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Reg. No. 33-79750
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-2
POST-EFFECTIVE AMENDMENT NO. 5
TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MML BAY STATE LIFE INSURANCE COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT
-----------
(State or other jurisdiction of incorporation or organization)
43-0581430
----------
(I.R.S. Employer Identification No.)
1295 State Street
Springfield, Massachusetts 01111
(413) 744-8411
--------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Ann F. Lomeli
Secretary
MML Bay State Life Insurance Company
1295 State Street
Springfield, MA 01111
(413) 744-5373
--------------
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: May 1, 1999
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
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MML BAY STATE LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
Form S-2 Item Number and Caption Heading in Prospectus
1. Forepart of the Registration
Statement and Outside
Front Cover Page of Prospectus ............... Outside Front Cover Page
2. Inside Front and Outside
Back Pages of Prospectus ..................... Inside Front Cover
3. Summary Information,
Risk Factors and
Ratio of Earnings to
Fixed Charges ................................ Financial Statements
4. Use of Proceeds .............................. Investments
5. Determination of
Offering Price ............................... Not Applicable
6. Dilution ..................................... Not Applicable
7. Selling Security Holders ..................... Not Applicable
8. Plan of Distribution ......................... Distribution of Contracts
9. Description of Securities
to be Registered ............................. Product Description
10. Interests and Named
Experts and Counsel .......................... Not Applicable
11. Information with Respect
to the Registrant ............................ MML Bay State & MassMutual -
Description of the Business;
Management's Discussion and
Analysis; Financial
Statements
12. Incorporation of Certain Information
by Reference ................................. Not Applicable
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities .................................. Not Applicable
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MML Bay State Life Insurance Company
Fixed Account with Market Value Adjustment
This prospectus describes the fixed account with market value adjustment offered
by MML Bay State Life Insurance Company. The fixed account is available as an
investment option for owners of the LifeTrust variable annuity contract ("the
contract"). You, the contract owner, may allocate purchase payments or transfer
contract values, in accordance with the contract's transfer rules, to the fixed
account. Since the fixed account is available only through the contract, you
should carefully review the discussion of the contract contained in the attached
prospectus for the contract. We limit the focus of this prospectus to the fixed
account's operations and features.
We guarantee specific rates of interest for amounts you allocate to the fixed
account for specific periods of time. The interest rate we guarantee for a
particular period is an annual effective yield. The guaranteed rates will
fluctuate, but we guarantee they will never go below 3%. Our general account
assets, including amounts allocated to the fixed account, are available to meet
the guarantees associated with the fixed account. These assets are chargeable
with liabilities arising from other business of the company. You may make
purchase payments and transfers of contract value among the fixed account and
the funds in the contract.
We will apply a market value adjustment to amounts removed from the fixed
account:
. If you take a full or partial withdrawal;
. If you transfer contract value from the fixed account;
. If we pay a death benefit upon the death of the contract owner who is not the
annuitant; or
. If we begin making annuity payments.
We will not apply a market value adjustment if the amounts are removed from the
fixed account during the 30-day period before the end of the guarantee period.
The market value adjustment may be positive or negative. Therefore you may
experience a negative investment return.
Please read this prospectus before investing in the fixed account. You should
keep it for future reference. It contains important information.
This prospectus must be accompanied by the LifeTrust variable annuity contract
prospectus and the prospectus for the funds underlying the LifeTrust variable
annuity contract.
- --------------------------------------------------------------------------------
The SEC has not approved these contracts or determined that this prospectus is
accurate or complete. Any representation that it has is a criminal offense.
- --------------------------------------------------------------------------------
May 1, 1999
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Table of Contents
Index of Special Terms 2
Product Description 3
The Fixed Account and the Market Value Adjustment Feature 3
Market Value Adjustment 3
Accumulation Phase of a Contract 5
The Guaranteed Rate 5
Contingent Deferred Sales Charge 5
Investments 6
Distribution of Contracts 6
Accounting Practices 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
General 8
Results of Operations 8
Statement of Financial Position 11
Liquidity and Capital Resources 11
Year 2000 issue 12
Inflation 16
Investments 16
Quantitative and Qualitative Information about Market Risk 18
Description of the Business 18
Experts and Additional Available Information 21
Selected Historical Financial Data 21
Audited Statutory Financial Statements FF-1
Index of Special Terms
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the contract, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms. The page that is indicated here is where we believe you will
find the best explanation for the word or term.
Page
Expiration Date 5
Fixed Account 3
Guarantee Period 3
Guaranteed Rate 3
Market Value Adjustment 3
Segment 5
Withdrawal 3
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Product Description
The investment option described in this prospectus is a fixed account with
market value adjustment ("MVA") available in conjunction with the LifeTrust
variable annuity contract ("contract"). The contract provides for the
accumulation of values prior to maturity and for the distribution of annuity
payments after the maturity date. Additionally, a death benefit is also
available under the contract.
The earnings on purchase payments or contract value you allocate to the fixed
account will have an impact on your contract's value, its maturity value, its
cash redemption value and the death benefit. We believe that we have adequate
resources to meet our obligations with regard to the fixed account and the
contract.
We have described the contract in greater detail in the attached prospectus for
the contract. You should review that prospectus in conjunction with this
prospectus before deciding whether to invest in the contract or allocate money
to the fixed account. The fixed account is not available in all states.
The Fixed Account and the Market Value Adjustment Feature
The fixed account is available during the accumulation phase of the contract.
The fixed account offers different guarantee periods, which provide the option
of earning interest at various guaranteed rates on all or a portion of your
contract value in the fixed account. Please note that amounts credited to a
guarantee period at different times may have different guaranteed rates, current
rates, and expiration dates since we change the current and guaranteed rates
periodically.
You may allocate purchase payments or transfer all or a portion of your contract
value to the fixed account. Amounts credited to the fixed account earn interest
at the guaranteed rate applicable for the guarantee period you select on the
date the amounts are credited. The applicable guaranteed rate does not change
during the guarantee period. The guaranteed rate may never be less than 3%.
Allocations to a guarantee period (or fixed account segment) must be for at
least $1,000. The value of your contract in the fixed account is not guaranteed
against the claims of our creditors.
We may make guarantee periods available in periods of one to ten years. To the
extent permitted by law, we reserve the right at any time to offer guarantee
periods that differ from those available when we issued your contract. We also
reserve the right, at any time, to stop accepting purchase payments, transfers,
or renewals for a particular guarantee period. Since the specific guarantee
periods available may change periodically, please contact our Annuity Service
Center to determine the guarantee periods we are currently offering.
Market Value Adjustment
Any withdrawal of your contract value from the fixed account will be subject to
a market value adjustment ("MVA") unless the effective date of the withdrawal is
within 30 days before the end of a guarantee period. If the allocated amount
remains in the fixed account until the applicable expiration date, its value
will be equal to:
. the amount originally allocated,
. multiplied on an annually compounded basis, by its guaranteed rate.
For this purpose, we also treat transfers, death benefits based on a contract
owner's death (where the contract owner and the annuitant are different), and
annuity payments as withdrawals.
We will not apply an MVA upon the payment of a death benefit following the death
of the annuitant. We will apply the MVA to the amount being withdrawn, after the
deduction of any applicable administrative charge and before the deduction of
any applicable contingent deferred sales charge. The MVA can be positive or
negative. Therefore, the amount being withdrawn after our application of the MVA
can be greater than or less than the amount withdrawn before our application of
the MVA.
The MVA will reflect the relationship between the current rate (as defined
later) for the contract value being withdrawn and the guaranteed rate. It also
reflects the time remaining in the applicable guarantee period. Generally, if
the guaranteed rate is lower than the applicable current rate, then our
application of the MVA will result in a lower payment upon withdrawal.
Similarly, if the guaranteed rate is higher than the
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applicable current rate, our application of the MVA will result in a higher
payment upon withdrawal.
We determine the market value adjustment which we apply to the amount being
withdrawn by using the following formula:
n
-----
365
( 1 + i )
MVA= Amount x [ ----- - 1 ]
( 1 + j )
where,
Amount is the amount being withdrawn from a given fixed account segment less any
applicable administrative charges.
i is the guaranteed rate we are crediting to the contract value subject to the
MVA; and
j, the "current rate," is the guaranteed rate, available as of the effective
date of our application of the MVA, for current allocations to the fixed account
segment whose guarantee period equals the number of years remaining, both
partial and full, for the amount being withdrawn; and
n, is the number of days remaining in the guarantee period of the amount subject
to the MVA.
In determining "j," if we do not currently offer the required fixed account
segment, we will base "j" on the rates available for currently offered fixed
account segments.
EXAMPLES
The following examples illustrate how the MVA operates on amounts held in a
particular segment:
Example 1
$1,000 is applied on May 10, 1994, into a segment with a 5 year guarantee
period. The guaranteed rate for amounts applied to this fixed account segment on
May 10, 1994, is 6%. If the $1,000 is left in that fixed account segment until
May 10, 1999, it will accumulate at a 6% effective annual rate of interest for
the full 5 years to $1,338.23.
If, however, you withdraw the full amount from the fixed account segment as of
May 10, 1998:
(1) The guaranteed rate applied on May 10, 1998 to amounts credited to a 1-
year segment is 4%; and
(2) The accumulated amount prior to the application of the MVA as of May 10,
1998 equals:
4
$1,000 x 1.06 = $1,262.48
(3) The number of days remaining = 365 (n = 365);
(4) The MVA equals $24.28, and is calculated according to the following
formula:
365
---
365
( 1.06 )
$24.28 = $1,262.48 x [ ---- - 1 ]
( 1.04 )
Therefore, a withdrawal on May 10, 1998, of the amount credited to the 5-year
fixed account segment on May 10, 1994, is equal to $1,286.76 ($1,262.48 +
$24.28).
Example 2
$1,000 is applied to a 7-year segment on May 10, 1992, with a guaranteed rate of
5%. If the $1,000 is left in that fixed account segment until May 10, 1999, it
will accumulate at a 5% effective annual rate of interest to $1,407.10.
If, however, you withdraw the full amount from the fixed account segment as of
May 10, 1995:
(1) The guaranteed rate applied on May 10, 1995 to amounts credited to a 4-
year segment is 10%; and
(2) The accumulated amount prior to the application of MVA as of May 10, 1995
equals:
3
$1,000 x 1.05 = $1,157.63
(3) The period of time from May 10, 1995 to the end of the guarantee period
is 4 years or 1460 days
(n = 1460);
(4) The MVA equals $-196.56, and is calculated according to the following
formula:
1460
----
365
( 1.05 )
$-196.56 = $1,157.63 x [ ---- - 1 ]
( 1.10 )
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Therefore, a withdrawal on May 10, 1995 of the amount credited to the 7-year
fixed account segment on May 10, 1992, is equal to $961.07 ($1,157.63 - $196.56
= $961.07).
These examples are hypothetical and are not indicative of future or past
performance.
Accumulation Phase of a Contract
Variable annuities are designed to permit you to accumulate values over a period
of time. Generally, you will use such contract values for long term needs such
as retirement planning. Accordingly, amounts you allocate to the fixed account
will be subject to several guarantee periods over the life of the contract in
many instances.
The end of a guarantee period for a specific amount credited to a fixed account
segment is called its expiration date. At least 45 days, but not more than 75
days, before the expiration date for your contract value in the fixed account
segment, we will inform you of the guaranteed rates we are offering and the
guarantee periods available as of the date of such notice. The guaranteed rates
on the date of a renewal may be more or less than the rates we quoted in such
notice.
The guarantee period normally "renews". In the absence of instructions from you
on the expiration date, we will begin crediting interest for a new guarantee
period lasting the same amount of time as the one that just ended. The contract
value in the fixed account segment then earns interest at the new guaranteed
rate applicable at the time of renewal.
At the expiration date for a guarantee period, you may also choose different
guarantee periods from among those we are then offering, or you may transfer all
or a portion of your contract value in the fixed account segment to the funds
underlying the contract.
If your fixed account segment is no longer available to receive new amounts, or
you choose a different fixed account segment that is no longer available, we
will try to reach you so that you may make another choice. If you have not made
a choice at this point, we will apply your fixed account contract value to the
fixed account segment with the next shorter guarantee period available. If that
fixed account segment is not available, we will apply your fixed account
contract value to the fixed account segment with the next longer period.
The Guaranteed Rate
We will make the final determination about future guarantee rates for future
purchase payments, transfers or renewals. Although we cannot predict future
guarantee rates, they will never be less than three percent (3%) per year.
Contingent Deferred Sales Charge
We will apply an MVA if you partially or fully withdraw contract value from the
fixed account segment unless the effective date of the withdrawal is within 30
days before the end of the guarantee period. When you make a withdrawal, we will
reduce your contract value by the amount you withdraw from the fixed account
segment prior to any MVA.
Any contract value you withdraw may also be subject to a contingent deferred
sales charge under the contract as follows:
Full Years Since Contingent Deferred
Purchase Payment Sales Charge
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7 or more 0%
We assess a contingent deferred sales charge because we do not assess a sales
charge when we receive a purchase payment. We base the amount of the contingent
deferred sales charge on the length of time between the date we receive the
particular payment and the date it is withdrawn.
Purchase payments you withdraw after 7 full years are not subject to a
contingent deferred sales charge. Amounts in the fixed account, however,
continue to be subject to a market value adjustment. We will not assess a
contingent deferred sales charge against transfers, certain annuity payments,
and certain death benefit payments. For more information concerning the
application of the contingent deferred sales charge, please consult the contract
prospectus.
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Investments
We must invest our assets in accordance with the requirements established by
applicable state laws regarding the nature and quality of investments that may
be made by life insurance companies and the percentage of their assets that may
be committed to any particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in
federal, state, and municipal obligations, corporate bonds, preferred and common
stocks, real estate mortgages, real estate and certain other investments.
We will allocate proceeds from the fixed account to a non-unitized segment of
our general account, which is set up as a separate account for accounting
purposes. Proceeds will be used to fund our obligations under the contract and
amounts not required to fund such obligations may accrue to us as profit. Our
obligations under the contract are also met through the operation of the funds
to which a contract owner has allocated accumulated value. All of our general
account assets are available to meet the contract guarantees.
In establishing guaranteed rates, we take into account the yields available on
the instruments in which we intend to invest the proceeds from the contracts.
Our investment strategy with respect to the proceeds attributable to allocations
made to the fixed account will generally be to invest in investment-grade debt
instruments having durations tending to match the applicable guarantee periods.
Distribution of Contracts
MML Distributors, LLC ("MML Distributors") serves as principal underwriter for
the contracts. MML Investors Services, Inc. ("MMLISI") serves as co-underwriter
for the contracts. Their purpose as underwriters is to distribute the contracts.
MML Distributors and MMLISI are wholly-owned subsidiaries of Massachusetts
Mutual Life Insurance Company ("MassMutual"). Both are located at 1414 Main
Street, Springfield, Massachusetts 01144-1013.
We will pay commissions to broker-dealers who sell the contracts. We pay
commissions based on a percentage of purchase payments or a combination
percentage of purchase payments and contract value. Currently, we pay an amount
up to 6.25% of purchase payments. We may pay a commission of up to 0.25% of
contract values each contract year.
From time-to-time, MML Distributors may enter into special arrangements with
certain broker-dealers. These special arrangements may provide for the payment
of higher compensation to such broker-dealers for selling the contracts.
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Accounting Practices
We have prepared the accompanying statutory financial information, included in
this filing, in conformity with the practices of the National Association of
Insurance Commissioners ("NAIC") and the accounting practices prescribed or
permitted by the Insurance Department of the State of Connecticut ("statutory
accounting practices"). We redomesticated from the state of Missouri to the
state of Connecticut on June 30, 1997. Our redomestication had no effect on our
statutory accounting practices.
The accompanying statutory financial statements are different in some respects
from financial statements prepared to conform with generally accepted accounting
principles ("GAAP"). The more significant differences are as follows:
(a) acquisition costs, such as commissions and other
costs directly related to acquiring new business, are charged to current
operations as incurred, whereas GAAP would require these expenses to be
capitalized and recognized over the life of the policies;
(b) policy reserves are based upon statutory mortality and interest requirements
without consideration of withdrawals, whereas GAAP reserves would be based
upon reasonably conservative estimates of mortality, morbidity, interest,
and withdrawals;
(c) bonds are generally carried at amortized cost whereas GAAP generally
requires they be reported at fair value;
(d) deferred income taxes are not provided for book-tax timing differences as
would be required by GAAP; and
(e) payments received for universal life, variable life and variable annuity
products are reported as premium income, whereas under GAAP, these payments
would be recorded as deposits to policyholders' account balances.
In accordance with the life insurance laws and regulations under which we
operate, we are obligated to carry on our books, as liabilities, actuarially
determined reserves to meet our obligations on outstanding contracts. We develop
policyholders' reserves for life insurance contracts using accepted actuarial
methods computed principally on the net level premium method and the
Commissioners' Reserve Valuation Method bases using the 1958 and 1980
Commissioners' Standard Ordinary mortality tables with assumed interest rates
ranging from 3.0 to 5.5 percent. We develop reserves for individual annuities
based on accepted actuarial methods, principally at interest rates ranging from
5.3 to 6.0 percent.
We maintain an asset valuation reserve ("AVR") and an Interest Maintenance
Reserve ("IMR"), in compliance with regulatory requirements. The AVR and other
investment reserves stabilize shareholder's equity against declines in the value
of bonds. The IMR captures after-tax realized capital gains and losses that
result from changes in the overall level of interest rates, for all types of
fixed income investments. The IMR amortizes these capital gains and losses into
income using the grouped method over the remaining life of the investment sold
or over the remaining life of the underlying asset. The IMR is included in other
liabilities on the Statutory Statement of Financial Position.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective not later than January 1, 2001. The effect of
adopting Codification will be reported as an adjustment to shareholder's equity
on the effective date. We are currently reviewing the impact of Codification.
However, since the Department of Insurance of the State of Connecticut has not
approved Codification, we cannot determine the ultimate impact at this time.
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, as well
as disclosures of contingent assets and liabilities, as of the date of the
financial statements. We must also make estimates and assumptions that affect
the amounts of revenues and expenses during the reporting period. Future events,
including changes in the levels of mortality, morbidity, interest rates, and
asset valuations, could cause our actual results to differ from the estimates we
used in the financial statements.
We reclassified certain prior year amounts to conform with the current year
presentation.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
You should read the following discussion in conjunction with the Statutory
Financial Statements, Notes to Statutory Financial Statements and Selected
Historical Financial Data.
Our direction and operations are guided by a statement of corporate vision.
Under that vision we manage our operations to maintain a financially strong and
efficient enterprise. Our long-term objectives are to maintain corporate
financial strength, enhance policyholder value, and generate and sustain growth.
We have pursued these objectives by:
. emphasizing profitability through refined product pricing,
. sophisticated asset/liability management,
. rigorous expense control,
. prudent underwriting standards,
. the adoption of efforts to improve persistency and retention levels, and
. continued commitment to the high credit quality of our general account
investment portfolio.
Results of Operations
For the Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following table sets forth the components of our net (loss):
Years Ended December 31,
1998 1997
---- ----
(In Millions)
Revenue:
Premium income $ 573 $ 606
Net investment income 5 4
Fees and other income 79 62
----- -----
Total revenue 657 672
Benefits and expenses: ----- -----
Policyholders' benefits and
payments 53 34
Addition to policyholders'
reserves and funds 495 544
Expenses, commissions and
state taxes 103 85
----- -----
Total benefits and expenses 651 663
----- -----
Net gain from operations
before federal income taxes 6 9
Federal income taxes 12 16
----- -----
Net loss from operations (6) (7)
Net realized capital gain (loss) -- --
----- -----
Net loss $ (6) $ (7)
===== =====
Net loss decreased $1 million, or 14.3%, to $6 million in 1998 from $7 million
in 1997. We continue to generate losses as a result of our continued growth in
the number of policies and the amount of life insurance in force on which
acquisition costs exceed first year premium. More specifically, we attribute
this decrease primarily to a reduction of addition to policyholder reserves and
funds and an increase in fees and other income, partially offset by a decrease
in premium income, an increase in policyholders' benefits and payments and an
increase in expenses, commissions and state taxes.
Premium income decreased $33 million, or 5.4%, to $573 million in 1998 from $606
million in 1997. We attribute this decrease primarily to a 30.7% reduction in
premiums from variable annuity products and a 11.2% reduction in premiums from
corporate owned life products, partially offset by a 32.0% increase in premiums
from variable life insurance products. Variable annuity sales are down due to
recent financial market volatility, increased annuity market
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competition and a shift by MassMutual's sales force to products offered by other
MassMutual affiliates. Variable life sales growth is consistent with the prior
year. Corporate owned life policy sales represent a small number of very large
cases sold to corporate clients. Therefore, corporate owned life policy sales
results may vary significantly from year to year.
The following table sets forth premium, sales, and other information for our
products:
Years Ended December 31,
-----------------------
1998 1997
---- ----
(In Millions)
Premium Income:
Variable Life $ 198 $ 150
Variable Annuities 106 153
Corporate Owned Life 269 303
------- -------
Total $ 573 $ 606
======= =======
Life Insurance Sales - Face Amount:
Variable Life $ 4,060 $ 3,872
Corporate Owned Life 174 1,302
------- -------
Total $ 4,234 $ 5,174
======= =======
Life Insurance In Force - Face Amount:
Variable Life $16,984 $13,261
Corporate Owned Life 6,651 6,376
------- -------
Total 23,635 19,637
Less reinsurance ceded 2,375 1,890
------- -------
$21,260 $17,747
======= =======
Number of Policies/Certificates In Force:
(In Whole Units)
Variable Life 80,764 65,905
Variable Annuities 7,416 5,531
Corporate Owned Life 7,972 7,433
------- -------
Total 96,152 78,869
======= =======
Average Face Value of a New
Policy Sold: (In Thousands)
Variable Life $ 230 $ 219
Corporate Owned Life $ 312 $ 1,232
Net investment income increased $1 million, or 25.0%, to $5 million in 1998 from
$4 million in 1997. We attribute this increase primarily to an increase in
average invested assets due to additional capital infusions from MassMutual,
partially offset by lower yields on the investment portfolio due to market
conditions. Our average gross yield on the general investment account portfolio
decreased to 7.0% in 1998 from 7.6% in 1997. Bond yields are declining as older,
higher yielding bonds mature and are replaced with new bonds that have lower
current yields. Fluctuations in market conditions will impact future investment
results.
Fees and other income increased $17 million, or 27.4%, to $79 million in 1998
from $62 million in 1997. We attribute this increase primarily to an increase in
separate account fees we earn for administration of the accounts. This increase
is consistent with the average increase in life insurance in force and the
increase in number of policies and certificates in force.
Policyholders' benefits and payments increased $19 million, or 55.9%, to $53
million in 1998 from $34 million in 1997. We attribute this increase primarily
to an $11 million increase in annuity surrenders, a $4 million increase in life
surrenders and a $3 million increase in death benefits. The growth in the blocks
of business, as evidenced by significant growth in assets and in-force policies
over the last two years, caused these increases. Our lapse rate on variable life
policies improved to 3.4% in 1998 from 3.6% in 1997.
Addition to policyholders' reserves and funds decreased $49 million, or 9.0%, to
$495 million in 1998 from $544 million in 1997. We attribute this decrease
primarily to the reduction in premiums and a higher level of withdrawals,
partially offset by significant investment returns in our separate accounts.
Expenses increased by $10 million, or 26.3%, to $48 million in 1998 from $38
million in 1997. We attribute this increase primarily to salaries and agency
costs associated with the acquisition of new life business. Expenses are
primarily charges for administrative services provided by MassMutual, which are
higher due to continued investments in technology.
Commissions increased by $7 million, or 20.0%, to $42 million in 1998 from $35
million in 1997. Overall commissions increased while premiums decreased as a
result of the change in sales mix. We attribute this increase in commissions
primarily to higher sales of variable life insurance and renewal commissions we
paid on the growing life insurance block. Variable life insurance has a higher
commission structure as compared with commissions on annuity and corporate owned
life policies.
Federal income taxes decreased $4 million, or 25.0%, to $12 million in 1998 from
$16 million in 1997. We attribute this decrease primarily to timing of the tax
deductibility of acquisition expenses and policyholder reserves and funds.
We had no significant net realized capital gains or losses for 1998 and 1997,
before or after transfers to the IMR.
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For the Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The following table sets forth the components of our net income (loss):
Years Ended December 31,
------------------------
1997 1996
---- ----
(In Millions)
Revenue:
Premium income $ 606 $ 441
Net investment income 4 4
Fees and other income 62 43
----- -----
672 488
===== =====
Benefits and expenses:
Policyholders' benefits and
payments 34 11
Addition to policyholders'
reserves and funds 544 402
Expenses, commissions and
state taxes 85 61
----- -----
663 474
===== =====
Net gain from operations
before federal income taxes 9 14
Federal income taxes 16 12
----- -----
Net gain (loss) from operations (7) 2
Net realized capital gain (loss) -- --
----- -----
Net income (loss) $ (7) $ 2
===== =====
We had a net loss of $7 million in 1997 compared to $2 million of net income in
1996. We attribute this loss primarily to increased benefits and expenses from
increased sales of variable life and annuity products and to higher federal
income taxes. The loss was partially offset by increases in premium income and
fees we earned for administration of our separate accounts.
Premium income increased $165 million, or 37.4%, to $606 million in 1997 from
$441 million in 1996. We attribute this increase to increased premiums from
variable life products of 37.6%, increased premium from variable annuity
products of 77.9%, and increased premium from corporate owned life products of
23.2%. The increase in variable annuity products in our business mix is
primarily a result of increased sales through MassMutual's distribution
channels, which experienced a shift toward annuity products we issued from those
issued by other MassMutual subsidiaries. Corporate owned life policy sales
represent a small number of very large cases sold to corporate clients.
Therefore, corporate owned life policy sales results may vary significantly from
year-to-year.
The following table sets forth premium, sales, and other information for our
products:
Years Ended December 31,
-----------------------
1997 1996
---- ----
(In Millions)
Premium Income:
Variable Life $ 150 $ 109
Variable Annuities 153 86
Corporate Owned Life 303 246
------- -------
Total $ 606 $ 441
======= =======
Life Insurance Sales - Face Amount:
Variable Life $ 3,872 $ 3,409
Corporate Owned Life 1,302 4,585
------- -------
Total $ 5,174 $ 7,994
======= =======
Life Insurance In Force Face Amount:
Variable Life $13,261 $ 9,686
Corporate Owned Life 6,376 4,979
------- -------
Total 19,637 14,665
Less reinsurance ceded 1,890 1,605
------- -------
$17,747 $13,060
======= =======
Number of Policies/Certificates In Force:
(In Whole Units)
Variable Life 65,905 50,703
Variable Annuities 5,531 2,373
Corporate Owned Life 7,433 6,395
------- -------
Total 78,869 59,471
======= =======
Average Face Value of a New
Policy Sold: (In Thousands)
Variable Life $ 219 $ 208
Corporate Owned Life $ 1,232 $ 809
Fees and other income increased $19 million, or 44.2%, to $62 million in 1997
from $43 million in 1996. We attribute this increase primarily to an increase in
separate account fees we earned for administration of the accounts. This
increase is consistent with the increase in business in force.
Policyholders' benefits and payments for 1997 increased $23 million, or 209.1%,
to $34 million in 1997 from $11 million in 1996. We attribute this increase
primarily to a $12 million increase in death benefits and a $10 million increase
in surrenders. Our increase in death benefits and surrenders is consistent with
the increase in our in force business occurring in 1997 and 1996. Our variable
life insurance lapse rate was 3.6% in 1997, compared to 3.8% in 1996.
Addition to policyholders' reserves and funds increased by $142 million, or
35.3%, to $544 million in 1997 from $402 million in 1996. We attribute this
increase to growth in premiums, a low level of
10
<PAGE>
withdrawals, and favorable investment results in our separate accounts.
Expenses, which includes charges for administrative services provided by
MassMutual, increased by $14 million, or 58.3%, compared to 1996. We attribute
this increase primarily to salaries and agency costs associated with the
acquisition of new business.
Commissions increased by $7 million, or 26.0%, in 1997 compared to 1996. We
attribute this increase to higher sales of variable life insurance and renewal
commissions paid on the growing block of life and annuity business. The
percentage increase in commissions was lower than the percentage increase in
premiums due to a reduced commission structure for annuity and corporate owned
life policies.
Federal income taxes increased to $16 million in 1997 compared to $12 million in
1996, primarily due to the timing of the tax deductibility of acquisition
expenses.
In 1997 and 1996, we had no significant net realized capital gains or losses,
before or after transfers to the IMR.
Statement of Financial Position
Assets
Total assets increased $675 million, or 43.9% to $2,211 million as of December
31, 1998, from $1,536 million as of December 31, 1997. We attribute this
increase primarily to continued growth in our separate accounts. Separate
account assets increased $632 million, or 45.1%, to $2,032 million as of
December 31, 1998, from $1,400 million as of December 31, 1997. We attribute
this increase primarily to financial market appreciation and additional deposits
from variable products, partially offset by withdrawals.
General account assets increased $43 million, or 31.6%, to $179 million as of
December 31, 1998, from $136 million as of December 31, 1997. We attribute this
increase primarily to capital contributions from MassMutual and increased
recoveries due from separate accounts, which represent separate account assets
in excess of statutory benefit reserves. These recoveries due from separate
accounts increased $27 million, or 35.5% to $103 million as of December 31,
1998, from $76 million as of December 31, 1997.
Bonds decreased $10 million, or 25.6%, to $29 million as of December 31, 1998,
from $39 million as of December 31, 1997. We attribute this decrease primarily
to funding of increased commissions and expenses relating to new and existing
business.
Policy loans increased $8 million, or 50.0%, to $24 million as of December 31,
1998, from $16 million as of December 31, 1997. We attribute this increase
primarily to increased loan activity by policyholders', which is consistent with
the increase in variable life business.
Cash and short-term investments increased $14 million, or 466.7%, to $17 million
as of December 31, 1998, from $3 million as of December 31, 1997. We attribute
this increase primarily to a $15 million capital contribution from MassMutual
late in December 1998.
Liabilities
Total liabilities increased $629 million, or 42.8%, to $2,097 million as of
December 31, 1998, from $1,468 million as of December 31, 1997. We attribute
this increase primarily to the growth in separate accounts discussed earlier.
Separate account reserves and liabilities increased $631 million, or 45.2%, to
$2,028 million as of December 31, 1998, from $1,397 million as of December 31,
1997.
Policyholder reserves and funds increased $11 million, or 30.6%, to $47 million
as of December 31, 1998, from $36 million as of December 31, 1997. We attribute
this increase primarily to growth from new sales and interest credited on
general account reserves, partially offset by transfers to separate accounts and
withdrawals.
Shareholder's Equity
Shareholder's equity increased $46 million, or 67.6%, to $114 million as of
December 31, 1998, from $68 million as of December 31, 1997. We attribute this
increase primarily to $50 million of surplus contributions from MassMutual.
These contributions were made to help support our growth in life insurance in
force.
Liquidity and Capital Resources
Liquidity
Net cash used in operating activities increased $34 million, or 850.0%, to $38
million in 1998 from $4
11
<PAGE>
million in 1997. In years of increasing sales, particularly in the life
insurance business, our operating activities result in a net use of cash. In
1998, we used $38 million of net cash in operations, primarily due to
acquisition costs in excess of first year premium.
Loans and purchases of investments decreased $4 million, or 20.0%, to $16
million in 1998 from $20 million in 1997. Sales and maturities of investments
and receipts from repayments of loans decreased $3 million, or 15.0%, to $17
million in 1998 from $20 million in 1997. We attribute these decreases primarily
to the timing of current year surplus contributions. These contributions
were scheduled in order to reduce the need for cash previously provided by asset
sales and purchases.
In 1998, MassMutual made capital contributions that totaled $50 million. These
contributions were made in order to supply us with the cash flow and the capital
needed to support our continued business growth.
We have structured our investment portfolio to ensure a strong liquidity
position in order to permit timely payment of policy and contract benefits
without requiring an untimely sale of assets. We manage our liquidity position
by matching our exposure to cash demands with adequate sources of cash and other
liquid assets.
Our principal sources of liquidity are cash flow and holdings of cash, cash
equivalents and other readily marketable assets. The primary cash flow sources
are investment income and principal repayments on invested assets and life
insurance premiums.
Our liquid assets include Treasury bond holdings, short-term money market
investments, and marketable long-term fixed income securities. Cash and
short-term investments totaled $17 million at December 31, 1998.
The market value of other highly liquid securities, including NAIC Class 1 and 2
publicly traded bonds, was $44 million at December 31, 1998.
We proactively manage our liquidity position on an ongoing basis to meet cash
needs while minimizing adverse impacts on investment returns. We also employ
quantitative asset/liability cash flow management techniques to optimize and
control the investment return and liquidity for the portfolio.
Based on our ongoing monitoring and analysis of our liquidity sources and
demands, we believe that we are in a strong liquidity position.
Capital Resources
As of December 31, 1998, our total adjusted capital as defined by the NAIC was
$114 million. The NAIC developed the Risk Based Capital ("RBC") model to compare
total adjusted capital with a standard design in order to reflect an insurance
company's risk profile. Although we believe that there is no single appropriate
means of measuring RBC needs, we feel that the NAIC approach to RBC measurement
is reasonable, and we will manage our capital position with significant
attention to maintaining adequate total adjusted capital relative to RBC. Our
total adjusted capital was well in excess of all RBC standards at December 31,
1998 and 1997. We believe that we enjoy a strong capital position in light of
the risks to which we are subject and that we are well positioned to meet
policyholder and other obligations.
Year 2000 Issue
We prepared the following Year 2000 readiness disclosure under the U. S. "Year
2000 Information and Readiness Disclosure Act" (Public Law No. 105-271).
General
Like other businesses and governments around the world, we would be adversely
affected if our computer systems and those of others with which we do business
do not properly recognize the Year 2000. This is commonly known as the "Year
2000 ("Y2K") issue."
In 1996, our parent company, MassMutual, began an enterprise-wide process to
address the Y2K issue on its own behalf and on behalf of certain subsidiaries,
including us. MassMutual operates each insurance subsidiary pursuant to a
management services agreement. In accordance with the management services
agreement, MassMutual's Project 2000 incorporates our Year 2000 accommodations.
The Y2K issue affects virtually all organizations worldwide. Moreover, the
electronic links between businesses and governments mean that complete Y2K
compliance is beyond the ability of any one entity to achieve. Vigorous and
coordinated Y2K readiness efforts throughout the public and private sectors are
necessary to avoid disruption after 1999.
12
<PAGE>
Risks
MassMutual plans to have its computer systems, including those operated for us,
ready for the Year 2000. MassMutual has identified Y2K readiness as one of its
highest priorities and has committed extensive technological, financial and
human resources to minimizing the impact of Y2K on our business. MassMutual
believes that its Project 2000 program, described below, will limit the number
and severity of any Y2K-related disruptions.
We do not have any knowledge of any particular event, trend or uncertainty that
makes us believe that there will be significant Y2K-related disruption to our
business. However, the potential for disruption remains, particularly given the
electronic connections and interdependencies in today's business environment and
the fact that our Y2K readiness is tied to that of third parties.
We do not know and cannot predict the potential impact of Y2K disruptions upon
our business. There are possible consequences if we or the third parties that we
do business with, are not ready for Y2K. These possible consequences may include
the inability to process premiums, to purchase or sell investments or to process
claims and other benefits.
Risks of Litigation
We have no reason to expect any particular Y2K litigation. However, Y2K
litigation is a possibility given the interdependencies of information systems
and the worldwide magnitude of the Y2K issue. We currently have no reason to
expect that Y2K litigation would materially adversely affect our financial
position, operations or liquidity.
Examination - Massachusetts Division of Insurance
MassMutual, our parent, is legally domiciled in the Commonwealth of
Massachusetts, and its primary regulator is the Massachusetts Division of
Insurance (the "Division"). The Division is conducting Y2K examinations of most,
if not all, of the insurance companies domiciled in the Commonwealth.
In November 1998, as part of an ongoing examination, the Division conducted an
on-site examination of MassMutual's readiness for the Year 2000. The Division
found no weaknesses in MassMutual's Project 2000, and recommended no changes
other than an acceleration of contingency planning, which is already under way.
Project 2000
In 1996, MassMutual began an enterprise-wide process of identifying, evaluating
and implementing changes to computer systems, to address the Y2K issue.
MassMutual established Project 2000 the following year as the corporate-wide
program responsible for addressing all requirements associated with the century
date change. Project 2000 operates under the direction and accountability of
MassMutual's senior management, and leads and coordinates Y2K activities with
representatives from every information systems and business unit in MassMutual.
Project 2000 addresses both systems compliance and business compliance.
. Systems compliance includes all information technology department-supported
applications, (computer technology hardware and software), and all on-site
physical facilities, such as internal heating, air conditioning,
telecommunications, elevators, security systems, and emergency power for
MassMutual's data center.
. Business compliance includes end-user computing (such as desktop and
spreadsheet applications) in the business units. It also includes risk
management of any business function dependent upon external systems or
third parties. Contingency planning is a prime component of risk management
activities.
Y2K Compliant Standards
In order for information systems or software applications to be Y2K compliant
according to MassMutual's standards, the system or application must demonstrate
that it can successfully accommodate the Year 2000 date and beyond. All computer
hardware, operating software and applications systems, whether MassMutual or
vendor- developed, must go through MassMutual's Y2K certification process. This
is so even if the vendor claims its product is Y2K compliant.
MassMutual's certification requires, among other things, multiple levels of
testing in current-date and future-date environments. Testing must successfully
demonstrate:
. Rolling over the century date, from the last processing day in 1999
through the first processing day in 2000.
. Handling leap year processing in 2000.
. Transitioning from 2000 to 2001, including Julian calendar date processing.
Each application is examined for additional dates pertinent to its particular
processing requirements.
13
<PAGE>
Upgrades and changes to certified products must be recertified according to
MassMutual's standards before being introduced into the computing environment.
Successful future-date testing, with appropriately dated information, is
important because it mimics the environment, data and application as it will
exist after 1999. Future-date testing occurs in separate, isolated computer
environments. Full production volume future-date testing is also conducted
periodically at MassMutual's disaster-recovery site, a separate location where
MassMutual has previously established business and systems recovery plans.
Costs
As of January 15, 1999, MassMutual made estimates of the cost of Project 2000.
MassMutual started incurring these costs in 1997 and has already spent $70
million. MassMutual has estimated that an additional $20 million will be
incurred in 1999 and $2 million will be incurred in 2000. The total cost of the
four year project is estimated to total approximately $92 million enterprise-
wide. These costs are being expensed when incurred. MassMutual allocates a
portion of these costs to us pursuant to our management services agreement with
MassMutual. In total, MassMutual estimates that $2 million, of the total $92
million, will be allocated to us. When viewed in the context of the total
financial picture, the costs are not material to our's or MassMutual's financial
position.
Staffing
As of February 28, 1999, MassMutual had approximately 120 full-time equivalent
information systems employees and 70 full-time and part-time consultants working
on Project 2000. In addition, approximately 100 employees from MassMutual's
business units are working at least part-time on Project 2000. This is down from
a high of 300 employees and 150 consultants. The number of people working on
this project is expected to continually decrease as 1999 progresses and Y2K work
is completed.
State of Readiness
MassMutual's Project 2000 manager maintains an enterprise-wide plan that tracks
planned vs. actual completion dates. MassMutual planned for most mission
critical systems to be Y2K compliant by the end of 1998, and for the remainder
of its internal computer systems, to be Y2K compliant by June 30, 1999. Project
2000 is on schedule.
. Computer code conversion of all information technology department supported
applications was 99% complete by February 28, 1999. MassMutual had
identified over 52 million lines of mainframe code that needed to be
converted.
. Most correction and testing of internal mission critical systems has
already been completed. MassMutual anticipates the remainder to be
completed by June 30, 1999. Of the 309 mission critical projects, 81% were
completed as of December 31, 1998. An additional 43 projects, or 14%, are
targeted for completion by the end of March 1999, bringing the combined
percentage to 95%. The remaining 16 projects, or 5%, are planned to be
complete by June 30, 1999.
. End-user computing such as desktop and spreadsheet applications is well
under way and is targeted to be complete by June 30, 1999.
. The critical core infrastructure for MassMutual's on-site physical
facilities (internal heating, air conditioning, telecommunications,
elevators, security systems, and emergency power for MassMutual's data
center) was Y2K compliant by December 31, 1998.
Major activities planned for 1999 include:
. Change Control. MassMutual will continue testing its computer technology
--------------
hardware and software throughout 1999. Future-date testing will also
continue when necessary. During the remainder of 1999, MassMutual will also
focus on keeping previously tested applications Y2K compliant.
. Enterprise Testing. MassMutual will continue to conduct internal,
------------------
enterprise-wide integrated tests, concentrating on major systems and
environments.
. "Street" or Industry Testing. MassMutual will be joining forces with many
----------------------------
of its and our service providers and other third parties, to test
communication links.
. Awareness and Communication. MassMutual will continue to communicate
---------------------------
widely, with policyholders, customers, vendors, service providers,
governments and others about Project 2000.
. Operational Readiness. MassMutual will determine what is needed to respond
---------------------
to our policyholders and customers. For example, MassMutual will make sure
that customer service centers are adequately staffed should we receive a
great number of year-end Y2K inquires.
14
<PAGE>
. Readiness of Third Parties. MassMutual is assessing the Y2K readiness of
--------------------------
others.
. Contingency Planning. MassMutual is developing contingency plans as needed.
--------------------
Third Parties
Third parties which do business with us or MassMutual include:
. banks,
. financial service providers,
. mutual funds,
. third party administrators,
. reinsurers,
. telecommunications firms,
. utility companies,
. security and climate control systems companies,
. package transportation carriers, and
. governmental agencies such as:
. the state insurance departments,
. the Internal Revenue Service, and
. the Securities and Exchange Commission.
MassMutual has identified all of the third parties with which we have a material
business relationship, and has contacted them as to their Y2K compliance.
MassMutual has also identified and contacted third parties which are not
material to our business. Third parties are generally not providing guarantees
and assurances about their Y2K compliance, but instead are providing statements
about their approach to the Y2K issue, their progress and target dates.
Given our reliance on third parties, a major focus in 1999 is assessing third
parties' Y2K compliance. Their responses are a key factor in decisions about our
Y2K contingency plans. Y2K readiness by third parties with which we have a
material relationship is most important. If necessary for MassMutual to make an
assessment of Y2K readiness of these parties, MassMutual asks for additional
information. MassMutual's approach with them is to conduct telephone interviews,
send more detailed questionnaires, conduct account manager interviews, and if
necessary, make an on-site visit.
Contingency Plans
Because of the comprehensive requirements of MassMutual's Project 2000, we
believe our general risk of Y2K-related failure is low. However, detailed
contingency plans will be created as necessary, based upon the expected impact
on us and our judgement about the level of risk. Risks are presented by both
internal computer systems (those developed and operated by MassMutual, including
systems operated for us), and by third parties which provide services and
electronic data to us. MassMutual has identified critical business functions and
is developing a watch list of critical service providers and systems that
support these functions.
Contingency planning falls into two broad categories: business continuity plans
and systems recovery plans.
Existing business recovery plans form the foundation for the Y2K business
continuity efforts and will be supplemented with Y2K requirements. MassMutual's
business areas are assessing the policies and responses that may be needed,
since potential scenarios are unique to the business areas. In general, however,
the business continuity plans will address failures caused by external sources,
and fall into three situations which include:
. a failure by a third party,
. a failure of a MassMutual system or function due to corrupt data from a
third party, and
. a power outage in MassMutual's business offices.
Necessary parts of each plan will include a description of failure indicators,
contingency actions, preparation steps necessary to successfully invoke the
contingency actions, timetables for preparatory steps, and guidelines for
resumption of regular activities. Plans will differ according to type and
duration of failure.
Systems recovery plans address our internal systems infrastructure. Plans will
be developed by computing platform and will detail information on each systems
product or group of products (such as operating systems). Each plan will
include:
. a timetable of how and when products will be started on January 1, 2000;
. the individual or unit responsible for each product;
. the recovery plan if the product will not come up or will not work correctly;
. the steps that will be taken in each event; and
. the vendor contact, if any.
Tests and walkthroughs of the plans will be conducted, and our internal auditing
department will be involved.
Contingency planning is a high-priority project. We plan to have any needed
contingency plans in place by year-end, 1999.
15
<PAGE>
Inflation
Our operating expenses are affected by inflation. A large portion of our
operating expenses consist of administrative fees charged by MassMutual. The
largest component of these fees is salaries, which are subject to wage increases
that are at least partially affected by the rate of inflation. MassMutual's and
our continuing efforts to control expenses may reduce the impact of inflation on
operating expenses.
Inflation also indirectly affects us. Our new sales of insurance products and
investment income are affected by inflation to the extent that the government's
economic policy to control the level of inflation results in changes in interest
rates. Changes in the level of interest rates also have an effect on interest
spreads, as investment earnings are reinvested.
Investments
As directed by our policyholders, the majority of our assets are policyholders'
investments in our separate accounts. We record the assets in our separate
accounts at market value, and we pass all investment risks on to the
policyholders. The following discussion focuses on the general investment
account portfolio, which does not include our separate account assets.
At December 31, 1998, we had $70 million of invested assets in our general
investment account. Our portfolio of invested assets is managed to support the
liabilities of the business in light of yield, liquidity, and diversification
considerations.
The following table sets forth our invested assets in the general investment
account and the gross investment yield:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Carrying % of Carrying % of Carrying % of
Value Total Yield Value Total Yield Value Total Yield
----- ----- ----- ----- ----- ----- ----- ----- -----
($ In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds $ 29 41.4% 6.8% $ 39 67.2% 7.7% $ 45 72.6% 7.5%
Policy loans 24 34.3 6.2 16 27.6 6.3 10 16.1 6.4
Cash and short-
term investments 17 24.3 9.0 3 5.2 10.5 7 11.3 13.1
---- ------ ---- ---- ------ ----- ---- ------ -----
Total investments $ 70 100.0% 7.0% $ 58 100.0% 7.6% $ 62 100.0% 7.7%
==== ====== ==== ==== ====== ===== ==== ====== =====
</TABLE>
Our yield on total investments before investment expenses was 7.0%, 7.6% and
7.7% for the years ended December 31, 1998, 1997 and 1996, respectively. If
investment expenses were deducted, our net yields were 6.9%, 5.8% and 6.6%,
respectively. Our net yield improved in 1998 as a result of lower than expected
investment expenses. We do not expect this expense improvement to continue. We
calculate the yield on each investment category before federal income taxes as:
(a) two times gross investment income, divided by (b) the sum of assets at the
beginning of the year and assets at the end of the year, less gross investment
income.
We record our investments in accordance with methods and values prescribed by
the NAIC and adopted by state insurance authorities. Generally, we value bonds
at amortized cost. We carry policy loans at the outstanding loan balance less
amounts unsecured by the cash surrender value of the policy. We state short-term
investments at amortized cost, which approximates fair value.
16
<PAGE>
Bonds
The following table provides certain information regarding the maturity
distribution of bonds (excluding short-term securities):
Bond Maturities
December 31,
1998
----
Carrying % of
Value Total
----- -----
($ In Millions)
Due in one year or less $ 2 6.9%
Due after one year
through five years 14 48.3
Due after five years
through ten years 6 20.7
Due after ten years 2 6.9
Mortgage-backed
securities (1) 5 17.2
---- -----
$ 29 100.0%
==== =====
(1) Including securities guaranteed by the U.S. Government.
Our bond maturities are sufficiently diversified and are carefully monitored and
managed in light of our liquidity needs.
Bonds and short-term investments consist of $44 million of publicly traded and
$2 million of privately placed debt securities. Substantially all of our
publicly traded and privately placed bonds are evaluated by the NAIC's
Securities Valuation Office ("SVO"), which assigns securities to one of six NAIC
investment credit classes, with Class 1 securities being the highest quality and
Class 6 securities being the lowest quality. Class 1 and 2 are investment grade,
Class 3 is medium quality, and Classes 4, 5, and 6 are non-investment grade. We
rate the remainder of the securities which have not as yet received NAIC ratings
under an internal system which we believe to be equivalent to that used by the
SVO. At December 31, 1998 and 1997, the portfolio was 100% invested in NAIC
Classes 1 and 2.
We invest a significant portion of our investment funds in high quality publicly
traded bonds in order to maintain and manage liquidity and reduce the risk of
default in the portfolio. We utilize our investments in the privately placed
bond portfolio to enhance the value of the overall portfolio, increase
diversification and obtain higher yields than are possible with comparable
quality public market securities. To control risk we, through MassMutual, rely
upon:
. broader access to management information,
. strengthened negotiated protective covenants,
. call protection features, and
. a higher level of collateralization than can customarily be achieved in the
public market.
The following table sets forth bonds, including short-term securities, by
industry category as of December 31, 1998:
Bond Portfolio By Industry
December 31, 1998
-----------------
($ In Millions)
Carrying % of
Industry Category Value Total
- ----------------- ----- -----
Utilities $11 23.9%
Collateralized (1) 9 19.6
U.S. Government (2) 5 10.8
Food Wholesalers 5 10.8
Finance 4 8.7
Consumer Goods 4 8.7
Natural Resources 2 4.3
Other Services 1 2.2
Aerospace 1 2.2
Media 1 2.2
Transportation 1 2.2
Retail 1 2.2
Producer Goods (3) 1 2.2
--- -----
Total $46 100.0%
(1) These bonds are collateralized by mortgages backed by FNMA or FHLMC and
include collateralized mortgage obligations.
(2) These bonds include $1 million in privately placed bonds.
(3) These are privately placed bonds.
At December 31, 1998 and 1997, the bond portfolio did not have any material
gross unrealized gains or losses. The estimated fair value of bonds is based
upon quoted market prices for actively traded securities. We subscribe to
commercial pricing services providing estimated fair values of fixed income
securities that are not actively traded. Estimated fair values for privately
placed bonds are generally determined by applying interest rate spreads based on
quality and asset type to the appropriate duration on the Treasury yield curve.
Bond Portfolio Surveillance and Under Performing Investments
To identify under-performing investments, we review all bonds on a regular basis
utilizing the following criteria:
(i) material declines in revenues or margins,
17
<PAGE>
(ii) significant uncertainty regarding the issuer's industry,
(iii) debt service coverage or cash flow ratios that fall below
industry-specific thresholds,
(iv) violation of financial covenants,
(v) trading of public securities at a substantial discount due to specific
credit concerns, and
(vi) other subjective factors that relate to the issuer.
We actively review the bond portfolio to estimate the likelihood and amount of
financial defaults or write-downs in the portfolio and to make timely decisions
as to the potential sale or re-negotiation of terms of specific investments.
As defined by the NAIC, under performing bonds are those whose deferral of
interest and/or principal payments are deemed to be caused by the inability of
the obligor to make such payments as called for in the bond contract. At
December 31, 1998 and 1997, we had no under-performing bonds.
We do not accrue interest income on bonds delinquent more than 90 days or when
we believe the collection of interest is uncertain. Interest not accrued on
bonds was zero for the years ended December 31, 1998 and 1997.
Write-downs and Investment Reserves
When we determine that it is probable that the net realizable value of an
invested asset is less than our carrying value, appropriate write-downs or
investment reserves are established and recorded in accordance with statutory
practice.
We determine the net realizable value of bonds in accordance with principles
established by the SVO using criteria such as:
. the net worth and capital structure of the borrower,
. the value of the collateral;
. the presence of additional credit support, and
. our evaluation of the borrower's ability to compete in a relevant market.
In compliance with regulatory requirements, we maintain an Asset Valuation
Reserve. This reserve stabilizes shareholder equity against non-interest rate
related fluctuations in the value of bonds, stocks and other investments. As of
and for the years ended December 31, 1998 and 1997, investments reserve balances
and related activity were not significant.
Quantitative and Qualitative Information about Market Risk
We developed the following discussion of our risk-management activities using
"forward-looking statements" that are based on estimates and assumptions. While
we believe that the assumptions we have made are reasonably possible in the near
term, actual results could differ materially from those projected in the
forward-looking statements. In addition, we would likely take certain actions to
mitigate the impacts of the assumed market changes, thereby reducing the
negative impact discussed below.
We have excluded all non-guaranteed separate account assets and liabilities from
the following discussion since all market risks associated with those accounts
are assumed by the contract holders, not us.
Our assets, such as bonds, and policy loans are financial instruments and are
subject to the risk of market volatility and potential market disruptions. These
risks may reduce the value of our financial instruments, or impact future cash
flows and earnings from those instruments. We do not hold any financial
instruments for the purpose of trading and we do not use any derivative
financial insruments to manage risk.
Our primary market risk exposure is to changes in interest rates, which can
cause changes in the fair value, cash flows and earnings of certain financial
instruments. To manage our exposure to interest rate changes we use
sophisticated quantitative asset/liability management techniques.
Asset/liability management allows us to match the market sensitivity of assets
with the liabilities they support. If these sensitivities are matched perfectly,
the impact of interest rate changes is effectively offset on an economic basis
as the change in value of the asset is offset by a corresponding change in the
value of the supported liability. In addition, we invest a significant portion
of our investment funds in high quality bonds in order to maintain and manage
liquidity and reduce the risk of default in the portfolio.
Based upon the information and assumptions we used in our asset/liability
analysis as of December 31, 1998, we estimate that a hypothetical immediate 10%
change in interest rates would not have a material effect on our future earnings
and cash flows, or on the fair value of our financial instruments.
Description of the Business
We are a stock life insurance company and our Home Office is located in
Hartford, Connecticut. Our principal administrative office is located at 1295
State Street, Springfield, Massachusetts. We were organized in 1894 under the
laws of the State of Missouri. In 1981 MassMutual purchased us. In 1982,
MassMutual changed our name to MML Bay State Life Insurance Company from Western
Life Insurance Company of America. On June 30, 1997, we redomesticated from the
State of Missouri to the State of Connecticut.
18
<PAGE>
We are principally engaged in the sale of insurance products. Our insurance
products include variable life insurance, corporate owned life insurance, and
variable annuity contracts. We distribute these products through career agents,
registered financial planners and brokers. We are licensed to sell variable life
insurance in the District of Columbia and in all states except New York. We plan
to obtain variable annuity authority in all states except New York. As of March
1, 1999, we have obtained this authority in 44 states and the District of
Columbia.
Currently, aside from the LifeTrust variable annuity contract, we offer certain
variable universal life insurance policies. These products provide a
policyholder, within guidelines established by the terms of the policy, the
ability to select and change premium levels, amounts of death benefits, and
account value investment options. We credit premiums in excess of specified
sales charges to the account value of the policies. Policyholders may allocate
premiums either to a guaranteed principal account backed by our general
investment account, or to one or more of our available divisions of the
policies' separate accounts.
We believe that we have adequate space, equipment and resources to meet our
obligations with regard to the fixed account and the contract. We had an
agreement with Alliance One Services, Inc., to provide most of the
administrative services for the contract through the operation of the service
center. However as of July 1, 1998, we relocated the service center to our home
office in Hartford, Connecticut and administration is currently being provided
by MassMutual.
Functionally, we are part of MassMutual's operations, and as a result, a
discussion of MassMutual's business and our position within MassMutual's
operations is useful for an understanding of our business.
MassMutual is a mutual life insurance company organized as a Massachusetts
corporation which was originally chartered in 1851. As a mutual life insurance
company, MassMutual has no shareholders. MassMutual's primary business is
ordinary life insurance. MassMutual also provides, directly or through its
subsidiaries, a wide range of annuity and disability products, and pension and
pension-related products and services, as well as investment services to
individuals, corporations and other institutions in all 50 states of the United
States, Puerto Rico and the District of Columbia. MassMutual and its
subsidiaries or affiliates are also licensed to transact business in six
provinces of Canada, Chile, Argentina, Bermuda and Luxembourg, although its
operations in such jurisdictions are not material.
MassMutual's principal lines of business are
(i) Individual Line of Business, which includes life, disability, annuities,
large corporate life insurance and investment products and services;
(ii) Retirement Services, which provides group pension investment products and
administrative services, primarily to sponsors of tax qualified retirement
plans;
(iii) MassMutual Investment Group, which provides investment advisory services
to MassMutual, its affiliates and various outside individual and
institutional investors through MassMutual's investment management staff
and its principal subsidiaries: OppenheimerFunds, Inc., David L. Babson
and Company, Inc., Antares Capital Corporation, and Cornerstone Real
Estate Advisors, Inc.
A statement of corporate vision guides the direction and operations of
MassMutual's business. Under this vision, MassMutual's operations are managed to
maintain a financially strong and efficient enterprise for the benefit of
policyholders. MassMutual's long-term objectives are to maintain corporate
financial strength, enhance policyholder value, and generate and sustain
growth.
Underwriting
The risk assessment process is carefully balanced to ensure an evaluation of
relative risks consistent with the issuance of new business and competitive
product performance. We utilize a computerized system in the process of
reviewing and approving applications for life insurance. This system affords us
substantial savings in underwriting time and cost, and lends consistency to the
underwriting process.
Competition
The life insurance industry is highly competitive. There are more than 1,700
life insurance companies in the United States, many of which offer insurance
products similar to those we market. In addition to competition within the
industry, insurers are increasingly facing competition from non-traditional
sources in the financial services industry. Such businesses include mutual
funds, banks, securities brokerage houses and other financial services entities.
Many of our competitors provide alternative investment and savings vehicles for
consumers.
19
<PAGE>
Legislative initiatives proposed at the federal level would, if enacted, reorder
the financial services industry, thereby changing the environment in which we
compete.
We believe our financial strength, agent skill and historical product
performance provide competitive advantages for the products we offer in these
markets. Ours and MassMutual's financial strength continues to be recognized
favorably by the rating agencies. Ours and MassMutual's year end 1998 ratings
were again among the highest enjoyed by any company in any industry.
Our AAA (Extremely Strong) financial strength rating from Standard & Poor's and
A++ (Superior) financial strength rating from A.M. Best were the highest
possible.
MassMutual's AAA financial strength rating from Standard & Poor's, A++ financial
strength rating from A.M. Best, and AAA claims-paying rating from Duff & Phelps
were the highest possible. MassMutual's Aa1 financial strength rating from
Moody's Investors Service was the highest in its "Excellent" Category.
Each rating agency independently assigns ratings based on its own separate
review and takes into account a variety of factors (which are subject to change
in making its decision). Accordingly, there can be no assurance of the ratings
that will be afforded us in the future.
Regulation
We are organized as a Connecticut stock life insurance company, and are subject
to Connecticut laws governing insurance companies. We are regulated and
supervised by the State of Connecticut Insurance Commissioner. By March 1 of
every year, we must prepare and file an annual statement, in a form prescribed
by the State of Connecticut Insurance Department, as of December 31 of the
preceding year. The Commissioner's agents have the right at all times to review
or examine our books and assets. A full examination of our operations is
conducted periodically according to the rules and practices of the National
Association of Insurance Commissioners. We are also subject to the insurance
laws of the states in which we are authorized to do business, to various federal
and state securities laws and regulations, and to regulatory agencies that
administer those laws and regulations.
We are licensed, regulated and supervised in all jurisdictions where we conduct
business. The extent of such regulation varies. However most jurisdictions have
laws and regulations requiring the licensing of insurers and their agents,
setting standards of solvency and business conduct to be maintained by licensed
insurance companies, and may regulate withdrawal from certain markets. In
addition, statutes and regulations usually require the approval of policy forms
and, for certain lines of insurance, the approval of rates. Such statutes and
regulations also prescribe the permitted types and concentration of investments.
We are also subject to regulation of our accounting methodologies and are
required to file detailed annual financial statements with supervisory agencies
in each of the jurisdictions in which we do business. Each of our operations and
accounts are also subject to examination by such agencies at regular intervals.
All 50 states of the United States, the District of Columbia and Puerto Rico
have insurance guaranty fund laws requiring insurance companies doing business
within those jurisdictions to participate in guaranty associations. Guaranty
associations are organized to pay contractual obligations under insurance
policies and certificates issued under group insurance policies, issued by
impaired or insolvent life insurance companies. These associations levy
assessments, up to prescribed limits, on all member insurers in a particular
state. Levies are calculated on the basis of the proportionate shares of the
premiums written by member insurers in the lines of business in which the
impaired or insolvent insurer is engaged. Some states permit member insurers to
recover assessments paid through full or partial premium tax offsets, usually
over a period of years. We believe such assessments in excess of amounts accrued
will not materially affect our financial position, results of operations or
liquidity.
We are also subject to risk-based capital ("RBC") requirements promulgated by
the National Association of Insurance Commissioners ("NAIC"). The RBC Model Act
gives state insurance commissioners explicit regulatory authority to require
various actions by, or take various actions against, insurance companies whose
total adjusted capital does not meet the RBC standards. Although we believe that
there is no single appropriate means of measuring RBC needs, we feel that the
NAIC approach to RBC measurement is reasonable, and we will manage our capital
position with significant attention to maintaining adequate total adjusted
capital relative to RBC. Our total adjusted capital was well in excess of all
RBC standards at December 31, 1998 and 1997. We believe that we enjoy a strong
capital position in light of the risks to which we
20
<PAGE>
are subject and that we are well positioned to meet policyholder and other
obligations.
In addition to regulation of our insurance business, we are subject to various
types of federal and state laws and regulations affecting the conduct, taxation
and other aspects of our businesses. Certain policies and contracts that we
offer are subject to federal securities laws administered by the Securities and
Exchange Commission.
We believe that we are in compliance in all material respects, with all
applicable regulations.
Experts and Additional Available Information
Experts
We included our audited statutory financial statements in this prospectus in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing. These
statements include the statement of statutory financial position as of December
31, 1998 and 1997, and the related statutory statements of income, changes in
shareholder's equity and cash flows for each of the years in the three year
period ended December 31, 1998.
Additional Available Information
We file registration statements, reports and informational statements with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933 and
the Securities Exchange Act of 1934. These filings contain information not
contained in this Prospectus. You can review and copy such registration
statements, reports, information statements and other information at the public
reference facilities maintained by the SEC. The SEC is located, at Room 1024,
450 Fifth Street, N.W., Washington, D.C., 20549. The SEC's New York and Chicago
regional offices are located at the following addresses:
. Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York, 10046; and
. Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
The SEC also maintains a Web site that contains these filings. The SEC's
internet address is http://www.sec.gov.
Selected Historical Financial Data
We have prepared our financial information on the basis of statutory accounting
practices prescribed or permitted by the Department of Insurance of the State of
Connecticut and prior to June 30, 1997, the Department of Insurance of the State
of Missouri. We have derived the following statutory information for the years
ended and at December 31, 1998, 1997, 1996, 1995 and 1994 from our statutory
financial statements. PricewaterhouseCoopers LLP, independent accountants, have
audited these statutory financial statements. For a description of the
accounting principles applicable to this financial information and certain
differences between statutory accounting practices and generally accepted
accounting principles, see the Accounting Practices section.
The following information should be read in conjunction with, and is qualified
in its entirety by, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and other information
included elsewhere in this Prospectus. The results for past accounting periods
are not necessarily indicative of the results to be expected for any future
accounting period.
21
<PAGE>
MML Bay State Life Insurance Company
Selected Historical Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (In Millions)
Revenue:
Premium income $ 573 $ 606 $ 441 $ 93 $ 55
Net investment income 5 4 4 4 3
Fees and other income 79 62 43 21 14
------- ------- ------- ------- -------
Total revenue 657 672 488 118 72
------- ------- ------- ------- -------
Benefits and expenses:
Policyholders' benefits and payments 53 34 11 6 3
Addition to policyholders' reserves and funds 495 544 402 87 44
Expenses, commissions and state taxes 103 85 61 29 24
------- ------- ------- ------- -------
Total benefits and expenses 651 663 474 122 71
------- ------- ------- ------- -------
Net gain (loss) from operations before federal
income taxes 6 9 14 (4) 1
Federal income taxes (benefit) 12 16 12 1 (1)
------- ------- ------- ------- -------
Net gain (loss) from operations (6) (7) 2 (5) 2
Net realized capital gain (loss) -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) $ (6) $ (7) $ 2 $ (5) $ 2
======= ======= ======= ======= =======
Balance Sheet Data (at period end):
Assets:
General account $ 179 $ 136 $ 116 $ 79 $ 80
Separate account 2,032 1,400 707 265 151
------- ------- ------- ------- -------
Total assets $ 2,211 $ 1,536 $ 823 $ 344 $ 231
======= ======= ======= ======= =======
Liabilities:
Policyholders' reserves and funds $ 47 $ 36 $ 27 $ 19 $ 12
Payable to parent 11 22 -- 3 4
Separate account liabilities 2,028 1,397 704 263 149
Other liabilities 11 13 14 9 10
------- ------- ------- ------- -------
Total liabilities 2,097 1,468 745 294 175
Shareholder's equity (1)(2) 114 68 78 50 56
------- ------- ------- ------- -------
Total liabilities and shareholder's equity $ 2,211 $ 1,536 $ 823 $ 344 $ 231
======= ======= ======= ======= =======
</TABLE>
(1) We received surplus contributions totaling $25 million in 1994, $26 million
in 1996, and $50 million in 1998. Additionally, in 1994, we recorded a
prior year adjustment of $4 million through the Statement of Changes in
Shareholder's Equity.
(2) Shareholder's equity also represents our Total Adjusted Capital as defined
by the National Association of Insurance Commissioners.
We reclassified certain prior year amounts to conform with current year
presentation.
22
<PAGE>
Report Of Independent Accountants
To the Board of Directors and Policyholders of
MML Bay State Life Insurance Company
We have audited the accompanying statutory statements of financial position of
MML Bay State Life Insurance Company as of December 31, 1998 and 1997, and the
related statutory statements of income and changes in shareholder's equity, and
of cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the Department of Insurance
of the State of Connecticut, and prior to June 30, 1997, the Department of
Insurance of the State of Missouri, which practices differ from generally
accepted accounting principles. The effects on the financial statements of the
variances between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements audited by us do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of MML Bay State Life Insurance Company as of December 31, 1998 and 1997, or the
results of its operations or its cash flows for each of the three years in the
period ended December 31, 1998.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the financial position of MML Bay State Life Insurance
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, on the basis of accounting described in Note 1.
PricewaterhouseCoopers LLP
Springfield, Massachusetts
February 25, 1999
FF-1
<PAGE>
MML Bay State Life Insurance Company
<TABLE>
<CAPTION>
STATUTORY STATEMENTS OF FINANCIAL POSITION
December 31,
1998 1997
------ ------
(In Millions)
Assets:
<S> <C> <C>
Bonds $ 28.6 $ 38.5
Policy loans 24.1 16.1
Cash and short-term investments 17.2 3.5
--------- --------
69.9 58.1
Investment and insurance amounts
receivable 1.7 2.0
Transfer due from separate accounts 103.0 75.8
Federal income tax receivable 4.2 -
-------- --------
178.8 135.9
Separate account assets 2,031.7 1,400.1
-------- --------
$2,210.5 $1,536.0
======== ========
</TABLE>
See notes to statutory financial statements.
FF-2
<PAGE>
MML Bay State Life Insurance Company
STATUTORY STATEMENTS OF FINANCIAL POSITION, Continued
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
($ In Millions Except for Par Value)
Liabilities:
<S> <C> <C>
Policyholders' reserves and funds $ 47.3 $ 36.2
Policyholders' claims and other benefits 2.9 1.9
Payable to parent 10.8 21.7
Federal income tax 3.9
Other liabilities 7.9 8.1
-------- --------
68.9 71.8
Separate account liabilities 2,027.7 1,396.7
-------- --------
2,096.6 1,468.5
-------- --------
Shareholder's equity:
Common stock, $200 par value
25,000 shares authorized
12,501 shares issued and outstanding 2.5 2.5
Paid-in capital and contributed surplus 121.7 71.7
Surplus (10.3) (6.7)
--------- ---------
113.9 67.5
-------- --------
$2,210.5 $1,536.0
======== ========
</TABLE>
See notes to statutory financial statements.
FF-3
<PAGE>
MML Bay State Life Insurance Company
STATUTORY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------ ------ ------
(In Millions)
Revenue:
<S> <C> <C> <C>
Premium income $573.0 $606.6 $441.2
Net investment income 4.9 3.9 4.2
Fees and other income 78.8 61.7 42.4
------ ------ ------
656.7 672.2 487.8
----- ----- -----
Benefits and expenses:
Policyholders' benefits and payments 53.0 34.3 11.0
Addition to policyholders' reserves and funds 494.9 543.9 401.7
Operating expenses 47.8 38.3 24.0
Commissions 42.1 35.4 28.1
State taxes, licenses and fees 12.9 11.2 9.1
------ ------ ------
650.7 663.1 473.9
------ ------ ------
Net gain from operations
before federal income taxes 6.0 9.1 13.9
Federal income taxes 11.9 15.9 11.8
------ ------ ------
Net gain (loss) from operations (5.9) (6.8) 2.1
Net realized capital loss (0.2) (0.1) (0.1)
------ ------ ------
Net income (loss) $ (6.1) $ (6.9) $ 2.0
====== ====== ======
</TABLE>
See notes to statutory financial statements.
FF-4
<PAGE>
MML Bay State Life Insurance Company
STATUTORY STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Shareholder's equity, beginning of year $ 67.5 $ 77.6 $ 50.3
------- ------ ------
Increases (decrease) due to:
Net income (loss) (6.1) (6.9) 2.0
Capital contribution 50.0 - 25.5
Other 2.5 (3.2) (0.2)
------- ------ ------
46.4 (10.1) 27.3
------- ------ ------
Shareholder's equity, end of year $ 113.9 $ 67.5 $ 77.6
======== ====== ======
</TABLE>
See notes to statutory financial statements.
FF-5
<PAGE>
MML Bay State Life Insurance Company
STATUTORY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------ ------ ------
(In Millions)
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ (6.1) $ (6.9) $ 2.0
Addition to policyholders' reserves and funds,
net of transfers to separate accounts 12.1 10.5 7.0
Net realized capital loss 0.2 0.1 0.1
Change in receivable from separate accounts (27.2) (25.6) (21.2)
Change in (payable) receivable to parent (10.9) 22.8 (0.2)
Change in federal taxes (payable) receivable (8.1) 5.0 (1.0)
Other changes 1.8 (9.7) 1.5
------- ------ --------
Net cash used in operating activities (38.2) (3.8) (11.8)
------- ------ --------
Investing activities:
Loans and purchases of investments (15.5) (20.1) (35.9)
Sales and maturities of investments and receipts
from repayments of loans 17.4 20.4 28.7
------- ------ --------
Net cash provided by (used in) investing activities 1.9 0.3 (7.2)
------- ------ --------
Financing activities:
Capital and surplus contribution 50.0 - 25.5
------- ------ --------
Net cash provided by financing activities 50.0 - 25.5
------- ------ --------
Increase (decrease) in cash and short-term investments 13.7 (3.5) 6.5
Cash and short-term investments, beginning of year 3.5 7.0 0.5
------- ------ --------
Cash and short-term investments, end of year $ 17.2 $ 3.5 $ 7.0
======= ====== ========
</TABLE>
See notes to statutory financial statements.
FF-6
<PAGE>
Notes To Statutory Financial Statements
MML Bay State Life Insurance Company (the "Company") is a wholly-owned stock
life subsidiary of Massachusetts Mutual Life Insurance Company
("MassMutual"). The Company is primarily engaged in the sale of flexible and
limited premium variable whole life insurance and variable annuities
distributed through career agents and brokers. The Company is licensed to
sell life insurance and annuities in the District of Columbia and 49 states
(excluding New York).
1. SUMMARY OF ACCOUNTING PRACTICES
The accompanying statutory financial statements have been prepared in
conformity with the statutory accounting practices of the National
Association of Insurance Commissioners ("NAIC") and the accounting practices
prescribed or permitted by the Department of Insurance of the State of
Connecticut, and prior to June 30, 1997, the Department of Insurance of the
State of Missouri. On June 30, 1997, the Company redomesticated from the
state of Missouri to the state of Connecticut which did not have any effect
on the accounting practices being followed. These statutory financial
statements are different in some respects from financial statements prepared
in accordance with generally accepted accounting principles ("GAAP"). The
more significant differences are as follows: (a) acquisition costs, such as
commissions and other costs directly related to acquiring new business, are
charged to current operations as incurred, whereas under GAAP these expenses
would be capitalized and recognized over the life of the policies; (b) policy
reserves are based upon statutory mortality and interest requirements without
consideration of withdrawals, whereas GAAP reserves would be based upon
reasonably conservative estimates of mortality, morbidity, interest and
withdrawals; (c) bonds are generally carried at amortized cost whereas GAAP
generally requires they be reported at fair value; (d) deferred income taxes
are not provided for book-tax timing differences as would be required by
GAAP; and (e) payments received for universal life products and variable
annuities are reported as premium revenue, whereas under GAAP, these payments
would be recorded as deposits to policyholders' account balances.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). Codification provides a comprehensive guide of
statutory accounting principles for use by insurers in all states and is
expected to become effective no later than January 1, 2001. The effect of
adopting Codification shall be reported as an adjustment to surplus on the
effective date. The Company is currently reviewing the impact of
Codification; however, since the Department of Insurance of the State of
Connecticut has not approved Codification, the ultimate impact cannot be
determined at this time.
The preparation of statutory financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as disclosures of contingent assets and liabilities, at
the date of the statutory financial statements. Management must also make
estimates and assumptions that affect the amounts of revenues and expenses
during the reporting period. Future events, including changes in the levels
of mortality, morbidity, interest rates and asset valuations, could cause
actual results to differ from the estimates used in these statutory financial
statements.
Certain 1997 and 1996 amounts have been reclassified to conform with the
current year presentation.
The following is a description of the Company's principal accounting policies
and practices.
A. Investments
Bonds are valued in accordance with rules established by the NAIC. Generally,
bonds are valued at amortized cost.
Policy loans are carried at the outstanding loan balance less amounts
unsecured by the cash surrender value of the policy.
FF-7
<PAGE>
Notes To Statutory Financial Statements (Continued)
Short-term investments are stated at amortized cost, which approximates fair
value.
In compliance with regulatory requirements, the Company maintains an Asset
Valuation Reserve ("AVR") and an Interest Maintenance Reserve ("IMR"). The
AVR and other investment reserves stabilize surplus against declines in the
value of bonds. The IMR captures after-tax realized capital gains and losses
which result from changes in the overall level of interest rates for all
types of fixed income investments and amortizes these capital gains and
losses into income using the grouped method over the remaining life of the
investment sold or over the life of the underlying asset. Net realized after
tax capital losses of $0.1 million in 1998, 1997 and 1996 were charged to the
IMR. Amortization of the IMR into net investment income amounted to $0.1
million in 1998, 1997 and 1996. The IMR is included in other liabilities on
the Statutory Statement of Financial Position.
Realized capital gains and losses, less taxes, not includable in the IMR, are
recognized in net income. Realized capital gains and losses are determined
using the specific identification method. Unrealized capital gains and losses
are included in surplus.
B. Separate Accounts
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of variable annuity
and variable life insurance policyholders. Assets, consisting of holdings in
an open-ended series investment fund affiliated with MassMutual, bonds,
common stocks, and short-term investments, are reported at fair value. The
transfer due from separate accounts represent the policyholders' account
values in excess of statutory benefit reserves. Premiums, benefits and
expenses of the separate accounts are reported in the Statutory Statement of
Income. The Company receives compensation for providing administrative
services to the separate account and for assuming mortality and expense risks
in connection with the policies. The Company had $4.0 million and $3.4
million of its assets invested in the separate account as of December 31,
1998 and 1997, respectively.
Net transfers to separate accounts of $481.2 million, $479.4 million, and
$356.1 million in 1998, 1997 and 1996, respectively, are included in the
addition to policyholders' reserves and funds.
C. Policyholders' Reserves
Policyholders' reserves for life insurance contracts were developed using
accepted actuarial methods computed principally on the net level premium
method and the Commissioners' Reserve Valuation Method using the 1958 and
1980 Commissioners' Standard Ordinary mortality tables with assumed interest
rates ranging from 3.0 to 5.5 percent. Reserves for individual annuities are
based on accepted actuarial methods, principally at interest rates ranging
from 5.28 to 6.0 percent.
The Company made certain changes in the valuation of policyholders' reserves
which increased surplus by $2.6 million in 1998 and decreased surplus by $3.0
million in 1997.
D. Premium and Related Expense Recognition
Life insurance premium revenue is recognized annually on the anniversary date
of the policy. Annuity premium is recognized when received. Commissions and
other costs related to issuance of new policies, maintenance and settlement
costs, are charged to current operations when incurred.
E. Cash and Short-Term Investments
For purposes of the Statutory Statement of Cash Flows, the Company considers
all highly liquid short-term investments purchased with a maturity of twelve
months or less to be short-term investments.
FF-8
<PAGE>
Notes To Statutory Financial Statements (Continued)
2. SHAREHOLDER'S EQUITY
The Board of Directors of MassMutual has authorized the contribution of funds
to the Company sufficient to meet the capital requirements of all states in
which the Company is licensed to do business. Substantially all of the
statutory shareholder's equity is subject to dividend restrictions relating
to various state regulations, which limit the payment of dividends to the
shareholder without prior approval. Under these regulations, $6.7 million of
shareholder's equity is available for distribution to the shareholder in 1999
without prior regulatory approval.
During 1998, MassMutual contributed additional paid-in capital of $50.0
million to the Company. Additionally, in 1996, MassMutual contributed
additional paid-in capital of $25.0 million to the Company and purchased an
additional 2,500 shares of common stock for $0.5 million.
3. RELATED PARTY TRANSACTIONS
MassMutual and the Company have an agreement whereby MassMutual, for a fee,
furnishes the Company, as required, operating facilities, human resources,
computer software development and managerial services. Also, investment and
administrative services are provided to the Company pursuant to a management
services agreement with MassMutual. Fees incurred under the terms of these
agreements were $47.8 million, $26.8 million and $16.4 million in 1998, 1997
and 1996, respectively.
The Company has reinsurance agreements with MassMutual in which MassMutual
assumed specific plans of insurance on a yearly renewal term basis. Premium
income and policy benefits and payments are stated net of reinsurance.
Premium income of $4.7 million, $5.1 million and $3.8 million was ceded to
MassMutual in 1998, 1997 and 1996, respectively. Policyholder benefits of
$2.2 million, $5.5 million and $3.1 million were ceded to MassMutual in 1998,
1997 and 1996, respectively.
The Company entered into a stop-loss agreement with MassMutual on January 1,
1997 under which the Company cedes claims, which, in aggregate exceed 18% of
the covered volume for any year, with maximum coverage of $25.0 million above
the aggregate limit. For 1998 and 1997, the aggregate limit was $37.0 million
and $15.4 million, respectively and it was not exceeded in any of the years.
The Company paid approximately $0.9 million and $1.0 million in premiums to
MassMutual under the agreement in 1998 and 1997, respectively.
4. FEDERAL INCOME TAXES
The provision for federal income taxes is based upon the Company's estimate
of its tax liability. No deferred tax effect is recognized for temporary
differences that may exist between financial reporting and taxable income.
Accordingly, the reporting of miscellaneous temporary differences, such as
reserves and acquisition costs, resulted in effective tax rates which differ
from the statutory tax rate.
The Company plans to file its 1998 federal income tax return on a
consolidated basis with its parent, MassMutual and MassMutual's other
eligible life and non-life affiliates. MassMutual and its eligible life
affiliates and its non-life affiliates are subject to a written tax
allocation agreement which allocates the group's tax liability for payment
purposes. Generally, the agreement provides that affiliates shall be
compensated for the use of their losses and credits by other affiliates.
The Internal Revenue Service has completed examining MassMutual's
consolidated income tax returns through the year 1992 and is currently
examining the years 1993 and 1994. The Company believes any adjustments
resulting from such examinations will not materially affect its statutory
financial statements.
Federal tax payments were $20.2 million in 1998, $10.9 million in 1997 and
$12.8 million in 1996.
FF-9
<PAGE>
Notes To Statutory Financial Statements (Continued)
5. INVESTMENTS
The Company maintains a diversified investment portfolio. Investment
policies limit concentration in an asset class, geographic region, industry
group, economic characteristic, investment quality or individual
investment.
A. Bonds
The carrying value and estimated fair value of bonds are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 5.6 $0.1 $ - $ 5.7
and obligations of U. S.
government corporations
and agencies
Mortgage-backed securities 4.6 0.1 - 4.7
Corporate debt securities 17.9 0.6 0.1 18.4
Utilities 0.5 - - 0.5
----- ---- ---- -----
TOTAL $28.6 $0.8 $0.1 $29.3
===== ==== ==== =====
December 31, 1997
-----------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------- ---------- ----------- ----------
(In Millions)
U. S. Treasury securities $ 7.6 $0.1 $ - $ 7.7
and obligations of U. S.
government corporations
and agencies
Mortgage-backed securities 6.5 0.1 - 6.6
Corporate debt securities 23.9 0.4 - 24.3
Utilities 0.5 - - 0.5
----- ---- ---- -----
TOTAL $38.5 $0.6 $ - $39.1
===== ==== ==== =====
</TABLE>
FF- 10
<PAGE>
Notes To Statutory Financial Statements (Continued)
The carrying value and estimated fair value of bonds at December 31, 1998
by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
--------- ---------
(In Millions)
<S> <C> <C>
Due in one year or less $ 1.8 $ 1.8
Due after one year through five years 13.6 13.9
Due after five years through ten years 6.4 6.6
Due after ten years 1.5 1.5
----- -----
23.3 23.8
Mortgage-backed securities, including
securities guaranteed by the
U.S. Government 5.3 5.5
----- -----
TOTAL $28.6 $29.3
===== =====
</TABLE>
Proceeds from sales and maturities of investments in bonds were $17.4
million during 1998, $20.4 million during 1997 and $28.7 million during
1996. Gross capital gains of $0.1 million in 1998, 1997 and 1996 and gross
capital losses of $0.1 million in 1998, 1997, and 1996 were realized on
those sales, portions of which were included in the IMR. The estimated fair
value of non-publicly traded bonds is determined by the Company using a
pricing matrix and quoted market prices for publicly traded bonds.
B. Other
Policy loans are recorded at cost as it is not practicable to determine the
fair value since they do not have a stated maturity.
6. BUSINESS RISKS AND CONTINGENCIES
Approximately 45% and 49% of the Company's premium revenue in 1998 and
1997, respectively, was derived from three customers and approximately 52%
of the Company's premium revenue in 1996 was derived from two customers.
The Company is subject to insurance guaranty fund laws in the states in
which it does business. These laws assess insurance companies amounts to be
used to pay benefits to policyholders and claimants of insolvent insurance
companies. Many states allow these assessments to be credited against
future premium taxes. The Company believes such assessments in excess of
amounts accrued will not materially affect its financial position, results
of operations or liquidity.
The Company is involved in litigation arising in and out of the normal
course of its business. Management intends to defend these actions
vigorously. While the outcome of litigation cannot be foreseen with
certainty, it is the opinion of management, after consultation with legal
counsel, that the ultimate resolution of these matters will not materially
affect its financial position, results of operations or liquidity.
7. AFFILIATED COMPANIES
The relationship of the Company, its parent and affiliated companies as of
December 31, 1998 is illustrated below. Subsidiaries are wholly-owned by
the parent, except as noted.
FF-11
<PAGE>
Notes To Statutory Financial Statements (Continued)
Parent
------
Massachusetts Mutual Life Insurance Company
Subsidiaries of Massachusetts Mutual Life Insurance Company
-----------------------------------------------------------
CM Assurance Company
CM Benefit Insurance Company
C.M. Life Insurance Company
MassMutual Holding Company
MassMutual of Ireland, Limited
MML Bay State Life Insurance Company
MML Distributors, LLC
MassMutual Mortgage Finance, LLC
Subsidiaries of MassMutual Holding Company
------------------------------------------
GR Phelps & Co., Inc.
MassMutual Holding Trust I
MassMutual Holding Trust II
MassMutual Holding MSC, Inc.
MassMutual International, Inc.
MML Investor Services, Inc.
Subsidiaries of MassMutual Holding Trust I
------------------------------------------
Antares Capital Corporation - 99.4%
Charter Oak Capital Management, Inc. - 80.0%
Cornerstone Real Estate Advisors, Inc.
DLB Acquisition Corporation - 85.8%
Oppenheimer Acquisition Corporation - 89.36%
Subsidiaries of MassMutual Holding Trust II
-------------------------------------------
CM Advantage, Inc.
CM International, Inc.
CM Property Management, Inc.
HYP Management, Inc.
MMHC Investments, Inc.
MML Realty Management
Urban Properties, Inc.
MassMutual Benefits Management, Inc.
Subsidiaries of MassMutual International, Inc.
----------------------------------------------
Compensa de Seguros de Vida S.A. - 33.5%
MassLife Seguros de Vida (Argentina) S. A.
MassMutual International (Bermuda) Ltd.
Mass Seguros de Vida (Chile) S. A. - 33.5%
MassMutual International (Luxembourg) S. A.
MassMutual Holding MSC, Inc.
----------------------------
MassMutual Corporate Value Limited - 40.93%
9048 - 5434 Quebec, Inc.
1279342 Ontario Limited
Affiliates of Massachusetts Mutual Life Insurance Company
---------------------------------------------------------
MML Series Investment Fund
MassMutual Institutional Funds
Oppenheimer Value Stock Fund
FF-12
<PAGE>
PART II. INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
-------------------------------------------
Not applicable.
Item 15. Indemnification of Directors and Officers
-----------------------------------------
MML Bay State directors and officers are indemnified under its by-laws. MML Bay
State indemnifies each person who was or is a party to any threatened, pending
or completed action, suit or to any liability to any entity which is registered
as an investment company under the Investment Company Act of 1940 or to the
security holders thereof provided that:
(a) Such person acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation;
(b) With respect to any criminal action or proceeding, such person had no
reasonable cause to believe their conduct was unlawful;
(c) Unless ordered by a court, indemnification shall be made only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances set
forth in subparagraphs (a) and (b) above, such determination to be made (i)
by the Board of Directors of the MML Bay State by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable
a quorum of disinterested Directors so directs, by independent legal counsel
in a written opinion, or (iii) by the stockholders of the corporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
MML Bay State pursuant to the foregoing provisions, or otherwise, MML Bay
State has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
MML Bay State of expenses incurred or paid by a director, officer or
controlling person of MML Bay State in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, MML Bay State
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issues.
Item 16. Exhibits
--------
Exhibit Number Description Method of Filing
- -------------- ----------- ----------------
(1)(a) Form of Underwriting Agreement with
MML Investors Services, Inc. *
(1)(b) Form of Underwriting Agreement with
MML Distributors, LLC **
4 Form of Individual Annuity Contract ***
5 Opinion re legality Filed herewith
6
<PAGE>
23(i) Consent of Independent Accountants, Filed herewith
PricewaterhouseCoopers LLP
24(a) Powers of Attorney for: ***
Lawrence V. Burkett, Jr.
John B. Davies
Stuart H. Reese
Isadore Jermyn
24(b) Powers of Attorney for: Filed herewith
Edward M. Kline
John Miller, Jr.
James Miller
27 Financial Data Schedule Filed herewith
*Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement File No. 33-79750.
**Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement File No. 33-79750.
***Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement File No. 33-79750.
Item 17. Undertakings
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement, including (but
not limited to) any addition or deletion of a managing
underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has caused this Post-Effective Amendment
No. 5 to Registration Statement No. 33-79750 to be signed on its behalf by the
undersigned thereunto duly authorized, all in the city of Springfield and the
Commonwealth of Massachusetts, on the 22(nd) day of March, 1999.
MML BAY STATE LIFE INSURANCE COMPANY
(Registrant)
By: /s/ Lawrence V. Burkett, Jr.*
-----------------------------
Lawrence V. Burkett, Jr., Director, President and Chief Executive
Officer
MML Bay State Life Insurance Company
/s/ Richard M. Howe On March 22, 1999, as Attorney-in-Fact pursuant to
- -------------------
*Richard M. Howe powers of attorney.
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 5 to Registration Statement No. 33-79750 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lawrence V. Burkett, Jr.* Director, President and Chief March 22, 1999
- -----------------------------
Lawrence V. Burkett, Jr. Executive Officer
/s/ Edward M. Kline* Vice President and Treasurer March 22, 1999
- --------------------
Edward M. Kline (Principal Financial Officer)
/s/ John M. Miller, Jr.* Vice President and Comptroller March 22, 1999
- ------------------------
John M. Miller Jr. (Principal Accounting Officer)
/s/ John B. Davies* Director March 22, 1999
- -------------------
John B. Davies
/s/ Stuart H. Reese* Director March 22, 1999
- --------------------
Stuart H. Reese.
/s/ Isadore Jermyn* Director March 22, 1999
- -------------------
Isadore Jermyn
/s/ James Miller* Director March 22, 1999
- -----------------
James Miller
/s/ Richard M. Howe On March 22, 1999, as Attorney-in-Fact pursuant to
- -------------------
*Richard M. Howe powers of attorney.
</TABLE>
8
<PAGE>
LIST OF EXHIBITS
Exhibit 5 Opinion re legality
Exhibit 23(i) Consent of Independent Accountants
Exhibit 24(b) Powers of Attorney
Exhibit 27 Financial Data Schedule
9
<PAGE>
EXHIBIT 5
OPINION RE LEGALITY
March, 1999
MML Bay State Life Insurance Company
1295 State Street
Springfield, MA 01111
RE: MML Bay State Fixed Account with Market Value
Adjustment; Commission File No. 33-79750
Ladies and Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 5 to the Registration Statement on Form S-2 (the "Registration
Statement") under the Securities Act of 1933 for MML Bay State Fixed Account
with Market Value Adjustment (the "Fixed Account") offered in connection with
the LifeTrust variable annuity contract, issued by MML Bay State.
The Fixed Account offers investors the choice among various guarantee periods to
which account value may be allocated. If such amounts remain in the fixed
account for the chosen guarantee period, then a guaranteed rate of interest will
be paid. If, however, amounts are withdrawn prior to the expiration of the
selected guarantee period, such withdrawal will be subject to a market value
adjustment.
As Vice President for MML Bay State Life Insurance Company, ("MML Bay State"), I
provide legal advice to MML Bay State in connection with the operation of its
variable products. In such role I have participated in the preparation of Post-
Effective Amendment No. 5 to the Registration Statement for the Fixed Account.
In so acting, I have made such examination of the law and examined such records
and documents as in my judgment are necessary or appropriate to enable me to
render the opinion expressed below. I am of the following opinion:
1. MML Bay State is a valid and subsisting corporation, operated under
Connecticut law, and subject to regulation by the Connecticut Commissioner of
Insurance.
2. The securities being registered, when sold will be legally issued, fully paid
and non-assessable.
I hereby consent to the use of this opinion as an exhibit to the Post-Effective
Amendment.
Very truly yours,
/s/Stephen R. Bosworth
-------------------
Stephen R. Bosworth
Vice President-Law
10
<PAGE>
EXHIBIT 23(I)
Consent of Independent Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
MML Bay State Life Insurance Company
We consent to the inclusion in this Post-Effective Amendment No. 5 to the
registration statement on Form S-2 File (No. 33-79750) of our report, which
includes explanatory paragraphs relating to the use of statutory accounting
practices, which practices differ from generally accepted accounting principles,
dated February 25, 1999 on our audits of the statutory financial statements of
MML Bay State Life Insurance Company. We also consent to the references to our
firm under the caption "Experts" and "Selected Historical Financial Data".
PricewaterhouseCoopers LLP
Springfield, Massachusetts
March 25, 1999
11
<PAGE>
EXHIBIT 24(b)
POWERS OF ATTORNEY
POWER OF ATTORNEY: FEDERAL SECURITIES LAWS
The Undersigned, James Miller, a member of the Board of Directors of MML Bay
State Life Insurance Company ("MML Bay State"), does hereby constitute and
appoint Thomas F. English, Richard M. Howe, Stephen R. Bosworth, and Michael
Berenson, and each of them individually, as his true and lawful attorneys and
agents.
Such attorneys and agents shall have full power of substitution and authority to
take any and all action and execute any and all instruments on the Undersigned's
behalf as a member of the Board of Directors of MML Bay State that said
attorneys and agents may deem necessary or advisable to enable MML Bay State to
comply with the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the Investment Company Act of 1940, as amended,
(collectively, the "Acts") and any rules, regulations, orders or other
requirements of the Securities and Exchange Commission (the "Commission")
thereunder. This Power of Attorney authorizes such attorneys and agents to sign
the Undersigned's name on his behalf as a member of the Board of Directors of
MML Bay State to any and all registration statements and/or amendments thereto,
reports, instruments or documents filed or to be to be filed with the Commission
under the Acts. Without limiting the scope of this Power of Attorney, it shall
apply to filings by or on behalf of MML Bay State separate investment accounts
currently in existence or established in the future, including but not limited
to those listed below.
MML Bay State Variable Annuity Separate Account 1
MML Bay State Variable Life Separate Account I
MML Bay State Variable Life Separate Account II
MML Bay State Variable Life Separate Account III
MML Bay State Variable Life Separate Account IV
MML Bay State Variable Life Separate Account V
The Undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF the Undersigned has set his hand this 7th day of
December, 1998
/s/ James Miller
- ---------------- -------------
James Miller Witness
Member, Board of Directors
12
<PAGE>
POWER OF ATTORNEY: FEDERAL SECURITIES LAWS
------------------------------------------
The Undersigned, John Miller, Jr., Vice President and Comptroller of MML Bay
State Life Insurance Company ("MML Bay State"), does hereby constitute and
appoint Lawrence V. Burkett, Jr., Thomas F. English, Richard M. Howe, Stephen R.
Bosworth, and Michael Berenson, and each of them individually, as his true and
lawful attorneys and agents.
Such attorneys and agents shall have full power of substitution and authority to
take any and all action and execute any and all instruments on the Undersigned's
behalf as Vice President and Comptroller of MML Bay State that said attorneys
and agents may deem necessary or advisable to enable MML Bay State to comply
with the Securities Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, the Investment Company Act of 1940, as amended, (collectively,
the "Acts") and any rules, regulations, orders or other requirements of the
Securities and Exchange Commission (the "Commission") thereunder. This Power of
Attorney authorizes such attorneys and agents to sign the Undersigned's name on
his behalf as Vice President and Comptroller of MML Bay State to any and all
registration statements and/or amendments thereto, reports, instruments or
documents filed or to be to be filed with the Commission under the Acts. Without
limiting the scope of this Power of Attorney, it shall apply to filings by or on
behalf of MML Bay State separate investment accounts currently in existence or
established in the future, including but not limited to those listed below.
MML Bay State Variable Annuity Separate Account 1
MML Bay State Variable Life Separate Account I
MML Bay State Variable Life Separate Account II
MML Bay State Variable Life Separate Account III
MML Bay State Variable Life Separate Account IV
MML Bay State Variable Life Separate Account V
The Undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF the Undersigned has set his hand this 7th day of December,
1998
/s/ John Miller, Jr.
- --------------------- -------------
John Miller, Jr. Witness
Vice President and
Comptroller
13
<PAGE>
POWER OF ATTORNEY: FEDERAL SECURITIES LAWS
------------------------------------------
The Undersigned, Edward M. Kline, Vice President and Treasurer of MML Bay State
Life Insurance Company ("MML Bay State"), does hereby constitute and appoint
Lawrence V. Burkett, Jr., Thomas F. English, Richard M. Howe, Stephen R.
Bosworth, and Michael Berenson, and each of them individually, as his true and
lawful attorneys and agents.
Such attorneys and agents shall have full power of substitution and authority to
take any and all action and execute any and all instruments on the Undersigned's
behalf as Vice President and Treasurer of MML Bay State that said attorneys and
agents may deem necessary or advisable to enable MML Bay State to comply with
the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the Investment Company Act of 1940, as amended, (collectively, the
"Acts") and any rules, regulations, orders or other requirements of the
Securities and Exchange Commission (the "Commission") thereunder. This Power of
Attorney authorizes such attorneys and agents to sign the Undersigned's name on
his behalf as Vice President and Treasurer of MML Bay State to any and all
registration statements and/or amendments thereto, reports, instruments or
documents filed or to be to be filed with the Commission under the Acts. Without
limiting the scope of this Power of Attorney, it shall apply to filings by or on
behalf of MML Bay State separate investment accounts currently in existence or
established in the future, including but not limited to those listed below.
MML Bay State Variable Annuity Separate Account 1
MML Bay State Variable Life Separate Account I
MML Bay State Variable Life Separate Account II
MML Bay State Variable Life Separate Account III
MML Bay State Variable Life Separate Account IV
MML Bay State Variable Life Separate Account V
The Undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF the Undersigned has set his hand this 7th day of
December, 1998
/s/ Edward M. Kline
- ---------------------- -------------
Edward M. Kline Witness
Vice President and
Treasurer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of MML Bay State Life Insurance Company and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 29
<DEBT-CARRYING-VALUE> 29
<DEBT-MARKET-VALUE> 29
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 70
<CASH> 17
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 2,211
<POLICY-LOSSES> 47
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 3
<POLICY-HOLDER-FUNDS> 2,028
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 111
<TOTAL-LIABILITY-AND-EQUITY> 2,211
573
<INVESTMENT-INCOME> 84
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 548
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 103
<INCOME-PRETAX> 6
<INCOME-TAX> 12
<INCOME-CONTINUING> (6)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
