Report of Independent Registered Public Accounting Firm

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1 Report of Independent Registered Public Accounting Firm The Board of Directors of Massachusetts Mutual Life Insurance Company and Policy owners of Massachusetts Mutual Variable Life Separate Account II: We have audited the accompanying statement of assets and liabilities of Massachusetts Mutual Variable Life Separate Account II, (comprised of the divisions listed in Note 2) (collectively, the Separate Account ) as of December 31, 2016, the related statements of operations and changes in net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Separate Account s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the underlying mutual funds or their transfer agent. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Massachusetts Mutual Variable Life Separate Account II as of December 31, 2016, and the results of its operations and changes in its net assets for each of the years or periods in the two-year period then ended, and the financial highlights for each of the years or periods in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. Hartford, CT March 3, 2017 /s/ KPMG LLP LA2051 F-1

2 Massachusetts Mutual Variable Life Separate Account II STATEMENT OF ASSETS AND LIABILITIES December 31, 2016 MML MML U.S. MML MML Managed Government Blend Equity Bond Money Market Division Division Division Division ASSETS Investments Number of shares... 30,639 43,474 1, ,123 Identified cost...$ 675,508 $ 856,737 $ 12,793 $ 247,875 Value...$ 660,060 $ 1,220,663 $ 12,318 $ 248,126 Receivable from Massachusetts Mutual Life Insurance Company... 10, Total assets ,976 1,221,033 12, ,126 LIABILITIES Payable to Massachusetts Mutual Life Insurance Company ,255 NET ASSETS (Note 3G) $ 670,976 $ 1,221,033 $ 12,318 $ 243,871 See Notes to Financial Statements. F-2

3 Massachusetts Mutual Variable Life Separate Account II STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS For The Year Ended December 31, 2016 MML MML U.S. MML MML Managed Government Blend Equity Bond Money Market Division Division Division Division Investment Income Dividends... $ 15,200 $ 19,868 $ 350 $ - Interest Income on Policy loans (Note 3F)... 22,902 7, Total Income... 38,102 27, Expenses Mortality and expense risk fees... 1,772 2, Net investment income (loss)... 36,330 24, (423) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares... 37,579 19,223 (15) 3 Realized gain distribution... 69,512 72, Realized gain (loss) ,091 91, Change in net unrealized appreciation/depreciation of investments... (59,315) 25,200 (69) 264 Net gain (loss) on investments... 47, ,064 (31) 267 Net increase (decrease) in net assets resulting from operations... 84, , (156) Capital transactions: Transfer of net premiums... 30,131 24, ,358 Transfers due to death benefits Transfers due to withdrawal of funds... (541,899) (57,580) 37 (4,271) Transfers due to policy loans, net of repayments ,350 5, ,525 Transfers due to cost of insurance... (52,534) (40,334) (314) (2,232) Transfers between divisions and to/from General Account Net increase (decrease) in net assets resulting from capital transactions... (140,952) (67,705) 606 (1,620) Total increase (decrease)... (56,846) 73, (1,776) NET ASSETS, at beginning of the year ,822 1,147,166 11, ,647 NET ASSETS, at end of the year... $ 670,976 $ 1,221,033 $ 12,318 $ 243,871 See Notes to Financial Statements. F-3

4 Massachusetts Mutual Variable Life Separate Account II STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS For The Year Ended December 31, 2015 MML MML MML MML Managed Money Blend Equity Bond Market Division Division Division Division Investment Income Dividends... $ 18,550 $ 25,018 $ 330 $ 13 Interest Income on Policy loans (Note 3F)... 20,978 6, Total Income... 39,528 31, Expenses Mortality and expense risk fees... 2,190 2, Net investment income (loss)... 37,338 28, (181) Net realized and unrealized gain (loss) on investments Realized gain (loss) on sale of fund shares ,749 19,596 (5) - Realized gain distribution... 73,205 54, Realized gain (loss) ,954 74, Change in net unrealized appreciation/depreciation of investments... (211,884) (139,150) (464) (12) Net gain (loss) on investments... (12,930) (64,912) (422) (12) Net increase (decrease) in net assets resulting from operations... 24,408 (36,675) (91) (193) Capital transactions: Transfer of net premiums... 31,240 24, ,358 Transfers due to death benefits Transfers due to withdrawal of funds... (23,919) (17,741) 14 (2,809) Transfers due to policy loans, net of repayments... (19,902) (25,182) (24) 2,000 Transfers due to cost of insurance... (47,618) (35,455) (227) (3,444) Transfers between divisions and to/from General Account... (221,130) ,130 Net increase (decrease) in net assets resulting from capital transactions... (281,329) (53,895) ,235 Total increase (decrease)... (256,921) (90,570) ,042 NET ASSETS, at beginning of the year ,743 1,237,736 10,899 26,605 NET ASSETS, at end of the year... $ 727,822 $ 1,147,166 $ 11,386 $ 245,647 See Notes to Financial Statements. F-4

5 Massachusetts Mutual Variable Life Separate Account II Notes To Financial Statements 1. ORGANIZATION Massachusetts Mutual Variable Life Separate Account II ( the Separate Account ) is a separate investment account of Massachusetts Mutual Life Insurance Company ( MassMutual ). The Separate Account is registered as a unit investment trust under the Investment Company Act of 1940 ( the 1940 Act ). The Separate Account was originally established on May 16, 1984 under the name Mass Variable Life Separate Account I as a separate account of Mass Life Insurance Company of New York ( MLICO ), a wholly owned subsidiary of MassMutual, in accordance with the provisions of Section 227 of the New York Insurance Law. Pursuant to an Assumption Reinsurance Agreement and a Plan to Transfer Assets dated December 29, 1989, the Separate Account was transferred from MLICO to MassMutual. In order to receive this transfer, MassMutual established the Separate Account on October 8, 1988, in accordance with the provisions of Section 132G of Chapter 175 of the general laws of the Commonwealth of Massachusetts. The Separate Account continued its operation unchanged except for the identity of its sponsor. The transfer had no impact on the economic interests of the policy owners of the former Mass Variable Life Separate Account I. The net assets of each division of the Separate Account after the effective time of the reorganization were the same as the net assets of Mass Variable Life Separate Account I immediately prior to such time. The expenses of the transfer were borne by MLICO and MassMutual. MassMutual maintains one segment within the Separate Account for the use of the Variable Life product. The assets and liabilities of the Separate Account are clearly identified and distinguished from MassMutual s other assets and liabilities. The Separate Account assets are not chargeable with liabilities arising from any other MassMutual business. 2. INVESTMENT OF THE SEPARATE ACCOUNT S ASSETS As of December 31, 2016, the Separate Account consists of four divisions that invest in the following mutual funds: The division listed in the first column Divisions invests in the fund in this column MML Blend Division MML Blend Fund 1 MML Equity Division MML Equity Fund 1 MML Managed Bond Division MML Managed Bond Fund 1 MML U.S. Government Money Market Division 2 MML U.S. Government Money Market Fund 1 1 MML Investment Advisers, LLC is the investment adviser to the listed MML II Trust Funds pursuant to an investment management agreement. 2 MML U.S. Government Money Market Division was formerly known as MML Money Market Division. 3. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Separate Account in preparation of the financial statements in conformity with generally accepted accounting principles. Separate Account Massachusetts Mutual Variable Life Separate Account II follows the accounting and reporting guidance in FASB Accounting Standards Codification 946. A. Investment Valuation Investments in the investment divisions are valued at the closing net asset value of each of the respective underlying funds, which value their investment securities at fair value. F-5

6 Notes To Financial Statements (Continued) B. Accounting for Investments Investment transactions are accounted for on a trade-date basis and identified cost is the basis followed in determining the cost of investments sold for financial statement purposes. Dividend income and gains from realized gain distributions are recorded on the ex-distribution date, and are reinvested in the underlying investment divisions. C. Federal Income Taxes MassMutual is taxed under federal law as a life insurance company under the provisions of the 1986 Internal Revenue Code, as amended. Under existing federal law, no taxes are payable on net investment income and net realized capital gains attributable to policies, which depend on the Separate Account s investment performance. Accordingly, no provision for federal income tax has been made. MassMutual may, however, make such a charge in the future if an unanticipated change of current law results in a company tax liability attributable to the Separate Account. D. Policy Charges See Note 7B for charges associated with the policies. E. Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F. Policy Loans When a policy loan is made, the Separate Account transfers the amount of the loan to MassMutual, thereby decreasing both the investments and net assets of the Separate Account by an equal amount. The policy owner is charged an interest rate of 5% on the loan amount. The policy owner s cash surrender value is affected because the policy will be credited with a 4% annual return on any money put into the general investment account ( General Account ) rather than a rate of return reflecting the investment performance of the Separate Account. The loan interest rate expense charge represents the difference (cost) between the loan interest rate charged and the interest credited on loaned amounts. The General Account is not registered as an investment company under the 1940 Act. Interest income presented in the Statement of Operations represents interest credited by MassMutual to policyholders of the Variable Life product on their outstanding loan balance. This amount is not included in calculation of Investment Income Ratio as it does not impact overall performance of the division. G. Policy Owner s Share of Net Assets The policy owner s share of net assets in each division of the Separate Account is expressed in terms of dollars rather than shares or units of investments. Charges assessed by the Separate Account, as noted in 7B, are shown as a reduction in assets. H. Life Reserves Life reserves are developed by using accepted actuarial methods and are computed using the 1958 CSO mortality table. F-6

7 Notes To Financial Statements (Continued) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The Separate Account defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Separate Account generally uses the market approach as the valuation technique due to the nature of the mutual fund investments offered in the Separate Account. This technique maximizes the use of observable inputs and minimizes the use of unobservable inputs. Investments in mutual funds are valued at the mutual fund s closing net asset value per share on the day of valuation. Valuation Inputs: Various inputs are used to determine the value of the Separate Account s investments. These inputs are summarized in the three broad levels listed below: Level 1 quoted prices in active markets for identical securities Level 2 observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds and credit risk) Level 3 unobservable inputs The net assets of the Separate Account are measured at fair value. All the net assets are categorized as Level 1 as of December 31, There have been no transfers between levels for the year ended December 31, RELATED PARTY TRANSACTIONS A. Sales Agreements MML Investors Services, LLC ( MMLIS ), a wholly owned subsidiary of MassMutual, serves as the underwriter for the policies pursuant to underwriting and servicing agreements among MMLIS, MassMutual and the Separate Account. MMLIS is registered with the Securities and Exchange Commission (the SEC ) as a broker-dealer under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority ( FINRA ). Registered representatives of MMLIS sold the policies as authorized variable product agents under applicable state insurance laws. Pursuant to the underwriting and servicing agreements, commissions or other fees due to registered representatives for selling and servicing the policies are paid by MassMutual on behalf of MMLIS. MMLIS also receives compensation for its actions as underwriter of the policies.. The policies are no longer offered for sale to the public. Policy owners may continue, however, to make premium payments under existing policies. B. Receivable from/payable to MassMutual Certain fees such as cost of insurance and mortality and expense fees are charges paid between the General Account and the Separate Account. 6. PURCHASE AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales investments for the year ended December 31, 2016 were as follows: MML MML U.S. MML MML Managed Government Blend Equity Bond Money Market Division Division Division Division Cost of purchases...$ 127,148 $ 123,369 $ 1,370 $ 5,325 Proceeds from sales... (160,908) (93,396) (353) (5,894) F-7

8 Notes To Financial Statements (Continued) 7. FINANCIAL HIGHLIGHTS A. A summary of net assets, investment income ratios, expense ratios (excluding expenses of the underlying funds) and total return ratios for each of the five years in the period ended December 31, 2016 follows: At December 31, For the Years Ended December 31, Investment Income Expense Total Units 4 Unit Value 4 Net Assets Ratio 1 Ratio 2 Return 3 MML Blend Division $ 670, % 0.25 % 9.15 % , (0.17) , , , MML Equity Division ,221, ,147, (3.67) ,237, ,355, ,104, MML Managed Bond Division , , (1.00) , , (1.88) , MML U.S. Government Money Market Division , (0.14) , (0.25) , (0.25) , (0.25) , (0.25) 1 The investment income ratios represent the dividends, excluding distributions of capital gains, received by the division from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that are assessed against policy owner accounts. The recognition of investment income by the division is affected by the timing of the declaration of dividends by the underlying fund in which the division invests. 2 The expense ratios represent the annualized policy expenses of the Separate Account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction of assets. Charges made directly to policy owner accounts through the deduction from premiums and expenses of the underlying fund have been excluded. 3 The total returns are for the periods indicated, including changes in the value of the underlying fund, and the expenses assessed through the reduction of assets. These ratios do not include any expenses assessed through the deduction from premiums. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for each period indicated or from the effective date through the end of the reporting period. 4 See Note 3G. F-8

9 Notes To Financial Statements (Continued) B. The Separate Account assesses current charges associated with each policy. These charges are assessed as a direct reduction in assets for all policies contained within the Separate Account (See note 3G). Charges shown below state charges assessed at a monthly rate unless otherwise specified. Administrative Charge This charge is assessed as a reduction of assets. $2.50 per month, or $30 per year Mortality and Expense Risk Charge Effective annual rate of 0.25% of the policy s average daily net assets. This charge is assessed through reduction in assets. Loan Interest Rate Expense Charge This charge is assessed as a reduction in assets. Effective annual rate of 1.00% of the loan amount Rider Charges: These charges are assessed as a reduction of assets. 8. SUBSEQUENT EVENTS A. Accidental Death Benefit $0.79 to $1.42 per $1,000 of insurance risk B. Children's Term $5.00 per $1,000 of insurance risk C. Renewable Term $1.53 to $39.37 per $1,000 of insurance risk D. Waiver of Premium $0.11 to $3.51 per $1,000 of insurance risk The Separate Account s management has reviewed events occurring through March 3, 2017 the date the financial statements were issued and no subsequent events occurred requiring accrual or disclosure. F-9

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12 LA2051

13 STATUTORY FINANCIAL STATEMENTS As of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014

14 STATUTORY FINANCIAL STATEMENTS Table of Contents Page Independent Auditors' Report...1 Statutory Statements of Financial Position...3 Statutory Statements of Operations...4 Statutory Statements of Changes in Surplus...5 Statutory Statements of Cash Flows...6 Notes to Statutory Financial Statements: 1. Nature of operations Summary of significant accounting policies New accounting standards Investments a. Bonds...25 b. Preferred stocks...30 c. Common stocks subsidiaries and affiliates...30 d. Common stocks unaffiliated...33 e. Mortgage loans...33 f. Real estate...39 g. Partnerships and limited liability companies...39 h. Derivatives...40 i. Repurchase agreements...45 j. Net investment income...45 k. Net realized capital gains (losses) Federal income taxes Other than invested assets Policyholders liabilities Reinsurance Withdrawal characteristics Debt Employee benefit plans Employee compensation plans Surplus notes Presentation of the Statutory Statements of Cash Flows Fair value of financial instruments Business risks, commitments and contingencies Related party transactions Business combinations and goodwill Subsequent events Subsidiaries and affiliated companies Impairment listing for loan-backed and structured securities Structured Notes...105

15 Independent Auditors Report The Board of Directors and Policyholders of Massachusetts Mutual Life Insurance Company: We have audited the accompanying financial statements of Massachusetts Mutual Life Insurance Company (the Company), which comprise the statutory statements of financial position as of December 31, 2016 and 2015, and the related statutory statements of operations, changes in surplus, and cash flow for the three-year period ended December 31, 2016, and the related notes to the statutory financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with statutory accounting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles As described in Note 2 to the financial statements, the financial statements are prepared by the Company using statutory accounting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance, which is a basis of accounting other than U.S. generally accepted accounting principles. Accordingly, the financial statements are not intended to be presented in accordance with U.S. generally accepted accounting principles.

16 The effects on the financial statements of the variances between the statutory accounting practices described in Note 2 and U.S. generally accepted accounting principles, although not reasonably determinable, are presumed to be material. Adverse Opinion on U.S. Generally Accepted Accounting Principles In our opinion, because of the significance of the variances between statutory accounting practices and U.S. generally accepted accounting principles discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles paragraph, the financial statements referred to above do not present fairly, in accordance with U.S. generally accepted accounting principles, the financial position of the Company as of December 31, 2016 and 2015, or the results of its operations or its cash flows for the three-year period ended December 31, Opinion on Statutory Basis of Accounting In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the three-year period ended December 31, 2016, in accordance with statutory accounting practices prescribed or permitted by the Commonwealth of Massachusetts Division of Insurance described in Note 2. Hartford, Connecticut February 22, 2017 /s/kpmg LLP

17 STATUTORY STATEMENTS OF FINANCIAL POSITION December 31, Assets: Bonds $ 83,821 $ 79,547 Preferred stocks Common stocks subsidiaries and affiliates 14,244 7,960 Common stocks unaffiliated 1,120 1,140 Mortgage loans 20,961 22,008 Policy loans 12,461 11,813 Real estate Partnerships and limited liability companies 7,187 7,473 Derivatives 9,763 9,268 Cash, cash equivalents and short-term investments 3,726 3,049 Other invested assets Total invested assets 154, ,760 Investment income due and accrued 1,914 1,834 Federal income taxes Deferred income taxes 1,606 1,299 Other than invested assets 3,016 3,015 Total assets excluding separate accounts 161, ,973 Separate account assets 62,204 60,386 Total assets $ 223,670 $ 210,359 Liabilities and Surplus: Policyholders' reserves $ 112,186 $ 102,626 Liabilities for deposit-type contracts 11,574 10,491 Contract claims and other benefits Policyholders' dividends 1,609 1,742 General expenses due or accrued 1, Asset valuation reserve 3,178 2,817 Repurchase agreements 4,729 5,130 Commercial paper and other borrowed money Collateral 2,839 2,126 Derivatives 6,014 5,840 Other liabilities 2,150 2,504 Total liabilities excluding separate accounts 146, ,000 Separate account liabilities 62,195 60,376 Total liabilities 208, ,376 Surplus 15,423 14,983 Total liabilities and surplus $ 223,670 $ 210,359 See notes to statutory financial statements 3

18 STATUTORY STATEMENTS OF OPERATIONS Revenue: Years Ended December 31, Premium income $ 21,432 $ 21,543 $ 18,383 Net investment income 6,334 6,387 6,332 Fees and other income 1, Total revenue 29,049 28,727 25,590 Benefits and expenses: Policyholders' benefits 18,312 16,300 16,511 Change in policyholders' reserves 7,387 8,592 5,803 Change in group annuity reserves assumed (1,510) (942) (1,564) General insurance expenses 2,251 1,793 1,793 Commissions State taxes, licenses and fees Total benefits and expenses 27,615 26,799 23,557 Net gain from operations before dividends and federal income taxes 1,434 1,928 2,033 Dividends to policyholders 1,566 1,728 1,553 Net (loss) gain from operations before federal income taxes (132) Federal income tax (benefit) expense (326) (153) 23 Net gain from operations Net realized capital (losses) gains (208) Net (loss) income $ (14) $ 412 $ 623 See notes to statutory financial statements 4

19 STATUTORY STATEMENTS OF CHANGES IN SURPLUS Years Ended December 31, Surplus, beginning of year $ 14,983 $ 14,231 $ 12,524 Increase (decrease) due to: Net (loss) income (14) Change in net unrealized capital gains (losses), net of tax 1, ,022 Change in net unrealized foreign exchange capital gains (losses), net of tax (441) (226) (240) Change in other net deferred income taxes Change in nonadmitted assets (326) (16) (97) Change in asset valuation reserve (361) (197) (425) Change in reserve valuation basis (1) - - Change in surplus notes Cumulative effect of accounting changes Prior period adjustments 34 9 (123) Change in minimum pension liability 6 (150) (157) Other Net increase ,707 Surplus, end of year $ 15,423 $ 14,983 $ 14,231 See notes to statutory financial statements 5

20 STATUTORY STATEMENTS OF CASH FLOWS Years Ended December 31, Cash from operations: Premium and other income collected $ 21,685 $ 20,842 $ 19,081 Net investment income 6,394 6,213 6,133 Benefit payments (17,832) (16,261) (16,963) Net transfers from separate accounts 2, ,303 Net receipts from group annuity reserves assumed 1, ,564 Commissions and other expenses (3,355) (2,907) (2,638) Dividends paid to policyholders (1,698) (1,565) (1,471) Federal and foreign income taxes recovered (paid) 353 (234) (10) Net cash from operations 9,339 7,800 6,999 Cash from investments: Proceeds from investments sold, matured or repaid: Bonds 14,660 12,496 16,588 Preferred and common stocks unaffiliated Common stocks affiliated Mortgage loans 3,847 2,575 1,736 Real estate Partnerships and limited liability companies 908 2,560 1,593 Derivatives Other (122) (114) (284) Total investment proceeds 20,549 19,116 21,204 Cost of investments acquired: Bonds (21,393) (15,012) (23,721) Preferred and common stocks unaffiliated (379) (576) (623) Common stocks affiliated (1,499) (539) (628) Mortgage loans (3,505) (5,296) (4,700) Real estate (201) (283) (144) Partnerships and limited liability companies (1,568) (3,443) (1,512) Derivatives (627) (438) (377) Other (41) Total investments acquired (29,057) (25,178) (31,746) Net increase in policy loans (648) (658) (570) Net cash from investing activities (9,156) (6,720) (11,112) Cash from financing and miscellaneous sources: Net deposits on deposit-type contracts Cash provided by surplus note issuance Change in repurchase agreements (401) 472 1,171 Change in collateral Corporate-owned life insurance purchased - (1,937) - Other cash used (572) (494) (294) Net cash from financing and miscellaneous sources ,795 Net change in cash, cash equivalents and short-term investments 677 1,169 (2,318) Cash, cash equivalents and short-term investments: Beginning of year 3,049 1,880 4,198 End of year $ 3,726 $ 3,049 $ 1,880 See notes to statutory financial statements 6

21 NOTES TO STATUTORY FINANCIAL STATEMENTS 1. Nature of operations Massachusetts Mutual Life Insurance Company (the Company), a mutual life insurance company domiciled in the Commonwealth of Massachusetts, and its domestic life insurance subsidiaries provide individual and group life insurance, disability insurance, individual and group annuities and guaranteed interest contracts (GICs) to individual and institutional customers in all 50 states of the United States of America (U.S.), the District of Columbia and Puerto Rico. Products and services are offered primarily through the Company s MM Financial Advisors (MMFA), Direct to Consumer, Institutional Solutions and Workplace Solutions distribution channels. MMFA is a sales force that operates in the U.S. via 9,528 financial advisors. MMFA sells individual life, individual annuities and disability insurance. The Company s Direct to Consumer distribution channel sells individual life primarily through direct response television advertising, digital media, search engine optimization and search engine marketing. The Company s Institutional Solutions distribution channel sells group annuities, group life and GICs primarily through retirement advisory firms, actuarial consulting firms, investment banks, insurance benefit advisors and investment management companies. The Company s Workplace Solutions distribution channel sells group annuities as well as individual and group life products distributed through investment advisors. 2. Summary of significant accounting policies a. Basis of presentation The 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 Commonwealth of Massachusetts Division of Insurance (the Division). Statutory accounting practices are different in some respects from financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The more significant differences between statutory accounting principles and U.S. GAAP are as follows: (a) bonds are generally carried at amortized cost, whereas U.S. GAAP reports bonds at fair value for bonds available for sale and trading or at amortized cost for bonds held to maturity; (b) changes in the fair value of derivative financial instruments are recorded as changes in surplus, whereas U.S. GAAP generally reports these changes as revenue unless deemed an effective hedge; (c) interest rate and credit default swaps associated with replicated asset transactions are carried at amortized cost, whereas U.S. GAAP would carry them at fair value; (d) embedded derivatives are recorded as part of the underlying contract, whereas U.S. GAAP would identify and bifurcate certain embedded derivatives from the underlying contract or security and account for them separately at fair value; (e) income recognition on partnerships and limited liability companies (LLCs), which are accounted for under the equity method, is limited to the amount of cash distribution, whereas U.S. GAAP is without limitation; (f) certain majority-owned subsidiaries and variable interest entities are accounted for using the equity method, whereas U.S. GAAP would consolidate these entities; (g) changes in the balances of deferred income taxes, which provide for book versus tax temporary differences, are subject to limitation and are recorded in surplus, whereas U.S. GAAP would generally include the change in deferred taxes in net income without limitation; (h) assets and liabilities associated with certain group annuity and variable universal life contracts, which do not pass-through all investment gains to contract holders, are maintained in separate accounts and are presented on a single line in the statutory financial statements, whereas U.S. GAAP reports these contracts as general investments and liabilities of the Company; (i) assets are reported at admitted asset value and assets designated as nonadmitted are excluded through a charge against surplus, whereas U.S. GAAP recognizes all assets, net of any valuation allowances; (j) statutory policy reserves are based upon prescribed methods, such as the Commissioners Reserve Valuation Method (CRVM), Commissioners Annuity Reserve Valuation Method (CARVM) or net level premium method, and prescribed statutory mortality, morbidity and interest assumptions at the time of issuance, whereas U.S. GAAP policy reserves would generally be based upon the net level premium method or the estimated gross margin method with estimates, at time of issuance, of future mortality, morbidity, persistency and interest; (k) liabilities for policyholder reserves, unearned premium, and unpaid claims are presented net of reinsurance ceded, whereas U.S. GAAP would present the liabilities on a direct basis and report an asset for the amounts due from reinsurers for the amounts ceded; (l) an asset valuation reserve (AVR) is reported as a contingency reserve to stabilize surplus against fluctuations in the statement value of real estate, partnerships and LLCs and certain common stocks as well as credit-related changes in the value of bonds, mortgage loans and certain 7

22 derivatives, whereas U.S. GAAP does not record this reserve; (m) after-tax realized capital gains (losses) that result from changes in the overall level of interest rates for all types of fixed-income investments and interest-related hedging activities are deferred into the interest maintenance reserve (IMR) and amortized into revenue, whereas U.S. GAAP reports these gains and losses as revenue; (n) changes to the mortgage loan valuation allowance are recognized in net unrealized capital gains (losses), net of tax, in the Statutory Statements of Changes in Surplus, whereas U.S. GAAP reports these changes in net realized capital gains (losses); (o) the overfunded status of pension and other postretirement plans, which is the excess of the fair value of the plan assets over the projected benefit obligation, is a nonadmitted asset for statutory accounting whereas U.S. GAAP recognizes the overfunded status as an asset; (p) surplus notes are reported in surplus, whereas U.S. GAAP would report these notes as liabilities; (q) payments received for universal and variable life insurance products, certain variable and fixed deferred annuities and group annuity contracts are reported as premium income and corresponding change in reserves, whereas U.S. GAAP would treat these payments as deposits to policyholders account balances; (r) certain acquisition costs, such as commissions and other variable costs, directly related to successfully acquiring new business are charged to current operations as incurred, whereas U.S. GAAP would generally capitalize these expenses and amortize them based on profit emergence over the expected life of the policies or over the premium payment period; and (s) Statutory Statements of Changes in Surplus includes net income, change in net unrealized capital gains (losses), change in net unrealized foreign exchange capital gains (losses), change in other net deferred income taxes, change in nonadmitted assets, change in asset valuation reserve, prior period adjustments and change in minimum pension liability, whereas U.S. GAAP presents net income as retained earnings and net unrealized capital gains (losses), change in net unrealized foreign exchange capital gains (losses), change in minimum pension liability as other comprehensive income. The preparation of financial statements requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities, the disclosure of assets and liabilities as of the date of the statutory financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates include those used in determining the carrying values of investments including the amount of mortgage loan investment valuation reserves, other-than-temporary impairment(s) (OTTI), the value of the investment in MassMutual Holding LLC (MMHLLC), the liabilities for policyholders reserves, the determination of admissible deferred tax assets (DTAs), the liability for taxes and the liability for litigation or other contingencies. Future events including, but not limited to, changes in the level of mortality, morbidity, interest rates, persistency, asset valuations and defaults could cause results to differ from the estimates used in the statutory financial statements. Although some variability is inherent in these estimates, management believes the amounts presented are appropriate. b. Corrections of errors and reclassifications The following summarizes the corrections of prior year errors that have been recorded in surplus, net of tax: Year Ended December 31, 2016 Increase (Decrease) to: Correction Prior Current of Asset Years Year or Liability Net Income Surplus Balances Policyholders' reserves $ 49 $ 49 $ (49) Partnerships and limited liability companies - 5 (5) Federal income tax receivable (12) (12) 12 Fees and other income (3) (3) 3 Total $ 34 $ 39 $ (39) 8

23 Of the $39 million increase to surplus for prior year errors, $34 million was recorded as prior period adjustments and $5 million was recorded as a change in net unrealized capital gains (losses), net of tax in the Statutory Statements of Changes in Surplus. Year Ended December 31, 2015 Increase (Decrease) to: Correction Prior Current of Asset Years Year or Liability Net Income Surplus Balances Policyholders' reserves $ 6 $ 6 $ (6) Policyholders' benefits 4 4 (4) Net investment income (1) (1) (1) Total $ 9 $ 9 $ (11) Year Ended December 31, 2014 (Decrease) Increase to: Correction Prior Current of Asset Years Year or Liability Net Income Surplus Balances Income tax payable $ (76) $ (76) $ 76 Policyholders' reserves (36) (36) 36 Other liabilities (11) (11) 11 Asset valuation reserves - (14) 14 Total $ (123) $ (137) $ 137 Of the $137 million decrease to surplus for prior year errors, $123 million was recorded as prior period adjustments and $14 million was recorded as a Change in asset valuation reserve, net of tax in the Statutory Statements of Changes in Surplus. Certain prior year amounts within these financial statements have been reclassified to conform to the current year presentation. c. Bonds Bonds are generally valued at amortized cost using the constant yield interest method with the exception of NAIC Category 6 bonds, which are in or near default, and certain residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), which are rated by outside modelers, which are carried at the lower of amortized cost or fair value. NAIC ratings are applied to bonds and other securities. Categories 1 and 2 are considered investment grade, while Categories 3 through 6 are considered below investment grade. Bonds are recorded on a trade date basis, except for private placement bonds, which are recorded on the funding date. For loan-backed and structured securities, such as asset-backed securities (ABS), mortgage-backed securities (MBS), including RMBS and CMBS, and structured securities, including collateralized debt obligations (CDOs), amortization or accretion is revalued quarterly based on the current estimated cash flows, using either the prospective or retrospective adjustment methodologies. 9

24 Certain fixed income securities, with the highest ratings from a rating agency follow the retrospective method of accounting. Under the retrospective method, the recalculated effective yield equates the present value of the actual and anticipated cash flows, including new prepayment assumptions, to the original cost of the investment. Prepayment assumptions are based on borrower constraints and economic incentives such as the original term, age and coupon of the loan as affected by the interest rate environment. The current carrying value is then increased or decreased to the amount that would have resulted had the revised yield been applied since inception, and investment income is correspondingly decreased or increased. All other fixed income securities, such as floating rate bonds and interest only securities, including those that have been impaired, follow the prospective method of accounting. Under the prospective method, the recalculated future effective yield equates the carrying value of the investment to the present value of the anticipated future cash flows. The fair value of bonds is based on quoted market prices when available. If quoted market prices are not available, values provided by other third-party organizations are used. If values provided by other third-party organizations are unavailable, fair value is estimated using internal models by discounting expected future cash flows using observable current market rates applicable to yield, credit quality and maturity of the investment or using quoted market values for comparable investments. Internal inputs used in the determination of fair value include estimated prepayment speeds, default rates, discount rates and collateral values, among others. Structure characteristics and cash flow priority are also considered. Fair values resulting from internal models are those expected to be received in an orderly transaction between willing market participants. Refer to Note 2dd. "Realized capital gains (losses) including other-than-temporary impairments and unrealized capital gains (losses)" for information on the Company s policy for determining OTTI. d. Preferred stocks Preferred stocks in good standing, those that are rated Categories 1 through 3 by the Securities Valuation Office (SVO) of the NAIC, are generally valued at amortized cost. Preferred stocks not in good standing, those that are rated Categories 4 through 6 by the SVO of the NAIC, are valued at the lower of amortized cost or fair value. Fair values are based on quoted market prices, when available. If quoted market prices are not available, values provided by third-party organizations are used. If values provided by third-party organizations are unavailable, fair value is estimated using internal models. These models use inputs not directly observable or correlated with observable market data. Typical inputs integrated into the Company s internal discounted expected earnings models include, but are not limited to, earnings before interest, taxes, depreciation and amortization estimates. Fair values resulting from internal models are those expected to be received in an orderly transaction between willing market participants. Refer to Note 2dd. "Realized capital gains (losses) including other-than-temporary impairments and unrealized capital gains (losses)" for information on the Company s policy for determining OTTI. e. Common stocks subsidiaries and affiliates Common stocks of unconsolidated subsidiaries, primarily C.M. Life Insurance Company (C.M. Life), MML Bay State Life Insurance Company (MML Bay State), MMHLLC and MassMutual International LLC (MMI), are accounted for using the statutory equity method. The Company accounts for the value of MMHLLC and MMI at its underlying U.S. GAAP equity value adjusted to remove certain nonadmitted and intangible assets. MMHLLC s value is also adjusted by a portion of its noncontrolling interests (NCI) and appropriated retained earnings, after consideration of MMHLLC s fair value and the Company s capital levels. The Division has affirmed the statutory recognition of the Company s application of the NCI guidelines in MMHLLC s statutory carrying value. However, the Company has limited this recognition to $2,675 million as of December 31, 2016 and $2,600 million as of December 31, Operating results, less dividend distributions, for MMHLLC are reflected as net unrealized capital gains (losses) in the Statutory Statements of Changes in Surplus. Dividend distributions received from MMHLLC are recorded in net investment income and are limited to MMHLLC s U.S. GAAP retained earnings. The cost basis of common stocks subsidiaries and affiliates is adjusted for impairments deemed to be other than temporary. 10

25 Refer to Note 4c. "Common stocks subsidiaries and affiliates" for further information on the valuation of MMHLLC and MMI. f. Common stocks unaffiliated Unaffiliated common stocks are carried at fair value, which is based on quoted market prices when available. If quoted market prices are not available, values provided by third-party organizations are used. If values from third parties are unavailable, fair values are determined by management using estimates based upon internal models. The Company s internal models include estimates based upon comparable company analysis, review of financial statements, broker quotes and last traded price. Fair values resulting from internal models are those expected to be received in an orderly transaction between willing market participants. Refer to Note 2dd. "Realized capital gains (losses) including other-than-temporary impairments and unrealized capital gains (losses)" for information on the Company s policy for determining OTTI. g. Mortgage loans Mortgage loans are valued at the unpaid principal balance of the loan, net of unamortized premium, discount, mortgage origination fees and valuation allowances. Interest income earned on impaired loans is accrued on the outstanding principal balance of the loan based on the loan s contractual coupon rate. Interest is not accrued for (a) impaired loans more than 60 days past due, (b) delinquent loans more than 90 days past due, or (c) loans that have interest that is not expected to be collected. The Company continually monitors mortgage loans where the accrual of interest has been discontinued, and will resume the accrual of interest on a mortgage loan when the facts and circumstances of the borrower and property indicate that the payments will continue to be received according to the terms of the original or modified mortgage loan agreement. Refer to Note 2dd. "Realized capital gains (losses) including other-than-temporary impairments and unrealized capital gains (losses)" for information on the Company s policy for determining OTTI. h. Policy loans Policy loans are carried at the outstanding loan balance less amounts unsecured by the cash surrender value of the policy, less amounts ceded to reinsurers. At issuance, policy loans are fully secured by the cash surrender value of the policy. Unsecured amounts can occur when subsequent charges are incurred on the underlying policy without the receipt of additional premium. If the premium is not paid during the contractual grace period, the policy will lapse. Unsecured nonadmitted amounts were less than $1 million as of December 31, 2016 and Policy loans earn interest calculated based upon either a fixed or a variable interest rate. Accrued investment income on policy loans more than 90 days past due is included in the unpaid balance of the policy loan to the extent it does not exceed the cash surrender value of the underlying contract. i. Real estate Investment real estate, which the Company has the intent to hold for the production of income, and real estate occupied by the Company, are carried at depreciated cost, less encumbrances. Depreciation is calculated using the straight-line method over the estimated useful life of the real estate holding, not to exceed 40 years. Depreciation expense is included in net investment income. Real estate held for sale is initially carried at the lower of depreciated cost or fair value less estimated selling costs and is no longer depreciated. Adjustments to carrying value, including for further declines in fair value, are recorded in a valuation reserve, which is included in realized capital losses. Fair value is generally estimated using the present value of expected future cash flows discounted at a rate commensurate with the underlying risks. The Company also obtains external appraisals for a rotating selection of properties annually. If an external appraisal is not obtained, an internal appraisal is performed. Refer to Note 2dd. "Realized capital gains (losses) including other-than-temporary impairments and unrealized capital gains (losses)" for information on the Company s policy for determining OTTI. 11