<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT
OF ADDITIONAL INFORMATION
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
CROSS REFERENCE SHEET TO STATEMENT OF ADDITIONAL INFORMATION
Form N-4
Item Number Caption in Statement of Additional Information
15. Cover Page
16. Table of Contents
17. Minnesota Mutual Group Variable Annuity Account
18. Not Applicable
19. Not Applicable
20. Distribution of Contracts
21. Not Applicable
22. Annuity Payments
23. Financial Statements
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
Statement of Additional Information
The date of this document and the Prospectus is: May 1, 1997
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement of Additional Information expands upon
subjects discussed in the Prospectus. Therefore, this Statement should be read
in conjunction with the Group Variable Annuity Account's current Prospectus,
bearing the same date, which may be obtained by calling Minnesota Mutual at
(612) 665-3500, or writing the Group Variable Annuity Account at Minnesota
Mutual Life Center, 400 Robert Street North, St. Paul, Minnesota 55101-2098.
TABLE OF CONTENTS
Separate Account
Trustees and Principal Management Officers of Minnesota Mutual
Distribution of Contracts
Annuity Payments
Auditors
Financial Statements
Appendix A - Calculation of Unit Values
1
<PAGE>
GROUP VARIABLE ANNUITY ACCOUNT
Minnesota Mutual Group Variable Annuity Account is a separate account of The
Minnesota Mutual Life Insurance Company ("Minnesota Mutual"). The Group
Variable Account is registered as a unit investment trust.
TRUSTEES AND PRINCIPAL MANAGEMENT OFFICERS OF MINNESOTA MUTUAL
TRUSTEES PRINCIPAL OCCUPATION
Giulio Agostini Senior Vice President, Finance and
Administrative Services, Minnesota Mining and
Manufacturing Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller
Company, St. Paul, Minnesota (Adhesive
Products) since June 1995, prior thereto
for more than five years President and
Chief Executive Officer, H. B. Fuller
Company
John F. Grundhofer Chairman of the Board, President and Chief
Executive Officer, First Bank System, Inc.,
Minneapolis, Minnesota (Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for
more than five years Chairman of the Board,
President and Chief Executive Officer,
Deluxe Corporation, Shoreview, Minnesota
(Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General
Mills Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Ph.D. Prior to March 1996, and for more than five
years, President, Northwest Area Foundation,
St. Paul, Minnesota (Private Regional
Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual
Life Insurance Company, since August 1995;
prior thereto for more than five years Vice
President and Actuary, The Minnesota Mutual
Life Insurance Company
2
<PAGE>
Michael E. Shannon Chairman, Chief Financial and
Administrative Officer, Ecolab, Inc.,
St. Paul, Minnesota, since August 1992,
prior thereto President, Residential
Services Group, Ecolab Inc., St. Paul,
Minnesota from October 1990 to July 1992
(Develops and Markets Cleaning and
Sanitizing Products)
Frederick T. Weyerhaeuser Chairman, Clearwater Investment Trust since
May 1996, prior thereto for more than five
years, Chairman, Clearwater Management
Company, St. Paul, Minnesota (Financial
Management)
PRINCIPAL OFFICERS (OTHER THAN TRUSTEES)
<TABLE>
<CAPTION>
NAME POSITION
<S> <C>
John F. Bruder Senior Vice President
Keith M. Campbell Vice President
Paul H. Gooding Vice President and Treasurer
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Richard D. Lee Vice President
Joel W. Mahle Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Vice President and Actuary
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
</TABLE>
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All
officers of Minnesota Mutual have been employed by Minnesota Mutual for at
least five years.
DISTRIBUTION OF CONTRACTS
The Contracts will be continuously sold by Minnesota Mutual life insurance
agents who are also registered representatives of MIMLIC Sales Corporation or
other broker-dealers who have entered into selling agreements with MIMLIC
Sales. MIMLIC Sales acts as the principal underwriter of the contracts.
MIMLIC Sales Corporation is a wholly-owned subsidiary of MIMLIC Asset
Management Company, which in turn is a wholly-owned subsidiary of Minnesota
Mutual. MIMLIC Sales is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc.
3
<PAGE>
ANNUITY PAYMENTS
Please see Appendix A to this Statement of Additional Information for an
illustration of the calculation of annuity unit values and of a variable annuity
payment, showing the method used for the calculation of both the initial and
subsequent payments.
AUDITORS
The financial statements of the Group Variable Annuity Account and The Minnesota
Mutual Life Insurance Company included in this Statement of Additional
Information have been audited by KPMG Peat Marwick LLP, 4200 Norwest Center, 90
South Seventh Street, Minneapolis, Minnesota 55402, independent auditors, as
indicated in their reports in this Statement of Additional Information, and are
included herein in reliance upon such reports and upon the authority of such
firm as experts in accounting and auditing.
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Contract Owners of Minnesota Mutual Group Variable Annuity Account:
We have audited the accompanying statements of assets and liabilities of the
MIMLIC Growth, MIMLIC Money Market, MIMLIC Asset Allocation, MIMLIC Index 500,
Vanguard Long-Term Corporate, Vanguard Wellington, Fidelity Contrafund, Scudder
International and Janus Twenty Segregated Sub-Accounts of Minnesota Mutual Group
Variable Annuity Account (the Account) as of December 31, 1996 and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for the periods presented in footnote (6). These financial
statements and the financial highlights are the responsibility of the Account's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statements.
Investments owned at December 31, 1996 were confirmed to us by the respective
Sub-Account mutual fund group, or, for MIMLIC Series Fund, Inc., verified by
examination of the underlying portfolios. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the MIMLIC Growth, MIMLIC Money
Market, MIMLIC Asset Allocation, MIMLIC Index 500, Vanguard Long-Term Corporate,
Vanguard Wellington, Fidelity Contrafund, Scudder International and Janus Twenty
Segregated Sub-Accounts of Minnesota Mutual Group Variable Annuity Account at
December 31, 1996 and the results of their operations, changes in their net
assets and the financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC MIMLIC
MIMLIC MONEY ASSET
ASSETS GROWTH MARKET ALLOCATION
---------- ---------- ----------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
MIMLIC Series Fund, Inc. - Growth Portfolio, 62,534 shares
at net asset value of $2.34 per share (cost $142,718) . . . . . . . . $ 146,534 - -
MIMLIC Series Fund, Inc. - Money Market Portfolio, 1,838,445
shares at net asset value of $1.00 per share (cost $1,838,445). . . . - 1,838,445 -
MIMLIC Series Fund, Inc. - Asset Allocation Portfolio, 39,679
shares at net asset value of $1.87 per share (cost $71,538) . . . . . - - 73,997
MIMLIC Series Fund, Inc. - Index 500 Portfolio, 2,527,457 shares
at net asset value of $2.41 per share (cost $5,323,400) . . . . . . . - - -
Vanguard Long-Term Corporate Portfolio, 310,816 shares
at net asset value of $8.79 per share (cost $2,722,470) . . . . . . . - - -
Vanguard Wellington, 540,034 shares at net asset value
of $26.15 per share (cost $13,063,067) . . . . . . . . . . . . . . . - - -
Fidelity Contrafund, 707,283 shares at net asset
value of $42.15 per share (cost $25,942,291). . . . . . . . . . . . . - - -
Scudder International Fund, 118,237 shares at net asset value of
$47.56 per share (cost $5,243,333) . . . . . . . . . . . . . . . . . - - -
Janus Twenty Fund, 171,421 shares at net asset
value of $27.47 per share (cost $4,967,813) . . . . . . . . . . . . . - - -
---------- ---------- ----------
146,534 1,838,445 73,997
Receivable for investments sold. . . . . . . . . . . . . . . . . . . . . . 2,859 3,567 3
Receivable from Minnesota Mutual for contract purchase payments . . . . . - 75,683 624
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1 -
---------- ---------- ----------
Total assets .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,393 1,917,696 74,624
---------- ---------- ----------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . - 75,683 624
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges. . . . . . . . . . . . . . . . . . . . . . 2,859 3,567 3
---------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,859 79,250 627
---------- ---------- ----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS . . . . . . . . . . . . . . . . . $ 146,534 1,838,446 73,997
---------- ---------- ----------
---------- ---------- ----------
ACCUMULATION UNITS OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . 136,198 1,676,436 69,684
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER ACCUMULATION UNIT . . . . . . . . . . . . . . . . . . $ 1.076 1.097 1.062
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC VANGUARD
INDEX LONG-TERM VANGUARD
ASSETS 500 CORPORATE WELLINGTON
---------- ---------- ----------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
MIMLIC Series Fund, Inc. - Growth Portfolio, 62,534 shares
at net asset value of $2.34 per share (cost $142,718) . . . . . . . . - - -
MIMLIC Series Fund, Inc. - Money Market Portfolio, 1,838,445
shares at net asset value of $1.00 per share (cost $1,838,445). . . . - - -
MIMLIC Series Fund, Inc. - Asset Allocation Portfolio, 39,679
shares at net asset value of $1.87 per share (cost $71,538) . . . . . - - -
MIMLIC Series Fund, Inc. - Index 500 Portfolio, 2,527,457 shares
at net asset value of $2.41 per share (cost $5,323,400) . . . . . . . 6,087,912 - -
Vanguard Long-Term Corporate Portfolio, 310,816 shares
at net asset value of $8.79 per share (cost $2,722,470) . . . . . . . - 2,732,075 -
Vanguard Wellington, 540,034 shares at net asset value
of $26.15 per share (cost $13,063,067) . . . . . . . . . . . . . . . - - 14,121,879
Fidelity Contrafund, 707,283 shares at net asset
value of $42.15 per share (cost $25,942,291). . . . . . . . . . . . . - - -
Scudder International Fund, 118,237 shares at net asset value of
$47.56 per share (cost $5,243,333) . . . . . . . . . . . . . . . . . - - -
Janus Twenty Fund, 171,421 shares at net asset
value of $27.47 per share (cost $4,967,813) . . . . . . . . . . . . . - - -
---------- ---------- ----------
6,087,912 2,732,075 14,121,879
Receivable for investments sold. . . . . . . . . . . . . . . . . . . . . . 29,862 276 610
Receivable from Minnesota Mutual for contract purchase payments . . . . . 13,428 4,506 23,571
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
---------- ---------- ----------
Total assets .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,131,202 2,736,857 14,146,060
---------- ---------- ----------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . 13,428 4,506 23,571
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges. . . . . . . . . . . . . . . . . . . . . . 29,862 276 610
---------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 43,290 4,782 24,181
---------- ---------- ----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS . . . . . . . . . . . . . . . . . 6,087,912 2,732,075 14,121,879
---------- ---------- ----------
---------- ---------- ----------
ACCUMULATION UNITS OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . 3,811,296 2,199,884 9,571,917
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER ACCUMULATION UNIT . . . . . . . . . . . . . . . . . . 1.597 1.242 1.475
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
SCUDDER
FIDELITY INTER- JANUS
ASSETS CONTRAFUND NATIONAL TWENTY
---------- ---------- ----------
<S> <C> <C> <C>
Investments in shares of underlying mutual funds:
MIMLIC Series Fund, Inc. - Growth Portfolio, 62,534 shares
at net asset value of $2.34 per share (cost $142,718) . . . . . . . . - - -
MIMLIC Series Fund, Inc. - Money Market Portfolio, 1,838,445
shares at net asset value of $1.00 per share (cost $1,838,445). . . . - - -
MIMLIC Series Fund, Inc. - Asset Allocation Portfolio, 39,679
shares at net asset value of $1.87 per share (cost $71,538) . . . . . - - -
MIMLIC Series Fund, Inc. - Index 500 Portfolio, 2,527,457 shares
at net asset value of $2.41 per share (cost $5,323,400) . . . . . . . - - -
Vanguard Long-Term Corporate Portfolio, 310,816 shares
at net asset value of $8.79 per share (cost $2,722,470) . . . . . . . - - -
Vanguard Wellington, 540,034 shares at net asset value
of $26.15 per share (cost $13,063,067) . . . . . . . . . . . . . . . - - -
Fidelity Contrafund, 707,283 shares at net asset
value of $42.15 per share (cost $25,942,291). . . . . . . . . . . . . 29,811,995 - -
Scudder International Fund, 118,237 shares at net asset value of
$47.56 per share (cost $5,243,333) . . . . . . . . . . . . . . . . . - 5,623,345 -
Janus Twenty Fund, 171,421 shares at net asset
value of $27.47 per share (cost $4,967,813) . . . . . . . . . . . . . - - 4,708,948
---------- ---------- ----------
29,811,995 5,623,345 4,708,948
Receivable for investments sold. . . . . . . . . . . . . . . . . . . . . . 30,031 692 188
Receivable from Minnesota Mutual for contract purchase payments . . . . . 33,414 1,679 16,622
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
---------- ---------- ----------
Total assets .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,875,440 5,625,716 4,725,758
---------- ---------- ----------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . 33,414 1,679 16,622
Payable to Minnesota Mutual for contract terminations and
mortality and expense charges. . . . . . . . . . . . . . . . . . . . . . 30,031 692 188
---------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 63,445 2,371 16,810
---------- ---------- ----------
NET ASSETS APPLICABLE TO CONTRACT OWNERS . . . . . . . . . . . . . . . . . 29,811,995 5,623,345 4,708,948
---------- ---------- ----------
---------- ---------- ----------
ACCUMULATION UNITS OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . 18,638,007 4,774,006 2,891,975
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER ACCUMULATION UNIT . . . . . . . . . . . . . . . . . . 1.600 1.178 1.628
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC MIMLIC
MIMLIC MONEY ASSET
GROWTH MARKET ALLOCATION
---------- ---------- ----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . $ - 53,181 -
Mortality and expense risk charges (note 3) . . . . . . . . . . . . . . (268) (9,373) (151)
Administrative charges (note 3) .. . . . . . . . . . . . . . . . . . . . (47) (1,654) (27)
---------- ---------- ----------
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . (315) 42,154 (178)
---------- ---------- ----------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . - - -
---------- ---------- ----------
Realized gains on sales of investments:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . 1,777 3,768,229 649
Cost of investments sold . . . . . . . . . . . . . . . . . . . . . . . (1,706) (3,768,229) (633)
---------- ---------- ----------
71 - 16
---------- ---------- ----------
Net realized gains on investments . . . . . . . . . . . . . . . . . . 71 - 16
---------- ---------- ----------
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,816 - 2,459
---------- ---------- ----------
Net gains (losses) on investments .. . . . . . . . . . . . . . . . . . 3,887 - 2,475
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . $ 3,572 42,154 2,297
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC VANGUARD
INDEX LONG-TERM VANGUARD
500 CORPORATE WELLINGTON
---------- ---------- ----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 38,734 145,547 437,061
Mortality and expense risk charges (note 3) . . . . . . . . . . . . . . (31,081) (17,675) (78,491)
Administrative charges (note 3) .. . . . . . . . . . . . . . . . . . . . (5,485) (3,119) (13,852)
---------- ---------- ----------
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . 2,168 124,753 344,718
---------- ---------- ----------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 20,051 38,347 545,916
---------- ---------- ----------
Realized gains on sales of investments:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . 1,097,451 509,296 458,433
Cost of investments sold . . . . . . . . . . . . . . . . . . . . . . . (986,612) (498,909) (416,640)
---------- ---------- ----------
110,839 10,387 41,793
---------- ---------- ----------
Net realized gains on investments . . . . . . . . . . . . . . . . . . 130,890 48,734 587,709
---------- ---------- ----------
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,849 (116,339) 482,836
---------- ---------- ----------
Net gains (losses) on investments .. . . . . . . . . . . . . . . . . . 699,739 (67,605) 1,070,545
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 701,907 57,148 1,415,263
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
SCUDDER
FIDELITY INTER- JANUS
CONTRAFUND NATIONAL TWENTY
---------- ---------- ----------
<S> <C> <C> <C>
Investment income (loss):
Investment income distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 254,811 143,278 391,082
Mortality and expense risk charges (note 3) . . . . . . . . . . . . . . (189,322) (36,914) (23,862)
Administrative charges (note 3) .. . . . . . . . . . . . . . . . . . . . (33,410) (6,514) (4,211)
---------- ---------- ----------
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . 32,079 99,850 363,009
---------- ---------- ----------
Realized and unrealized gains on investments - net:
Realized gain distributions from underlying
mutual fund (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . 1,792,004 124,900 394,754
---------- ---------- ----------
Realized gains on sales of investments:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . 990,972 826,980 678,557
Cost of investments sold . . . . . . . . . . . . . . . . . . . . . . . (876,061) (778,816) (625,059)
---------- ---------- ----------
114,911 48,164 53,498
---------- ---------- ----------
Net realized gains on investments . . . . . . . . . . . . . . . . . . 1,906,915 173,064 448,252
---------- ---------- ----------
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,320,829 290,641 (203,397)
---------- ---------- ----------
Net gains (losses) on investments .. . . . . . . . . . . . . . . . . . 4,227,744 463,705 244,855
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 4,259,823 563,555 607,864
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC MIMLIC
MIMLIC MONEY ASSET
GROWTH MARKET ALLOCATION
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . . $ (315) 42,154 (178)
Net realized gains on investments . . . . . . . . . . . . . . . . . . . 71 - 16
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,816 - 2,459
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 3,572 42,154 2,297
---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . . . . 144,424 4,696,233 72,171
Contract terminations, withdrawals and charges . . . . . . . . . . . . (1,462) (3,757,202) (471)
---------- ---------- ----------
Increase in net assets from contract transactions . . . . . . . . . . . . 142,962 939,031 71,700
---------- ---------- ----------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . 146,534 981,185 73,997
Net assets at the beginning of year. . . . . . . . . . . . . . . . . . . . - 857,261 -
---------- ---------- ----------
Net assets at the end of year .. . . . . . . . . . . . . . . . . . . . . . $ 146,534 1,838,446 73,997
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
MIMLIC VANGUARD
INDEX LONG-TERM VANGUARD
500 CORPORATE WELLINGTON
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . . 2,168 124,753 344,718
Net realized gains on investments . . . . . . . . . . . . . . . . . . . 130,890 48,734 587,709
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,849 (116,339) 482,836
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 701,907 57,148 1,415,263
---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . . . . 4,785,759 1,953,546 8,416,427
Contract terminations, withdrawals and charges . . . . . . . . . . . . . (1,060,885) (762,893) (968,102)
---------- ---------- ----------
Increase in net assets from contract transactions . . . . . . . . . . . . 3,724,874 1,190,653 7,448,325
---------- ---------- ----------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . 4,426,781 1,247,801 8,863,588
Net assets at the beginning of year. . . . . . . . . . . . . . . . . . . . 1,661,131 1,484,274 5,258,291
---------- ---------- ----------
Net assets at the end of year . . . . . . . . . . . . . . . . . . . . . . 6,087,912 2,732,075 14,121,879
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
SCUDDER
FIDELITY INTER- JANUS
CONTRAFUND NATIONAL TWENTY
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . . 32,079 99,850 363,009
Net realized gains on investments . . . . . . . . . . . . . . . . . . . 1,906,915 173,064 448,252
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,320,829 290,641 (203,397)
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 4,259,823 563,555 607,864
---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . . . . 13,563,785 2,946,298 4,060,942
Contract terminations, withdrawals and charges . . . . . . . . . . . . . (2,871,293) (1,015,404) (1,236,955)
---------- ---------- ----------
Increase in net assets from contract transactions . . . . . . . . . . . . 10,692,492 1,930,894 2,823,987
---------- ---------- ----------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . 14,952,315 2,494,449 3,431,851
Net assets at the beginning of year. . . . . . . . . . . . . . . . . . . . 14,859,680 3,128,896 1,277,097
---------- ---------- ----------
Net assets at the end of year . . . . . . . . . . . . . . . . . . . . . . 29,811,995 5,623,345 4,708,948
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------
MIMLIC MIMLIC VANGUARD
MONEY INDEX LONG-TERM VANGUARD
MARKET 500 CORPORATE WELLINGTON
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operations:
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . $ 26,568 274 48,052 119,940
Net realized gains on investments . . . . . . . . . . . . . . . . . - 15,267 2,616 71,719
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . - 195,854 125,712 602,762
---------- ---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . 26,568 211,395 176,380 794,421
---------- ---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . 1,810,340 1,326,654 1,124,779 3,495,164
Contract terminations, withdrawals and charges . . . . . . . . . . (1,301,875) (132,580) (89,744) (363,725)
---------- ---------- ---------- ----------
Increase in net assets from contract transactions . . . . . . . . . . 508,465 1,194,074 1,035,035 3,131,439
---------- ---------- ---------- ----------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . 535,033 1,405,469 1,211,415 3,925,860
Net assets at the beginning of year. . . . . . . . . . . . . . . . . . 322,228 255,662 272,859 1,332,431
---------- ---------- ---------- ----------
Net assets at the end of year . . . . . . . . . . . . . . . . . . . . $ 857,261 1,661,131 1,484,274 5,258,291
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to financial statements.
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------
SCUDDER
FIDELITY INTER- JANUS
CONTRAFUND NATIONAL TWENTY
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Investment income (loss) - net . . . . . . . . . . . . . . . . . . . . . (64,705) 1,891 88,121
Net realized gains on investments . . . . . . . . . . . . . . . . . . . 1,168,103 84,404 154,167
Net change in unrealized appreciation or depreciation
of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,598,911 199,794 (45,764)
---------- ---------- ----------
Net increase in net assets resulting from operations . . . . . . . . . . . 2,702,309 286,089 196,524
---------- ---------- ----------
Contract transactions (notes 3, 4 and 5):
Contract purchase payments . . . . . . . . . . . . . . . . . . . . . . 8,456,732 1,847,845 970,705
Contract terminations, withdrawals and charges . . . . . . . . . . . . (1,077,302) (694,100) (317,131)
---------- ---------- ----------
Increase in net assets from contract transactions . . . . . . . . . . . . 7,379,430 1,153,745 653,574
---------- ---------- ----------
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . 10,081,739 1,439,834 850,098
Net assets at the beginning of year. . . . . . . . . . . . . . . . . . . . 4,777,941 1,689,062 426,999
---------- ---------- ----------
Net assets at the end of year . . . . . . . . . . . . . . . . . . . . . . 14,859,680 3,128,896 1,277,097
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Minnesota Mutual Group Variable Annuity Account (the Account) was
established on June 14, 1993 as a segregated asset account of The Minnesota
Mutual Life Insurance Company (Minnesota Mutual) under Minnesota law and is
registered as a unit investment trust under the Investment Company Act of
1940 (as amended). The Account commenced operations September 2, 1994.
The Account currently has nineteen segregated sub-accounts to which
variable annuity contract owners may allocate their purchase payments. On
December 15, 1995, twelve additional segregated sub-accounts, MIMLIC
Growth, MIMLIC Bond, MIMLIC Asset Allocation, MIMLIC Mortgage Securities,
MIMLIC Capital Appreciation, MIMLIC International Stock, MIMLIC Small
Company, MIMLIC Maturing Government Bond 1998, MIMLIC Maturing Government
Bond 2002, MIMLIC Maturing Government Bond 2006, MIMLIC Maturing Government
Bond 2010 and MIMLIC Value Stock, were added to the Account.
The assets of each segregated sub-account are held for the exclusive
benefit of the variable annuity contract owners and are not chargeable with
liabilities arising out of the business conducted by any other account or
by Minnesota Mutual. Contract owners allocate their variable annuity
purchase payments to one or more of the nineteen segregated sub-accounts.
Such payments are then invested in shares of MIMLIC Series Fund, Inc. or in
shares of other registered investment companies or portfolios (Underlying
Funds). Payments allocated to the MIMLIC Growth, MIMLIC Bond, MIMLIC Money
Market, MIMLIC Asset Allocation, MIMLIC Mortgage Securities, MIMLIC Index
500, MIMLIC Capital Appreciation, MIMLIC International Stock, MIMLIC Small
Company, MIMLIC Maturing Government Bond 1998, MIMLIC Maturing Government
Bond 2002, MIMLIC Maturing Government Bond 2006, MIMLIC Maturing Government
Bond 2010, MIMLIC Value Stock, Vanguard Long-Term Corporate, Vanguard
Wellington, Fidelity Contrafund, Scudder International and Janus Twenty
segregated sub-accounts are invested in shares of the Growth, Bond, Money
Market, Asset Allocation, Mortgage Securities, Index 500, Capital
Appreciation, International Stock, Small Company, Maturing Government Bond
1998, Maturing Government Bond 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010 and Value Stock Portfolios of the MIMLIC
Series Fund, Inc., Long-Term Corporate Portfolio of the Vanguard Fixed
Income Securities Fund, Inc., Vanguard/Wellington Fund, Inc., Fidelity
Contrafund, Scudder International Fund and Janus Twenty Fund, respectively.
Each of the Underlying Funds is registered under the Investment Company Act
of 1940 (as amended) as a diversified, open-end management investment
company. As of December 31, 1996, no contract owners have elected to
allocate payments to the MIMLIC Bond, MIMLIC Mortgage Securities, MIMLIC
Capital Appreciation, MIMLIC International Stock, MIMLIC Small Company,
MIMLIC Maturing Government Bond 1998, MIMLIC Maturing Government Bond 2002,
MIMLIC Maturing Government Bond 2006, MIMLIC Maturing Government Bond 2010
and MIMLIC Value Stock segregated sub-accounts.
MIMLIC Sales Corporation acts as the underwriter for the Account. MIMLIC
Asset Management Company acts as the investment adviser for the MIMLIC
Series Fund, Inc. MIMLIC Sales Corporation is a wholly-owned subsidiary of
MIMLIC Asset Management Company. MIMLIC Asset Management Company is a
wholly-owned subsidiary of Minnesota Mutual.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets resulting from operations during the period. Actual results
could differ from those estimates.
<PAGE>
2
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENTS IN UNDERLYING FUNDS
Investments in shares of the Underlying Funds are stated at market value
which is the net asset value per share as determined daily by each of the
Underlying Funds. Investment transactions are accounted for on the date
the shares are purchased or sold. The cost of investments sold is
determined on the average cost method. All dividend distributions received
from the Underlying Funds are reinvested in additional shares of the
Underlying Funds and are recorded by the segregated sub-accounts on the ex-
dividend date.
FEDERAL INCOME TAXES
The Account is treated as part of Minnesota Mutual for federal income tax
purposes. Under current interpretations of existing federal income tax
law, no income taxes are payable on investment income or capital gain
distributions received by the Account from the Underlying Funds.
(3) MORTALITY AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
The mortality and expense risk charge paid to Minnesota Mutual is computed
daily and is equal, on an annual basis, to .85 percent of the average daily
net assets of the Account. Under certain conditions, the mortality and
expense risk charge may be increased to 1.25 percent of the average daily
net assets of the Account.
The contract administrative charge paid to Minnesota Mutual is computed
daily and is equal, on an annual basis, to .15 percent of the average daily
net assets of the Account. Under certain conditions, the contract
administrative charge may be increased to not more than .40 percent of the
average daily net assets of the Account.
A contingent deferred sales charge may be imposed on a contract owner
during the first six years if a contract's accumulation value is reduced by
withdrawal or surrender. This sales charge is currently being waived by
Minnesota Mutual.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Underlying Fund shares, including reinvestment
of dividend distributions, were as follows for the year ended December 31,
1996:
Growth Portfolio of the MIMLIC Series Fund, Inc. . . . . . . $ 144,424
Money Market Portfolio of the MIMLIC Series Fund, Inc. . . . 4,749,649
Asset Allocation Portfolio of the MIMLIC Series Fund, Inc.. . 72,171
Index 500 Portfolio of the MIMLIC Series Fund, Inc. . . . . . 4,844,544
Long-Term Corporate Portfolio of the Vanguard Fixed
Income Securities Fund, Inc. . . . . . . . . . . . . . . . 1,877,089
Vanguard/Wellington Fund, Inc. . . . . . . . . . . . . . . . 8,810,294
Fidelity Contrafund . . . . . . . . . . . . . . . . . . . . . 13,562,531
Scudder International Fund . . . . . . . . . . . . . . . . . 2,995,640
Janus Twenty Fund . . . . . . . . . . . . . . . . . . . . . . 4,259,859
<PAGE>
3
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the year ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------
MIMLIC MIMLIC MIMLIC
MIMLIC MONEY ASSET INDEX
GROWTH MARKET ALLOCATION 500
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Units outstanding at
December 31, 1994 . . . . . . . . . . . . - 318,636 - 261,150
Contract purchase payments . . . . . . . - 1,756,508 - 1,106,436
Deductions for contract terminations
and withdrawal payments . . . . . . . . - (1,263,069) - (115,104)
---------- ---------- ----------- ---------
Units outstanding at
December 31, 1995 . . . . . . . . . . . . - 812,075 - 1,252,482
Contract purchase payments . . . . . . . 137,557 4,346,833 70,145 3,278,878
Deductions for contract terminations
and withdrawal payments . . . . . . . . (1,359) (3,482,472) (461) (720,064)
---------- ---------- ----------- ---------
Units outstanding at
December 31, 1996 . . . . . . . . . . . . 136,198 1,676,436 69,684 3,811,296
---------- ---------- ----------- ---------
---------- ---------- ----------- ---------
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------
VANGUARD SCUDDER
LONG-TERM VANGUARD FIDELITY INTER- JANUS
CORPORATE WELLINGTON CONTRAFUND NATIONAL TWENTY
---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1994 . . . . . . . . . . . . 275,796 1,363,274 4,870,232 1,807,445 444,821
Contract purchase
payments . . . . . . . . . . . . . . . . 1,007,465 3,051,713 7,266,625 1,913,174 832,636
Deductions for contract
terminations and
withdrawal payments . . . . . . . . . . (80,518) (317,901) (904,520) (709,191) (287,346)
---------- ---------- ----------- --------- ----------
Units outstanding at
December 31, 1995 . . . . . . . . . . . . 1,202,743 4,097,086 11,232,337 3,011,428 990,111
Contract purchase
payments . . . . . . . . . . . . . . . . 1,631,680 6,194,350 9,383,519 2,682,525 2,722,397
Deductions for contract
terminations and
withdrawal payments . . . . . . . . . . (634,539) (719,519) (1,977,849) (919,947) (820,533)
---------- ---------- ----------- --------- ----------
Units outstanding at
December 31, 1996 . . . . . . . . . . . . 2,199,884 9,571,917 18,638,007 4,774,006 2,891,975
---------- ---------- ----------- --------- ----------
---------- ---------- ----------- --------- ----------
</TABLE>
<PAGE>
4
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for
an accumulation unit outstanding during the years ended December 31, 1996
and 1995 and the period from September 2, 1994, commencement of operations,
to December 31, 1994 (year ended December 31, 1996 for MIMLIC Growth and
MIMLIC Asset Allocation):
<TABLE>
<CAPTION>
MIMLIC
MIMLIC MIMLIC ASSET
GROWTH MONEY MARKET ALLOCATION
------------ --------------------------------------- -----------
1996 1996 1995 1994 1996
------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period . . . . . . $ 1.000 1.055 1.011 1.000 1.000
------------ --------- --------- --------- ---------
Income from investment operations:
Net investment income (loss). . . . . . . (.004) .042 .044 .011 (.004)
Net gains or losses on securities
(both realized and unrealized) . . . . . .080 - - - .066
------------ --------- --------- --------- ---------
Total from investment operations. . . . . . .076 .042 .044 .011 .062
------------ --------- --------- --------- ---------
Unit value, end of period . . . . . . . . . $ 1.076 1.097 1.055 1.011 1.062
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
MIMLIC INDEX 500 VANGUARD LONG-TERM CORPORATE
------------------------------------- ---------------------------------
1996 1995 1994 1996 1995 1994
------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period . . . . . . $ 1.326 .979 1.000 1.234 .989 1.000
------------ --------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss) . . . . . . .001 - (.003) .072 .067 .020
Net gains or losses on securities
(both realized and unrealized) . . . . . .270 .347 (.018) (.064) .178 (.031)
------------ --------- --------- --------- --------- ---------
Total from investment
operations . . . . . . . . . . . . . . . .271 .347 (.021) .008 .245 (.011)
------------ --------- --------- --------- --------- ---------
Unit value, end of period . . . . . . . . $ 1.597 1.326 .979 1.242 1.234 .989
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
5
MINNESOTA MUTUAL GROUP VARIABLE ANNUITY ACCOUNT
(6) FINANCIAL HIGHLIGHTS - CONTINUED
<TABLE>
<CAPTION>
VANGUARD WELLINGTON FIDELITY CONTRAFUND
---------------------------------- ---------------------------------
1996 1995 1994 1996 1995 1994
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period . . . . . . $ 1.283 .977 1.000 1.322 .981 1.000
--------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) . . . . . . .051 .047 .022 .002 (.008) (.003)
Net gains or losses on securities
(both realized and unrealized). . . . . . .141 .259 (.045) .276 .349 (.016)
--------- -------- -------- -------- -------- --------
Total from investment
operations. . . . . . . . . . . . . . . .192 .306 (.023) .278 .341 (.019)
--------- -------- -------- -------- -------- --------
Unit value, end of period . . . . . . . . . $ 1.475 1.283 .977 1.600 1.322 .981
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
SCUDDER INTERNATIONAL JANUS TWENTY
--------------------------------- ---------------------------------
1996 1995 1994 1996 1995 1994
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period . . . . . . $ 1.039 .934 1.000 1.289 .959 1.000
--------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) . . . . . . .025 .001 (.003) .199 .132 .003
Net gains or losses on securities
(both realized and unrealized) . . . . . .114 .104 (.063) .140 .198 (.044)
--------- -------- -------- -------- -------- --------
Total from investment
operations . . . . . . . . . . . . . . .139 .105 (.066) .339 .330 (.041)
--------- -------- -------- -------- -------- --------
Unit value, end of period . . . . . . . . . $ 1.178 1.039 .934 1.628 1.289 .959
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
APPENDIX A
Calculation of Accumulation Unit Values
Calculation of the net investment factor and the accumulation unit value may be
illustrated by the following hypothetical example. Assume the accumulation unit
value of the Index 500 Sub-Account on the immediately preceding valuation period
was $1.000000. Assume the following about the Series Fund Index 500 Portfolio:
(a) the net asset value per share of the Index 500 Portfolio was $1.394438 at
the end of the current valuation period; (2) the Index 500 Portfolio declared a
per share dividend and capital gain distribution in the amount of $.037162
during the current valuation period; and (3) the net asset value per share of
the Index 500 Portfolio was $1.426879 at the end of the preceding valuation
period.
The gross investment rate for the valuation period would be equal to 1.003300
(1.394438 plus .037162 divided by 1.426879). The net investment rate for the
valuation period is determined by deducting the total Index 500 Sub-Account
expenses from the gross investment rate. Total Index 500 Sub-Account expenses
of .000040 is equal to .000034 for mortality and risk expense charge (the daily
equivalent of .85% assuming 252 valuation dates per year) plus .000006 for
contract administrative charge (the daily equivalent of .15% assuming 252
valuation dates per year). The net investment rate equals 1.003269 (1.003309
minus .000040).
The accumulation unit value at the end of the valuation period would be equal to
the value on the immediately preceding valuation date ($1.00000) multiplied by
the net investment factor for the current valuation period (1.003269), which
produces $1.003269.
Calculation of Annuity Unit Values and Variable Annuity Payment
The determination of the annuity unit value and the annuity payment may be
illustrated by the following hypothetical example. Assume that the contract has
been in force for more than six years so that no deferred sales charge will
apply and that there is no deduction for annuity premium taxes. Assume further
that at the date of his or her retirement, the annuitant has credited to his or
her account 30,000 accumulation units, and that the value of an accumulation
unit on the valuation date next following the fourteenth day of the preceding
month was $1.150000, producing a total value of $34,500. Assume also that the
annuitant elects an option for which the table in the contract indicates the
first monthly payment is $6.57 per $1,000 of value applied; the annuitant's
first monthly payment would thus be 34.500 multiplied by $6.57, or $226.67.
Assume that the annuity unit value on the due date of the first payment was
$1.100000. When this is divided into the first monthly payment, the number of
annuity units represented by that payment is determined to be 206.064. The
value of this same number of annuity units will be paid in each subsequent
month.
Assume further that the accumulation unit value on the valuation date next
following the fourteenth day of the succeeding month is $1.160000. This is
divided by the accumulation unit value on the preceding monthly valuation date
($1.150000) to produce a ratio of 1.008696.
<PAGE>
Multiplying this ratio by .996338 to neutralize the assumed investment rate of
4.5% per annum already taken into account in determining annuity units as
described above, produces a result of 1.005002. This is then multiplied by the
preceding annuity unit value ($1.100000) to produce a current annuity value of
$1.105502.
The second monthly payment is then determined by multiplying the fixed number of
annuity units (206.064) by the current annuity unit value ($1.105502), which
produces a second monthly annuity payment of $227.80.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Minnesota Mutual Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles. As discussed in Note
2 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts," in 1996.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 10, 1997
53
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,558,975 and $4,525,352) $ 4,674,082 $ 4,761,561
Held-to-maturity, at amortized cost (fair value
$1,179,112 and $1,281,523) 1,125,638 1,180,654
Equity securities, at fair value (cost $429,509 and
$277,554) 549,797 384,882
Mortgage loans, net 608,808 608,537
Real estate, net 43,082 47,256
Policy loans 204,178 198,716
Short-term investments 122,772 72,841
Other invested assets 98,247 91,530
----------- -----------
Total investments 7,426,604 7,345,977
Cash 57,140 48,358
Finance receivables, net 259,192 226,720
Deferred policy acquisition costs 589,517 539,732
Accrued investment income 90,996 98,373
Premiums receivable 77,140 85,247
Property and equipment, net 55,050 50,809
Reinsurance recoverables 126,629 102,198
Other assets 54,798 46,530
Separate account assets 3,706,256 2,609,460
----------- -----------
Total assets $12,443,322 $11,153,404
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,310,015 $ 4,287,083
Future policy and contract benefits 1,638,720 1,554,898
Pending policy and contract claims 70,577 55,812
Other policyowner funds 396,848 371,537
Policyowner dividends payable 49,899 50,450
Unearned premiums and fees 207,111 210,494
Federal income tax liability:
Current 25,643 39,516
Deferred 149,665 173,905
Other liabilities 286,042 320,607
Notes payable 319,000 279,967
Separate account liabilities 3,691,374 2,596,285
----------- -----------
Total liabilities 11,144,894 9,940,554
Policyowners' surplus:
Unassigned surplus 1,190,116 1,059,598
Net unrealized investment gains 108,312 153,252
----------- -----------
Total policyowners' surplus 1,298,428 1,212,850
----------- -----------
Total liabilities and policyowners' surplus $12,443,322 $11,153,404
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 612,359 $ 603,770 $ 562,018
Policy and contract fees 245,966 214,203 188,115
Net investment income 530,987 515,047 486,101
Net realized investment gains 59,546 66,643 25,769
Finance charge income 46,932 39,937 34,258
Other income 51,630 40,250 30,106
---------- ---------- ---------
Total revenues 1,547,420 1,479,850 1,326,367
---------- ---------- ---------
Benefits and expenses:
Policyowner benefits 541,520 517,771 498,424
Interest credited to policies and con-
tracts 288,967 297,145 283,626
General operating expenses 302,618 273,425 253,317
Commissions 103,370 93,465 87,631
Administrative and sponsorship fees 79,360 76,223 71,143
Dividends to policyowners 24,804 27,282 26,672
Interest on notes payable 22,798 11,128 7,295
Increase in deferred policy acquisition
costs (15,312) (29,822) (43,974)
---------- ---------- ---------
Total benefits and expenses 1,348,125 1,266,617 1,184,134
---------- ---------- ---------
Income from operations before taxes 199,295 213,233 142,233
Federal income tax expense:
Current 68,033 71,379 63,641
Deferred 744 11,995 (1,511)
---------- ---------- ---------
Total federal income tax expense 68,777 83,374 62,130
Net income $ 130,518 $ 129,859 $ 80,103
========== ========== =========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,212,850 $ 874,577 $ 892,510
Net income 130,518 129,859 80,103
Change in net unrealized investment
gains and losses (44,940) 208,414 (98,036)
---------- ---------- ---------
Policyowners' surplus, end of year $1,298,428 $1,212,850 $ 874,577
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,518 $ 129,859 $ 80,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to annuity and insur-
ance contracts 275,968 288,218 277,863
Fees deducted from policy and contract
balances (206,780) (201,575) (188,226)
Change in future policy benefits 84,389 100,025 63,328
Change in other policyowner liabilities 16,099 (4,762) (16,794)
Change in deferred policy acquisition
costs (15,312) (29,822) (43,974)
Change in premiums due and other receiv-
ables (26,142) (18,039) 38,166
Change in federal income tax liabilities (12,055) 18,376 17,854
Net realized investment gains (59,546) (66,643) (25,769)
Other, net 29,987 36,561 28,958
---------- ---------- ----------
Net cash provided by operating activi-
ties 217,126 252,198 231,509
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 877,682 1,349,348 653,498
Equity securities 352,901 203,493 88,645
Mortgage loans 15,567 4,315 20,912
Real estate 11,678 15,948 17,571
Other invested assets 12,280 10,775 28,305
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 329,550 253,576 327,337
Fixed maturity securities, held-to-matu-
rity 114,222 127,617 75,648
Mortgage loans 94,703 104,730 126,134
Cost of purchases of:
Fixed maturity securities, available-
for-sale (1,228,048) (1,975,130) (1,123,125)
Fixed maturity securities, held-to-matu-
rity (60,612) (140,763) (131,820)
Equity securities (446,599) (212,142) (131,483)
Mortgage loans (108,691) (209,399) (145,964)
Real estate (3,786) (16,554) (10,985)
Other invested assets (29,271) (20,517) (12,732)
Finance receivable originations or pur-
chases (175,876) (167,298) (134,867)
Finance receivable principal payments 142,723 123,515 104,539
Other, net (43,662) (19,292) 15,309
---------- ---------- ----------
Net cash used for investing activities (145,239) (567,778) (233,078)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insurance
contracts 657,405 710,525 647,237
Withdrawals from annuity and insurance
contracts (702,681) (563,569) (645,969)
Proceeds from issuance of surplus notes -- 124,967 --
Proceeds from issuance of debt by subsidi-
ary 60,000 50,000 30,000
Payments on debt by subsidiary (21,000) (10,000) (9,100)
Other, net (6,898) (3,801) (5,940)
---------- ---------- ----------
Net cash provided by (used for) fi-
nancing activities (13,174) 308,122 16,228
---------- ---------- ----------
Net increase (decrease) in cash and short-
term investments 58,713 (7,458) 14,659
Cash and short-term investments, beginning
of year 121,199 128,657 113,998
---------- ---------- ----------
Cash and short-term investments, end of
year $ 179,912 $ 121,199 $ 128,657
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues reported in 1996 by these business units were
$780,250,000, $279,554,000, $213,461,000 and $104,059,000, respectively.
Additional revenues of $170,096,000 were reported by the Company's
subsidiaries.
At December 31, 1996, the Company was one of the 11 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). All material intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from management's estimates.
New Accounting Principles
In 1995 and prior years, the Company prepared its financial statements
according to statutory accounting practices prescribed or permitted by the
Commerce Department of the State of Minnesota (Department of Commerce), and
these accounting practices were considered GAAP for mutual life insurance
companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 40 (the Interpretation), "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises."
The Interpretation was supposed to become effective for fiscal years beginning
after December 15, 1994 and stated that financial statements prepared in
accordance with statutory accounting practices would no longer be considered to
be in conformity with GAAP. The Interpretation requires all mutual life
insurance companies that report their financial statements in conformity with
GAAP to apply all applicable authoritative GAAP pronouncements, with the
exception of Statements of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long Duration Contracts and
Realized Gains and Losses from the Sale of Investments," and No. 113,
"Accounting for Reinsurance of Short-Duration and Long-Duration Contracts."
In January 1995, the FASB issued SFAS 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Contracts." This statement deferred the implementation
of the Interpretation to fiscal years beginning after December 15, 1995 and
extended the requirements of SFAS Nos. 60, 97 and 113 to mutual life insurance
enterprises.
SFAS No. 120 also requires mutual life insurance enterprises to adopt
Statement of Position 95-1, "Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises," which was issued by the American Institute
of Certified Public Accountants.
57
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 120 on January 1, 1996, and the accompanying
1994 and 1995 financial statements and related notes have been restated to
conform with the presentation of the 1996 GAAP financial statements.
The Company will continue to prepare financial statements according to
statutory accounting practices prescribed or permitted by the Department of
Commerce for purposes of filing with the Department of Commerce, the National
Association of Insurance Commissioners and states in which the Company is
licensed to do business. The significant differences between statutory and GAAP
financial results are presented in Note 12.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to gross margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated premium revenues.
The ultimate premium revenues are estimated based upon the same assumptions
used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred acquisition
costs are amortized over the estimated lives of the contracts in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins.
Deferred acquisition costs amortized were $125,978,000, $104,940,000 and
$86,477,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest is suspended when a loan is contractually delinquent for more than 60
days and is subsequently recognized when received. Accrual is resumed when the
loan is contractually less than 60 days past due. An allowance for
uncollectible amounts is maintained by direct charges to operations at an
amount which management believes, based upon historical losses and economic
conditions, is adequate to absorb probable losses on existing receivables that
may become uncollectible. The reported receivables are net of this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities which may be sold prior to maturity are classified as available-for-
sale and carried at fair value.
58
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1996 and 1995, was $5,968,000 and $8,342,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps are used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps are based upon
certain stock indices, and settlement with the counterparties will take place
in January 1998. If, at the time of settlement for a particular swap, the
designated stock index has fallen below a specified level, the counterparty
will pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index has risen, the Company will pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap.
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely affected by changes in the
market) and credit risk (that the counterparty will not perform according to
the contract terms). To reduce credit risk, the swap contracts require that the
counterparties maintain sufficient credit ratings and provide collateral under
certain circumstances.
The swaps are carried at fair value, which is based upon dealer quotes.
Changes in fair value are recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses are recognized in income.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of policyowners'
surplus, net of taxes and related adjustments to deferred policy acquisition
costs and unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$81,962,000 and $75,507,000 at December 31, 1996 and 1995, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expense for the years ended December 31, 1996,
1995 and 1994, was $6,454,000, $5,941,000 and $8,136,000, respectively.
59
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of certain policyowners
and contractholders. The Company receives administrative and investment
advisory fees for services rendered on behalf of these funds. Separate account
assets and liabilities are carried at fair value, based upon the market value
of the investments held in the segregated funds.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $14,882,000 and $13,175,000 as of December 31, 1996 and 1995, respectively.
Policyowner Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees based upon actuarial determinations which take into
consideration current mortality, interest earnings, expense factors and federal
income taxes. Dividends are recognized as expenses consistent with the
recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $433,985 $426,114 $417,698
Equity securities 14,275 8,883 4,485
Mortgage loans 63,865 58,943 49,676
Real estate (475) 497 648
Policy loans 13,828 12,821 11,800
Short-term investments 6,535 6,716 4,262
Other invested assets 4,901 5,168 3,212
-------- -------- --------
Gross investment income 536,914 519,142 491,781
Investment expenses (5,927) (4,095) (5,680)
-------- -------- --------
Total $530,987 $515,047 $486,101
======== ======== ========
</TABLE>
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $(6,536) $24,025 $(2,528)
Equity securities 57,770 36,374 11,268
Mortgage loans (721) (207) (82)
Real estate 7,088 2,436 3,915
Other invested assets 1,945 4,015 13,196
------- ------- -------
Total $59,546 $66,643 $25,769
======= ======= =======
</TABLE>
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 19,750 $ 34,898 $ 13,375
Gross realized losses (26,286) (10,873) (15,903)
Equity securities:
Gross realized gains 79,982 52,670 21,538
Gross realized losses (22,212) (16,296) (10,270)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $314,576 $358,877
Gross unrealized losses (77,337) (13,713)
Adjustment to deferred policy acquisition costs (65,260) (99,732)
Adjustment to unearned policy and contract fees (8,192) (11,665)
Deferred federal income taxes (55,475) (80,515)
-------- --------
Net unrealized gains $108,312 $153,252
======== ========
</TABLE>
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
States, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- ------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- ------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- ------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to-maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- ------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- ------- ----------
Total $6,114,122 $367,312 $78,443 $6,402,991
========== ======== ======= ==========
DECEMBER 31, 1995
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 261,669 $ 10,911 $ 440 $ 272,140
States, municipalities, and polit-
ical subdivisions 26,317 3,262 -- 29,579
Foreign governments 1,704 223 -- 1,927
Corporate securities 2,523,889 169,329 6,098 2,687,120
Mortgage-backed securities 1,711,773 62,510 3,488 1,770,795
---------- -------- ------- ----------
Total fixed maturities 4,525,352 246,235 10,026 4,761,561
Equity securities--unaffiliated 196,355 91,269 1,590 286,034
Equity securities--affiliated 81,199 17,649 -- 98,848
---------- -------- ------- ----------
Total equity securities 277,554 108,918 1,590 384,882
---------- -------- ------- ----------
Total available-for-sale 4,802,906 355,153 11,616 5,146,443
Held-to-maturity:
United States government and gov-
ernment agencies and authorities 250 3 -- 253
States, municipalities, and polit-
ical subdivisions 525 6 -- 531
Corporate securities 953,511 89,962 525 1,042,948
Mortgage-backed securities 226,368 11,540 117 237,791
---------- -------- ------- ----------
Total held-to-maturity 1,180,654 101,511 642 1,281,523
---------- -------- ------- ----------
Total $5,983,560 $456,664 $12,258 $6,427,966
========== ======== ======= ==========
</TABLE>
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 33,390 $ 33,429 $ 4,889 $ 4,948
Due after one year through five
years 435,040 459,870 163,206 168,527
Due after five years through ten
years 1,383,954 1,429,460 223,848 235,754
Due after ten years 913,784 936,047 513,051 542,822
---------- ---------- ---------- ----------
2,766,168 2,858,806 904,994 952,051
Mortgage-backed securities 1,792,807 1,815,276 220,644 227,061
---------- ---------- ---------- ----------
Total $4,558,975 $4,674,082 $1,125,638 $1,179,112
========== ========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, bonds and certificates of deposit with a
carrying value of $12,934,000 and $15,296,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,895 $ 1,711
Foreclosed real estate 535 400
Investment real estate 2,529 2,565
------- -------
Total $ 4,959 $ 4,676
======= =======
</TABLE>
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000, and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
At December 31, 1995, the recorded investment in mortgage loans that were
considered to be impaired was $12,232,000 before allowance for credit losses.
Included in this amount is $3,256,000 of impaired loans, for which the related
allowance for credit losses is $211,000, and $8,976,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, a
general allowance for credit losses was established for potential impairments
in the remainder of the mortgage loan portfolio. The general allowance was
$1,500,000 at December 31, 1996, 1995 and 1994.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,711 $2,449 $2,412
Provision for credit losses 381 127 622
Charge-offs (197) (865) (585)
------ ------ ------
Balance at end of year $1,895 $1,711 $2,449
====== ====== ======
</TABLE>
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $9,375 $15,845 $20,236
Interest income on impaired mortgage loans--contractual 1,796 1,590 2,103
Interest income on impaired mortgage loans--collected 1,742 1,515 1,963
</TABLE>
(4) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $204,038 $178,262
Retail installment notes 30,843 32,345
Retail revolving credit 24,863 14,864
Credit card receivables 3,541 4,479
Accrued interest 3,404 3,147
-------- --------
Gross receivables 266,689 233,097
Allowance for uncollectible amounts (7,497) (6,377)
-------- --------
Finance receivables, net $259,192 $226,720
======== ========
</TABLE>
Direct installment loans at December 31, 1996 consisted of $93,127,000 of
discount basis loans (net of unearned finance charges) and $110,911,000 of
interest-bearing loans. As of December 31, 1995, discount basis loans amounted
to $92,351,000 and interest-bearing loans amounted to $85,911,000. Direct
installment loans generally have a maximum term of 84 months. Retail
installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Experience has shown that a substantial portion of
finance receivables will be renewed, converted or paid in full prior to
maturity.
Principal cash collections of direct installment loans amounted to
$92,438,000, $75,865,000 and $70,941,000, and the percentage of these cash
collections to average net balances was 48%, 47% and 55% for the years ended
December 31, 1996, 1995 and 1994, respectively.
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 6,377 $5,360 $4,801
Provision for credit losses 10,086 6,140 4,652
Charge-offs (11,036) (6,585) (5,305)
Recoveries 2,070 1,462 1,212
------- ------ ------
Balance at end of year $ 7,497 $6,377 $5,360
======= ====== ======
</TABLE>
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $69,753 $74,631 $49,781
Differences between
computed and actual tax
expense:
Dividends received
deduction (2,534) (1,710) (1,293)
Special tax on mutual
life insurance
companies 2,760 10,134 9,880
Tax credits (3,475) (1,840) (1,150)
Expense adjustments and
other 2,273 2,159 4,912
------- ------- -------
Total tax expense $68,777 $83,374 $62,130
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 15,854 $ 22,151
Unearned fee income 43,232 43,576
Pension and post-retirement benefits 21,815 20,187
Tax deferred policy acquisition costs 58,732 47,228
Net realized capital losses 8,275 7,881
Other 19,229 17,997
-------- --------
Gross deferred tax assets 167,137 159,020
Deferred tax liabilities:
Deferred policy acquisition costs 206,331 188,906
Real estate and property and equipment depreciation 10,089 9,049
Basis difference on investments 8,605 7,402
Net unrealized capital gains 81,339 119,604
Other 10,438 7,964
-------- --------
Gross deferred tax liabilities 316,802 332,925
-------- --------
Net deferred tax liability $149,665 $173,905
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1996 and 1995, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1996, 1995 and 1994, were
$79,026,000, $64,390,000 and $45,268,000, respectively.
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $377,302 $349,311 $323,304
Less: reinsurance recoverable 80,333 61,624 51,549
-------- -------- --------
Net balance at January 1 296,969 287,687 271,755
-------- -------- --------
Incurred related to:
Current year 134,727 129,896 129,028
Prior years 4,821 (4,014) 860
-------- -------- --------
Total incurred 139,548 125,882 129,888
-------- -------- --------
Paid related to:
Current year 51,695 47,620 46,270
Prior years 70,073 68,980 67,686
-------- -------- --------
Total paid 121,768 116,600 113,956
-------- -------- --------
Net balance at December 31 314,749 296,969 287,687
Plus: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Balance at December 31 $416,910 $377,302 $349,311
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in future policy and contract benefits and pending policy
and contract claims on the consolidated balance sheets.
Incurred claims related to prior years are due to the differences between
actual and estimated claims incurred as of the end of the prior year and
interest credited to future policy and contract benefits.
(7) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan which provides certain employees with benefits
in excess of limits for qualified retirement plans.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 6,019 $ 5,294 $ 4,880
Interest accrued on projected benefit obligation 8,541 7,935 7,382
Actual return on plan assets (12,619) (18,061) (1,331)
Net amortization and deferral 4,698 11,811 (5,094)
-------- -------- -------
Net periodic pension cost $ 6,639 $ 6,979 $ 5,837
======== ======== =======
</TABLE>
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLAN
------------------ ----------------
1996 1995 1996 1995
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 61,328 $ 56,428 $ -- $ --
Non-vested benefit obligation 19,119 16,599 5,912 4,539
-------- -------- ------- -------
Accumulated benefit obligation $ 80,447 $ 73,027 $ 5,912 $ 4,539
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $117,836 $105,180 $12,576 $10,430
Plan assets at fair value 115,107 102,594 -- --
-------- -------- ------- -------
Plan assets less than projected bene-
fit obligation 2,729 2,586 12,576 10,430
Unrecognized net gain (loss) 3,633 2,095 (2,332) (1,187)
Unrecognized prior service cost (364) (213) -- --
Unamortized transition asset (obliga-
tion) 2,422 2,643 (8,451) (9,219)
Additional minimum liability -- -- 4,119 4,515
-------- -------- ------- -------
Net pension liability $ 8,420 $ 7,111 $ 5,912 $ 4,539
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.8% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1996 and 1995. The assumed long-term rate of return on plan assets was either
7.5% or 8.5%, depending on the plan.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the trustees of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1996, 1995 and 1994 of $6,092,000, $6,595,000 and $6,866,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
The Company also has unfunded postretirement plans that provide certain health
care and life insurance benefits to substantially all retired employees and
agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $1,011 $1,276 $1,760
Interest accrued on projected benefit obligation 2,041 2,452 2,298
Amortization of prior service cost (513) (513) (223)
Amortization of net gain (177) -- --
------ ------ ------
Net periodic postretirement benefit cost $2,362 $3,215 $3,835
====== ====== ======
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $10,238 $11,875
Other fully eligible plan participants 4,594 5,535
Other active plan participants 9,514 9,809
------- -------
Total accumulated postretirement benefit obligation 24,346 27,219
Unrecognized prior service cost 4,107 4,620
Unrecognized net gain 9,880 4,743
------- -------
Accrued postretirement benefit liability $38,333 $36,582
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1996 and 1995 was 7.5%. The 1996 net health care cost trend rate
was 9.0%, graded to 5.5% over 7 years, and the 1995 rate was 11.0%, graded to
5.5% over 11 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1996 and 1995. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31, 1996 by
$4,262,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1996 by $583,000.
(8) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $615,098 $600,841 $558,066
Reinsurance assumed 64,489 64,792 60,939
Reinsurance ceded (67,228) (61,863) (56,987)
-------- -------- --------
Net premiums $612,359 $603,770 $562,018
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $72,330,000,
$58,338,000 and $60,970,000 during 1996, 1995 and 1994, respectively.
68
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgment is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short term investments and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1996 and 1995, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1996 and 1995, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts, and other
fund deposits, which have guaranteed interest rates and surrender charges, are
estimated to be the amount payable on demand as of December 31, 1996 and 1995.
The amount payable on demand equates to the account balance less applicable
surrender charges. Contracts without guaranteed interest rates and surrender
charges have fair values equal to their accumulation values plus applicable
market value adjustments. The fair values of guaranteed investment contracts
and supplementary contracts without life contingencies are calculated using
discounted cash flows, based on interest rates currently offered for similar
products with maturities consistent with those remaining for the contracts
being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
The carrying amounts and fair values of the Company's financial instruments
which were classified as assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,674,082 $4,674,082 $4,761,561 $4,761,561
Held-to-maturity 1,125,638 1,179,112 1,180,654 1,281,523
Equity securities 549,797 549,797 384,882 384,882
Mortgage loans:
Commercial 432,198 445,976 373,897 391,089
Residential 176,610 180,736 234,640 239,723
Policy loans 204,178 204,178 198,716 198,716
Short-term investments 122,772 122,772 72,841 72,841
Cash 57,140 57,140 48,358 48,358
Finance receivables, net 259,192 259,192 226,720 226,720
Derivatives 1,197 1,197 -- --
---------- ---------- ---------- ----------
Total financial assets $7,602,804 $7,674,182 $7,482,269 $7,605,413
========== ========== ========== ==========
</TABLE>
69
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
which were classified as liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,178,355 $2,152,636 $2,178,223 $2,156,886
Annuity certain contracts 52,636 53,962 48,492 50,732
Other fund deposits 808,592 805,709 856,535 847,975
Guaranteed investment contracts 18,770 18,866 47,426 47,987
Supplementary contracts without
life contingencies 47,966 47,536 41,431 39,962
Notes payable 319,000 325,974 279,967 294,103
---------- ---------- ---------- ----------
Total financial liabilities $3,425,319 $3,404,683 $3,452,074 $3,437,645
========== ========== ========== ==========
</TABLE>
(10) NOTES PAYABLE
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyowners' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1996 and 1995. The issuance costs of
$1,403,000 are deferred and amortized over 30 years on a straight-line basis.
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate--surplus notes, 8.25%, 2025 $125,000 $124,967
Consumer finance subsidiary--senior, 6.53%--8.77%, through
2003 194,000 155,000
-------- --------
Total notes payable $319,000 $279,967
======== ========
</TABLE>
At December 31, 1996, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1997, $21,000,000; 1998, $31,000,000;
1999, $49,000,000; 2000, $33,000,000; 2001, $26,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth.
As of December 31, 1996, the consumer finance subsidiary was required to have a
minimum liquid net worth of $41,354,000. Liquid net worth at that date was
$51,803,000.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994,
was $21,849,000, $6,504,000 and $5,378,000, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
The Company has issued certain participating group annuity and life insurance
contracts jointly with another life insurance company. The joint contract
issuer has liabilities related to these contracts of
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$328,346,000 as of December 31, 1996. To the extent the joint contract issuer
is unable to meet its obligation under the agreement, the Company remains
liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $142,469,000 as of December 31, 1996. The Company
estimates that $35,000,000 of these commitments will be invested in 1997, with
the remaining $107,469,000 invested over the next four years.
As of December 31, 1996, the Company had committed to purchase bonds and
mortgage loans totaling $74,123,000 but had not completed the purchase
transactions.
At December 31, 1996, the Company had guaranteed the payment of $68,700,000
in policyowner dividends and discretionary amounts payable in 1997. The Company
has pledged bonds, valued at $70,336,000, to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Associations. An asset is held for the amount of guaranty fund assessments paid
which can be recovered through future premium tax credits.
(12) STATUTORY FINANCIAL DATA
Statutory accounting is primarily focused on solvency and surplus adequacy.
Therefore, fundamental differences exist between statutory and GAAP accounting,
and their effects on income and policyowners' surplus are illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1996 1995 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 682,886 $ 601,565 $115,797 $ 88,706 $ 65,123
Adjustments:
Deferred policy acquisi-
tion costs 589,517 539,732 15,312 29,822 43,974
Net unrealized invest-
ment gains 111,575 235,143 -- -- --
Statutory asset valua-
tion reserve 240,474 201,721 -- -- --
Statutory interest main-
tenance reserve 24,707 32,899 (8,192) 12,976 (4,426)
Premiums and fees de-
ferred or receivable (75,716) (77,444) 1,587 497 (2,310)
Change in reserve basis 98,406 77,464 20,114 12,382 (1,444)
Separate accounts (40,755) (36,010) (6,304) (854) (5,837)
Unearned policy and con-
tract fees (121,843) (122,786) (2,530) (4,410) (10,406)
Surplus notes (125,000) (124,967) -- -- --
Net deferred taxes (149,665) (173,905) 744 (11,995) 1,511
Nonadmitted assets 31,531 28,211 -- -- --
Policyowner dividends 57,765 57,263 502 4,660 2,446
Other (25,454) (26,036) (6,512) (1,925) (8,528)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,298,428 $1,212,850 $130,518 $129,859 $ 80,103
========== ========== ======== ======== ========
</TABLE>
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 302,820 $ 298,461 $ 298,461
States, municipalities and political
subdivisions 11,296 12,055 12,055
Foreign governments 1,926 1,872 1,872
Public utilities 547,228 590,445 573,030
Mortgage-backed securities 2,013,451 2,042,337 2,035,920
All other corporate bonds 2,807,892 2,908,024 2,878,382
---------- ---------- ----------
Total bonds 5,684,613 5,853,194 5,799,720
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 510 611 611
Banks, trusts and insurance companies 12,824 21,484 21,484
Industrial, miscellaneous and all
other 329,792 422,401 422,401
Nonredeemable preferred stocks 10,857 11,491 11,491
---------- ---------- ----------
Total equity securities 353,983 455,987 455,987
---------- ---------- ----------
Mortgage loans on real estate 608,808 xxxxxx 608,808
Real estate (2) 43,082 xxxxxx 43,082
Policy loans 204,178 xxxxxx 204,178
Other long-term investments 98,247 xxxxxx 98,247
Short-term investments 122,772 xxxxxx 122,772
---------- ----------
Total $1,077,087 xxxxxx $1,077,087
---------- ----------
Total investments $7,115,683 xxxxxx $7,332,794
========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $1,810,000.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments.
72
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------- ------------------------------------------------------------
FUTURE POLICY AMORTIZATION
DEFERRED BENEFITS OTHER POLICY BENEFITS, OF DEFERRED
POLICY LOSSES, CLAIMS CLAIMS AND NET CLAIMS, LOSSES POLICY OTHER
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE REVENUE(3) INCOME EXPENSES COSTS EXPENSES
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212 $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 55,888 400,950 34,847 14,567 153,505 33,358 93,482 11,448 83,345
Annuity 53,015 3,401,760 -- 33 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance -- 30,117 23,783 -- 49,216 5,703 33,563 -- 18,090
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$539,732 $5,841,981 $210,494 $55,812 $817,973 $515,047 $842,198 $104,940 $454,241
======== ========== ======== ======= ======== ======== ======== ======== ========
1994:
Life insurance $510,117 $1,867,170 $133,221 $47,099 $505,300 $192,141 $443,233 $ 59,351 $245,791
Accident and
health insurance 46,506 352,955 36,529 17,142 136,619 30,119 93,359 12,401 75,380
Annuity 92,664 3,263,042 -- 12 60,479 258,196 238,301 14,725 79,498
Property and
liability
insurance -- 32,807 21,865 -- 47,735 5,645 33,829 -- 18,717
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$649,287 $5,515,974 $191,615 $64,253 $750,133 $486,101 $808,722 $ 86,477 $419,386
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
PREMIUMS
SEGMENT WRITTEN(4)
- ------- ----------
(IN THOUSANDS)
<S> <C>
1996:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 50,515
-------
$50,515
=======
1995:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 51,133
-------
$51,133
=======
1994:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 47,073
-------
$47,073
=======
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
1994:
Life insurance in force $ 99,220,067 $13,570,369 $23,520,616 $109,170,314 21.5%
============ =========== =========== ============
Premiums:
Life insurance $ 322,799 $ 38,088 $ 59,064 $ 343,775 17.2%
Accident and health
insurance 145,333 10,007 1,293 136,619 0.9%
Annuity 33,889 -- -- 33,889 --
Property and liability
insurance 56,045 8,892 582 47,735 1.2%
------------ ----------- ----------- ------------
Total premiums $ 558,066 $ 56,987 $ 60,939 $ 562,018 10.8%
============ =========== =========== ============
</TABLE>
74
