity.
Examination - Massachusetts Division of
Insurance
MassMutual, our parent, is legally domiciled in the Commonwealth of
Massachusetts, and its primary regulator is the Massachusetts Division of
Insurance (the "Division"). The Division is conducting Y2K examinations of most,
if not all, of the insurance companies domiciled in the Commonwealth.
In November 1998, as part of an ongoing examination, the Division conducted an
on-site examination of MassMutual's readiness for the Year 2000. The Division
found no weaknesses in MassMutual's Project 2000, and recommended no changes
other than an acceleration of contingency planning, which is already under way.
Project 2000
In 1996, MassMutual began an enterprise-wide process of identifying, evaluating
and implementing changes to computer systems, to address the Y2K issue.
MassMutual established Project 2000 the following year as the corporate-wide
program responsible for addressing all requirements associated with the century
date change. Project 2000 operates under the direction and accountability of
MassMutual's senior management, and leads and coordinates Y2K activities with
representatives from every information systems and business unit in MassMutual.
Project 2000 addresses both systems compliance and business compliance.
17
<PAGE>
. Systems compliance includes all information technology department-supported
applications, (computer technology hardware and software), and all on-site
physical facilities, such as internal heating, air conditioning,
telecommunications, elevators, security systems, and emergency power for
MassMutual's data center.
. Business compliance includes end-user computing (such as desktop and
spreadsheet applications) in the business units. It also includes risk
management of any business function dependent upon external systems or third
parties. Contingency planning is a prime component of risk management
activities.
Y2K Compliant Standards
In order for information systems or software applications to be Y2K compliant
according to MassMutual's standards, the system or application must demonstrate
that it can successfully accommodate the Year 2000 date and beyond. All computer
hardware, operating software and applications systems, whether MassMutual or
vendor- developed, must go through MassMutual's Y2K certification process. This
is so even if the vendor claims its product is Y2K compliant.
MassMutual's certification requires, among other things, multiple levels of
testing in current-date and future-date environments. Testing must successfully
demonstrate:
. Rolling over the century date, from the last processing day in 1999 through
the first processing day in 2000.
. Handling leap year processing in 2000.
. Transitioning from 2000 to 2001, including Julian calendar date processing.
Each application is examined for additional dates pertinent to its particular
processing requirements. Upgrades and changes to certified products must be
recertified according to MassMutual's standards before being introduced into the
computing environment.
Successful future-date testing, with appropriately dated information, is
important because it mimics the environment, data and application as it will
exist after 1999. Future-date testing occurs in separate, isolated computer
environments. Full production volume future-date testing is also conducted
periodically at MassMutual's disaster-recovery site, a separate location where
MassMutual has previously established business and systems recovery plans.
Costs
As of January 15, 1999, MassMutual made estimates of the cost of Project 2000.
MassMutual started incurring these costs in 1997 and has already spent $70
million. MassMutual has estimated that an additional $20 million will be
incurred in 1999 and $2 million will be incurred in 2000. The total cost of the
four year project is estimated to total approximately $92 million enterprise-
wide. These costs are being expensed when incurred. MassMutual allocates a
portion of these costs to us pursuant to our management services agreement with
MassMutual. In total, MassMutual estimates that $5 million, of the total $92
million, will be allocated to us. When viewed in the context of the total
financial picture, the costs are not material to our or MassMutual's financial
position.
Staffing
As of February 28, 1999, MassMutual had approximately 120 full-time equivalent
information systems employees and 70 full-time and part-time consultants working
on Project 2000. In addition, approximately 100 employees from MassMutual's
business units are working at least part-time on Project 2000. This is down from
a high of 300 employees and 150 consultants. The number of people working on
this project is expected to continually decrease as 1999 progresses and Y2K work
is completed.
State of Readiness
MassMutual's Project 2000 manager maintains an enterprise-wide plan that tracks
planned vs. actual completion dates. MassMutual planned for most mission
critical systems to be Y2K compliant by the end of 1998, and for the remainder
of its internal computer systems to be Y2K compliant by June 30, 1999. Project
2000 is on schedule.
. Computer code conversion of all information technology-department supported
applications was 99% complete by February 28, 1999. MassMutual had
identified over 52 million lines of mainframe code that needed to be
converted.
. Most correction and testing of internal mission critical systems has
already been completed. MassMutual anticipates the remainder to be
completed by June 30, 1999. Of the 309 mission critical projects, 81% were
completed as of December 31, 1998. An additional 43 projects, or 14%, are
targeted for completion by the end of March 1999, bringing the combined
percentage to 95%. The remaining 16 projects, or 5%, are planned to be
complete by June 30, 1999.
. End-user computing such as desktop and spreadsheet applications is well
under way and is targeted to be complete by June 30, 1999.
18
<PAGE>
. The critical core infrastructure for MassMutual's on-site physical
facilities (internal heating, air conditioning, telecommunications,
elevators, security systems, and emergency power for MassMutual's data
center) was Y2K compliant by December 31, 1998.
Major activities planned for 1999 include:
. Change Control. MassMutual will continue testing its computer technology
---------------
hardware and software throughout 1999. Future-date testing will also
continue when necessary. During the remainder of 1999, MassMutual will also
focus on keeping previously tested applications Y2K compliant.
. Enterprise Testing. MassMutual will continue to conduct internal,
-------------------
enterprise-wide integrated tests, concentrating on major systems and
environments.
. "Street" or Industry Testing. MassMutual will be joining forces with many
-----------------------------
of its and our service providers and other third parties, to test
communication links.
. Awareness and Communication. MassMutual will continue to communicate
----------------------------
widely, with policyholders, customers, vendors, service providers,
governments and others about Project 2000.
. Operational Readiness. MassMutual will determine what is needed to respond
----------------------
to our policyholders and customers. For example, MassMutual will make sure
that customer service centers are adequately staffed should we receive a
great number of year-end Y2K inquires.
. Readiness of Third Parties. MassMutual is assessing the Y2K readiness of
---------------------------
others.
. Contingency Planning. MassMutual is developing contingency plans as needed.
---------------------
Third Parties
Third parties which do business with us or MassMutual include:
. banks,
. financial service providers,
. mutual funds,
. third party administrators,
. reinsurers,
. telecommunications firms,
. utility companies,
. security and climate control systems companies,
. package transportation carriers, and
. governmental agencies such as:
. the state insurance departments,
. the Internal Revenue Service, and
. the Securities and Exchange Commission.
MassMutual has identified all of the third parties with which we have a material
business relationship, and has contacted them as to their Y2K compliance.
MassMutual has also identified and contacted third parties which are not
material to our business. Third parties are generally not providing guarantees
and assurances about their Y2K compliance, but instead are providing statements
about their approach to the Y2K issue, their progress and target dates.
Given our reliance on third parties, a major focus in 1999 is assessing third
parties' Y2K compliance. Their responses are a key factor in decisions about our
Y2K contingency plans. Y2K readiness by third parties with which we have a
material relationship is most important. If necessary for MassMutual to make an
assessment of Y2K readiness of these parties, MassMutual asks for additional
information. MassMutual's approach with them is to conduct telephone interviews,
send more detailed questionnaires, conduct account manager interviews, and if
necessary, make an on-site visit.
Contingency Plans
Because of the comprehensive requirements of MassMutual's Project 2000, we
believe our general risk of Y2K-related failure is low. However, detailed
contingency plans will be created as necessary, based upon the expected impact
on us and upon our judgement about the level of risk. Risks are presented by
both internal computer systems (those developed and operated by MassMutual,
including systems operated for us), and by third parties which provide services
and electronic data to us. MassMutual has identified critical business functions
and is developing a watch list of critical service providers and systems that
support these functions.
Contingency planning falls into two broad categories: business continuity plans
and systems recovery plans.
Existing business recovery plans form the foundation for the Y2K business
continuity efforts and will be supplemented with Y2K requirements. MassMutual's
business areas are assessing the policies and responses that may be needed,
since potential scenarios are unique to the business areas. In general, however,
the business continuity plans will address failures caused by external sources,
and fall into three situations which include:
. a failure by a third party,
. a failure of a MassMutual system or function due to corrupt data from a
third party, and
. a power outage in MassMutual's business offices.
19
<PAGE>
Necessary parts of each plan will include a description of failure indicators,
contingency actions, preparation steps necessary to successfully invoke the
contingency actions, timetables for preparatory steps, and guidelines for
resumption of regular activities. Plans will differ according to type and
duration of failure.
Systems recovery plans address our internal systems infrastructure. Plans will
be developed by computing platform and will detail information on each systems
product or group of products (such as operating systems). Each plan will
include:
. a timetable of how and when products will be started on January 1, 2000;
. the individual or unit responsible for each product;
. the recovery plan if the product will not come up or will not work
correctly;
. the steps that will be taken in each event; and
. the vendor contact, if any.
Tests and walkthroughs of the plans will be conducted, and our internal auditing
department will be involved.
Contingency planning is a high-priority project. We expect to have any needed
contingency plans in place by year-end 1999.
Inflation
Inflation affects our operating expenses. A large portion of our operating
expenses consist of administrative fees charged by MassMutual. The largest
component of these fees is salaries, which are subject to wage increases that
are at least partially affected by the rate of inflation. MassMutual's and our
continuing efforts to control expenses may reduce the impact of inflation on
operating expenses.
Inflation also indirectly affects us. Inflation affects our new sales of
insurance products and investment income to the extent that the government's
economic policy to control the level of inflation results in changes in interest
rates. Changes in the level of interest rates also have an effect on interest
spreads, as investment earnings are reinvested.
Investments
At December 31, 1998, we had $1,142 million of invested assets in our general
investment account. We manage the portfolio of invested assets to support
product liabilities in light of yield, liquidity and diversification
considerations. The general investment account portfolio does not include our
separate account assets. The following table sets forth our invested assets in
the general investment account and gross investment yield:
<TABLE>
<CAPTION>
December 31,
-----------
1998 1997 1996
---- ---- ----
Carrying % of Carrying % of Carrying % of
Value Total Yield Value Total Yield Value Total Yield
----- ----- ----- ----- ----- ----- ----- ----- -----
($ In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds $ 683 59.8% 7.5% $ 665 62.7% 7.9% $ 736 71.9% 7.8%
Mortgage loans 126 11.0 7.3 102 9.6 7.6 34 3.3 12.6
Other investments 76 6.7 14.8 64 6.0 7.7 56 5.5 4.7
Policy loans 151 13.2 8.8 142 13.4 8.0 133 13.0 8.1
Cash and short-term
Investments 106 9.3 5.9 88 8.3 5.3 64 6.3 10.6
------ ----- ---- ------ ----- --- ------ ----- ----
Total investments $1,142 100.0% 7.9% $1,061 100.0% 7.6% $1,023 100.0% 7.9%
====== ===== ==== ====== ===== === ====== ===== ====
</TABLE>
20
<PAGE>
Our yield on total investments before investment expenses was 7.9%, 7.6% and
7.9% for the years ended December 31, 1998, 1997 and 1996, respectively. If
investment expenses were deducted, net yields would be 7.7%, 7.5% and 7.8%,
respectively. The yield on each investment category, before federal income
taxes, is calculated as: (a) two times gross investment income divided by (b)
the sum of assets at the beginning of the year and assets at the end of the
year, less gross investment income.
We record our investments in accordance with methods and values prescribed by
the NAIC and adopted by the Connecticut Insurance Department. Generally, we
value bonds using amortized cost, preferred stocks in good standing using cost,
and common stocks using fair value. We value mortgage loans at principal less
impairments and unamortized discount or premium. We record policy loans at the
outstanding loan balance less amounts unsecured by the cash surrender value of
the policy. We record short-term investments at amortized cost, which
approximates fair value.
We periodically use standard derivative financial instruments such as options
and futures to hedge certain risks associated with anticipated purchases and
sales of investments and certain payments denominated in foreign currencies. We
use these derivative financial instruments to protect us from market
fluctuations in interest and exchange rates between the contract date and the
date on which the hedged transaction occurs. We are subject to off-balance sheet
risk that the counterparties of the transactions will fail to perform as
contracted. We manage this risk by only entering into contracts with highly
rated institutions and listed exchanges. We do not hold or issue derivative
financial instruments for trading purposes.
Bonds
The following table provides certain information regarding the maturity
distribution of bonds (excluding short-term securities):
Bond Maturities
December 31, 1998,
-----------------
Carrying % of
Value Total
----- -----
($ In Millions)
Due in one year or less $ 52 7.6%
Due after one year
through five years 217 31.8
Due after five years
through ten years 233 34.1
Due after ten years 69 10.1
Mortgage-backed
securities(1) 112 16.4
---- -----
$ 683 100.0%
===== =====
(1) Including securities guaranteed by the U.S. Government.
We carefully monitor and manage our bond portfolio to ensure that bond
maturities are sufficiently diversified in light of our liquidity needs.
Bonds consist primarily of government securities and high-quality marketable
corporate securities. We invest a significant portion of our investment funds in
high quality publicly traded bonds in order to maintain and manage liquidity and
reduce the risk of default in the portfolio. Publicly traded bonds, including
short-term securities, comprised 63.2% of the total bond portfolio and short
term securities at December 31, 1998, and 64.1% at December 31, 1997. Privately
placed bonds comprised the remainder.
Substantially all of our publicly traded and privately placed bonds are
evaluated by the NAIC's Securities Valuation Office ("SVO"), which assigns
securities to one of six NAIC investment classes with Class 1 securities being
the highest quality and Class 6 securities being the lowest quality. Classes 1
and 2 are investment grade, Class 3 is medium quality and Classes 4, 5 and 6 are
non-investment grade. For securities which have not yet been rated by the NAIC,
we use an internal rating system. We believe that our internal rating system is
similar to that used by the SVO.
The table below sets forth the NAIC SVO ratings for our bond portfolio
(including short-term securities) and, what we believe are the equivalent public
rating agency designations. At December 31, 1998 and 1997, 88.4% and 91.6%,
respectively, of the portfolio was invested in NAIC Classes 1 and 2
securities, as depicted in the following table:
21
<PAGE>
Bond Credit Quality
(includes short-term securities)
December 31,
------------
1998 1997
---- ----
($ In Millions)
NAIC
Bond Rating Agency Carrying % of Carrying % of
Rating Equivalent Designation Value Total Value Total
- ------ ---------------------- ----- ----- ----- -----
1 Aaa/Aa/A $ 399 50.6% $ 422 56.1%
2 Baa 298 37.8 267 35.5
3 Ba 69 8.8 49 6.5
4 B 22 2.8 6 0.8
5 Caa and lower - - 7 0.9
6 In or near default - - 1 0.2
----- ----- ----- -----
Total $ 788 100.0% $ 752 100.0%
===== ===== ===== =====
We utilize our investments in the privately placed bond portfolio to enhance the
value of our overall portfolio, increase diversification and obtain higher
yields than are possible with comparable quality public market securities. To
control risk, we rely upon broader access to management information,
strengthened negotiated protective covenants, call protection features, and a
higher level of collateralization than can customarily be achieved in the public
market. The strength of our privately placed bond portfolio is demonstrated by
the predominance of NAIC Classes 1 and 2 securities. As of December 31, 1998,
73.9% of the privately placed bonds were rated as NAIC Classes 1 and 2 compared
to 84.0% as of December 31, 1997. For publicly traded bonds 96.9% were rated as
NAIC Classes 1 and 2 as of December 31, 1998, compared to 95.9% as of December
31, 1997.
The following table sets forth the total bond portfolio, including short-term
securities, as of December 31, 1998, by industry category.
Bond Portfolio By Industry
December 31, 1998
-----------------
Private Public Total
Carrying % of Carrying % of Carrying % of
Industry Category Value Total Value (1) Total Value Total
- ----------------- ----- ----- --------- ----- ----- -----
($ In Millions)
Collateralized (2) $ 33 11.4% $177 35.6% $210 26.7%
Finance & Leasing Co. 22 7.6 97 19.5 119 15.1
Producer Goods 52 17.9 34 6.8 86 10.9
Natural Resources 32 11.0 39 7.9 71 9.0
Consumer Goods 42 14.5 14 2.8 56 7.1
Utilities 14 4.8 33 6.6 47 6.0
U.S. Government 4 1.4 31 6.2 35 4.4
Other Services 32 11.0 1 0.2 33 4.2
Others 19 6.6 15 3.0 34 4.3
Health Care 4 1.4 28 5.6 32 4.1
Media 16 5.5 15 3.0 31 3.9
Retail 5 1.7 7 1.4 12 1.5
Transportation 5 1.7 6 1.2 11 1.4
Aerospace 10 3.5 1 0.2 11 1.4
---- ----- ---- ----- ---- -----
Total $290 100.0% $498 100.0% $788 100.0%
==== ===== ==== ===== ==== =====
(1) Includes short-term securities.
(2) These bonds are collateralized by mortgages backed by FNMA, GNMA or FHLMC
and include collateralized mortgage obligations and pass-through securities.
These amounts also include asset backed securities such as credit card,
automobile and residential mortgage securities.
22
<PAGE>
The estimated fair value of bonds is based upon quoted market prices for
actively traded securities. We subscribe to commercial pricing services
providing estimated fair values of fixed income securities that are not actively
traded. We generally determine estimated fair values for privately placed bonds
by applying interest rate spreads based on quality and asset type to the
appropriate duration on the Treasury yield curve. The tables below set forth the
carrying value, gross unrealized gains and losses, net unrealized gains and
losses and estimated fair value of the bond portfolio (excluding short-term
securities) at December 31, 1998 and 1997.
Bonds By Category
December 31, 1998
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain Value
----- ----- ------ ----------- -----
($ In Millions)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 69 $ 2 $- $ 2 $ 71
Foreign governments 3 - - - 3
Mortgage-backed securities 58 2 1 1 59
State and local governments 12 - - - 12
Corporate debt securities 523 17 3 14 537
Utilities 18 1 - 1 19
---- --- -- --- ----
$683 $22 $4 $18 $701
==== === == === ====
December 31, 1997
-----------------
Gross Gross Net Estimated
Carrying Unrealized Unrealized Unrealized Fair
Value Gains Losses Gain (Loss) Value
----- ----- ------ ----------- -----
($ In Millions)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 104 $ 2 $ - $ 2 $ 106
Foreign governments 5 - 1 (1) 4
Mortgage-backed securities 39 1 - 1 40
State and local governments 20 - - - 20
Corporate debt securities 472 16 2 14 486
Utilities 25 1 - 1 26
----- ----- ----- ----- -----
$ 665 $ 20 $ 3 $ 17 $ 682
===== ===== ===== ===== =====
23
<PAGE>
Bond Portfolio Surveillance and Under-Performing Investments
We review all bonds on a regular basis utilizing the following criteria:
. material declines in revenues or margins,
. significant uncertainty regarding the issuer's industry,
. debt service coverage or cash flow ratios that fall below industry-specific
thresholds,
. violation of financial covenants,
. trading of public securities at a substantial discount due to specific
credit concerns, and
. other subjective factors that relate to the issuer.
We actively review the bond portfolio to estimate the likelihood and amount of
financial defaults or write-downs in the portfolio and to make timely decisions
as to the potential sale or re-negotiation of terms of specific investments.
The NAIC defines under-performing bonds as those whose deferral of interest
and/or principal payments are deemed to be caused by the inability of the
obligor to make such payments as called for in the bond contract.
We do not accrue interest income on bonds delinquent more than 90 days or when
we believe the collection of interest is uncertain. Interest not accrued on
bonds was zero for the years ended December 31, 1998 and 1997.
As a result of our conservative monitoring process, we generate an internal
watch list, which includes certain securities that would not be classified as
under- performing under the SVO credit rating system. At December 31, 1998,
bonds having a carrying value of $19 million (2.4% of the total bond portfolio)
had been placed on the internal watch list. The internal watch list is comprised
of bonds that have the following NAIC ratings: $5 million NAIC Class 2, $5
million NAIC Class 3 and $9 million NAIC Class 4.
Mortgage Loans
Mortgage loans represented 11.0% and 9.6% of the total investments in the
general account at December 31, 1998 and 1997, respectively. Mortgage loans
consist of commercial mortgage loans and residential mortgage loan pools. At
December 31, 1998 and 1997, commercial mortgage loans comprised 64.3% and 69.4%,
respectively, of the mortgage loan portfolio.
The following table provides certain information regarding the maturity
distribution of commercial mortgage loans:
Mortgage Loan Maturities
December 31, 1998
-----------------
Carrying % of
Value Total
----- -----
($ In Millions)
Commercial
Due in one year or less $ 9 7.1%
Due after one year
through five years 39 31.0
Due after five years
through ten years 32 25.4
Due after ten years 1 0.8
---- -----
81 64.3
Residential 45 35.7
---- -----
Total $126 100.0%
==== =====
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Residential
The residential mortgage loan portfolio consists of conventional and FHA/VA
mortgage pools. We impose rigorous investment standards, including governmental
agency guarantees, seasoned pools and discount pricing as protection against
prepayment risk.
Commercial
The commercial mortgage loan portfolio consists of fixed rate loans on
completed, income producing properties.
At December 31, 1998, 98.4% of the commercial mortgage loan portfolio consisted
of bullet loans (loans that do not fully amortize over their term) compared to
99.9% at December 31, 1997.
During 1998 and 1997, all renewed bullet loans were performing assets prior to
renewal and all loan renewals reflected market conditions. Past experience with
regard to bullet maturities, however, is not necessarily indicative of future
results.
24
<PAGE>
We consider the maturities of commercial mortgage loans to be sufficiently
diversified, and carefully monitor and manage maturities in light of our
liquidity needs. In 1998, we added approximately 16 new loans. Ten of the new
loans were office buildings, which resulted in an increase in our carrying value
of office building mortgages as illustrated in the following chart.
Additionally, in 1998, borrowers paid off two loans, which totaled $3 million.
The following tables set forth by property type and geographic distribution, the
carrying value of commercial mortgage loan balances:
Commercial Mortgage Loans by Property Type
December 31,
------------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Office $41 50.6% $22 31.4%
Apartments 25 30.9 20 28.6
Hotels & motels 11 13.6 17 24.3
Industrial & other 3 3.7 6 8.6
Retail 1 1.2 5 7.1
--- ----- --- -----
$81 100.0% $70 100.0%
=== ===== === =====
Commercial Mortgage Loans by
Geographic Distribution
December 31,
-----------
1998 1997
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
($ In Millions)
Southwest $28 34.6% $ 7 10.0%
Northeast 19 23.5 18 25.7
West 13 16.1 4 5.7
Mid-Atlantic 7 8.6 9 12.9
Southeast 7 8.6 26 37.1
Midwest 7 8.6 6 8.6
--- ----- --- -----
$81 100.0% $70 100.0%
=== ===== === =====
Mortgage Loan Portfolio Surveillance and Under-Performing Investments
MassMutual actively monitors, manages and directly services our commercial
mortgage loan portfolio. MassMutual personnel perform or review all aspects of
loan origination and portfolio management, including lease analysis, property
transfer analysis, economic and financial reviews, tenant analysis and oversight
of default and bankruptcy proceedings. We revalue all properties each year and
re-inspect either each or every other year based on internal quality ratings.
MassMutual uses the following criteria to determine whether a current or
potential problem exists:
. borrower bankruptcies,
. major tenant bankruptcies,
. requests for restructuring,
. delinquent tax payments,
. late payments,
. loan-to-value or debt service coverage deficiencies, and
. overall vacancy levels.
Restructured mortgage loans are loans for which current payment terms have been
modified to less than current market rates, at the time of modification and are
currently performing in accordance with such modified terms. Loans on which
maturities have been extended but on which current payments are being made at or
above market interest rates are not classified as restructured loans.
The carrying value of current and potential problem mortgage loans, consisting
of restructured mortgage loans, was $10 million at December 31, 1998, and $17
million at December 31, 1997. There were no problem commercial mortgage loans in
process of foreclosure, in default or in actively managed properties.
The asset valuation reserve contains a mortgage loan component, which totaled $4
million at December 31, 1998. In addition, at December 31, 1998, we held other
investment reserves on commercial mortgage loans of $2 million. See "Write-downs
and Investment Reserves".
We do not accrue interest income on mortgage loans which are delinquent more
than 90 days or when we believe the collection of interest is uncertain.
Interest not accrued on mortgage loans was zero for both the years ended
December 31, 1998 and 1997.
The following tables set forth current and potential problem mortgage loans by
property type and geographic region as of December 31, 1998:
Commercial Mortgage Loan Distribution By Property Type
December 31, 1998
-----------------
Problem % of
Total Loan Loan Loan
Amount Amount Amount
------ ------ ------
($ In millions)
Office $41 $10 24.4%
Apartments 25 - -
Hotels and Motels 11 - -
Industrial and other 3 - -
Retail 1 - -
--- ---
Total $81 $10 12.3%
=== ===
25
<PAGE>
Commercial Mortgage Loan Distribution By Geographic Region
December 31, 1998
-----------------
Problem % of
Total Loan Loan Total Loan
Amount Amount Amount
------ ------ ------
($ In Millions)
Southwest $28 - -
Northeast 19 $10 52.6%
West 13 - -
Mid-Atlantic 7 - -
Southeast 7 - -
Midwest 7 - -
--- ---
Total $81 $10 12.3%
=== ===
Write-downs and Investment Reserves
When MassMutual, on our behalf, determines that it is probable that the net
realizable value of an invested asset is less than its carrying value,
appropriate write-downs or investment reserves are established and recorded in
accordance with statutory practice.
For bonds, MassMutual determines the net realizable value in accordance with
principles established by the SVO. Additionally, MassMutual uses criteria such
as the net worth and capital structure of the borrower, the value of the
collateral, the presence of additional credit support and MassMutual's
evaluation of the borrower's ability to compete in a relevant market. For
commercial mortgage loans, MassMutual makes assessments of individual borrower
situations.
In compliance with regulatory requirements, we maintain an asset valuation
reserve. This reserve stabilizes shareholder's equity against non-interest rate
related fluctuations in the value of stocks, bonds, mortgage loans and real
estate investments. Additionally, we maintain other investment reserves, which
are not mandated by regulation, in anticipation of future losses on specific
mortgage loans, particularly mortgage loans in the process of foreclosure.
Our total investment reserves at December 31, 1998, were $24 million, an 11.1%
decrease from December 31, 1997, consisting of asset valuation reserves of $22
million and mortgage loan other investment reserves of $2 million.
The following table presents the change in asset valuation and other investment
reserves for the years 1998 and 1997:
Bonds, Preferred
Stocks and
Short-term Mortgage Other
Investments Loans Investments Total
----------- ----- ----------- -----
(In Millions)
Balance at December 31, 1996 (1) $6 $3 $13 $22
Reserve contributions (2) 1 3 - 4
Net realized capital gains (losses) (3) - - - -
Unrealized capital gains (losses) (4) (2) - 3 1
-- -- --- ---
Net change to shareholder's equity (5) (1) 3 3 5
-- -- --- ---
Balance at December 31, 1997 (1) 5 6 16 27
-- -- --- ---
Reserve contributions (2) 2 1 1 4
Net realized capital gains (losses) (3) - (1) - (1)
Unrealized capital gains (losses) (4) - - (6) (6)
-- -- --- ---
Net change to shareholder's equity (5) 2 - (5) (3)
-- -- --- ---
Balance at December 31, 1998(1) $7 $6 $11 $24
== == === ===
(1) The balance is comprised of the asset valuation reserve and other investment
reserves, which is recorded as a liability in the statutory financial
statements. The asset valuation reserve is a component of total adjusted
capital, while other investment reserves are excluded from total adjusted
capital, according to the NAIC definition.
(2) Amounts represent contributions calculated on a statutory formula and other
amounts we deem necessary. Additionally, these amounts represent the net
impact on shareholder's equity for investment gains and losses not related
to changes in interest rates.
(3) These amounts offset realized capital gains (loss), net of tax, that have
been recorded as a component of net income. Amounts include realized capital
gains and losses, net of tax, on sales not related to interest fluctuations,
such as repayments of mortgage loans at a discount and mortgage loan
foreclosures.
26
<PAGE>
(4) These amounts offset unrealized capital gains (loss), recorded as a change
in shareholder's equity. Amounts include unrealized losses due to market
value reductions of securities with an NAIC quality rating of 6 and net
changes in the unrealized capital gains and losses from affiliated mutual
funds.
(5) Amounts represent the reserve contribution (note 2) less amounts already
recorded (notes 3 and 4). This net change in reserves is recorded as a
change to shareholder's equity.
Quantitative and Qualitative Information about Market Risk
We developed the following discussion of our risk-management activities using
"forward-looking statements" that are based on estimates and assumptions. While
we believe that the assumptions we have made are reasonably possible in the near
term, actual results could differ materially from those projected in the
forward-looking statements. In addition, we would likely take certain actions to
mitigate the impacts of the assumed market changes, thereby reducing the
negative impact discussed below.
We have excluded all non-guaranteed separate account assets and liabilities from
the following discussion since all market risks associated with those accounts
are assumed by the contract holders, not us.
Our assets, such as bonds, mortgage loans, policy loans and derivatives are
financial instruments and are subject to the risk of market volatility and
potential market disruptions. These risks may reduce the value of our financial
instruments, or impact future cash flows and earnings from those instruments. We
do not hold any financial instruments for the purposes of trading.
Our primary market risk exposure is changes in interest rates, which can cause
changes in the fair value, cash flows and earnings of certain financial
instruments. To manage our exposure to interest rate changes we use
sophisticated quantitative asset/liability management techniques.
Asset/liability management allows us to match the market sensitivity of assets
with the liabilities they support. If these sensitivities are matched perfectly,
the impact of interest rate changes is effectively offset on an economic basis
as the change in value of the asset is offset by a corresponding change in the
value of the supported liability. In addition, we invest a significant portion
of our investment funds in high quality bonds in order to maintain and manage
liquidity and reduce the risk of default in the portfolio.
Based upon the information and assumptions we used in our asset/liability
analysis as of December 31, 1998, we estimate that a hypothetical immediate 10%
increase in interest rates would decrease the net fair value of our financial
instruments by $20 million. A change in interest rates of 10% would not have a
material impact on our future earnings or cash flows. A significant portion of
our liabilities, e.g., insurance policy and claim reserves, are not considered
financial instruments and are excluded from the above analysis. Because of our
asset/liability management, a corresponding change in the fair values of these
liabilities, based on the present value of estimated cash flows, would
significantly offset the net decrease in fair value estimated above.
We also use derivative financial instruments to manage our market risks,
primarily to reduce interest rate and duration imbalances determined in
asset/liability analyses. The fair values of these derivative financial
instruments described below, which are not recorded in the financial statements,
are based upon market prices or prices obtained from brokers. We do not hold or
issue these financial instruments for trading purposes.
The notional amounts do not represent amounts exchanged by the parties and,
thus, are not a measure of our exposure. The amounts exchanged are calculated on
the basis of the notional amounts and the other terms of the instruments, which
relate to interest rates, exchange rates, security prices or financial or other
indexes.
We utilize interest rate swap agreements, options, and purchased caps and floors
to reduce interest rate exposures arising from mismatches between assets and
liabilities and to modify portfolio profiles to manage other risks identified.
Under interest rate swaps, we agree, at specified intervals, to an exchange
between streams of variable rate and fixed rate interest payments. The amount
exchanged is calculated by reference to an agreed-upon notional principal
amount. We defer and amortize gains and losses realized on the termination of
contracts through the interest
27
<PAGE>
maintenance reserve ("IMR") over the remaining life of the associated contract.
IMR amortization is included in net investment income on the Statutory Statement
of Income. We accrue net amounts receivable and payable as adjustments to net
investment income and included in investment and insurance amounts receivable in
the Statutory Statement of Financial Position. We had outstanding swaps with
notional amounts of $197 million at December 31, 1998, and $47 million at
December 31, 1997. The fair values of these instruments were $3 million at
December 31, 1998, and zero at December 31, 1997.
Options grant us the right to buy or sell a security or enter into a derivative
transaction at a stated price within a stated period. Our option contracts have
terms of up to ten years. We amortize the amounts we pay for options into net
investment income over the life of the contract. We record unamortized costs as
other investments on the Statutory Statement of Financial Position. We record
gains and losses on these contracts at the expiration or termination date and
are amortized through the IMR over the remaining life of the option contract. We
had option contracts with notional amounts of $961 million at December 31, 1998,
and $111 million at December 31, 1997. Our credit risk exposure was limited to
the unamortized costs of $8 million at December 31, 1998, and $2 million at
December 31, 1997. Additionally, these contracts had a market value of $10
million at December 31, 1998, and $2 million at December 31, 1997.
Interest rate cap agreements grant us the right to receive the excess of a
referenced interest rate over a stated rate calculated by reference to an agreed
upon notional amount. Interest rate floor agreements grant us the right to
receive the excess of a stated rate over a referenced interest rate calculated
by reference to an agreed upon notional amount. We amortize the amounts we paid
for interest rate caps and floors into net investment income over the life of
the asset on a straight-line basis. We record unamortized costs as other
investments in the Statutory Statement of Financial Position. We accrue amounts
receivable and payable as adjustments to net investment income and include them
in the Statutory Statement of Financial Position as investment and insurance
amounts receivable. Upon termination of these contracts, we recognize gains and
losses. We defer and amortize these gains and losses and any unamortized cost
through the IMR over the remaining life of the associated cap or floor
agreement. At December 31, 1998, we had agreements with notional amounts of $355
million. The fair values of these instruments were $2 million at December 31,
1998. At December 31, 1997, we did not have any open interest rate caps or floor
agreements.
We utilize asset swap agreements to reduce exposures, such as currency risk and
prepayment risk, built into certain assets acquired. Cross-currency interest
rate swaps allow investment in foreign currencies, increasing access to
additional investment opportunities, while limiting foreign exchange risk. We
recognize the net cash flows from asset and currency swaps as adjustments to the
underlying assets' net investment income. Gains and losses realized on the
termination of these contracts adjust the bases of the underlying asset. At
December 31, 1998, we did not have any open asset swap agreements. Notional
amounts relating to asset and currency swaps totaled $1 million at December 31,
1997, having fair values of zero.
We enter into forward U.S. Treasury, Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") commitments. We
enter into these forward commitments for the purpose of managing interest rate
exposure. We generally do not take delivery on these commitments. Instead of
taking delivery, we settle these commitments with offsetting transactions. We
record gains and losses on these commitments when settled and we amortize these
gains and losses through the IMR over the remaining life of the commitments. We
had outstanding commitments of $1 million at December 31, 1998, and $3 million
at December 31, 1997.
We are exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. This exposure is limited to
contracts with a positive fair value. The amounts at risk in a net gain position
were $14 million at December 31, 1998, and $3 million at December 31, 1997. We
monitor exposure to ensure counterparties are credit worthy and concentration of
exposure is minimized. Additionally, we obtain collateral positions with
counterparties when considered prudent.
28
<PAGE>
Description of the Business
We are a stock life insurance company located at 140 Garden Street, Hartford,
Connecticut, 06154, and were chartered by a Special Act of the Connecticut
General Assembly on April 25, 1980. We are principally engaged in the sale of
life insurance and annuities, primarily flexible premium universal life
insurance and variable annuity products. We distribute these products through
career agents, registered financial planners and brokers. We are 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, we became a
wholly-owned stock life insurance subsidiary of MassMutual when the operations
of our former parent, Connecticut Mutual Life Insurance Company were merged with
and into MassMutual.
Functionally, we are part of MassMutual's operations, and as a result, a
discussion of MassMutual's operations is useful for an understanding of our
business.
MassMutual is a mutual life insurance company organized as a Massachusetts
corporation which was originally chartered in 1851. As a mutual life insurance
company, MassMutual has no shareholders. MassMutual's primary business is
ordinary life insurance. MassMutual also provides, directly or through its
subsidiaries, a wide range of annuity and disability products, and pension and
pension-related products and services, as well as investment services to
individuals, corporations and other institutions in all 50 states of the United
States, Puerto Rico and the District of Columbia. MassMutual and its
subsidiaries or affiliates are also licensed to transact business in six
provinces of Canada, Chile, Argentina, Bermuda and Luxembourg although its
operations in such jurisdictions are not material.
MassMutual's principal lines of business are:
. Individual Line of Business, which includes life, disability, annuities,
large corporate life insurance and investment products and services;
. Retirement Services, which provides group pension investment products and
administrative services, primarily to sponsors of tax qualified retirement
plans;
. MassMutual Investment Group, which provides investment advisory services to
MassMutual, its affiliates and various outside individual and institutional
investors through MassMutual's investment management staff and its
principal subsidiaries: OppenheimerFunds, Inc., David L. Babson and
Company, Inc., Antares Capital Corporation, and Cornerstone Real Estate
Advisors, Inc.
The direction and operations of MassMutual's business are guided by a statement
of corporate vision. Under this vision, MassMutual's operations are managed so
as to maintain a financially strong and efficient enterprise for the benefit of
policyholders. MassMutual's long-term objectives are to maintain corporate
financial strength, enhance policyholder value, and generate and sustain growth.
Products
We sell term, universal life, variable life and variable annuity products. The
Regular Series Universal Life product is an interest-sensitive,
flexible-premium, universal life policy. An additional universal life product is
an Employee Series Universal Life product sold as a flexible-premium universal
life policy for use in employer-sponsored sales. We sell these products in all
states except New York. We also sell Universal Life Enterprise Plus as a
flexible-premium, non-participating interest-sensitive universal life policy. In
1996, we introduced Enterprise Survivorship Universal Life. In 1998, we
introduced Survivorship Variable Universal Life, a survivorship flexible premium
adjustable variable life insurance policy. In the first quarter of 1999, we
introduced a variable universal life product, a flexible premium adjustable
variable life insurance policy.
Our annuity products include CM Windows, Panorama Plus Variable Annuity
("Panorama Plus"), and Panorama Premier Variable Annuity ("Panorama Premier".)
CM Windows is a single-premium deferred annuity paying a fixed interest rate
guaranteed for the life of the contract. This product is not registered with the
Securities and Exchange Commission ("SEC"). We sell CM Windows through any
licensed agent or broker who is contracted with us.
Panorama Plus is distributed by MML Distributors,
29
<PAGE>
LLC ("MML Distributors"), formerly Connecticut Mutual Financial Services, LLC,
and MML Investors Services, Inc. ("MMLISI") and allows for investment in the
Panorama Plus Separate Account or our general account. The Panorama Plus
Separate Account invests in shares of Panorama Series Fund, Inc. and in shares
of Oppenheimer Variable Account Funds. As of May 1, 1999, it will invest in T.
Rowe Price Equity Series, Inc., American Century Variable Portfolios and
Fidelity Variable Insurance Products Fund II. The general account provides for a
guaranteed interest rate and the protection of principal. We declare quarterly
interest rates, which are guaranteed never to fall below 3 percent per year.
Your investment in Panorama Plus may be divided among the funds invested in the
Panorama Plus Separate Account, an account maintained separately from our
general accounts to invest purchase payments into underlying funds, the general
account, or any combination thereof. Panorama Plus is registered with the SEC.
We sell Panorama Plus through licensed representatives of broker-dealers who
maintain a current selling group agreement with MML Distributors, as well as,
registered representatives of MMLISI.
Panorama Premier is distributed by MML Distributors and MMLISI, and allows for
investment in the Panorama Premier segment of the C.M. Multi-Account A, separate
account, or our general account. The Panorama Premier segment of the separate
account invests in shares of Panorama Series Fund, Inc., shares of Oppenheimer
Variable Account Funds, the MML Series Investment Fund, T. Rowe Price Equity
Series, Inc., American Century Variable Portfolio and Fidelity Variable
Insurance Fund II. The general account provides for a guaranteed interest rate
and the protection of principal. We declare quarterly interest rates, which are
guaranteed never to fall below 3 percent per year. Your investment in Panorama
Premier may be divided among the investment portfolios of the Panorama Premier
Division of the separate account, the general account, or any combination
thereof. Panorama Premier is registered with the SEC. We sell Panorama Premier
through licensed representatives of broker-dealers who maintain a current
selling group agreement with MML Distributors, as well as registered
representatives of MMLISI.
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 we market. In addition to competition within the
industry, insurers are increasingly facing competition from non-traditional
sources in the financial services industry. Such businesses, include mutual
funds, banks, securities brokerage houses and other financial services entities.
Many of our competitors provide alternative investment and savings vehicles for
consumers. Legislative initiatives currently proposed at the federal level
would, if enacted, reorder the financial services industry, thereby changing the
environment in which we compete.
We believe our financial strength, agent skill and historical product
performance provide competitive advantages for the products we offer in these
markets. Our and MassMutual's financial strength continues to be recognized
favorably by the rating agencies. Our and MassMutual's year end 1998 rating were
again among the highest enjoyed by any company in any industry. Our and
MassMutual's AAA (Extremely Strong) financial strength rating from Standard &
Poor's, A++ (Superior) financial strength rating from A.M. Best, and AAA
claims-paying rating from Duff & Phelps were the highest possible. Our and
MassMutual's Aa1 financial strength rating from Moody's Investors Service was
the highest in its "Excellent" category.
Each rating agency independently assigns ratings based on its own separate
review and takes into account a variety of factors (which are subject to change
in making its decision). Accordingly, there can be no assurance of the ratings
that will be afforded us in the future.
Regulation
We are organized as a Connecticut stock life insurance company, and are subject
to Connecticut laws governing insurance companies. We are regulated and
supervised by the State of Connecticut Insurance Commissioner. By March 1 of
every year, we must prepare and file an annual statement, in a form prescribed
by the State of Connecticut Insurance Department, as of December 31 of the
preceding year. The Commissioner's agents have the right at all times to review
or examine our books and assets. A full examination of our operations is
conducted periodically according to the rules and practices of the National
Association of Insurance Commissioners. We are also subject to the insurance
laws of the states in which we are authorized to do business, to various federal
and state securities laws and regulations, and to regulatory agencies that
administer those laws and regulations.
30
<PAGE>
We are licensed to transact our insurance business in, and are 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. However, most jurisdictions have laws and regulations
requiring the licensing of insurers and their agents, and setting standards of
solvency and business conduct to be maintained by licensed insurance companies,
and may regulate withdrawal from certain markets. In addition, statutes and
regulations usually require the approval of policy forms and, for certain lines
of insurance, the approval of rates. Such statutes and regulations also
prescribe the permitted types and concentration of investments. We are also
subject to regulation of our accounting methodologies and are required to file
detailed annual financial statements with supervisory agencies in each of the
jurisdictions in which we do business. Each of our operations and accounts are
also subject to examination by such agencies at regular intervals.
All 50 states of the United States, the District of Columbia and Puerto Rico
have insurance guaranty fund laws requiring insurance companies doing business
within those jurisdictions to participate in guaranty associations. Guaranty
associations are organized to pay contractual obligations under insurance
policies and certificates issued under group insurance policies, issued by
impaired or insolvent life insurance companies. These associations levy
assessments, up to prescribed limits, on all member insurers in a particular
state. Levies are calculated on the basis of the proportionate share of the
premiums written by member insurers in the lines of business in which the
impaired or insolvent insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax offsets, usually
over a period of years.
In addition to regulation of our insurance business, we are subject to various
types of federal and state laws and regulations affecting the conduct, taxation
and other aspects of our businesses. Certain policies and contracts we offer are
subject to the federal securities laws administered by the Securities and
Exchange Commission.
We believe that we are in compliance, in all material respects, with all
applicable regulations.
Experts and Additional Information
Experts
We included our audited statutory financial statements in this prospectus in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing. These
statements include the statement of statutory financial position as of December
31, 1998 and 1997, and the related statutory statements of income, changes in
shareholder's equity and of cash flows for each of the years in the three year
period ended December 31, 1998.
Additional Available Information
We file registration statements, reports and informational statements with the
Securities and Exchange Commission ("SEC') under the Securities Act of 1933 and
the Securities Exchange Act of 1934. These filings contain information not
contained in this prospectus. You can review and copy such registration
statements, reports, information statements and other information at the public
reference facilities maintained by the SEC. The SEC is located, at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC's New York and Chicago
regional offices are located at the following addresses:
. Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York, 10046; and
. Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
The SEC also maintains a Web site that contains these filings. The SEC's
Internet address is http://www.sec.gov.
31
<PAGE>
Selected Historical Financial Data
We have prepared our financial information on the basis of statutory accounting
practices. For a description of the accounting principles applicable to this
financial information and certain differences between statutory accounting
practices and generally accepted accounting principles, see Accounting
Practices.
The following statutory information for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 has been derived from our audited statutory financial
statements. The 1998, 1997 and 1996 statutory financial statements have been
audited by PricewaterhouseCoopers LLP, independent accountants. The 1995 and
1994 statutory financial statements were audited by auditors other than
PricewaterhouseCoopers LLP.
The following information should be read in conjunction with, and is qualified
in its entirety by, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and other information
included elsewhere in this Prospectus. The results for past accounting periods
are not necessarily indicative of the results to be expected for any future
accounting period.
32
<PAGE>
C.M. Life Insurance Company
Selected Historical Financial Data
For the Years Ended December 31,
($ In Millions)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Premium income $ 406 $ 331 $ 314 $ 261 $ 251
Net investment income 82 75 75 69 60
Fees and other income 6 8 9 20 25
------- ------- ------- ------- -------
494 414 398 350 336
------- ------- ------- ------- -------
Benefits and expenses:
Policyholders' benefits and payments 185 100 99 59 42
Addition to policyholders' reserves and 169 201 218 216 234
funds
Operating expenses 72 50 45 32 15
Commissions 49 33 25 14 7
State taxes, licenses and fees 8 3 3 5 4
------- ------- ------- ------- -------
483 387 390 326 302
------- ------- ------- ------- -------
Net gain from operations before federal
income taxes 11 27 8 24 34
Federal income taxes 7 19 6 9 14
------- ------- ------- ------- -------
Net gain from operations 4 8 2 15 20
Net realized capital (loss) (1) -- -- (1) (2)
------- ------- ------- ------- -------
Net income $ 3 $ 8 $ 2 $ 14 $ 18
======= ======= ======= ======= =======
Assets:
General account $ 1,212 $ 1,123 $ 1,087 $ 1,029 $ 912
Separate account 1,319 1,096 780 531 310
------- ------- ------- ------- -------
Total assets $ 2,531 $ 2,219 $ 1,867 $ 1,560 $ 1,222
======= ======= ======= ======= =======
Liabilities:
Policyholders' reserves and funds $ 996 $ 951 $ 907 $ 868 $ 784
Asset valuation and investment reserves 24 27 22 20 6
Other liabilities 51 32 48 28 18
Separate account reserves and liabilities 1,319 1,096 780 531 310
------- ------- ------- ------- -------
Total liabilities 2,390 2,106 1,757 1,447 1,118
======= ======= ======= ======= =======
Shareholder's Equity:
Common stock 2 2 2 2 2
Paid-in capital and contributed surplus(1) 69 44 44 44 44
Unassigned surplus 70 67 64 67 58
------- ------- ------- ------- -------
Total shareholder's equity 141 113 110 113 104
------- ------- ------- ------- -------
Total liabilities and shareholder's equity $ 2,531 $ 2,219 $ 1,867 $ 1,560 $ 1,222
======= ======= ======= ======= =======
Total adjusted capital data (2)
Total shareholder's equity $ 141 $ 113 $ 110 $ 113 $ 104
Asset valuation reserve 22 23 18 16 6
------- ------- ------- ------- -------
Total adjusted capital $ 163 $ 136 $ 128 $ 129 $ 110
======= ======= ======= ======= =======
</TABLE>
(1) In 1998, we received a surplus contribution of $25 million from MassMutual.
(2) Defined by the NAIC as surplus plus Asset Valuation Reserve.
We reclassified prior year amounts to conform with current year presentation.
33
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Policyholders of
C.M. Life Insurance Company
We have audited the accompanying statutory statements of financial position of
C.M. Life Insurance Company as of December 31, 1998 and 1997, and the related
statutory statements of income and changes in shareholder's equity, and of cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the Department of Insurance
of the State of Connecticut, which practices differ from generally accepted
accounting principles. The effects on the financial statements of the variances
between the statutory basis of accounting and generally accepted accounting
principles, although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements audited by us do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of C.M. Life Insurance Company as of December 31, 1998 and 1997, or the results
of its operations or its cash flows for each of the three years in the period
ended December 31, 1998.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of C.M. Life Insurance Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, on the basis
of accounting described in Note 1.
PricewaterhouseCoopers LLP
Springfield, Massachusetts
February 25, 1999
FF-1
<PAGE>
C.M. Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION
December 31,
1998 1997
---- ----
(In Millions)
Assets:
Bonds $ 683.0 $ 664.5
Mortgage loans 126.3 101.6
Other investments 76.3 63.6
Policy loans 150.4 142.5
Cash and short-term investments 105.7 88.4
-------- --------
1,141.7 1,060.6
Investment and insurance amounts
receivable 33.9 30.1
Federal income tax receivable 2.1 --
Transfer due from separate accounts 34.3 32.0
-------- --------
1,212.0 1,122.7
Separate account assets 1,318.9 1,096.5
-------- --------
$2,530.9 $2,219.2
======== ========
See notes to statutory financial statements.
FF-2
<PAGE>
C.M. Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION, Continued
December 31,
1998 1997
---- ----
($ In Millions Except for Par Value)
Liabilities:
Policyholders' reserves and funds $ 996.3 $ 951.0
Policyholders' claims and other benefits 3.8 4.5
Payable to parent 28.8 13.6
Federal income taxes -- 6.1
Asset valuation and other investment reserves 23.9 26.6
Other liabilities 18.2 7.7
-------- --------
1,071.0 1,009.5
Separate account liabilities 1,318.9 1,096.5
-------- --------
2,389.9 2,106.0
-------- --------
Shareholder's equity:
Common stock, $200 par value
50,000 shares authorized
12,500 shares issued and outstanding 2.5 2.5
Paid-in and contributed surplus 68.8 43.8
Surplus 69.7 66.9
-------- --------
141.0 113.2
-------- --------
$2,530.9 $2,219.2
======== ========
See notes to statutory financial statements.
FF-3
<PAGE>
C.M. Life Insurance Company
STATUTORY STATEMENTS OF INCOME
Years Ended December 31,
1998 1997 1996
---- ---- ----
(In Millions)
Revenue:
Premium income $406.4 $331.3 $314.4
Net investment income 82.4 75.3 75.2
Fees and other income 5.5 7.5 8.7
------ ------ ------
494.3 414.1 398.3
------ ------ ------
Benefits and expenses:
Policyholders' benefits and payments 185.2 100.4 99.0
Addition to policyholders' reserves and funds 168.8 200.7 217.8
Operating expenses 72.1 49.5 45.4
Commissions 49.6 33.5 25.0
State taxes, licenses and fees 8.1 3.5 3.2
------ ------ ------
483.8 387.6 390.4
------ ------ ------
Net gain from operations before federal
income taxes 10.5 26.5 7.9
Federal income taxes 6.8 19.0 6.3
------ ------ ------
Net gain from operations 3.7 7.5 1.6
Net realized capital gain (loss) (1.1) 0.1 0.6
------ ------ ------
Net income $ 2.6 $ 7.6 $ 2.2
====== ====== ======
See notes to statutory financial statements.
FF-4
<PAGE>
C.M. Life Insurance Company
STATUTORY STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
Years Ended December 31,
1998 1997 1996
---- ---- ----
(In Millions)
Shareholder's equity, beginning of year $113.2 $109.8 $113.2
------ ------ ------
Increases (decreases) due to:
Net income 2.6 7.6 2.2
Change in asset valuation and investment
reserves 2.7 (4.8) (1.9)
Change in net unrealized capital gain (loss) (5.8) 0.8 (1.0)
Capital contribution 25.0 -- --
Other 3.3 (0.2) (2.7)
------ ------ ------
27.8 3.4 (3.4)
------ ------ ------
Shareholder's equity, end of year $141.0 $113.2 $109.8
====== ====== ======
See notes to statutory financial statements.
FF-5
<PAGE>
C.M. Life Insurance Company
STATUTORY STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
---- ---- ----
(In Millions)
Operating activities:
Net income $ 2.6 $ 7.6 $ 2.2
Additions to policyholders' reserves and funds
net of transfers to separate accounts 44.6 44.2 41.6
Net realized capital (gain) loss 1.1 (0.1) (0.6)
Other changes 7.8 0.5 (0.8)
------- ------- -------
Net cash provided by operating activities 56.1 52.2 42.4
------- ------- -------
Investing activities:
Loans and purchases of investments (568.6) (438.6) (184.9)
Sales and maturities of investments and
receipts from repayment of loans 504.8 411.1 191.1
------- ------- -------
Net cash provided by (used in) investing
activities (63.8) (27.5) 6.2
------- ------- -------
Financing Activities:
Capital and surplus contribution 25.0 -- --
------- ------- -------
Increase in cash and short-term investments 17.3 24.7 48.6
Cash and short-term investments, beginning of
year 88.4 63.7 15.1
------- ------- -------
Cash and short-term investments, end of year $ 105.7 $ 88.4 $ 63.7
======= ======= =======
See notes to statutory financial statements
FF-6
<PAGE>
NOTES TO STATUTORY FINANCIAL STATEMENTS
C.M. Life Insurance Company (the Company) is a wholly-owned stock life
insurance subsidiary of Massachusetts Mutual Life Insurance Company
("MassMutual"). On March 1, 1996, the operations of the Company's former
parent, Connecticut Mutual Life Insurance Company, were merged into
MassMutual. The Company is primarily engaged in the sale of flexible premium
universal life insurance and variable annuity products distributed through
career agents. The Company is licensed to sell life insurance and annuities
in Puerto Rico, the District of Columbia and 49 states (excluding New York).
1. SUMMARY OF ACCOUNTING PRACTICES
The accompanying statutory financial statements, have been prepared in
conformity with the statutory accounting practices of the National
Association of Insurance Commissioners ("NAIC") and the accounting practices
prescribed or permitted by the Department of Insurance of the State of
Connecticut and are different in some respects from financial statements
prepared in accordance with generally accepted accounting principles
("GAAP"). The more significant differences are as follows: (a) acquisition
costs, such as commissions and other costs directly related to acquiring new
business, are charged to current operations as incurred, whereas GAAP would
require these expenses to be capitalized and recognized over the life of the
policies; (b) policy reserves are based upon statutory mortality and
interest requirements without consideration of withdrawals, whereas GAAP
reserves would be based upon reasonably conservative estimates of mortality,
morbidity, interest and withdrawals; (c) bonds are generally carried at
amortized cost whereas GAAP generally requires they be reported at fair
value; (d) deferred income taxes are not provided for book-tax timing
differences as would be required by GAAP; and (e) payments received for
universal life products and variable annuities are reported as premium
revenue, whereas under GAAP, these payments would be recorded as deposits to
policyholders' account balances.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective no later than January 1, 2001. The effect of
adopting Codification shall be reported as an adjustment to surplus on the
effective date. The Company is currently reviewing the impact of
Codification; however, since the Department of Insurance of the State of
Connecticut has not approved Codification, the ultimate impact cannot be
determined at this time.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as disclosures of contingent assets and liabilities, at
the date of the financial statements. Management must also make estimates
and assumptions that affect the amounts of revenues and expenses during the
reporting period. Future events, including changes in the levels of
mortality, morbidity, interest rates and asset valuations, could cause
actual results to differ from the estimates used in these financial
statements.
Certain 1997 and 1996 amounts have been reclassed to conform with the
current year presentation.
The following is a description of the Company's principal accounting
policies and practices.
A. Investments
Bonds are valued in accordance with rules established by the NAIC.
Generally, bonds are valued at amortized cost.
Mortgage loans are valued at unpaid principal net of unamortized premium or
discount. The Company discontinues the accrual of interest on mortgage loans
which are delinquent more than 90 days or when collection is uncertain.
FF-7
<PAGE>
Notes To Statutory Financial Statements (Continued)
Policy loans are carried at the outstanding loan balance less amounts
unsecured by the cash surrender value of the policy.
Short-term investments are stated at amortized cost, which approximates fair
value.
Other invested assets include investments in affiliated mutual funds and
preferred stocks and are valued in accordance with rules established by the
NAIC. Generally, investments in mutual funds are valued at fair value and
preferred stocks in good standing at cost.
In compliance with regulatory requirements, the Company maintains an Asset
Valuation Reserve ("AVR") and an Interest Maintenance Reserve ("IMR"). The
AVR and other investment reserves stabilize surplus against fluctuations in
the value of stocks, as well as declines in the value of bonds and mortgage
loans. The IMR captures after-tax realized capital gains and losses which
result from changes in the overall level of interest rates for all types of
fixed income investments and interest related hedging activities. These
interest related gains and losses are amortized into income using the grouped
method over the remaining life of the investment sold or over the remaining
life of the underlying asset. Net realized after-tax capital gains of $2.6
million in 1998, $2.0 million in 1997 and $0.4 million in 1996 were
transferred to the IMR. Amortization of the IMR into net investment income
amounted to $0.3 million in 1998 and $0.1 million in 1997 and 1996. At
December 31, 1997, the IMR consisted of a net loss deferral, which, in
accordance with the regulations, was recorded as a reduction of surplus.
Realized capital gains and losses, less taxes, not includable in the IMR, are
recognized in net income. Realized capital gains and losses are determined
using the specific identification method. Unrealized capital gains and losses
are included in surplus.
B. Separate Accounts
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of variable annuity
contract holders. Assets consist principally of marketable securities
reported at fair value. Transfers due from separate accounts represent the
policyholders' account values in excess of statutory benefit reserves.
Premiums, benefits and expenses of the separate accounts are reported in the
Statutory Statement of Income. The Company receives administrative and
investment advisory fees from these accounts.
Net transfers to separate accounts of $121.0 million, $146.5 million and
$170.5 million in 1998, 1997 and 1996, respectively, are included in the
addition to policyholders' reserves and funds.
C. Non-admitted Assets
Assets designated as "non-admitted" (principally prepaid agent commissions,
other prepaid expenses and the IMR, when in a net loss deferral position) are
excluded from the statutory statement of financial position. These amounted
to $5.5 million and $5.7 million as of December 31, 1998 and 1997,
respectively and changes therein are charged directly to surplus.
D. Policyholders' Reserves and Funds
Policyholders' reserves for life insurance contracts are developed using
accepted actuarial methods computed principally on the net level premium, the
Commissioners' Reserve Valuation Method and the California Method bases using
the 1980 Commissioners' Standard Ordinary mortality tables with assumed
interest rates ranging from 3.0 to 4.5 percent.
FF-8
<PAGE>
Notes To Statutory Financial Statements (Continued)
Reserves for individual annuities are based on accepted actuarial methods,
principally at interest rates ranging from 5.25 to 9.0 percent. Reserves for
policies and contracts considered investment contracts have a carrying value
of $129.8 million and $115.6 million at December 31, 1998 and 1997,
respectively with a fair value of $132.8 million and $116.0 million at
December 31, 1998 and 1997, respectively as determined by discounted cash
flow projections.
The Company made certain changes in the valuation of policyholders' reserves
which increased surplus by $2.7 million in 1998.
E. Premium and Related Expense Recognition
Life insurance premium revenue is recognized annually on the anniversary date
of the policy. Annuity premium is recognized when received. Commissions and
other costs related to the issuance of new policies, maintenance and
settlement costs are charged to current operations when incurred.
F. Cash and Short-term Investments
For purposes of the Statutory Statement of Cash Flows, the Company considers
all highly liquid short-term investments purchased with a maturity of twelve
months or less to be short-term investments.
2. FEDERAL INCOME TAXES
Provision for federal income taxes is based upon the Company's estimate of
its tax liability. No deferred tax effect is recognized for temporary
differences that may exist between financial reporting and taxable income.
Accordingly, the reporting of miscellaneous temporary differences, such as
reserves and acquisition costs, resulted in effective tax rates which differ
from the statutory tax rate.
The Company plans to file a separate company 1998 federal income tax return.
The Internal Revenue Service has completed its examination of the Company's
income tax returns through the year 1995.
Federal tax payments were $16.9 million in 1998, $6.8 million in 1997 and
$17.6 million in 1996.
3. SHAREHOLDER'S EQUITY
The Board of Directors of MassMutual has authorized the contribution of funds
to the Company sufficient to meet the capital requirements of all states in
which the Company is licensed to do business. Substantially all of the
statutory shareholder's equity is subject to dividend restrictions relating
to various state regulations, which limit the payment of dividends to the
shareholder without prior approval. Under these regulations, $11.3 million of
shareholder's equity is available for distribution to the shareholder in 1999
without prior regulatory approval.
During 1998, MassMutual contributed additional paid-in capital of $25.0
million to the Company.
4. RELATED PARTY TRANSACTIONS
MassMutual and the Company have an agreement whereby MassMutual, for a fee,
furnishes the Company, as required, operating facilities, human resources,
computer software development and managerial services. Also, investment and
administrative services are provided to the Company pursuant to a management
services agreement with MassMutual. Similar arrangements were in place with
Connecticut Mutual Life Insurance Company, the Company's former parent, prior
to its merger with MassMutual. Fees incurred under the terms of these
agreements were $74.1 million, $39.7 million and $45.9 million in 1998, 1997
and 1996, respectively.
FF-9
<PAGE>
Notes To Statutory Financial Statements (Continued)
Prior to March 1, 1996, the Company had an underwriting agreement with its
affiliates GR Phelps & Co., Inc. and MML Distributors LLC. Under this
agreement, the affiliates paid commissions and received the cash flows from
variable annuity contract fees. Effective March 1, 1996, this agreement was
cancelled, and the Company began paying all commissions and retained the
right to the related future cash flows from contract fees.
The Company cedes a portion of its life insurance business to MassMutual and
other insurers in the normal course of business. The Company's retention
limit per individual insured is $12.0 million; the portion of the risk
exceeding the retention limit is reinsured with other insurers. The Company
is contingently liable with respect to ceded reinsurance in the event any
reinsurer is unable to fulfill its contractual obligations.
The Company has a modified coinsurance quota-share reinsurance agreement with
MassMutual whereby the Company cedes 75% of the premiums on certain universal
life policies. In return, MassMutual pays the Company a stipulated expense
allowance, death and surrender benefits, and a modified coinsurance
adjustment based upon experience. Reserves for payment of future benefits for
the ceded policies are retained by the Company.
The Company also has a stop-loss agreement with MassMutual under which the
Company cedes claims which, in aggregate, exceed 18% of the covered volume
for any year, with maximum coverage of $25.0 million above the aggregate
limit. The aggregate limit was $36.9 million in 1998, $35.6 million in 1997,
and $28.1 million in 1996 and it was not exceeded in any of the years. The
Company paid approximately $1.0 million in premiums to MassMutual under the
agreement in 1998 and 1997, and $0.4 million in 1996.
5. INVESTMENTS
The Company maintains a diversified investment portfolio. Investment policies
limit concentration in any asset class, geographic region, industry group,
economic characteristic, investment quality or individual investment.
A. Bonds
The carrying value and estimated fair value of investments in bonds as of
December 31, 1998 and 1997 are as follows:
December 31, 1998
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
(In Millions)
U. S. Treasury securities $ 69.3 $ 1.4 $ 0.1 $ 70.6
and obligations of U.S.
government corporations
and agencies
Debt securities issued by 3.2 -- 0.1 3.1
foreign governments
Mortgage-backed securities 57.9 1.6 0.2 59.3
State and local governments 12.1 0.4 0.2 12.3
Corporate debt securities 522.6 17.8 3.0 537.4
Utilities 17.9 0.9 -- 18.8
-------- ------- ------ --------
Total $ 683.0 $ 22.1 $ 3.6 $ 701.5
======== ======= ====== ========
FF-10
<PAGE>
Notes To Statutory Financial Statements (Continued)
December 31, 1997
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
(In Millions)
U. S. Treasury securities $ 104.3 $ 2.2 $ 0.2 $ 106.3
and obligations of U.S.
government corporations
and agencies
Debt securities issued by 4.6 -- 0.3 4.3
foreign governments
Mortgage-backed securities 38.8 1.0 0.2 39.6
State and local governments 20.0 0.3 -- 20.3
Corporate debt securities 471.8 15.6 1.9 485.5
Utilities 25.0 1.1 -- 26.1
-------- ------- ------ --------
Total $ 664.5 $ 20.2 $ 2.6 $ 682.1
======== ======= ====== ========
The carrying value and estimated fair value of bonds at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
-------- ---------
(In Millions)
<S> <C> <C>
Due in one year or less $ 52.2 $ 52.5
Due after one year through five years 216.8 223.2
Due after five years through ten years 233.1 240.0
Due after ten years 69.4 72.1
-------- --------
571.5 587.8
Mortgage-backed securities, including
securities guaranteed by the U.S.
Government 111.5 113.7
-------- --------
Total $ 683.0 $ 701.5
======== ========
</TABLE>
Proceeds from sales of investments in bonds were $480.4 million during 1998,
$388.8 million during 1997, and $162.9 million during 1996. Gross capital
gains of $5.0 million in 1998, $3.8 million in 1997, and $1.6 million in 1996
and gross capital losses of $0.9 million in 1998, $0.5 million in 1997, and
$0.9 million in 1996 were realized on those sales, portions of which were
included in the IMR. Estimated fair value of non-publicly traded bonds is
determined by the Company using a pricing matrix and quoted market prices for
publicly traded bonds.
B. Mortgages
The fair value of mortgage loans, as determined from a pricing matrix for
performing loans and the estimated underlying real estate value for non-
performing loans, approximated carrying value.
The Company had restructured loans with book values of $10.4 million and
$17.3 million at December 31, 1998 and 1997, respectively. The loans
typically have been modified to defer a portion of the contractual interest
payments to future periods. Interest deferred to future periods totaled $0.2
million in 1998, 1997 and 1996. At December 31, 1998, scheduled commercial
mortgage loan maturities were as follows: 1999 - $8.6 million; 2000 - $1.5
million; 2001 - $10.3 million; 2002 - $15.0 million; 2003 - $8.6 million; and
$37.0 million thereafter.
FF-11
<PAGE>
Notes To Statutory Financial Statements (Continued)
C. Policy Loans
Policy loans are recorded at cost as it is not practicable to determine the
fair value since they do not have a stated maturity.
D. Other
Investments in affiliated mutual funds had a cost of $62.4 million in 1998
and $50.2 million in 1997 with fair values of $67.7 million in 1998 and $61.4
million in 1997, using quoted market prices. Preferred stocks in good
standing had fair values of $0.5 million in 1998 using a pricing matrix for
non-publicly traded stocks and quoted market prices for publicly traded
stocks. At December 31, 1998, the fair values of preferred stocks
approximated cost. The Company did not invest in any preferred stocks at
December 31, 1997.
The carrying value of investments which were non-income producing for the
preceding twelve months was $0.4 million at December 31, 1998 and 1997.
6. PORTFOLIO RISK MANAGEMENT
The Company manages its investment risks primarily to reduce interest rate
and duration imbalances determined in asset/liability analyses. The fair
values of these instruments, which are not recorded in the financial
statements, are based upon market prices or prices obtained from brokers. The
Company does not hold or issue these financial instruments for trading
purposes.
The notional amounts described do not represent amounts exchanged by the
parties and, thus, are not a measure of the exposure of the Company. The
amounts exchanged are calculated on the basis of the notional amounts and the
other terms of the instruments, which relate to interest rates, exchange
rates, security prices or financial or other indexes.
The Company utilizes interest rate swap agreements, options, and purchased
caps and floors to reduce interest rate exposures arising from mismatches
between assets and liabilities and to modify portfolio profiles to manage
other risks identified. Under interest rate swaps, the Company agrees to an
exchange, at specified intervals, between streams of variable rate and fixed
rate interest payments calculated by reference to an agreed-upon notional
principal amount. Gains and losses realized on the termination of contracts
are deferred and amortized through the IMR over the remaining life of the
associated contract. IMR amortization is included in net investment income on
the Statutory Statement of Income. Net amounts receivable and payable are
accrued as adjustments to investment income and included in investment and
insurance amounts receivable on the Statutory Statement of Financial
Position. At December 31, 1998 and 1997, the Company had swaps outstanding
with notional amounts of $197.5 million and $46.5 million, respectively. The
fair value of these instruments was $2.7 million at December 31, 1998 and
$0.2 million at December 31, 1997.
Options grant the purchaser the right to buy or sell a security or enter into
a derivative transaction at a stated price within a stated period. The
Company's option contracts have terms of up to ten years. The amounts paid
for options purchased are amortized into investment income over the life of
the contract on a straight-line basis. Unamortized costs are included in
other investments on the Statutory Statement of Financial Position. Gains and
losses on these contracts are recorded at the expiration or termination date
and are deferred and amortized through the IMR over the remaining life of the
option contract. At December 31, 1998 and 1997, the Company had option
contracts with notional amounts of $961.2 million and $111.3 million,
respectively. The Company's credit risk exposure was limited to the
unamortized costs of $7.5 million and $2.2 million which had fair values of
$9.8 million and $2.3 million at December 31, 1998 and 1997, respectively.
FF-12
<PAGE>
Notes To Statutory Financial Statements (Continued)
Interest rate cap agreements grant the purchaser the right to receive the
excess of a referenced interest rate over a stated rate calculated by
reference to an agreed upon notional amount. Interest rate floor agreements
grant the purchaser the right to receive the excess of a stated rate over a
referenced interest rate calculated by reference to an agreed upon notional
amount. Amounts paid for interest rate caps and floors are amortized into
investment income over the life of the asset on a straight-line basis.
Unamortized costs are included in other investments on the Statutory
Statement of Financial Position. Amounts receivable and payable are accrued
as adjustments to investment income and included in the Statutory Statement
of Financial Position as investment and insurance amounts receivable. Gains
and losses on these contracts, including any unamortized cost, are recognized
upon termination and are deferred and amortized through the IMR over the
remaining life of the associated cap or floor agreement. At December 31,
1998, the Company had agreements with notional amounts of $355.0 million. The
Company's credit risk exposure on these agreements is limited to the
unamortized costs of $0.5 million. The fair values of these instruments were
$1.6 million at December 31, 1998. At December 31, 1997, the Company did not
have any open interest rate caps or floor agreements.
The Company utilizes asset swap agreements to reduce exposures, such as
currency risk and prepayment risk, built into certain assets acquired. Cross-
currency interest rate swaps allow investment in foreign currencies,
increasing access to additional investment opportunities, while limiting
foreign exchange risk. The net cash flows from asset and currency swaps are
recognized as adjustments to the underlying assets' investment income. Gains
and losses realized on the termination of these contracts adjusts the bases
of the underlying asset. Notional amounts relating to asset and currency
swaps totaled $1.0 million at December 31, 1997. The fair values of these
instruments were an unrealized gain of $0.1 million at December 31, 1997. As
of December 31, 1998, the Company did not have any open asset swap
agreements.
The Company enters into forward U.S. Treasury, Government National Mortgage
Association ("GNMA") and Federal National Mortgage Association ("FNMA")
commitments for the purpose of managing interest rate exposure. The Company
generally does not take delivery on forward commitments. These commitments
are instead settled with offsetting transactions. Gains and losses on forward
commitments are recorded when the commitment is closed and amortized through
the IMR over the remaining life of the asset. At December 31, 1998 and 1997,
the Company had U. S. Treasury, GNMA and FNMA purchase commitments which will
settle during the following year with contractual amounts of $1.0 million and
$3.0 million, respectively.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments. This
exposure is limited to contracts with a positive fair value. The amounts at
risk in a net gain position were $14.2 million and $2.6 million at December
31, 1998 and 1997, respectively. The Company monitors exposure to ensure
counterparties are credit worthy and concentration of exposure is minimized.
Additionally, collateral positions have been obtained with counterparties
when considered prudent.
7. BUSINESS RISKS AND CONTINGENCIES
The Company is subject to insurance guaranty fund laws in the states in which
it does business. These laws assess insurance companies amounts to be used to
pay benefits to policyholders and claimants of insolvent insurance companies.
Many states allow these assessments to be credited against future premium
taxes. The Company believes such assessments in excess of amounts accrued
will not materially affect its financial position, results of operations or
liquidity.
The Company is involved in litigation arising in and out of the normal course
of its business. Management intends to defend these actions vigorously. While
the outcome of litigation cannot be foreseen with certainty, it is the
opinion of management, after consultation with legal counsel, that the
ultimate resolution of these matters will not materially impact its financial
position, results of operations or liquidity.
8. AFFILIATED COMPANIES
The relationship of the Company, its parent and affiliated companies as of
December 31, 1998 is illustrated below. Subsidiaries are wholly-owned by the
parent, except as noted.
FF-13
<PAGE>
Notes To Statutory Financial Statements (Continued)
Parent
------
Massachusetts Mutual Life Insurance Company
Subsidiaries of Massachusetts Mutual Life Insurance Company
-----------------------------------------------------------
CM Assurance Company
CM Benefit Insurance Company
C.M. Life Insurance Company
MassMutual Holding Company
MassMutual of Ireland, Limited
MML Bay State Life Insurance Company
MML Distributors, LLC
MassMutual Mortgage Finance, LLC
Subsidiaries of MassMutual Holding Company
------------------------------------------
GR Phelps & Co., Inc.
MassMutual Holding Trust I
MassMutual Holding Trust II
MassMutual Holding MSC, Inc.
MassMutual International, Inc.
MML Investor Services, Inc.
Subsidiaries of MassMutual Holding Trust I
------------------------------------------
Antares Capital Corporation - 99.4%
Charter Oak Capital Management, Inc. - 80.0%
Cornerstone Real Estate Advisors, Inc.
DLB Acquisition Corporation - 85.8%
Oppenheimer Acquisition Corporation - 89.36%
Subsidiaries of MassMutual Holding Trust II
-------------------------------------------
CM Advantage, Inc.
CM International, Inc.
CM Property Management, Inc.
HYP Management, Inc.
MMHC Investments, Inc.
MML Realty Management
Urban Properties, Inc.
MassMutual Benefits Management, Inc.
Subsidiaries of MassMutual International, Inc.
----------------------------------------------
Compensa de Seguros de Vida S.A. - 33.5%
MassLife Seguros de Vida (Argentina) S. A.
MassMutual International (Bermuda) Ltd.
Mass Seguros de Vida (Chile) S. A. - 33.5%
MassMutual International (Luxembourg) S. A.
MassMutual Holding MSC, Inc.
----------------------------
MassMutual Corporate Value Limited - 40.93%
9048 - 5434 Quebec, Inc.
1279342 Ontario Limited
Affiliates of Massachusetts Mutual Life Insurance Company
---------------------------------------------------------
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
FF-14
<PAGE>
PART II. INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
-------------------------------------------
Not applicable.
Item 15. Indemnification of Directors and Officers
-----------------------------------------
C.M. Life directors and officers are indemnified under its by-laws. C.M. Life
indemnifies each person who was or is a party to any threatened, pending or
completed action, suit or to any liability to any entity which is registered as
an investment company under the Investment Company Act of 1940 or to the
security holders thereof provided that:
(a) Such person acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation;
(b) With respect to any criminal action or proceeding, such person had no
reasonable cause to believe their conduct was unlawful;
(c) Unless ordered by a court, indemnification shall be made only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances set
forth in subparagraphs (a) and (b) above, such determination to be made (i)
by the Board of Directors of the C.M. Life by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable
a quorum of disinterested Directors so directs, by independent legal counsel
in a written opinion, or (iii) by the stockholders of the corporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
C.M. Life pursuant to the foregoing provisions, or otherwise, C.M. Life has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by C.M. Life
of expenses incurred or paid by a director, officer or controlling person of
C.M. Life in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, C.M. Life will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act of 1933 and
will be governed by the final adjudication of such issues.
Item 16. Exhibits
--------
Exhibit Number Description Method of Filing
- -------------- ----------- ----------------
(1) Form of Underwriting Agreement *
with MML Distributors
4 Form of Individual Annuity Contract **
5 Opinion re legality Filed herewith
23(i) Consent of Independent Accountants, Filed herewith
PricewaterhouseCoopers LLP
24(a) Powers of Attorney for: **
Lawrence V. Burkett, Jr.
6
<PAGE>
John B. Davies
Stuart H. Reese
24(b) Powers of Attorney for: ***
Edward M. Kline
John Miller, Jr.,
James Miller
Isadore Jermyn
27 Financial Data Schedule Filed herewith
*Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement File No. 333-2347, filed and effective May 1, 1997.
(**)Incorporated by reference to Post-Effective No. 4 to Registration Statement
File No. 333-2347, filed and effective May 1, 1998.
(***)Incorporated by reference to Post-Effective No. 4 to Registration Statement
File No. 33-61679, filed on Form N-4 on December 21, 1998.
Item 17. Undertakings
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement, including (but not
limited to) any addition or deletion of a managing
underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has caused this Post-Effective Amendment
No. 5 to Registration Statement No. 333-2347 (formerly 33-85988) to be signed on
its behalf by the undersigned thereunto duly authorized, all in the city of
Springfield and the Commonwealth of Massachusetts, on the 22nd day of March,
1999.
C.M. LIFE INSURANCE COMPANY
(Registrant)
By: /s/ Lawrence V. Burkett, Jr.*
-----------------------------
Lawrence V. Burkett, Jr., Director, President and
Chief Executive Officer
C.M. Life Insurance Company
/s/ Richard M. Howe On March 22, 1999, as Attorney-in-Fact pursuant to
- --------------------- powers of attorney.
*Richard M. Howe
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 5 to Registration Statement No. 333-2347 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lawrence V. Burkett, Jr.* Director, President and Chief March 22, 1999
- ----------------------------- Executive Officer
Lawrence V. Burkett, Jr.
/s/ Edward M. Kline* Vice President and Treasurer March 22, 1999
- ---------------------- (Principal Financial Officer)
Edward M. Kline
/s/ John M. Miller, Jr.* Vice President and Comptroller March 22, 1999
- ------------------------ (Principal Accounting Officer)
John M. Miller Jr.
/s/ John B. Davies* Director March 22, 1999
- -------------------
John B. Davies
/s/ Stuart H. Reese* Director March 22, 1999
- --------------------
Stuart H. Reese.
/s/ Isadore Jermyn* Director March 22, 1999
- -------------------
Isadore Jermyn
/s/ James Miller* Director March 22, 1999
- -----------------
James Miller
/s/ Richard M. Howe On March 22, 1999, as Attorney-in-Fact
- ------------------- pursuant to powers of attorney.
*Richard M. Howe
</TABLE>
8
<PAGE>
LIST OF EXHIBITS
Exhibit 5 Opinion re legality
Exhibit 23(i) Consent of Independent Accountants, PricewaterhouseCoopers LLP
Exhibit 27 Financial Data Schedule
9
<PAGE>
Exhibit 5
OPINION RE LEGALITY
March, 1999
C.M. Life Insurance Company
140 Garden Street
Hartford, CT
RE: C.M. Life Fixed Account with Interest Rate Factor Adjustment;
Commission File No. 333-2347
Ladies and Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 5 to the Registration Statement on Form S-2 (the "Registration
Statement") under the Securities Act of 1933 for the Fixed Account with interest
rate factor adjustment (the "Fixed Account") offered in connection with the
Panorama Plus variable annuity contract, issued by C.M. Life.
The Fixed Account offers investors a guarantee that amounts allocated to the
Fixed Account will be credited with an interest rate of at least 3% per year.
If, however, amounts are withdrawn from the Fixed Account other than during the
window period, such withdrawal will be subject to an interest rate factor
adjustment.
As Vice President for C.M. Life Insurance Company, ("CM Life"), I provide legal
advice to CM Life in connection with the operation of its variable products. In
such role I have participated in the preparation of Post-Effective Amendment No.
5 to the Registration Statement for the Fixed Account. In so acting, I have made
such examination of the law and examined such records and documents as in my
judgment are necessary or appropriate to enable me to render the opinion
expressed below. I am of the following opinion:
1. CM Life is a valid and subsisting corporation, organized and operated under
Connecticut law, and subject to regulation by the Connecticut Commissioner of
Insurance.
2. The securities being registered, when sold will be legally issued, fully paid
and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the Post-Effective
Amendment.
Very truly yours,
/s/Stephen R. Bosworth
- ----------------------
Stephen R. Bosworth
Vice President-Law
10
<PAGE>
Exhibit 23(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
C.M. Life Insurance Company
We consent to the inclusion in this Post-Effective Amendment No. 5 to the
registration statement on Form S-2 (File No. 333-2347) of our report, which
includes explanatory paragraphs relating to the use of statutory accounting
practices, which practices differ from generally accepted accounting principles,
dated February 25, 1999 on our audits of the statutory financial statements of
C.M. Life Insurance Company. We also consent to the references to our firm under
the caption "Experts" and "Selected Historical Financial Data".
PricewaterhouseCoopers LLP
Springfield, Massachusetts
March 25, 1999
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of C.M Life Insurance Company and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 683
<DEBT-CARRYING-VALUE> 683
<DEBT-MARKET-VALUE> 701
<EQUITIES> 68
<MORTGAGE> 126
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,142
<CASH> 106
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 2,531
<POLICY-LOSSES> 996
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4
<POLICY-HOLDER-FUNDS> 1,319
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 139
<TOTAL-LIABILITY-AND-EQUITY> 2,531
406
<INVESTMENT-INCOME> 88
<INVESTMENT-GAINS> (1)
<OTHER-INCOME> 0
<BENEFITS> 354
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 130
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<INCOME-TAX> 7
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
