M LIFE INSURANCE COMPANY by zwi14607

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									Report of Financial Examination
                                    M Life Insurance Company   1
as of December 31, 1997




                           COLORADO DIVISION OF INSURANCE

                                   REPORT OF EXAMINATION

                                              OF

                                  M LIFE INSURANCE COMPANY
                                       205 SE Spokane Street
                                      Portland, Oregon 97202

                                             AS OF

                                      DECEMBER 31, 1997
Report of Financial Examination
                                                         M Life Insurance Company                                                                             2
as of December 31, 1997

                                                            TABLE OF CONTENTS
                                                                                                                                                          Page
SALUTATION..............................................................................................................................................3
SCOPE OF EXAMINATION .......................................................................................................................4
HISTORY AND CAPITAL ..........................................................................................................................4
    History...................................................................................................................................................4
    Capital ...................................................................................................................................................4
    Dividends to Stockholders ....................................................................................................................6
AFFILIATED COMPANIES........................................................................................................................6
    Parents, Subsidiaries and Affiliates ......................................................................................................6
    Holding Company Filings .....................................................................................................................6
    Organizational Chart .............................................................................................................................7
MANAGEMENT AND CONTROL.............................................................................................................8
    Shareholder Meetings ...........................................................................................................................8
    Board of Directors.................................................................................................................................8
    Officers .................................................................................................................................................9
    Committees .........................................................................................................................................10
    Conflict of Interest ..............................................................................................................................11
    Service and Management Agreements................................................................................................11
CORPORATE RECORDS..........................................................................................................................13
FIDELITY BOND AND OTHER INSURANCE .......................................................................................14
EMPLOYEES’ AND AGENTS’ WELFARE AND PENSION PLANS ...................................................14
TERRITORY AND PLAN OF OPERATIONS..........................................................................................14
    Territory ..............................................................................................................................................14
    Plan of Operations...............................................................................................................................14
MARKET CONDUCT ACTIVITIES.........................................................................................................15
    Policy Forms and Underwriting Practices ..........................................................................................15
    Treatment of Policyholders.................................................................................................................15
    Advertising and Sales Material...........................................................................................................15
GROWTH OF COMPANY ........................................................................................................................15
BUSINESS IN FORCE BY ESTATE.........................................................................................................16
MORTALITY AND LOSS EXPERIENCE................................................................................................16
REINSURANCE .........................................................................................................................................16
    Assumed..............................................................................................................................................16
    Ceded ..................................................................................................................................................18
STATUTORY AND SPECIAL DEPOSITS...............................................................................................19
ACCOUNTS AND RECORDS ..................................................................................................................20
FINANCIAL STATEMENTS ....................................................................................................................22
    Assets, Liabilities, Surplus and Other Funds......................................................................................23
    Summary of Operations ......................................................................................................................25
    Capital and Surplus Account ..............................................................................................................26
    Reconciliation of Capital and Surplus ................................................................................................27
    Analysis of Examination Changes ......................................................................................................28
    Comparative Financial Statement .......................................................................................................29
NOTES TO FINANCIAL STATEMENTS ................................................................................................31
SUMMARY ................................................................................................................................................32
RECOMMENDATIONS ............................................................................................................................32
CONCLUSION ...........................................................................................................................................34
Report of Financial Examination
                                      M Life Insurance Company                                           3
as of December 31, 1997

                                                                                     Portland, Oregon
                                                                                     June 30, 1999




Honorable William J. Kirven III
Commissioner of Insurance
State of Colorado
1560 Broadway, Suite 850
Denver, Colorado 80202




Commissioner:

Pursuant to your instructions and in compliance with Section 10-1-201, et seq., C.R.S., an examination
has been made of the books, records and financial condition of

                                   M LIFE INSURANCE COMPANY
                                        205 SE Spokane Street
                                       Portland, Oregon 97202


and the report thereon is respectfully submitted.

M Life Insurance Company, hereinafter referred to as the “Company”, was last examined by the
Colorado Division of Insurance as of December 31, 1992. The current examination covered the
intervening period through December 31, 1997. The examination was conducted by Deloitte and Touche
LLP on behalf of, and based upon guidance from, the Colorado Division of Insurance. The firm of Huff,
Thomas and Company was retained to supervise the examination work and to assure the examination was
conducted in accordance with the Examiners Handbook published by the National Association of
Insurance Commissioners (NAIC) and the Colorado Examiners Handbook. No other states participated
in this examination.

All comments and recommendations made in the prior report of examination have been adequately
addressed by the Company.
Report of Financial Examination
                                      M Life Insurance Company                                               4
as of December 31, 1997

                                      SCOPE OF EXAMINATION

This examination covers the five year period from January 1, 1993 through December 31, 1997. During
the examination, assets were verified and valued and all known liabilities were established as of
December 31, 1997. The work performed was in accordance with statutory requirements and procedures
recommended in the Colorado Examiners Handbook and the NAIC Examiners Handbook. The extent of
review on any given account or activity was based upon its relationship and importance to the total
operation. A general review was also made of the Company’s operations, including market conduct
activities and statutory compliance.

All phases of the examination were conducted to determine compliance with the insurance laws and
regulations of the State of Colorado. Specific details pertaining to the phases of the examination are set
forth under the appropriate caption in subsequent sections of this report.

HISTORY AND CAPITAL

History

The Company was incorporated on June 26, 1981 as a capital stock corporation. On December 11, 1981,
the Insurance Commissioner of the State of Colorado granted the Company the authority to transact
business as a life insurance company. (See “Capital” and “Parent, Subsidiaries, and Affiliates” sections
of this report.)

As set forth in the Articles of Incorporation, the purposes of the Company are: to enter into insurance
and reinsurance transactions and contracts whereby the Company assumes or cedes life and other
insurance contract risks of licensed insurance agencies (Member Firms); to provide marketing products
and services; and to conduct the business of insurance which is authorized by statute for a company so
organized and licensed.

Capital

The Company’s initial capital structure consisted of 2,500 shares of class A common stock with a par
value of $100 per share, 10,000 shares of class B common stock with a par value of $0.50 per share and
600,000 shares of preferred stock with a par value of $1.00 per share for a total of 612,500 authorized
shares of capital stock. On June 12, 1996 the Company’s merger with M Financial Holdings,
Incorporated was completed. As a result of the merger all stock was extinguished and 1,000 shares of
common stock were authorized with no par value. As of December 31, 1997, 200 shares of the common
stock was issued.

The following schedule summarizes changes in the Company’s authorized capital structure since
incorporation:

          Amendment                          Par                Total Shares             Authorized
          Date                              Value               Authorized              Capital Stock

          Class A:

          At inception                      $ 100.00                     2,500            $     250,000
          May 23, 1985                        100.00                     5,000                  500,000
          February 2, 1989                    800.00                     5,000                4,000,000
Report of Financial Examination
                                     M Life Insurance Company                                              5
as of December 31, 1997


        Amendment                          Par                Total Shares             Authorized
        Date                              Value               Authorized              Capital Stock

        Class B

        Inception to June 12, 1996        $      0.50                10,000             $      5,000

        Preferred

        Inception to June 12, 1996        $      1.00               600,000             $   600,000

        Common Stock, No Par

        June 12, 1996 to Date             $      0.00                 1,000             $       0.00


Changes in capital paid up and gross paid in and contributed surplus since inception are summarized
below:
                                                                              Par      Capital Contributed
Year          Description                       Shares Issued                Value     Paid Up      Surplus
                                      Class Class                    No
                                        A        B     Preferred Par

1981 At Organization:
      Class A common                    200                               $100.00     $ 20,000         $180,000
      Class B common                           3,000                         0.50        1,500            2,500
      Preferred                                          600,000           100.00      600,000          746,000

1982    Class A common                   80                                  100.00       8,000           72,000
1983    Class A common                   60                                  100.00       6,000           54,000
1984    Class A common                   90                                  100.00       9,000           81,000
1985    Class A common                   70                                  100.00       7,000           63,000
1987    Class A common                  100                                  100.00      10,000           90,000
1988    Preferred redemption                            (600,000)              1.00   (600,000)        (746,000)
1989    Increased par value                                                             420,000        (420,000)
         from $100 to $800

1989    Class A common                  110                                  800.00       88,000            22,000
1993    Class A common                  170                                  800.00      136,000            34,000
1994    Class A common                   70                                  800.00       56,000            14,000
1995    Class A common redemption      (97)                                  800.00     (77,600)          (19,400)
1996    Class A common redemption     (852)                                  800.00    (681,600)           638,423
1996    Class B common redemption             (2,999)                          0.50   (1,499.50)
1997    Class A common redemption       (1)                                  800.00         (800)            800
1997    Class B common redemption                 (1)                          0.50        (0.50)              1
1997    Common stock/no par                                         200        0.00      812,324       (812,324)

       December 31, 1997                  0        0           0    200               $ 812,324       $         0
Report of Financial Examination
                                      M Life Insurance Company                                           6
as of December 31, 1997

Effective June 12, 1996, the Company became a wholly owned subsidiary of M Financial Holdings,
Incorporated, a Delaware corporation. Each share of the Company’s theretofore outstanding capital
stock was converted into a share of the capital stock of M Financial Holdings, Incorporated having, to the
maximum extent permitted by applicable law, the same designations, preferences and relative rights as
the share of the Company prior to such conversion. The transaction was consummated in accordance
with the Order of the Commissioner dated March 22, 1996.

As of December 31, 1997, M Financial Holdings, Incorporated holds all of the outstanding capital stock
of the Company, now consisting of 200 shares of Common Stock, without par value. The aggregate
number of shares that the Company has authority to issue is 1,000 shares of Common Stock, without par
value.

Dividends to Stockholders

The Company declared and paid the following dividends during the period under review:

Year                           Type                          Amount

1996          Dividends to Stockholders                    $ 12,250,000
1997          Dividends to Stockholders                      17,600,000

Total                                                      $ 29,850,000

An evaluation of all dividend payments was made to determine compliance with Section 10-3-805(3),
C.R.S. It was concluded that all were ordinary dividends and as such, did not require prior approval from
the Commissioner of Insurance, State of Colorado. It was noted that notification was provided to the
Division of Insurance, in accordance with 10-3-805(4.5), C.R.S.

AFFILIATED COMPANIES

Parent, Subsidiaries and Affiliates

By virtue of its previous ownership of all class B common stock, Management Partnership controlled the
Company. Management Partnership provided consulting services to insurance companies. Several of the
partners were officers and directors of the Company. However, on January 3, 1997, M Financial
Holdings, Incorporated acquired Management Partnership interests. Through the acquisition of
Management Partnership, M Financial Holdings, Incorporated acquired control of the Company. M
Financial Holdings, Incorporated is owned by Member Firms. Member Firms are insurance agents which
sell the insurance business assumed and ceded by the Company.

Holding Company Filings

Pursuant to Section 10-3-801(4), C.R.S., the Company is a member of an insurance holding system and is
therefore subject to the registration requirements of Section 10-3-804, C.R.S. and Colorado Insurance
Regulation 3-4-1. As defined pursuant to Section 10-3-801(3), C.R.S. and Colorado Insurance
Regulation 3-4-1(III), ultimate control of the holding company system is held by M Financial Holdings,
Incorporated.
Report of Financial Examination
                                      M Life Insurance Company                                          7
as of December 31, 1997

The annual holding company registration statements and amendments thereto have been filed on a timely
basis with the Colorado Division of Insurance. The filings contain the required information pertaining to
transactions, relationships and agreements with affiliates.

Organizational Chart




                                N       A          N      N
                             M FI A N C I L H O LD I G S I C O R PO R A TED
                                                    Delaware




                                  100%                                               100%

                               N
                         M FI A N C I LA                                            N
                                                                          M H O LD I G S
                          N
                         I V E S TM E N T                                          TI
                                                                          SE C U R I ES ,
                              S        N
                        A D V I E R S ,I C .                                    N
                                                                               I C.
                               Colorado                                       Oregon


                                                  100%


                                                  M
                                               SU B C O ,
                                                 N
                                                 I C.
                                                Delaware
                    100%


                  M LI FE
               N
               I SU R AN C E                                        98%
                                                    2%
                C O M PAN Y
                    Colorado


                                                                                   P
                                                 M A N A G EM EN T P A R TN E R SH I
                                                                  Oregon

                       17%



                         N
               M FU N D ,I C .
                   Maryland
Report of Financial Examination
                                      M Life Insurance Company                                              8
as of December 31, 1997

MANAGEMENT AND CONTROL

The supervision and administration of the Company’s business affairs and management policies are
vested in the Board of Directors, which is comprised of nine members. The Board is assigned the power
to adopt, amend or rescind such by-laws for the management of business affairs as is deemed proper and
in accordance with statute.

Shareholder Meetings

The by-laws provide that the annual meeting of the shareholders be held on the first Friday in May, at
such time and place as determined by the president or the board. The purpose of said meeting is for the
election of directors and the transaction of such other business as may come before the shareholders.

Special meetings of the shareholders may be called by the president, the secretary, the Board of
Directors, or by the Company’s shareholders holding in the aggregate 10 percent of all votes entitled to
be cast at the meeting. The Board may designate any place and time for special meetings. Unless
waived, written notice of each annual or special meeting, stating the time and place, must be delivered to
the shareholder not less than 10 days nor more than 60 days before such meetings. The notice of a
special meeting must state the purpose for the meeting.

A majority of the outstanding shares represented in person, or by proxy, constitutes a quorum for the
transaction of business. Each share is entitled to one vote on any matter brought before the meeting.
Cumulative voting is not allowed in the election of directors or for any other purpose. Any action
required by the shareholders may be taken without a meeting, if written consent for such action is given,
by all shareholders entitled to vote on such matters.

During the period under review, the shareholders held five annual meetings and 23 special meetings.

Board of Directors

The business and affairs of the Company are managed by the Board of Directors, subject to any
limitation set forth in the Articles of Incorporation. The Board of Directors shall consist of nine
members, until the number is changed by amendment of the bylaws. The directors shall be elected at the
annual meeting of the shareholders.

The by-laws provide that the Board of Directors shall meet immediately after the annual meeting of
shareholders for the purpose of organizing the Board, electing the officers and conducting such other
business as is brought before the meeting. Notice of the time of any regular meeting is not required.

The president, secretary or three directors may call special meetings of the directors. The Board
determines the place and time for all regular and special meetings. Unless waived, notice of the time and
place for each special meeting must be given at least 24 hours before the meeting.

During the period under review, the Board of Directors held five annual meetings and 23 special
meetings. (See “Corporate Records” section of this report.)

Directors duly elected and serving at December 31, 1997, together with their state of residence and
principal business affiliations are presented as follows:
Report of Financial Examination
                                        M Life Insurance Company                                              9
as of December 31, 1997


           Name and Address                             Business Affiliations
           Fred H. Jonske                               President and CEO,
           Portland, Oregon                             M Financial Holdings, Incorporated

           Lawton M. Nease, III                         President of Nease, Lagana,
           Atlanta, Georgia                             Eden & Culley, Inc.

           Mark I. Solomon                              Founder and Chairman
           Philadelphia, Pennsylvania                   of the Board of CMS Companies

           David J. Downey                              President of The Downey
           Champaign, Illinois                          Group, Inc.

           Peter W. Mullin                              Chairman and Chief Executive Officer
           Los Angeles, California                      of Mullin Consulting, Inc.

           Donald Mehlig                                President of
           Rolling Hills, CA                            Cal-Surance Benefit Plans, Inc.

           Wayne Schuh                                  Managing Director of
           Bryn Mawr, PA                                MCG –Northwest

           Richard Snipes                               President of
           Rock Hill, SC                                Barry, Evans, Josephs & Snipes

           Carl G. Mammel                               Chairman,
           Omaha, Nebraska                              M Financial Holdings, Incorporated

Changes to the Board of Directors subsequent to the examination date follow:

     Donald Mehlig resigned as a director.
     John W. Meisenbach and Gary W. Sitzmann were elected to the Board.
     Peter W. Mullin was appointed Chairman of the Board.

In addition, on May 10, 1999 the company's by-laws were amended to provide that the board consist of
not less than nine nor more than 15 directors.

Officers

The operations of the Company and general supervision of its business affairs are under the direction of
its corporate officers. The by-laws, as amended, provide that the Board of Directors elect a president, a
secretary and a treasurer. In addition, the board may annually elect other officers and assistant officers,
as deemed necessary.

The president presides over all meetings of the shareholders and the Board of Directors, and has such
other powers and duties as the board may assign. The president has general charge of the Company’s
business affairs, and implements orders and resolutions of the Board of Directors.
Report of Financial Examination
                                        M Life Insurance Company                                       10
as of December 31, 1997

Officers elected during 1997 and serving at December 31, l997, are as follows:

       Name                                       Tittle
       Fred H. Jonske                             President & CEO

       David W. Schutt                            Secretary and Treasurer

       Nichimen Au                                Vice President, Appointed Actuary, M Life

       Thomas N. Spitzer                          Sr. Vice President and Senior Marketing Officer

       Ronald D. Stockfleth                       Vice President and Actuary

       Daniel F. Byrne                            Sr. Vice President, Product Development & Sales Support

All officers noted above are still serving as of the date of this report.

Committees

The by-laws permit the board to appoint an executive committee, audit committee, as well as an
investment committee and other committees, as deemed necessary. The audit committee and the
investment committees are Company committees, which also serve as committees for M Financial
Holdings, Incorporated. An executive committee was not appointed during the examination period.
Appointed committees and membership as of December 31, 1997 follow:

           Audit Committee

           Fred Jonske            President and CEO
           Connie Elmore          Sr. Vice President and COO, M Financial Holdings
           Dave Schutt            Secretary/Treasurer
           Nichimen Au            Vice President and Appointed Actuary
           Ron Stockfleth         Sr. Vice President and Actuary
           David Downey           Director
           Don Mehlig (Chair)     Director
           Carl Mammel            Director

           Investment Committee

           Fred Jonske            President and CEO
           Connie Elmore          Sr. Vice President and COO, M Financial Holdings
           Ron Stockfleth         Sr. Vice President and Actuary
           Dave Schutt            Secretary/Treasurer
           Rick Snipes            Director
           Carl Mammel            Director
           Tony Arnerich          Consultant
Report of Financial Examination
                                      M Life Insurance Company                                           11
as of December 31, 1997

Conflict of Interest

The Company has procedures for the annual disclosure of any material interest or affiliation that might
conflict with the respective duties of officers, directors and key employees. For the period under
examination, these affidavits were reviewed. Although none identified specific conflicts, several contain
disclosures of various business affiliations and investment holdings of various officers and directors.

The Company gave an affirmative response to the question in the general interrogatories section of the
1997 annual statement concerning this subject.

Service and Management Agreements

The Company is party to the following service and/or management agreements with affiliates:

Management Agreement:

In accordance with a management agreement dated April 7, 1997, the Company agrees to pay M
Financial Holdings, Incorporated directly allocable expenses incurred by M Financial Holdings,
Incorporated for the benefit of the Company, a reasonable allocation of indirectly allocable expenses of
M Financial Holdings, Incorporated attributable to the Company, and a management fee equal to 25% of
the sum of direct and indirect expenses. In 1997 the Company did not pay the management fees to M
Financial Holdings under the terms of the management agreement. The Company is not currently paying
management fees. In January 1999, M Financial Holdings, Incorporated issued a letter waiving the
management fees for 1997.

RECOMMENDATION No. 1:

Since the Company has not paid management fees in accordance with the terms of the management
agreement, it is recommended that M Financial Holdings, Incorporated formalize the waiver of these fees
in a board resolution to clarify the fact that the Company will not be obligated to pay these fees in the
future. It is also recommended that the agreement be amended to clarify the conditions under which the
fee would be paid.


Tax Sharing Agreement:

In accordance with a tax sharing agreement dated October 8, 1997, the Company agreed to file a
consolidated income tax return with its parent, M Financial Holdings, Incorporated, and agreed to pay the
parent the amount of Federal income tax that the Company would have paid if it filed a separate Federal
income tax return. In the event the Company calculates a tax refund under the separate Federal income
tax return, M Financial Holdings, Incorporated shall pay that amount to the Company. Any Federal
income tax benefits recognized in filing a consolidated income tax return shall be recognized by the M
Financial Holdings, Incorporated.

The Company filed its return for December 31, 1997 as part of the Federal income tax return of M
Financial Holdings, Incorporated and subsidiaries life-nonlife consolidated return. In its December 31,
1997 Federal income tax return, the Company claimed a deduction of $51.1 million for “payment of cash
and stock compensation by parent deductible under section 83(h) per Private Letter Ruling (PLR) dated
6/3/97.” This PLR states in part as follows:
Report of Financial Examination
                                       M Life Insurance Company                                           12
as of December 31, 1997

“In this case, when the Class A and B shareholders exchange their Equity Accounts and stock in the
Company for stock in M Financial Holdings, Incorporated and cash, the stock and cash attributable to
the Equity Accounts will be transferred in connection with the performance of services and will thus be
included in the service providers’ incomes under sections 61 and 83 of the Code and deductible to the
service recipient under section 83(h) and 404(d).”

The $51.1 million deduction claimed by the Company (as service recipient) was not reported as an
expense in the NAIC annual statement but was reported in the tax return as an adjustment between the
NAIC annual statement income and the taxable income reported on the December 31, 1997 Federal
income tax return. After reduction for the $51.1 million deduction, the Company reported a tax loss of
($32.1) million on its December 31, 1997 income tax return.

As a result of the loss, the Company incurred no Federal income tax liability in 1997. The tax loss of
($32.1) million was carried back to the separate income tax returns of the Company for the years ended
December 31, 1994 and 1995 resulting in refunds of $4.4 million and $7.2 million, respectively. In the
original return filed for December 31, 1994, the Company had claimed a small life insurance company
deduction of $194,540. This deduction was eliminated in 1994 as a result of the loss carryback. In the
original return filed for December 31, 1995, the Company did not claim a small life insurance company
deduction. The Company claimed a small life insurance company deduction of $1,176,115 after the loss
carryback to 1995.

The tax sharing agreement entered into on October 8, 1997 was effective after approval by the Colorado
Division of Insurance for tax years ending after December 31, 1996 for which a consolidated return is
filed. The agreement effectively states that the Company shall pay to M Financial Holdings,
Incorporated the Federal income tax it would have paid had the Company filed a separate Federal income
tax return. However, the agreement provides that in calculating the taxes of the Company, any
deductions related to the Section 83 Stock, Compensatory Payments or the Small Life Company
Deduction are to be ignored. In the event that the Company's operations result in a tax loss, M Financial
Holdings, Incorporated shall pay the Company the refund to which it would've been entitled had the
Company filed a separate Federal income tax return. For this purpose, the separate taxable loss of the
Company shall be calculated without regard to Section 83 Stock or Compensatory Payments.

In a letter dated November 17, 1997, the Colorado Division of Insurance ("Division") stated as follows:

“The Division reviewed the amended contract relating to income taxes, filed November 5, 1997. The
Division does not object to the proposed contract, as amended. This action does not create permitted
accounting practices. In addition, the Division reserves the right to change its view, if further review of
additional information would result in a different decision.”

In calculating the separate company Federal income tax liability of the Company for 1997, the $51.1
million deduction for “payment of cash and stock compensation by parent deductible under section 83(h)
per PLR dated 6/3/97” and the small life insurance company deduction amounts of ($194,540) and
$1,176,115 for 1994 and 1995, respectively, were ignored. The tax benefit related to these amounts
which were ignored was approximately $18.3 million. The Company’s parent, M Financial Holdings,
Incorporated, kept the $18.3 million tax benefit, in accordance with the agreement.

Upon consideration of the information received as part if this examination and the significant tax benefits
retained by the Company’s parent, M Financial, Holdings, it has been determined that the tax benefits
paid to or retained by M financial Holdings under the terms of the tax sharing agreement should be
reported to the Division for consideration in accordance with Section 10-3-805(3) and (4.5), C.R.S. This
determination is based upon the following:
Report of Financial Examination
                                      M Life Insurance Company                                            13
as of December 31, 1997


1. The Company claims the tax deduction. As such, the Company’s separate tax attributes are used to
   obtain the reduction in the consolidated tax liability. The reduction in the Company’s Federal
   income tax liability, in the absence of the consolidated tax sharing agreement, would belong to the
   Company, not its parent.

2. The tax deduction arises as a result of services provided to the Company, not for services provided to
   its parent.

3. The intercompany tax allocation agreement can only by its own terms apply to years where a
   consolidated return is filed with Company’s parent. Tax refunds received for years prior to the
   effective date of the agreement are not based on a consolidated return, but rather from the separate
   return years of the Company.

RECOMMENDATION No. 2:

As such, it is recommended that amounts paid to or retained by M Financial Holdings in accordance the
tax sharing agreement be reported to the Division each year for consideration in accordance with
Section 10-3-805(3) and (4.5), C.R.S. This information will need to be included in reports/notices filed
with the Division in calendar year 2000 and subsequent periods. Amounts paid to or retained by M
Financial Holdings under the terms of the agreement in 1997 and 1998 should be disclosed to the
Division for informational purposes.

CORPORATE RECORDS

The Articles of Incorporation, by-laws and amendments thereto, as well as the minutes of the meetings of
the shareholders, Board of Directors and committees were reviewed for the period under examination.
The minutes indicate that meetings are generally well attended.

A general review of the Company’s business practices indicates that such practices comply with the
Articles of Incorporation and the by-laws.

The Company entered into an Investment Management Agreement with Metropolitan West Securities
(MetWest), Inc. on September 27, 1996. The agreement gives MetWest the right to invest funds for the
Company in accordance with guidelines provided by the Company. The Investment Committee approved
the agreement; however, the agreement allows MetWest to make investment decisions where the
Investment Committee does not approve the subsequent investment decisions. This is not in compliance
with Section 10-3-234, C.R.S. which requires the advance written approval of each investment
transaction by the Board of Directors, committee or officer charged with such duty.

RECOMMENDATION No. 3:

It is recommended that the Company implement procedures to ensure that written approval of all
investment transactions is made in advance by the Board of Directors or by a committee or officer so
authorized as required by Section 10-3-234, C.R.S.
Report of Financial Examination
                                      M Life Insurance Company                                             14
as of December 31, 1997

FIDELITY BOND AND OTHER INSURANCE

Fidelity Bond:

As required by Colorado Insurance Regulation 3-1-1, the Company maintains fidelity coverage through
an insurance company licensed in the State of Colorado. The current bond was issued on August 15,
1997, in effect until August 15, 1998. Based on its admitted assets and gross revenues, the Company
should have coverage between $900,000 and $1,000,000. The current bond provides $1,000,000 in
coverage with a $25,000 deductible. The bond is a blanket bond covering M Financial Holdings,
Incorporated, the Company and all other subsidiaries of M Financial Holdings, Incorporated.

Other Insurance:

The Company is insured with its parent, M Financial Holdings Incorporated, for the following:
Commercial General $2,000,000, Personal Property $2,600,000, EDP Hardware $800,000, Commercial
Umbrella Liability $5,000,000, Workers’ Compensation $500,000, Fiduciary Liability $1,000,000, Bond
for Insurance Companies $1,000,000, Directors & Officers and Employment Practices $4,000,000,
Foreign Liability $1,000,000, Multimedia/ Publishers Liability $1,000,000, and Mutual Fund Directors &
Officers/Errors & Omissions $5,000,000.

EMPLOYEES’ AND AGENTS’ WELFARE AND PENSION PLANS

All personnel are employees of the parent company, M Financial Holdings, Incorporated, and not of the
Company. All employee compensation, including employee benefit plans, are administered by the
parent, with the appropriate expenses allocated back to the subsidiary level.

TERRITORY AND PLAN OF OPERATIONS

Territory

The Company is only licensed in the State of Colorado.

Plan of Operations

The Company is not a direct-writing insurance company, but instead operates solely as a reinsurer. The
Company therefore does not employ agents nor are any agency agreements applicable.

Agents of the Member Firms, directly or indirectly affiliated with the Company sell life insurance
products for Security Life of Denver Insurance Company, Pacific Mutual Life Insurance Company, John
Hancock Variable Life Insurance Company, New York Life Insurance Company and Prudential Select
Marketing Corporation. A portion of each risk written by an agent of a Member Firm for Security Life of
Denver Insurance Company, John Hancock Variable Life Insurance Company and Pacific Life Insurance
Company, formerly know as Pacific Mutual Life Insurance before its demutualization, is reinsured with
the Company.

The Company was formed to allow high production agents with quality business to participate in the
economic gains and losses of the business they generate. If the business performs on a “better than
priced for basis,” the profit margins are shared with the agents of the Member Firms. Conversely, if the
business performs poorly, the Member Firms share in the poor experience.
Report of Financial Examination
                                     M Life Insurance Company                                          15
as of December 31, 1997

Among the business written by affiliated Member Firms are large corporate risks, key person coverages,
estate planning products and other specialty products.

MARKET CONDUCT ACTIVITIES

Policy Forms and Underwriting Practices

The Company does not have any policy forms nor has it developed underwriting guidelines. In that all
business is assumed, the Company relies on the underwriting performed by the ceding companies.

Treatment of Policyholders

The Company operates exclusively as a reinsurer. In that reinsurance agreements are contracts for
indemnification between the Company and the insurer, the Company does not settle claims directly with
policyholders. As such, claims were not reviewed to determine the Company’s treatment of
policyholders.

Advertising and Sales Material

The Company does not advertise and does not use sales material.

GROWTH OF COMPANY

                  Admitted                                                 Unassigned
  Year             Assets            Liabilities          Capital            Funds

  1993               65,336,515         49,306,289           705,500          15,324,726
  1994               66,661,911         44,012,333           761,500          21,888,078
  1995               99,535,685         63,611,979           683,900          35,239,806
  1996              122,354,916         83,838,853               801          38,515,262
 *1997              131,118,222        100,181,392           812,324          30,124,506

* Per examination

The growth and progress of the Company is presented in the following schedule:

Life insurance assumed or increased and, death claims and other terminations for selected years are
shown in the following exhibit.
                                               (in 000's)

                Assumed           Terminations         Other            Insurance
  Year         Increased*           by Death        Terminations         In Force

  1993        $     2,554,465                                          $ 13,068,219
  1994              2,350,056                                            15,418,095
  1995              2,037,237                                            17,455,201
  1996              1,900,796                                            19,355,997
  1997                825,006                                            20,181,003

*Consists solely of reinsurance assumed.
Report of Financial Examination
                                        M Life Insurance Company                                       16
as of December 31, 1997

A summary of premium income for selected years by line of business (assumed business only) is shown
in the following schedule:
                                                    Accidental
  Year             Life          Annuities        and Health            Total

  1993        $    83,310,912                                           $     83,310,912
  1994            133,774,075                                           $    133,774,075
  1995            143,046,621                                           $    143,046,621
  1996            215,697,733                                           $    215,697,733
  1997            180,229,435                                           $    180,229,435

Insurance in force at December 31, 1997, is summarized by type of coverage as follows:

                        Participating      Non-Participating                  Total

Ordinary                                      $    20,173,658               $ 20,173,658

Credit                                                   7,345                        7,345

Total                        $       0        $    20,181,003               $ 20,181,003

Amounts reported in each of the above exhibits were extracted from the respective annual statements.

BUSINESS IN FORCE BY STATE

In that the Company does not write direct business, the 1997 business in force and premium income by
state is not presented.

MORTALITY AND LOSS EXPERIENCE

In that a large amount of the Company’s business is assumed on a YRT basis, the ratio of net benefits to
expected mortality is significantly skewed and is therefore not presented in this report.

REINSURANCE

Assumed

The Company does not write business on a direct basis. All business is assumed through the reinsurance
agreements identified below:
                                                   Period of Coverage/           1997*
                        Ceding      Eff.               Termination               Credit          Amount
      Contract            Co.      Date                     Date                 Taken           in Force

50% of all basic plan      SLD    01/01/1982                Jan. 1, 1982 to date              0      173,440,621
YRT-50% of all risks       SLD    01/01/1991                July 1, 1991 to date              0    4,165,145,551
YRT-50% of all risks       SLD    01/01/1995      Jan. 1, 1995 to Dec. 31, 1995               0       29,092,430
YRT-50% of all risks       SLD    01/01/1996      Jan. 1, 1996 to Mar. 31, 1998               0      401,281,556
50% Modco                   PL    01/01/1984      Jan. 1, 1984 to June 30, 1991               0    5,322,222,873
50% Modco                   PL    01/01/1991                July 1, 1991 to date              0    5,070,376,433
YRT/Modco                   ML    04/01/1987       Apr. 7, 1998 to Apr. 1, 1991               0      219,599,020
Report of Financial Examination
                                     M Life Insurance Company                                         17
as of December 31, 1997


                                                    Period of Coverage/          1997*
                         Ceding      Eff.              Termination               Credit         Amount
      Contract            Co.        Date                  Date                  Taken          in Force

YRT                        JHM    01/01/1992             Jan. 1, 1992 to date     2,875,770     2,250,415,454
YRT                        JHV    01/01/1992             Jan. 1, 1992 to date     1,072,676       520,268,886
50% Modco                  JHV    01/01/1994             Jan. 1, 1994 to date             0     1,998,928,523
YRT - 35% of all risks     NYL    01/01/1997             Jan. 1, 1997 to date             0        19,474,432
YRT - 35% of all risks     NYL    01/01/1997             Jan. 1, 1997 to date             0        10,759,478

                                                                                $ 3,948,446 $ 20,181,005,257

     SLD      = Security Life of Denver Insurance Company, Colorado
     PL       = Pacific life Insurance Company, California
     ML       = Manufacturers Life Insurance Company, Canada
     JHV      = John Hancock Variable Life Insurance Company, Massachusetts
     JHM      = John Hancock Mutual Life Insurance Company, Massachusetts
     NYL      = New York Life Insurance Company, New York
     NYLA     = New York Life Insurance and Annuity Company, New York

* By Ceding Company

The Company has assumed a portion of all life insurance plans written by Security Life of Denver
Insurance Company (SLD) between January 1, 1978 and December 31, 1983 on a yearly renewable term
basis. Only those policies written by agencies appointed by SLD which are associated with the Company
through its parent, M Financial Holdings, Incorporated, are eligible under this agreement.

The Company entered into a Prorate Yearly Treaty with SLD on January 1, 1991. The YRT agreement
includes all the prior business issued under the Modified Coinsurance Agreement which was effective
from January 1, 1984 through January 1, 1991. In addition, the Company entered into Yearly Renewal
Treaty with SLD on January 1, 1995 and January 1, 1996.

Through modified coinsurance agreements with Pacific Life Insurance Company (PL), the Company
assumes 50% of the risks written by agencies appointed by PL which are associated with the Company.
The business assumed through this arrangement covers risks written from 1983 through to date. Excess
amounts above the Company’s retention, written prior to July 1, 1991, are reinsured through a pooling
agreement with SLD and PL. Excess amounts assumed after June 30, 1991 are reinsured with Lincoln
National Life Insurance Company.

The Company also assumes individual life business from Manufacturers Life Insurance Company on
both a yearly renewable term (YRT) and a modified coinsurance basis.

In 1984, the Company entered into a modified coinsurance agreement with SLD. Under this agreement,
the Company assumed 50% of the individual life business written by Member Firms appointed by SLD
who were associated with Management Partnership. Effective December 31, 1990, this agreement was
terminated and all business previously assumed under this agreement was transferred to a new
reinsurance agreement (1991 YRT), which cedes the risks on a yearly renewable term (YRT) basis. All
new business currently being ceded by SLD to the Company is transferred under this agreement.
Report of Financial Examination
                                     M Life Insurance Company                                        18
as of December 31, 1997

Amounts in excess of the Company’s retention written prior to July 1, 1991 are reinsured through a
pooling agreement with SLD and PL. Excess amounts above the Company’s retention of $400,000
assumed after June 30, 1991 are reinsured by Lincoln National Life Insurance Company (guaranteed
issues only) or retroceded to SLD (underwritten risks only).

The Company also entered into an agreement that will move business from the 1991 YRT agreement
with SLD, to a 1991 modified coinsurance agreement also with SLD. This transfer will occur when and
if the business reaches certain profitability benchmarks.

The Company entered into a YRT agreement with John Hancock Variable Life Insurance Company and
John Hancock Mutual Life Insurance Company with an effective date of January 1, 1992. The premiums
under the John Hancock YRT agreement are paid annually on policy anniversary which require policy
reserves to be held by the Company in Exhibit 8. The Reserve in Schedule S - Part 3C - Section 1 and in
Exhibit 8 as of December 31, 1997 for this block of John Hancock business was $3,948,446.

In 1991, the Company increased its retention from $150,000 to $250,000. In 1994, the retention was
retroactively increased from $250,000 to $400,000 for business assumed from SLD. The retention for
risks assumed from PL also increased retroactively effective January 1, 1994. However, the increased
retention only applies to those risks assumed through June 30, 1991. The Company’s retention for risks
assumed from PL after this date remains at $250,000.

Ceded

The Company cedes amounts in excess of its established retention to several reinsurance companies
licensed in the State of Colorado as identified below:

  Assuming          Effective                            Reserve Credit
  Company             Date           Amount Inforce          Taken             Premiums

    SLD            01/01/1984             848,040,350                               5,829,672
    SLD            07/01/1991           1,008,738,209                               2,206,871
     PL            01/01/1984           1,555,467,676                               6,658,727
    LNL            07/01/1991           3,476,589,373                               1,261,522
    RGA            01/01/1992           2,496,571,996           2,613,024           1,204,780
    NYL            01/01/1997              14,315,378                                  29,182
    RSL            01/01/1997               -                                          90,578
     CL            01/01/1997               -                                          24,355
    CGL            01/01/1997               -                                          16,285

     SLD = Security Life of Denver Insurance Company, Colorado
     PL = Pacific Life Insurance Company , California
     LNL = Lincoln National Life Insurance Company, Indiana
     RGA = RGA Reinsurance Company
     NYL = New York Life Insurance Company, New York
     RSL = ReliaStar Life Insurance Company, Minnesota
     CL = Crown Life Insurance Company, Saskatchewan, Canada
     CGL = Connecticut General Life Insurance Company, Connecticut

Excess risks assumed by the Company through the modified coinsurance agreements with PL and risks
assumed through June 30, 1991, under the 1991 YRT agreement with SLD, are retroceded to SLD and
PL through a YRT pool agreement effective January 1, 1984.
Report of Financial Examination
                                        M Life Insurance Company                                          19
as of December 31, 1997

Excess risks assumed from SLD after June 30, 1991, are retroceded to SLD (underwritten risks only) and
to Lincoln National Life Insurance Company (guaranteed issues only) on a YRT basis. All excess risks
assumed from PL are ceded to Lincoln National Life Insurance Company on a YRT basis.

Excess risk assumed by the Company through the 1992 YRT with John Hancock Variable Life,
excluding 1992 issues on the Modified Premium Whole Life are retroceded to General American Life
Insurance. A portion of the profits on this experience rated business shall be returned to the Company.
On June 1, 1996 all past, present, and future rights and responsibilities of General American Life
Insurance were assigned to RGA Reinsurance Company. The General American Life Insurance
agreement, hereinafter is referred to as RGA Reinsurance Company agreement.

Under the RGA Reinsurance agreement, reinsurance premiums are paid to RGA Reinsurance annually on
policy anniversary. This requires RGA Reinsurance to hold policy reserves, and permits the Company to
book Reserve Credit Taken in Schedule S - Part 3A and Exhibit 8 on the life insurance ceded. As of
December 31,1997, the reserve credit taken on this General American block of business was $2,613,024.
This YRT reinsurance agreement with RGA Reinsurance qualifies for reserve credit under Regulation 3-
3-2 Sections VI and VII. It was noted, however, that the RGA Reinsurance contract is referred to as
General American Life Insurance in schedule S of the 1997 Annual Statement.

RECOMMENDATION No. 4:

It is recommended the Company properly identify the reinsurance contract with RGA Reinsurance
Company in schedule S of filed Annual Statements.


The Company has obtained catastrophic reinsurance providing $5,000,000 in coverage for each net loss
in excess of $300,000. Stop loss coverage was also purchased providing up to $6,979,500 in
indemnification should total losses exceed a specified amount. To date, no recoveries have been
necessary under these agreements. In the prior examination it was noted that these agreements were not
evidenced by a written reinsurance contract. These agreements have been written and were executed in
March of 1998.

It was noted during the review of ceded reinsurance contracts that several contracts were not identified
by a unique number as required by Colorado Insurance Regulation 3-3-2 (VII)(A)(2) and did not contain
an arbitration provision as specified by Colorado Insurance Regulation 3-3-2 (VII)(A)(6). These
regulations are required to be included in the contract for a ceded reinsurance agreement to qualify for
reserve credit. However, no reserve credit was claimed under these contracts.

STATUTORY AND SPECIAL DEPOSITS

The Company maintains the following statutory deposits as of December 31, 1997.

Held for the protection of all policyholders:

 Location             Type of                    Par        Statement        Market
 of Deposit           Security                  Value         Value          Value

Colorado               Treasury Notes     $     1,550,000   $   1,548,191   $ 1,578,000

TOTALS                                    $ 1,550,000       $   1,548,191   $ 1,578,000
Report of Financial Examination
                                      M Life Insurance Company                                           20
as of December 31, 1997

The securities on deposit with the Commissioner of Insurance, State of Colorado were confirmed with
the bank custodian. This deposit complies with the provisions of Sections 10-3-201, 10-3-206 and 10-3-
210, C.R.S., as well as Colorado Insurance Regulations 3-1-2 and 3-2-3.

The Company filed its quarterly market value reports for securities on joint deposit with the Colorado
Division of Insurance.

ACCOUNTS AND RECORDS

The accounts and records of the Company are generated and maintained on a PC-based system through
an in-house electronic data processing system. The system generates a general ledger, cash receipts and
disbursements information, as well as subsidiary records common to the life insurance industry.

A trial balance was extracted from the general ledger for the year ending December 31, 1997, and traced
to the appropriate assets, liabilities, income and expense exhibits of the annual statement. The
Company’s trial balances for 1993, 1994, 1995 and 1996 were also reviewed and the asset and liability
amounts traced to the respective annual statements. A review of income and disbursements and other
postings to the general ledger was made for selected periods under examination. Test checks of postings
from original documents to the general ledger revealed no material differences.

During 1995, the Company changed its method of recording reinsurance under modified coinsurance
(MODCO) agreements. Prior to 1995, premiums receivable under MODCO agreements were recorded
net of MODCO reserves and the corresponding investment income earned on those reserves. These
amounts are now recorded separately on the statement of admitted assets, liabilities and capital as life
insurance premiums uncollected and other amounts payable on reinsurance assumed, respectively. The
change was made to more closely comply with guidelines provided in the NAIC Accounting Practices
and Procedures Manual.

On January 4, 1996 the Company invested $5 million in the voting securities of its affiliate, M Fund, Inc.
M Fund, Inc., incorporated in January 1996, is registered under the Investment Company Act of 1940 as
an open-end management investment company. M fund, Inc. offers its shares to separate accounts of
certain insurance companies as the underlying funding vehicle for certain variable annuity and variable
life insurance policies offered by members of M Financial Holdings, Incorporated. Currently, shares of
M fund, Inc. are offered only to separate accounts funding contracts issued by John Hancock Variable
life Insurance Company, Pacific Life Insurance Company and New York Life Insurance company;
however, the Company's original investment in M Fund, Inc., which does not relate to separate accounts
continues to exist. As of December 31, 1997, these investments, which include amounts subsequently
invested in the Edinburgh Overseas Equity Fund, Turner Core Growth Fund, Frontier Capital

Appreciation fund and Enhanced U.S. Equity Fund, had a book value of $5,427,621 and a market value
of $6,804,500. These amounts have been reported as admitted assets in accordance with Section 10-3-
240, C.R.S. and 10-3-230, C.R.S.

It was noted however, that the Company did not file all of the M Fund, Inc. investments with the
Securities Valuation Office of the NAIC.
Report of Financial Examination
                                      M Life Insurance Company                                           21
as of December 31, 1997


RECOMMENDATION No. 5:

It is recommended that the Company file these investments and all future investments with the NAIC
Securities Valuation Office for the valuation as required by the annual statement instructions and the
NAIC Practices and Procedures Manual.


The Company is audited annually by an independent accounting firm. As required by Colorado
Insurance Regulation 3-l-4, the Company filed an audited financial report for each year under review,
complying with the provisions of the regulation. In addition, the Company filed a report on significant
deficiencies in internal controls, which concluded that no significant deficiencies were noted.
The review of management letter comments issued by the Company’s independent auditors noted that a
Disaster Recovery Plan was not implemented. This was the second year this comment was made.

RECOMMENDATION No. 6:

It is recommended that the Company implement a Disaster Recovery Plan as provided in the
management letter of the independent auditors.


As required by Colorado Insurance Regulation 3-1-3, the Company filed actuarial memorandums for
each year under review, complying with the provisions of this regulation.

Year 2000:

As the Company’s computer systems are PC-based, the Company has researched its current computer
systems and determined that the systems researched are year 2000 compliant. The company determined
three areas need further research and cooperation from the Company’s reinsurance carriers: the TAI
reinsurance system, persistency data, and stockholder allocation data. The Company has been working
with the carrier managers of these systems to develop a plan for assessing the situation and for ensuring
Year 2000 compliance. The Company expects to complete the year 2000 assessment of these systems in
1999.
Report of Financial Examination
                                     M Life Insurance Company                                        22
as of December 31, 1997



                                     FINANCIAL STATEMENTS

The following pages present a Statement of Assets, Liabilities, Surplus and Other Funds as determined
by this examination. This statement is followed by supporting statements and reconciliations presented
in the following order:

     Statement of Assets, Liabilities, Surplus and Other Funds, December 31, 1997

     Summary of Operations, Year 1997

     Capital and Surplus Account, Year 1997

     Reconciliation of Capital and Surplus, December 31, 1992 through December 31, 1997

     Analysis of Examination Changes, December 31, 1997

     Comparative Financial Statement, December 31, 1992 and December 31, 1997
Report of Financial Examination
                                     M Life Insurance Company                                         23
as of December 31, 1997

            STATEMENT OF ASSETS LIABILITIES, SURPLUS AND OTHER FUNDS

                                         December 31, 1997

                                             ASSETS

                                         Ledger         Non-Ledger     Not Admitted    Net Admitted

Bonds                                $   23,932,403 $                  $              $ 23,932,403
Stocks:
   Common                                 8,818,955        1,265,693                     10,084,648
Mortgage loans on real estate               397,500                                         397,500
Cash and short-term investments           5,867,542                                       5,867,542
Aggregate write-ins :
CSV of Insurance Policy                    439,894                                         439,894
Prepaid Expenses                             8,756                            8,756              0
Reinsurance ceded:
   Experience rating and other
   refunds due                                             1,975,294                      1,975,294
Life insurance premium and annuity
   considerations due and deferred                        87,592,720                     87,592,720
Investment income due and accrued                            621,208                        621,208
Aggregate write-ins for other than
   invested assets:
System Carrier Receivable                                    207,013                       207,013
Leasehold Improvements                       47,948                          47,948              0


TOTALS                                $ 39,512,998 $ 91,661,928         $    56,704 $ 131,118,222
Report of Financial Examination
                                        M Life Insurance Company                                24
as of December 31, 1997


      STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS (Continued)


                               LIABILITIES, SURPLUS AND OTHER FUNDS

Aggregate reserve for life policies and contracts (Note 1)                                $      536,407
Policy and contract claims - life                                                             15,073,156
Policy and contract liabilities not included elsewhere:
 Surrender value on canceled policies                                                          4,492,824
 Other amounts payable on reinsurance assumed                                                 47,695,739
 Interest maintenance reserves                                                                   509,005
Commissions and expense allowance payable on reinsurance assumed                              18,467,630
General expenses due or accrued                                                                1,417,656
Asset valuation reserve (Note 2)                                                               3,096,553
Payable to parent subsidiaries and affiliates                                                  5,311,018
Aggregate write-ins for liabilities - Amounts payable to inactive shareholders (Note 3)        3,581,404

      TOTAL LIABILITIES                                                                   $ 100,181,392

Common capital stock                                                                      $      812,324
Gross paid in and contributed surplus                                                                  0
Unassigned funds                                                                              30,124,506

      CAPITAL AND SURPLUS                                                                 $   30,936,830

      TOTAL LIABILITIES, CAPITAL AND SURPLUS                                              $ 131,118,222
Report of Financial Examination
                                      M Life Insurance Company                            25
as of December 31, 1997


                                    SUMMARY OF OPERATIONS
                                            1997


Premium and annuity considerations                                           $   180,229,435
Net investment income                                                              2,944,636
Amortization of Interest Maintenance Reserves                                        104,992
Aggregate write-ins for miscellaneous income (expense):
Systems Income                                                                     1,491,933
Dac Tax Reimbursement                                                                781,596

      TOTALS                                                                 $   185,552,592

Death benefits                                                               $    37,282,929
Surrender benefits and other fund withdrawals                                     64,866,116
Interest on policy and contract funds                                                 28,803
Increase (Decrease) in aggregate reserves for life and accident and health
   policies and contracts (Note 1)                                                 (432,541)
Commissions and expenses allowances on reinsurance assumed                        56,997,906
General insurance expenses                                                         7,606,023

      TOTAL                                                                  $   166,349,236

Net gain from operations before dividends to policyholders and
  federal income taxes                                                       $    19,203,356
Dividends to policyholders                                                                 0
Federal income taxes incurred                                                      6,534,294
Net gain from operations after dividends to policyholders and
  federal income taxes and before realized capital gains                     $    12,669,062
Net realized capital losses                                                        (156,403)

      NET INCOME                                                             $    12,512,659
Report of Financial Examination
                                       M Life Insurance Company                    26
as of December 31, 1997



                              CAPITAL AND SURPLUS ACCOUNT
                                           1997


Capital and surplus, December 31, of previous year                 $ 38,516,063

Net income (Note 1)                                                $ 12,512,659
Change in net unrealized capital/losses                                  876,014
Change in asset valuation reserve (Note 2)                             (543,632)
Change in nonadmitted assets and related items                            30,771
Dividends to stockholders                                           (17,600,000)
Change in liability to inactive/dissenting shareholders (Note 3)     (2,471,266)
Prior period adjustment                                                (383,779)

Net change in capital and surplus                                  $ (7,579,233)

Capital and surplus December 31, of current year                   $ 30,936,830
  Report of Financial Examination
                                       M Life Insurance Company                                   27
  as of December 31, 1997


                               RECONCILIATION OF CAPITAL AND SURPLUS
                                 December 31, 1992 through December 31, 1997


                                    1993          1994            1995           1996             1997
Capital and surplus,
  December 31, of previous
  year                          $   11,461,095 $ 16,030,226 $ 22,649,576 $ 35,923,707 $          38,516,063


Net income (Note 1)                 4,480,170      7,345,870      15,417,935     17,724,523      12,512,659
Change in net unrealized
  capital/losses                      301,252      (650,162)         297,070        403,957         876,014
Change in non-admitted
  assets                                           (123,595)          48,448        (12,327)           30,771
Change in asset valuation
  reserve (Note 2)                   (382,291)      (22,763)      (1,182,210)     (747,074)       (543,632)
Capital changes:
  Paid in                             136,000        56,000         (77,600)      (683,099)         811,524
Surplus adjustments:
  Paid in                              34,000        14,000         (19,400)        638,423       (811,524)

Dividends to stockholders                                                       (12,250,000)    (17,600,000)

Aggregate write-ins (Note 3)                                      (1,210,112)    (2,482,047)     (2,471,266)
Prior period adjustment                                                                            (383,779)
Net change in capital and
  surplus                       $   4,569,131 $    6,619,350 $ 13,274,131 $       2,592,356 $    (7,579,233)

Capital and surplus
  December 31 of current
  year                          $   16,030,226 $ 22,649,576 $ 35,923,707 $ 38,516,063 $          30,936,830
Report of Financial Examination
                                      M Life Insurance Company                                 28
as of December 31, 1997


                         ANALYSIS OF EXAMINATION CHANGES
                                 DECEMBER 31, 1997
                                                                                 Surplus
                                                  Per             Per            Increase
                                                Company        Examination      (Decrease)

Admitted Assets:

No Changes per examination

Liabilities:

Aggregate reserve for life policies and
contracts (Note 1)                          $      1,335,422   $     536,407 $      799,015

Asset valuation reserve (Note 2)                   2,088,088       3,096,553     (1,008,465)

Aggregate write-ins for liabilities -
Amounts payable to inactive shareholders
(Note 3)                                            270,715        3,581,404     (3,310,689)

Net Change Per Examination                                                     $ (3,520,139)

Capital and Surplus per Annual Statement                                       $ 34,456,969

Net Change per Examination                                                     $ (3,520,139)

Capital and Surplus per Examination                                             $30,936,830
Report of Financial Examination
                                    M Life Insurance Company                                29
as of December 31, 1997


                             COMPARATIVE FINANCIAL STATEMENT
                              December 31, 1992 and December 31, 1997

                                         ADMITTED ASSETS


                                                         December 31, 1992*    December 31, 1997*

Bonds                                                       $       919,881      $      23,932,403
Stocks:
  Preferred                                                        1,842,260                     0
  Common                                                           3,484,998            10,084,648
Mortgage Loans                                                             0               397,500
Cash and short-term investments                                      389,410             5,867,542
Aggregate write-ins                                                  111,777               646,907
Electronic data processing equipment                                  27,779                     0
Federal income tax recoverable                                       783,101                     0
Reinsurance ceded: Experience rating and other refunds                     0             1,975,294
Life insurance premiums and annuity considerations
  deferred and uncollected                                                 0            87,592,720
Investment income due and accrued                                     31,001               621,208
Funds withheld under reinsurance contracts                         5,336,352                     0
Systems revenue accrual                                            1,140,449               207,013
Other amounts recoverable from reinsurers                         34,169,331                     0

TOTALS                                                     $      48,236,339     $     131,118,222


*Per examination
Report of Financial Examination
                                        M Life Insurance Company                                30
as of December 31, 1997


                        COMPARATIVE FINANCIAL STATEMENT (Continued)
                             December 31, 1992 and December 31, 1997

                             LIABILITIES, SURPLUS AND OTHER FUNDS


                                                        December 31, 1992*      December 31, 1997*

Aggregate reserve for life policies and contracts          $        5,336,352       $        536,407
Policy and contract claims:
   Life                                                               578,624             15,073,156
General expenses due or accrued                                       587,961              1,417,656
Federal income taxes due or accrued                                   812,239                      0
Asset valuation reserve                                               218,583              3,096,553
Interest maintenance reserve                                                0                509,005
Payable to Parent                                                           0              5,311,018
Aggregate write-ins                                                         0              3,581,404
Amounts payable to reinsurers                                      29,241,485             70,656,193

TOTAL LIABILITIES                                         $        36,775,244       $    100,181,392

Common capital stock                                                  569,500                812,324
Gross paid in and contributed surplus                                 144,500                      0
Unassigned funds                                                   10,747,095             30,124,506

SURPLUS                                                   $        11,461,095       $     30,936,830

TOTAL CAPITAL AND SURPLUS                                 $        48,236,339       $    131,118,222


*Per examination
Report of Financial Examination
                                       M Life Insurance Company                                           31
as of December 31, 1997

NOTES TO FINANCIAL STATEMENTS

Note 1 – Aggregate reserve for life policies and contracts

As of December 31, 1997, the amount of confirmed ceded reserves was $799,015 higher than the
Company had reported. The adjustment decreases the aggregate reserve for life policies and contracts
from $1,335,422 to $536,407. These variances were due to timing difference between the Company and
its reinsurers.

Note 2 – Asset valuation reserve

As of December 31, 1997, the asset valuation reserve was calculated incorrectly, as the Company did not
use the appropriate beta factor. Using the appropriate beta factor the asset valuation reserve is calculated
at $3,025,395 compared to $2,088,088 requiring an adjustment of $1,008,649.

RECOMMENDATION No. 7:

It is recommended that the Company use the appropriate beta factor per NAIC guidelines for calculating
the Asset Valuation Reserve.


Note 3 – Aggregate write-ins for liabilities – Amounts payable to inactive shareholders

On March 29, 1999, the District Court, of Denver, State of Colorado, issued a Court’s Order Re:
Findings of Fact, Conclusions of Law, and Judgment in the case of M Life Insurance Company vs. Linda
R. Hoagland, et al. The sole issue in this proceeding was to determine the “fair value” of the dissenting
shareholders share in the Company under Colorado Dissenters’ Rights Statute. The Court's judgment
requires the Company to pay an additional amount of $2,331,404, plus interest. The Court also assessed
the reasonable and necessary fees and expenses of counsel and experts. The Company calculated interest
at $500,000. In addition, $750,000 was estimated for legal fees. The adjustment to the statutory
financial statements totaled $3,581,404 related to this judgment. This adjustment was included in the
Company's statutory financial statements for the period ending December 31, 1998.
Report of Financial Examination
                                     M Life Insurance Company                                         32
as of December 31, 1997

                                                 SUMMARY

The results of this examination disclosed that as of December 31, 1997, the Company had admitted assets
of $131,118,222, liabilities of $100,181,392, paid in capital of $812,324, and unassigned funds of
$30,124,506. As a result of this examination, the Company's unassigned funds were reduced by
$3,520,139. The examination changes are detailed on page 28 of this report.

                                        RECOMMENDATIONS

Recommendations resulting from the examination will be found in previous sections of this report.
References to such items are listed categorically for convenience as follows:

                                                  Rec.    Page
Issue                                             No.     No.       Recommendation
The Company is not currently paying the 25%       1       11        Since the Company has not paid
management fee as required in the terms of its                      management fees in accordance with
management agreement with M Financial                               the terms of the management
Holdings, Incorporated.                                             agreement, it is recommended that
                                                                    M Financial Holdings, Incorporated
                                                                    formalize the waiver of these fees in
                                                                    a board resolution to clarify the fact
                                                                    that the Company will not be
                                                                    obligated to pay these fees in the
                                                                    future. It is also recommended that
                                                                    the agreement be amended to clarify
                                                                    the conditions under which the fee
                                                                    would be paid.
The Company's parent, M Financial Holdings        2       13        It is recommended that amounts paid
has retained approximately $18.3 million of                         to or retained by M Financial
tax benefits attributed to the Company's                            Holdings in accordance the tax
revised tax returns. Upon consideration of the                      sharing agreement be reported to the
information received as part if this                                Division each year for consideration
examination and the significant tax benefits                        in accordance with Section 10-3-
retained by the Company’s parent, M                                 805(3) and (4.5), C.R.S. This
Financial, Holdings, it has been determined                         information will need to be included
that the tax benefits paid to or retained by M                      in reports/notices filed with the
financial Holdings under the terms of the tax                       Division in calendar year 2000 and
sharing agreement should be reported to the                         subsequent periods. Amounts paid
Division for consideration in accordance with                       to or retained by M Financial
Section 10-3-805(3) and (4.5), C.R.S.                               Holdings under the terms of the
                                                                    agreement in 1997 and 1998 should
                                                                    be disclosed to the Division for
                                                                    informational purposes.
The Company’s investment approval                 3       13        It is recommended that the Company
procedures are not in compliance with Section                       implement procedures to ensure that
10-3-234, C.R.S.                                                    written approval of all investment
                                                                    transactions is made in advance by
                                                                    the Board of Directors or by a
                                                                    committee or officer so authorized
                                                                    as required by Section 10-3-234,
                                                                    C.R.S.
Report of Financial Examination
                                    M Life Insurance Company                                     33
as of December 31, 1997


                                                Rec.   Page
Issue                                           No.    No.     Recommendation
The Company’s Annual Statement Schedule S       4      19      It is recommended that the Company
does not properly identify the RGA                             properly identify the reinsurance
reinsurance contract. General American Life                    contract with RGA Reinsurance in
Insurance is listed as the reinsurer in                        Schedule S of filed Annual
Schedule S.                                                    Statements.

The Company did not file all of the M Fund      5      21      It is recommended that the Company
investments with the Securities Valuation                      file these investments and all future
Office of the NAIC.                                            investments with the NAIC
                                                               Securities Valuation Office for the
                                                               valuation as required by the annual
                                                               statement instructions and the NAIC
                                                               Practices and Procedures Manual.

The Company has not implemented a Disaster      6      21      It is recommended that the Company
Recovery Plan as recommended by its                            implement a Disaster Recovery Plan.
external auditors.

The Company did not use the appropriate beta    7      31      It is recommended that the Company
factor in calculating Asset Valuation Reserve                  use the appropriate beta factor per
(AVR).                                                         NAIC guidelines for calculating
                                                               AVR.
Report of Financial Examination
                                     M Life Insurance Company                                      34
as of December 31, 1997

                                            CONCLUSION

The assistance and cooperation extended by the officers and employees of the Company during this
examination is greatly appreciated.

In addition to the undersigned, the following from Deloitte & Touche LLP participated in the
examination.

     Edward Morrissey, CPA     Partner
     Avril Andrew, CPA         Manager
     Bryan Thiel               Senior
     Trace Bringhurst          Staff
     Tracy French              Staff
     Jason Morton              Actuary
     Brian Falk                Tax


                                          Respectfully submitted,




                                          Cecil W. Thomas, CFE
                                          Huff, Thomas & Company
                                          on behalf of the
                                          Division of Insurance
                                          State of Colorado

								
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