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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
COMMISSION FILE NO. 1-15607
JOHN HANCOCK FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3483032
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
John Hancock Place
Boston, Massachusetts 02117
(617) 572-0600
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value New York Stock Exchange, Inc.
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Series A Junior Preferred Stock
purchase rights New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
As of March 2, 2000, there were outstanding 314,828,166 shares of Common Stock,
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$0.01 par value per share of the registrant. The aggregate market value of the
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shares of the registrant's common equity held by non-affiliates of the
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registrant was $5,076,604,177 based on the closing price of $16.125 per share of
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Common Stock on the New York Stock Exchange on March 2, 2000.
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Documents Incorporated by Reference
-----------------------------------
Document Part of the Form 10-k
-------- into which incorporated
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None
Contents
Forward-Looking Statements................................................................................... 1
PART I....................................................................................................... 2
ITEM 1. Business of John Hancock Financial Services........................................................ 2
ITEM 2. Properties......................................................................................... 46
ITEM 3. Legal Proceedings.................................................................................. 46
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 47
PART II...................................................................................................... 48
ITEM 5. Market for John Hancock Financial Services, Inc. Common Stock and Related Stockholder Matters...... 48
ITEM 6. Selected Financial Data............................................................................ 48
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Segment Operations...... 55
ITEM 7A. Quantitative and Qualitative Information About Market Risk........................................ 6
ITEM 8. Financial Statements and Supplementary Data........................................................ 9
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 9
PART III..................................................................................................... 10
ITEM 10. Directors and Executive Officers of John Hancock Financial Services............................... 10
ITEM 11. Executive Compensation............................................................................ 13
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................... 21
ITEM 13. Certain Relationships and Related Transactions.................................................... 22
PART IV...................................................................................................... 23
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................................. 23
Forward-Looking Statements
The statements, analyses, and other information contained herein relating
to trends in the company's operations and financial results, the markets for the
company's products, the future development of the company's business, and the
contingencies and uncertainties to which the company may be subject, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "will," "should," "may," and other similar
expressions, are "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. Such statements are made based upon management's
current expectations and beliefs concerning future events and their effects on
the company and may not be those anticipated by management. John Hancock's
actual results may differ materially from the results anticipated in these
forward-looking statements.
These forward-looking statements are subject to risks and uncertainties
including, but not limited to, the risks that (1) a significant downgrade in our
ratings for claims-paying ability and financial strength may lead to policy and
contract withdrawals and materially harm our ability to market our products, (2)
elimination of Federal tax benefits for our products and other changes in laws
and regulations may adversely affect sales of our insurance and investment
advisory products, (3) as a holding company, we will depend on dividends from
our subsidiaries and the Massachusetts insurance law may restrict ability of
John Hancock Life Insurance Company to pay dividends to us, (4) we face
increasing competition in our retail and institutional businesses from mutual
fund companies, banks and investment management firms as well as from other
insurance companies, (5) a decline or increased volatility in the securities
markets, and other economic factors, may adversely affect our business,
particularly our variable life insurance, mutual fund, variable annuity and
investment business, (6) our life insurance sales are highly dependent on a
third party distribution relationship, (7) interest rate volatility may
adversely affect our profitability, (8) our net income and revenues will suffer
if customers surrender annuities and variable and universal life insurance
policies or redeem shares of our open-end mutual funds, (9) the independent
directors of our variable series trusts and of our mutual funds could reduce
the compensation paid to us or could terminate our contracts to manage the
funds, (10) under our Plan of Reorganization, we were required to establish the
closed block a special arrangement for the benefit of a group of our
policyholders and we may have to fund deficiencies in our closed block, and any
overfunding of the closed block will benefit only the holders of policies
included in the closed block, not our stockholders, (11) there are a number of
provisions of our Plan of Reorganization, our restated certificate of
incorporation and by-laws, laws applicable to us, agreements that we have
entered into with our senior management and our stockholder rights plan, that
will prevent or discourage takeovers and business combinations that our
stockholders might otherwise consider to be in their best interests, (12) we
will face losses if the claims on our insurance products, or reductions in rates
of mortality on our annuity products, are greater than we projected, (13) we
face risks relating to our investment portfolio, (14) the market price of our
common stock may decline if persons receiving common stock as compensation in
the reorganization sell their stock in the public market, (15) we may experience
volatility in net income due to changes in standards for accounting for
derivatives, (16) our United States insurance companies are subject to risk-
based capital requirements and possible guaranty fund assessments, (17) the
National Association of Insurance Commissioners' codification of statutory
accounting practices may adversely affect the statutory surplus of John Hancock
Life Insurance Company, (18) we may be unable to retain personnel who are key to
our business, (19) we face risks from assumed reinsurance business in respect of
personal accident insurance and the occupational accident component of workers
compensation insurance, (20) litigation and regulatory proceedings may result in
financial losses, harm our reputation and divert management resources, and (21)
we face unforeseen liabilities arising from our acquisitions and dispositions of
businesses.
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
filed by the company with the Securities and Exchange Commission. The company
specifically disclaims any obligation to update or revise any forward-looking
information, whether as a result of new information, future developments, or
otherwise.
PART I
ITEM 1. Business of John Hancock Financial Services
The Board of Directors of John Hancock Mutual Life Insurance Company
unanimously adopted a Plan of Reorganization effective February 1, 2000 and John
Hancock Mutual Life Insurance Company converted from a mutual life insurance
company to a stock life insurance company, John Hancock Life Insurance Company,
and became a wholly-owned subsidiary of John Hancock Financial Services, Inc.
Also on February 1, 2000, John Hancock Financial Services, Inc. completed an
initial public offering of 102,000,000 shares of its common stock, par value
$0.01 per share.
Founded in 1862, John Hancock today is one of the nation's leading
financial services companies, providing a broad array of insurance and
investment products and services to retail and institutional customers,
primarily in North America.
We operate our business in five segments. Two segments primarily serve
retail customers, and two segments serve institutional customers. Our fifth
segment is the Corporate and Other Segment.
Our retail segments are the Protection Segment and the Asset Gathering
Segment. The Protection Segment offers variable life, universal life, whole
life, term life, and individual and group long-term care insurance products. The
Asset Gathering Segment offers variable and fixed, deferred and immediate
annuities, and mutual funds. Our retail business also includes our retail
distribution and customer service operations.
In 1998, we were one of the ten largest writers of individual life
insurance in the U.S. (according to the 1999 A.M. Best's Sales Studies rankings
for Total Direct Premiums Written), and were the seventh largest writer of
individual variable universal life insurance (according to data published by
Tillinghast). We believe we are among the top five writers of individual long-
term care insurance, and, based on total in force premiums, the top provider of
group long-term care insurance, in the U.S. As of December 31, 1998, we were the
29th largest individual annuity company, based on LIMRA sales data, and our
mutual fund subsidiary ranked 26th (28/th/ as of September 30, 1999) among U.S.
asset managers in terms of total long-term, open end assets under management
(according to data published by Financial Research Corporation).
Our institutional segments are the Guaranteed and Structured Financial
Products Segment and the Investment Management Segment. The Guaranteed and
Structured Financial Products Segment offers a wide variety of spread-based and
fee-based investment products and services, most provide the customer with some
form of guaranteed return. The Investment Management Segment consists of
investment management services and products marketed to institutions. This
business is primarily fee-based and investment management products generally do
not offer guarantees.
Our expertise in both the Guaranteed and Structured Financial Products
Segment and the Investment Management Segment has its roots in our long history
of managing the assets in our general account. Our general account assets are
available to meet all general corporate obligations, including the financial
guarantees of our underlying insurance and investment products. Our investment
operations emphasize strong credit analysis and transaction origination
capabilities, with a distinctive focus on private fixed income investing. For
many years we have developed an expertise in structuring guaranteed products for
U.S. pension plans through our general account. Over the past two decades we
have also gained a reputation as a manager of funds held in separate accounts.
Separate account assets are generally dedicated to specific institutional
clients and managed in accordance with specific investment guidelines and are
generally not available to satisfy general account obligations. Our specialties
in this market include fixed maturity securities, equities, natural resources,
collateralized bond obligations and mezzanine financings, mostly managed for
U.S. pension plan sponsors.
Our principal executive offices are located at John Hancock Place, Boston,
Massachusetts 02117.
Protection Segment
Overview
Through our Protection Segment, we offer a variety of non-traditional and
traditional life insurance products and individual and group long-term care
insurance products. Our non-traditional life insurance products include variable
life and universal life insurance. Our traditional life insurance products
include whole life insurance and term life insurance. Protection products are
distributed through multiple distribution channels, including our career agency
system, which we are integrating into our newly formed distribution subsidiary,
Signator Financial Network (''Signator''), M Financial Group, independent
broker/dealers, a private label arrangement, banks and directly to consumers,
via the Internet and over the phone.
The Protection Segment has traditionally been our largest business segment,
contributing 37.9% and 40.9% of consolidated operating revenues and 31.1% and
34.4% of consolidated after-tax operating income in the years ended December 31,
1999 and 1998, respectively. The Protection Segment has achieved the following
financial results for the periods indicated:
As of or for the Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- --------------- -----------
(in millions)
Sales (new premiums and deposits):
Non-traditional life--excluding COLI and BOLI (1)
Variable life............................................ $ 130.6 $ 103.9 $ 96.3
Universal life........................................... 16.4 20.3 9.5
Traditional life--excluding COLI (1)
Whole life............................................... 18.9 18.8 31.2
Term life................................................ 24.0 22.9 12.8
COLI and BOLI
Variable life--COLI...................................... 23.6 53.5 18.9
Universal life--COLI..................................... 3.3 23.5 13.3
Whole life--COLI......................................... - 1.2 2.2
Universal life--BOLI..................................... - 12.4 3.0
Individual long-term care.................................. 70.9 56.8 55.0
Group long-term care (2)................................... 6.3 3.8 5.9
--------- --------- ---------
Total................................................. $ 294.0 $ 317.1 $ 248.1
========= ========= =========
Operating revenues: (3)
Non-traditional life....................................... $ 520.7 $ 488.1 $ 409.5
Traditional life........................................... 1,949.6 1,921.2 1,930.0
Individual long-term care.................................. 319.9 246.7 193.7
Group long-term care....................................... 104.0 94.2 87.5
Other...................................................... 8.8 9.0 11.1
--------- --------- ---------
Total................................................. $ 2,903.0 $ 2,759.2 $ 2,631.8
========= ========= =========
Segment after-tax operating income: (3)
Non-traditional life....................................... $ 92.8 $ 74.6 $ 38.6
Traditional life........................................... 68.2 73.0 97.9
Individual long-term care ................................ 20.6 16.4 15.9
Group long-term care....................................... 7.9 7.8 8.4
Other...................................................... 1.1 0.5 (2.7)
--------- --------- ---------
Total................................................. $ 190.6 $ 172.3 $ 158.1
========= ========= =========
Assets:
Non-traditional life....................................... $10,195.5 $ 8,713.2 $ 7,091.6
Traditional life........................................... 13,716.7 16,412.4 15,753.0
Individual long-term care.................................. 1,008.5 754.8 582.0
Group long-term care....................................... 466.0 400.2 345.7
Other...................................................... 36.5 23.2 21.1
Intra-segment eliminations................................. (44.8) (600.1) (619.5)
--------- --------- ---------
Total................................................. $25,378.4 $25,703.7 $23,173.9
========= ========= =========
_________________
(1) Individual life insurance sales exclude (a) excess premiums, which are
premiums that build cash value but do not purchase face amounts of
insurance on variable life and universal life insurance products and (b)
premiums on corporate owned life insurance (''COLI'') and bank owned life
insurance (''BOLI'') policies covering more than 200 lives. Sales include
10% of single premium payments on universal and whole life insurance
products.
(2) Group long-term care sales include only sales made to new employer groups
initially effective in the year. Re-
enrollments on existing accounts, sales constituting increased coverage to
existing insureds, sales to non-employer groups and sales to new employees
added to a group are excluded.
(3) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 12 to our
Audited Consolidated Financial Statements for a reconciliation of amounts
reported for operating segments to amounts reported in those financial
statements.
Products and Markets
We have built a broad life insurance product portfolio that covers nearly
all product categories. The following chart shows the product categories where
we are actively selling at least one, if not more, products.
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Separate
General Account Account
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Product Term Whole Universal Variable
Category Life Life Life Life
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Single life insurance X X X X
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Joint or second-to-die life
insurance X X X
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Corporate and bank owned
life insurance X X
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Individual Life Insurance. We believe there are two distinct groups of
consumers for our individual life insurance products: relationship-oriented
consumers and self-directed consumers. Relationship-oriented consumers are
generally those in the high and upper-middle income markets. They typically have
complex buying needs and are willing to pay a price premium to be served
personally by professional advisors. Self-directed consumers typically have
simpler product needs, are more price sensitive and are more likely to initiate
their own insurance purchases as protection needs arise. We market our variable,
universal and whole life insurance products to relationship-oriented consumers.
We market our term life insurance products to relationship-oriented consumers,
as well as to self-directed consumers.
In the past several years, our life insurance sales growth has come
principally from sales of variable and universal life insurance, while sales of
whole life insurance have declined. By diversifying from traditional life
insurance products to the investment-oriented savings products demanded by
today's consumer, we have generated strong business and earnings growth.
. Variable Life Insurance. Our primary variable life insurance product
is variable universal life insurance. This product provides life
insurance coverage and an investment return linked to an underlying
portfolio of investments chosen by the policyholder. Our sales of
variable life insurance have grown at a compound annual rate of 16%
from 1997 through 1999. For the year ended December 31, 1999, our
sales of variable life insurance, excluding corporate owned life
insurance, increased 26% from 1998. Including corporate owned life
insurance, our sales of variable life insurance declined by 2% from
1998, due to lower volume of corporate owned life insurance sales. Our
variable life insurance product portfolio includes joint (second-to-
die) and corporate owned life insurance products, as well as single
life policies. Second-to-die products are typically used for estate
planning purposes and insure two lives rather than one, with the
policy proceeds paid after the death of both insured individuals.
Corporate owned life insurance products are sold to corporations to
fund special deferred compensation plans and benefit programs for key
employees. We were among the first insurance companies to offer
variable life insurance products, beginning in 1980, and we believe
the length of our experience in this market is a competitive strength.
Variable life insurance policies, including corporate owned life
insurance, represented 71% of our individual life insurance sales in
the year ended December 31, 1999, compared to an average of 65% over
the past three full years.
Our current variable life insurance products offer the policyholder a broad
array of choices with respect to both investment options and also fund managers
through our Variable Series Trust (VST). As of December 31, 1999, the VST
included 24 fund options and 16 fund managers, offering a broad range of
domestic equity, fixed income and international investment styles from retail
and institutional managers. Offerings include both John Hancock and non-John
Hancock funds.
. Universal Life Insurance. Our universal life insurance products
provide life insurance coverage and a cash value that increases based
on a credited interest rate which is periodically reset. These
policies generally permit policyholders to use any increase in cash
value to vary the amount of insurance coverage and the timing and
amount of premium payments. Our universal life insurance product
portfolio also includes corporate owned life insurance and bank owned
life insurance products which are sold to banks to fund post-
retirement employee benefit plan liabilities. We participate in the
bank owned life insurance market selectively, as special sales
opportunities arise. For the year ended December 31 1999, sales of
universal life insurance policies declined 65% compared to 1998. This
decline is primarily attributable to the significant sales of bank and
corporate owned life insurance that occurred in 1998. From 1997
through 1999, our sales of universal life insurance products declined
at a compound annual rate of 13%. Universal life insurance policies
represented 9% of our individual life insurance sales in the year
ended December 31, 1999, compared to an average of 15% over the past
three full years.
. Traditional Life Insurance Products. Our traditional life insurance
products include single life and joint life (second-to-die) whole life
insurance, and term life insurance. Participating whole life insurance
combines a death benefit with a cash value that generally increases
gradually in amount over a period of years, and typically pays a
policy dividend. Term life insurance provides only a death benefit,
does not build up cash value, and does not pay a dividend. Whole life
insurance products represented 9%, and term life insurance products
represented 11%, of our individual life insurance sales in 1999. For
the year ended December 31, 1999, our whole life insurance sales,
excluding corporate owned life insurance, were consistent with 1998.
From 1997 through 1999, our whole life insurance sales declined at a
25% compound annual rate, as demand shifted to our variable life
insurance products. For the year ended December 31, 1999, our term
life insurance sales increased by 5% over 1998. From 1997 through
1999, sales of our term life insurance products grew at a compound
annual rate of 37%. There has been a shift of term sales to the direct
channel with Internet term sales up 79% over last year. Traditional
life insurance policies represented 20% of our average individual life
insurance sales over the past three full years.
The following table illustrates, for the periods indicated, total statutory
premiums and deposits, which is the premium we report on the annual statements
we file with insurance regulators, life insurance in force and GAAP reserves for
our individual life insurance products. In addition to premium from sales of new
policies, which we refer to as ''sales,'' statutory premiums and deposits
includes revenues from renewals of policies, 10% of single premium payments, and
premiums from reinsurance assumed by us. We deduct from this measure the
premiums that we cede to our reinsurers. Statutory premiums and deposits differ
from GAAP premiums because GAAP requires that premiums on variable and universal
life insurance products be accounted for using deposit accounting. Deposit
accounting excludes from revenue the premiums received on these products and
generally shows the fees earned from the products as revenues.
Individual Life Insurance Selected Financial Data
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------- ------------ -----------
(in millions)
Total statutory premiums and deposits:
Variable life........................... $ 829.8 $ 810.8 $ 670.8
Universal life (1)...................... 117.9 436.8 141.8
Traditional life........................ 1,043.6 1,051.3 1,071.7
---------- ---------- ----------
Total................................. $ 1,991.3 $ 2,298.9 $ 1,884.3
========== ========== ==========
Life insurance in force:
Variable life........................... $ 56,691.1 $ 52,552.9 $ 46,175.3
Universal life.......................... 8,967.2 8,511.0 6,967.2
Traditional life........................ 57,284.8 52,122.6 61,772.3
---------- ---------- ----------
Total................................. $122,943.1 $113,186.5 $114,914.8
========== ========== ==========
GAAP Reserves:
Variable life........................... $ 6,560.0 $ 5,407.5 $ 4,124.9
Universal life.......................... 2,065.7 1,930.3 1,468.0
Traditional life........................ 9,786.3 9,386.0 9,046.4
---------- ---------- ----------
Total................................. $ 18,412.0 $ 16,723.8 $ 14,639.3
========== ========== ==========
________________
(1) Includes bank owned life insurance premiums of $340.0 million and $65.0
million for the years ended December 31, 1998 and 1997, respectively.
There were no bank owned life insurance premiums for the year ended
December 31, 1999.
Long-Term Care Insurance. We are one of the few insurance companies that
offers both individual and group long-term care insurance. We entered the
individual long-term care insurance market in 1987 and the group long-term care
insurance market in 1988. In 1998, we believe that we were the market leader for
group long-term care insurance, with a 26% share of total premiums according to
data reported by LIMRA. In 1998, we were among the top five writers of
individual long-term care insurance according to data published by LifePlans,
Inc.
On March 1, 2000 we completed the acquisition of the individual long-term
care insurance business of Fortis, Inc. This acquisition increases by about 50%
(as measured by total premiums and number of policies in force) the total size
of our individual long-term care insurance business, boosting our market share
to 12% from 8%. The business acquired reported approximately $124 million of
total premium for the year ended December 31, 1999, and included approximately
97,000 policies in force as of December 31, 1999. In addition, the acquisition
will, we anticipate, provide us with access to an established national network
of long-term care insurance brokers.
Our long-term care insurance products provide protection against the large
and escalating costs of home health care, assisted living, and nursing home
care. With the aging population, the expected inability of government
entitlement programs to meet retirement needs, and a growing public awareness of
long-term care insurance, we believe there is excellent growth potential for the
long-term care insurance market. In addition to our core distribution channels,
which include our Signator/career agent channel, broker/dealers and banks, we
expect to derive sales growth from alternative distribution methods, such as
private label arrangements where our products are sold through other insurers'
sales forces.
Our long-term care insurance products are reimbursement products, which
provide benefits only for documented nursing home or health care expenses. These
products are sold on a guaranteed renewable basis, meaning that we are required
to renew the policies each year as long as the premium is paid. However, this
also gives us the ability to reset the price of the product prospectively, if
needed. Our claims history on these products has been favorable.
. Individual Long-Term Care Insurance. Our individual long-term care
insurance products are sold to pre-retirement and retired customers.
For the year ended December 31, 1999, our sales of individual long-
term care insurance products were $70.9 million, an increase of 25%
over 1998. From 1997 through 1999, our sales of individual long-term
care insurance products increased at a compound annual rate of 13%. In
the year ended December 31, 1999, we implemented two innovative
processes designed to streamline back end processing, saving
administrative time and providing quicker policy delivery to the
consumer. The first is an innovative Telephone Interview Program that
permits eligible long-term care clients to be interviewed over the
telephone by trained nurses. This program has successfully replaced
the collection of a physician's statement in 50% of cases, leading to
lower costs and faster cycle times, without any loss of required
underwriting information. The second, our SNAP ticket process, is an
innovative approach to selling long term care insurance in the
broker/dealer community based on the broker's selling model of
"dropping a ticket". The broker completes a basic information sheet,
then we work directly with the client to complete the application and
set up any necessary underwriting tests. This process frees up the
broker's time and removes them from the position of asking personal
medical information from their client.
The following table illustrates for the periods indicated first year
premium, total premium and reserves for our individual long-term care insurance
products. First year premium represents total premiums earned during the first
year of the policy for all new individual long-term care insurance business.
Selected Financial Data
Individual Long-Term Care Insurance
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(in millions)
First year premium....... $ 74.8 $ 57.2 $ 56.0
Total premium............ 276.6 218.5 175.2
Reserves................. 658.0 473.4 340.9
. Group Long-Term Care Insurance. Our group long-term care insurance
products are sold through employer-sponsored plans to employees and
retirees, and their eligible relatives. The insured, not the employer,
generally pays the premium for this insurance. Following selection of
one of our plans by an employer, we market our products directly to
the employee base. The principal market for our group long-term care
insurance products is companies with over 7,500 employees and
retirees. We also pursue smaller employers with 500 or more employees
and retirees in selected industries.
Our sales of group long-term care insurance for the year ended
December 31, 1999 were $6.3 million, an increase of 66% over 1998.
From 1997 through 1999 our sales of group long-term care insurance
products increased at a compound annual rate of 4%.
The following table illustrates for the periods indicated first year
premium, total premium and reserves for our group long-term care insurance
products. First year premium represents total premiums earned during the first
year of the policy for all new group long-term care insurance business,
including employer and non-employer groups, and new employees added to a group.
Selected Financial Data
Group Long-Term Care Insurance
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------- ------------ -----------
(in millions)
First year premium...... $ 10.0 $ 5.5 $ 7.1
Total premium........... 78.4 72.7 69.6
Reserves................ 334.3 275.2 219.9
Distribution
We employ multiple distribution channels, both owned and non-owned, to sell
our protection products. Typically we employ separate sales efforts for each
product. However, we also attempt to optimize our distributor relationships by
selling complementary products where the needs of the consumer call for them.
The Protection Segment's distribution channels include the following:
Signator. We are making fundamental changes in our career agency system to
improve productivity, reduce fixed costs and enhance service. To enable our
agents to provide more sophisticated financial planning services as well as a
broader range of financial products, we are making a significant investment in
agent education and training, expanding licensing requirements and enhancing our
service and product support capability. A key component of this strategy was the
creation in early 1999 of Signator, a separate distribution subsidiary. Signator
will provide highly tailored financial planning tools and market support and
will further enable our agents to sell products of multiple companies. This new
subsidiary is structured to enable us to recruit, develop and retain top
producers. The major producers within Signator include 43 managerial agencies
owned by us and 100 independent general agencies, as well as insurance brokers.
The managerial agencies are in the process of transitioning to independent
general agencies. In addition to brokerage business sold through the managerial
agencies and independent general agencies, Signator has established a direct
brokerage outlet serving consumers in the high-end markets. Combined, the
Signator system includes approximately 3,000 associated sales personnel. We
believe that over time Signator will enable us to continue growing revenues,
while reducing unit expenses.
M Financial Group. M Financial Group is a national producer group founded
in 1978 of approximately 100 life insurance producing firms with over 400
individual producers operating exclusively in the upper end of the wealth
transfer and executive benefit markets. We believe John Hancock has been either
the first or second largest provider of life insurance products to the M
Financial Group in each of the past three years, although the member firms also
sell the products of other prominent U.S. life insurance companies.
We have jointly developed a proprietary life insurance product line with M
Financial Group to meet the distinct requirements of its producers. We also
offer four proprietary investment options of M Fund, Inc. on all variable life
insurance products sold by M Financial Group members, in addition to the
investment options supported by the VST. In addition to these proprietary
products, we provide a number of exclusive services to M Financial Group
members, including a deferred compensation plan, dedicated sales, underwriting
and service teams and participation in special marketing events, as well as M
Financial Group sponsored systems and technology initiatives. In addition, M
Life Insurance Company shares the insurance risk, through reinsurance, on 50% of
most of our policies that its members sell. These products and services and this
reinsurance arrangement serve to align M Financial Group producers' incentives
with ours.
The business generated by M Financial Group producers has experienced lower
termination or non-renewal (referred to in the industry as ''lapse'') and
mortality rates than the industry average. Over the past three full years, sales
originated through the M Financial Group relationship have accounted for
approximately 39% of our average annual life insurance sales. In 1999, these
sales included $18.5 million of large corporate owned life insurance policies.
Independent Broker/Dealers. We have selling agreements for individual long-
term care insurance products with over 20 independent broker/dealer
organizations. In 1998, we launched Investors Partner Life Insurance Company, a
wholly-owned subsidiary, to work with independent broker/dealers in offering
tailored life insurance products to high income clients. In addition, our sales
through Signator include some life insurance sold by broker/dealers.
Direct distribution. We have developed a direct distribution unit,
operating under the ''MarketPlace by John Hancock'' brand, to complement our
traditional sales efforts. Through this unit, we sell term life insurance and
variable annuities over the telephone, through direct mail and over the
Internet, directly to consumers. We currently sell fully underwritten and
simplified issue term insurance products and a simplified, no load, no surrender
charge variable annuity. Term insurance products are marketed via direct
response television, targeted direct mail and over the Internet. Consumers can
call a toll-free number or go directly to our web site to get information,
obtain a quote or start an application. We have built a call center and a
streamlined application, payment and issue process to support this distribution
channel.
Our e-commerce initiatives include the launch of a John Hancock Internet
web site that allows consumers to collect information on John Hancock and our
products, get a quote, and begin an insurance application process directly on-
line. Consumers can also access our term life insurance products through the on-
line services offered by Quotesmith Corporation, InsWeb Corporation, and
Intuit's QuickenInsurance site.
Banks. We offer a full line of life and individual long-term care insurance
products through banks that have established an insurance sales force.
Group sales force. Group long-term care insurance products are marketed by
a dedicated sales force located in major cities around the country. The sales
force works closely with consultants, brokers, and other intermediaries to
generate sales and grow existing accounts.
Private label arrangements. We have launched, during the second quarter of
1999, an individual long-term care product which is being sold through another
insurer under a private label arrangement. We anticipate entering into more of
these private label arrangements with respect to various products.
Signator, the M Financial Group, our independent broker/dealer channel and
the bank channel are aimed at relationship-oriented consumers. The direct
distribution channel targets self-directed consumers.
The table below shows Protection Segment sales by distribution channel for
the periods indicated. Individual life insurance sales exclude excess premiums,
which are premiums that build cash value but do not purchase any additional face
amount of insurance, on variable life and universal life insurance products and
premiums on corporate owned life insurance and bank owned life insurance
policies covering more than 200 lives. Sales include 10% of single premium
payments on universal life and whole life insurance policies. Group long-term
care sales include only sales made to new employer groups initially effective in
the year. Re-enrollments on existing accounts, sales constituting increased
coverage to existing insureds, and sales to non-employer groups and new
employees added to a group are excluded. COLI is sold only by Signator and M
Financial Group. BOLI is sold only by Signator.
Protection Segment Sales by Distribution Channel
For the Year Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
(in millions)
Signator: (1)
Individual life--excluding COLI and BOLI.... $122.9 $111.4 $108.7
Individual life--COLI....................... 8.5 9.1 6.2
Individual life--BOLI....................... - 12.4 3.0
Individual long-term care................... 63.3 50.7 49.1
M Financial Group:
Individual life--excluding COLI............. 55.8 48.7 40.3
Individual life--COLI....................... 18.4 69.1 28.2
Individual long-term care................... .1 .1 --
Independent Broker/Dealers:
Individual long-term care................... 6.6 5.7 5.8
Direct Distribution:
Individual life............................. 8.6 4.8 .7
Banks:
Individual life............................. 1.7 .5 --
Individual long-term care................... .7 .2 .1
Dedicated Sales Force:
Group long-term care........................ 6.3 3.8 5.9
Other:
Individual life............................. 0.9 .5 .1
Individual long-term care................... .2 .1 --
Total:
Individual life--excluding COLI and BOLI.... 189.9 165.9 149.8
Individual life--COLI and BOLI.............. 26.9 90.6 37.4
Individual long-term care................... 70.9 56.8 55.0
Group long-term care........................ 6.3 3.8 5.9
_______________
(1) Sales originated through independent broker/dealers and reported within the
Signator channel were 26%, 25% and 19% of total Signator individual life
insurance sales, before deduction of excess premiums but after exclusion of
cases with over 200 lives, for the years ended December 31, 1999, 1998 and
1997, respectively. For individual long-term care insurance for each of
these three periods, less than 3% of total Signator sales were originated
through independent broker/dealers. Also reported in the Signator channel
are sales originated through independent insurance brokers, which accounted
for 25%, 23% and 17% of total Signator individual life insurance sales,
before deduction of excess premiums but after exclusion of cases with over
200 lives, for the years ended December 31, 1999, 1998 and 1997,
respectively. For individual long-term care insurance, 22% 18% and 17% of
total Signator channel sales were originated through independent insurance
brokers for the years ended December 31, 1999, 1998 and 1997, respectively.
Underwriting
Insurance underwriting involves a determination of the type and amount of
risk that an insurer is willing to accept. Underwriting also determines the
amount and type of reinsurance levels appropriate for a particular type of risk.
By utilizing reinsurance, we can limit our risk and improve product pricing.
Our underwriting standards for life insurance are intended to result in the
issuance of policies that produce mortality experience consistent with the
assumptions used in product pricing. For individual long-term care products, we
use separate but similar underwriting criteria appropriate to the morbidity
risks insured. Our overall profitability depends to a large extent on the degree
to which our mortality and/or morbidity experience matches our pricing
assumptions. In addition, a key focus of our life insurance and long-term care
underwriting is the streamlining of the process we use in issuing new business.
An example of an innovation in this area is the Telephone Interview Program for
long-term care products, described above.
For life insurance, our underwriting is based on our historical mortality
experience, as well as the experience of the insurance industry and of the
general population. We continually compare our underwriting standards against
the industry to mitigate our exposure to higher risk business and to stay
abreast of industry trends.
Our life and long-term care insurance underwriters evaluate policy
applications on the basis of the information provided by the applicant and
others. We use a variety of methods to evaluate certain policy applications,
such as those where the size of the policy is large, or the applicant is an
older individual or has a known medical impairment or is engaged in a hazardous
occupation or hobby.
Group long-term care underwriting is conducted on both the employer group
level and the individual level. Our group long-term care corporate customers
generally offer their employees the opportunity to purchase coverage on a
"guaranteed-issue" basis, meaning that all employees are eligible for
insurance coverage, and offer individually underwritten coverage to family
members. We rely on our experience in underwriting large groups in order to set
prices that take into account the underwriting arrangements, the general health
conditions of the corporate customers' employees, the specifics of the
negotiated plan design, and other demographic and morbidity trends. Group
products are written on a guaranteed renewable basis, which permits repricing if
necessary.
Our corporate owned and bank owned life insurance policies covering
multiple lives are issued on a guaranteed issue basis, where the amount of
insurance issued per life on a guaranteed basis is related to the total number
of lives being covered and the particular need for which the product is being
purchased. Guaranteed issue underwriting applies to employees actively at work,
and product pricing reflects the additional guaranteed issue underwriting risk.
Reserves
We establish and report liabilities for future policy benefits on our
balance sheet to meet the obligations under our insurance policies and
contracts. Our liability for variable life insurance and universal life
insurance policies and contracts is equal to the cumulative account balances.
Cumulative account balances include deposits plus credited interest less expense
and mortality fees and withdrawals. Future policy benefits for our traditional
life, individual long-term care and group long-term care insurance policies are
calculated based on a set of actuarial assumptions that we establish and
maintain throughout the lives of the policies. Our assumptions include
investment yields, mortality, morbidity and expenses.
Competition
We face significant competition in all our retail protection businesses.
Our competitors include other large and highly rated insurance carriers. Some
competitors have penetrated more markets and have greater resources than us.
Many competitors offer similar products and use similar distribution channels.
In the e-commerce arena, we also face competition from internet start-up
companies and traditional competitors that have established internet platforms.
We believe that we distinguish ourselves from our competitors through the
combination of:
. our strong and reputable brand name;
. our strong financial ratings;
. our broad range of competitive and innovative products and our ability
to create unique product combinations;
. our ability to develop customized/proprietary products for various
distribution channels;
. the variety of our distribution channels;
. the depth of our experience as one of the first companies to offer
variable life insurance, individual long-term care insurance and group
long-term care insurance;
. the quality of the support we provide to the distributors of our
products including sophisticated tax, estate and business planning
support; and
. our dedication to customer service.
Competition also exists for agents and other distributors of insurance
products. Much of this competition is based on the pricing of products and the
agent or distributor compensation structure. We believe that our competitive
strengths coupled with the advantages of our new Signator network will enable us
to compete successfully to attract and retain top quality agents and
distributors. We continuously provide technology upgrades and enhanced agent
training, and strive to improve service.
Reinsurance
We reinsure portions of the risks we assume for our protection products.
The maximum amount of individual ordinary life insurance retained by us on any
life is $10 million under an individual policy and $20 million under a
second-to-die policy. We have negotiated with several reinsurers to establish an
additional reinsurance program which will limit our exposure to fluctuations in
claims under in-force policies as of December 31, 1999 where the net amount at
risk is $2 million or more. When complete, this program will be effective as of
the beginning of 2000. We have reached agreement on the terms of this program,
and we expect all documents will be executed in the near future. We are
investigating similar arrangements for new business, to be effective at a later
date, however the terms of these arrangements are not yet determined. By
entering into reinsurance agreements with a diverse group of highly rated
reinsurers, we seek to control our exposure to losses. Our reinsurance, however,
does not discharge our legal obligations to pay policy claims on the policies
reinsured. As a result, we enter into reinsurance agreements only with highly
rated reinsurers. Nevertheless, there can be no assurance that all our
reinsurers will pay the claims we make against them. Failure of a reinsurer to
pay a claim could adversely affect our business, financial condition or results
of operations.
We have several major life reinsurance arrangements, including agreements
with five reinsurers (The Lincoln National Life Insurance Company, Transamerica
Occidental Life Insurance Company, RGA, Life Reassurance Corporation of America
and Cologne Reinsurance Company of America) that, in the aggregate, transfer a
total of 80% of the risk arising from our indeterminate premium term life
insurance policies. We also have a reinsurance agreement with M Life Insurance
Company, an affiliate of the M Financial Group, under which M Life Insurance
Company reinsures 50% of most of our policies that its members sell. Under the
terms of this agreement, we continue to hold the assets backing the reserves on
the risks reinsured. M Life Insurance Company is assigned an NR-1 classification
by A.M. Best, a rating which is primarily assigned to small companies for which
A.M. Best
does not have sufficient financial information required to assign rating
opinions. To review the claims-paying ability and financial strength of M Life
Insurance Company, we review semi-annual financial information provided to us by
M Life Insurance Company, and hold semi-annual meetings with its management to
review operations, marketing, reinsurance and financial issues. We also review
the annual audited financial reports of the parent company of M Life Insurance
Company. For amounts in excess of $400,000 per policy that would otherwise be
reinsured by M Life Insurance Company, we have entered into reinsurance
agreements with The Lincoln National Life Insurance Company and RGA.
The total amount of reinsurance premiums paid in 1999 by the individual
life insurance line of business to reinsurers amounted to $261.6 million. At
December 31, 1999 we had reinsured $37,576.0 million in face amount of
insurance, representing 23% of our total face amount of $160,519.1 million. Our
five principal unaffiliated life reinsurers are listed below, along with the
reinsurance recoverable, on a statutory basis, the face amount of life insurance
in force reinsured as of December 31, 1999, and their respective A.M. Best
ratings as of February 10, 2000:
Face Amount
-----------
of Life A.M.
------- ----
Reinsurance Insurance Best
----------- --------- ----
Recoverable In-Force Rating
----------- -------- ------
Reinsurer
- ---------
(in millions)
RGA Reinsurance Company............................. $32.8 $10,128.8 A
The Lincoln National Life Insurance Company......... 29.6 8,910.5 A
Life Reassurance Corporation of America............. 28.0 6,427.0 A+
Transamerica Occidental Life Insurance Company...... 18.0 4,681.5 A+
M Life Insurance Company............................ 2.5 2,849.4 NR-1
Our individual long-term care business unit has entered into a coinsurance
agreement with London Life International Reinsurance Company of Barbados. The
amount of reinsurance premium paid in the years ended December 31, 1999 and
1998 under these agreements was $18.0 million and $18.7 million, respectively.
As of December 31, 1999, there was, on a statutory basis, $68.1 million of total
reinsurance recoverable under this agreement.
Asset Gathering Segment
Overview
Through our Asset Gathering Segment, we offer individual annuities, mutual
fund products and investment management services. Individual annuities include
variable and fixed annuities, both immediate and deferred. Mutual fund products
primarily consist of open-end mutual funds and closed-end funds. Open-end mutual
funds are subject to redemption at any time by investors. After their initial
public offering, the shares of closed-end funds are not subject to redemption,
and accordingly represent a more stable base of assets than open-end funds.
As of December 31, 1999, 74.5% of our mutual fund assets under management
were invested in open-end mutual funds. Our investment management services
include retirement services, offered principally to 401(k) plans, and the
management of institutional pools of capital. We distribute these products and
services through Signator, independent broker/dealers, banks, directly to state
lottery commissions and, both directly and through pension consultants to
retirement plan sponsors. In this segment, we also include the results of
Signator, of John Hancock Signature Services, our servicing subsidiary, of First
Signature Bank & Trust Company, our limited-service banking
subsidiary, and of Essex Corporation, one of the nation's largest intermediaries
between banks and product manufacturers for annuities.
The Asset Gathering Segment contributed 13.8% and 15.0% of consolidated
operating revenues and 18.8% and 22.2% of consolidated after-tax operating
income in the year ended December 31, 1999 and 1998, respectively. The Asset
Gathering Segment has achieved the following financial results for the periods
indicated:
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
---------- --------- ---------
(in millions)
Sales:
Variable annuities (1)...................... $ 847.7 $ 882.7 $ 745.9
Fixed annuities (1)......................... 648.6 377.8 714.0
John Hancock Funds (2)...................... 3,899.6 6,797.7 7,442.3
---------- --------- ---------
Total..................................... $ 5,395.9 $ 8,058.2 $ 8,902.2
========== ========= =========
Operating revenues: (3)
Variable annuities.......................... $ 115.6 $ 94.1 $ 76.3
Fixed annuities............................. 396.1 390.1 400.5
John Hancock Funds (4)...................... 452.4 467.2 377.9
Signator Investors (formerly John Hancock
Distributors, Inc.)........................ 184.1 169.0 112.2
John Hancock Signature Services............. 101.2 102.2 101.7
Other....................................... 31.9 10.8 10.8
Eliminations................................ (224.0) (218.1) (174.5)
---------- --------- ---------
Total..................................... $ 1,057.3 $ 1,015.3 $ 904.9
========== ========= =========
Segment after-tax operating income: (3)
Variable annuities.......................... $ 34.3 $ 18.3 $ 8.3
Fixed annuities............................. 32.7 34.9 37.4
John Hancock Funds.......................... 49.5 54.8 45.6
Signator Investors (formerly John Hancock
Distributors, Inc.)........................ 0.7 1.5 1.2
John Hancock Signature Services............. (3.3) 0.7 -
Other....................................... 1.2 0.9 0.8
---------- --------- ---------
Total..................................... $ 115.1 $ 111.1 $ 93.3
========== ========= =========
Assets:
Variable annuities.......................... $ 7,877.6 $ 6,820.5 $ 5,360.0
Fixed annuities............................. 5,693.0 5,140.4 5,042.5
John Hancock Funds.......................... 442.9 502.1 467.3
Signator Investors (formerly John Hancock
Distributors, Inc.)........................ 16.1 13.2 12.4
John Hancock Signature Services............. 26.9 26.7 22.3
Other....................................... 240.7 212.8 165.8
---------- --------- ---------
Total..................................... $ 14,297.2 $12,715.7 $11,070.3
========== ========= =========
Assets Under Management:
Variable annuities.......................... $ 7,598.1 $ 6,569.6 $ 5,125.6
Fixed annuities............................. 5,255.0 4,867.4 4,777.8
John Hancock Funds (5)...................... 32,696.6 34,945.2 31,402.0
_______________
(1) Represents statutory annual statement values. Statutory revenues include
premiums and deposits on variable and fixed annuities. Statutory premiums
and deposits differ from GAAP premiums because GAAP requires that variable
and certain fixed annuity products be accounted for using deposit
accounting. Deposit accounting
excludes from revenue the premiums and deposits received on these products.
(2) Mutual fund and institutional asset sales are defined as new inflows of
funds from investors into our investment products. Sales of retail money
market products are not included. Sales of mutual fund products are
recorded on the trade date. Sales of institutional investment products are
recorded on the date a firm commitment is established.
(3) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 12 to our
Audited Consolidated Financial Statements for a reconciliation of amounts
reported for operating segments to amounts reported in those financial
statements.
(4) Includes $6.1 million, $5.8 million and $7.7 million of revenue from
management of our general account assets for the years 1999, 1998 and 1997,
respectively.
(5) Includes $2.3 billion, $2.6 billion, and $2.3 billion of our general
account assets and assets managed for certain John Hancock subsidiaries as
of December 31, 1999, 1998 and 1997, respectively.
Products and Markets
Annuities
We offer variable and fixed annuities, immediate and deferred, to a broad
range of consumers through multiple distribution channels. Variable annuities
are separate account products, where the contractholder bears the investment
risk and has the right to allocate their funds among various separate investment
subaccounts. Our major source of revenues from variable annuities is mortality
and expense fees charged to the contractholder, generally determined as a
percentage of the market value of the underlying assets under management. Fixed
annuities are general account products, where we bear the investment risk as
funds are invested in our general account and a stated interest rate is credited
to the contractholders' accounts. Our major source of income from fixed
annuities is the spread between the investment income earned on the underlying
general account assets and the interest credited to contractholders' accounts.
Annuities may be deferred, where assets accumulate until the contract is
surrendered, the contractholder dies, or the contractholder begins receiving
benefits under an annuity payout option; or immediate, where payments begin
within one year of issue and continue for a fixed period of time or for life
with or without a period certain.
Annuities offer a tax-deferred means of accumulating savings for retirement
needs, and provide a tax-efficient source of income in the payout period. We
sell our annuity products primarily to members of two groups: forty to sixty
year-olds seeking to accumulate assets for retirement, and people over sixty
years old seeking to protect against outliving assets during retirement. Members
of both groups typically have annual incomes of less than $100,000.
Investment management skills are critical to the growth and profitability
of our annuity business. In addition to variable annuity products that offer the
same fund choices as our variable life insurance products, we also offer
variable annuities that offer funds managed by our subsidiaries. As of December
31, 1999, 82% of our variable annuity assets were managed by John Hancock Funds,
our mutual fund subsidiary, and by Independence Investment Associates, Inc., our
internal institutional equity manager. All our fixed annuity assets are managed
internally.
The relative proportion of our total annuity sales represented by fixed and
variable annuities is generally driven by the relative performance of the equity
and fixed income markets. Fixed annuity deposits represented 49% of total
annuity deposits in 1997, and, as interest rates declined, represented only 43%
of total annuity deposits in 1999. However, as a result of strong equity
markets, deposits of variable annuities grew from 51% of total annuity deposits
in 1997 to 57% of total annuity deposits in 1999. From 1997 through 1999,
variable annuity deposits grew at a compound annual rate of 7% while fixed
annuity deposits fell at a compound annual rate of 5%, as interest rates
generally declined and the equity markets have generally been strong. During
1999, as interest rates have generally risen, fixed annuity deposits have
increased as a proportion of total annuity sales.
In order to enhance our competitiveness in the variable annuity
marketplace, we introduced a new variable
annuity product line, the Revolution suite of variable annuities, in September
of 1999. These products include features that are responsive to the demand in
all of our distribution channels, and will be sold through Signator, independent
brokers, financial planners, broker/dealers and banks. Innovative optional
features of these products, which can be added by consumers by way of riders to
their original contracts, include a number of long-term care protection options.
We believe that these new variable annuity products will present an attractive
offering in the evolving variable annuity marketplace.
The following table present certain information regarding our annuity
reserve activity for the periods indicated:
Annuity Reserve Activity
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
--------- --------- --------
(in millions)
Variable Annuities:
Reserves, beginning of period...................... $ 6,660.4 $ 5,245.0 $4,092.3
Deposits...................................... 847.7 882.7 745.9
Interest credited and investment performance.. 942.1 1,090.9 816.6
Surrenders and benefits....................... (655.1) (467.4) (337.1)
Product charges............................... (111.9) (90.8) (72.7)
--------- --------- --------
Reserves, end of period............................ $ 7,683.2 $ 6,660.4 $5,245.0
========= ========= ========
Fixed Annuities:
Reserves, beginning of period...................... $ 4,591.3 $ 4,501.8 $4,083.0
Premiums and deposits......................... 648.6 360.6 692.6
Interest credited............................. 262.3 245.0 228.1
Surrenders and benefits....................... (547.2) (507.1) (492.0)
Product charges............................... (8.6) (9.0) (9.9)
--------- --------- --------
Reserves, end of period............................ $ 4,946.4 $ 4,591.3 $4,501.8
========= ========= ========
Total Annuities:
Reserves, beginning of period...................... $11,251.7 $ 9,746.8 $8,175.3
Premiums and deposits......................... 1,496.3 1,243.3 1,438.5
Interest credited and investment performance.. 1,204.4 1,335.9 1,044.7
Surrenders and benefits....................... (1,202.3) (974.5) (829.1)
Product charges............................... (120.5) (99.8) (82.6)
--------- --------- --------
Reserves, end of period............................ $12,629.6 $11,251.7 $9,746.8
========= ========= ========
John Hancock Funds
John Hancock Funds, our mutual fund subsidiary, had $32.7 billion in total
assets under management as of December 31, 1999. We employ a team style in the
management of our funds. These teams manage portfolios in accordance with a
variety of specified strategies, which we believe gives us a competitive
advantage over competitors, many of whom deploy only one style across a family
of funds. As of December 31, 1999, our fixed income and equity research staffs
included over 62 portfolio managers and analysts with an average of 15 years of
experience. We are recruiting additional investment professionals to enhance our
capabilities across both fundamental and quantitative analysis and investment
styles. This ongoing commitment to investment research further enables us to
develop new products intended to strengthen our fund offerings, across a broad
array of investment styles.
Through John Hancock Funds, we offer a variety of mutual fund products and
related investment management services:
. Mutual Funds. John Hancock Funds offers a broad array of open-end
mutual funds and closed-end funds to a broad base of consumers across
varying income levels. We also offer our mutual funds as investment
options in variable annuities and variable life insurance products.
Our product offerings cover both domestic and international equity and
fixed-income markets. As of December 31, 1999,
68% of assets under management were invested in equity funds with the
balance in fixed-income and money market funds. As of the same date,
23% of assets under management were invested in financial services
sector funds.
We have three principal sources of income from our mutual fund
business: investment advisory fees; commission income; and Rule 12b-1
fees. We receive investment advisory fees for providing investment
advisory and management services to the funds. Any changes in these
fees must be approved by fund shareholders. Rule 12b-1 fee income
consists of fees charged to cover the costs of distributing fund
shares. We also receive a monthly management fee for shareholder and
accounting services. Mutual fund investment advisory contracts,
including the level of fees charged, are subject to the approval of
the independent board members of the individual funds.
Commission income consists of sales charges, also referred to as
"loads," on our open-end funds. We offer three commission structures.
Class A shares have a front-end load, in which sales charges are
incurred as deposits are received. John Hancock Funds retains a
portion of the front-end loads it receives but pays most of the amount
to the broker/dealer firms that sell the funds' shares. Class B shares
have a back-end or contingent load, in which sales charges are
incurred only if redemptions are made within a time frame specified at
the time of deposit. These charges decline to zero over time,
typically a six year period. Class C shares do not have an upfront
sales charge but they do have a back-end load for redemptions made
within one year and ongoing annual expenses tend to be higher. Class B
shares have been our highest selling class of mutual fund since 1997,
representing 49% of deposits in the year ended December 31, 1999.
Class C shares have been offered on our funds since 1998.
. Retirement Services. We offer mutual funds and services to 401(k) plan
sponsors, primarily small- and mid-size companies, on either a full-
service or on an unbundled basis. A third option is available to
clients who want to choose John Hancock Funds on an investment-only
basis.
We also offer traditional IRA programs and a complete line of
retirement products, including: SIMPLE IRA and SIMPLE 401(k) plans for
companies with no more than 100 eligible employees and no other
qualified plan; Simplified Employee Pensions for companies of any
size, including self-employed persons, partnerships and corporations;
and Roth IRA plans for individuals.
Capturing retirement plan assets is an important focus of John Hancock
Funds, as plan participants' contributions are typically long-term in
nature and therefore represent a stable source of investment advisory
fee income. As of December 31, 1999, our retirement plan assets under
management, including 401(k) and IRA assets under management, were
approximately $5.4 billion. The retirement services we provide help us
to attract and retain assets under management.
Institutional Pools of Capital. Through institutional funds and
private accounts, John Hancock Funds manages assets for public pension
plans, high net-worth individuals, corporate pension plans, pooled
separate accounts, union pension plans, foundations and endowments. As
of December 31, 1999, assets under management included $2.3 billion of
our general account assets and assets managed for certain John Hancock
subsidiaries.
The following table present certain information regarding the assets under
management by John Hancock Funds for the periods indicated:
Asset Flow Summary
For the Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Retail Mutual Funds:
Assets under management, beginning of period (1).... $29,248.7 $26,826.2 $19,244.5
Deposits and reinvestments........................ 4,010.8 6,242.8 6,178.3
Redemptions and withdrawals....................... (6,039.6) (4,412.8) (3,282.1)
Market appreciation (depreciation)................ 1,051.4 1,044.0 5,048.9
Fees.............................................. (428.9) (451.5) (363.4)
--------- --------- ---------
Assets under management, end of period.............. $27,842.4 $29,248.7 $26,826.2
========= ========= =========
Institutional Investment Management:
Assets under management, beginning of period........ $ 5,696.5 $ 4,575.8 $ 4,054.1
Deposits and reinvestments........................ 494.3 2,184.4 811.9
Redemptions and withdrawals....................... (1,561.1) (907.2) (573.3)
Market appreciation (depreciation)................ 240.3 (132.4) 307.3
Fees.............................................. (15.8) (24.1) (24.2)
--------- --------- ---------
Assets under management, end of period.............. $ 4,854.2 $ 5,696.5 $ 4,575.8
========= ========= =========
Total:
Assets under management, beginning of period........ $34,945.2 $31,402.0 $23,298.6
Deposits and reinvestments........................ 4,505.1 8,427.2 6,990.2
Redemptions and withdrawals....................... (7,600.7) (5,320.0) (3,855.4)
Market appreciation (depreciation)................ 1,291.7 911.6 5,356.2
Fees.............................................. (444.7) (475.6) (387.6)
--------- --------- ---------
Assets under management, end of period.............. $32,696.6 $34,945.2 $31,402.0
========= ========= =========
____________
(1) Retail mutual fund assets under management includes $5.4 billion, $5.0
billion and $4.4 billion in retirement plan assets for the years ended
December 31, 1999, 1998 and 1997, respectively.
For the year ended December 31, 1999, John Hancock Funds experienced net
redemptions of $3.1 billion, primarily due to higher redemptions and sharply
declining sales of its regional bank and financial services industries funds.
Performance of these sector funds declined as did the underlying stocks in these
industry categories. Further, industry-wide data indicates a general slowdown in
the mutual fund industry. According to information published by Financial
Research Corporation, net flows of new money into long-term open end mutual
funds have declined by nearly 13% in 1999, from $219.3 billion for the year
December 31, 1998 to $190.8 billion for the year ended December 31, 1999. To
increase our mutual fund assets under management, we have taken steps to boost
sales, including the development of several new fund offerings and refocusing
the sales organization on regional broker/dealers and financial planners.
Operating expenses have also been cut to protect profit margins.
The following table sets forth the performance of our 10 largest retail open
end mutual funds, as measured by net assets as of December 31, 1999. All of
these mutual funds are managed by our affiliates. The historical performance of
these funds is not an indicator of future performance. The table also sets forth
the net assets of all other retail open end funds as a group, our variable
annuity funds, our institutional funds, our closed end funds and our private
accounts and other funds, which include $2.3 billion of our own general account
assets and assets managed for certain John Hancock subsidiaries.
Summary of Fund Performance
As of December 31, 1999
Overall
------------ -------------- -------------- -------------
One-Year Three-Year Five-Year Morningstar
----- ------- ------------ ------------ -------------- -------------- -------------
- --------------------------- Class Type of Net Assets Annual Total Average Annual Average Annual Rating
----- ------- ------------ ------------ -------------- -------------- (Stars)
Fund (1) Fund (in millions) Return Total Return Total Return (2)
- --------------------------- ----- ------- ------------ ------------ -------------- -------------- -------------
10 Largest Open End Funds
Regional Bank A Equity $ 963.2 -15.86% 9.52% 20.34% 2
B 2,871.5 -16.37 8.79 19.53 3
C 7.9 N/A N/A N/A N/A
Financial Industries A Equity 622.8 -1.07 12.66 N/A 2
B 2,044.7 -1.64 N/A N/A N/A
C 10.5 N/A N/A N/A N/A
Sovereign Investors A Equity 1,787.6 5.91 16.50 19.15 3
B 819.5 5.20 15.67 18.27 3
C 10.6 5.17 N/A N/A N/A
Global Technology A Equity 862.3 132.38 54.63 43.55 5
B 1,044.4 130.77 53.55 42.54 5
C 43.6 N/A N/A N/A N/A
Small Cap Growth A Equity 773.2 64.96 28.83 28.34 3
B 1,075.4 63.62 27.87 27.40 4
C 9.4 63.59 N/A N/A N/A
Bond A Income 1,193.8 -1.36 5.16 7.65 3
B 222.2 -2.04 4.43 6.92 3
C 23.9 -2.05 N/A N/A N/A
Large Cap Value A Equity 604.2 37.89 29.77 29.57 4
B 768.3 36.95 28.86 28.64 4
C 12.7 36.94 N/A N/A N/A
Strategic Income A Income 549.0 3.35 7.07 10.23 4
B 617.7 2.63 6.32 9.47 4
C 32.6 2.63 N/A N/A N/A
High Yield Bond A Income 274.7 10.91 5.07 9.22 2
B 787.7 10.08 4.27 8.40 2
C 35.5 10.08 N/A N/A N/A
Core Equity A Equity 393.8 12.37 23.21 25.48 4
B 664.1 11.59 22.37 N/A 3
C 29.9 11.59 N/A N/A N/A
Other Retail Open-End Funds 5,208.5
--------------
Total Retail Open-End Funds 24,365.2
Variable Annuity Funds 376.0
Institutional Funds 830.2
Closed-End Funds 2,147.9
Private Accounts and Other 4,977.3 (3)
--------------
Total $32,696.6 (3)
==============
- ----------------
(1) Represents different classes of shares within each fund, based upon fee and
expense computations.
(2) Morningstar is an independent provider of financial information concerning
mutual fund performance. According to Morningstar, a fund's 10 year return
accounts for 50% of its overall rating score, its five year return accounts
for 30% and its three year return accounts for 20%. If only five years of
history are available, the five year period is weighted 60% and the three
year period is weighted 40%. If only three years of data are available, the
three years are used alone. Funds scoring in the top 10% of their
investment category receive 5 stars; funds scoring in the next 22.5%
receive 4 stars; the next 35% receive 3 stars; those in the next 22.5%
receive 2 stars and the bottom 10% receive 1 star.
(3) Includes $2.3 billion of our general account assets and assets managed for
certain John Hancock subsidiaries.
The following table presents certain information regarding our investment
management revenues, commissions and other fees earned by John Hancock Funds in
the periods indicated.
Investment Management Revenues, Commissions and Other Fees
For the Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Investment advisory fee income................... $201.9 $210.9 $173.7
Commission income................................ 77.7 84.8 71.6
Rule 12b-1 fee income............................ 159.5 163.7 125.3
Shareholder and accounting service fee income.... 814.4 4.2 3.9
------ ------ ------
Total.......................................... $447.2 $463.6 $374.5
====== ====== ======
Distribution
We sell our asset gathering products and services through multiple
distribution channels, both owned and non-owned, including many of the channels
described within the Protection Segment.
Signator. Signator, through its broker/dealer and insurance agency
subsidiaries, is the primary distribution channel for our variable annuities. We
also sell fixed annuities, mutual funds, 401(k) programs and other retirement
programs through these entities.
Broker/Dealers. Broker/dealers, which include regional and national
brokerage firms and financial planners, are the primary distribution channel for
our mutual funds. Broker/dealers also sell our fixed and variable annuities. We
support this distribution channel with an internal network of wholesalers. These
wholesalers meet directly with broker/dealers and financial planners and are
supported by an extensive home office sales staff.
Our recent distribution initiatives in this channel have included
participation in alternative distribution programs, including: (1) wrap programs
which package products under a single asset-based fee; (2) fund supermarkets,
which distribute a menu of funds to consumers through a single brokerage
account; and (3) subadvisory arrangements where we are hired to provide
investment management services by other organizations involved in the packaging
and distribution of mutual fund products.
We also sell our 401(k) programs and other retirement programs through the
broker/dealer channel. We employ a dedicated team of retirement plan wholesalers
to sell products and services to this channel and are seeking to leverage these
wholesalers to sell more retirement business directly to the small to mid-size
401(k) plan
marketplace typically served by intermediaries. We have recently expanded our
internal and external wholesaling capabilities and have expanded our
telemarketing capabilities to better serve this channel.
Pension Consultants. We market investment management services to pension
consultants nationwide who provide advisory services to plan sponsors. Marketing
efforts are supported by dedicated client relationship officers who keep clients
updated on portfolio performance information.
Banks. Starting with sales of fixed annuities, we have expanded our
offerings through banks to include mutual funds and variable annuities. Starting
in 1998, we added additional products to our bank offerings. We believe we are
well positioned to take advantage of the growth opportunity we see for multiple
product offerings, coupled with added value marketing programs and customized
service support for banks.
Essex Corporation. In January 1999, we purchased Essex Corporation, one of
the nation's largest intermediaries between banks and product manufacturers for
annuities. Essex Corporation also serves as an intermediary in the distribution
of mutual funds. Essex Corporation's primary source of income is commissions on
sales of these products.
Direct Distribution. We are currently offering a variable annuity through
the direct distribution channel where customers may call a toll-free number and
obtain an application to purchase the product.
The table below shows Asset Gathering Segment sales by distribution channel
for the periods indicated:
Asset Gathering Segment Sales by Distribution Channel
For the Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- ----------
(in millions)
Broker/Dealers:
Variable annuities..................... $ 126.5 $ 155.8 $ 62.8
Fixed annuities........................ 37.3 29.3 50.8
Mutual funds........................... 2,639.2 4,826.3 4,987.9
Signator:
Variable annuities..................... 685.1 709.7 678.4
Fixed annuities........................ 71.2 75.8 120.1
Mutual funds........................... 794.9 902.5 753.9
Pension Consultants:
Mutual funds......................... 317.8 885.9 1,562.5
Banks:
Variable annuities..................... 25.7 14.2 3.3
Fixed annuities........................ 54.4 255.1 490.7
Mutual funds........................... 127.0 183.0 138.0
Essex (included with bank channel prior to 1999):
Variable annuities..................... 6.9 - -
Fixed annuities........................ 422.0 - -
Mutual funds........................... 20.7 - -
Direct Distribution 3.5 3.0 1.4
Other (1) 63.7 17.6 52.4
-------- -------- --------
Total $5,395.9 $8,058.2 $8,902.2
======== ======== ========
(1) Other includes single premium immediate annuities, including lottery-
related payout contracts, and supplemental contracts involving life
contingencies.
Reserves
We establish and report liabilities for future policy benefits on our balance
sheet to meet the obligations under our annuity contracts. Our liability for
variable annuity contracts and deferred fixed annuity contracts is equal to the
cumulative account balances. Cumulative account balances include deposits plus
credited interest or investment earnings less expense and mortality fees, as
applicable, and withdrawals. Future policy benefits on our immediate fixed
annuity contracts are calculated based on a set of actuarial assumptions that we
establish and maintain throughout the lives of the contracts.
Competition
We face substantial competition in all aspects of our asset gathering
business. The annuity business is highly competitive. We compete with a large
number of insurance companies, investment management firms, mutual fund
companies, banks and others in the sale of annuities. We compete for mutual fund
business with hundreds of fund companies. Many of our competitors in the mutual
fund industry are larger, have been established for a longer period of time,
offer less expensive products, have deeper penetration in key distribution
channels and have more resources than us.
Competition in the asset gathering business is based on several factors. These
include investment performance and the ability to successfully penetrate
distribution channels, to offer effective service to intermediaries and
consumers, to develop products to meet the changing needs of various consumer
segments, to charge competitive fees and to control expenses.
We believe the Asset Gathering Segment is well positioned to increase assets
under management in the face of this competition. Our competitive strengths
include our ability to:
. deliver strong investment performance, and enhance this performance by
expanding the depth and breadth of fundamental research, portfolio
management teams, and investment professionals;
. develop new products and expand into new markets; and
. provide excellent service to investors and distributors.
Distribution and Service Organizations
Within the Asset Gathering Segment, we also include our distribution company,
Signator, and our servicing subsidiary, John Hancock Signature Services.
Signator is the holding company for Signator Investors, Inc. and several
insurance agencies. Signator Investors, Inc. representatives are able to offer
securities and financial advisory products and services including general
securities trading, wrap account products and other financial instruments to
their clients, including not only John Hancock mutual funds and variable
products, but also the products and services of other companies.
John Hancock Signature Services combines and coordinates customer service
functions for life insurance, annuity and mutual fund customers. The services
provided by John Hancock Signature Services, Inc. include new business
processing, contract change services, claims processing, premium collection and
processing, billing, and preparation of annual or quarterly statements. Through
this subsidiary, we seek to provide an integrated and comprehensive customer
service function on a cost effective basis. This system permits a customer to
have a single point of contact for most servicing needs.
Banking Products and Services
First Signature Bank & Trust Company is a limited-service bank, which accepts
demand deposits but does not make commercial loans. It provides consumer banking
products and services to our customers. First Signature Bank & Trust Company had
$225.4 million in assets as of December 31, 1999.
Guaranteed and Structured Financial Products Segment
Overview
Through our Guaranteed and Structured Financial Products Segment, we offer a
variety of products to qualified defined benefit and defined contribution
retirement plans, as well as to other institutional buyers. A ''defined benefit
plan'' is a retirement plan in which benefit payment obligations are specified
by the plan document and where the contribution levels must adjust as necessary
to fund these benefit obligations. In contrast to this, a ''defined contribution
plan'' is a retirement plan in which the rules for making contributions to the
plan are determined pursuant to a plan document and where the ultimate benefit
levels will adjust to reflect actual contributions and the investment earnings
thereon.
Our products include non-guaranteed, partially guaranteed and fully guaranteed
general account and separate account investment options. We distribute these
products through home office and regional sales representatives either directly
to institutional buyers or indirectly through financial intermediaries,
consultants and brokers.
The Guaranteed and Structured Financial Products Segment contributed 28.7% and
25.6% of consolidated operating revenues and 33.0% and 29.1% of consolidated
after-tax operating income in the years ended December 31, 1999 and 1998,
respectively.
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------- ------------ -----------
(in millions)
Operating Revenues: (1)
Spread-based products..................... $ 1,829.5 $ 1,353.7 $ 1,433.6
Fee-based products........................ 364.5 377.5 380.8
--------- --------- ---------
Total................................... $ 2,194.0 $ 1,731.2 $ 1,814.4
========= ========= =========
Segment After-Tax Operating Income: (1)
Spread-based products..................... $ 164.7 $ 117.5 $ 103.0
Fee-based products........................ 37.7 28.2 36.9
--------- --------- ---------
Total................................... $ 202.4 $ 145.7 $ 139.9
========= ========= =========
Assets:
Spread-based products..................... $17,957.7 $17,311.6 $16,100.4
Fee-based products........................ 12,273.8 12,003.6 12,009.6
--------- --------- ---------
Total................................... $30,231.5 $29,315.2 $28,110.0
========= ========= =========
Assets Under Management:
Spread-based products..................... $17,502.2 $16,808.6 $15,653.5
Fee-based products........................ 11,862.8 11,738.0 11,759.6
--------- --------- ---------
Total................................... $29,365.0 $28,546.6 $27,413.1
========= ========= =========
- ----------------
(1) Excluded from the operating segment financial results are net realized
investment gains and losses, except those incurred for investments in the
separate account supporting our short-term funding agreements, and non-
recurring or unusual items. See Note 12 to our Audited Consolidated
Financial Statements for a reconciliation of amounts reported for operating
segments to amounts reported in those financial statements.
Products and Markets
The Guaranteed and Structured Financial Products Segment offers spread-based
products and fee-based products.
Spread-Based Products. Our spread-based products provide a guaranteed rate
of return to the customer. We derive earnings on these products primarily from
the difference between the investment returns on the supporting assets and the
guaranteed returns provided to customers. We refer to this difference as the
"spread." Our spread-based products include both fund-type products and single
premium annuities:
. Fund-type products. Our fund-type products consist of the following:
General account GICs. GICs are annuity contracts that pay a guaranteed
rate of return. GICs are primarily marketed to sponsors of tax-qualified
retirement plans such as 401(k) plans. The guaranteed rate of return on
GICs can be a fixed rate or a floating rate based on an external market
index.
Funding agreements. Funding agreements are investment contracts that pay a
guaranteed rate of return. However, funding agreements generally are
issued to corporations, mutual funds and other institutional investors
and, unlike GICs, are not typically used to fund retirement plans. The
guaranteed rate of return on funding agreements can be a fixed rate or a
floating rate based on an external market index.
. Single premium annuities. Single premium annuities are immediate or
deferred annuities which commence payment at a specified time, typically
retirement. The two most common types of annuities are the straight life
annuity, which makes payments for the life of a retired annuitant, and the
joint and survivor annuity, which continues to make payments to a spouse
after the death of the annuitant.
The following table illustrates for the periods indicated, statutory premiums
and deposits, future policy benefits/account balances and assets under
management for our spread-based products. Statutory premiums and deposits differ
from GAAP premiums because GAAP requires that contributions to general account
GICs and funding agreements be accounted for using deposit accounting. Deposit
accounting excludes from revenue the contributions and deposits received on
these products and generally shows only fees and investment income earned from
these products as revenues.
Spread-Based Products Selected Financial Data
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ---------- -----------
(in millions)
Statutory Premiums and Deposits:
Fund-type products
General account GICs...................... $ 2,442.2 $ 2,578.9 $ 2,332.7
Funding agreements........................ 2,775.2 2,416.1 311.0
Single premium annuities.................... 451.8 111.8 193.7
--------- --------- ---------
Total..................................... $ 5,669.2 $ 5,106.8 $ 2,837.4
========= ========= =========
Future Policy Benefits/Account Balances:
Fund-type products
General account GICs...................... $ 9,058.2 $ 9,743.3 $10,976.4
Funding agreements........................ 4,051.1 2,929.5 531.7
Single premium annuities.................... 3,504.1 3,182.3 3,131.0
--------- --------- ---------
Total..................................... $16,613.4 $15,855.1 $14,639.1
========= ========= =========
Assets Under Management:
Fund-type products
General account GICs...................... $ 9,542.8 $10,329.2 $11,736.9
Funding agreements........................ 4,267.9 3,105.7 568.6
Single premium annuities.................... 3,691.5 3,373.7 3,348.0
--------- --------- ---------
Total..................................... $17,502.2 $16,808.6 $15,653.5
========= ========= =========
Segment After-Tax Operating Income:
Fund-type products.......................... $ 131.5 $ 83.7 $ 78.9
Single premium annuities.................... 33.2 33.8 24.1
--------- --------- ---------
Total..................................... $ 164.7 $ 117.5 $ 103.0
========= ========= =========
The Company intends to limit sales of GICs and Funding Agreements in calendar
year 2000 so that total assets under management for those products are less than
30% of general account assets and 20% to 25% of consolidated operating income
after taxes.
Fee-Based Products. Our fee-based products generally pass the investment
results of invested assets through to the contractholder with no, or minimal,
guarantees. We derive earnings on these products primarily from expense, risk
and profit charges which are generally assessed on the basis of assets under
management. Fee-based businesses provide relatively stable revenues and have
lower capital requirements than do our spread-based businesses. Our fee-based
products include:
. General account participating pension fund-type products and conversion
annuity contracts. These products are funding vehicles for group annuities
that pass investment results through to the contractholder, after expense,
risk and profit charges. Annuity guarantees of these products are
supported by asset adequacy requirements under which assets must be
maintained at levels at least 5% above the
annuity reserve. If the level of assets held under the contract falls
below this threshold we may withdraw an amount equal to the annuity
reserve and apply the assets to purchase a fully guaranteed annuity.
. Separate account GICs. These products pass the investment results of a
separate account through to the contractholder and contain only minimal
guarantees. Contractholders may select from among flexible investment
options provided by our various investment managers. Investment options
may include a guaranteed tranche of a collateralized bond obligation
offering originated by our Investment Management Segment. The separate
account GIC business leverages the strong marketing relationships
developed in our general account GIC business.
. Guaranteed separate account annuities. These products are funding vehicles
for group annuities which offer customers an insured pension-funding
program in conjunction with a broad range of investment options, including
both equity and fixed-income investment classes. The risk associated with
providing these fully guaranteed annuities is mitigated by excess
collateral maintenance requirements, which vary depending on the
investment option selected.
. Separate investment accounts. These are non-guaranteed group annuity
contracts under which assets are held in a separate account. We typically
use affiliated investment advisors to manage these assets. We may also use
non-affiliated investment managers if the customer so requires. Because
these products do not provide guarantees, most new sales of separate
investment accounts are reported in the Investment Management Segment.
Existing agreements, however, continue to be reported in and serviced by
the Guaranteed and Structured Financial Products Segment because of
customer relationships.
The following table illustrates, for the periods indicated, statutory premiums
and deposits, future policy benefits/balances and assets under management for
our fee-based products. Statutory premiums and deposits differ from GAAP
premiums because GAAP requires that premiums on general account participating
pension products, separate account GICs, separate account annuities and separate
investment accounts be accounted for using deposit accounting. Deposit
accounting excludes from revenue the contributions and deposits received on
these products and generally shows only the fees and investment income earned
from the products as revenues.
Fee-Based Products Selected Financial Data
As of or for the Year Ended December 31,
-------------------------------------------
1999 1998 1997
-------------- ------------- ------------
(in millions)
Statutory Premiums and Deposits:
General account participating pension fund-type products
and conversion annuity contracts........................... $ 527.9 $ 566.7 $ 703.8
Separate account GICs....................................... 615.7 459.9 456.0
Guaranteed separate account annuities....................... (60.4) (27.9) (70.4)
Separate investment accounts................................ 333.1 173.5 265.4
--------- --------- ---------
Total..................................................... $ 1,416.3 $ 1,172.2 $ 1,354.8
========= ========= =========
Future Policy Benefits/Account Balances:
General account participating pension fund-type products
and conversion annuity contracts........................... $ 3,526.6 $ 3,167.9 $ 3,338.2
Separate account GICs....................................... 3,584.2 3,333.6 3,305.0
Guaranteed separate account annuities....................... 1,975.5 2,118.9 1,944.2
Separate investment accounts................................ 2,577.3 2,463.1 2,285.1
--------- --------- ---------
Total..................................................... $11,663.6 $11,083.5 $10,872.5
========= ========= =========
Assets Under Management:
General account participating pension fund-type products
and conversion annuity contracts........................... $ 3,357.1 $ 3,466.6 $ 3,651.8
Separate account GICs....................................... 3,891.0 3,644.5 3,799.7
Guaranteed separate account annuities....................... 1,977.5 2,113.4 1,968.6
Separate investment accounts................................ 2,637.2 2,513.5 2,339.5
--------- --------- ---------
Total..................................................... $11,862.8 $11,738.0 $11,759.6
========= ========= =========
Markets. We offer our spread-based products and our fee-based products in a
variety of markets. We emphasize a comprehensive understanding of each market in
which we participate, and strive to create and maintain strong, consultative
relationships with key buyers and intermediaries. By working closely with our
customers to develop customized investment programs, we have been able to build
a leading market share in several important markets, including general account
GICs, separate account GICs, funding agreements and single premium annuities.
The following table provides a summary of our products and the markets in which
they are sold.
- ---------------------------------------------------------------------------------------------
Markets
- ---------------------------------------------------------------------------------------------
Products Qualified Defined Qualified and Non-
Contribution Qualified Defined Non-Qualified
Plans Benefit Plans Institutional Market
- ---------------------------------------------------------------------------------------------
Spread-based
- ---------------------------------------------------------------------------------------------
General account GICs X
- ---------------------------------------------------------------------------------------------
Single premium annuities X X
- ---------------------------------------------------------------------------------------------
Funding agreements X
- ---------------------------------------------------------------------------------------------
Fee-based
- ---------------------------------------------------------------------------------------------
Separate account GICs X
- ---------------------------------------------------------------------------------------------
Guaranteed separate account
annuities X
- ---------------------------------------------------------------------------------------------
General account participating
pension fund-type
products and conversion
annuity products X
- ---------------------------------------------------------------------------------------------
Separate investment accounts X
- ---------------------------------------------------------------------------------------------
Industry sales of single premium annuities are driven primarily by pension
plan terminations, which have been flat or have declined in recent years. Our
sales of single premium annuities will generally follow this trend in the
absence of a disproportionately large sale. In addition, due to declining demand
for general account GICs in the 401(k) plan market, deposits on our general
account GICs have remained relatively constant over the past three years.
In response to these trends, we have created new products for the non-
qualified institutional marketplace. In particular, beginning in 1998 we
significantly expanded our marketing and product development efforts for funding
agreements. We are now selling our products and services to defined contribution
plans, banks, insurance companies, mutual funds, and other investors in the U.S.
and have recently entered the European and Asian markets.
We intend to continue to capitalize on our risk-management and investment
skills to attract funds with new products from new markets, while continuing to
pursue opportunities in those parts of the U.S. pension market that are still
expanding.
. Qualified Defined Contribution Plans. We offer spread-based as well as
fee-based products to sponsors or investment managers of qualified
defined contribution plans. Our marketing efforts are directed
principally toward mid- to large-sized plans with an average contract
size of $7 million to $10 million.
The general account GIC has been the predominant product issued in
this market, primarily for use as the asset underlying the fixed
income investment option of 401(k) plans. Both general account and
separate account GICs sold in this market provide a feature which
permits individual plan participants to redeem or transfer funds in
their account at book value during the term of the contract. In the
case of separate account GICs, gains and losses arising out of these
book value redemptions are absorbed by the plan by means of
prospective changes in the crediting rate, which is the rate at which
the GIC fund balances increase in value under the terms of the GIC.
. Qualified and Non-Qualified Defined Benefit Plans. New sales to this
market are primarily limited to single premium annuities and separate
account annuities. There is little demand currently for new general
account participating pension products, as demand for these
arrangements has largely been replaced by demand for unbundled
services, such as non-insured arrangements. However, because the
significant
majority of our existing general account participating pension
products business does not contain provisions allowing for termination
of the agreement by the customer prior to the termination date
specified in the agreement, this business provides a slowly decreasing
but predictable source of earnings.
The primary drivers of the single premium annuity market are plan
terminations and plan spin-offs. In such instances, the plan sponsor
transfers all its obligations under the plan to an insurer by paying a
lump sum premium amount. Another type of single premium annuity,
referred to as a terminal funding annuity, is sold to plan sponsors
who wish to transfer the payment obligations with respect to
individual retirees to an insurer. Because the Department of Labor has
mandated that annuities be purchased only from the "safest
available" insurer, plan sponsors restrict their purchases of single
premium and terminal funding annuities almost exclusively to insurance
companies with superior or excellent financial quality ratings. We
believe that our strong financial ratings position us well to compete
in this market.
Separate account annuities are purchased by plan sponsors who wish to
provide guaranteed retirement benefits for their retirees and control
their asset allocation mix. The advantage of an insurer's guarantee
for a plan sponsor is that the obligation to the retiree is removed
from the employer's balance sheet, and the employer is no longer
required to pay Pension Benefit Guaranty Corporation premiums in
respect of such retiree.
. Non-Qualified Institutional Market. We issue funding agreements to
non-qualified institutional investors both in the domestic and the
international marketplace. We have broadened our marketing and product
development efforts in this market in response to declining demand for
traditional general account GICs in the 401(k) plan market.
International purchasers of funding agreements include pension funds,
banks, mutual funds, and insurance companies located in Europe and
Asia. For international funding agreements, interest rate guarantees
are generally fixed and the liabilities are denominated predominantly
in foreign currencies. These funding agreements (accompanied by a
currency swap where appropriate) typically are issued to a non-
affiliated conduit which issues publicly-traded and privately placed
medium-term notes. According to Capital NET Limited's MTNWare Volume
Table, there were nearly $763 billion of medium term notes issued in
Europe in 1999. None of the international funding agreements issued by
us gives the contractholder the right to terminate the funding
agreements prior to the contractually stated maturity dates.
As of December 31, 1999, our liabilities included $4.1 billion of
funding agreements, of which $3.6 billion were issued internationally.
None of our funding agreement liabilities have a termination provision
of less than one year, nor do we currently sell funding agreements
with less than a one year termination provision. We believe that
expansion into the domestic and international long term funding
agreement markets presents good prospects for future growth. Moreover,
diversification into these markets permits us to seek out the lowest
cost of funds among diverse markets.
Distribution
We distribute our guaranteed and structured financial products through a
variety of channels. General and separate account GICs are sold through our
regional representatives to plan sponsors, or to GIC managers who represent plan
sponsors. Funding agreements marketed in the United States are sold either
directly or through brokers, and in the international market they are sold
through investment banks in the form of medium-term notes. Annuities are sold
through pension consultants who represent defined benefit plan sponsors or
through brokers who receive a commission for sales of our products.
We maintain an experienced sales staff that develops and maintains
relationships with target customers, consultants, and other financial
intermediaries. We believe that our consistent market presence over the past two
decades has created strong and valuable relationships with a large segment of
the customer base.
Spread-Based Products Risk Management
Because of the significant guarantees provided as part of our spread-based
product offerings, risk management is particularly important in this line of
business. To facilitate risk management, we segregate and manage the assets
supporting our spread-based products separately from the rest of our general
account. Our risk management strategy is based on:
. Managing interest rate exposure by closely matching the relative
sensitivity of asset and liability values to interest rate changes,
i.e. controlling the "duration mismatch" of assets and liabilities.
We believe that our target duration mismatch of zero years, with a
maximum tolerance of plus or minus .05 years, is considerably narrower
than the standard in the industry.
. Using sophisticated systems and processes to project cash flows for
each asset and each liability and to measure with precision the
sensitivity of assets and liabilities to interest rate changes. This
measurement process provides risk managers with a more complete
picture of our asset/liability structure, the appropriateness of
pricing and the overall soundness of the management of the account
than do conventional accounting techniques alone.
. Writing contracts that typically have a predictable maturity structure
and do not have premature surrender or redemption provisions. This
predictability allows us to invest a significant proportion of our
assets in relatively illiquid asset classes, primarily private
placement bonds and commercial mortgages, which have traditionally
provided relatively attractive yields.
. Monitoring all contribution and withdrawal activity in each contract
to anticipate deviations from expected cash flows. Any such deviations
form the basis for new cash flow projections and may trigger a change
in portfolio hedging requirements.
. Establishing working groups with representatives from our various
business units, to facilitate interaction among portfolio management,
sales management, risk management, financial management and the
pricing staff. We believe frequent interaction and effective
communication across the various business units have been key
components of our successful risk management strategy.
Underwriting
Spread-based products, particularly general account GICs and single premium
annuities, are the products in this segment for which underwriting is most
significant.
General Account GICs. In developing pricing proposals for new contracts,
our underwriters estimate both base-line cash flows and also likely variance
from the base line due to plan participants reallocating assets from the
"stable value" option of their defined contribution plan. Our underwriters
utilize customized pricing models that generate plan-specific risk charges for
each customer's book value payment provision. If these pricing models project
the risk of losses exceeding customary thresholds, instead of rejecting the
business, our underwriters can modify the proposal by suggesting the use of risk
reduction techniques designed to shift some of the risk of redemptions back to
the plan or to a third party.
Single Premium Annuities. We underwrite immediate annuities using recent
mortality experience and an assumption of continued improvement in annuitant
longevity. We underwrite deferred annuities by analyzing not only mortality risk
but also the expected time to retirement.
Reserves
We establish and report liabilities for contractholders' funds and future
policy benefits to meet the obligations on our policies and contracts. Our
liability for general account GICs, funding agreements, and fee-based products
is equal to the cumulative account balances for these products. Cumulative
account balances include deposits plus credited interest or investment earnings
less expense charges and withdrawals. Future policy benefits for our single
premium annuity contracts are calculated based on a set of actuarial assumptions
that we establish and maintain throughout the lives of the contracts. Our
assumptions include investment yields, mortality and the expected time to
retirement.
Competition
Our Guaranteed and Structured Financial Products Segment operates in a
variety of highly competitive institutional markets. Although a large number of
companies offer these products, the market is concentrated. Through the first
three quarters of 1999, five insurers, including John Hancock, issued
approximately 60% of total GICs and funding agreements issued by U.S. insurance
companies reporting to LIMRA; and through the first three quarters of 1999, five
insurers, including John Hancock, issued more than 75% of total single premium
annuities. Our competitors include a variety of well-recognized insurance
companies, domestic and foreign banks and other institutional investment
advisors, many of whom are larger and have greater resources than us. The recent
entry of several new competitors, particularly foreign banks, has placed
pressure on the pricing of some products. We have, as a result, pursued a
strategy of concentrating on higher value-added products and positioning our
offerings over a wider variety of institutional markets.
We believe that we are able to compete successfully in our markets as a
result of our strong financial ratings, investment management expertise,
national distribution, flexible product design and competitive pricing.
Competition in this market is restricted almost exclusively to insurance
companies with superior or excellent financial ratings. The requirement for
strong financial ratings reduces pressure on margins by limiting the number of
potential competitors and by lowering our cost of funds.
Investment Management Segment
Overview
Through our Investment Management Segment, we provide investment management
services to domestic and international institutions. While this segment includes
primarily assets managed for third-party institutional clients, the investment
professionals providing these services also manage assets underlying our general
account and separate account products, as well as variable life and annuity and
mutual fund products. The Investment Management Segment attracts funds from
corporate and public pension plan sponsors, banks, insurance companies, mutual
funds, and other domestic and international institutions.
Our total assets under management as of December 31, 1999 and December 31,
1998 were $127.3 billion and $124.4 billion, respectively, of which the
Investment Management Segment represented 31.6% and 31.9%, respectively. The
Investment Management Segment contributed $189.9 million of consolidated
operating revenues and $37.3 million of consolidated after-tax operating income
in the year ended December 31, 1999.
As of or for the Year Ended December 31,
----------------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Operating revenues (1)...................... $ 189.9 $ 143.9 $ 118.5
Segment after-tax operating income (1)...... 37.3 15.4 17.2
Assets...................................... 3,531.4 3,439.6 3,286.8
Assets under management (2)................. 40,211.7 39,637.7 34,361.5
_____________
(1) Excluded from the operating segment financial results are net realized
investment gains and losses, except for gains or losses from mortgage
securitization, and non-recurring or unusual items. See Note 12 to our
Audited Consolidated Financial Statements for a reconciliation of amounts
reported for operating segments to amounts reported in those financial
statements.
(2) Includes $164.5 million, $88.1 million and $66.0 million of general account
cash and invested assets as of December 31, 1999, 1998 and 1997,
respectively.
Products and Markets
The Investment Management Segment is primarily a fee-based investment
advisory business in which we do not offer guarantees to our customers. We
provide a variety of investment structures, such as investment advisory client
portfolios, individually managed and pooled separate accounts, securitized
portfolios, and registered investment company funds. We have recently added bond
and mortgage securitizations, and mutual fund management capabilities.
Our investment management expertise covers a wide range of private and
publicly-traded asset classes and is based on fundamental research and
disciplined, quantitatively-based analysis and asset-liability management. Our
private fixed income, equity, real estate and alternative asset operations have
strong credit analysis capabilities and deal origination expertise. These
operations enjoy broad networks of relationships with intermediaries giving them
early access to new investment opportunities.
The capabilities of the Investment Management Segment include:
Public Fixed Income and Equity Investments. Through our Independence
Investment Associates and its subsidiaries we provide active stock and bond
management to pension funds, endowments, and other institutions. We provide
core, value, growth, medium-cap, balanced and market neutral investment
strategies. We also offer international stock and bond management.
In addition, through other subsidiaries, we offer active, quantitative
investment management services in the high quality fixed income markets, with a
special emphasis on structuring and managing portfolios of mortgage-backed
securities and Treasury securities combined, when appropriate, with various
derivative strategies.
Private Fixed Income, Equity and Alternative Asset Class Investments. We
manage funds for external institutional clients investing in private fixed-
income and equity securities and alternative asset classes. Our strength is in
private placement corporate securities, structured and innovative transactions
and niche investment opportunities. Our recently completed offerings include a
mezzanine fund investing primarily in subordinated debt with equity
participation features and a collateralized bond obligation fund, which have
been marketed domestically and overseas to banks, insurance companies, brokers
and other clients outside of the pension market.
We are the leading manager of equity timberland for large tax-exempt
institutional investors, and are among the largest managers of equity farmland
investments. In addition, we sponsor affordable housing investments that qualify
for Federal tax credits. We have recently entered the business of commercial
mortgage securitization. We now originate all mortgages in a standardized form
so that they can be allocated to our own accounts, third parties or securitized
as demand dictates. We also invest in independent power and renewable energy
project investments on behalf of institutional clients.
The following tables present certain information regarding the assets under
management by the Investment Management Segment for the periods indicated:
Total Assets Under Management By Asset Class
As of December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Assets Under Management: (1) (2)
Domestic equity and balanced............................ $26,940.8 $25,699.0 $21,993.9
International equity and balanced....................... 2,242.9 2,340.0 1,927.1
Domestic fixed income................................... 6,043.0 7,265.5 6,760.1
International fixed income.............................. 836.6 286.6 166.9
Independent power generation............................ 519.2 375.5 375.5
Timber.................................................. 3,086.6 3,255.0 2,819.0
Farmland................................................ 378.1 328.0 253.0
--------- --------- ---------
Total................................................. $40,047.2 $39,549.6 $34,295.5
========= ========= =========
Asset Flow Summary
For the Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Assets Under Management:
Assets under management, beginning of period (1) (3).... $39,549.6 $34,295.5 $32,830.0
Sales and reinvestments................................. 5,258.6 3,738.9 1,309.0
Redemptions and withdrawals............................. (7,984.8) (4,916.8) (6,218.0)
Market appreciation..................................... 3,223.8 6,432.0 6,374.5
--------- --------- ---------
Assets under management, end of period (1) (2).......... $40,047.2 $39,549.6 $34,295.5
========= ========= =========
- ----------------
(1) Includes $1,060.8 million, $1,563.0 million and $1,411.2 million of assets
managed by subsidiaries for our general account for the year ended December
31, 1999, 1998 and 1997, respectively.
(2) Does not include $164.5 million, $88.1 million and $66.0 million of general
account cash and invested assets as of December 31, 1999, 1998 and 1997,
respectively.
(3) Does not include $88.1 million, $66.0 million and $54.5 million of general
account cash and invested assets as of January 1, 1999, 1998, and 1997,
respectively.
Distribution
We sell our investment management products and services through multiple
distribution channels. Marketing to pension funds, endowments, foundations and
other institutional clients is conducted primarily by our experienced sales
professionals and dedicated marketing and client relationship staff. Products
are also offered through independent marketing specialists, consulting firms,
and investment banking firms.
Competition
The institutional asset management industry is highly competitive, with
over 23,000 registered investment advisers. Consolidation activity over the past
three years has increased the concentration of competitors within certain asset
classes, particularly in the timber and independent power generation asset
classes. We compete with other investment management firms, insurance companies,
banks and mutual fund companies, many of whom are larger and have greater
resources than us.
We believe the key bases for competition are investment performance and
customer service. Our competitive strategy focuses on attracting assets through
superior performance. Consistent with this strategy, we continually evaluate
opportunities to develop internally, acquire, or divest investment management
units and strive to improve our investment management products and services. In
addition, we believe our leading role in non-traditional asset classes helps to
create a distinct and competitively advantageous profile in the institutional
asset management marketplace.
Corporate and Other Segment
Overview
Our Corporate and Other Segment consists primarily of our international
insurance operations, corporate operations, and non-core businesses that are
either in the process of winding down (i.e., are in "run-off") or have been
divested. This segment contributed approximately 17.1% of consolidated operating
revenues and 11.1% of consolidated after-tax operating income in the year ended
December 31, 1999.
The Corporate and Other Segment has achieved the following financial
results for the periods indicated:
For the Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Operating revenues: (1)
International insurance operations...... $ 972.8 $ 744.9 $ 728.3
Corporate operations.................... 289.0 292.5 264.1
Non-core businesses..................... 48.6 74.2 330.8
--------- --------- ---------
Total.............................. $ 1,310.4 $ 1,111.6 $ 1,323.2
========= ========= =========
Segment after-tax operating income: (1)
International insurance operations...... $ 26.0 $ 25.3 $ 8.3
Corporate operations.................... 31.2 8.7 (32.0)
Non-core businesses..................... 10.6 22.3 63.1
--------- --------- ---------
Total.............................. $ 67.8 $ 56.3 $ 39.4
========= ========= =========
Assets:
International insurance operations...... $ 8,810.8 $ 5,222.0 $ 4,828.1
Corporate operations.................... 4,942.3 3,494.0 3,745.7
Non-core businesses..................... 1,212.2 1,894.8 2,013.4
Intra-segment eliminations.............. (3,948.1) (4,818.3) (4,810.7)
--------- --------- ---------
Total.............................. $11,107.2 $ 5,792.5 $ 5,776.5
========= ========= =========
(1) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 12 to our
Audited Consolidated Financial Statements for a reconciliation of amounts
reported for operating segments to amounts reported in those financial
statements.
International Insurance Operations
Our international insurance operations include The Maritime Life Assurance
Company, the 9th largest Canadian life insurance company based on total domestic
assets under management at year-end 1998. This company distributes a full range
of individual life and health insurance products, investment products and group
life and health products through independent agencies, investment brokerage
firms, and employee benefit brokers and consultants. On October 1, 1999, we
completed the purchase of Aetna Canada Holdings Limited, which will be
integrated into the operations of The Maritime Life Assurance Company. The
acquisition essentially doubles our Canadian business in terms of revenues and
customers, making our Canadian insurance operations the 8th largest Canadian
life insurer based on combined assets under management, sixth based on domestic
inforce premiums and third based on domestic new sales. We also offer individual
life and group insurance and pension products through local affiliates doing
business in five Southeast Asian countries. Working with an international
network of over 40 insurers, we also coordinate and reinsure group life, health,
disability and pension coverage for foreign and globally mobile employees of
multinational companies in more than 45 countries.
In 1999, we were authorized to commence forming a joint venture life
insurance company in China which
promises to provide us an early foothold in this emerging economy with its vast
population. The joint venture company's license will initially be restricted to
operations in the city of Shanghai. While the joint venture arrangements remain
subject to further regulatory review, we currently anticipate commencing
operations in early 2001.
Corporate Operations
Corporate operations consist principally of (1) investment and treasury
activities, and assets, investment income, interest expense and other expenses
not specifically allocated to segments and (2) group life insurance operations.
Our group life insurance business generated $226.0 million and $234.5 million in
premium in the year ended December 31, 1999, and 1998, respectively.
Non-Core Businesses
We have certain non-core businesses that have been divested or put in run-
off, reflecting a strategic decision to focus on our retail and institutional
businesses. Non-core businesses consist primarily of run-off property and
casualty insurance companies that were sold in 1999, a portion of our group life
and accident and health business and related subsidiaries that were sold in
1997, and other small subsidiaries in various stages of running-off their
operations.
In 1992, we sold our individual disability income insurance block of
business to Provident Life and Accident Insurance Company through a reinsurance
arrangement. The reinsurance recoverable from Provident Life and Accident
Insurance Company reported on our GAAP financial statements was $225.9 million
as of December 31, 1999.
General Account Investments
General Account and Separate Accounts
Our investments include assets held in our general account and assets held
in numerous separate accounts. We manage our general account assets in
investment segments that support specific classes of product liabilities. These
investment segments permit us to implement investment policies that both support
the financial characteristics of the underlying liabilities, and also provide
returns on our invested capital. The investment segments also enable us to gauge
the performance and profitability of our various businesses.
Separate account assets are managed in accordance with specific investment
contracts. We generally do not bear any investment risk on assets held in
separate accounts, but rather receive investment management fees based on levels
of assets under management, measured at fair value, as well as mortality fees,
policy administration fees and surrender charges. Generally, assets held in
separate accounts are not available to satisfy general account obligations.
For a further description of our investments, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - General Account
Investments."
Ratings
Insurance companies are rated by rating agencies based upon factors
relevant to policyholders. Ratings provide both industry participants and
insurance consumers meaningful information on specific insurance companies.
Higher ratings generally indicate financial stability and a strong ability to
pay claims. John Hancock Life Insurance
Company is rated A++ (Superior) by A.M. Best, AAA (Highest) by Duff and Phelps,
AA+ (second highest rating) by S&P, and Aa2 (third highest rating) by Moody's.
On November 12, 1999, Moody's reaffirmed our Aa2 rating but revised our ratings
outlook to negative. Moody's stated that the revision in ratings outlook was
based on Moody's concerns about our exposure to potential underwriting losses
arising from workers' compensation reinsurance programs arranged by Unicover
Managers, Inc., business changes that could result from the demutualization and
our sizable guaranteed and structured products business. The revision in ratings
outlook does not constitute a ratings "downgrade," nor has Moody's placed us
on their "Watchlist" for possible downgrade.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F," and some companies are not rated. A.M. Best publications indicate that
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have achieved superior overall performance when compared to the norms of
the life insurance industry and generally have demonstrated a strong ability to
meet their policyholder and other contractual obligations.
Moody's rating for insurance companies currently range from "Aaa" to
"C." S&P ratings for insurance companies range from "AAA" to "CC." In
evaluating a company's financial and operating performance, Moody's and S&P
review its profitability, leverage and liquidity as well as its book of
business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its policy reserves and
the experience and competency of its management.
We believe that our strong ratings are an important factor in marketing our
products to our distributors and customers, since ratings information is broadly
disseminated and generally used throughout the industry. Our ratings reflect
each rating agency's opinion of our financial strength, operating performance
and ability to meet our obligations to policyholders, and are not evaluations
directed toward the protection of investors. Such ratings are neither a rating
of securities nor a recommendation to buy, hold or sell any security, including
our common stock.
REGULATION
General
Our business is subject to extensive regulation at both the state and
Federal level, including regulation under state insurance and Federal and state
securities laws.
State Insurance Regulation
Our insurance subsidiaries are subject to supervision and regulation by the
insurance authorities in each jurisdiction in which they transact business.
Currently, we are licensed to transact business in all fifty states, the
District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern
Mariana Islands, and 13 Canadian provinces and territories, and therefore are
subject to regulation in all these jurisdictions. Most states have laws and
regulations governing such issues as: what lines of business a company may
engage in; underwriting practices, including a company's ability to request
results of applicants' genetic tests; what premium rates may be charged in
various lines of business; what products a company may sell; mandating certain
insurance benefits and policy forms; minimum rates for accumulation of cash
values and maximum rates for policy loans; licensing of insurance companies and
agents; advertising and marketing practices; statutory accounting and reporting
requirements; reserve requirements and solvency standards; admitted statutory
assets; the appropriate mix of investments; dividend payments; transactions with
affiliates; and acquisitions of control. State insurance departments
periodically review the business and operations of an insurance company by
examining its financial condition and how its agents sell its products. Our
insurance subsidiaries are also required to file various reports relating to
their financial condition, including detailed annual financial statements. This
is required in each jurisdiction where an insurance subsidiary is licensed.
State insurance regulatory authorities and other state law enforcement
agencies and attorneys general from time
to time make inquiries concerning whether our insurance subsidiaries are in
compliance with the regulations covering their businesses. We try to respond to
such inquiries in an appropriate way and to take corrective action if warranted.
The Arizona and New Jersey insurance departments have ongoing market
conduct examinations involving John Hancock Life Insurance Company. We do not
believe that the potential findings of these examinations will have a material
impact on our business, financial condition or results of operations.
State insurance regulators and the National Association of Insurance
Commissioners are continually re-examining existing laws and regulations. Among
other things, these laws and regulations may focus on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. For example, the National Association of Insurance
Commissioners has recently promulgated proposed changes to statutory accounting
standards and a number of states have adopted statutes imposing reporting
obligations in respect of Holocaust-related claims. These initiatives may be
adopted by the various states in which we are licensed, but the ultimate content
and timing of any statutes and regulations adopted by the states cannot be
determined at this time. It is impossible to predict the future impact of
changing state and federal regulations on our business, and there can be no
assurance that existing or future insurance-related laws and regulations will
not become more restrictive.
Regulation Governing Potential Acquisitions of Control
We are subject to regulation under the insurance holding company statutes
of the states in which our insurance subsidiaries are organized, principally
Massachusetts, which is the state of domicile of John Hancock Life Insurance
Company. The Massachusetts insurance law contains provisions which, in general,
provide that the acquisition or change of "control" of a domestic insurer or of
any person that controls a domestic insurer cannot be consummated without the
prior approval of the Massachusetts Commissioner of Insurance. In general, a
presumption of "control" arises from the ownership, control, possession with the
power to vote or possession of proxies with respect to, 10% or more of the
voting securities of an insurer or of a person that controls an insurer. A
person seeking to acquire control, directly or indirectly, of a Massachusetts
insurance company or of any person controlling a Massachusetts insurance company
must file an application for approval of the acquisition of control with the
Massachusetts Commissioner of Insurance and obtain the approval of the
Massachusetts Commissioner of Insurance before consummating the acquisition.
In addition, we may in the future become subject to New York insurance law
governing the activities of insurance holding companies. Other state holding
company laws, specifically those of California and Delaware, and similar
Canadian laws, apply to us as well because we have insurance subsidiaries
organized in those jurisdictions. Accordingly, the direct or indirect
acquisition of control of John Hancock Life Insurance Company will be subject to
the prior approval of the California and Delaware Commissioners of Insurance and
the Office of the Superintendent of Financial Institutions in Canada and may
also be subject to the prior approval of the New York Superintendent of
Insurance.
In addition to the restrictions under applicable insurance holding company
statutes, each of the Plan of Reorganization governing our reorganization and
our restated certificate of incorporation prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more
of the outstanding shares of our common stock until two years after
the effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire
beneficial ownership of 10% or more of the outstanding shares of our
common stock during the one year period following the two year
period described in the preceding paragraph.
Under the Plan of Reorganization, the same restrictions apply to the
common stock of John Hancock Life Insurance Company.
There is an exception to the foregoing prohibitions for acquisitions
by a person that becomes a beneficial owner of 10% or more of our common
stock as a result of our issuance of such common stock to such person as
consideration in an acquisition of another entity that was initiated by us
by authority of our board of directors. Any such acquisition initiated by
us by authority of our board of directors would require the approval of the
Massachusetts Commissioner of Insurance and the Commissioners of Insurance
of California and Delaware, the Office of the Superintendent of Financial
Institutions in Canada and, potentially, the New York Superintendent of
Insurance. If any person acquires or offers to acquire 10% or more of the
outstanding shares of our common stock in violation of our Plan of
Reorganization, we and the Massachusetts Commissioner of Insurance would be
entitled to injunctive relief. By virtue of these provisions of the Plan of
Reorganization and our restated certificate of incorporation, John Hancock
Financial Services, Inc. may not be subject to an acquisition by another
company during the two years following the effective date of the
reorganization and may only be subject to acquisition in the third year
following the effective date of the reorganization with the approval of our
board of directors and the Massachusetts Commissioner of Insurance.
All the restrictions described above may deter, delay or prevent a
future acquisition of control, including transactions that could be
perceived as advantageous to our stockholders.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
John Hancock Financial Services, Inc. is a holding company and its
assets consist of the outstanding capital stock of John Hancock Life
Insurance Company and a portion of the net proceeds of our initial public
offering. As an insurance holding company, we depend primarily on dividends
from John Hancock Life Insurance Company to pay dividends to our
stockholders (other than dividends during the first year following the
effective date of the reorganization) and pay operating expenses. Any
inability of John Hancock Life Insurance Company to pay dividends to us in
the future in an amount sufficient for us to pay dividends to our
stockholders and meet our cash obligations may materially adversely affect
the market price of our common stock and our business, financial condition
or results of operations.
The Massachusetts insurance law limits how and when John Hancock Life
Insurance Company can pay dividends to us. There are a number of provisions
of the Massachusetts insurance law that govern payment of shareholder
dividends and other distributions by stock insurance companies. Under the
Massachusetts insurance law, no insurer may pay any shareholder dividend
from any source other than statutory unassigned funds without the prior
approval of the Massachusetts Commission of Insurance. The Massachusetts
insurance holding company act requires that a report be given to the
Massachusetts Commissioner of Insurance no later than five days following
declaration, and at least ten days' prior to payment, of any dividend or
distribution by a Massachusetts insurance company. Further, this act
provides that no extraordinary dividend may be paid without thirty days'
prior written notice to the Massachusetts Commissioner of Insurance, and
only if the Massachusetts Commissioner of Insurance has not disapproved, or
has approved, the payment within the thirty day notice period. An
extraordinary dividend is any dividend or distribution of cash or other
property whose fair market value, together with other dividends or
distributions made within the preceding twelve months, exceeds the greater
of (1) 10% of an insurance company's surplus as regards policyholders as of
the preceding December 31, and (2) a life insurance company's statutory net
gain from operations for the twelve months ending on the preceding December
31. John Hancock Life Insurance Company in the future, could also be viewed
as being commercially domiciled in New York and, if so, dividend payments
may also be subject to New York's insurance holding company act as well as
Massachusetts law.
Surplus and Capital Requirements
Insurance regulators have the discretionary authority, in connection with the
ongoing licensing of our insurance subsidiaries, to limit or prohibit the
ability to issue new policies if, in the regulators' judgment, the insurer is
not maintaining a minimum amount of surplus or is in hazardous financial
condition. Limits may also be established on the ability to issue new life
insurance policies and annuity contracts above an amount based upon the face
amount and premiums of policies of a similar type issued in the prior year.
Risk-Based Capital
The National Association of Insurance Commissioners has established risk-based
capital standards for life insurance companies as well as a model act to apply
such standards at the state level. The model act provides that life insurance
companies must submit an annual risk-based capital report to state regulators
reporting their risk-based capital based on four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. The formula is intended to
be used by insurance regulators as an early warning tool to identify possible
weakly capitalized companies for purposes of initiating further regulatory
action.
If an insurer's risk-based capital falls below specified levels, the
insurer would be subject to different degrees of regulatory action depending
upon the level. These actions range from requiring the insurer to propose
actions to correct the risk-based capital deficiency to placing the insurer
under regulatory control. John Hancock Mutual Life Insurance Company exceeded
the level of risk-based capital that would require it to propose actions to
correct a deficiency by 140% as of December 31, 1999.
Guaranty Funds
All fifty states of the United States, the District of Columbia and Puerto
Rico have insurance laws requiring companies licensed to do life or health
insurance business within those jurisdictions to participate as members of the
state's life and health insurance guaranty association. These associations are
organized to pay contractual obligations under life and health insurance
policies and annuity contracts issued by impaired or insolvent insurance
companies. To meet these obligations, these associations levy assessments on all
member insurers based on the proportionate share of the premiums written by each
member in the lines of business in which the impaired or insolvent insurer is
engaged. Some states permit member insurers to recover assessments paid through
full or partial premium tax offsets, usually over a period of years. For the
years ended December 31, 1999, 1998 and 1997, we paid $0.2 million, $6.9 million
and $7.4 million, respectively, in assessments pursuant to state guaranty
association laws. We are also subject to assessments pursuant to similar types
of arrangements in Canada. While the amount of future assessments cannot be
accurately predicted, we believe that assessments with respect to other pending
insurance company impairments and insolvencies will not be material to our
business, financial condition or results of operations.
Statutory Investment Valuation Reserves
Life insurance companies are required to establish an asset valuation reserve
("AVR") consisting of two components: (i) a "default component," which provides
for future credit-related losses on fixed maturity investments, and (ii) an
"equity component," which provides for losses on all types of equity
investments, including equity securities and real estate. Insurers also are
required to establish an interest maintenance reserve ("IMR") for net realized
capital gains and losses on fixed maturity securities, net of tax, related to
changes in interest rates. The IMR is required to be amortized into statutory
earnings on a basis reflecting the remaining period to maturity of the fixed
maturity securities sold. These reserves are required by state insurance
regulatory authorities to be established as a liability on a life insurer's
statutory financial statements, but do not affect our financial statements
prepared in accordance with GAAP. Although future additions to AVR will reduce
the future statutory capital and surplus of John Hancock Life Insurance Company,
we do not believe that the impact under current regulations of such reserve
requirements will materially affect the ability of John Hancock Life Insurance
Company to increase its statutory
capital and surplus and pay future dividends to John Hancock Financial Services,
Inc.
IRIS Ratios
The National Association of Insurance Commissioners has developed a set of
financial tests known as the Insurance Regulatory Information System ("IRIS")
for early identification of companies which may require special attention by
insurance regulators. Insurance companies submit data on an annual basis to the
National Association of Insurance Commissioners. This data is used to calculate
ratios covering various categories of financial data, with defined "usual
ranges" for each category. IRIS consists of 12 key financial ratios for life
insurance companies. An insurance company may fall out of the usual range with
respect to one or more ratios because of specific transactions that are in
themselves immaterial or eliminated at the consolidated level. Departure from
the usual range on four or more of the ratios may lead to inquiries from
individual states' insurance departments. During the five-year period ended
December 31, 1999, John Hancock Mutual Life Insurance Company was outside one
usual IRIS ratio range (real estate mortgage loans to total investment assets)
on one occasion and has not been outside the usual IRIS ratio range with respect
to any ratio during the past four years.
Regulation of Investments
Our insurance subsidiaries are subject to state laws and regulations that
require diversification of their investment portfolios. Some of these laws and
regulations also limit the amount of investments in specified investment
categories, such as below investment grade fixed maturity securities, equity
real estate, other equity investments and derivatives. Failure to comply with
these laws and regulations would cause investments exceeding regulatory
limitations to be treated as nonadmitted assets for purposes of measuring
statutory surplus, and in some instances, requiring divestiture. State
regulatory authorities from the domiciliary states of our insurance subsidiaries
have not indicated any non-compliance with any such regulations.
Valuation of Life Insurance Policies Model Regulation
The National Association of Insurance Commissioners has adopted a revision to
the Valuation of Life Insurance Policies Model Regulation (known as Revised
XXX). This model regulation would establish new minimum statutory reserve
requirements for certain individual life insurance policies written in the
future. Before the new reserve standards can become effective, individual states
must adopt the model regulation. If these reserve standards were adopted in
their current form, companies selling certain individual life insurance products
such as term life insurance with guaranteed premium periods and universal life
insurance products with no-lapse guarantees would be required to redesign their
products or hold increased reserves to be consistent with the new minimum
standards with respect to policies issued after the effective date of the
regulation. While many jurisdictions have already approved this model regulation
effective January 1, 2000, we cannot predict whether this model regulation will
be adopted in Massachusetts or any other state and, if adopted, when it will
become effective. New York State adopted a regulation similar to the model
regulation in 1994, and is considering amending its regulation to be consistent
with Revised XXX.
Federal Insurance Initiatives and Litigation
Although the Federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on our business.
Current and proposed measures that may significantly affect the insurance
business generally include limitations on anti-trust immunity, minimum solvency
requirements and health care reform.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999, implementing fundamental changes in the regulation of the financial
services industry in the United States. The act permits the transformation of
the already converging banking, insurance and securities industries by
permitting mergers that combine commercial banks, insurers and securities firms
under one holding company. Under the act,
national banks retain their existing ability to sell insurance products in some
circumstances. In addition, bank holding companies that qualify and elect to be
treated as "financial holding companies" may engage in activities, and acquire
companies engaged in activities, that are "financial" in nature or "incidental"
or "complementary" to such financial activities, including acting as principal,
agent or broker in selling life, property and casualty and other forms of
insurance, including annuities. A financial holding company can own any kind of
insurance company or insurance broker or agent, but its bank subsidiary cannot
own the insurance company. Under state law, the financial holding company would
need to apply to the insurance commissioner in the insurer's state of domicile
for prior approval of the acquisition of the insurer, and the act provides that
the commissioner, in considering the application, may not discriminate against
the financial holding company because it is affiliated with a bank. Under the
act, no state may prevent or interfere with affiliations between banks and
insurers, insurance agents or brokers, or the licensing of a bank or affiliate
as an insurer or agent or broker.
Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933,
as amended, had limited the ability of banks to engage in securities-related
businesses, and the Bank Holding Company Act of 1956, as amended, had restricted
banks from being affiliated with insurance companies. With the passage of the
Gramm-Leach-Bliley Act, bank holding companies may acquire insurers, and
insurance holding companies may acquire banks. The ability of banks to affiliate
with insurance companies may materially adversely affect all of our product
lines by substantially increasing the number, size and financial strength of
potential competitors.
Moreover, the United States Supreme Court held in 1995 in NationsBank of North
Carolina v. Variable Annuity Life Insurance Company that annuities are not
insurance for purposes of the National Bank Act. Although the effect of these
recent developments on us and our competitors is uncertain, both the persistency
of our existing products and our ability to sell new products may be materially
impacted by these developments in the future.
Tax Legislation
Currently, under the Internal Revenue Code, holders of many life insurance and
annuity products, including both traditional and variable products, are entitled
to tax-favored treatment on these products. For example, income tax payable by
policyholders on investment earnings under traditional and variable life
insurance and annuity products which are owned by natural persons is deferred
during the product's accumulation period and is payable, if at all, only when
the insurance or annuity benefits are actually paid or to be paid. Also, for
example, interest on loans up to $50,000 secured by the cash value of life
insurance policies owned by businesses on key employees is eligible for
deduction even though investment earnings during the accumulation period are
tax-deferred.
In the past, legislation has been proposed that would have curtailed the tax-
favored treatment of some of our life insurance and annuity products. For
example, in 1992, the Bush Administration proposed legislation that, had it been
enacted, would have limited otherwise deductible interest payments for
businesses that own life insurance policies on the lives of their employees.
Similarly, in 1998, the Clinton Administration proposed legislation that, had it
been enacted, would have caused transfers between separate accounts underlying
tax-deferred annuity products to be taxable. The proposed legislation also
contained other provisions unfavorable to our tax favored annuity products. None
of these proposals was enacted, and no such proposals or similar proposals are
currently under active consideration by Congress. The Clinton Administration has
proposed tax law changes that would, if enacted, adversely affect our corporate
owned and bank owned life insurance product offerings. If these or similar
proposals directed at limiting the tax-favored treatment of life insurance
policies or annuity contracts were enacted, market demand for such products
would be adversely affected. In addition, there are a number of proposals
currently being considered by Congress which would either eliminate or
significantly reduce Federal estate taxes. Many insurance products are designed
and sold to help policyholders reduce the effect of Federal estate taxation on
their estates. Thus, the enactment of any legislation that eliminates or
significantly reduces Federal estate taxation would likely result in a
significant reduction in sales of our currently tax-favored products.
Securities Laws
Certain of our investment advisory activities are subject to federal and state
securities laws and regulations. Our mutual funds are registered under the
Securities Act of 1933, as amended (the "Securities Act"), and the Investment
Company Act. All of our separate investment accounts that fund retail variable
annuity contracts and retail variable life insurance products issued by us,
other than those which fund private placement investment options that are exempt
from registration or support fixed rate investment options that are also exempt
from registration, are registered both under the Securities Act and the
Investment Company Act. Institutional products such as group annuity contracts,
guaranteed investment contracts and funding agreements are sold to tax qualified
pension plans or are sold to other sophisticated investors as "private
placements," and are exempt from registration under both acts. Some of our
subsidiaries are registered as broker/dealers under the Securities Exchange Act
of 1934, as amended (the "Securities Exchange Act"), and with the National
Association of Securities Dealers, Inc., and a number are registered as
investment advisers under the Investment Advisers Act of 1940. One subsidiary is
registered as a commodity pool operator and as a commodity trading advisor under
the Commodity Exchange Act. Our insurance companies or other subsidiaries also
own or manage other investment vehicles that are exempt from registration under
the Securities Act and the Investment Company Act but may be subject to other
requirements of those laws, such as antifraud provisions and the terms of
applicable exemptions. We are also subject to similar laws and regulations in
the states and foreign countries in which we provide investment advisory
services, offer the products described above or non-variable life and annuity
products or conduct other securities and investment related activities.
Environmental Considerations
As owners and operators of real property, we are subject to extensive federal,
state and local environmental laws and regulations. Inherent in such ownership
and operation is the risk that there may be potential environmental liabilities
and costs in connection with any required remediation of such properties. When
deemed appropriate, we routinely conduct environmental assessments for real
estate being acquired for investment and before taking title to property
acquired through foreclosure or deed in lieu of foreclosure. Based on these
environmental assessments and compliance with our internal environmental
procedures, we believe that any costs associated with compliance with
environmental laws and regulations or any remediation of such properties would
not be material to our consolidated financial position. Furthermore, although we
hold equity positions in subsidiaries and investments that could potentially be
subject to environmental liabilities, we believe, based on our assessment of the
business and properties of these companies and our level of involvement in the
operation and management of such companies, that we would not be subject to any
environmental liabilities with respect to these investments which would have a
material adverse effect on our business, financial position or results of
operations.
ERISA Considerations
Certain of our lines of business, including our management of employee benefit
plan assets in our advisory capacity in separate accounts, are subject to the
requirements of ERISA. In addition, the Small Business Job Protection Act, which
we refer to as the SBJPA, offered insurers protection from potential litigation
exposure prompted by the 1993 U.S. Supreme Court decision in John Hancock Mutual
Life Insurance Company v. Harris Trust & Savings Bank, which we refer to as the
Harris Trust Decision, in which the Court held that, with respect to a portion
of the funds held under certain general account group annuity contracts, an
insurer is subject to the fiduciary requirements of ERISA. The pertinent SBJPA
provisions provide that insurers are protected from liability for breaches of
fiduciary duties under ERISA for past actions with respect to their general
account contracts. However, insurers remain subject to federal criminal law and
liable for actions brought by the U.S. Secretary of Labor alleging breaches of
fiduciary duties that also constitute a violation of federal or state criminal
law. The SBJPA also provides that contracts issued from an insurer's general
account on or before December 31, 1998, that are not guaranteed benefit
policies, will not be subject to ERISA's fiduciary requirements if they meet the
requirements of regulations issued by the United States Department of Labor. The
SBJPA further provides that contracts issued from an insurer's general account
after December 31, 1998, that are not guaranteed benefit policies will be
subject to ERISA.
In January 2000, the Department of Labor published a regulation pursuant to
the SBJPA which provides, among other things, that if an employee benefit plan
acquired an insurance policy (other than a guaranteed benefit policy) issued on
or before December 31, 1998 that is supported by the assets of the insurer's
general account, the plan's assets for purposes of ERISA will not be deemed to
include any of the assets of the insurer's general account, provided that the
requirements of the regulation are met. Accordingly, if those requirements are
met, the insurer is not subject to the fiduciary obligations of ERISA in
connection with such an insurance policy. These requirements include detailed
disclosures to be made to the employee benefit plan and the requirement that the
insurer must permit the policyholder to terminate the policy on 90 days' notice
and receive without penalty, at the policyholder's option, either (1) the
accumulated fund balance (which may be subject to market value adjustment) or
(2) a book value payment of such amount in annual installments with interest. In
the event John Hancock Life Insurance Company elects to comply with the
requirements set forth therein to secure the exemption provided by the
regulations from the fiduciary obligations of ERISA, John Hancock Life Insurance
Company's exposure to disintermediation risk could increase due to the
termination options that it would be required to provide to policyholders, but
such an increase would not be material. Since there has been no final ruling in
the Harris Trust litigation regarding whether John Hancock Life Insurance
Company, Inc. has violated ERISA, we are unable at this time to determine the
effects of the decision. With respect to employee welfare benefit plans subject
to ERISA, the Congress periodically has considered amendments to the law's
Federal preemption provision, which would expose John Hancock Life Insurance
Company, and the insurance industry generally, to state law causes of action,
and accompanying extra-contractual (e.g., punitive) damages in lawsuits
involving, for example, group life and group disability claims. To date, all
such amendments to ERISA have been defeated.
Employees
As of March 20, 2000 we employed approximately 9,700 people. We believe our
relations with our employees are satisfactory.
Management
For biographical information of our executive officers see "Item 10 -
Directors and Executive Officers of John Hancock Financial Services, Inc."
ITEM 2. Properties
Our home office consists of our 60-story landmark office tower and five other
buildings located in Boston, Massachusetts. We own this facility and occupy
approximately 60% of the 3.8 million gross square feet of space in these
buildings. In addition, we lease office space throughout the United States as
needed for our operations, including for our sales force. We believe that our
current facilities are adequate for our current and expected needs.
Since 1987, we have entered into a series of lease agreements with a non-
affiliated organization for the rental of furniture and equipment. The leases
have a non-cancelable term of twelve months and an expected term of
approximately nine years. Annual aggregate commitments under these leases are
approximately $8 million.
ITEM 3. Legal Proceedings
We are regularly involved in litigation, both as a defendant and as a
plaintiff. The litigation naming us as a defendant ordinarily involves our
activities as a provider of insurance protection products, as well as an
investment adviser, employer and taxpayer. In addition, state regulatory
bodies, the Securities and Exchange Commission, the National Association of
Securities Dealers, Inc. and other regulatory bodies regularly make inquiries
and, from time to time conduct examinations concerning our compliance with,
among other things, insurance laws, securities laws, and laws governing the
activities of broker/dealers. We do not believe that this litigation or any of
these other matters that are currently pending, either individually or in the
aggregate, will have a material adverse effect on our business, financial
condition or results of operations.
Sales Practice Class Action Settlement
Over the past several years, companies engaged in the life insurance business
have faced extensive claims, including class-action lawsuits, alleging improper
marketing and sales of individual life insurance policies or annuities. On
December 31, 1997, the United States District Court for the District of
Massachusetts approved a settlement of a nationwide class action lawsuit
regarding sales practices against John Hancock Mutual Life Insurance Company,
John Hancock Variable Life Insurance Company and John Hancock Distributors,
Inc., entitled Duhaime, et al. v. John Hancock Mutual Life Insurance Company,
John Hancock Variable Life Insurance Company and John Hancock Distributors, Inc.
With certain limited exceptions, the class that is bound by the terms of the
settlement includes persons and entities who at any time during the class period
(January 1, 1979 through December 31, 1996) had an ownership interest in one or
more of our whole life, universal life or variable life insurance policies (and
certain annuities and mutual funds) issued during the class period.
In conjunction with this settlement, we have established a reserve that stands
at $496.6 million at December 31, 1999. Given the uncertainties associated with
estimating the reserve, it is reasonably possible that the final cost of the
settlement could differ materially from the amounts presently provided for by
us. We will continue to update this estimate of the final cost of the settlement
as the claims are processed and more specific information is developed,
particularly as the actual cost of the claims subject to alternative dispute
resolution becomes available. However, based on information available at the
time, and the uncertainties associated with the final claim processing and
alternate dispute resolution and arbitration, the range of any additional costs
related to the settlement cannot be reasonably estimated.
Harris Trust Litigation
Since 1983, we have been involved in complex litigation known as Harris Trust
and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v. John
Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491), which raised the
question of whether insurance company general account assets as assets of a
contractholder's plan under ERISA. The case was tried in 1997, but as of yet
there is no final decision in this matter. If we have an unfavorable ruling in
the Harris Trust lawsuit, it would be limited to the Harris Trust contract, and
it might require that John Hancock Life Insurance Company pay money damages to
Harris Trust, as Trustee of the Sperry Retirement Trust No. 2.
ITEM 4. Submission of Matters to a Vote of Security Holders
On December 13, 1999, the following classification of the incumbent directors
of John Hancock Financial Services, Inc., with terms of office as noted, was
unanimously approved by the board of directors of John Hancock Mutual Life
Insurance Company, the sole shareholder of John Hancock Financial Services, Inc.
as of that date, effective December 13, 1999:
CLASS I (Initial term of office expiring at the annual meeting of shareholders
in the year 2000)
Foster L. Aborn
Robert E. Fast, Esq.
Dr. Kathleen Foley Feldstein
Michael C. Hawley
Robert J. Tarr, Jr.
CLASS II (Initial term of office expiring at the annual meeting of shareholders
in the year 2001)
Samuel W. Bodman
Stephen L. Brown
Wayne A. Budd
Nelson S. Gifford
Judith A. McHale
CLASS III (Initial term of office expiring at the annual meeting of shareholders
in the year 2002)
I. MacAllister Booth
John M. Connors, Jr.
David F. D'Alessandro
Edward H. Linde
Richard F. Syron
PART II
- -------
ITEM 5. Market for John Hancock Financial Services, Inc. Common Stock and
Related Stockholder Matters
Our Common Stock is listed on the New York Stock Exchange which is the
principal market for our Common Stock. Its symbol is JHF. As of March 2,
2000, there were approximately 918,551 record holders of our Common Stock.
Our stock was offered publicly on January 27, 2000, thus there was no market
activity in the two most recent fiscal years. In future filings, the dividends
declared and the high and low reported closing sales prices on the New York
Stock Exchange with respect to our common stock for each quarterly period for
the two most recent fiscal years will be disclosed as required.
Dividend decisions will be based on, and affected by, a number of factors;
including the operating results and financial requirements of John Hancock
Financial Services, Inc. and the impact of regulatory restrictions discussed in
the Regulation section of Business and Liquidity and Capital Resources section
of the Management's Discussion and Analysis (MD&A). We currently intend to
declare an initial annual cash dividend of $.30 per share in the fourth quarter
of 2000.
ITEM 6. Selected Financial Data
The following table sets forth certain selected historical consolidated
financial data. The selected income statement data for each of the three years
ended December 31, 1999 and balance sheet data as of December 31, 1999 and 1998
have been derived from our audited consolidated financial statements and notes
thereto included elsewhere in this form 10-K. The following selected income
statement data for the years ended December 31, 1996 and 1995 and balance sheet
data as of December 31, 1997, 1996 and 1995 have been derived from our audited
consolidated financial statements not included herein. The following selected
consolidated financial data has been prepared in accordance with GAAP, except
that the statutory data presented below has been prepared in accordance with
applicable statutory accounting practices and was taken from our annual
statements filed with insurance regulatory authorities.
The following selected historical consolidated financial data should be read
in conjunction with other information including our Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", included elsewhere in this form
10-K.
For the Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
(in millions)
Income Statement Data: (1)(2)
Revenues
Premiums................................................................. $2,717.5 $2,197.9 $2,473.6 $2,922.5 $2,657.1
Universal life and investment-type product charges....................... 703.5 597.0 512.0 466.3 414.0
Net investment income.................................................... 3,574.0 3,330.7 3,190.7 3,223.1 3,099.4
Net realized investment gains, net of related amortization of deferred
policy acquisition costs and amounts credited to participating pension
contractholders (3)..................................................... 175.1 106.4 157.0 110.7 52.3
Investment management revenues, commissions and other fees............... 680.9 659.7 554.7 751.3 660.0
Other revenue............................................................ 6.5 10.3 58.3 230.9 248.3
-------- -------- -------- -------- --------
Total revenues..................................................... 7,857.5 6,902.0 6,946.3 7,704.8 7,131.1
Benefits and expenses
Benefits to policyholders, excluding amounts related to net realized
investment gains credited to participating pension contractholders (4).. 5,418.4 4,152.0 4,303.1 4,676.7 4,226.5
Other operating costs and expenses....................................... 1,412.3 1,383.0 1,283.7 1,694.1 1,568.3
Amortization of deferred acquisition costs, excluding amounts related to
net realized investment gains (5)....................................... 166.8 249.7 312.0 230.9 229.1
Dividends to policyholders............................................... 501.6 473.2 457.8 435.1 496.5
-------- -------- -------- -------- --------
Total benefits and expenses........................................ 7,499.1 6,257.9 6,356.6 7,036.8 6,520.4
-------- -------- -------- -------- --------
Income before income taxes, extraordinary item and cumulative effect of
accounting change....................................................... 358.4 644.1 589.7 668.0 610.7
Income taxes............................................................. 101.9 183.9 106.4 247.5 261.2
-------- -------- -------- -------- --------
Income before extraordinary item and cumulative effect of accounting
change.................................................................. 256.5 460.2 483.3 420.5 349.5
Extraordinary item - demutualization expenses, net of tax................ (93.6) (11.7) - - -
Cumulative effect of accounting change................................... (9.7) - - - -
-------- -------- -------- -------- --------
Net income......................................................... $ 153.2 $ 448.5 $ 483.3 $ 420.5 $ 349.5
======== ======== ======== ======== ========
As of or for the Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- --------- ---------
(in millions)
Balance Sheet Data:
General account assets............ $56,408.1 $52,000.1 $49,906.4 $48,420.6 $47,485.7
Separate account assets........... 28,047.6 24,966.6 21,511.1 18,082.1 15,835.2
Total assets...................... 84,455.7 76,966.7 71,417.5 66,502.7 63,320.9
General account liabilities....... 50,986.6 46,416.9 44,667.7 43,265.9 42,770.6
Long-term debt.................... 536.9 602.7 543.3 1,037.0 934.3
Separate account liabilities...... 28,047.6 24,966.6 21,511.1 18,082.1 15,835.2
Total liabilities................. 79,571.1 71,986.2 66,722.1 62,385.0 59,540.1
Minority Interest................. 93.5 25.3 25.3 25.3 25.3
Policyholders' equity............. 4,791.1 4,955.2 4,670.1 4,092.4 3,755.5
Statutory Data:
Capital and surplus (6)........... $ 3,456.7 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5
Asset valuation reserve ("AVR")... 1,272.8 1,316.9 1,191.0 1,088.4 1,035.6
--------- --------- --------- --------- ---------
Capital and surplus plus AVR...... $ 4,729.5 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1
========= ========= ========= ========= =========
Net income........................ $ 573.2 $ 627.3 $ 414.0 $ 313.8 $ 340.8
We evaluate segment performance and base management's incentives on segment
after-tax operating income, which excludes the effect of net realized investment
gains and losses and unusual or non-recurring events and transactions. Segment
after-tax operating income is determined by adjusting GAAP net income for net
realized investment gains and losses, extraordinary items, and certain other
items which we believe are not indicative of overall operating trends. While
these items may be significant components in understanding and assessing our
consolidated financial performance, we believe that the presentation of segment
after-tax operating income enhances the understanding of our results of
operations by highlighting net income attributable to the normal, recurring
operations of the business. However, segment after-tax operating income and
total segment income are not a substitute for net income determined in
accordance with GAAP.
For the Year Ended December 31,
----------------------------------
Segment Data: (7) 1999 1998 1997
---------- ---------- ----------
Segment after-tax operating income:
Protection Segment..................................... $ 190.6 $ 172.3 $ 158.1
Asset Gathering Segment................................ 115.1 111.1 93.3
------- ------- -------
Total Retail.......................................... 305.7 283.4 251.4
Guaranteed and Structured Financial Products
Segment............................................... 202.4 145.7 139.9
Investment Management Segment.......................... 37.3 15.4 17.2
------- ------- -------
Total Institutional................................... 239.7 161.1 157.1
Corporate and Other Segment............................ 67.8 56.3 39.4
------- ------- -------
Total segment income................................... 613.2 500.8 447.9
After-tax adjustments:
Realized investment gains, net (8)..................... 119.9 93.9 104.9
Class action lawsuit................................... (91.1) (150.0) (112.5)
Workers' compensation reinsurance reserve.............. (133.7) - -
Restructuring charges.................................. (17.0) - -
Corporate account asset transfer....................... (205.8) - -
Other demutualization related costs.................... (6.8) - -
Benefit from pension participating contract
modification.......................................... - - 7.7
Surplus tax............................................ (22.2) 15.5 35.3
------- ------- -------
Total after-tax adjustments............................ (356.7) (40.6) 35.4
------- ------- -------
GAAP Reported:
Income before extraordinary item and cumulative
effect of accounting change........................... 256.5 460.2 483.3
Extraordinary item-
demutualization expenses, net of tax.................. (93.6) (11.7) -
Cumulative effect of accounting change................. (9.7) - -
------- ------- -------
Net income............................................. $ 153.2 $ 448.5 $ 483.3
======= ======= =======
(1) Prior to 1996, we prepared our financial statements in conformity with
accounting practices prescribed or permitted by the Massachusetts Division
of Insurance which accounting practices were considered to be GAAP for
mutual life insurance companies. As of January 1, 1996, we adopted
Financial Accounting Standards Board "FASB" Interpretation No. 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises and Statement of Financial Accounting
Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Policies. Interpretation No. 40 and SFAS No. 120
require mutual life insurance companies to adopt all applicable
authoritative GAAP pronouncements in their general purpose financial
statements. Accordingly, the financial information presented in the
Selected Financial Data for periods prior to 1996 has been derived from our
financial information which has been retroactively restated to reflect the
adoption of all applicable authoritative GAAP pronouncements. All such
applicable pronouncements were adopted as of the effective date originally
specified in each such pronouncement. The following sets forth the
significant accounting pronouncements with effective dates subsequent to
the earliest financial information presented herein, the effective dates of
their adoption by us and, if applicable, a description of the accounting
followed by us for periods presented herein prior to the effective date of
such pronouncements.
. SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was adopted
on a retroactive basis for the year ended December 31, 1995 and subsequent
years. For periods prior to the adoption of SFAS No. 114, we established a
policy to record impairment losses for troubled loans based on discounted
cash flows or the fair value of the collateral. The policy was
substantially consistent with SFAS No. 114. The adoption of SFAS No. 114
did not have a material effect on the level of the allowances for possible
losses on loans on our consolidated results of operations or financial
position.
. SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was adopted for the year ended
December 31, 1996 and subsequent years. For periods prior to the adoption
of SFAS No. 121, writedowns on impaired real estate were established if the
undiscounted cash flows were less than the carrying value. In such cases,
the asset was written down to the discounted cash flow amount. Real estate
held for sale was carried at the lower of cost or fair value. Accordingly,
there was no material effect on our financial statements as a result of the
adoption of SFAS No. 121.
. SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was adopted for the year ended December 31, 1997, retroactive
to December 31, 1994. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
financial statements. The segment data presented herein reflects the
adoption of SFAS No. 131.
(2) We have completed a number of transactions which have affected the
comparability of our results of operations.
On March 31, 1999, we completed the sale of Unigard Security Insurance
Company ("USIC") and John Hancock Insurance Co. of Bermuda Ltd. ("John
Hancock Bermuda"). The sale of USIC was completed by entering into a 100%
quota share reinsurance agreement with a third party reinsurer and then
through a stock sale. We also sold 100% of the stock of John Hancock
Bermuda, which offered reinsurance products and services. Assets and
liabilities transferred in connection with both sales amounted to $381.0
million and $161.8 million, respectively. The sale of USIC resulted in an
after-tax loss of $21.4 million. John Hancock Bermuda was sold for its net
book value which resulted in the recognition of no gain or loss.
On February 28, 1997, we sold a major portion of our group insurance
business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly-
owned subsidiary of WellPoint Health Networks, Inc. The business sold
included our group accident and health business and related group life
insurance business and Cost Care, Inc., Hancock Association Services Group
and Tri-State Inc., all of which were indirectly wholly-owned subsidiaries
of the company. The company retained its group long-term care operations.
Assets equal to liabilities of $686.7 million at February 28, 1997 were
transferred to UNICARE in connection with the sale. Income from operations
in 1997 was not significant. The insurance business sold was transferred to
UNICARE through a 100% coinsurance agreement.
On November 29, 1996, we closed the sale of 95% of John Hancock Freedom
Securities Corporation ("Freedom Securities"), a holding company, and its
subsidiaries, primarily Tucker Anthony Incorporated and Sutro and Co., both
broker/dealers. Net assets transferred were approximately $164.3 million
and the sale resulted in the recognition of a $25.1 million pre-tax gain in
1996. We sold the remaining 5% of Freedom Securities during 1998 and
recognized a pre-tax gain of $4.3 million.
Effective July 1, 1996, John Hancock Property and Casualty Insurance
Company ("JHP&C") and its wholly-owned subsidiary, John Hancock Indemnity
Company ("Indemnity") each entered into a quota share reinsurance agreement
with a third party reinsurer under which they ceded 100% of their loss,
loss adjustment expense and unearned premium reserves at June 30, 1996,
relating to continuing operations. Under the terms of the quota share
reinsurance agreement, JHP&C cedes 100% of all continuing operations
business written subsequent to June 30, 1996. Net assets transferred were
approximately $12.0 million and no gain or loss was recognized on the
transaction. On September 12, 1996, JHP&C sold 100% of the stock of
Indemnity. Net assets transferred were approximately $6.0 million and the
sale resulted in the recognition of a $6.0 million pre-tax gain. On
September 9, 1999, we sold 100% of the stock of JHP&C. Net assets were
approximately $21.0 million and no gain or loss was recognized on the sale.
The disposed businesses' results of operations for each of the three years in
the three-year period ended December 31, 1999 are presented below:
For the Year Ended December 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(in millions)
Income Statement Data:
Revenues
Premiums....................................... $ - $ - $101.4
Net investment income.......................... 9.0 29.9 37.4
Net realized investment (losses) gains, net of
related amortization of deferred policy
acquisition costs and amounts credited to
participating pension contractholders......... (23.0) 20.5 44.0
Other (expense) revenue........................ (2.9) (.7) 36.1
------- ----- ------
Total revenues................................. (16.9) 49.7 218.9
Benefits and expenses
Benefits to policyholders, excluding amounts
related to net realized investment gains
credited to participating pension
contractholders............................... 243.6 11.2 132.7
Other operating costs and expenses............. - - 42.1
Amortization of deferred acquisition costs,
excluding amounts related to net realized
investment gains.............................. - - -
Dividends to policyholders..................... - - 2.3
------- ----- ------
Total benefits and expenses.................... 243.6 11.2 177.1
------- ----- ------
Income before income taxes..................... (260.5) 38.5 41.8
Income taxes................................... (113.8) 7.5 4.6
------- ----- ------
Net (loss) income.............................. $(146.7) $31.0 $ 37.2
======= ===== ======
(3) Net realized investment gains have been reduced by: (1) amortization of
deferred policy acquisition costs to the extent that such amortization
results from realized gains and losses and (2) the portion of realized
gains and losses credited to participating pension contractholder accounts.
We believe presenting realized investment gains and losses in this format
provides information useful in evaluating our operating performance. This
presentation may not be comparable to presentations made by other insurers.
See note 8 for related amounts.
(4) Benefits to policyholders excludes amounts related to net realized
investment gains credited to participating pension contractholders of
$35.3 million, $79.1 million, $29.3 million, $22.3 million and $1.3 million
for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
(5) Amortization of deferred policy acquisition costs excludes amounts related
to net realized investment gains of $50.5 million, $41.2 million, $31.2
million, $17.6 million and $24.7 million for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
(6) In accordance with accounting practices prescribed or permitted by the
Massachusetts Division of Insurance, statutory capital and surplus includes
$450.0 million in total principal amount of our surplus notes outstanding.
(7) Our GAAP reported net income was significantly affected by net realized
investment gains and losses and unusual or non-recurring events and
transactions presented above as after-tax adjustments. A description of
these adjustments follows.
In all periods, net realized investment gains and losses, except for gains
and losses from mortgage securitizations and investments backing our short-
term funding agreements, have been excluded from segment after-tax
operating income due to their volatility between periods and because such
data are often excluded by analysts and investors when evaluating the
overall financial performance of insurers. The volatility between periods
can be impacted by fluctuations in the market, as well as by changes in the
volume of activity which can be influenced by us and our investment
decisions. Realized investment gains and losses from mortgage
securitizations and investments backing our short-term funding agreements
were not excluded from segment after-tax operating income because we view
the related gains and losses as in integral part of the core business of
those operations. See Note 8 for related amounts.
During 1997, we entered into a court approved settlement relating to a
class action lawsuit involving individual life insurance policies sold from
1979 through 1996, as specified in the Legal Proceedings section of this
form 10-K. In entering into the settlement, we specifically denied any
wrongdoing. The reserve held in connection with the settlement to provide
for relief to class members and for legal and administrative costs
associated with the settlement amounted to $496.6 million, $436.6 million
and $308.8 million at December 31, 1999, 1998 and 1997, respectively. Given
the uncertainties associated with estimating the reserve, it is reasonably
possible that the final cost of the settlement could differ materially from
the amount previously reported.
Through our group health insurance operations, which we sold in 1997, we
entered into a number of reinsurance arrangements in respect of personal
accident insurance and the occupational accident component of workers
compensation insurance, a portion of which was originated through a pool
managed by Unicover Managers, Inc. Under these arrangements, we both
assumed risks as a reinsurer, and also passed 95% of these risks on to
other companies. This business had originally been reinsured by a number of
different companies, and has become the subject of widespread disputes.
Late in the fourth quarter of 1999 and early 2000, we received additional
information about our exposure to losses under the various reinsurance
programs. As a result of this additional information and in connection with
global settlement discussions initiated in late 1999 with other parties
involved in the reinsurance programs, our present best estimate of our
remaining loss exposure to this issue is $133.7 million, after tax, which
we recognized in 1999.
During 1999, we recorded $17.0 million in after-tax restructuring charges
to reduce costs and increase future operating efficiency by consolidating
portions of our operations. For additional information see "Note 1 -
Summary of Significant Accounting Policies - Severance" of our Consolidated
Financial Statements.
During 1999, we recorded a $205.8 million after-tax charge for the transfer
of certain assets from the Guaranteed and Structured Financial Products
Segment to the corporate account. These assets included investments in
certain subsidiaries and the home office real estate complex (collectively
referred to as "corporate purpose assets"). Certain group contracts have
participating features, under which crediting rates and dividends are
affected directly by portfolio earnings. Certain participating
contractholders participate in contract experience related to net
investment income and realized capital gains and losses in the general
account. These participating contractholders were compensated for
transferred assets based on the fair value of the assets transferred. The
difference between the fair value and carrying value of the assets
transferred were credited to affected participating contractholders through
the crediting rates and dividends on their contracts.
During 1999, we recorded a $6.8 million after-tax charge for
demutualization related expenses to improve our financial analysis and
financial reporting abilities. These charges primarily included consulting
fees and planning and expense management costs.
During 1997, a participating pension reinsurance contractholder requested
the distribution of a portion of contract funds. At the time of the
request, the contract stated that these funds were to be paid out over a
specified number of years. However, we distributed a portion of the
contractholder's funds in exchange for
the right to retain the tax credits that resulted from the distribution.
The contractual amendment resulted in the recognition of a $7.7 million
after-tax gain.
We have been subject to the surplus tax imposed on mutual life insurance
companies which disallows a portion of mutual life insurance company's
policyholder dividends as a deduction from taxable income. As a stock
company, we are no longer subject to surplus tax and have excluded the
surplus tax from segment after-tax operating income in all periods.
(8) Net realized investment gains have been reduced by: (1) amortization of
deferred policy acquisition costs to the extent that such amortization
results from realized gains and losses and (2) the portion of realized
gains and losses credited to participating pension contractholder accounts.
We believe presenting realized investment gains and losses in this format
provides information useful in evaluating our operating performance. This
presentation may not be comparable to presentations made by other insurers.
Summarized below is a reconciliation of (a) net realized investment gains
per the consolidated financial statements for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, and (b) the adjustment made for net
realized investment gains to calculate segment after-tax operating income
for the years ended December 31, 1999, 1998 and 1997.
For the Year Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
(in millions)
Net realized investment gains....................................................... $260.9 $226.7 $217.5 $150.6 $ 78.3
Less amortization of deferred policy
acquisition costs related to net realized
investment gains................................................................... (50.5) (41.2) (31.2) (17.6) (24.7)
Less amounts credited to participating pension
contractholder accounts............................................................ (35.3) (79.1) (29.3) (22.3) (1.3)
------ ------ ------ ------ ------
Net realized investment gains, net of related
amortization of deferred policy acquisition
costs and amounts credited to participating
pension contractholders per consolidated
financial statements............................................................... 175.1 106.4 157.0 $110.7 $ 52.3
====== ======
Less realized investment gains (losses)
attributable to mortgage securitizations and
investments backing short-term funding
agreements......................................................................... (27.7) (42.1) (4.6)
------ ------ ------
Realized investment gains (losses), net - pre-tax adjustment to calculate segment
operating income................................................................... 202.8 148.5 161.6
Less income tax effect.............................................................. (82.9) (54.6) (56.7)
------ ------ ------
Realized investment gains (losses), net - after-tax adjustment to calculate segment
operating income................................................................... $119.9 $ 93.9 $104.9
====== ====== ======
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Segment Operations
Management's discussion and analysis reviews our consolidated segment
financial condition as of December 31, 1999 and 1998, the consolidated results
of operations for the years ended December 31, 1999, 1998, and 1997 and, where
appropriate, factors that may affect future financial performance. This
discussion should be read in conjunction with the Consolidated Financial
Statements and related notes included elsewhere in this Form 10-K.
Forward-Looking Information
The statements, analyses, and other information contained herein relating
to trends in the company's operations and financial results, the markets for the
company's products, the future development of the company's business, and the
contingencies and uncertainties to which the company may be subject, as well as
other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "will," "should," "may," and other similar
expressions, are "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. Such statements are made based upon management's
current expectations and beliefs concerning future events and their effects on
the company and may not be those anticipated by management. John Hancock's
actual results may differ materially from the results anticipated in these
forward-looking statements.
These forward-looking statements are subject to risks and uncertainties
including, but not limited to, the risks that (1) a significant downgrade in our
ratings for claims-paying ability and financial strength may lead to policy and
contract withdrawals and materially harm our ability to market our products, (2)
elimination of Federal tax benefits for our products and other changes in laws
and regulations may adversely affect sales of our insurance and investment
advisory products, (3) as a holding company, we will depend on dividends from
our subsidiaries and the Massachusetts insurance law may restrict ability of
John Hancock Life Insurance Company to pay dividends to us, (4) we face
increasing competition in our retail and institutional businesses from mutual
fund companies, banks and investment management firms as well as from other
insurance companies, (5) a decline or increased volatility in the securities
markets, and other economic factors, may adversely affect our business,
particularly our variable life insurance, mutual fund, variable annuity and
investment business, (6) our life insurance sales are highly dependent on a
third party distribution relationship, (7) interest rate volatility may
adversely affect our profitability, (8) our net income and revenues will suffer
if customers surrender annuities and variable and universal life insurance
policies or redeem shares of our open-end mutual funds, (9) the independent
directors of our variable series trusts and of our mutual funds could reduce
the compensation paid to us or could terminate our contracts to manage the
funds, (10) under our Plan of Reorganization, we were required to establish the
closed block a special arrangement for the benefit of a group of our
policyholders and we may have to fund deficiencies in our closed block, and any
overfunding of the closed block will benefit only the holders of policies
included in the closed block, not our stockholders, (11) there are a number of
provisions of our Plan of Reorganization, our Restated Certificate of
incorporation and by-laws, laws applicable to us, agreements that we have
entered into with our senior management and our stockholder rights plan, that
will prevent or discourage takeovers and business combinations that our
stockholders might otherwise consider to be in their best interests, (12) we
will face losses if the claims on our insurance products, or reductions in rates
of mortality on our annuity products, are greater than we projected, (13) we
face risks relating to our investment portfolio, (14) the market price of our
common stock may decline if persons receiving common stock as compensation in
the reorganization sell their stock in the public market, (15) we may experience
volatility in net income due to changes in standards for accounting for
derivatives, (16) our United States insurance companies are subject to risk-
based capital requirements and possible guaranty fund assessments, (17) the
National Association of Insurance Commissioners' codification of statutory
accounting practices may adversely affect the statutory surplus of John Hancock
Life Insurance Company, (18) we may be unable to retain personnel who are key to
our business, (19) we face risks from assumed reinsurance business in respect of
personal accident insurance and the occupational accident component of workers
compensation insurance, (20) litigation and regulatory proceedings may result in
financial losses, harm our reputation and divert management resources, and (21)
we face unforeseen liabilities arising from our acquisitions and dispositions of
businesses.
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
filed by the company with the Securities and Exchange Commission. The company
specifically disclaims any obligation to update or revise any forward-looking
information, whether as a result of new information, future developments, or
otherwise.
Overview
We are a leading financial services company providing a broad range of
products and services in two major
businesses: (1) the retail business, which offers insurance protection and asset
gathering products and services primarily to retail consumers; and (2) the
institutional business, which offers guaranteed and structured financial
products and investment management products and services primarily to
institutional customers. In addition, we have a Corporate and Other Segment.
Our revenues are derived principally from:
. premiums on individual life insurance, individual and group long-term
care insurance, annuities with life contingencies, single premium
annuity contracts and group life insurance;
. product charges from variable and universal life insurance products and
annuities;
. asset management fees from mutual fund and institutional investment
management products;
. sales charges and commissions derived from sales of investment and
insurance products and distribution fees; and
. net investment income and realized investment gains on general account
assets.
Our expenses consist principally of insurance benefits provided to
policyholders, interest credited on policyholders' general account balances,
dividends to policyholders, other operating costs and expenses, which include
commissions and general business expenses, net of expenses deferred,
amortization of deferred policy acquisition costs, and premium and income taxes.
Our profitability depends in large part upon: (1) the adequacy of our
product pricing, which is primarily a function of competitive conditions, our
ability to assess and manage trends in mortality and morbidity experience, our
ability to generate investment earnings and our ability to maintain expenses in
accordance with pricing assumptions; (2) the amount of assets under management;
and (3) the maintenance of our target spreads between the rate of earnings on
our investments and credited rates on policyholders' general account balances.
Our sales and financial results of our retail business over the last
several years have been affected by general economic and industry trends.
Variable products, including variable life insurance and variable annuities,
have accounted for the majority of recent increases in total premiums and
deposits for the insurance industry as a result of the strong equity market
growth in recent years and the "baby boom" generation reaching its high-
earnings years and seeking tax-advantaged investments to prepare for retirement.
As sales of variable products have increased, sales of traditional life
insurance products have experienced continued declines. With respect to our
long-term care insurance products, premiums have increased due to the aging of
the population and the expected inability of government entitlement programs to
meet retirement needs.
Premiums and deposits of our individual annuity products increased 20.3% to
$1,496.3 million in 1999 as compared to 1998. Our variable life insurance
product deposits in 1999 have remained relatively consistent with those for 1998
at $829.8 million, while premiums on our individual and group long-term care
insurance increased 21.9%, to $355.0 million in 1999. Primarily due to lower
sales and redemptions in our financial industries sector mutual funds, mutual
fund deposits and reinvestments were $4,505.1 million in 1999 compared to
$8,427.2 million in 1998. In response to the decline in mutual fund deposits and
reinvestments, we have reduced operating expenses to protect profit margins. In
addition, we have taken steps to increase mutual fund sales, including the
development of several new fund offerings and refocusing the sales organization
on regional broker/dealers and financial planners. However, our mutual fund
operations are impacted by general market trends and a continued downturn in the
mutual fund market may negatively affect our future operating results.
Recent economic and industry trends also have affected the sales and
financial results of our institutional business. Due to declining demand for
general account GICs in the 401(k) plan market, deposits on our general account
GICs have remained relatively level over the past three years and were $2,442.2
million in 1999.
In response to such trends, we have created new products for the non-qualified
institutional marketplace. Deposits of our guaranteed funding agreements to non-
qualified institutional investors in the domestic and the international
marketplace grew 14.9%, to $2,775.2 million in 1999. We are currently not
selling funding agreements with less than one year termination provisions. In
addition, in the fourth quarter of 1999, we exercised our termination rights on
all funding agreements containing 30 or 90 day termination provisions which
totaled approximately $1.2 billion at September 30, 1999. The cost associated
with exercising our right to terminate under these agreements was not material.
Segment after-tax operating income for funding agreements containing 30 or 90
day termination provisions was $11.0 million in 1999 compared to a loss of $11.5
million in 1998.
Premiums from single premium annuity contracts increased to $451.8 million
in 1999 from $111.8 million in 1998, primarily due to the sale of one single
premium annuity contract for $339.0 million. Moreover, our investment management
services provided to domestic and international institutions have increased
through our introduction of new products including collateralized bond
obligations, mortgage securitizations, and sub-advisory services for mutual
funds. Assets under management of our Investment Management Segment increased to
$40,211.7 million as of December 31, 1999.
The Reorganization
The board of directors of John Hancock Mutual Life Insurance Company
unanimously adopted the Plan of Reorganization on August 31, 1999. Under the
terms of the Plan of Reorganization, effective February 1, 2000, John Hancock
Mutual Life Insurance Company converted from a mutual life insurance company to
a stock life insurance company and became a wholly owned subsidiary of John
Hancock Financial Services, Inc., which is a holding company. In connection with
the reorganization, John Hancock Mutual Life Insurance Company changed its name
to John Hancock Life Insurance Company.
Under the Plan of Reorganization, as of February 1, 2000, John Hancock Life
Insurance Company created a closed block for the benefit of policies included
therein. The purpose of the closed block is to protect the policy dividend
expectations of the policies included in the closed block after demutualization.
Unless the Massachusetts Commissioner of Insurance and, in certain
circumstances, the New York Superintendent of Insurance, consent to an earlier
termination, the closed block will continue in effect until the date none of
such policies is in force. Had the closed block been established as of December
31, 1999 John Hancock Life Insurance Company would have segregated closed block
assets of $9,306.4 million, an amount that would be expected to produce cash
flows which, together with anticipated revenues from policies included in the
closed block, would be expected to be reasonably sufficient to provide for
payment of policy benefits, taxes and direct asset acquisition and disposal
costs, and for continuation of policy dividend scales payable in 1999, so long
as the experience underlying such dividend scales continues. The assets
allocated to the closed block and any cash flows provided by these assets will
solely benefit the holders of policies included in the closed block. Had the
closed block been established as of December 31, 1999, total closed block
liabilities would have been $12,081.6 million.
The assets and liabilities allocated to the closed block will be recorded
in our consolidated financial statements at their historical carrying values.
The carrying value of the assets allocated to the closed block were less than
the carrying value of the closed block liabilities at the effective date of the
reorganization. The excess of the closed block liabilities over the closed block
assets at the effective date represents the estimated future post-tax
contribution expected from the operation of the closed block, which will be
recognized in our consolidated income over the period the policies in the closed
block remain in force.
Actual cash flows from the assets allocated to the closed block and other
experience relating to the closed block business, in the aggregate, may be more
favorable than we assumed in setting up the closed block. In that case, total
policy dividends paid to closed block policyholders in future years will be
greater than the total policy dividends that would have been paid to such
policyholders if the policy dividend scales payable in 1999 had been
continued without adjustment. Conversely, to the extent that such cash flows and
other experience are, in the aggregate, less favorable than we assumed in
setting up the closed block, total policy dividends paid to closed block
policyholders in future years will be less than the total dividends that would
have been paid to such policyholders if the policy dividend scales payable in
1999 had been continued without adjustment, unless we choose, for competitive
reasons, to use our general account assets to support the dividends. As a result
of continuing efforts to contact policyholders in connection with our
demutualization, we anticipate that additional death claims will be reported to
us. We have agreed to reimburse the closed block for the financial effect of the
excess claims incurred prior to January 1, 1999, which are reported through
December 31, 2000, over the reserve for such claims as of December 31, 1998. We
presently estimate that this amount will approximate $61.7 million, as a result
of additional claim data received by us in 1999 and have recognized a reserve in
that amount. The 1999 charge lowered estimated gross profits for purposes of
amortizing deferred policy acquisition costs and reduced amortization expense by
approximately $32.4 million in 1999.
In addition, if the assets allocated to the closed block, the cash flows
therefrom and the revenues from the closed block business prove to be
insufficient to pay the benefits guaranteed under the policies included in the
closed block, John Hancock Life Insurance Company will be required to make
payments from its general funds in an amount equal to the shortfall. We funded
the closed block to provide for payment of guaranteed benefits on such policies
and for continuation of dividends paid under 1999 policy dividends scales,
assuming the experience underlying such dividend scales continues. Therefore, we
do not believe it will be necessary to use general funds to pay guaranteed
benefits on closed block business unless the closed block business experiences
substantial adverse deviations in investment, mortality, persistency or other
experience factors.
We estimate that costs relating to the demutualization, excluding costs
relating to the offering, will be approximately $156.4 million net of income
taxes, of which $112.1 million was recognized through December 31, 1999.
Demutualization expenses include printing and mailing costs and our aggregate
cost of engaging independent accounting, actuarial, financial, investment
banking, legal and other consultants to advise us. In addition, our costs
include the costs of the staff and advisors of the Massachusetts Division of
Insurance and the New York Insurance Department as to the demutualization
process and related matters.
For additional information on the creation of the closed block see Note 14
to our consolidated financial statements.
Corporate Account Asset Transfer
Background
We established a "corporate account" as part of our Corporate and Other
Segment to facilitate our capital management process. The corporate account
contains capital not allocated to support the operations of our business
segments.
Late in the fourth quarter of 1999, we transferred certain assets from the
business segments to the corporate account. These assets include investments in
certain subsidiaries and the home office real estate complex (collectively
referred to as "corporate purpose assets"). Historically, we have allocated
the investment performance or other earnings of corporate purpose assets among
all of our business segments. However, subsequent to the conversion to a stock
life insurance company, we will centrally manage the performance of corporate
purpose assets through the corporate account.
Implications to Contractholders and Policyholders
The asset transfer directly affected certain participating contractholders,
including group pension participating contractholders and participating
individual life insurance policyholders because those contracts have
participating
features, under which crediting rates and dividends are affected directly by
portfolio earnings. Our nonparticipating contracts have guaranteed crediting
rates, dividends and other contract values that are unaffected by earnings on
specific portfolio assets. We compensated the affected contractholders and
policyholders for the impact of the transfer as follows:
Group Participating Contracts. Certain group products have participating
features, under which crediting rates and dividends are affected directly by
portfolio earnings. Certain participating contractholders participate in
contract experience related to net investment income and realized capital gains
and losses in the general account. These participating contractholders were
compensated for transferred assets based on the fair value of the assets
transferred, which amounted to $771.7 million. These participating
contractholders were credited with their portion of the difference between the
fair value and carrying value of the assets transferred through the crediting
rates and dividends on their contracts. The after-tax amount of the transfer
was $205.8 million.
Participating Individual Life Insurance. As part of the reorganization, we
established and operate a closed block for our participating individual life
insurance business. The closed block supports the continuation of policyholder
dividend scales in effect for 1999, assuming continuation of the experience
underlying those dividend scales. The assets included in the closed block do not
include any corporate purpose assets. Moreover, our Plan of Reorganization
contemplates that the fair value of corporate purpose assets is included in the
calculation of consideration payable to our participating individual life
insurance policyholders upon our demutualization. As a result, our participating
individual life policyholders are not expected to be impacted unfavorably by the
transfer of the corporate purpose assets.
Accounting and Timing
We accounted for the transfer of the corporate purpose assets between the
business segments and the corporate account at historical cost.
Because of the participating features of the affected group participating
contracts, we believe that the transfer of corporate purpose assets was
analogous to their sale. Group participating contractholders are entitled to
receive the proceeds from assets sold from the segment. As a result, we
recognized an expense to increase our liability to affected group participating
contractholders for their proportionate share of the appreciation of the
corporate purpose assets transferred. For the other business segments,
differences between the historical cost of the assets transferred and the fair
value of amounts received by the business segments was recorded as a capital
adjustment by each segment.
The transfer during the fourth quarter of 1999 resulted in a charge to
operations of $205.8 million, net of tax.
Transactions Affecting Comparability of Results of Operations--Disposed
Businesses
We have completed a number of transactions which have affected the
comparability of our results of operations. On March 31, 1999, we completed the
sale of Unigard Security Insurance Company ("USIC") and John Hancock Insurance
Co. of Bermuda Ltd. ("John Hancock Bermuda"). The sale of USIC was completed by
entering into a 100% quota share reinsurance agreement with a third party
reinsurer and then through a stock sale. We also sold 100% of the stock of John
Hancock Bermuda, which offered reinsurance products and services. Assets and
liabilities transferred in connection with both sales amounted to $381.0 million
and $161.8 million, respectively. The sale of USIC resulted in an after-tax
loss of $21.4 million. John Hancock Bermuda was sold for its net book value
which resulted in the recognition of no gain or loss.
On February 28, 1997, we sold a major portion of our group insurance
business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly owned
subsidiary of WellPoint Health Networks, Inc. The business
sold included our group accident and health business and related group life
insurance business and Cost Care, Inc., Hancock Association Services Group and
Tri-State Inc., all of which were indirectly wholly-owned subsidiaries of the
company. The company retained its group long-term care operations. Assets equal
to liabilities of $686.7 million at February 28, 1997, subject to agreement on
asset and liability values, were transferred to UNICARE in connection with the
sale. The insurance business sold was transferred to UNICARE through a 100%
coinsurance agreement.
On November 29, 1996, we closed the sale of 95% of John Hancock Freedom
Securities Corporation ("Freedom Securities"), a holding company, and its
subsidiaries, primarily Tucker Anthony Incorporated and Sutro and Co., both
broker/dealers. Net assets transferred were approximately $164.3 million and
the sale resulted in the recognition of a $25.1 million pre-tax gain in 1996.
We sold the remaining 5% of Freedom Securities during 1998 and recognized a pre-
tax gain of $4.3 million.
Effective July 1, 1996, John Hancock Property and Casualty Insurance
Company ("JHP&C") and its wholly-owned subsidiary, John Hancock Indemnity
Company ("Indemnity") each entered into a quota share reinsurance agreement with
a third party reinsurer under which they ceded 100% of their loss, loss
adjustment expense and unearned premium reserves at June 30, 1996, relating to
continuing operations. Under the terms of the quota share reinsurance agreement,
JHP&C cedes 100% of all continuing operations business written subsequent to
June 30, 1996. Net assets transferred were approximately $12.0 million and no
gain or loss was recognized on the transaction. On September 12, 1996, JHP&C
sold 100% of the stock of Indemnity. Net assets transferred were approximately
$6.0 million and the sale resulted in the recognition of a $6.0 million pre-tax
gain. On September 9, 1999, we sold 100% of the stock of JHP&C. Net assets were
approximately $21.0 million and no gain or loss was recognized on the sale.
In order to enhance comparability, the following discussion of our results
of operations is supplemented, where appropriate, by financial information of
the disposed businesses in each period presented. The financial information of
the disposed businesses is presented for informational purposes only.
Results of Operations
The table below presents the results of operations of our ongoing businesses,
disposed businesses, and consolidated financial information for the years ended
1999, 1998 and 1997.
For the Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ -----------------------
Ongoing Disposed Ongoing Disposed Ongoing Disposed
Businesses Businesses Consolidated Businesses Businesses Consolidated Businesses Businesses Consolidated
---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------
(in millions)
Revenues
Premiums.................. $ 2,717.5 $ -- $ 2,717.5 $ 2,197.9 $ -- $ 2,197.9 $ 2,372.2 $ 101.4 $ 2,473.6
Universal life and
investment-
type product charges..... 703.5 -- 703.5 597.0 -- 597.0 512.0 -- 512.0
Net investment income..... 3,565.0 9.0 3,574.0 3,300.8 29.9 3,330.7 3,153.3 37.4 3,190.7
Net realized investment
gains (losses), net of
related amortization of
deferred policy
acquisition costs and
amounts credited to
participating pension
contractholders (1)...... 198.1 (23.0) 175.1 85.9 20.5 106.4 113.0 44.0 157.0
Investment management
revenues, commissions,
and other fees........... 680.9 -- 680.9 659.7 -- 659.7 554.7 -- 554.7
Other revenue (expense)... 9.4 (2.9) 6.5 11.0 (.7) 10.3 22.2 36.1 58.3
------- ------ ------- ------- ----- ------- ------- ------ -------
Total revenues
(expenses).............. 7,874.4 (16.9) 7,857.5 6,852.3 49.7 6,902.0 6,727.4 218.9 6,946.3
Benefits and expenses
Benefits to policyholders,
excluding amounts related
to net realized investment
gains credited to
participating pension
contractholders (2)...... 5,174.8 243.6 5,418.4 4,140.8 11.2 4,152.0 4,170.4 132.7 4,303.1
Other operating costs and
expenses................. 1,412.3 -- 1,412.3 1,383.0 -- 1,383.0 1,241.6 42.1 1,283.7
Amortization of deferred
policy acquisition costs,
excluding amounts related
to net realized investment
gains (3)................ 166.8 -- 166.8 249.7 -- 249.7 312.0 -- 312.0
Dividends to
policyholders............ 501.6 -- 501.6 473.2 -- 473.2 455.5 2.3 457.8
-------- ------ -------- -------- ----- -------- -------- ------ --------
Total benefits and
expenses.................. 7,255.5 243.6 7,499.1 6,246.7 11.2 6,257.9 6,179.5 177.1 6,356.6
-------- ------ -------- -------- ----- --------- -------- ------ --------
Income (loss) before
income taxes,
extraordinary items, and
cumulative effect of
accounting change......... 618.9 (260.5) 358.4 605.6 38.5 644.1 547.9 41.8 589.7
Income taxes (benefit)..... 215.7 (113.8) 101.9 176.4 7.5 183.9 101.8 4.6 106.4
-------- ------ -------- -------- ----- --------- -------- ------ --------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change......... 403.2 (146.7) 256.5 429.2 31.0 460.2 446.1 37.2 483.3
Extraordinary item--
Demutualization expenses,
net of tax............... (93.6) -- (93.6) (11.7) -- (11.7) -- -- --
Cumulative effect of
accounting change......... (9.7) -- (9.7) -- -- -- -- -- --
-------- ------- -------- -------- ----- -------- -------- ------- -------
Net income (loss).......... $ 299.9 $(146.7) $ 153.2 $ 417.5 $31.0 $ 448.5 $ 446.1 $ 37.2 $ 483.3
======== ======= ======== ======== ===== ======== ======== ======= =======
- ---------------
(1) Net of related amortization of deferred policy acquisition costs and
amounts credited to participating pension contractholders of $85.8 million,
$120.3 million, and $60.5 million for the years ended 1999, 1998, and 1997,
respectively.
(2) Excluding amounts related to net realized investment gains credited to
participating pension contractholders of $35.3 million, $79.1 million, and
$29.3 million for the years ended 1999, 1998, and 1997, respectively.
(3) Excluding amounts related to net realized investment gains of $50.5
million, $41.2 million, and $31.2 million for the years ended 1999, 1998,
and 1997, respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Consolidated income before income taxes, extraordinary item and cumulative
effect of accounting change of $358.4 million for the year ended December 31,
1999 decreased by $285.7 million, or 44.4%, as compared to consolidated income
before income taxes, extraordinary item and cumulative effect of accounting
change of $644.1 million for the year ended December 31, 1998. The decrease was
primarily attributable to decreases in income before income taxes, extraordinary
item and cumulative effect of accounting change of $194.3 million in the
Guaranteed and Structured Financial Products Segment, $191.0 million in the
Corporate and Other Segment, and $34.0 million in the Asset Gathering Segment.
These decreases were offset by increases of $94.1 million in the Protection
Segment and $39.5 million in the Investment Management Segment. The decrease in
the Guaranteed and Structured Financial Products Segment was primarily due to
recognizing a $345.5 million pre-tax charge for compensation of group
participating contractholders for assets transferred in conjunction with the
formation of the corporate account. The decrease in the Corporate & Other
Segment was primarily due to a $208.6 million pre-tax charge for our exposure to
losses under our Workers' Compensation reinsurance programs, including Unicover
Managers, Inc., that was associated with the group business we sold in 1997
partially offset by lower pre-tax charges in connection with the class action
settlement of $140.2 million in 1999 compared to $230.8 million in 1998. The
decrease in the Asset Gathering Segment was primarily due to lower investment
advisory fees earned from our mutual fund operations. The increase in the
Protection Segment was primarily due to higher realized investment gains on real
estate, higher fee income on variable life insurance products, and favorable
claims experience on long-term care insurance products. The increase in the
Investment Management Segment was due primarily to higher investment advisory
fees resulting from growth in assets under management and higher realized
investment gains on sales of mortgage loans.
Ongoing Businesses. Premium revenue from ongoing businesses was $2,717.5
million for 1999, an increase of $519.6 million, or 23.6%, from $2,197.9 million
in 1998. The increase was due to a $342.3 million increase in premiums in the
Guaranteed and Structured Financial Products Segment, including the sale of one
single premium annuity contract for $339.0 million, and a $58.1 million
increase, or 26.6%, in the Protection Segment for premiums on individual long-
term care insurance products.
Universal life and investment-type product charges from ongoing businesses
were $703.5 million for 1999, an increase of $106.5 million, or 17.8%, from
$597.0 million in 1998. These product charges consist primarily of cost of
insurance fees on our variable life insurance and universal life insurance
products and mortality and expense fees on our variable annuity products. The
increase was primarily due to higher cost of insurance fees resulting from
growth in the average amount of variable life insurance in force and higher
average variable annuity separate account liabilities. Investment-type product
charges in the Guaranteed and Structured Financial Products Segment also
increased as a result of higher sales of single premium annuity contracts and
separate account GICs.
Net investment income from ongoing businesses was $3,565.0 million for 1999,
an increase of $264.2 million, or 8.0%, from $3,300.8 million in 1998. The
increase was primarily the result of higher average invested assets, which
increased $3,447.3 million, or 8.0%, to $46,757.6 million in 1999, as compared
to $43,310.3 million in 1998. The net yield on average invested assets was 7.62%
for 1999 and 1998. Yields were positively impacted in 1999 from lower investment
expenses offset by the general decline in market interest rates.
Net realized gains on investments from ongoing businesses were $198.1 million
for 1999, an increase of $112.2 million from $85.9 million in 1998. The increase
was primarily the result of increased gains on sales of real estate relating to
the program initiated in 1998 to sell more than 150 of the properties in our
real estate portfolio in order to take advantage of the strong real estate
market and reduce our general account investment in real estate.
Realized gains on sales of real estate increased $66.6 million to $115.1
million in 1999 from $48.5 million in 1998.
Investment management revenues, commissions, and other fees from ongoing
businesses were $680.9 million, an increase of $21.2 million, or 3.2%, from
$659.7 million in 1998. The increase was the result of higher institutional
investment advisory fees which increased $18.3 million primarily due to growth
in average institutional assets under management at Independence Investment
Advisors, our investment advisory subsidiary. Average institutional assets under
management increased 13.5% to $40,554.7 million in 1999. Underwriting and
distribution fees increased $12.2 million primarily resulting from our
acquisition of the Essex Corporation, a distributor of annuities and mutual
funds through banks, in January 1999. Partially offsetting these increases,
mutual fund advisory fees declined $8.1 million in 1999, primarily due to lower
average assets under management along with a slight decline in the average
investment advisory fee rate, as fixed income assets, which bear a lower
advisory fee than equity assets, increased as a percentage of total assets.
Other revenue from ongoing businesses was $9.4 million in 1999, a decrease of
$1.6 million, or 14.5%, from $11.0 million reported in 1998.
Benefits to policyholders from ongoing businesses were $5,174.8 million for
1999, an increase of $1,034.0 million, or 25.0%, from $4,140.8 million in 1998.
The increase was primarily due to a $373.9 million increase in benefits due to
higher sales of single premium annuity contracts, a $345.5 million increase in
benefits related to the compensation of group participating contractholders for
assets transferred in conjunction with the formation of the corporate account, a
$140.7 million increase in benefits on traditional life insurance products due
to higher death benefits, including $61.7 million of reserves established for
incurred but unreported deaths identified as a result of the policyholder
demutualization mailing, a $113.2 million increase in benefits related to the
settlement of a class action lawsuit involving individual life insurance
policies sold from 1979 through 1996 and a $63.2 million increase in benefits on
individual long-term care insurance products, resulting from higher sales.
Other operating costs and expenses from ongoing businesses were $1,412.3
million for 1999, an increase of $29.3 million, or 2.1%, from $1,383.0 million
for 1998. The increase was primarily due to $26.3 million in restructuring
charges during 1999 and increased interest and related expenses of $9.0 million
in the Investment Management Segment primarily resulting from the formation of a
collateralized bond obligation during the second quarter of 1998. These
increases were partially offset by a $20.9 million decrease in interest expense
on prior year taxes.
Amortization of deferred policy acquisition costs from ongoing businesses was
$166.8 million for 1999, a decrease of $82.9 million, or 33.2%, from $249.7
million for 1998. The decrease was primarily due to lower amortization expense
on non-traditional life insurance products resulting from revised projections of
estimated gross profits based upon increases in estimated future interest
margins and mortality margins. In addition, amortization expense on traditional
life insurance products decreased due to lower profits, primarily resulting from
$61.7 million of previously unreported deaths identified as a result of the
policyholder demutualization mailing.
Dividends to policyholders from ongoing businesses were $501.6 million in
1999, an increase of $28.4 million, or 6.0%, from $473.2 million in 1998. The
increase primarily resulted from normal growth in dividends on traditional life
insurance products.
Income taxes from ongoing businesses were $215.7 million in 1999, compared to
$176.4 million for 1998. Our effective tax rate from ongoing businesses before
the surplus tax and demutualization expenses was 31.3% in 1999, as compared to
31.7% in 1998. We have been subject to the surplus tax (add-on tax) imposed on
mutual life insurance companies which disallows a portion of mutual life
insurance company's policyholder dividends as a deduction from taxable income.
As a stock company, we are no longer subject to the surplus tax.
Extraordinary expenses from ongoing businesses, net of tax, were $93.6
million in 1999 compared to $11.7 million in 1998. These expenses were comprised
of direct non-recurring costs specifically related to our reorganization. These
costs primarily consist of printing and mailing fees, fees of the regulators'
advisors and our financial, legal, actuarial, and accounting advisors.
Cumulative effect of accounting change, net of tax was $9.7 million in 1999.
During 1999 we adopted Statement of Position 98-5, Reporting the Costs of Start-
up Activities, which requires that start-up costs capitalized prior to January
1, 1999 be written off and any future start-up costs be expensed as incurred. We
wrote off the unamortized balance of capitalized start-up costs related to our
closed-end mutual funds in 1999.
Disposed Businesses. Revenues from disposed businesses decreased $66.6 million
and benefits and expenses from disposed businesses increased $232.4 million in
1999 as compared to 1998. The decrease in revenues is due to the previously
described disposals. The increase in benefits and expenses is primarily due to
recognizing a $208.6 million pre-tax charge for our exposure to losses under our
Workers' Compensation reinsurance programs, including Unicover Managers, Inc.,
that was associated with the group business we sold in 1997.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated income before income taxes, extraordinary item and cumulative
effect of accounting change of $644.1 million for the year ended December 31,
1998 increased by $54.4 million, or 9.2%, as compared to consolidated income
before income taxes, extraordinary item and cumulative effect of accounting
change of $589.7 million for the year ended December 31, 1997. The increase was
primarily attributable to increases in consolidated income before income taxes,
extraordinary item and cumulative effect of accounting change of $43.6 million
in the Asset Gathering Segment, $20.2 million in the Guaranteed and Structured
Financial Products Segment, and $3.1 million in the Protection Segment. These
increases were offset by decreases of $8.5 million in the Corporate and Other
Segment and $4.0 million in the Investment Management Segment. The increase in
the Asset Gathering Segment was primarily attributable to growth in investment
management revenues, commissions, and other fees, investment-type product
charges, and net investment income, all due to growth in assets under
management, primarily due to net sales. The increase in the Guaranteed and
Structured Financial Products Segment was primarily due to improved interest
margins on spread-based products and growth in general account assets. The
increase in the Protection Segment was primarily due to higher fee income from
cost of insurance and separate account charges on variable life insurance
products and lower amortization of deferred policy acquisition costs, partially
offset by higher operating expenses. Corporate and Other Segment income declined
due to the disposal of businesses previously described. The decrease in the
Investment Management Segment was due primarily to reduced advisory fees on
timber assets and higher operating expenses due to growth in operations.
Ongoing Businesses. Premium revenue from ongoing businesses was $2,197.9
million for 1998, a decrease of $174.3 million, or 7.3%, from $2,372.2 million
in 1997. The decrease was primarily due to a decline in premiums of $107.6
million resulting from the termination of our participation in the Federal
Employers Group Life Insurance Program (the ''FEGLI Program'') in the Corporate
and Other Segment and a $79.6 million decrease in single premium annuity
contract premiums in the Guaranteed and Structured Financial Products Segment.
The decline in premiums due to the termination of our participation in the FEGLI
Program has little effect on earnings, as the decline in premiums is completely
offset by corresponding decreases in benefits to policyholders. Traditional life
insurance premiums in the Protection Segment decreased $38.0 million primarily
due to term insurance premiums ceded under a reinsurance contract entered into
during 1998. These decreases were partially offset by higher premiums of
individual long-term care insurance of $43.3 million, an increase of 24.7%.
Universal life and investment-type product charges from ongoing businesses
were $597.0 million for 1998, an increase of $85.0 million, or 16.6%, from
$512.0 million in 1997. The increase was primarily the result of growth in
account values of variable life insurance products due to additional deposits
and market appreciation. The average amount of variable life insurance in force
increased 12.7% to $49,364.1 million in 1998 from $43,791.7 million in 1997.
Average variable annuity separate account liabilities increased 28.9% to
$5,736.0 million in 1998 compared to $4,450.0 million in 1997.
Net investment income from ongoing businesses was $3,300.8 million for 1998,
an increase of $147.5 million, or 4.7%, from $3,153.3 million in 1997. The
increase was primarily the result of an increase in average invested
assets related to ongoing businesses due to continued sales among all segments.
Average invested assets related to ongoing businesses increased $1,688.4
million, or 4.1%, to $43,310.3 million for 1998, as compared to $41,621.9
million in 1997. The net yield on average invested assets increased to 7.62% in
1998 from 7.58% in 1997. The increase was primarily due to increased investments
in leveraged leases and lower depreciation expense on real estate, which
resulted from suspending depreciation on real estate properties held for sale
during 1998.
Net realized gains on investments from ongoing businesses were $85.9 million
for 1998, a decrease of $27.1 million, or 24.0%, from $113.0 million in 1997.
The decrease was primarily due to additional provisions for losses of $142.0
million on mortgage loans, real estate, and other invested assets, partially
offset by higher gains on sales of common stock and real estate. During 1998 we
initiated a program to sell more than 150 properties in our real estate
portfolio. Once we identify a property to be sold, it is held for sale and
valued at the lower of cost or fair value less costs to sell. Realized gains on
sales of common stock were $82.0 million in 1998, as compared to $6.2 million in
1997. Realized gains on sales of real estate were $48.5 million in 1998, as
compared to $18.3 million in 1997.
Investment management revenues, commissions, and other fees from ongoing
businesses were $659.7 million, an increase of $105.0 million, or 18.9%, from
$554.7 million in 1997. This increase was primarily the result of higher
underwriting and distribution fees earned of $64.1 million, higher investment
advisory fees earned of $39.0 million, and higher shareholder service and other
fees earned of $6.7 million primarily in the Asset Gathering Segment. The
increases primarily reflect a higher level of average assets under management,
which increased 15.6% to $69,960.2 million in 1998 from $60,513.7 million in
1997.
Other revenue from ongoing businesses was $11.0 million in 1998, a decrease of
$11.2 million, or 50.5%, from $22.2 million reported in 1997. Of the decrease,
$4.4 million was due to lower conversion fee income resulting from the
termination of our participation in the FEGLI Program. Conversion fee income is
earned when an insured in the FEGLI Program purchases insurance directly from
us.
Benefits to policyholders from ongoing businesses were $4,140.8 million for
1998, a decrease of $29.6 million, or 0.7%, from $4,170.4 million in 1997. This
decrease primarily resulted from a $107.0 million decline in benefits related to
the termination of the FEGLI Program and a $83.6 million decline in benefits
primarily resulting from lower sales of single premium annuity contracts. These
decreases were partially offset by a $77.3 million increase in benefits related
to the settlement of a class action lawsuit involving certain individual life
insurance policies sold from 1979 through 1996 and higher benefits on non-
traditional life insurance and individual long-term care insurance products due
to increased sales.
Other operating costs and expenses from ongoing businesses were $1,383.0
million for 1998, an increase of $141.4 million, or 11.4%, from $1,241.6 million
for 1997. The increase was primarily due to higher compensation and related
costs and administrative expenses of approximately $60.6 million related to
mutual fund and institutional investment management operations as a result of
continued growth in those businesses and additional expenses of $47.2 million
related to the operation, management, and enhancement of our information
systems. Commissions increased from 1997 as a result of higher sales of mutual
fund and non-traditional life insurance products. These increases were partially
offset by lower expenses of $19.6 million in 1998, as compared to 1997, related
to the settlement of a class action lawsuit involving certain individual life
insurance policies sold from 1979 through 1996.
Amortization of deferred policy acquisition costs from ongoing businesses was
$249.7 million for 1998, a decrease of $62.3 million, or 20.0%, from $312.0
million for 1997. The decrease was primarily the result of higher amortization
expense in 1997 for non-traditional life insurance products resulting from
revised projections of estimated gross profits.
Dividends to policyholders from ongoing businesses were $473.2 million in
1998, an increase of $17.7 million, or 3.9%, from $455.5 million in 1997. The
increase primarily resulted from normal growth in dividends on
traditional life insurance products, partially offset by a reduction in
participating group annuity contract payments.
Income taxes from ongoing businesses were $176.4 million in 1998, compared to
$101.8 million for 1997. Our effective tax rate from ongoing businesses before
the surplus tax and demutualization expenses was 31.7% in 1998, as compared to
25.0% in 1997. The increase in the effective tax rate was due primarily to the
development of tax planning strategies to use $51.0 million of net loss
carryforwards in 1997.
Extraordinary expenses of $11.7 million, net of tax, for 1998 were comprised
of direct non-recurring costs specifically related to our reorganization. These
costs primarily consist of fees of our financial, legal, actuarial, and
accounting advisors.
Disposed Businesses. Revenues from disposed businesses decreased $169.2
million and benefits and expenses from disposed businesses decreased $165.9
million from 1997 to 1998 due to the previously described disposals.
Results of Operations by Segment
We evaluate segment performance and base management's incentives on segment
after-tax operating income, which excludes the effect of net realized investment
gains and losses and unusual or non-recurring events and transactions. Segment
after-tax operating income is determined by adjusting GAAP net income for net
realized investment gains and losses, extraordinary items, and certain other
items which we believe are not indicative of overall operating trends. While
these items may be significant components in understanding and assessing our
consolidated financial performance, we believe that the presentation of segment
after-tax operating income enhances the understanding of our results of
operations by highlighting net income attributable to the normal, recurring
operations of the business. However, segment after-tax operating income is not a
substitute for net income determined in accordance with GAAP.
A discussion of the adjustments to GAAP reported income, many of which affect
each operating segment, follows. A reconciliation of segment after-tax operating
income, as adjusted, to GAAP reported net income precedes each segment
discussion.
For the Year Ended December 31,
---------------------------------
1999 1998 1997
--------- -------- --------
(in millions)
Segment Data: (1)
Segment after-tax operating income:
Protection Segment.................................. $ 190.6 $ 172.3 $ 158.1
Asset Gathering Segment............................. 115.1 111.1 93.3
-------- -------- --------
Total Retail........................................ 305.7 283.4 251.4
Guaranteed and Structured Financial Products
Segment............................................ 202.4 145.7 139.9
Investment Management Segment....................... 37.3 15.4 17.2
-------- -------- --------
Total Institutional................................. 239.7 161.1 157.1
Corporate and Other Segment......................... 67.8 56.3 39.4
-------- -------- --------
Total segment income................................ 613.2 500.8 447.9
After-tax adjustments: (1)
Realized investment gains, net (1).................. 119.9 93.9 104.9
Class action lawsuit................................ (91.1) (150.0) (112.5)
Workers' compensation reinsurance reserve........... (133.7) - -
Restructuring charges............................... (17.0) - -
Corporate account asset transfer.................... (205.8) - -
Other demutualization related costs................. (6.8) - -
Benefit from pension participating contract
modification....................................... - - 7.7
Surplus tax......................................... (22.2) 15.5 35.3
-------- -------- --------
Total after-tax adjustments......................... (356.7) (40.6) 35.4
-------- -------- --------
GAAP Reported:
Income before extraordinary item and cumulative
effect of accounting change........................ 256.5 460.2 483.3
Extraordinary item
Demutualization expenses, net of tax............... (93.6) (11.7) -
Cumulative effect of accounting change.............. (9.7) - -
-------- -------- --------
Net income.......................................... $ 153.2 $ 448.5 $ 483.3
======== ======== ========
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis.
Adjustments to GAAP Reported Net Income
Our GAAP reported net income was significantly affected by net realized
investment gains and losses and unusual or non-recurring events and transactions
presented above as after-tax adjustments. A description of these adjustments
follows.
In all periods, net realized investment gains and losses, except for gains
and losses from mortgage securitizations and investments backing our short-term
funding agreements, have been excluded from segment after-tax operating income
due to their volatility between periods and because such data are often excluded
by analysts and investors when evaluating the overall financial performance of
insurers. The volatility between periods can be impacted by fluctuations in the
market, as well as by changes in the volume of activity which can be influenced
by us and our investment decisions. Realized investment gains and losses from
mortgage securitizations and investments backing our short-term funding
agreements were not excluded from segment after-tax operating income because we
view the related gains and losses as an integral part of the core business of
those operations.
Net realized investment gains have been reduced by: (1) amortization of
deferred policy acquisition costs to the extent that such amortization results
from realized gains and losses and (2) the portion of realized gains and losses
credited to certain participating contractholder accounts. We believe presenting
realized investment gains and losses in this format provides information useful
in evaluating our operating performance. This presentation may not be comparable
to presentations made by other insurers. Summarized below is a reconciliation of
(a) net realized investment gains per the consolidated financial statements and
(b) the adjustment made for net realized investment gains to calculate segment
after-tax operating income for the years ended December 31, 1999, 1998 and 1997.
For the Year Ended December 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
(in millions)
Net realized investment gains......................................................... $260.9 $226.7 $217.5
Less amortization of deferred policy
acquisition costs related to net realized
investment gains..................................................................... (50.5) (41.2) (31.2)
Less amounts credited to participating pension
contractholder accounts.............................................................. (35.3) (79.1) (29.3)
------ ------ ------
Net realized investment gains, net of related
amortization of deferred policy acquisition
costs and amounts credited to participating
pension contractholders per consolidated
financial statements................................................................. 175.1 106.4 157.0
Less realized investment gains (losses)
attributable to mortgage securitizations and
investments backing short-term funding
agreements........................................................................... (27.7) (42.1) (4.6)
------ ------ ------
Realized investment gains (losses), net - pre-tax adjustment to calculate segment
operating income..................................................................... 202.8 148.5 161.6
Less income tax effect................................................................ (82.9) (54.6) (56.7)
------ ------ ------
Realized investment gains (losses), net - after-tax adjustment to calculate segment
operating income..................................................................... $119.9 $ 93.9 $104.9
====== ====== ======
During 1997, we entered into a court approved settlement relating to a
class action lawsuit involving individual life insurance policies sold from 1979
through 1996, as specified in the Legal Proceedings section of this Form 10-K.
In entering into the settlement, we specifically denied any wrongdoing. The
reserve held in connection with the settlement to provide for relief to class
members and for legal and administrative costs associated with the settlement
amounted to $496.6 million, $436.6 million and $308.8 million at December 31,
1999, 1998 and 1997 respectively. Given the uncertainties associated with
estimating the reserve, it is reasonably possible that the final cost of the
settlement could differ materially from the amount previously reported.
Through our group health insurance operations, which we sold in 1997, we
entered into a number of reinsurance arrangements in respect of personal
accident insurance and the occupational accident component of workers
compensation insurance, a portion of which was originated through a pool managed
by Unicover Managers, Inc. Under these arrangements, we both assumed risks as a
reinsurer, and also passed 95% of these risks on to other companies. This
business had originally been reinsured by a number of different companies, and
has become the subject of widespread disputes. During the fourth quarter of
1999 and early 2000, we received additional information about our exposure to
losses under the various reinsurance programs. As a result of this additional
information and in connection with global settlement discussions initiated in
late 1999 with other parties involved in the reinsurance programs, our present
best estimate of our remaining loss exposure to this issue is $133.7 million,
after tax, which we recognized in 1999.
During 1999, we recorded $17.0 million in after-tax restructuring charges
to reduce costs and increase future operating efficiency by consolidating
portions of our operations. For additional information see "Note 1 - Summary of
Significant Accounting Policies - Severance" of our Consolidated Financial
Statements.
During 1999, we recorded a $205.8 million after-tax charge for the transfer
of certain assets from the Guaranteed and Structured Financial Products Segment
to the corporate account. These assets included investments in certain
subsidiaries and the home office real estate complex (collectively referred to
as "corporate purpose assets"). Certain group contracts have participating
features, under which crediting rates and dividends are affected directly by
portfolio earnings. Certain participating contractholders participate in
contract experience related to net investment income and realized capital gains
and losses in the general account. These participating contractholders were
compensated for transferred assets based on the fair value of the assets
transferred. The difference between the fair value and carrying value of the
assets transferred were credited to affected participating contractholders
through the crediting rates and dividends on their contracts.
During 1999, we recorded a $6.8 million after-tax charge for
demutualization related expenses to improve our financial analysis and financial
reporting abilities. These charges primarily included consulting fees and
planning and expense management costs.
During 1997, a participating pension reinsurance contractholder requested
the distribution of a portion of contract funds. At the time of the request,
the contract stated that these funds were to be paid out over a specified number
of years. However, we distributed a portion of the contractholder's funds in
exchange for the right to retain the tax credits that resulted from the
distribution. The contractual amendment resulted in the recognition of a $7.7
million after-tax gain.
We have been subject to the surplus tax imposed on mutual life insurance
companies which disallows a portion of mutual life insurance company's
policyholder dividends as a deduction from taxable income. As a stock company,
we are no longer subject to surplus tax and have excluded the surplus tax from
segment after-tax operating income in all periods.
Amortization of Goodwill
The excess of cost over the fair value of the net assets of businesses
acquired was $155.3 million and $69.8 million at December 31, 1999 and 1998,
respectively. Goodwill is amortized on a systematic basis over periods not
exceeding 40 years, which correspond with the benefits estimated to be derived
from the acquisitions. Accumulated amortization was $43.3 million and $34.5
million at December 31, 1999 and 1998, respectively. Amortization expense
included in other operating costs and expenses was $9.7 million, $9.1 million,
and $16.7 million in 1999, 1998 and 1997, respectively. The Company reevaluates
the recoverability of recorded goodwill based on the undiscounted cash flows of
the related business whenever significant events or changes indicate an
impairment may exist. If the undiscounted cash flows do not support the amount
recorded, an impairment is recognized by a charge to current operations to
reduce the carrying value of the goodwill based on the expected discounted cash
flows of the related business. The following table shows the amount of goodwill
amortization for each applicable segment:
For the Year Ended December 31,
----------------------------------
1999 1998 1997
---------- -------- ----------
(in millions)
Amortization of Goodwill:
Protection Segment.................. $ - $ - $ -
Asset Gathering Segment............. 6.8 6.5 6.5
------ ------ ------
Total Retail...................... 6.8 6.5 6.5
Guaranteed and Structured
Financial Products Segment........ - - -
Investment Management Segment....... 1.1 1.1 1.1
------ ------ ------
Total Institutional............... 1.1 1.1 1.1
Corporate and Other Segment......... 1.8 1.5 9.1
------ ------ ------
Total segment income................ $ 9.7 $ 9.1 $16.7
- ------------------------------------------------------------------------
Segment Allocations
We allocate surplus to the segments in amounts sufficient to support the
associated liabilities of each segment and to maintain capital levels consistent
with the overall business segment and corporate strategies. Allocations of net
investment income are based on the amount of assets owned by each segment. Other
costs and operating expenses are allocated to each segment based on a review of
the nature of such costs, cost allocations utilizing time studies, and other
allocation methodologies.
Retail-Protection Segment
The following table presents certain summary financial data relating to the
Protection Segment for the periods indicated.
For the Year Ended
December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
Operating Results:
Revenues
Premiums........................................... $1,431.7 $1,351.4 $1,343.0
Universal life and investment-type product
charges........................................... 361.1 333.3 288.8
Net investment income.............................. 1,107.3 1,063.9 983.4
Other revenue...................................... 2.9 10.6 16.6
-------- -------- --------
Total revenues................................... 2,903.0 2,759.2 2,631.8
Benefits and expenses
Benefits to policyholders......................... 1,709.4 1,493.8 1,399.1
Other operating costs and expenses................ 407.1 442.4 375.7
Amortization of deferred policy acquisition
costs, excluding amounts related to net realized
investment gains............................... 71.8 153.9 224.7
Dividends to policyholders.......................... 452.0 422.8 395.9
-------- -------- --------
Total benefits and expenses...................... 2,640.3 2,512.9 2,395.4
Segment pre-tax operating income (1)................. 262.7 246.3 236.4
Income taxes......................................... 72.1 74.0 78.3
-------- -------- --------
Segment after-tax operating income (1)............... 190.6 172.3 158.1
After-tax adjustments:(1)
Realized investment gains, net (1)................ 108.5 49.2 53.5
Restructuring charges............................. (8.6) - -
Other demutualization related costs............... (4.6)
Surplus tax....................................... (12.5) 11.7 16.9
-------- -------- --------
Total after-tax adjustments..................... 82.8 60.9 70.4
-------- -------- --------
GAAP Reported:
Income before extraordinary item.................... 273.4 233.2 228.5
Extraordinary item-demutualization expenses,
net of tax....................................... (61.3) (7.9) -
-------- -------- --------
Net income........................................... $ 212.1 $ 225.3 $ 228.5
======== ======== ========
For the Year Ended
December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
Other Data:
Segment after-tax operating income (loss)
Non-traditional life (variable life and universal
life).............................................. $ 92.8 $ 74.6 $ 38.6
Traditional life.................................... 68.2 73.0 97.9
Individual long-term care........................... 20.6 16.4 15.9
Group long-term care................................ 7.9 7.8 8.4
Other............................................... 1.1 .5 (2.7)
Statutory premiums (2)
Variable life....................................... $ 829.8 $ 810.8 $ 670.8
Universal life (3).................................. 117.9 436.8 141.8
Traditional life.................................... 1,043.6 1,051.3 1,071.7
Individual long-term care........................... 258.6 199.8 156.6
Group long-term care................................ 78.4 72.7 69.6
________________
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis.
(2) Statutory data have been derived from the annual statements of John Hancock
Mutual Life Insurance Company, John Hancock Variable Life Insurance
Company, Investors Partner Life (formerly John Hancock Life Insurance
Company of America), and John Hancock Reassurance Company Ltd. as filed
with insurance regulatory authorities and prepared in accordance with
statutory accounting practices.
(3) Includes bank owned life insurance premiums of $340.0 million and $65.0
million for the years ended December 31, 1998 and 1997, respectively.
There were no bank owned life insurance premiums for the year ended
December 31, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Segment after-tax operating income was $190.6 million in 1999, an increase of
$18.3 million, or 10.6%, from $172.3 million in 1998. Non-traditional life
insurance segment after-tax operating income increased $18.2 million, or 24.4%,
primarily due to an increase in universal life and investment-type product
charges due to growth in variable life insurance in-force. Traditional life
insurance segment after-tax operating income decreased $4.8 million, or 6.6%,
primarily resulting from higher death benefits and a $29.3 million charge net of
deferred acquisition costs for the incurred but not reported reserve associated
with the demutualization, partially offset by a decrease in interest expense on
prior year taxes. Individual long-term care insurance segment after-tax
operating income increased $4.2 million, or 25.6%, primarily due to higher net
investment income resulting from an increase in invested assets, partially
offset by unfavorable persistency. Group long-term care insurance segment
after-tax operating income increased by $0.1 million, or 1.3%.
Total revenues were $2,903.0 million in 1999, an increase of $143.8
million, or 5.2%, from $2,759.2 million in 1998. Premiums increased $80.3
million, or 5.9%, primarily due to an increase in individual long-term care
insurance premiums, which increased $58.1 million, or 26.6%. Universal life and
investment-type product charges consist primarily of cost of insurance fees and
separate account fees and were $361.1 million in 1999, an increase of $27.8
million, or 8.3%, from $333.3 million in 1998. The increase was primarily due to
higher cost of insurance fees resulting from growth in the average amount of
variable life insurance in-force, which increased 10.7% to $54,622.0 million in
1999 from $49,364.1 million in 1998. Net investment income increased $43.4
million, or 4.1%, primarily due to an increase in the segment's average invested
assets and lower investment expenses.
Total benefits and expenses were $2,640.3 million in 1999, an increase of
$127.4 million, or 5.1%, from $2,512.9 million in 1998. Benefits to
policyholders increased $215.6 million, or 14.4%, primarily due to a $140.7
million increase in benefits on traditional life insurance products due to
higher death benefits, including $61.7 million of benefits from previously
unreported deaths identified as a result of the policyholder demutualization
mailing, and a $63.2 million increase in benefits on individual long-term care
insurance products, due to higher sales. Other operating costs and expenses
decreased $35.3 million, or 8.0%, to $407.1 million in 1999 from $442.4 million
in 1998, primarily due to a decrease in interest expense on prior year taxes.
Amortization of deferred policy acquisition costs of $71.8 million in 1999
decreased $82.1 million, or 53.3%, from $153.9 million in 1998. The decrease was
primarily due to lower amortization expense on non-traditional life insurance
products resulting from revised projections of estimated gross profits based
upon increases in estimated future interest margins and mortality margins. In
addition, amortization expense on traditional life insurance products decreased
due to lower profits, primarily resulting from $61.7 million of previously
unreported death claims identified as a result of the policyholder
demutualization mailing. Dividends to policyholders increased $29.2 million, or
6.9%, primarily due to normal growth of dividends on traditional life insurance
products. The segment's effective tax rate declined to 27.4% in 1999 from 30.0%
in 1998, due to non-deductible losses in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Segment after-tax operating income was $172.3 million in 1998, an increase
of $14.2 million, or 9.0% from $158.1 million in 1997. Non-traditional life
insurance segment after-tax operating income increased $36.0 million, or 93.3%,
to $74.6 million in 1998 from $38.6 million in 1997. This increase was primarily
due to higher product charges on variable life insurance resulting from
increased sales and market appreciation. This increase also was due to lower
amortization expense of deferred policy acquisition costs in 1998 compared to
1997 that resulted from revised projections of estimated gross profits.
Traditional life insurance segment after-tax operating income declined by $24.9
million, or 25.4%, primarily due to higher operating expenses incurred for the
operation, management and enhancement of our information systems. Individual
long-term care insurance segment after-tax operating income increased $0.5
million, or 3.1%, to $16.4 million in 1998 from $15.9 million in 1997, primarily
due to favorable claims experience partially offset by unfavorable persistency.
Group long-term care insurance segment after-tax operating income declined by
$0.6 million, or 7.1%, primarily due to unfavorable persistency.
Total revenues were $2,759.2 million in 1998, an increase of $127.4
million, or 4.8%, from $2,631.8 million in 1997. Premiums increased $8.4
million, or 0.6%, from 1997 primarily due to an increase in individual long-term
care insurance premiums of $43.3 million, or 24.7%, partially offset by a
decrease in traditional life insurance premiums of $38.0 million, or 3.5%. The
decrease in traditional life insurance premiums was primarily due to $34.5
million of term insurance premiums, primarily related to policies issued from
1986 to 1995, which were ceded under a reinsurance contract entered into during
1998. Universal life and investment-type product charges increased $44.5
million, or 15.4%, to $333.3 million in 1998 from $288.8 million in 1997. Cost
of insurance fees increased primarily due to growth in the average amount of
variable life insurance in force, which increased 12.7% to $49,364.1 million in
1998 from $43,791.7 million in 1997. Fees earned on separate account products
increased as a result of the strong stock market returns experienced during the
year. Net investment income increased by $80.5 million, or 8.2%, compared to
1997, primarily reflecting an increase in the segment's invested assets. Other
revenue decreased $6.0 million in 1998 primarily due to lower conversion fee
income of $4.4 million resulting from the termination of our participation in
the FEGLI Program.
Total benefits and expenses were $2,512.9 million in 1998, an increase of
$117.5 million, or 4.9%, from $2,395.4 million in 1997. This increase was
primarily due to a $85.6 million increase in benefits to policyholders on non-
traditional life insurance and individual long-term care insurance products.
Benefits on non-traditional life insurance products increased $51.8 million, or
32.3%, primarily due to interest credited on the average total account balance
on universal life insurance, which increased 19.8% to $1,699.2 million for 1998
from $1,418.4 million for 1997, due to sales of new contracts. Benefits on
individual long-term care insurance products increased $33.8 million, or 28.4%,
due to sales of new contracts and higher than expected persistency of insurance
in force. These
increases were partially offset by favorable mortality and persistency on
traditional life and non-traditional life insurance products. Other operating
costs and expenses increased $66.7 million, or 17.8%, to $442.4 million in 1998
from $375.7 million in 1997. The increase was primarily due to higher expenses
incurred for the operation, management, and enhancement of our information
systems and increased commissions resulting from higher sales of non-traditional
life insurance products. Amortization of deferred policy acquisition costs of
$153.9 million for 1998 decreased $70.8 million, or 31.5%, from $224.7 million
for 1997 primarily due to higher amortization expense recorded in 1997 that
resulted from revised projections of estimated gross profits based upon changes
in estimated future expense levels. Dividends to policyholders increased $26.9
million, or 6.8%, due primarily due to normal growth of dividends on traditional
life insurance products. The segment's effective tax rate declined to 30.0% in
1998, from 33.1% in 1997 due to nondeductible losses arising in 1997.
Retail-Asset Gathering Segment
The following table presents certain summary financial data relating to the
Asset Gathering Segment for the periods indicated.
For the Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- ------
(in millions)
Operating Results:
Revenues
Premiums.......................................... $ 17.2 $ 19.8 $ 55.0
Investment-type product charges................... 120.6 99.9 82.7
Net investment income............................. 388.6 378.0 353.3
Investment management revenues, commissions,
and other fees................................... 528.8 516.8 412.4
Other revenue..................................... 2.1 0.8 1.5
-------- -------- ------
Total revenues.................................. 1,057.3 1,015.3 904.9
Benefits and expenses
Benefits to policyholders......................... 299.3 296.3 314.5
Other operating costs and expenses................ 529.3 504.9 416.2
Amortization of deferred policy
acquisition costs, excluding amounts related to
net realized investment gains.................. 53.4 46.8 38.9
Dividends to policyholders........................ 0.1 0.1 0.1
-------- -------- ------
Total benefits and expenses..................... 882.1 848.1 769.7
Segment pre-tax operating income (1)................ 175.2 167.2 135.2
Income taxes........................................ 60.1 56.1 41.9
-------- -------- ------
Segment after-tax operating income (1).............. 115.1 111.1 93.3
After-tax adjustments (1):
Realized investment gains, net.................... (6.9) 12.0 4.4
Restructuring charges............................. (7.3) - -
Other demutualization related costs............... (0.9) - -
Surplus tax....................................... (1.0) 0.3 0.3
-------- -------- ------
Total after-tax adjustments.................... (16.1) 12.3 4.7
-------- -------- ------
GAAP Reported:
Income before extraordinary item and cumulative
effect of accounting change...................... 99.0 123.4 98.0
Extraordinary item-demutualization expenses, net
of tax........................................... (13.0) (1.8) -
Cumulative effect of accounting change............ (9.6) - -
-------- -------- ------
Net income.......................................... $ 76.4 $ 121.6 $ 98.0
======== ======== ======
Amortization of goodwill, net of tax................ $ 4.4 $ 4.2 $ 4.2
-------- -------- ------
Net Income before amortization of goodwill.......... $ 80.8 $ 125.8 $102.2
======== ======== ======
For the Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Other Data:
Segment after-tax operating income
Annuity................................. $ 67.0 $ 53.2 $ 45.7
Mutual funds............................ 46.9 57.0 46.8
Other................................... 1.2 0.9 0.8
Annuity premiums and deposits (2)
Fixed................................... $ 648.6 $ 360.6 $ 692.6
Variable................................ 847.7 882.7 745.9
Mutual fund assets under management, end of
period..................................... $32,696.6 $34,945.2 $31,402.0
________________
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis.
(2) Statutory data have been derived from the annual statements of John Hancock
Mutual Life Insurance Company and John Hancock Variable Life Insurance
Company, as filed with insurance regulatory authorities and prepared in
accordance with statutory accounting practices.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Segment after-tax operating income was $115.1 million in 1999, an increase of
$4.0 million, or 3.6%, from $111.1 million in 1998. Annuity segment after-tax
operating income increased $13.8 million, or 25.9%, primarily due to an increase
in variable annuity product charges, resulting from higher average account
balances, and higher investment spread on fixed annuity products, primarily
resulting from a decline in the average interest credited rate. Mutual fund
segment after-tax operating income decreased $10.1 million, or 17.7%, primarily
due to lower advisory fees as a result of lower assets under management and
exiting the New Mexico Capital Management business, partially offset by a
decline in operating expenses.
Total revenues increased $42.0 million, or 4.1%, to $1,057.3 million in 1999
from $1,015.3 million in 1998. Premiums decreased $2.6 million, or 13.1%, due to
lower sales of immediate fixed annuities with life contingencies. Investment-
type product charges increased $20.7 million, or 20.7%, due to growth in average
variable annuity separate account liabilities, which increased 21.3% to $6,955.7
million in 1999 from $5,736.0 million in 1998. Mortality and expense fees as a
percentage of average account balances were 1.41% and 1.37% for the years ended
December 31, 1999 and 1998, respectively. Net investment income increased $10.6
million or 2.8%, primarily due to a higher level of invested assets backing
fixed annuity products, partially offset by a decrease in the average investment
yield on invested assets backing fixed annuity products. The average investment
yield on invested assets backing fixed annuity products was 7.77% in 1999
compared to 7.91% in 1998, reflecting lower market interest rates on new fixed
income investments.
Investment management revenues, commissions, and other fees increased $12.0
million, or 2.3%, to $528.8 million in 1999 from $516.8 million in 1998. Average
mutual fund assets under management decreased $882.0 million, or 2.6%, to
$33,348.0 million in 1999 from $34,230.0 million in 1998, primarily due to net
redemptions of $3,095.6 million in 1999 compared to net sales of $3,107.2
million in 1998. Investment advisory fees decreased $8.1 million, or 3.9%, to
$200.3 million in 1999 and were .60% and .62% of average mutual fund assets
under management for the years ended December 31, 1999 and 1998, respectively.
The decline in the investment advisory fee rate occurred primarily because fixed
income assets, which bear a lower advisory fee than equity assets, increased as
a percentage of total assets. Underwriting and distribution fees increased $12.2
million, or 4.6%, to $278.9 million in 1999, primarily due to our acquisition of
the Essex Corporation, a distributor of annuities and mutual funds through
banks, in January 1999. Shareholder service and other fees were $49.6 million in
1999
compared to $41.7 million in 1998, primarily reflecting the increase in average
number of customer accounts.
Total benefits and expenses increased $34.0 million, or 4.0%, to $882.1
million in 1999 from $848.1 million in 1998. Benefits to policyholders increased
$3.0 million, or 1.0%, primarily due to an increase in interest credited on
fixed annuity account balances. Interest credited on fixed annuity account
balances increased primarily due to higher average fixed annuity account balance
of $4,862.2 million in 1999, as compared to $4,673.2 million in 1998. The
increase in interest credited on average fixed annuity account balances was
partially offset by a decline in the average interest credited rate on fixed
annuity account balances to 5.59% in 1999 from 5.96% in 1998. The average
interest credited rate pattern is dependent upon the general trend of market
interest rates, frequency of credited rate resets and business mix. Deferred
fixed annuities' interest credited rates generally are reset annually on the
policy anniversary. Other operating costs and expenses increased $24.4 million,
or 4.8%, to $529.3 million in 1999 from $504.9 million in 1998. The increase was
primarily due to our acquisition of the Essex Corporation and higher
amortization of mutual fund deferred selling commissions, resulting from higher
redemptions in 1999. These increases were partially offset by a decrease in
operating expenses related to our mutual fund operations and annuities
operations. Amortization of deferred policy acquisition costs increased $6.6
million, or 14.1%, to $53.4 million in 1999 from $46.8 million in 1998,
primarily due to higher profits. The segment's effective tax rate was 34.3% and
33.6% in 1999 and 1998, respectively.
Amortization of goodwill increased $0.2 million in 1999 as compared to 1998
due to the acquisition of the Essex Corporation in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Segment after-tax operating income was $111.1 million in 1998, an increase
of $17.8 million, or 19.1% from $93.3 million in 1997. Annuity segment after-tax
operating income increased $7.5 million, or 16.4%, primarily due to higher
variable annuity product charges resulting from higher sales and market
appreciation on account balances. This increase also was due to higher
investment spread in 1998 primarily due to an increase in average invested
assets backing fixed annuity products. Mutual fund segment after-tax operating
income increased $10.2 million, or 21.8%, to $57.0 million in 1998 from $46.8
million in 1997 primarily due to an increase in advisory and distribution fees
as a result of growth in assets under management due to net sales.
Total revenues increased $110.4 million, or 12.2%, to $1,015.3 million in
1998 from $904.9 million in 1997. Premiums decreased $35.2 million, or 64.0%,
due to decreased sales of immediate fixed annuities with life contingencies.
Premiums in 1997 include $44.8 million of sales of immediate fixed annuities
with life contingencies. Investment-type product charges were $99.9 million, an
increase of $17.2 million, or 20.8%, as compared to $82.7 million in 1997. The
increase was due to growth in average variable annuity separate account
liabilities, which were $5,736.0 million in 1998 compared to $4,450.0 million in
1997, an increase of 28.9%. Variable annuity deposits grew 18.3% to $882.7
million in 1998 from $745.9 million in 1997. Mortality and expense fees as a
percentage of average account balances were 1.37% and 1.38% in 1998 and 1997,
respectively. Net investment income increased by $24.7 million, or 7.0%, in 1998
compared to 1997 as a result of a higher level of invested assets backing fixed
annuity products partially offset by a decrease in the average investment yield
on invested assets backing fixed annuity products. The average investment yield
on invested assets backing fixed annuity products was 7.91% in 1998, compared to
7.98% in 1997. This decrease reflects lower market interest rates on new
investments.
Investment management revenues, commissions, and other fees increased
$104.4 million, or 25.3%, in 1998. Average mutual fund assets under management
increased to $34,230.0 million in 1998 from $27,009.2 million in 1997 due to net
sales of approximately $3,107.2 million in 1998, and market appreciation.
Investment advisory fees were $208.4 million in 1998 compared to $173.7 million
in 1997, reflecting a higher level of average mutual fund assets under
management. Investment advisory fees were .62% and .64% of average mutual fund
assets under management in 1998 and 1997, respectively. The decline in the
investment advisory fee rate reflected an increase in institutional assets under
management of $1,120.7 million, or 24.5%, to $5,696.5 million from $4,575.8
million in
1997. Institutional assets under management generally have a lower advisory fee
rate than retail assets under management. Underwriting and distribution fees
increased $64.1 million, or 31.6%, to $266.7 million in 1998 from $202.6 million
in 1997, primarily due to higher asset levels of mutual funds. Shareholder
service and other fees were $41.7 million in 1998 compared to $36.2 million in
1997, reflecting an increase in the average number of customer accounts.
Total benefits and expenses increased $78.4 million, or 10.2%, to $848.1
million in 1998 from $769.7 million in 1997, reflecting the growth in annuity
and mutual fund assets under management. Benefits to policyholders decreased
$18.2 million in 1998, primarily resulting from a $35.2 million decrease in
premiums of immediate fixed annuities with life contingencies. This decrease was
partially offset by an increase in interest credited on fixed annuity account
balances which was $278.7 million in 1998 compared to $263.7 million in 1997.
The increase was due to an increase in the average interest credited rate on
fixed annuity account balances which was 5.96% in 1998, compared to 5.90% in
1997, and higher average fixed annuity account balances during 1998 of $4,673.2
million, as compared to $4,468.9 million during 1997. Other operating costs and
expenses were $504.9 million in 1998, an increase of $88.7 million, or 21.3%,
from $416.2 million in 1997. The increase was primarily due to an increase in
compensation and related costs and administrative expenses incurred to support
sales and marketing of mutual fund products and higher amortization of deferred
selling commissions on mutual fund products. The increase was partially offset
by lower commissions on fixed annuity products due to a decline in sales.
Amortization of deferred policy acquisition costs of $46.8 million for 1998
increased $7.9 million from $38.9 million in 1997 primarily due to higher
profits. The segment's effective tax rate increased to 33.6% in 1998 from 31.0%
in 1997, primarily due to a state tax benefit provided to Massachusetts
domiciled investment management companies in 1997.
Institutional-Guaranteed and Structured Financial Products Segment
The following table presents certain summary financial data relating to the
Guaranteed and Structured Financial Products Segment for the periods indicated.
For the Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
Operating Results:
Revenues
Premiums............................................ $ 463.7 $ 121.4 $ 201.0
Investment-type product charges..................... 79.5 71.4 68.7
Net investment income............................... 1,681.4 1,576.3 1,545.2
Realized investment losses, net (1)................. (31.2) (37.7) (0.6)
Other revenue (expense)............................. 0.6 (0.2) 0.1
-------- -------- --------
Total revenues.................................... 2,194.0 1,731.2 1,814.4
Benefits and expenses
Benefits to policyholders, excluding amounts
related to net realized investment gains credited
to participating pension contractholders........... 1,785.4 1,411.5 1,493.0
Other operating costs and expenses.................. 85.8 92.6 81.0
Amortization of deferred policy
acquisition costs................................. 3.1 3.7 5.2
Dividends to policyholders.......................... 25.9 20.8 41.4
-------- -------- --------
Total benefits and expenses....................... 1,900.2 1,528.6 1,620.6
Segment pre-tax operating income (1).................. 293.8 202.6 193.8
Income taxes.......................................... 91.4 56.9 53.9
-------- -------- --------
Segment after-tax operating income (1)................ 202.4 145.7 139.9
After-tax adjustments: (1)
Realized investment gains, net (1).................. 58.4 17.2 4.8
Restructuring charges............................... (0.6) - -
Corporate account asset transfer.................... (205.8) - -
Other demutualization related costs................. (1.1) - -
Benefit from pension participating contract
modification....................................... - - 7.7
Surplus tax......................................... (6.5) 2.0 5.5
-------- -------- --------
Total after-tax adjustments...................... (155.6) 19.2 18.0
-------- -------- --------
GAAP Reported:
Income before extraordinary item.................... 46.8 164.9 157.9
Extraordinary item-demutualization expenses,
net of tax......................................... (16.1) (1.5) -
-------- -------- --------
Net income............................................ $ 30.7 $ 163.4 $ 157.9
======== ======== ========
For the Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
Other Data:
Segment after-tax operating income
Spread-based products
GICs and funding agreements...... $ 131.5 $ 83.7 $ 78.9
Single premium annuities.......... 33.2 33.8 24.1
Fee-based products................... 37.7 28.2 36.9
Statutory premiums and deposits (2)
Spread-based products
GICs and funding agreements........ 5,217.4 4,995.0 2,643.7
Single premium annuities........... 451.8 111.8 193.7
Fee-based products
Participating contracts and
Conversion annuity contracts... 527.9 566.7 703.8
Separate account GICs.............. 615.7 459.9 456.0
Other separate account contracts... 272.7 145.6 195.0
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis.
(2) Statutory data have been derived from the annual statement of John Hancock
Mutual Life Insurance Company, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting practices.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Segment after-tax operating income was $202.4 million in 1999, an increase of
$56.7 million, or 38.9% from $145.7 million in 1998. Spread-based products'
segment after-tax operating income increased $47.2 million, or 40.2%, primarily
due to higher investment spread as a result of an increase in average invested
assets backing spread-based products and the receipt of $14.7 million of
interest on a defaulted fixed maturity investment. Fee-based products' segment
after-tax operating income increased $9.5 million to $37.7 million in 1999 from
$28.2 million in 1998 primarily due to an increase in separate account GIC fees
and lower operating expenses.
Total revenues increased $462.8 million, or 26.7%, to $2,194.0 million in 1999
from $1,731.2 million in 1998, primarily due to a $342.3 million increase in
premiums. During the second quarter of 1999, we sold one single premium annuity
contract for $339.0 million. Investment-type product charges were $79.5 million
for 1999, an increase of $8.1 million, or 11.3%, primarily due to higher sales
of single premium annuity contracts and higher product charges from separate
account GICs due to higher average account balances resulting from sales.
Investment-type product charges were .65% and .59% of average fee-based policy
reserves in 1999 and 1998, respectively. The increase primarily reflects higher
expense charges on participating contracts and the recognition of fee income
upon the sale of single premium annuity contracts and separate account GICs. Net
investment income increased $105.1 million, or 6.7%, in 1999 compared to 1998,
primarily as a result of a higher level of average invested assets backing
spread-based products. Average invested assets backing spread-based products
increased $1,924.5 million, or 12.7%, to $17,076.3 million in 1999 from
$15,151.8 million in 1998. The average investment yield on these invested assets
declined to 8.10% in 1999 compared to 8.18% in 1998, reflecting the reinvestment
of proceeds from higher-yielding fixed maturities into relatively lower-yielding
securities. Realized investment losses associated with our short-term funding
agreements, which were terminated in 1999, improved $6.5 million in 1999
primarily due to a narrowing of interest rate spreads on mortgage-backed
securities and corporate bonds relative to U.S. Treasury securities, resulting
in higher prices upon the sale of the securities in 1999 as compared to 1998.
Total benefits and expenses increased $371.6 million, or 24.3%, to $1,900.2
million in 1999 from $1,528.6 million in 1998. The increase was primarily due
to a $373.9 million increase in benefits to policyholders as a result of
increased sales of single premium annuity contracts. Benefits to policyholders
also includes interest credited on account balances for spread-based products,
which was $1,118.3 million in 1999, an increase of $69.2 million, or 6.6%, from
$1,049.1 million in 1998. The increase was primarily due to an increase in
average account balances for spread-based products of $1,356.7 million to
$16,429.1 million in 1999 from $15,072.4 million in 1998 partially offset by a
decline in the average interest credited rate on account balances for spread-
based products, which was 6.81% in 1999 compared to 7.21% in 1998. The decline
in the average interest credited rate on account balances for spread-based
products was primarily due to sales of GICs and funding agreements with lower
average interest credited rates. Other operating costs and expenses were $85.8
million in 1999, a decrease of $6.8 million, or 7.3%, from $92.6 million in
1998. The decrease was primarily due to lower guaranty fund assessments.
Dividends of $25.9 million in 1999, increased $5.1 million, or 24.5%, from $20.8
million for 1998, reflecting higher earnings on participating contractholders'
accounts. The segment's effective tax rate was 31.1% in 1999, as compared to
28.1% in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Segment after-tax operating income was $145.7 million in 1998, an increase
of $5.8 million, or 4.1%, from $139.9 million in 1997. Spread-based products'
segment after-tax operating income increased $14.5 million, or 14.1%, primarily
due to a decline in the average interest credited rate partially offset by
deposit growth from sales of funding agreements. Fee-based products' segment
after-tax operating income decreased $8.7 million to $28.2 million in 1998 from
$36.9 million in 1997 primarily due to an increase in operating expenses while
average fee-based assets under management remained nearly level.
Total revenues decreased $83.2 million, or 4.6%, to $1,731.2 million in
1998 from $1,814.4 million in 1997, due primarily to a $79.6 million decrease in
premiums primarily resulting from lower sales of single premium annuity
contracts. Investment-type product charges were $71.4 million for 1998, an
increase of $2.7 million, or 3.9%, primarily reflecting higher amortization of
deferred profits on single premium group annuity and terminal funding annuity
contracts, and were .59% and .58% of average fee-based policy reserves in 1998
and 1997, respectively. Net investment income increased $31.1 million, or 2.0%,
in 1998 compared to 1997, primarily as a result of a higher level of average
invested assets backing spread-based products, partially offset by a decline in
average investment yield on these invested assets. Average invested assets
backing spread-based products increased $325.1 million, or 2.2%, to $15,151.8
million in 1998 from $14,826.7 million in 1997. The average investment yield on
these invested assets was 8.18% in 1998 compared to 8.37% in 1997. The decrease
in the average investment yield was primarily due to lower market interest rates
during 1998. Realized investment losses were $37.7 million for 1998, an increase
of $37.1 million from realized investment losses of $0.6 million for 1997. The
increase primarily resulted from a widening of interest rate spreads on
mortgage-backed securities and corporate bonds relative to U.S. Treasury
securities, resulting in lower prices upon the sale of the securities.
Total benefits and expenses decreased $92.0 million, or 5.7%, to $1,528.6
million in 1998 from $1,620.6 million in 1997. The decrease was due primarily to
an $81.5 million decrease in benefits to policyholders primarily resulting from
lower sales of single premium annuity contracts. Interest credited on account
balances for spread-based products was $1,049.1 million in 1998, a decrease of
$29.7 million, or 2.8%, from $1,078.8 million in 1997. The decrease was due
largely to a decline in the average interest credited rate on account balances
for spread-based products, which was 7.21% in 1998 compared to 7.50% in 1997.
The decrease in the average interest credited rate was primarily due to the
general decline of market interest rates, resulting in new GIC and funding
agreement liabilities which have a lower average interest credited rate. Other
operating costs and expenses were $92.6 million in 1998, an increase of $11.6
million, or 14.3%, from $81.0 million in 1997. The increase was primarily due to
higher guaranty fund assessments and continuing investments in technology for
administrative systems. Dividends of $20.8 million in 1998, decreased $20.6
million, or 49.8%, from $41.4 million for 1997. Dividends in 1997 included $25.9
million resulting from contract modifications and conversions. Excluding
dividends on contract
modifications and conversions, dividends were $20.2 million for 1998 and $15.5
million in 1997. The increase in recurring dividends primarily resulted from
appreciation of equity securities. The segment's effective tax rate was 28.1% in
1998, as compared to 27.8% in 1997.
Institutional-Investment Management Segment
The following table presents certain summary financial data relating to the
Investment Management Segment for the periods indicated.
For the Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Operating Results:
Revenues
Net investment income........................................... $ 45.9 $ 24.1 $ 4.0
Realized investment gains (losses), net (1)..................... 3.5 (4.4) (4.0)
Investment management revenues,
commissions, and other fees.................................... 140.2 123.8 118.3
Other revenue................................................... 0.3 0.4 0.2
--------- --------- ---------
Total revenues............................................... 189.9 143.9 118.5
Benefits and expenses
Other operating costs and expenses.............................. 127.2 117.8 88.4
--------- --------- ---------
Total benefits and expenses..................................... 127.2 117.8 88.4
Segment pre-tax operating income (1).............................. 62.7 26.1 30.1
Income taxes...................................................... 25.4 10.7 12.9
--------- --------- ---------
Segment after-tax operating income (1)............................ 37.3 15.4 17.2
After-tax adjustments: (1)
Realized investment gains, net (1)............................. 2.0 0.1 0.1
--------- --------- ---------
GAAP Reported:
Income before cumulative effect of accounting
change......................................................... 39.3 15.5 17.3
Cumulative effect of accounting change......................... (0.1) - -
--------- --------- ---------
Net income........................................................ $ 39.2 $ 15.5 $ 17.3
========= ========= =========
Amortization of goodwill, net of tax.............................. 0.7 0.7 0.7
--------- --------- ---------
Net Income before amortization of goodwill........................ $ 39.9 $ 16.2 $ 18.0
========= ========= =========
Other Data:
Assets under management, end of period (2)........................ $40,211.7 $39,637.7 $34,361.5
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis
(2) Includes general account cash and invested assets of $164.5 million, $88.1
million, and $66.0 million as of December 31, 1999, 1998, and 1997,
respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Segment after-tax operating income was $37.3 million in 1999, an increase
of $21.9 million, or 142.2%, from $15.4 million in 1998. The increase was
primarily due to higher investment advisory fees resulting from an increase in
average assets under management and higher realized investment gains on sales of
mortgage loans.
Total revenues increased $46.0 million, or 32.0%, to $189.9 million in 1999
from $143.9 million in 1998. Net investment income was $45.9 million in 1999,
an increase of $21.8 million from $24.1 million for 1998. The increase in net
investment income was due to a higher level of average invested assets due to
the formation of a collateralized bond obligation in the fourth quarter of 1998.
Investment management revenues, commissions, and other fees increased $16.4
million, or 13.2%, in 1999, primarily due to an increase in investment advisory
fees, which increased $18.3 million to $133.6 million in 1999 compared to $115.3
million in 1998. The increase in investment advisory fees was primarily due to
a higher level of average assets under management, which increased $4,824.5
million, or 13.5%, to $40,554.7 million in 1999 from $35,730.2 million in 1998.
Investment advisory fees were .33% and .32% of average advisory assets under
management in 1999 and 1998, respectively. This increase primarily reflects the
receipt of a fee in connection with the termination of a timber management
contract. Mortgage origination and servicing fees were $6.6 million in 1999
compared to $8.5 million in 1998. Realized investment gains increased $7.9
million in 1999 primarily due to a narrowing of interest rate spreads in 1999,
as compared to 1998, on mortgage loans held for sale.
Other operating costs and expenses were $127.2 million in 1999, an increase
of $9.4 million, or 8.0%, from $117.8 million in 1998. The increase was
primarily due to a $6.7 million increase in interest expense in connection with
our collateralized bond obligation. Other operating costs and expenses were
0.22% and 0.24% of average advisory assets under management in 1999 and 1998,
respectively. The segment's effective tax rate was 41.0% in 1999 and 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Segment after-tax operating income was $15.4 million in 1998, a decrease of
$1.8 million, or 10.5%, from $17.2 million in 1997 primarily due to higher
investment advisory fees earned on timber assets under management in 1997
resulting from strong market appreciation, partially offset by higher operating
expenses resulting from the formation of a collateralized bond obligation in
1998.
Total revenues increased $25.4 million, or 21.4%, to $143.9 million in 1998
from $118.5 million in 1997. Net investment income was $24.1 million in 1998, an
increase of $20.1 million from $4.0 million for 1997. The increase in net
investment income was due to an increase in the average loans held for sale and
a higher level of average invested assets due to the formation of a
collateralized bond obligation. Average loans held for sale in 1998 were $106.2
million, compared to $20.7 million in 1997. Investment management revenues,
commissions, and other fees increased $5.5 million, or 4.6%, in 1998. Average
advisory assets under management increased $2,225.7 million, or 6.6%, to
$35,730.2 million in 1998 from $33,504.5 million in 1997, primarily due to
market appreciation in 1998. Investment advisory fees were $115.3 million in
1998 compared to $111.0 million in 1997 primarily due to a higher level of
average advisory assets under management. Investment advisory fees were .32% and
.33% of average advisory assets under management in 1998 and 1997, respectively.
Mortgage origination and servicing fees were $8.5 million in 1998 compared to
$7.3 million in 1997. Realized investment losses were $4.4 million in 1998
compared to $4.0 million in 1997. The increase primarily resulted from a
widening of interest rate spreads on mortgage loans held for sale, partially
offset by gains on loan sales.
Other operating costs and expenses were $117.8 million in 1998, an increase
of $29.4 million, or 33.3%, from $88.4 million in 1997. The increase was due
primarily to $13.9 million of interest and other expenses in connection with the
collateralized bond obligation. In addition, operating expenses increased $5.8
million due to financing an increased average balance of loans held for sale.
Other operating costs and expenses were .24% and .23% of average advisory assets
under management in 1998 and 1997, respectively. The segment's effective tax
rate declined to 41.0% in 1998 from 42.9% in 1997 primarily due to lower state
tax payments in 1997.
Corporate and Other Segment
The following table presents certain summary financial data relating to the
Corporate and Other Segment for the periods indicated.
For the Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(in millions)
Operating Results:
Segment after-tax operating income (loss): (1)
International insurance operations.................. $ 26.0 $ 25.3 $ 8.3
Corporate operations................................ 31.2 8.7 (32.0)
Non-core businesses................................. 10.6 22.3 63.1
------- ------- -------
Total............................................. 67.8 56.3 39.4
After-tax adjustments:(1)
Realized investment gains (losses), net (1)......... (42.1) 15.4 42.1
Class action lawsuit................................ (91.1) (150.0) (112.5)
Restructuring charges............................... (0.5) - -
Other demutualization related costs................. (0.2) - -
Workers' compensation reinsurance reserve........... (133.7) - -
Surplus tax......................................... (2.2) 1.5 12.6
------- ------- -------
Total after-tax adjustments...................... (269.8) (133.1) (57.8)
GAAP Reported:
(Loss) income before extraordinary item............. (202.0) (76.8) (18.4)
Extraordinary item-demutualization expenses, net
of tax............................................. (3.2) (0.5) -
------- ------- -------
Net (loss) income..................................... $(205.2) $ (77.3) $ (18.4)
Amortization of goodwill, net of tax.................. 1.2 0.9 5.9
------- ------- -------
Net income before amortization of goodwill............ $(204.0) $ (76.4) $ (12.5)
======= ======= =======
(1) See "Adjustments to GAAP Reported Net Income" included in this Management's
Discussion and Analysis
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Segment after-tax operating income from international insurance operations was
$26.0 million for 1999, an increase of $0.7 million from $25.3 million for 1998.
On October 1, 1999, The Maritime Life Assurance Company (Maritime), our Canadian
subsidiary, purchased Aetna Holdings Canada Limited (Aetna). Accordingly,
Aetna's results of operations are included with Maritime's from the date of the
acquisition. The increase in segment after-tax operating income primarily
resulted from the inclusion of Aetna's after-tax operating income of $5.2
million partially offset by a decrease in Maritime's after-tax operating income
due to unfavorable group claims experience.
Segment after-tax operating income from corporate operations was $31.2 million
in 1999, an increase of $22.5 million from $8.7 million in 1998. The increase
was primarily due to a $13.7 million decrease in unallocated corporate overhead
and expenses associated with the disposed businesses and higher net investment
income due to a higher level of corporate purpose assets. During the fourth
quarter of 1999, a corporate account was formed and all corporate type assets
were removed from the business units to the Corporate and Other Segment. As
part of this move, the group pension participating contractholders were
reimbursed at fair market value for these contracts. Because of this
transaction, there was no longer a need to calculate the participating
policyholders share of the change in these assets. As a result, 1999's segment
after-tax operating income includes a charge for this item for nine months
versus a full year in 1998, an improvement of $9.4 million.
Segment after-tax operating income from non-core businesses was $10.6
million in 1999, a decrease of $11.7 million from $22.3 million in 1998. The
decrease was due primarily to lower net investment income resulting from the
previously described disposals.
Amortization of goodwill increased $0.3 million in 1999, as compared to
1998, due to the acquisition of Aetna in 1999 partially offset by completing the
amortization period for Investors Guarantee Life in 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Segment after-tax operating income from international insurance operations
was $25.3 million for 1998, an increase of $17.0 million from $8.3 million for
1997. The increase in segment after-tax operating income primarily resulted from
continued growth in our Canadian operations' segregated assets, which resulted
in higher product charges, which increased $20.5 million, or 29.3%, from 1997.
The increase was primarily due to growth in segregated assets under management
which were $1,988.1 million in 1998, an increase of 30.4% from $1,524.9 million
in 1997.
Segment after-tax operating income from corporate operations was $8.7
million in 1998, an increase of $40.7 million from an after-tax operating loss
of $32.0 million in 1997. The increase primarily resulted from higher net
investment income of $32.9 million on corporate assets. Unallocated corporate
overhead and expenses associated with the disposed businesses declined $8.0
million during 1998.
Segment after-tax operating income from non-core businesses was $22.3
million in 1998, a decrease of $40.8 million from $63.1 million in 1997. The
decrease was due primarily to the development of tax planning strategies to use
$51.0 million of net loss carryforwards in 1997.
Amortization of goodwill decreased $5.0 million in 1998, as compared to
1997, due to completing the amortization period for Direct Foreign Operations in
1997.
General Account Investments
General Account and Separate Accounts
Our investments include assets held in our general account and assets held
in numerous separate accounts. We manage our general account assets in
investment segments that support specific classes of product liabilities. These
investment segments permit us to implement investment policies that both support
the financial characteristics of the underlying liabilities, and also provide
returns on our invested capital. The investment segments also enable us to gauge
the performance and profitability of our various businesses.
Separate account assets are managed in accordance with specific investment
contracts. We generally do not bear any investment risk on assets held in
separate accounts, but rather receive investment management fees based on levels
of assets under management, measured at fair value, as well as mortality fees,
policy administration fees and surrender charges. Generally, assets held in
separate accounts are not available to satisfy general account obligations.
Asset/Liability Risk Management
Our primary investment objective is to maximize after-tax returns within
acceptable risk parameters. We are exposed to two primary types of investment
risk:
. Credit risk, meaning uncertainties associated with the continued
ability of an obligor to make timely payments of principal and
interest; and
. Interest rate risk, meaning changes in the market value of fixed
maturity securities as interest rates change over time.
Management of credit risk is central to our business and we devote
considerable resources to the credit analysis underlying each investment
acquisition. Our corporate bond management group employs a staff of highly
specialized, experienced, and well-trained credit analysts. We rely on these
analysts' ability to analyze complex private financing transactions and to
acquire the investments needed to profitably fund our liability guarantees. In
addition, when investing in private fixed maturity securities, we rely upon
broad access to management information, negotiated protective covenants, call
protection features and collateral protection.
Our bond portfolio is reviewed on a continuous basis to assess the
integrity of current quality ratings. As circumstances warrant, specific
investments are "re-rated" with the adjusted quality ratings reflected in our
investment system. All bonds are evaluated regularly against the following
criteria:
. material declines in the issuer's revenues or margins;
. significant management or organizational changes;
. significant uncertainty regarding the issuer's industry;
. debt service coverage or cash flow ratios that fall below industry-
specific thresholds;
. violation of financial covenants; and
. other business factors that relate to the issuer.
Our records dating back to 1970 show that, on average, the default
assumptions built into our investment and liability pricing models have been
consistent with actual investment performance.
We also apply a variety of strategies to minimize credit risk in our
commercial mortgage loan portfolio. When considering the origination of new
commercial mortgage loans, we review the cash flow fundamentals of the property,
a physical assessment of the underlying security, a comprehensive market
analysis, and industry lending practices. Upon completion of our due diligence
investigation, we score each mortgage loan application against a number of
qualitative and quantitative factors that we have developed and tested over many
years of mortgage lending. We emphasize the acquisition of commercial mortgage
loans on properties that are at, or near, full lease. Guidelines for new
mortgage loans typically require a loan-to-value ratio of 75% or less at the
time of origination. A portfolio management team is responsible for centralized
monitoring of the portfolio, including receiving and analyzing current rent
rolls and financial statements on a property-by-property basis.
To assist in the risk management of our commercial mortgage portfolio,
beginning in 1991 we undertook the development of an analytic database, the
"Mortgage Investment Risk Analysis" system. This system is designed to screen
our mortgage portfolio for likely default candidates.
We use a variety of techniques to control interest rate risk in our
portfolio of assets and liabilities. In general, our risk management philosophy
is to limit the net impact of interest rate changes on our assets and
liabilities. Each investment segment holds bonds, mortgages, and other asset
types that will satisfy the projected cash needs of its underlying liabilities.
Where policyholder withdrawal options make it difficult to accurately forecast
liability cash flows, and thus difficult to implement conventional
asset/liability matching techniques based on interest rate sensitivity, we
project asset and liability cash flows under a wide variety of possible economic
scenarios. We use those cash flow projections to assess and control interest
rate risk.
Another important aspect of our asset-liability management efforts is the
use of interest rate derivatives. We selectively apply derivative instruments,
such as interest rate swaps and futures, to reduce the interest rate risk
inherent in our portfolios.
Overall Composition of the General Account
The investment assets in our general account as of December 31, 1999 were
generally of high quality and broadly diversified across asset classes and
individual credits. As shown in the following table, the major categories of
investment assets are fixed maturity securities, including bonds, redeemable
preferred stock, asset and mortgage-backed securities, and commercial and
agricultural mortgage loans. The remainder of the general account is invested in
cash and short-term investments, real estate, equity securities, and "other"
invested assets. "Other" invested assets primarily include fixed income
leases, private equity investments and independent power generation projects in
joint venture and limited partnership form. In addition, policy loans are
included in our general account.
In the following discussion, we include the investment portfolio of our
Canadian subsidiary, The Maritime Life Assurance Company. As of December 31,
1999, 37.2% of The Maritime Life Assurance Company's invested assets consisted
of government-insured mortgage loans and obligations of the Canadian federal
government and provincial governments.
General Account Invested Assets
As of December 31,
--------------------------------------------
1999 1998 1997
---------------- ---------------- --------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Fixed maturity securities (1)... $30,869.9 63.5% $28,200.4 61.9% $27,174.9 62.4%
Mortgage loans (2).............. 10,736.4 22.0 9,616.1 21.1 9,296.3 21.4
Real estate..................... 548.5 1.1 1,483.2 3.2 2,035.6 4.7
Policy loans.................... 1,938.8 4.0 1,879.7 4.1 1,855.6 4.3
Equity securities............... 1,316.2 2.7 1,063.7 2.3 953.6 2.2
Other invested assets........... 1,311.1 2.7 1,254.6 2.7 831.6 1.9
Short-term investments.......... 166.9 0.3 279.8 0.6 294.1 0.7
Cash and cash equivalents....... 1,817.9 3.7 1,876.4 4.1 1,036.6 2.4
--------- ----- --------- ----- --------- -----
Total invested assets......... $48,705.7 100.0% $45,653.9 100.0% $43,478.3 100.0%
========= ===== ========= ===== ========= =====
________________
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $631.9 million, $639.2
million and $546.2 million as of December 31, 1999, 1998, and 1997,
respectively. Carrying value is composed of investments categorized as
"held-to-maturity," which are carried at amortized cost, and investments
categorized as "available-for-sale," which are carried at fair value. The
total fair value of our fixed maturity security portfolio was $30,518.0
million, $29,143.9 million and $28,028.6 million at December 31, 1999, 1998
and 1997, respectively.
(2) The fair value for our mortgage loan portfolio was $10,685.2 million,
$10,204.4 million and $9,873.0 million as of December 31, 1999, 1998 and
1997, respectively.
Consistent with the nature of our product liabilities, our assets are
heavily oriented toward fixed maturity securities. We determine the allocation
of our assets primarily on the basis of cash flow and return requirements of our
products and secondarily by the level of investment risk.
Description of Investment Assets
The following table provides gross investment yields by asset categories
for the periods indicated. Overall, the yield, net of investment expenses, on
our general account portfolio increased modestly from 1997 through 1999. Within
the real estate and mortgage loan categories, there was a reduction in the yield
reflecting our recent real estate sales program and lower yields attributable to
relatively tight investment spreads in this market sector. Largely offsetting
these lower yields were favorable interest rates achieved on our 1999 fixed
maturity security acquisitions and higher money market rates. In particular,
1999 bond acquisitions benefited from a combination of higher U.S. Treasury
rates and relatively wide spreads in both the public and private sectors.
Indicative of the increase in U.S. Treasury rates, between December 31, 1998 and
December 31, 1999, the 10-year U.S. Treasury rate rose 180 basis points to
6.44%.
General Account Yields by Asset Type
As of December 31,
-------------------------------------------
1999 1998 1997
------------------ ------------------- -------------------
Yield Amount Yield Amount Yield Amount
------ ------------- ------ ------------- ------ -------------
(in millions) (in millions) (in millions)
Fixed maturity securities
Gross income (1)...................... 8.47% $ 2,500.7 7.98% $ 2,210.2 7.93% $ 2,097.3
Ending assets......................... 30,869.9 28,200.4 27,174.9
Equity securities
Gross income (1)...................... 5.26 62.6 1.85 18.7 3.12 27.8
Ending assets......................... 1,316.2 1,063.7 953.6
Mortgage loans
Gross income (1)...................... 8.17 831.7 8.26 781.2 8.62 808.6
Ending assets......................... 10,736.4 9,616.1 9,296.3
Real estate
Gross income (1)...................... 15.59 158.4 23.63 415.7 20.54 430.9
Ending assets......................... 548.5 1,483.2 2,035.6
Policy loans
Gross income (1)...................... 5.75 109.8 5.99 111.9 5.82 107.7
Ending assets......................... 1,938.8 1,879.7 1,855.6
Short-term investments and cash and
cash equivalents
Gross income (1)...................... 4.47 92.6 2.60 45.3 4.50 71.7
Ending assets......................... 1,984.8 2,156.2 1,330.7
Other invested assets
Gross income (1)...................... 12.89 165.3 17.38 181.3 16.81 144.5
Ending assets......................... 1,311.1 1,254.6 831.6
Total gross income (1)............... 8.31 3,921.1 8.45 3,764.3 8.55 3,688.5
Less: investment expenses............. (347.1) (433.6) (497.8)
--------- --------- ---------
Net investment income................ 7.57% $ 3,574.0 7.47% $ 3,330.7 7.40% $ 3,190.7
========= ========= =========
________________
(1) Gross income before investment expenses
Fixed Maturity Securities. Our fixed maturity securities portfolio is
predominantly comprised of low risk, investment grade, publicly and privately
traded corporate bonds and senior tranches of asset-backed securities ("ABS")
and mortgage-backed securities ("MBS"), with the balance invested in
government bonds. Our fixed maturity securities portfolio also includes
redeemable preferred stock. As of December 31, 1999, fixed maturity securities
represented 63.4% of general account investment assets with a carrying value of
$30.9 billion, roughly comprised of 51% public securities and 49% private
securities. Each year we direct the majority of our net cash inflows into
investment grade fixed maturity securities. We typically invest between 10% and
15% of funds allocated to fixed maturity securities in below-investment-grade
bonds, some of which include equity participations, such as warrants.
Allocations are based on our assessment of relative value and the likelihood of
enhancing risk-adjusted portfolio returns. While the general account has
profited from the below-investment-grade asset class in the
past, care is taken to manage its growth strategically by limiting its size
relative to our net worth.
The following table shows the composition by issuer of our fixed maturity
securities portfolio.
Fixed Maturity Securities -- By Issuer
As of December 31,
--------------------------------------------
1999 1998
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
(in millions) (in millions)
Corporate securities.......................... $23,590.4 76.4% $21,479.6 76.1%
MBS/ABS....................................... 5,288.4 17.1 5,830.1 20.7
U.S. Treasury securities and obligations of
U.S. government agencies..................... 297.3 1.0 334.7 1.2
Debt securities issued by foreign
governments.................................. 1,560.2 5.1 450.3 1.6
Obligations of states and political
subdivisions................................. 133.6 0.4 105.7 0.4
Other debt securities......................... 0.0 0.0 0.0 0.0
--------- ----- --------- -----
Total....................................... $30,869.9 100.0% $28,200.4 100.0%
========= ===== ========= =====
Our MBS and ABS holdings, in keeping with our investment philosophy of
tightly managing interest rate risk, are heavily concentrated in commercial MBS
where the underlying loans are largely call protected, which means they are not
prepayable without penalty prior to maturity at the option of the issuer, rather
than in residential MBS where the underlying loans have no call protection. By
investing in MBS and ABS securities with relatively predictable repayments, we
add high quality, liquid assets to our portfolios without incurring the risk of
excessive cash flow in periods of low interest rates or a cash flow deficit in
periods of high interest rates. We believe the portion of our MBS/ABS portfolio
subject to prepayment risk as of December 31, 1999 and 1998 was limited to 3.9%
and 6.8% of our total MBS/ABS portfolio and 0.7% and 1.4% of our total fixed
maturity securities holdings, respectively.
The following table provides the scheduled maturities of our general
account fixed maturity securities as of the dates indicated. The portfolio's
maturity distributions are primarily a function of our liability composition,
but also reflect where our investment managers see relative value.
Fixed Maturity Securities -- By Scheduled Maturities
As of December 31,
--------------------------------------------
1999 1998
---- ----
Carrying % of Carrying % of
Value Total Value Total
----- ----- ----- -----
(in millions) (in millions)
Fixed Maturity Securities:
Due in one year or less..................... $ 1,799.2 5.8% $ 1,776.2 6.3%
Due after one year through five years....... 6,961.1 22.6 6,604.6 23.4
Due after five years through ten years...... 7,834.1 25.4 6,258.1 22.2
Due after ten years......................... 8,987.1 29.1 7,731.4 27.4
--------- ----- --------- -----
Subtotal................................. 25,581.5 82.9 22,370.3 79.3
Mortgage & Asset-backed securities.......... 5,288.4 17.1 5,830.1 20.7
--------- ----- --------- -----
Total Fixed Maturity Securities.......... $30,869.9 100.0% $28,200.4 100.0%
========= ===== ========= =====
The Securities Valuation Office ("SVO") of the National Association of
Insurance Commissioners evaluates all
public and private bonds purchased as investments by insurance companies. The
SVO assigns one of six investment categories to each security it reviews.
Category 1 is the highest quality rating, and Category 6 is the lowest.
Categories 1 and 2 are the equivalent of investment grade debt as defined by
rating agencies such as S&P and Moody's (i.e., BBB-/Baa3 or higher), while
Categories 3-6 are the equivalent of below-investment grade securities. SVO
ratings are reviewed and may be revised at least once a year.
The following table sets forth the SVO ratings for our bond portfolio along
with an equivalent S&P rating agency designation. The majority of our bonds are
investment grade, with 85.4% invested in Category 1 and 2 securities as of
December 31, 1999. As a percent of total invested assets, our below investment
grade bonds, at 9.0% as of December 31, 1999, are higher than the American
Council of Life Insurance ("ACLI") industry average of 4.8%, last published as
of December 31, 1998. This allocation reflects our strategy of avoiding the
unpredictability of interest rate risk in favor of relying on our bond analysts'
ability to better predict credit or default risk. Our bond analysts operate in
an industry-based, team-oriented structure that permits the evaluation of a wide
range of below investment grade offerings in a variety of industries. We believe
this results in substantive input from all analysts and a well-diversified high
yield portfolio. Category 6 bonds represent securities that were originally
acquired as long-term investments, but subsequently became distressed. The fair
value of our Category 6 bonds was $168.5 million, $181.2 million and $152.4
million as of December 31, 1999, 1998 and 1997, respectively. For the years
ended December 31, 1999, 1998 and 1997, $24.8 million, $31.2 million and $28.7
million of scheduled interest payments were not received on problem fixed
maturity securities.
Fixed Maturity Securities -- By Credit Quality
As of December 31,
----------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total
- ---------- --------------- --------- ----- --------- ----- --------- -----
(in millions) (in millions) (in millions)
1 AAA/AA/A.............. $14,760.6 48.8% $14,157.7 51.3% $14,018.8 52.7%
2 BBB 11,077.6 36.6 9,636.6 35.0 9,008.2 33.8
3 BB 2,901.8 9.6 2,688.5 9.8 2,369.5 8.9
4 B 868.8 2.9 669.1 2.4 828.5 3.1
5 CCC and lower......... 460.7 1.5 228.1 0.8 251.3 0.9
6 In or near default.... 168.5 0.6 181.2 0.7 152.4 0.6
--------- ----- --------- ----- --------- -----
Total................. $30,238.0 100.0% $27,561.2 100.0% $26,628.7 100.0%
========= ===== ========= ===== ========= =====
- ----------------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of $631.9
million, $639.2 million and $546.2 million as of December 31, 1999, 1998
and 1997, respectively.
The following table sets forth the credit quality of our public fixed maturity
securities portfolio. As the public market has grown to include new asset
classes such as securities issued in the Rule 144A market, which we classify as
"public" securities, and MBS/ABS, our public fixed maturity securities
portfolio has grown in both absolute and relative terms, from 48.6% of our fixed
maturity securities portfolio, as of December 31, 1997, to 52.0%, as of December
31, 1999.
Public Fixed Maturity Securities -- By Credit Quality
As of December 31,
-----------------------------------------
1999 1998 1997
-------------------- -------------- --------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total
- ---------- --------------- --------- ----- --------- ----- --------- -----
(in millions) (in millions) (in millions)
1 AAA/AA/A................ $ 9,146.9 58.2% $ 8,687.8 62.5% $ 8,665.9 67.0%
2 BBB..................... 4,814.7 30.6 3,565.1 25.6 2,941.7 22.7
3 BB...................... 1,443.9 9.2 1,425.3 10.2 1,086.5 8.4
4 B....................... 226.8 1.4 169.8 1.2 191.8 1.5
5 CCC and lower........... 43.3 0.3 60.1 0.4 36.8 0.3
6 In or near default...... 40.2 0.3 16.4 0.1 11.0 0.1
--------- ----- --------- ----- --------- -----
Total................... $15,715.8 100.0% $13,924.5 100.0% $12,933.7 100.0%
========= ===== ========= ===== ========= =====
- ----------------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of $131.2
million, $225.2 million and $161.6 million as of December 31, 1999, 1998
and 1997, respectively.
The following table sets forth the credit quality of our private fixed
maturity securities portfolio. We invest in privately placed bonds to enhance
the returns of our overall portfolio and to increase issuer diversification. We
believe there are significantly higher risk-adjusted spreads to be obtained in
the private placement market than in the public market. Over time the relative
percentage of asset qualities has remained stable, with minor repositioning
year-to-year reflecting our perception of relative value in the private
placement market.
Private Fixed Maturity Securities -- By Credit Quality
As of December 31,
-------------------------------------------------
1999 1998 1997
--------------------- -------------- --------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total
- --------- -------------- --------- ----- --------- ----- --------- -----
(in millions) (in millions) (in millions)
1 AAA/AA/A.............. $ 5,613.7 38.7% $ 5,469.9 40.1% $ 5,352.9 39.1%
2 BBB................... 6,262.9 43.1 6,071.5 44.5 6,066.5 44.3
3 BB.................... 1,457.9 10.0 1,263.2 9.3 1,283.0 9.4
4 B..................... 642.0 4.4 499.3 3.7 636.7 4.6
5 CCC and lower......... 417.4 2.9 168.0 1.2 214.5 1.6
6 In or near default.... 128.3 0.9 164.8 1.2 141.4 1.0
--------- ----- --------- ----- --------- -----
Total................. $14,522.2 100.0% $13,636.7 100.0% $13,695.0 100.0%
========= ===== ========= ===== ========= =====
- -----------------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of $500.7
million, $414.0 million and $384.5 million as of December 31, 1999, 1998
and 1997, respectively.
The following tables detail the different industry classes that were
represented in our bond portfolio as of the dates indicated. Our bond
portfolio's industry diversification reflects our preference for corporate
issuers and for issuers that rely on the private placement and Rule 144A
markets. Our diversification tends to be fairly stable. Relative to insurance
industry averages, we invest significantly less in MBS due to our aversion to
prepayment and extension risk.
Fixed Maturity Securities -- By Industry Diversification
As of December 31, 1999
----------------------------------------------
Publicly Traded Privately Traded Total
------------------- -------------------- ----------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Manufacturing.............................................. $ 1,184.8 7.5% $ 2,661.6 17.7% $ 3,846.4 12.5%
Utilities.................................................. 1,567.4 9.9 3,053.6 20.3 4,621.0 15.0
MBS........................................................ 3,169.4 20.0 0.1 0.0 3,169.5 10.2
ABS........................................................ 1,891.5 11.9 227.4 1.5 2,118.9 6.9
Bank & Finance............................................. 1,744.5 11.0 1,482.0 9.9 3,226.5 10.5
Transportation............................................. 1,075.2 6.8 1,361.8 9.1 2,437.0 7.9
Oil & Gas.................................................. 1,632.5 10.3 1,124.2 7.5 2,756.7 8.9
Agri/Forestry/Mining....................................... 333.3 2.1 1,775.2 11.8 2,108.5 6.8
Government................................................. 1,874.6 11.8 1,001.0 6.7 2,875.6 9.3
Services................................................... 445.8 2.8 1,033.7 6.9 1,479.5 4.8
Communications............................................. 595.7 3.8 456.8 3.0 1,052.5 3.4
Trade...................................................... 263.0 1.7 703.7 4.7 966.7 3.1
Other...................................................... 69.3 0.4 141.8 0.9 211.1 0.7
--------- ----- --------- ----- --------- -----
Total Fixed Maturity Securities................ $15,847.0 100.0% $15,022.9 100.0% $30,869.9 100.0%
========= ===== ========= ===== ========= =====
As of December 31, 1998
----------------------------------------------
Publicly Traded Privately Traded Total
------------------- ----------------- -----------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ------ ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Manufacturing............................................... $ 1,158.3 8.2% $ 2,897.1 20.5% $ 4,055.4 14.4%
Utilities................................................... 1,381.3 9.8 2,743.0 19.5 4,124.3 14.6
MBS......................................................... 3,408.4 24.1 2.6 0.0 3,411.0 12.1
ABS......................................................... 2,126.5 15.0 292.6 2.1 2,419.1 8.6
Bank & Finance.............................................. 1,305.9 9.2 1,556.1 11.1 2,862.0 10.1
Transportation.............................................. 1,194.6 8.4 1,193.4 8.5 2,388.0 8.5
Oil & Gas................................................... 856.8 6.1 1,063.5 7.6 1,920.3 6.8
Agri/Forestry/Mining........................................ 377.3 2.7 1,435.3 10.2 1,812.6 6.4
Government.................................................. 1,027.4 7.3 687.1 4.9 1,714.5 6.1
Services.................................................... 295.7 2.1 909.1 6.5 1,204.8 4.3
Communications.............................................. 519.4 3.7 478.7 3.4 998.1 3.5
Trade....................................................... 280.7 2.0 598.2 4.3 878.9 3.1
Other....................................................... 217.4 1.4 194.0 1.4 411.4 1.5
--------- ----- --------- ----- --------- -----
Total Fixed Maturity Securities........................... $14,149.7 100.0% $14,050.7 100.0% $28,200.4 100.0%
========= ===== ========= ===== ========= =====
As of December 31, 1997
----------------------------------------------
Publicly Traded Privately Traded Total
------------------- --------------------- ----------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Manufacturing........................... $ 868.9 6.6% $ 3,275.3 23.3% $ 4,144.2 15.3%
Utilities............................... 1,224.6 9.4 2,524.9 17.9 3,749.5 13.8
MBS..................................... 3,035.6 23.2 4.3 0.0 3,039.9 11.2
ABS..................................... 2,310.5 17.6 80.5 0.6 2,391.0 8.8
Bank & Finance.......................... 1,100.2 8.4 1,580.6 11.2 2,680.8 9.9
Transportation.......................... 1,028.0 7.9 1,180.1 8.4 2,208.1 8.1
Oil & Gas............................... 552.1 4.2 1,131.7 8.0 1,683.8 6.2
Agri/Forestry/Mining.................... 292.6 2.2 1,291.7 9.2 1,584.3 5.8
Government.............................. 1,262.5 9.6 651.2 4.6 1,913.7 7.0
Services................................ 239.1 1.8 940.7 6.7 1,179.8 4.3
Communications.......................... 558.7 4.3 620.6 4.4 1,179.3 4.3
Trade................................... 246.6 1.9 585.3 4.2 831.9 3.1
Other................................... 375.9 2.9 212.7 1.5 588.6 2.2
--------- ----- --------- ----- --------- -----
Total Fixed Maturity Securities....... $13,095.3 100.0% $14,079.6 100.0% $27,174.9 100.0%
========= ===== ========= ===== ========= =====
The following tables provide additional detail on the composition of our MBS
and ABS portfolios. As the securitized asset market has continued to expand in
recent years, we have made use of this asset class selectively to add attractive
risk-adjusted returns and furnish additional liquidity to our fixed maturity
securities portfolios. For asset-liability management purposes we favor
relatively stable cash flow structures such as those funded with commercial
mortgages, auto loans and credit card receivables.
Mortgage Backed Securities -- By Type
As of December 31, 1999
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------ ----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Commercial mortgage-backed securities....... $1,951.6 61.6% $0.1 100.0% $1,951.7 61.6%
Residential collateralized mortgage
obligations................................ 245.3 7.7 -- 0.0 245.3 7.7
Residential pass-through securities......... 972.5 30.7 -- 0.0 972.5 30.7
-------- ----- ---- ----- -------- -----
Total..................................... $3,169.4 100.0% $0.1 100.0% $3,169.5 100.0%
======== ===== ==== ===== ======== =====
As of December 31, 1998
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------ ----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Commercial mortgage-backed securities...... $2,048.5 60.1% $2.6 100.0% $2,051.1 60.1%
Residential collateralized mortgage
obligations............................... 307.1 9.0 -- 0.0 307.1 9.0
Residential pass-through securities........ 1,052.8 30.9 -- 0.0 1,052.8 30.9
-------- ----- ---- ----- -------- -----
Total.................................... $3,408.4 100.0% $2.6 100.0% $3,411.0 100.0%
======== ===== ==== ===== ======== =====
As of December 31, 1997
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- -------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ------ ----- ------ ----- ------
(in millions) (in millions) (in millions)
Commercial mortgage-backed securities...... $1,596.7 52.6% $ 4.3 100.0% $1,601.0 52.7%
Residential collateralized mortgage
obligations............................... 228.5 7.5 -- 0.0 228.5 7.5
Residential pass-through securities........ 1,210.4 39.9 -- 0.0 1,210.4 39.8
-------- ----- ------ ----- -------- -----
Total.................................... $3,035.6 100.0% $ 4.3 100.0% $3,039.9 100.0%
======== ===== ====== ===== ======== =====
Asset Backed Securities -- By Type
As of December 31, 1999
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- -------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ------ ----- ------ ----- ------
(in millions) (in millions) (in millions)
Credit card receivables.................... $ 94.3 5.0% $ 0.4 0.2% $ 94.7 4.5%
Auto loans................................. 716.3 38.0 -- 0.0 716.3 33.8
Manufactured housing....................... 86.1 4.5 -- 0.0 86.1 4.1
Home equity loans.......................... 25.1 1.3 43.3 19.1 68.4 3.2
Collateralized bond obligations............ 430.4 22.8 0.0 0.0 430.4 20.3
Other...................................... 539.3 28.4 183.7 80.7 723.0 34.1
-------- ----- ------ ----- -------- -----
Total.................................... $1,891.5 100.0% $227.4 100.0% $2,118.9 100.0%
======== ===== ====== ===== ======== =====
As of December 31, 1998
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- -------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ------ ----- ------ ----- ------
(in millions) (in millions) (in millions)
Credit card receivables.................... $ 257.6 12.1% $ -- 0.0% $ 257.6 10.6%
Auto loans................................. 839.7 39.5 4.6 1.6 844.3 34.9
Manufactured housing....................... 113.6 5.3 -- 0.0 113.6 4.7
Home equity loans.......................... 74.0 3.5 -- 0.0 74.0 3.1
Collateralized bond obligations............ 471.2 22.2 198.8 67.9 670.0 27.7
Other...................................... 370.4 17.4 89.2 30.5 459.6 19.0
-------- ----- ------ ----- -------- -----
Total.................................... $2,126.5 100.0% $292.6 100.0% $2,419.1 100.0%
======== ===== ====== ===== ======== =====
As of December 31, 1997
-----------------------------------------------
Publicly Traded Privately Traded Total
------------------- -------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ------ ----- ------ ----- ------
(in millions) (in millions) (in millions)
Credit card receivables.................... $ 490.6 21.2% $ -- 0.0% $ 490.6 20.5%
Auto loans................................. 937.1 40.6 15.2 18.9 952.3 39.8
Manufactured housing....................... 152.4 6.6 -- 0.0 152.4 6.4
Home equity loans.......................... 53.5 2.3 -- 0.0 53.5 2.2
Collateralized bond obligations............ 331.7 14.4 18.0 22.4 349.7 14.6
Other...................................... 345.2 14.9 47.3 58.7 392.5 16.5
-------- ----- ------ ----- -------- -----
Total.................................... $2,310.5 100.0% $ 80.5 100.0% $2,391.0 100.0%
======== ===== ====== ===== ======== =====
Mortgage Loans. As of December 31, 1999, we held mortgage loans with a
carrying value of $10.7 billion, including $1.9 billion of agricultural loans
and $1.1 billion of commercial loans managed by our Canadian subsidiary, The
Maritime Life Assurance Company.
The following table shows the distribution of our mortgage loan portfolio by
property type as of the dates indicated. Our commercial mortgage loan portfolio
consists primarily of non-recourse fixed-rate mortgages on fully, or nearly
fully, leased commercial properties.
As of December 31,
-----------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----------- ------ ----------- ------ ----------- ------
(in millions) (in millions) (in millions)
Apartment............................ $ 2,493.7 23.2% $2,362.3 24.6% $2,476.7 26.7%
Office Buildings..................... 2,552.2 23.7 2,260.5 23.5 1,889.2 20.3
Retail............................... 1,844.8 17.2 1,730.4 18.0 1,748.8 18.8
Agricultural......................... 1,893.0 17.6 1,356.7 14.1 1,455.9 15.7
Industrial........................... 1,006.5 9.4 1,069.9 11.1 1,017.4 10.9
Hotels............................... 425.5 4.0 301.2 3.1 198.3 2.1
Multi-Family......................... 80.7 0.8 104.9 1.1 84.9 0.9
Mixed Use............................ 140.2 1.3 93.2 1.0 83.3 0.9
Other................................ 299.8 2.8 337.0 3.5 341.8 3.7
--------- ----- -------- ----- -------- -----
Total.............................. $10,736.4 100.0% $9,616.1 100.0% $9,296.3 100.0%
========= ===== ======== ===== ======== =====
The following table shows the distribution of our mortgage loan portfolio by
geographical region.
Mortgage Loans -- By ACLI Region
As of December 31,
----------------------------------------------------
1999 1998 1997
--------------- -------------- ----------------
Number Carrying % of Carrying % of Carrying % of
of Loans Value Total Value Total Value Total
-------- -------- ------ --------- ------ ---------- ------
(in millions) (in millions) (in millions)
East North Central................... 170 $ 1,108.2 10.3% $1,106.9 11.5% $ 803.2 8.6%
East South Central................... 38 299.0 2.8 157.4 1.6 157.5 1.7
Middle Atlantic...................... 141 1,676.3 15.6 1,500.2 15.6 1,491.2 16.0
Mountain............................. 112 355.5 3.3 381.2 4.0 410.2 4.4
New England.......................... 146 896.5 8.4 854.8 8.9 900.8 9.7
Pacific.............................. 314 2,119.0 19.7 1,885.0 19.6 1,817.3 19.5
South Atlantic....................... 221 1,927.2 18.0 1,648.3 17.1 1,557.8 16.8
West North Central................... 72 377.3 3.5 333.1 3.5 260.4 2.8
West South Central................... 175 742.9 6.9 645.6 6.7 653.9 7.0
Canada............................... 1,042 1,234.5 11.5 1,103.6 11.5 1,244.0 13.5
----- --------- ----- -------- ----- -------- -----
Total.............................. 2,431 $10,736.4 100.0% $9,616.1 100.0% $9,296.3 100.0%
===== ========= ===== ======== ===== ======== =====
The following table shows our commercial mortgage loan portfolio by loan
size. Our commercial mortgage loan portfolio is highly diversified by borrower.
As of December 31, 1999, 49.9% of the portfolio was comprised of mortgage loans
with principal balances of less than $10 million. Consistent with our diverse
base of business, our mortgage loans are originated through affiliated field
offices across the country and through a national network of mortgage
correspondents.
Commercial Mortgage Loan Portfolio -- By Loan Size
As of December 31,
------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
Number Number Number
of Principal % of of Principal % of of Principal % of
Loans Balance Total Loans Balance Total Loans Balance Total
------ --------- ------ ------ --------- ------ ------ --------- ------
(in millions) (in millions) (in millions)
Under $5 million.......... 1,541 $2,121.0 23.7% 1,779 $2,048.9 24.6% 1,555 $2,021.1 25.4%
$5 million but less
than $10 million......... 356 2,339.7 26.2 355 2,295.2 27.5 369 2,381.2 30.0
$10 million but less
than $20 million......... 138 1,790.8 20.0 142 1,781.6 21.4 131 1,736.6 21.9
$20 million but less
than $30 million......... 37 914.3 10.2 34 859.6 10.3 30 737.4 9.3
$30 million and over...... 28 1,779.8 19.9 24 1,351.0 16.2 20 1,060.3 13.4
----- -------- ----- ----- -------- ----- ----- -------- -----
Total................... 2,100 $8,945.6 100.0% 2,334 $8,336.3 100.0% 2,105 $7,936.6 100.0%
===== ======== ===== ===== ======== ===== ===== ======== =====
The following table shows the distribution of maturities of our commercial
mortgage loan portfolio. To accommodate our liability needs, we seek a
reasonably diversified maturity structure for this portfolio. The table
illustrates the trend toward longer maturity mortgages. This lengthening of the
portfolio primarily reflects commercial borrowers taking advantage of declining
interest rates by locking-in long-term financing.
Commercial Mortgage Loan Maturities
As of December 31,
----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Principal Principal Principal
Balance % of Balance % of Balance % of
Maturing Total Maturing Total Maturing Total
--------- ------ --------- ------ --------- ------
(in millions) (in millions) (in millions)
1998.......... N/A N/A N/A N/A $ 797.5 10.1%
1999.......... N/A N/A $ 609.0 7.3% 673.5 8.5
2000.......... $ 728.2 8.1% 736.2 8.8 859.2 10.8
2001.......... 646.0 7.2 691.8 8.3 834.2 10.5
2002.......... 622.2 7.0 767.8 9.2 844.2 10.6
2003.......... 788.0 8.8 859.5 10.3 598.3 7.6
2004.......... 647.7 7.2 443.0 5.3 509.1 6.4
2005.......... 766.7 8.6 698.3 8.4 637.3 8.0
2006.......... 649.5 7.3 429.0 5.2 420.5 5.3
2007.......... 535.0 6.0 507.7 6.1 517.3 6.5
After 2007.... 3,562.3 39.8 2,594.0 31.1 1,245.5 15.7
-------- ----- -------- ----- -------- -----
Total....... $8,945.6 100.0% $8,336.3 100.0% $7,936.6 100.0%
======== ===== ======== ===== ======== =====
The following table shows the percentages of our commercial loan portfolio
that are delinquent but not in foreclosure, delinquent and in foreclosure,
restructured and foreclosed. Commercial mortgage loans are classified as
delinquent when they are 60 days or more past due as to the payment of interest
or principal. Commercial mortgage loans are classified as restructured when they
are in good standing, but the basic terms, such as interest rate or maturity
date, have been modified as a result of a prior actual delinquency or an
imminent delinquency. Although we have recorded higher levels of delinquencies
and foreclosures than ACLI averages in most of the periods shown, we believe our
commercial mortgage portfolio has performed comparably to ACLI industry averages
for delinquencies, restructurings and foreclosures in process. While our total
delinquency rate as of September 30, 1999
was 0.46%, as shown in the table below, as of December 31, 1999, it has improved
to 0.34% due mainly to the foreclosure of a $13.0 million loan which was
completed in October. At September 30, 1999 our restructured mortgage loans were
at a higher percentage of our mortgage loan portfolio than was the industry
average. However, one $70 million loan accounted for 30.4% of our total
restructured mortgage loans as of September 30, 1999. This loan was sold during
the fourth quarter and reduced the percentage of our mortgage loans that are
restructured to approximately 1.58%. All foreclosure decisions are based on a
thorough assessment of the property's quality and location and market
conditions. The decision may also reflect a plan to invest additional capital in
a property to make tenant improvements or renovations to secure a higher resale
value at a later date. Following foreclosure, we rely on our real estate
investment group's ability to manage foreclosed real estate for eventual return
to investment real estate status or outright sale.
Commercial Mortgage Loan Comparisons
As of December 31,
--------------------------------------------
As of September 30, 1999 (1) 1998 1997
------------------------------ --------------- --------------
John John John
Hancock (2) ACLI (3) Hancock (2) ACLI (3) Hancock (2) ACLI (3)
------------- ------- ---------- ------- ---------- -------
Delinquent,
not in foreclosure...... 0.06% 0.16% 0.33% 0.17% 0.50% 0.32%
Delinquent,
in foreclosure.......... 0.40 0.15 0.30 0.31 0.67 0.58
Restructured............. 2.92 2.41 2.88 3.02 4.20 4.61
---- ---- ---- ---- ---- ----
Subtotal............... 3.38 2.72 3.51 3.50 5.37 5.51
Loans foreclosed
during period........... 0.28 0.26 0.64 0.44 1.58 0.84
---- ---- ---- ---- ---- ----
Total.................. 3.66% 2.98% 4.15% 3.94% 6.95% 6.35%
==== ==== ==== ==== ==== ====
________________
(1) Most recent reporting period available.
(2) Excludes data from The Maritime Life Assurance Company.
(3) Source: ACLI Investment Bulletins entitled "Mortgage Loan Portfolio
Profile" Numbers 1453, 1429 and 1399 dated November 22, 1999, March 4,
1999 and March 9, 1998, respectively.
We use our internally developed Mortgage Investment Risk Analysis system to
monitor the aggregate risk of our commercial mortgage loan portfolio. When a
loan becomes more than 30 days delinquent, an assessment is made as to what
course of action should be taken with the investment. In most instances, the
loan is referred for foreclosure; however, in some circumstances we may decide
that it is advantageous to restructure the loan. We will only restructure when
we believe we will recapture lost income as markets improve.
Delinquent and restructured loans are reviewed on a quarterly basis after
consultation with the controller's department. Loan officers present an analysis
of the problem loans, including a 10 year discounted cash flow analysis, that
establishes a value for the property. A reserve is established based on the
difference between the book value of the property and the agreed-upon market
value.
The following table shows our agricultural mortgage loan portfolio by its
three major sectors: agribusiness, timber and production agriculture.
Agribusiness is our largest agricultural sector and is a relatively stable
segment of the food industry that includes suppliers, warehousers, processors,
distributors, wholesalers, and retailers. Our expertise in this area provides us
with a specialized niche in the largest sector of manufactured goods in the
United States. Our largest concentrations of agricultural mortgage loans are
located in California and Maine, with the two states comprising 44% of our
agricultural mortgage loan portfolio's holdings as of December 31, 1999. We are
one of the largest lenders in the timber market and, in addition to managing
timber investments for third parties, we have a small amount of timber loans in
our general account. In 1998, we sold 70% of our production agriculture
portfolio and are not actively pursuing new investments in this market sector.
Agricultural Mortgage Loans -- By Sector
As of December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(in millions) (in millions) (in millions)
Agribusiness................. $1,290.8 68.1% $ 958.7 70.7% $ 717.5 49.3%
Timber....................... 542.4 28.7 319.2 23.5 402.4 27.6
Production Agriculture....... 59.8 3.2 78.8 5.8 336.0 23.1
-------- ----- -------- ----- -------- -----
Total....................... $1,893.0 100.0% $1,356.7 100.0% $1,455.9 100.0%
======== ===== ======== ===== ======== =====
Real Estate. We have recently completed a comprehensive strategic sales
initiative, liquidating approximately 90% of our December 31, 1997 "non-home
office" commercial real estate portfolio. Our current real estate holdings are
predominantly comprised of our headquarters in Boston, Massachusetts.
Our remaining equity real estate holdings include properties originally
acquired as investment real estate, foreclosed properties subsequently
transferred to investment status, and recently foreclosed properties. As of
December 31, 1999, our total real estate portfolio, with a carrying value of
$548.5 million, represented 1.1% of invested assets.
The following table shows investment valuation allowances for our mortgage
loan and real estate portfolios for the periods indicated:
Investment Valuation Allowances
Real
Mortgages ---- Total
--------- Estate -----
------
(in millions)
Year Ended December 31,
1997
Beginning Balance................................................ $142.0 $ 54.5 $ 196.5
Provision....................................................... 19.5 1.5 21.0
Write-offs...................................................... (34.2) (30.5) (64.7)
------ ------ -------
Ending balance.................................................. $127.3 $ 25.5 $ 152.8
Valuation allowance as % of carrying value before reserves...... 1.4% 1.3% 1.3%
1998
Provision (1)................................................... $ 15.9 $ 97.0 $ 112.9
Write-offs...................................................... (32.2) (10.5) (42.7)
------ ------ -------
Ending balance.................................................. $111.0 $112.0 $ 223.0
Valuation allowance as % of carrying value before reserves...... 1.2% 7.0% 2.0%
1999
Provision....................................................... $ 39.3 $ 22.5 $ 61.8
Write-offs...................................................... (39.9) (76.4) (116.3)
------ ------ -------
Ending balance.................................................. $110.4 $ 58.1 $ 168.5
Valuation allowance as % of carrying value before reserves...... 1.0% 9.6% 1.5%
- ----------------
(1) The increased amount in 1998 is primarily attributable to our commercial
real estate disposition initiative, which resulted in a shortening of the
expected holding period for the majority of all properties in our
commercial real estate portfolio.
The allowance for losses on mortgage loans on real estate and foreclosed real
estate is maintained at a level that we believe to be adequate to absorb
estimated probable credit losses. Our periodic evaluation of the adequacy of the
allowance for losses is based on past experience, known and inherent risks,
adverse situations that may affect the borrower's ability to repay (including
the timing of future payments), the estimated value of the underlying security,
the general composition of the portfolio, current economic conditions and other
factors. This evaluation is inherently subjective and is susceptible to
significant changes and no assurance can be given that the allowances taken will
in fact be adequate to cover all future losses or that additional valuation
allowances or asset write-downs will not be required in the future.
Policy Loans. As of December 31, 1999, our investment assets included
$1,938.8 million in policy loans, nearly unchanged in absolute terms from
outstanding levels as of December 31, 1998 and 1997. Policy loans are extended
to our life insurance policyholders and are collateralized by the cash value of
their insurance policies. The interest rates charged to policyholders on these
loans are set forth in their policies and are approved by state insurance
commissioners. These interest rates usually range from 5% to 8% for older
policies, which typically have fixed interest rate provisions. For newer
policies, which typically have variable interest rate provisions, interest rates
are expressly based on external market indices. Interest rates charged on policy
loans have generally exceeded the guaranteed interest rates credited on the
underlying policies. Our gross investment income from policy loans amounted to
$109.8 million, $111.9 million and $107.7 million in the year ended December 31,
1999, 1998 and 1997, respectively.
Equity Securities. As of December 31, 1999, we held $1,316.2 million of
equity securities, including $947.8
million of common equity that was largely acquired through the equity
participation features of below-investment-grade bonds or through recoveries on
defaulted bonds.
Other Invested Assets. Other invested assets totaled $1,311.1 million as of
December 31, 1999, compared to $1,254.6 million as of December 31, 1998. Total
gross investment income from other invested assets totaled $165.3 million for
the year ended December 31, 1999 and $181.3 million in 1998. Other invested
assets primarily include leases, private equity, and independent power projects.
Joint ventures and partnership interests are comprised of a variety of
underlying investment pools or assets such as real estate leases. Joint venture
and partnership interests are generally accounted for under the equity method.
The equity method requires increasing the asset's carrying value to recognize
undistributed earnings, or reducing the asset's carrying value to recognize
distributed earnings and return of principal, in the underlying entities. The
carrying value of this asset class, as well as the investment income it
generates, is highly contingent upon the economic performance of the underlying
entities or assets. Also included in this category are derivatives and other
miscellaneous assets.
The following table shows other invested assets carrying value and income by
type. Our real estate joint ventures were disposed of in 1999 as part of our
comprehensive real estate sale previously discussed.
As of December 31,
--------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
Carrying Carrying Carrying
Value Income Value Income Value Income
-------- ------- -------- ------- --------- -------
(in millions)
Real estate joint ventures.................. $ 0.0 $ (0.4) $ 173.8 $ 5.8 $123.7 $ 13.5
Equity participations....................... 46.9 10.4 72.3 11.5 35.4 8.5
Fixed income/leases......................... 302.7 27.3 213.4 30.5 200.2 23.5
Equity or fund type limited partnerships.... 169.2 27.9 151.4 31.7 151.7 51.7
Oil & gas, power, etc....................... 126.0 31.7 153.2 44.3 209.1 39.0
Derivatives................................. 139.1 6.4 31.8 (4.8) (12.0) (4.1)
Investments in process...................... 88.6 0.0 254.1 0.0 1.2 0.0
Investment settlements pending.............. 291.8 0.0 78.6 0.0 20.7 0.0
All other................................... 146.8 62.0 126.0 62.3 101.6 12.4
-------- ------ -------- ------ ------ ------
Total..................................... $1,311.1 $165.3 $1,254.6 $181.3 $831.6 $144.5
======== ====== ======== ====== ====== ======
Cash and Short-Term Investments. As of December 31, 1999, our short-term
investments (including cash and cash-equivalents) totaled $1,984.8 million.
Volatility in our annual short-term investment income reflects swings in our
cash balances, as well as changes in short-term interest rates. As a general
policy, we aim to minimize the opportunity cost of holding excess cash and
short-term investments, while balancing our need to meet obligations to our
policyholders and creditors, as well as to settle investment transactions. We
invest short-term funds in commercial paper, certificates of deposit and other
short-term instruments, subject to investment guidelines regarding issuer
concentration, quality and maturity. We also have an active securities-lending
program.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows
to meet the cash requirements of business operations. Historically, our
principal cash flow sources have been premiums, deposits and charges on policies
and contracts, investment income, maturing investments, and proceeds from sales
of investment assets. In addition to the need for cash flow to meet operating
expenses, our liquidity requirements relate principally to the liabilities
associated with our various life insurance, annuity, and structured investment
products, and to the funding of investments in new products, processes, and
technologies. Our product liabilities include the payment of benefits under
life insurance, annuity and structured investment products and the payment of
policy surrenders, withdrawals and policy loans.
John Hancock Financial Services, Inc. is an insurance holding company. The
assets of John Hancock Financial Services Inc. consist of the outstanding
capital stock of John Hancock Life Insurance Company and a portion of the net
proceeds of our initial public offering. The amount of net proceeds retained by
John Hancock Financial Services, Inc. was $105.7 million. John Hancock Financial
Services, Inc.'s sources of cash are dividends from its subsidiaries and
investment returns on the invested net proceeds of the offering retained by it.
State insurance laws generally restrict the ability of insurance companies to
pay cash dividends in excess of prescribed limitations without prior approval.
The ability of John Hancock Life Insurance Company, John Hancock Financial
Services Inc.'s primary operating subsidiary, to pay shareholder dividends is
and will continue to be subject to restrictions set forth in the insurance laws
and regulations of Massachusetts, its domiciliary state. The Massachusetts
insurance law limits how and when John Hancock Life Insurance Company can pay
shareholder dividends. John Hancock Life Insurance Company, in the future, could
also be viewed as being commercially domiciled in New York. If so, dividend
payments may also be subject to New York's holding company act as well as
Massachusetts law. John Hancock Financial Services, Inc. currently does not
expect such regulatory requirements to impair its ability to meet its liquidity
and capital needs. However, John Hancock Financial Services, Inc. can give no
assurance it will declare or pay dividends.
We maintain investment programs generally intended to provide adequate funds
to pay benefits without forced sales of investments. Products having
liabilities with longer lives, such as life insurance and certain pension
products, are matched with assets having similar estimated lives such as
mortgage loans, long-term bonds, and private placement bonds. Shorter-term
liabilities are matched with investments such as short and medium-term fixed
maturities. In addition, highly liquid, high quality short-term U.S. Treasury
securities and other liquid investment grade fixed maturities are held to fund
normal operating expenses, surrenders, withdrawals and development and
maintenance expenses associated with new products and technologies.
The liquidity of our insurance operations is also related to the overall
quality of our investments. As of December 31, 1999, $25,838.2 million, or 85.4%
of the fixed maturity securities held by us and rated by Standard & Poor's
Ratings Services, a division of the McGraw-Hill Companies, Inc. ("S&P") or the
National Association of Insurance Commissioners were rated investment grade (BBB
or higher by S&P or 1 or 2 by the National Association of Insurance
Commissioners). The remaining $4,399.8 million of fixed maturity investments
were rated non-investment grade.
We employ an asset/liability management approach tailored to the specific
requirements of each of our product lines. Each product line has an investment
strategy based on the specific characteristics of the liabilities in the product
line. As part of this approach, we develop investment policies and operating
guidelines for each portfolio based upon the return objectives, risk tolerance,
liquidity, and tax and regulatory requirements of the underlying products and
business segments.
In the fourth quarter of 1999, we exercised our termination rights on all
funding agreements containing 30 or 90 day termination provisions which totaled
approximately $1.2 billion at September 30, 1999. The cost associated with
exercising our right to terminate under these agreements was not material.
Net cash provided by operating activities was $1,688.3 million, $1,328.9
million, and $1,483.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. The increase in 1999 compared to 1998 resulted primarily
from a decrease in benefits paid to policyholders, partially offset by an
increase in purchases of trading securities. The decrease in 1998 as compared
to 1997 resulted primarily from an increase in benefits paid to policyholders in
1998 as compared to 1997.
Net cash used in investing activities was $1,996.9 million, $1,339.1 million
and $1,295.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in cash used in 1999 as compared to 1998 resulted
from net cash paid related to acquisitions and disposals of subsidiaries and a
decrease in maturities, prepayments and scheduled redemptions of fixed
maturities partially offset by an increase in sales of real estate. The increase
in net cash used in 1998 as compared to 1997 resulted primarily from an increase
in purchases of fixed maturities, partially offset by fixed maturity securities
maturing or being sold.
Net cash provided by financing activities was $250.1 million, $850.0 million
and ($792.4) million, for the years ended December 31, 1999, 1998 and 1997,
respectively. The decrease in 1999 as compared to 1998 resulted from cash
payments made on withdrawals of universal life insurance and investment-type
contracts which exceeded cash received from deposits on such contracts by $221.9
million. The increase in 1998 resulted primarily from cash received from
deposits on universal life insurance and investment-type contracts that exceeded
cash payments made on withdrawals of such contracts by $1,010.7 million.
Cash flow requirements also are supported by committed lines of credit
totaling $1,000.0 million, $500.0 million of which expires on July 29, 2000 and
$500.0 million of which expires June 30, 2001. The lines of credit are
available for general liquidity needs, capital expansion, and acquisitions. The
lines of credit contain covenants that, among other provisions, require
maintenance of certain levels of policyholders' equity. To date, we have not
borrowed any amounts under the lines of credit.
As of December 31, 1999, we had $990.7 million of debt outstanding consisting
of $380.6 million of commercial paper borrowings, $447.1 million of surplus
notes, and $163.0 million of other notes payable.
A primary liquidity concern with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal. We
closely evaluate and manage this risk. The following table summarizes our
annuity policy reserves and deposit fund liabilities for the contractholder's
ability to withdraw funds for the indicated periods:
As of December 31,
-----------------------------------------------
1999 1998
--------------------- ------------------------
Amount % Amount %
-------- ------ ---------- ------
(in millions) (in millions)
Not subject to discretionary withdrawal provisions..... $19,335.2 70.3% $15,383.4 62.4%
Subject to discretionary withdrawal adjustment:
With market value adjustment........................ 1,126.3 4.1 792.9 3.2
At contract value...................................... 1,540.6 5.6 4,010.7 16.3
Subject to discretionary withdrawal at contract
value less surrender charge......................... 5,496.5 20.0 4,462.8 18.1
---------- ------ ---------- ------
Total annuity reserves and deposit funds liability..... $27,498.6 100.0% $24,649.8 100.0%
========== ====== ========== ======
Individual life insurance policies are less susceptible to withdrawal than are
annuity contracts because policyholders may incur surrender charges and undergo
a new underwriting process in order to obtain a new insurance policy. As
indicated in the table above, there is a substantial percentage of annuity
reserves and deposit fund liabilities that are not subject to withdrawal. As a
matter of policy, we seek to include provisions limiting withdrawal rights from
general account institutional structured investment products. These include
GICs and funding agreements sold to plan sponsors where the contract prohibits
the contractholder from making withdrawals other than on a scheduled maturity
date.
Individual life insurance policies (other than term life insurance policies)
increase in cash values over their lives. Policyholders have the right to borrow
from us an amount generally up to the cash value of their policy at any time. As
of December 31, 1999, we had approximately $17.7 billion in cash values in which
policyholders have rights to policy loans. The majority of cash values eligible
for policy loans are at variable interest rates which are reset annually on the
policy anniversary. Moreover, a portion of our fixed interest rate policy loans
have features that provide for reduced crediting rates on the portion of cash
values loaned. The amount of policy loans has remained consistent over the past
three years, at approximately $1.9 billion.
The risk-based capital standards for life insurance companies, as prescribed
by the National Association of Insurance Commissioners, establish a risk-based
capital ratio comparing adjusted surplus to required surplus for each of our
United States domiciled insurance subsidiaries. If the risk-based capital ratio
falls outside of acceptable ranges, regulatory action may be taken ranging from
increased information requirements to mandatory control by the domiciliary
insurance department. The risk-based capital ratios of all our insurance
subsidiaries as of December 31, 1999, were above the ranges that would require
regulatory action.
We maintain reinsurance programs designed to protect against large or unusual
losses. Based on our review of our reinsurers' financial statements and
reputations in the reinsurance marketplace, we believe that our reinsurers are
financially sound, and, therefore, that we have no significant exposure to
uncollectable reinsurance in excess of uncollectable amounts recognized in the
Consolidated Financial Statements.
Given the historical cash flow of our subsidiaries and current financial
results, management believes that the cash flow from the operating activities
over the next year will provide sufficient liquidity for our operations, as well
as to satisfy debt service obligations and to pay other operating expenses.
Although we anticipate that we will be able to meet our cash requirements, we
can give no assurances in this regard.
Year 2000
By late 1999, we completed our Year 2000 readiness plan to address issues that
could result from computer programs being written using two digits to define the
applicable year rather than four to define the applicable year and century. As
a result, we were prepared for the transition to the Year 2000 and did not
experience any significant Year 2000 problems with respect to our mission
critical information technology ("IT") or non-IT systems, applications or
infrastructure. During the date rollover to the year 2000, we implemented and
monitored our millennium rollover plan and conducted business as usual on
Monday, January 3, 2000.
Since January 3, 2000, our information systems, including our mission critical
systems, which in the event of a Year 2000 failure would have the greatest
impact on our operations, have functioned properly. In addition, we have not
experienced any significant Year 2000 issues related to interactions with our
material business partners. We have experienced no disruption in our ability to
process claims, update customer accounts, process financial transactions, report
accurate data to management or any other business interruptions due to Year 2000
issues. While we continue to monitor our systems, and those of our material
business partners, closely to ensure that no unexpected Year 2000 issues
develop, we have no reason to expect any such issues.
The costs of the Year 2000 project consist of internal IT personnel and
external costs such as consultants, programmers, replacement software, and
hardware. The costs of the Year 2000 project are expensed as incurred. The
project is funded partially through a reallocation of resources from
discretionary projects. Through December 31, 1999, we have incurred and
expensed approximately $20.8 million in related payroll costs for internal IT
personnel on the project. The estimated range of remaining IT personnel costs
of the project is approximately $0.8 million to $0.9 million. Through December
31, 1999, we incurred and expensed approximately $47.0 million in external costs
for the project. The estimated range of remaining external costs of the project
is approximately $1.5 to $1.9 million. The total costs of the Year 2000
project, based on management's best estimates, include approximately $21.7
million in internal IT personnel, $14.6 million in the external modification of
software, $18.3 million for external solution providers, $9.1 million in
replacement costs of non-compliant IT systems and $6.9 million in oversight,
test facilities and other expenses. Accordingly, the estimated range of total
costs of the Year 2000 project, internal and external, is approximately $70 to
$72.5 million. Our total Year 2000 project costs include the estimated impact
of external solution providers based on presently available information.
ITEM 7A. Quantitative and Qualitative Information About Market Risk
Market risk is the risk that we will incur losses due to adverse changes in
market rates and prices. Our primary market risk exposures are to changes in
interest rates, although we have certain exposures to changes in equity prices
and foreign currency exchange rates.
The active management of market risk is integral to our operations. We may
use the following approaches to manage our exposure to market risk within
defined tolerance ranges: (1) rebalance our existing asset or liability
portfolios; (2) change the character of future investments purchased; or (3)
use derivative instruments to modify the market risk characteristics of existing
assets or liabilities or assets expected to be purchased.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. This risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets and also
have interest sensitive liabilities, primarily in our Protection, Asset
Gathering, and Guaranteed and Structured Financial Products Segments.
We seek to earn returns that enhance our ability to offer competitive rates
and prices to customers while contributing to attractive and stable profits and
long-term capital growth. Accordingly, our investment decisions and objectives
are a function of the underlying risks and product profiles of each primary
business operation. In addition, we diversify our product portfolio offerings to
include products that contain features that will protect us against fluctuations
in interest rates. Those features include adjustable crediting rates, policy
surrender charges, and market value adjustments on liquidations.
We manage the interest rate risk inherent in our assets relative to the
interest rate risk inherent in our liabilities. One of the measures we use to
quantify this exposure is duration. Duration measures the sensitivity of the
fair value of assets and liabilities to changes in interest rates. For example,
if interest rates increase by 100 basis points, the fair value of an asset with
a duration of 5 years is expected to decrease in value by approximately 5%. As
of December 31, 1999, the difference between the pre-tax asset and liability
duration on our duration managed portfolio was approximately 0.2 years. This
positive duration gap indicates that the fair value of our assets is somewhat
more sensitive to interest rate movements than the fair value of our
liabilities. Our objective is to manage this duration gap as closely as possible
to 0 years.
The selection of a 100 basis point immediate, parallel increase or decrease in
interest rates is a hypothetical rate scenario used to demonstrate potential
risk. While a 100 basis point immediate, parallel increase or decrease does not
represent our view of future market changes, it is a near term reasonably
possible hypothetical change that illustrates the potential impact of such
events. While these fair value measurements provide a representation of interest
rate sensitivity, they are based on our portfolio exposures at a point in time
and may not be representative of future market results. These exposures will
change as a result of ongoing portfolio transactions in response to new
business, management's assessment of changing market conditions and available
investment opportunities.
To calculate duration, we project asset and liability cash flows, and discount
them to a net present value basis using a risk-free market rate adjusted for
credit quality, sector attributes, liquidity, and other specific risks.
Duration is calculated by revaluing these cash flows at an alternative level of
interest rates, and determining the percentage change in fair value from the
base case.
Based upon the information and assumptions we use in our duration calculation
and in effect as of December 31, 1999, we estimate that a 100 basis point
immediate, parallel increase in interest rates ("rate shock") would decrease the
net fair value of our duration managed assets and liabilities by approximately
$31.0 million.
For other products, such as whole life insurance, term life insurance, and
single premium deferred annuities, the liability cash flow is less predictable,
and a duration-matching strategy is less reliable and manageable. For these
products, we manage interest rate risk based on modeling which considers the
target average life, maturities,
crediting rates, and assumptions of policyholder behavior. As of December 31,
1999, the fair value of assets supporting liabilities managed under this
modeling was $26,897.4 million. A rate shock (as defined above) would decrease
the fair value of these assets by $973.6 million.
We also utilize various derivative financial instruments to manage our
exposure to fluctuations in interest rates, including interest rate swaps,
interest rate futures, interest rate caps, interest rate floors, and interest
rate swaptions.
Interest rate swaps are used primarily to more closely match the interest rate
characteristics of assets and liabilities. We use a common variation of interest
rate swaps, constant maturity treasury ("CMT") swaps, to hedge our exposure to
floating rate, fixed maturity liability contracts. Interest rate futures
contracts are used to hedge changes in interest rates subsequent to the issuance
of an insurance liability (i.e., GIC) but prior to the purchase of a supporting
asset, or during periods of warehousing assets in anticipation of a near term
liability sale. We also use interest rate futures to periodically rebalance our
duration-managed accounts. We use interest rate caps to hedge embedded caps on
floating-rate assets and to manage the risk associated with a sudden rise in
interest rates. Similar to interest rate caps, we also use interest rate floors.
These contracts are used to hedge a sudden decline in interest rates during the
premium contribution "window" on our GICs or to hedge guaranteed minimum
crediting rates in certain contracts. Interest rate swaptions are used to hedge
premium contribution risk and withdrawal risk associated with fixed liability
contracts.
We also seek to reduce call or prepayment risk arising from changes in
interest rates in individual investments. We believe that we can assess credit
risk better than interest rate movements. We limit our exposure to investments
which are not call protected, which means they are not prepayable without
penalty prior to maturity at the option of the issuer, or we require incremental
yield to compensate for the risk that the option will be exercised. Examples of
investments we limit because of the option risk are residential mortgage-backed
securities. We assess option risk in all investments and, when taken, price
accordingly.
Our exposure to credit risk is the risk of loss from a counterparty failing to
perform the terms of the contract. We continually monitor our position and the
credit ratings of the counterparties to these derivative instruments. To limit
exposure associated with counterparty nonperformance on interest rate swap, cap,
floor, and swaption agreements, we enter into master netting agreements with our
counterparties. We believe the risk of incurring losses due to nonperformance
by our counterparties is remote and that such losses, if any, would be
immaterial. Futures contracts trade on organized exchanges and, therefore, have
no credit risk.
The table below shows the interest rate sensitivity of our interest rate
derivatives measured in terms of fair value.
These exposures will change as a result of ongoing portfolio and risk management
activities.
As of December 31, 1999
---------------------------------------------------------------------------
Fair Value
---------------------------------------
Weighted Average Term
Notional (Years) -100 Basis As of +100 Basis
Amount Point Change 12/31/99 Point Change
-------- --------------------- ------------- ---------- -------------
(in millions, except for Weighted Average Term)
Interest rate swaps.... $ 9,393.0 9.8 $ (78.0) $(18.3) $ 34.6
CMT swaps.............. 648.7 1.9 2.0 1.9 2.2
Futures contracts (1).. 2,350.0 (4.8) (104.7) 31.3 98.6
Interest rate caps..... 359.4 6.0 2.4 5.8 11.3
Interest rate floors... 125.0 4.3 0.2 0.1 0.1
Swaptions.............. 30.0 25.4 (2.1) (3.6) (4.9)
--------- -------------------- ------------- --------- -------------
Totals........... $12,906.1 6.7 $(180.2) $ 17.2 $141.9
========= ==================== ============= ========= =============
__________________________
(1) Represents the notional value on open contracts as of December 31, 1999.
As of December 31, 1999, the aggregate fair value of debt was $962.8 million.
A 100 basis point, immediate, parallel decrease in interest rates would increase
the fair value of debt by approximately $51.2 million.
Equity Risk
Equity risk is the risk that we will incur economic losses due to adverse
changes in a particular common stock. In order to reduce our exposure to market
fluctuations on some equity securities, we use equity collar agreements. These
equity collar agreements limit the market value fluctuations on equity
securities. As of December 31, 1999, the fair value of our equity securities was
$1,361.2 million. The fair value of our equity collar agreements as of December
31, 1999 was $53.0 million. A 15% decline in the value of the equity securities
including the equity collar agreements would result in an unrealized loss of
$184.8 million.
Foreign Currency Risk
Foreign currency risk is the risk that we will incur economic losses due to
adverse changes in foreign currency exchange rates. This risk arises from our
international operations and certain foreign currency-denominated funding
agreements issued to non-qualified institutional investors in the international
market. We also have fixed income securities that are denominated in foreign
currencies; however, we use derivatives to hedge the foreign currency risk of
these securities (both interest payments and the final maturity payment). At
December 31, 1999, fair value of our foreign currency denominated fixed maturity
securities was $300.0 million. We use currency swap agreements of the same
currency to hedge the foreign exchange risk related to our investments in
securities denominated in foreign currencies. The fair value of our currency
swap agreements at December 31, 1999 supporting foreign pay bonds was $(11.6)
million.
We estimate that as of December 31, 1999, a 10% immediate unfavorable change
in each of the foreign currency exchange rates to which we are exposed including
the currency swap agreements would result in no change to the net fair value of
our foreign currency denominated instruments identified above. The selection of
a 10% immediate unfavorable change in all currency exchange rates should not be
construed as a prediction by us of
future market events but rather as an illustration of the potential impact of
such an event. Our largest individual currency exposure is to the Canadian
dollar/U.S. dollar.
The modeling technique we use to calculate our exposure does not take into
account correlation among foreign currency exchange rates or correlation among
various markets. Our actual experience may differ from the results noted above
due to the correlation assumptions utilized or if events occur that were not
included in the methodology, such as significant liquidity or market events.
Effects of Inflation
We do not believe that inflation has had a material effect on our consolidated
operations except insofar as inflation may affect interest rates.
ITEM 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements and Schedules on page F-1 herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF JOHN HANCOCK FINANCIAL SERVICES
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists our directors and executive officers, their ages and
their positions as of March 24, 2000. Effective February 1, 2000, John Hancock
Mutual Life Insurance Company was renamed John Hancock Life Insurance Company
and became the direct, wholly-owned subsidiary of John Hancock Financial
Services, Inc.
NAME AGE POSITION
- --------------------------------- ----- -------------------------------------------------------------
Stephen L. Brown ................ 62 Chairman of the Board, Chief Executive Officer and Director
Foster L. Aborn ................. 65 Vice Chairman of the Board and Director
David F. D'Alessandro ........... 49 President and Chief Operations Officer and Director
Samuel W. Bodman ................ 61 Director
I. MacAllister Booth ............ 68 Director
Wayne A. Budd ................... 58 Director
John M. Connors, Jr. ............ 57 Director
Robert E. Fast, Esq. ............ 64 Director
Dr. Kathleen Foley Feldstein .... 59 Director
Nelson S. Gifford ............... 69 Director
Michael C. Hawley ............... 62 Director
Edward H. Linde ................. 58 Director
Judith A. McHale ................ 53 Director
Richard F. Syron ................ 56 Director
Robert J. Tarr, Jr. ............. 56 Director
Kathleen M. Graveline ........... 48 Executive Vice President
Thomas E. Moloney ............... 56 Chief Financial Officer
Richard S. Scipione ............. 62 General Counsel
The following is biographical information for our directors and executive
officers:
STEPHEN L. BROWN is the Chairman of the Board, Chief Executive Officer, a
director of John Hancock Financial Services, Inc. and a director of John Hancock
Life Insurance Company. Since 1992, he has been Chairman and Chief Executive
Officer of John Hancock Mutual Life Insurance Company and a John Hancock Mutual
Life Insurance Company director since 1982. Effective June 1, 2000, Mr. Brown
will be Chairman of the Board and a director of John Hancock Financial Services,
Inc., but will no longer serve as Chief Executive Officer. He is a Fellow,
Society of Actuaries, Enrolled Actuary under ERISA, member of American Academy
of Actuaries and Chartered Life Underwriter, American College of Chartered Life
Underwriters. He is a former director of the Federal Reserve Bank of Boston. On
December 7, 1999 Mr. Brown became chairman of The Berkeley Financial Group where
he previously served as a director. He is the Chairman of the Executive
Committee of the board of directors of John Hancock Financial Services, Inc.
FOSTER L. ABORN is the Vice Chairman of the Board, a director of John Hancock
Financial Services, Inc. and a director of John Hancock Life Insurance Company.
He has been Vice Chairman of the Board and Chief Investment Officer of John
Hancock Mutual Life Insurance Company since 1992 and a John Hancock Mutual Life
Insurance Company director since 1987. He is a director of John Hancock
Subsidiaries, Inc., Independence Investment Associates, Inc., and The Berkeley
Financial Group. He will retire on June 30, 2000.
DAVID F. D'ALESSANDRO is the President and Chief Operations Officer, a
director of John Hancock Financial Services, Inc. and a director of John Hancock
Life Insurance Company. He has been President and Chief Operations Officer of
John Hancock Mutual Life Insurance Company since 1998 and a John Hancock Mutual
Life Insurance Company director since 1990. Effective June 1, 2000 Mr.
D'Alessandro will also become Chief Executive Officer of John Hancock Financial
Services, Inc. From 1988 to 1997 he was Senior Executive Vice President. He is
Vice Chairman of the Executive Committee of the board of directors of John
Hancock Financial Services, Inc., Chairman of John Hancock Variable Life
Insurance Company and a director of John Hancock Subsidiaries, Inc. and The
Berkeley Financial Group. He is a director of Partners Healthcare Systems, Inc.,
an integrated healthcare delivery system.
SAMUEL W. BODMAN is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1992. Mr. Bodman has been Chairman
and Chief Executive Officer of Cabot Corporation, a manufacturer of specialty
chemicals and materials, since 1987. He is a director of Cabot Corporation,
Security Capital Group Incorporated, a global real estate management company,
Thermo Electron Corporation, a manufacturer of a broad range of biomedical and
other products, and Westvaco Corporation, a paper and paperboard producer. He is
Chairman of the Compensation Committee and a member of the Nominating and
Corporate Governance Committee and Executive Committee of the board of directors
of John Hancock Financial Services, Inc.
I. MACALLISTER BOOTH is a director of John Hancock Financial Services, Inc.
and a director of John Hancock Life Insurance Company. He has been a John
Hancock Mutual Life Insurance Company director since 1992. Mr. Booth is the
retired Chairman, President, Chief Executive Officer and a retired director of
Polaroid Corporation. He is a director of State Street Bank, ThermoLase
Corporation, a manufacturer of personal care products, and Western Digital
Corporation, a manufacturer of disk drives. He is a member of the Nominating and
Corporate Governance Committee of the board of directors of John Hancock
Financial Services, Inc.
WAYNE A. BUDD is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1998. Mr. Budd has been Senior Vice
President and Group President, Bell Atlantic-New England, Bell Atlantic
Corporation, since 1996. He is a director of Tosco Corporation, an independent
marketer of petroleum products. Prior to 1996, he was a Senior Partner in the
law firm of Goodwin, Proctor & Hoar. He is a member of the Audit Committee and
Compensation Committee of the board of directors of John Hancock Financial
Services, Inc.
JOHN M. CONNORS, JR. is a director of John Hancock Financial Services, Inc.
and a director of John Hancock Life Insurance Company. He has been a John
Hancock Mutual Life Insurance Company director since 1991. Mr. Connors has been
the Chairman and Chief Executive Officer of Hill, Holliday, Connors, Cosmopulos,
Inc., a full-service advertising agency, since 1968. He is a director of
Geerlings & Wade, Inc., a direct marketer of premium wines, Lycos, Inc., an
Internet company, and Saucony, Inc., a manufacturer of performance-oriented
athletic shoes. Mr. Connors is also the Chairman of the board of directors for
Partners Healthcare Systems, Inc., an integrated healthcare delivery system, and
a trustee of Boston College. He is a member of the Executive Committee and the
Nominating and Corporate Governance Committee of the board of directors of John
Hancock Financial Services, Inc.
ROBERT E. FAST is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1989. Mr. Fast is a Senior Partner
in the law firm of Hale and Dorr, where he has been an attorney since 1962.
DR. KATHLEEN FOLEY FELDSTEIN is a director of John Hancock Financial Services,
Inc. and a director of John Hancock Life Insurance Company. She has been a John
Hancock Mutual Life Insurance Company director since 1993. Dr. Feldstein has
been the President of Economics Studies, Inc., a private economic consulting
firm, since 1987. She is a director of Bank of America Corporation, BellSouth
Corporation, a telecommunications company, Ionics Corporation, a water
purification company, and Knight-Ridder
Corporation, a newspaper publishing company. She is a member of the Audit
Committee and the Compensation Committee of the board of directors of John
Hancock Financial Services, Inc.
NELSON S. GIFFORD is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1976. Mr. Gifford has been the
Principal of Fleetwing Capital, a venture capital investment firm, since 1991.
Prior to 1991, he was President, Chief Executive Officer and a director of
Dennison Manufacturing Company, a stationery products, systems and packaging
company. He is a trustee of NSTAR, a holding company for Massachusetts' utility
companies, including Boston Edison Company. He is the Chairman of the Audit
Committee and a member of the Executive Committee of the board of directors of
John Hancock Financial Services, Inc.
MICHAEL C. HAWLEY is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1995. Mr. Hawley was elected
Chairman and Chief Executive Officer of The Gillette Company in April, 1999.
Prior to this election, he had been President and Chief Operating Officer. He is
a director of The Gillette Company and Texaco, Inc. He is a member of the Audit
Committee and Compensation Committee of the board of directors of John Hancock
Financial Services, Inc.
EDWARD H. LINDE is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1999. Mr. Linde has been President
and Chief Executive Officer of Boston Properties, Inc., an owner and developer
of office properties, since 1970.
JUDITH A. MCHALE is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. She has been a John Hancock
Mutual Life Insurance Company director since 1999. She has been President and
Chief Operating Officer of Discovery Communications, Inc., parent company of
cable television's Discovery Channel, since 1995. From 1987 to 1995, she served
as Executive Vice President and General Counsel for Discovery Communications,
Inc. She is a director of the Potomac Electric Power Company.
RICHARD F. SYRON is a director of John Hancock Financial Services, Inc. and a
director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1985. Mr. Syron is the President
and Chief Executive Officer of Thermo Electron Corporation, a manufacturer of a
broad range of biomedical and other products. Mr. Syron has served as a director
of Thermo Electron Corporation since 1997. From 1994 to 1999, Mr. Syron was the
Chairman and Chief Executive Officer of the American Stock Exchange. From 1989
to 1994, he was the President and Chief Executive Officer of the Federal Reserve
Bank of Boston. He is a member of the Compensation Committee, the Executive
Committee and the Nominating and Corporate Governance Committee of the board of
directors of John Hancock Financial Services, Inc.
ROBERT A. TARR, JR. is a director of John Hancock Financial Services, Inc. and
a director of John Hancock Life Insurance Company. He has been a John Hancock
Mutual Life Insurance Company director since 1996. Mr. Tarr is Chairman,
President and Chief Executive Officer of HomeRuns.com, an Internet-based food
retailer. From 1991 to 1997 he was the President, Chief Executive Officer and
Chief Operating Officer of Harcourt General, Inc. (formerly General Cinema
Corporation) and the Neiman Marcus Group, Inc. He is a director of Barney's New
York, Inc., a retailer of men's and women's apparel and accessories, Hannaford
Bros. Co., a multi-regional food retailer, Houghton Mifflin Company and Wesco
International, Inc., a distributor of electrical products. He is a member of the
Audit Committee of the board of directors of John Hancock Financial Services,
Inc.
KATHLEEN M. GRAVELINE is an Executive Vice President of John Hancock Financial
Services, Inc. and John Hancock Life Insurance Company. She has been an
Executive Vice President of John Hancock Mutual Life Insurance Company since
1999. In 2000 she was elected Chairman of the board of directors of John Hancock
Signature Services. From 1996 through 1999, she was Senior Vice President,
Retail Sector, of John Hancock Mutual Life Insurance Company.
THOMAS E. MOLONEY is the Chief Financial Officer of John Hancock Financial
Services, Inc. and John Hancock Life Insurance Company. He has been Chief
Financial Officer of John Hancock Mutual Life Insurance Company and John Hancock
Subsidiaries, Inc. since 1992. He is the Chairman and a director of John Hancock
Management Company and John Hancock Reassurance Co., Ltd. He is a director of
The Berkeley Financial Group, John Hancock Realty Services Corp., John Hancock
Signature Services, John Hancock Subsidiaries, Inc., The Maritime Life Assurance
Company and John Hancock Canadian Holdings Limited.
RICHARD S. SCIPIONE is the General Counsel of John Hancock Financial Services,
Inc. and John Hancock Life Insurance Company. He has been General Counsel of
John Hancock Mutual Life Insurance Company since 1987. He is a director of
Signator Investors, Inc. and The Berkeley Financial Group. He will retire on
November 1, 2000.
Effective April 1, 2000, JOHN M. DECICCIO will become an Executive Vice
President of John Hancock Financial Services, Inc. and Chief Investment Officer
of John Hancock Life Insurance Company. From 1994 through 2000, he has been
Senior Vice President, Investment and Pension Sector, of John Hancock Mutual
Life Insurance Company. From 1997 through 2000, he has led the demutualization
project for John Hancock Mutual Life Insurance Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On March 15, 2000, Mr. Gifford filed a Form 4 which reported his purchase of
JHF stock on February 25, 2000. This form should have been filed by March 10,
but was late due to an administrative error.
ITEM 11. EXECUTIVE COMPENSATION
COMPOSITION OF BOARD AND COMMITTEES
The business of John Hancock Financial Services, Inc. is managed under the
direction of its board of directors. The board of directors currently consists
of 15 directors, 12 of whom are independent directors. John Hancock Financial
Services, Inc. has established the following standing committees:
COMPENSATION COMMITTEE
The Compensation Committee of John Hancock Financial Services, Inc. is chosen
by the board of directors from those members who are not officers of John
Hancock Financial Services, Inc. or its subsidiaries. The Compensation Committee
will make recommendations to the board of directors regarding salaries and any
supplemental employee compensation of the executive officers and act upon
management's recommendations for salary and supplemental employee compensation
for all other employees. The Compensation Committee will also act upon
management's recommendations which require director action with respect to all
employee pension and welfare benefit plans.
THE AUDIT COMMITTEE
The Audit Committee of John Hancock Financial Services, Inc. is chosen by the
board of directors from those members who are not officers of John Hancock
Financial Services, Inc. or its subsidiaries. The Audit Committee will
recommend to the board of directors the firm of independent certified public
accountants to annually audit the books and records. The Audit Committee will
review and report on the activities of the independent certified public
accountants to the board of directors and review and advise the board of
directors as to the adequacy of John Hancock Financial Services, Inc.'s system
of internal accounting controls.
OTHER COMMITTEES
The board of directors may form such other committees of the board of
directors as it deems appropriate. As of March 24, 2000, other committees of
the board of directors included the Nominating and Corporate Governance
Committee and Executive Committee.
COMPENSATION OF DIRECTORS
The compensation for our directors who are not officers or employees of John
Hancock Financial Services, Inc. consists of a $40,000 annual retainer plus a
$1,500 attendance fee for each regular or special board meeting attended. These
directors are also compensated for participation on committees. In addition,
each director has a deferral account that is annually credited with an amount
equal to one-half the annual retainer fee and is annually adjusted based on a
surplus measurement for John Hancock Life Insurance Company for that year. The
balance in the account is generally paid shortly following the end of the
director's service on the board of directors subject to certain options
available to the director. We do not currently plan to pay additional
compensation to directors for also participating on the board of directors of
John Hancock Life Insurance Company.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table describes the compensation paid to our Chief Executive
Officer and the four other most highly compensated executive officers for
services rendered during the fiscal years ended December 31, 1998 and 1999 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION LONG-TERM
------------------------- INCENTIVE ALL OTHER
NAME AND POSITION YEAR SALARY BONUS (1) PLAN (2) COMPENSATION (3)
- --------------------------------------------- ---- ----------- --------- --------- ----------------
S.L. Brown 1998 $1,000,000 $1,000,000 899,941 $ 10,000
Chairman of the Board and Chief Executive 1999 1,000,000 2,000,000 1,062,475 10,000
Officer
D.F. D'Alessandro 1998 600,000 420,000 554,605 10,000
President and Chief Operations Officer (4) 1999 646,154 1,360,000 660,447 10,000
F.L. Aborn 1998 518,000 310,800 503,946 10,000
Vice Chairman of the Board and Chief 1999 518,000 715,000 581,232 10,000
Investment Officer
T.E. Moloney 1998 412,000 206,000 358,807 10,000
Chief Financial Officer 1999 412,000 463,384 425,863 10,000
K.M. Graveline 1999 412,000 500,000 206,139 10,000
Executive Vice President
- ----------------
(1) The amount in this column represents the annual incentive paid in 1999 and
2000 for the prior performance years of 1998 and 1999.
(2) This column reports long-term incentive awards received or deferred in 1998
and 1999 for prior performance cycles.
(3) The amounts in this column include employer contributions under the
Investment Incentive Plan. This payment constitutes the company match on
base salary over the ERISA limitations as well as the match on deferred
base salary. In 1998, there was a 4% company match on base salary over the
1998 ERISA limitations of $160,000 as well as the 4% match on deferred base
salary. In 1999, there was a 4% company match on base salary over the 1999
ERISA limitations of $160,000 as well as the 4% match on deferred base
salary. Total company match contributions for 1998 and 1999 are capped at
$10,000.
(4) Mr. D'Alessandro's salary increased from $600,000 to $800,000, effective
October 11, 1999. Effective June 1, 2000, Mr. D'Alessandro will become
Chief Executive Officer (CEO) and his salary will be increased from
$800,000 to $1,000,000.
ANNUAL INCENTIVE COMPENSATION PLAN
Under the Incentive Compensation Plan for Employees (''ICP''), cash awards
will be payable to eligible employees upon the achievement of corporate
performance objectives established by the Compensation Committee of the board of
directors. Such cash awards will be stated as a percentage of the base salary
payable to the eligible employee, with the range of targets for executive
officers being from 55% to 100% of the officer's base salary. Actual amounts
payable will be adjusted up or down for performance at or above targeted levels
of performance. Amounts, if any, payable under the ICP are paid during the first
quarter of the fiscal year immediately following the performance year.
Generally, an eligible employee must be employed on the last day of the fiscal
year in order to receive a payment under the ICP in respect of such fiscal year.
However, in the event of an executive's death, disability or retirement, a pro-
rated amount may be payable in accordance with administrative guidelines
established by the Compensation Committee.
In order to assist our senior officers in meeting the ownership guidelines
established by the Compensation Committee, senior officers, other than the
executive officers, were permitted to receive matching stock grants if they used
a portion of their cash award (either 25% or 50%) to purchase company stock. For
those senior officers who made this election, we have provided an additional
company stock match equal to 50% of the amount of the cash award used to
purchase company stock in the open market. In 2001, we anticipate that program
would continue. Beginning in 2002, the company stock match for senior officers
who are not executive officers will be 25%. Any shares acquired by reason of the
officers' election to purchase shares with his cash award and any shares granted
to match these acquired shares are subject to sales restrictions and the match
is subject to forfeiture if within three years the individual terminates his
employment with the company or an affiliate (other than by retirement, death or
disability) or sells the elected company stock. For executive officers, they
will be allowed to elect to receive shares in lieu of a portion of their cash
awards, beginning with cash awards that become payable in March of 2001. For
these executive officers, the 50% match will continue until 2002. Thereafter,
the company stock match for executive officers will be 25%. The company stock
match will be paid out of the 1999 Long-Term Stock Incentive Plan.
LONG TERM INCENTIVE PLAN
The executive officers, each senior vice president or vice president and such
other senior officers of John Hancock Life Insurance Company, and officers of a
subsidiary as may be selected by the committee responsible for administering the
plan, are participants of the Long-Term Incentive Plan for Senior Executives
(the "LTIP"). The LTIP operates during successive three-year periods (the
"Performance Cycle"). At the beginning of the Performance Cycle each participant
is awarded a number of Equity Rights determined by dividing his or her Target
Award by 100. The Target Award is a percentage of salary established for each
participant, with the range of Target Awards for executive officers ranging from
70% to 350%. Under the LTIP, the Compensation Committee of the board of
directors establishes corporate performance objectives. If these objectives are
achieved at target levels, each of the equity rights is worth $100, but such
amount may be adjusted up (to a maximum of $300 per equity right) or down
depending on whether the goals have been exceeded or have not been met. For
Messrs. Brown, Aborn, D'Alessandro, Moloney and Ms. Graveline, beginning with
the 1999 Performance Cycle, equity rights vest in one installment after five
years. For most other participants, the equity rights vest in three
installments, one-third at the end of the Performance Cycle and one-third on
January 1 of each of the following two years. As equity rights vest, cash
payments equal to the value of the equity rights will be made to participants
unless a participant irrevocably elects to defer the payment until retirement or
more than five years from the date of election.
In the event of a participant's death, all equity rights for completed
Performance Cycles which have not previously vested will vest and a pro rata
share of the equity rights will vest based on the elapsed portion of any
Performance Cycle in progress. In the event of a participant's retirement or
disability, all equity rights for completed Performance Cycles which have not
previously vested will vest under the normal vesting schedule and a pro rata
share of the equity rights will vest based on the elapsed portion of any current
Performance Cycle. For all plan participants, including Messrs. Brown and Aborn,
beginning with the 1999 Performance Cycle, in the event of normal retirement,
all equity rights for completed Performance Cycles which have not previously
vested shall vest under the normal vesting schedule and a full share of the
equity rights for the current Performance Cycle will vest in one installment
following the later of the completion of the Performance Cycle or retirement.
Additionally, participants may be entitled to hardship distributions if, in the
opinion of the Compensation Committee, the participant has incurred a financial
hardship. Participants who terminate employment, other than by retirement,
disability or death, shall forfeit all non-vested equity rights.
In order to assist our senior officers in meeting the ownership guidelines
established by the Compensation Committee, senior officers, other than the
executive officers, were permitted to receive matching stock grants if they used
a portion of their equity rights (either 25% or 50%) to purchase company stock.
For those senior officers who made this election, we have provided an additional
company stock match equal to 50% of the amount of the equity rights used to
purchase company stock in the open market. In 2001, we anticipate that program
would continue. Beginning in 2002, the company stock match for senior officers
who are not executive officers will be 25%. Any shares acquired by reason of the
officers' election to purchase shares with 2000 equity rights and any shares
granted to match these acquired shares are subject to sales restrictions and the
match is subject to forfeiture if within three years the individual terminates
his employment with the company or an affiliate (other than by retirement, death
or disability) or sells the elected company stock. For executive officers, they
will be allowed to elect to receive shares in lieu of a portion of their equity
rights, beginning with equity rights that become payable in March of 2001. For
these executive officers, the 50% match will continue until 2002. Thereafter,
the company stock match for executive officers will be 25%. The company stock
match will be paid out of the 1999 Long-Term Stock Incentive Plan.
The table immediately below presents the number of equity rights granted to
each Named Executive Officer during 1999.
LONG-TERM INCENTIVE PLAN TABLE (CYCLE 1999)
ESTIMATED FUTURE PAYOUTS
NUMBER OF PERFORMANCE -------------------------
NAME EQUITY RIGHTS PERIOD TARGET MAXIMUM
- ----------------------- ------------- ----------- ---------- -------
S.L. Brown ............ 33,000 99-00-01 $3,300,000 $9,900,000
D.F. D'Alessandro ..... 20,000 99-00-01 2,000,000 6,000,000
F.L. Aborn ............ 10,360 99-00-01 1,036,000 3,108,000
T.E. Moloney .......... 8,240 99-00-01 824,000 2,472,000
K.M. Graveline ........ * 16,180 99-00-01 1,618,000 4,854,000
* Target equals 6,180 equity rights; additional grant equal to $1,000,000
(balance of retention award) equals 10,000 additional equity rights for a
total of 16,180 equity rights.
LONG-TERM STOCK INCENTIVE PLAN
Under the 1999 Long Term Stock Incentive Plan, (the "Long Term Stock
Incentive Plan") a committee responsible for administering the Long Term Stock
Incentive Plan (the "Committee"), may from time to time grant eligible
employees qualified or nonqualified stock options, and may grant eligible agents
and other producers nonqualified stock options, to purchase shares of common
stock having an exercise price at least equal to the fair market value of a
share of common stock on the effective date of the grant of such stock option.
The Committee may also award employees the right to receive shares, a cash
equivalent payment, or a combination of both which may be subject to
forfeitability contingencies based on continued employment with us or on meeting
performance criteria or both (the "Stock Awards"). The Long Term Stock
Incentive Plan further provides that the Committee must consist of two or more
members each of whom must be a "non-employee director" within the meaning of
Rule 16b-3, as promulgated pursuant to the Exchange Act, and Section 162(m) of
the Internal Revenue Code.
The maximum number of shares of common stock that may be issued under the
Long Term Stock Incentive Plan is 5.0% of the total number of shares of common
stock that are outstanding following our initial public offering. The shares of
common stock underlying any awards which are forfeited, canceled, reacquired by
us, satisfied without the issuance of common stock or otherwise terminated
(other than by exercise) shall be added back to the shares of common stock
available for issuance under the Long Term Stock Incentive Plan. The maximum
number of shares that may be granted as Stock Awards shall be 1.0% of total
shares outstanding and the maximum number of shares available for use as
incentive stock options shall be 4.0% of total shares outstanding. Additionally,
the maximum number of shares that may be awarded to any participant shall be 1%
of total shares outstanding. If there is a stock split, stock dividend,
recapitalization or other relevant change affecting the outstanding shares of
common stock, appropriate adjustments will be made in the number and kind of
shares available for award under the Long Term Stock Incentive Plan in the
future and the number and kind of shares as to which outstanding shares shall be
exercisable.
The Committee may amend the Long Term Stock Incentive Plan, except that no
amendment without the approval of our stockholders shall be made which would
increase the number of shares available for issuance under the Long Term Stock
Incentive Plan or cause the Long Term Stock Incentive Plan not to comply with
Rule 16b-3 of the Exchange Act or Section 162(m) of the Code. The Long Term
Stock Incentive Plan shall be effective as of the date approved by the board. No
awards may be made under the Long Term Stock Incentive Plan after ten years from
the date of approval or earlier termination of the Long Term Stock Incentive
Plan by the board.
In the event of a change of control, the Committee may provide for the
acceleration of any time period relating to the exercise or realization of the
award, provide for the purchase of the award upon the participant's request for
an amount of cash or other property that could have been received upon the
exercise or realization of the award had the award been currently exercisable or
payable, adjust the terms of the award, cause the award to be assumed, or new
rights substituted therefor, by another entity, or make such other provisions as
the Committee may consider to be equitable and in our best interests. Under the
Plan of Reorganization until one year after completion of the offering, we may
not award any stock options or stock grants to any of our executive officers or
directors.
FEDERAL INCOME TAX ASPECTS
The following is a brief summary of the Federal income tax consequences of
awards under the Long Term Stock Incentive Plan based on the Federal income tax
laws in effect on the date hereof. This summary is not intended to be exhaustive
and does not describe state or local tax consequences.
No taxable income is realized by the grantee upon the grant or exercise of
an Incentive Stock Option (an "ISO"). If a grantee does not sell the stock
received upon the exercise of an ISO ("ISO Shares") for at least two years
from the date of grant and one year from the date of exercise, when the ISO
Shares are sold any gain or loss realized will be treated as long-term capital
gain or loss. In such circumstances, no deduction will be allowed to the
grantee's employer for Federal income tax purposes.
If ISO Shares are disposed of prior to the expiration of the holding
periods described above, the grantee generally will realize ordinary income at
that time equal to the lesser of the excess of the fair market value of the
shares at exercise over the price paid for such ISO Shares or the actual gain on
the disposition. We will generally be entitled to deduct any such recognized
amount. Any further gain or loss realized by the grantee will be taxed as
short-term or long-term capital gain or loss. Subject to certain exceptions for
disability or death, if an ISO is exercised more than three months following the
termination of the grantee's employment, the ISO will generally be taxed as a
nonqualified stock option.
No income is realized by the grantee at the time a nonqualified stock
option is granted. Generally upon exercise of a nonqualified stock option, the
grantee will realize ordinary income in an amount equal to the difference
between the price paid for the shares and the fair market value of the shares on
the date of exercise. We will generally be entitled to a tax deduction in the
same amount and at the time as the grantee recognizes ordinary income. Any
appreciation or depreciation after the date of exercise will be treated as
either short-term or long-term capital gain or loss, depending upon the length
of time that the grantee has held the shares.
EMPLOYMENT CONTINUATION AGREEMENTS AND RETENTION ARRANGEMENT
EMPLOYMENT CONTINUATION AGREEMENTS. We have entered into agreements with
certain of our executive officers, including Messrs. Brown, Aborn, D'Alessandro,
and Moloney and Ms. Graveline, that provide for each executive's continued
employment with us for a period of three years following the occurrence of a
change of control. A change of control generally means a merger or other change
in corporate structure after which the majority of our board members is no
longer on our board or a majority of our shareholders are no longer
shareholders. Under these agreements, each eligible executive's terms and
conditions of employment, including his rate of base salary, annual bonus
opportunity and his title, position, duties and responsibilities, are not to be
modified in a manner adverse to the executive following the change of control.
If an eligible executive's employment is terminated by us within three years of
a change of control without cause, or is terminated by the executive for good
reason, we will provide the executive with certain benefits, including severance
in an amount equal to three times the sum of the executive's annual base salary
and target annual bonus amount. Cause is generally defined as the occurrence of
one or more acts of intentional and willful misconduct that has an adverse
effect on us. Good reason generally means the occurrence of one or more events
that have an adverse effect on the executive's terms and conditions of
employment, including a reduction in the executive's base salary or annual bonus
opportunity, a material adverse change in the executive's duties and
responsibilities, and the relocation of the executive's principal place of
employment to a location more than 50 miles away from his prior place of
employment. Additionally, if such a termination of employment occurs prior to
the fourth calendar year beginning after the first grant of stock options,
performance shares or any similar stock based awards made to the executive
following an underwritten public offering, the severance amount will also
include three times the long term incentive award granted to the executive with
respect to most recent performance period commencing prior to the change of
control. The severance amounts will also be payable if an executive's employment
is terminated after the occurrence of certain enumerated events that are a
prelude to a change of control, e.g., the commencement of a tender offer or a
proxy contest or the signing of a merger agreement, and a change of control
occurs within two years thereafter.
The agreements also ensure that an executive who receives severance
benefits will also receive various benefits and payments otherwise earned by or
owing to the executive for his prior service. Such an executive will receive a
pro-rated target bonus for the then current year, and pro-rated long term
incentive amounts in respect of performance periods then in effect. Except as
noted below, each such executive's retirement benefits will be calculated based
on the service (but not the age) the executive would have attained or completed
had the executive continued in our employ until the earlier of (1) the date the
executive attains age 65 or (2) the third anniversary of his termination. In the
event he becomes entitled to receive severance benefits under his agreement or
if his employment terminates more than three years after a change of control,
but under circumstances under which he would have been entitled to severance
were the agreement then still in effect, Mr. D'Alessandro will be deemed to have
worked until the earliest age at which he could retire and immediately commence
receipt of his retirement benefits without actuarial
reduction for early commencement. We will also make additional payments to any
eligible executive who incurs any excise taxes in respect of the benefits and
other payments provided to him under the agreement or otherwise on account of
the change of control. The payments will be in an amount such that, after taking
into account all applicable Federal, state and local taxes, the executive is
able to retain an amount equal to the excise taxes that are imposed without
regard to these additional payments.
RETENTION ARRANGEMENTS. In 1998, we established a special retention program
for Mr. D'Alessandro to induce him to remain in our employ for the five calendar
years ending December 31, 2002. The retention award was initially valued at two
million dollars, or $400,000 per year of service during the retention period.
This initial amount was treated as invested in surplus units. The value of these
surplus units will be payable to Mr. D'Alessandro if he is still employed at the
end of this five-year period. The value of the surplus units will also be paid
if Mr. D'Alessandro's employment terminates prior to December 31, 2002 due to
his death or disability or in certain circumstances following a change of
control.
Effective beginning in 1998, we established a special retention program for
Ms. Graveline to induce her to remain in our employ for the five calendar years
ending December 31, 2002. The retention award initially called for a payment of
$250,000 on March 31 of each year from 1998 through 2002. In March, 1999, the
payments for 1999 through 2002 were replaced with a $1,000,000 award under our
Long Term Incentive Plan. If Ms. Graveline voluntarily terminates her
employment, or if we terminate her employment for cause, prior to December 31,
2002 she will forfeit the special Long Term Incentive Plan award and be
obligated to repay the cash amount paid in 1998.
RETIREMENT PLAN
The following table shows the estimated annual pension benefits payable to
a covered participant at normal retirement age based on the final pay formula
contained in our Pension Plan, a qualified defined-benefit plan. The benefits
also include any pension amounts provided under our Non-Qualified Pension Plan
due to benefit limitations imposed by ERISA.
PENSION PLAN TABLE
FINAL AVERAGE YEARS OF PLAN PARTICIPATION
PAY 15 20 25 30 35 40
$ 300,000 $ 79,056 $ 105,408 $ 131,760 $ 158,112 $ 166,020 $ 173,916
350,000 92,556 123,408 154,260 185,112 194,364 203,616
400,000 106,056 141,408 176,760 212,112 222,720 233,316
450,000 119,556 159,408 199,260 239,112 251,064 263,016
500,000 133,056 177,408 221,760 266,112 279,420 292,716
550,000 146,556 195,408 244,260 293,112 307,764 322,416
600,000 160,056 213,408 266,760 320,112 336,120 352,116
650,000 173,556 231,408 289,260 347,112 364,464 381,816
700,000 187,056 249,408 311,760 374,112 392,820 411,516
750,000 200,556 267,408 334,260 401,112 421,164 441,216
800,000 214,056 285,408 356,760 428,112 449,520 470,916
900,000 241,056 321,408 401,760 482,112 506,220 530,316
1,000,000 268,056 357,408 446,760 536,112 562,920 589,716
1,100,000 295,056 393,408 491,760 590,112 619,620 649,116
1,200,000 322,056 429,408 536,760 644,112 676,320 708,516
1,300,000 349,056 465,408 581,760 698,112 733,020 767,916
1,400,000 376,056 501,408 626,760 752,112 789,720 827,316
1,500,000 403,056 537,408 671,760 806,112 846,420 886,716
1,600,000 430,056 573,408 716,760 860,112 903,120 946,116
1,700,000 457,056 609,408 761,760 914,112 959,820 1,005,516
1,900,000 511,056 681,408 851,760 1,022,112 1,073,220 1,124,316
2,100,000 565,056 753,408 941,760 1,130,112 1,186,620 1,243,116
2,300,000 619,056 825,408 1,031,760 1,238,112 1,300,020 1,361,916
The benefits shown in the above table are payable in the form of a straight
life annuity. Benefits payable under the Pension Plan are not subject to offset
for Social Security benefits. Compensation taken into account under the Pension
Plan is the average monthly compensation paid to a participant during the
consecutive 60-month period over the most recent 120-month period that produces
the highest average compensation. For this purpose, compensation includes the
total of base salary and bonus.
STOCK OWNERSHIP AND LOAN PROGRAM
We have adopted a mandatory stock ownership program for members of the
Policy Committee of John Hancock Life Insurance Company. Pursuant to this stock
ownership program, by the fifth anniversary of the date from which Policy
Committee members are eligible to purchase common stock of John Hancock
Financial Services, Inc., each such person is required to own common stock of
John Hancock Financial Services, Inc. in an amount equal to three times base
salary. We have extended a variation of this stock ownership program to all
senior officers.
We have implemented a loan program whereby John Hancock Financial Services,
Inc. will make loans available to members of the Policy Committee of John
Hancock Life Insurance Company, to facilitate their purchase of common stock of
John Hancock Financial Services, Inc. pursuant to the stock ownership program.
The maximum amount a member of the Policy Committee is entitled to borrow under
the loan program is two times his or her base salary. The principal amount of
such loans, plus any accrued but unpaid interest is required to be repaid prior
to the earlier of (i) the 180th day after the termination of employment or death
of such Policy Committee member or (ii) the fifth anniversary of the first date
any Policy Committee member was eligible to purchase common stock of John
Hancock Financial Services, Inc. Interest on the principal amount of such loans
is equal to the London Interbank Offer Rate plus 1.25%, reset every 30 days, and
will be paid quarterly. As of March 21, 2000, the following executive officers
had loans outstanding under the stock ownership loan program: David
D'Alessandro: $ 1,999,909.68; Kathleen Graveline: $ 500,000; Thomas E. Moloney:
$684,898.73. The initial rate of interest for these loans is 7.12625% through
March 31, 2000. The table in Item 12. Security Ownership of Certain Beneficial
Owners and Management, immediately below this section, however, reports shares
beneficially owned as of the most recent month end, February 29, 2000. As such,
the table does not fully include shares purchased by our executive officers
during March, 2000, using the stock ownership loan program.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of common stock beneficially
owned by each director and Named Executive Officer, individually, and by all
directors and executive officers as a group (in each case as of February 29,
2000). As of that date, all directors and executive officers as a group
beneficially owned less than 1% of John Hancock Financial Services, Inc.'s
outstanding common stock. The Named Executive Officers refer to those executive
officers that John Hancock Financial Services, Inc. is required to identify in
the Summary Compensation Table in Item 11 Executive Compensation. Except as
otherwise indicated below, each of the persons named in the table has sole
voting and investment power with respect to the shares beneficially owned by
such person as set forth opposite that person's name.
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1)
- ---- ---------------------
Stephen L. Brown (2) 24,741
Foster L. Aborn (3) 11,533
David F. D'Alessandro (4) 105,359
Samuel W. Bodman 486
I. MacAllister Booth 28
Wayne A. Budd (5) 493
John M. Connors, Jr. (6) 1,041
Robert E. Fast, Esq. 87
Dr. Kathleen Foley Feldstein 52
Nelson S. Gifford (7) 1,589
Michael C. Hawley 0
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1)
- ---- ---------------------
Edward H. Linde 141
Judith A. McHale 0
Richard F. Syron (8) 1,656
Robert J. Tarr, Jr. 31
Kathleen M. Graveline (9) 396
Thomas E. Moloney (10) 23,066
Richard S. Scipione 3,024
All directors and executive officers as a group (18 persons) (11) 173,723
(1) Based on ownership records as of February 29, 2000
(2) Includes 998 shares owned by Mr. Brown's spouse. Mr. Brown disclaims
beneficial ownership of 14,550 shares of 17,342 held in trust.
(3) Includes 92 shares owned by Mr. Aborn's spouse. Mr. Aborn disclaims
beneficial ownership of 11,343 shares held in trust.
(4) Mr. D'Alessandro disclaims beneficial ownership of 3,938 shares held in
trust.
(5) Includes 34 shares owned by Mr. Budd's spouse. Mr. Budd disclaims
beneficial ownership of 425 shares held in trust.
(6) Includes 52 shares owned by Mr. Connor's spouse. Mr. Connor's disclaims
beneficial ownership of 989 shares held in trust.
(7) Includes 20 shares owned by Mr. Gifford's spouse. Mr. Gifford disclaims
beneficial ownership of the shares held by his spouse. Mr. Gifford
disclaims beneficial ownership of 542 shares held in trust.
(8) Includes 1,656 shares owned by Mr. Syron's spouse. Mr. Syron disclaims
beneficial ownership of the shares held by his spouse.
(9) Includes 196 shares owned by Ms. Graveline's spouse.
(10) Includes 47 shares owned by Mr. Moloney's spouse. Mr. Moloney disclaims
beneficial ownership of 6,783 shares held in trust.
(11) Includes 40,246 shares of Common Stock for which beneficial ownership is
disclaimed by certain executive officers and directors.
We believe no persons beneficially own more than 5% of our outstanding
shares of common stock as of February 29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Fast is a Senior Partner in the law firm of Hale and Dorr, which we use,
among other law firms, for legal services. For a discussion of certain
relationships and related transactions, see "Item 11. Executive Compensation -
Stock Ownership and Loan Program."
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See index to Consolidated Financial
Statements and Schedules on page F-1 herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See index to Consolidated
Financial Statements and Schedules on page F-1 herein.
3. EXHIBITS
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement**
2.1 Plan of Reorganization**
3.1 Restated Certificate of Incorporation of John Hancock Financial
Services, Inc.**
3.2 By-laws of John Hancock Financial Services, Inc.**
4.1 Form of certificate for the common stock, par value $0.01 per share, of
John Hancock Financial Services, Inc. **
10.1 Credit Agreement, dated as of July 30, 1999, among John Hancock Mutual
Life Insurance Company, John Hancock Capital Corporation, Banks listed
therein, BankBoston, N.A., as Administrative Agent, Citicorp USA, Inc.,
as Syndication Agent, The First National Bank of Chicago, as
Documentation Agent, and Comerica Bank, The Bank of Nova Scotia, Fleet
National Bank, Royal Bank of Canada and Wachovia Bank, as Co-Agents**
10.2 Amended and Restated Credit Agreement, dated as of July 19, 1996 by and
among John Hancock Mutual Life Insurance Company and John Hancock
Capital Corporation, Banks named therein and Morgan Guaranty Trust
Company of New York, as Agent**
10.3 Fiscal Agency Agreement, dated as of February 25, 1994 by and between
John Hancock Mutual Life Insurance Company, as Issuer, and First
National Bank of Boston, as Fiscal Agent**
10.4 Reinsurance Agreement, dated as of July 30, 1992 by and between John
Hancock Mutual Life Insurance Company and Provident Life and Accident
Insurance Company**
10.5 Reinsurance Agreement, dated as of July 30, 1992 by and between John
Hancock Mutual Life Insurance Company and Provident Life and Accident
Insurance Company**
10.6 Coinsurance Agreement, dated as of March 1, 1997 by and between John
Hancock Mutual Life Insurance Company and UNICARE Life & Health
Insurance Company**
10.7 Letter of Credit Agreement, dated as of January 2, 1997 by and among
John Hancock Mutual Life Insurance Company, Banks named therein and
Morgan Guaranty Trust Company of New York as Issuing Bank and Agent**
10.8 Long-Term Incentive Plan for Senior Executives*
10.9 Form of Employment Continuation Agreement**
10.10 Form of Stockholder Rights Agreement**
10.11 1999 Long-Term Stock Incentive Plan**
10.11.1 First Amendment to the 1999 Long-Term Stock Incentive Plan**
10.12 Incentive Compensation Plan for Employees of John Hancock Financial
Services, Inc.*
10.13 Form of Stock Ownership Loan Program and form of Note*
21.1 Subsidiaries of John Hancock Financial Services, Inc.*
23.1 Consent of Ernst & Young LLP*
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
Any exhibit not included with this Form 10-K will be furnished to any
shareholder of record on written request and payment of up to $.25 per page plus
postage. Such requests should be directed to John Hancock Financial Services,
Inc., Investor Relations, John Hancock Place, Post Office Box 111, Boston,
Massachusetts 02117.
- --------
* Filed herewith
** Previously filed as an exhibit to John Hancock Financial Services, Inc.'s S-1
Registration Statement (file no. 333-87271)
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed since John Hancock Financial Services,
Inc.'s S-1 Registration Statement (file no. 333-87271) was filed on January 26,
2000.
Item 8. Financial Statements and Supplementary Data
JOHN HANCOCK FINANCIAL SERVICES, INC.
(FORMERLY KNOWN AS JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors................................................ F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998.................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997.............................................................. F-5
Consolidated Statements of Changes in Policyholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997..................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997.............................................................. F-8
Notes to Consolidated Financial Statements.................................... F-10--F-50
Financial Statement Schedules................................................. F-51--F-53
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
John Hancock Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of John Hancock
Financial Services, Inc. (formerly known as John Hancock Mutual Life Insurance
Company and subsidiaries) as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in policyholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedules listed on pages F-51
through F-53. These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of John
Hancock Financial Services, Inc. at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 2000
F-2
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1999 1998
-----------------------------
(IN MILLIONS)
ASSETS
Investments - Notes 2 and 3
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: 1999--$13,448.4; 1998--$13,921.7)................... $13,800.3 $12,978.2
Available-for-sale--at fair value
(cost: 1999--$17,267.7; 1998--$14,491.5)......................... 17,069.6 15,222.2
Equity securities:
Available-for-sale--at fair value
(cost: 1999--$1,088.1; 1998--$756.8).............................. 1,232.1 995.8
Trading securities--at fair value
(cost: 1999--$53.8; 1998--$53.0).................................. 84.1 67.9
Mortgage loans on real estate........................................ 10,736.4 9,616.1
Real estate.......................................................... 548.5 1,483.2
Policy loans......................................................... 1,938.8 1,879.7
Short-term investments............................................... 166.9 279.8
Other invested assets................................................ 1,311.1 1,254.6
-----------------------------
Total Investments................................................. 46,887.8 43,777.5
Cash and cash equivalents............................................ 1,817.9 1,876.4
Accrued investment income............................................ 654.5 537.9
Premiums and accounts receivable..................................... 215.6 227.5
Deferred policy acquisition costs.................................... 3,234.9 2,758.7
Reinsurance recoverable - Note 7..................................... 1,872.6 1,634.3
Other assets......................................................... 1,724.8 1,187.8
Separate accounts assets............................................. 28,047.6 24,966.6
-----------------------------
Total Assets...................................................... $84,455.7 $76,966.7
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31
1999 1998
----------------------------------
(IN MILLIONS)
LIABILITIES AND POLICYHOLDERS' EQUITY
Liabilities
Future policy benefits................................................. $31,106.2 $27,070.5
Policyholders' funds................................................... 15,562.3 14,671.7
Unearned revenue....................................................... 490.2 373.8
Unpaid claims and claim expense reserves............................... 358.9 886.3
Dividends payable to policyholders..................................... 472.8 432.8
Short-term debt - Note 5............................................... 453.8 427.8
Long-term debt - Note 5................................................ 536.9 602.7
Income taxes - Note 4.................................................. 159.2 385.1
Other liabilities...................................................... 2,383.2 2,168.9
Separate accounts liabilities.......................................... 28,047.6 24,966.6
--------------------------------
Total Liabilities................................................... 79,571.1 71,986.2
Minority interest - Note 6............................................. 93.5 25.3
Commitments and contingencies - Note 9
Policyholders' equity - Notes 11 and 14
Surplus................................................................ 4,825.0 4,671.8
Accumulated other comprehensive income................................. (33.9) 283.4
Total Policyholders' Equity......................................... 4,791.1 4,955.2
--------------------------------
Total Liabilities and Policyholders' Equity......................... $84,455.7 $76,966.7
================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
--------------------------------
(IN MILLIONS)
REVENUES
Premiums.............................................................. $2,717.5 $2,197.9 $2,473.6
Universal life and investment-type product charges.................... 703.5 597.0 512.0
Net investment income - Note 2........................................ 3,574.0 3,330.7 3,190.7
Net realized investment gains, net of related amortization of
deferred policy acquisition costs and amounts credited to
participating pension contractholders ($85.8, $120.3 and
$60.5, respectively) - Notes 1, 2 and 12........................... 175.1 106.4 157.0
Investment management revenues, commissions and
other fees.......................................................... 680.9 659.7 554.7
Other revenue......................................................... 6.5 10.3 58.3
--------------------------------
Total revenues..................................................... 7,857.5 6,902.0 6,946.3
BENEFITS AND EXPENSES
Benefits to policyholders, excluding amounts related to net
realized investment gains credited to participating pension
contractholders ($35.3, $79.1, $29.3, respectively) - Notes
1, 2 and 12........................................................ 5,418.4 4,152.0 4,303.1
Other operating costs and expenses.................................... 1,412.3 1,383.0 1,283.7
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment gains ($50.5,
$41.2 and $31.2, respectively) - Notes 1, 2 and 12.................. 166.8 249.7 312.0
Dividends to policyholders............................................ 501.6 473.2 457.8
--------------------------------
Total benefits and expenses........................................ 7,499.1 6,257.9 6,356.6
--------------------------------
Income before income taxes, extraordinary item and
cumulative effect of accounting change................................ 358.4 644.1 589.7
Income taxes - Note 4................................................... 101.9 183.9 106.4
--------------------------------
Income before extraordinary item and cumulative effect of
accounting change..................................................... 256.5 460.2 483.3
Extraordinary item - demutualization expenses, net of
tax - Note 1.......................................................... (93.6) (11.7) -
Cumulative effect of accounting change, net of
tax - Note 1.......................................................... (9.7) - -
--------------------------------
Net income.............................................................. $ 153.2 $ 448.5 $ 483.3
================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
YEAR ENDED
DECEMBER 31,1999
PRO FORMA
(UNAUDITED)
--------------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
BASIC AND DILUTED EARNINGS PER COMMON SHARE - NOTE 15:
Income before extraordinary item and cumulative
effect of accounting change....................................... $ .82
Extraordinary item.................................................. (.30)
Cumulative effect of accounting change.............................. (.03)
--------------------
Net income per common share......................................... $ .49
====================
Share data:
Weighted-average shares used in basic and diluted earnings
per share calculations........................................... 314.8
====================
The unaudited pro forma information above gives effect to the Reorganization and
Initial Public Offering referred to in Notes 1 and 14.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN POLICYHOLDERS' EQUITY
ACCUMULATED OTHER
SURPLUS COMPREHENSIVE INCOME TOTAL
-----------------------------------------------------------
(IN MILLIONS)
Balance at January 1, 1997............................ $3,740.0 $ 352.4 $4,092.4
-------------
Comprehensive income:
Net income.......................................... 483.3 483.3
Other comprehensive income, net of tax:
Net unrealized gains (losses).................... 131.0 131.0
Foreign currency translation adjustment.......... (28.4) (28.4)
Minimum pension liability........................ (8.2) (8.2)
-------------
Comprehensive income.................................. 577.7
-----------------------------------------------------------
Balance at December 31, 1997.......................... 4,223.3 446.8 4,670.1
-------------
Comprehensive income:
Net income.......................................... 448.5 448.5
Other comprehensive income, net of tax:
Net unrealized gains (losses).................... (148.6) (148.6)
Foreign currency translation adjustment.......... (6.0) (6.0)
Minimum pension liability........................ (8.8) (8.8)
-------------
Comprehensive income.................................. 285.1
-----------------------------------------------------------
Balance at December 31, 1998.......................... 4,671.8 283.4 4,955.2
-------------
Comprehensive income:
Net income.......................................... 153.2 153.2
Other comprehensive income, net of tax:
Net unrealized gains (losses).................... (311.3) (311.3)
Foreign currency translation adjustment.......... 16.9 16.9
Minimum pension liability........................ (22.9) (22.9)
-------------
Comprehensive income.................................. (164.1)
-----------------------------------------------------------
Balance at December 31, 1999.......................... $4,825.0 $ (33.9) $4,791.1
===========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------
(IN MILLIONS)
Cash flows from operating activities:
Net income................................................................ $ 153.2 $ 448.5 $ 483.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount - fixed maturities...................... (77.9) (55.6) (33.9)
Realized investment gains, net................................... (175.1) (106.4) (157.0)
Change in deferred policy acquisition costs...................... (317.3) (206.9) (154.9)
Depreciation and amortization.................................... 74.3 90.2 122.9
Net cash flows from trading securities........................... (16.2) 4.2 (11.6)
(Increase) decrease in accrued investment income................. (118.0) 21.3 59.8
Decrease (increase) in premiums and accounts
receivable..................................................... 11.8 131.3 (112.4)
Increase in other assets and other liabilities, net.............. (118.1) (362.8) (411.7)
Increase in policy liabilities and accruals, net................. 2,253.6 1,347.4 1,763.8
Loss on sale of subsidiaries..................................... 21.3 - -
(Decrease) increase in income taxes.............................. (3.3) 17.7 (110.0)
--------------------------------------
Net cash provided by operating activities.................... 1,688.3 1,328.9 1,438.3
Cash flows from investing activities:
Sales of:
Fixed maturities held-to-maturity....................................... 28.7 8.5 35.0
Fixed maturities available-for-sale..................................... 9,824.0 21,079.2 13,635.2
Equity securities available-for-sale.................................... 182.7 249.2 661.2
Real estate............................................................. 1,286.3 640.3 449.0
Short-term investments and other invested assets........................ 764.4 926.3 109.6
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity....................................... 1,777.1 2,166.9 2,035.9
Fixed maturities available-for-sale..................................... 1,880.3 2,162.3 2,571.1
Short-term investments and other invested assets........................ 311.8 79.4 167.4
Mortgage loans on real estate........................................... 1,509.0 1,849.8 1,426.5
Purchases of:
Fixed maturities held-to-maturity....................................... (2,725.2) (2,428.5) (1,886.7)
Fixed maturities available-for-sale..................................... (12,728.5) (24,154.7) (17,455.6)
Equity securities available-for-sale.................................... (386.0) (384.5) (663.8)
Real estate............................................................. (197.2) (152.0) (232.7)
Short-term investments and other invested assets........................ (715.4) (1,103.0) (466.3)
Mortgage loans on real estate issued.................................... (2,414.1) (2,265.3) (1,406.8)
Net cash paid related to sale of subsidiaries........................... (206.5) - -
Net cash paid for acquisition of subsidiary............................. (200.4) - -
Other, net.............................................................. 12.1 (13.0) (274.3)
--------------------------------------
Net cash used in investing activities........................... (1,996.9) (1,339.1) (1,295.3)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
JOHN HANCOCK FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------
(IN MILLIONS)
Cash flows from financing activities:
Universal life and investment-type contract deposits...................... $ 8,365.9 $ 8,214.8 $ 5,778.7
Universal life and investment-type contract maturities and
withdrawals............................................................ (8,144.0) (7,204.1) (6,447.6)
Issuance of long-term debt................................................ 6.0 77.0 55.4
Repayment of long-term debt............................................... (15.5) (298.1) (251.9)
Net (decrease) increase in commercial paper............................... (30.5) 60.4 73.0
Proceeds from issuance of preferred stock................................. 68.2 - -
-----------------------------------
Net cash provided by (used in) financing activities................... 250.1 850.0 (792.4)
-----------------------------------
Net (decrease) increase in cash and cash equivalents.................. (58.5) 839.8 (649.4)
Cash and cash equivalents at beginning of year.............................. 1,876.4 1,036.6 1,686.0
-----------------------------------
Cash and cash equivalents at end of year.............................. $ 1,817.9 $ 1,876.4 $ 1,036.6
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
John Hancock Financial Services, Inc. (the Company), formerly known as John
Hancock Mutual Life Insurance Company (the Mutual Company) and Subsidiaries, is
a diversified financial services organization that provides a broad range of
insurance and investment products and investment management and advisory
services.
Pursuant to a Plan of Reorganization, effective February 1, 2000, the Mutual
Company converted from a mutual life insurance company to a stock life insurance
company and became a wholly owned subsidiary of John Hancock Financial Services,
Inc., which is a holding company. Also effective February 1, 2000, the Company
completed an initial public offering (IPO). See Note 14--Subsequent Events for
more detail on the reorganization and the IPO.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned and controlled domestic and foreign subsidiaries.
Less than majority-owned entities in which the Company has at least a 20%
interest are accounted for using the equity method. All significant
intercompany transactions and balances have been eliminated.
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments
Management determines the appropriate classification of fixed maturity
investments at the time of purchase. Fixed maturity investments include bonds,
mortgage-backed securities, and redeemable preferred stock and are classified as
held-to-maturity or available-for-sale. Bonds and mortgage-backed securities,
which the Company has the positive intent and ability to hold to maturity, are
classified as held-to-maturity and carried at amortized cost. Fixed maturity
investments not classified as held-to-maturity are classified as available-for-
sale and are carried at fair value. Unrealized gains and losses related to
available-for-sale securities are reflected in policyholders' equity, net of
related amortization of deferred policy acquisition costs, amounts credited to
participating pension contractholders and applicable taxes. The amortized cost
of fixed maturity investments is adjusted for impairments in value deemed to be
other than temporary.
For the mortgage-backed bond portion of the fixed maturity investment portfolio,
the Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date, and
anticipated future payments and any resulting adjustment is included in net
investment income.
Equity securities include common stock and non-redeemable preferred stock.
Equity securities that have readily determinable fair values are carried at fair
value. For equity securities which the Company has classified as available-for-
sale, unrealized gains and losses are reflected in policyholders' equity as
described above. Gains and losses, both realized and unrealized, on equity
securities classified as trading are included in net investment income.
F-10
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Mortgage loans on real estate are carried at unpaid principal balances adjusted
for amortization of premium or discount, less allowance for probable losses.
When it is probable that the Company will be unable to collect all amounts of
principal and interest due according to the contractual terms of the mortgage
loan agreement, the loan is deemed to be impaired and a valuation allowance for
probable losses is established. The valuation allowance is based on the present
value of the expected future cash flows, discounted at the loan's original
effective interest rate, or on the collateral value of the loan if the loan is
collateral dependent. Any change to the valuation allowance for mortgage loans
on real estate is reported as a component of realized investment gains (losses).
Interest received on impaired mortgage loans on real estate is included in
interest income in the period received. If foreclosure becomes probable, the
measurement method used is collateral value. Foreclosed real estate is then
recorded at the collateral's fair value at the date of foreclosure, which
establishes a new cost basis.
Investment real estate, which the Company has the intent to hold for the
production of income, is carried at depreciated cost, using the straight-line
method of depreciation, less adjustments for impairments in value. In those
cases where it is determined that the carrying amount of investment real estate
is not recoverable, an impairment loss is recognized based on the difference
between the depreciated cost and fair value of the asset. The Company reports
impairment losses as part of realized investment gains (losses).
Real estate to be disposed of is carried at the lower of cost or fair value less
costs to sell. Any change to the valuation allowance for real estate to be
disposed of is reported as a component of realized investment gains (losses).
The Company does not depreciate real estate to be disposed of. During 1998, the
Company made a strategic decision to sell the majority of its commercial real
estate portfolio. Properties with a carrying value of $979.7 million and $512.0
million were sold in 1999 and 1998, respectively. The remaining properties to
be disposed of, which had a carrying value of $83.2 million at December 31,
1999, are expected to be sold in 2000.
Policy loans are carried at unpaid principal balances.
Short-term investments are carried at amortized cost.
Partnership and joint venture interests in which the Company does not have
control or a majority ownership interest are recorded using the equity method of
accounting and included in other invested assets.
Realized investment gains and losses are determined on the basis of specific
identification and are reported net of related amortization of deferred policy
acquisition costs and amounts credited to participating pension contractholder
accounts.
Derivative Financial Instruments
The Company uses futures contracts, interest rate swap, cap and floor
agreements, swaptions and currency rate swap agreements for other than trading
purposes to hedge and manage its exposure to changes in interest rate levels,
foreign exchange rate fluctuations and to manage duration mismatch of assets and
liabilities. The Company also uses equity collar agreements to reduce its
exposure to market fluctuations in certain equity securities.
The Company uses futures contracts principally to hedge risks associated with
interest rate fluctuations on sales of guaranteed investment contracts. Futures
contracts represent commitments to either purchase or sell securities at a
specified future date and at a specified price or yield.
F-11
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The Company uses interest rate swap, cap and floor agreements and swaptions for
the purpose of converting the interest rate characteristics (fixed or variable)
of certain investments to more closely match its liabilities. Interest rate
swap agreements are contracts with a counterparty to exchange interest rate
payments of a differing character (e.g., fixed-rate payments exchanged for
variable-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. Interest rate cap and floor
agreements are contracts with a counterparty which require the payment of a
premium for the right to receive payments for the difference between the cap or
floor interest rate and a market interest rate on specified future dates based
on an underlying principal balance (notional principal) to hedge against rising
and falling interest rates. Swaptions entitle the Company to receive settlement
payments from other parties on specified expiration dates, contingent on future
interest rates. The amount of such settlement payments, if any, is determined
by the present value of the difference between the fixed rate on a market rate
swap and the strike rate multiplied by the notional amount.
Currency rate swap agreements are used to manage the Company's exposure to
foreign exchange rate fluctuations. Currency rate swap agreements are contracts
to exchange the currencies of two different countries at the same rate of
exchange at specified future dates.
The Company invests in common stock that is subject to fluctuations from market
value changes in stock prices. The Company sometimes seeks to reduce its market
exposure to such holdings by entering into equity collar agreements. A collar
consists of a call option that limits the Company's potential for gain from
appreciation in the stock price as well as a put option that limits the
Company's potential for loss from a decline in the stock price.
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
The net differential to be paid or received on interest rate swap agreements and
currency rate swap agreements is accrued and recognized as a component of net
investment income. The related amounts due to or from counterparties are
included in accrued investment income receivable or payable.
Premiums paid for interest rate cap and floor agreements and swaptions are
deferred and amortized to net investment income on a straight-line basis over
the term of the agreements. The unamortized premium is included in other
assets. Amounts earned on interest rate cap and floor agreements and swaptions
are recorded as an adjustment to net investment income. Settlements received on
swaptions are deferred and amortized over the life of the hedged assets as an
adjustment to yield.
Interest rate swap, cap and floor agreements, swaptions and currency rate swap
agreements which hedge instruments designated as available-for-sale are adjusted
to fair value with the resulting unrealized gains and losses, net of related
taxes, included in policyholders' equity. The net unrealized gain (losses) on
derivatives hedging available-for-sale instruments included in policyholders'
equity was $86.1 million, ($128.1) million, and ($59.7) million, at December 31,
1999, 1998 and 1997, respectively. The change in net unrealized gain (losses)
for derivatives recorded as part of other comprehensive income for the years
ended December 31, 1999, 1998 and 1997 was $214.2 million, ($68.4) million and
($31.4) million, respectively. The fair value of those derivatives used to
hedge items other than available-for-sale instruments is not recognized in the
financial statements.
F-12
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Equity collar agreements are carried at fair value and are included in other
invested assets, with the resulting unrealized gains and losses included in
realized investment gains (losses).
Hedge accounting is applied after the Company determines that the items to be
hedged expose it to interest or price risk, designates these financial
instruments as hedges and assesses whether the instruments reduce the hedged
risks through the measurement of changes in the value of the instruments and the
items being hedged at both inception and throughout the hedge period.
From time to time, futures contracts, interest rate swaps, cap and floor
agreements, swaptions and currency rate swap agreements are terminated. If the
terminated position was accounted for as a hedge, realized gains or losses are
deferred and amortized over the remaining lives of the hedged assets or
liabilities. Realized and unrealized changes in fair value of derivatives
designated with items that no longer exist or are no longer probable of
occurring are recorded as a component of the gain or loss arising from the
disposition of the designated item or included in income when it is determined
that the item is no longer probable of occurring. Changes in the fair value of
derivatives no longer effective as hedges are recognized in income from the date
the derivative becomes ineffective until their expiration.
Revenue Recognition
Premiums from participating and non-participating traditional life insurance and
annuity policies with life contingencies are recognized as income when due.
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges, policy administration charges and surrender
charges.
Premiums for contracts with a single premium or a limited number of premium
payments, due over a significantly shorter period than the total period over
which benefits are provided, are recorded in income when due. The portion of
such premium that is not required to provide for all benefits and expenses is
deferred and recognized in income in a constant relationship to insurance in
force or, for annuities, the amount of expected future benefit payments.
Premiums from long-term care contracts are recognized as income when due.
Premiums from group life and health insurance contracts are recognized as income
over the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Property and casualty insurance premiums are recognized as earned over the terms
of the contracts.
Investment advisory, transfer agent, distribution and service fees are
recognized as revenues when services are performed. Commissions related to
security transactions and related expenses are recognized as income on the trade
date. Contingent deferred selling charge commissions are recognized as income
in the year received. Selling commissions paid to the selling broker/dealer for
sales of mutual funds that do not have a front-end sales charge are deferred and
amortized on a straight-line basis over periods not exceeding six years. This
is the approximate period of time expected to be benefited and during which fees
earned pursuant to Rule 12b-1 distribution plans are received from the funds and
contingent deferred sales charges are received from shareholders of the funds.
F-13
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Future Policy Benefits and Policyholders' Funds
Future policy benefits for participating traditional life insurance policies are
based on the net level premium method. This net level premium reserve is
calculated using the guaranteed mortality and dividend fund interest rates,
which range from 2.5% to 9.5%. The liability for annual dividends represents
the accrual of annual dividends earned. Settlement dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefits are estimated using a net level premium method on the basis of
actuarial assumptions as to mortality, persistency, interest and expenses
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on the Company's experience, which, together
with interest and expense assumptions, include a margin for adverse deviation.
Benefit liabilities for annuities during the accumulation period are equal to
accumulated contractholders' fund balances and after annuitization are equal to
the present value of expected future payments. Interest rates used in
establishing such liabilities range from 2.5% to 9.5% for life insurance
liabilities, from 2.0% to 14.2% for individual annuity liabilities and from 2.0%
to 12.6% for group annuity liabilities.
Policyholders' funds for universal life and investment-type products, including
guaranteed investment contracts and funding agreements, are equal to the
policyholder account values before surrender charges. As of December 31, 1999,
the Company had approximately $4.1 billion of funding agreements, of which
$231.8 million contained no early termination provisions of less than 1 year and
$3.8 billion contained no early termination provisions. Policy benefits that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances and interest credited to policyholders'
account balances. Interest crediting rates range from 3.0% to 9.0% for
universal life products and from 4.6% to 16.0% for investment-type products.
Future policy benefits for long-term care insurance policies are based on the
net level premium method. Assumptions established at policy issue as to
mortality, morbidity, persistency, interest and expenses which include a margin
for adverse deviation, are based on estimates developed by management. Interest
rates used in establishing such liabilities range from 6.0% to 8.5%.
Liabilities for unpaid claims and claim expenses include estimates of payments
to be made on reported individual and group life, long-term care, and group
accident and health insurance claims and estimates of incurred but not reported
claims based on historical claims development patterns.
Estimates of future policy benefit reserves, claim reserves and expenses are
reviewed continually and adjusted as necessary; such adjustments are reflected
in current earnings. Although considerable variability is inherent in such
estimates, management believes that future policy benefit reserves and unpaid
claims and claims expense reserves are adequate.
Property and casualty reserves include loss reserve estimates based on claims
reported and unreported and estimates of future expenses to be incurred in
settlement of the claims provided for in the loss reserves estimates. These
liabilities include estimates of future trends in claim severity and frequency
and other factors that could vary as the losses are ultimately settled. During
1999, the Company sold the rest of its property and casualty business. At
December 31, 1998, certain property and casualty reserves were recorded on a
discounted basis, using interest rates from 4.0% to 7.0%, the resulting
discounted reserves were $38.8 million, less than the projected ultimate values.
F-14
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Participating Insurance
Participating business represents approximately 88.1%, 87.7% and 86.8% of the
Company's life insurance in force, 98.3%, 98.4% and 98.5% of the number of life
insurance policies in force, and 97.4%, 97.3% and 96.8% of life insurance
premiums in 1999, 1998 and 1997, respectively.
The portion of earnings allocated to participating pension contractholders that
cannot be expected to inure to the Company is excluded from net income and
policyholders' equity.
The amount of policyholders' dividends to be paid is approved annually by the
Company's Board of Directors. The aggregate amount of policyholders' dividends
is related to actual interest, mortality, morbidity and expense experience for
the year and judgment as to the appropriate level of statutory surplus to be
retained by the Mutual Company.
Deferred Policy Acquisition Costs
Costs that vary with, and are related primarily to, the production of new
business have been deferred to the extent that they are deemed recoverable.
Such costs include commissions, certain costs of policy issue and underwriting,
and certain agency expenses. For participating traditional life insurance
policies, such costs are being amortized over the life of the contracts at a
constant rate based on the present value of the estimated gross margin amounts
expected to be realized over the lives of the contracts. Estimated gross margin
amounts include anticipated premiums and investment results less claims and
administrative expenses, changes in the net level premium reserve and expected
annual policyholder dividends. For universal life insurance contracts and
investment-type products, such costs are being amortized generally in proportion
to the present value of expected gross profits arising principally from
surrender charges and investment results, and mortality and expense margins.
The effects on the amortization of deferred policy acquisition costs of
revisions to estimated gross margins and profits are reflected in earnings in
the period such estimated gross margins and profits are revised. For non-
participating term life and long-term care life insurance products, such costs
are being amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves.
For property and casualty policies, such costs are being amortized over the
contract period. Amortization expense was $217.3 million, $290.9 million and
$343.2 million in 1999, 1998 and 1997, respectively.
Amortization of deferred policy acquisition costs is allocated to: (1) realized
investment gains and losses for those products that realized gains and losses
have a direct impact on the amortization of deferred policy acquisition costs;
(2) unrealized investment gains and losses, net of tax, to provide for the
effect on the deferred policy acquisition cost asset that would result from the
realization of unrealized gains and losses on assets backing participating
traditional life insurance and universal life and investment-type contracts; and
(3) a separate component of benefits and expenses to reflect amortization
related to the gross margins or profits, excluding realized gains and losses,
relating to policies and contracts in force.
Realized investment gains and losses related to certain products have a direct
impact on the amortization of deferred policy acquisition costs as such gains
and losses affect the amount and timing of profit emergence. Accordingly, to
the extent that such amortization results from realized gains and losses,
management believes that presenting realized investment gains and losses net of
related amortization of deferred policy acquisition costs provides information
useful in evaluating the operating performance of the Company. This
presentation may not be comparable to presentations made by other insurers.
F-15
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid investments with a
maturity of three months or less when purchased.
Goodwill
The excess of cost over the fair value of the net assets of businesses acquired
was $155.3 million and $69.8 million at December 31, 1999 and 1998,
respectively, and is included in other assets in the consolidated balance
sheets. Goodwill is amortized on systematic bases over periods not exceeding 40
years, which correspond with the benefits estimated to be derived from the
acquisitions. Accumulated amortization was $43.3 million and $34.5 million at
December 31, 1999 and 1998, respectively. Amortization expense included in
other operating costs and expenses was $9.7 million, $9.1 million and $16.7
million in 1999, 1998 and 1997, respectively. The Company reevaluates the
recoverability of recorded goodwill based on the undiscounted cash flows of the
related business whenever significant events or changes indicate an impairment
may exist. If the undiscounted cash flows do not support the amount recorded,
an impairment is recognized by a charge to current operations to reduce the
carrying value of the goodwill based on the expected discounted cash flows of
the related business.
On October 1, 1999, The Maritime Life Assurance Company (Maritime), an indirect
majority owned subsidiary of the Company, completed its purchase of Aetna Canada
Holdings Limited (Aetna Canada) for approximately $300 million. The acquisition
was recorded under the purchase method of accounting and, accordingly, the
operating results have been included in the Company's consolidated results of
operations from the date of acquisition. The purchase price was allocated to
the assets acquired and the liabilities assumed based on estimated fair values,
with the excess of the purchase price over the estimated fair values recorded as
goodwill. The goodwill calculation is preliminary and further refinements might
be necessary and are expected to be finalized in 2000.
The following unaudited pro forma summary presents information as if the
acquisition of Aetna Canada had occurred at the beginning of the years
presented. These pro forma amounts are not necessarily indicative of what the
actual combined results of operations would have been if the acquisition
occurred effective at the beginning of each year presented:
YEAR ENDED DECEMBER 31
1999 1998
--------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues............................................ $8,217.4 $7,348.7
Income before extraordinary item and
cumulative effect of accounting change............ 264.2 474.0
Net income.......................................... 160.9 462.3
Net income per basic and diluted common share....... .51 --
For purposes of the unaudited pro forma earnings per share calculation, the
weighted average number of shares outstanding during 1999 gives effect to the
Company's IPO completed February 1, 2000. See Notes 14 and 15. Unaudited pro
forma amounts after giving effect to the other business acquired during 1999
would not have been materially different from the reported amounts for either
year.
F-16
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Separate Accounts
Separate accounts assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are administered and invested
by the Company to meet specific investment objectives of the contractholders.
Investment income and investment gains and losses generally accrue directly to
such contractholders who bear the investment risk, subject in some cases to
minimum guaranteed rates. The assets of each account are legally segregated and
are not subject to claims that arise out of any other business of the Company.
Separate account assets are reported at fair value. Deposits, net investment
income and realized investment gains and losses of separate accounts are not
included in the revenues of the Company. Fees charged to contractholders,
principally mortality, policy administration and surrender charges, are included
in universal life and investment-type product charges.
Reinsurance
The Company utilizes reinsurance agreements to provide for greater
diversification of business, allow management to control exposure to potential
losses arising from large risks and provide additional capacity for growth.
Assets and liabilities related to reinsurance ceded contracts are reported on a
gross basis. The accompanying statements of income reflect premiums, benefits
and settlement expenses net of reinsurance ceded. Reinsurance premiums,
commissions, expense reimbursements, benefits and reserves related to reinsured
business are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
Federal Income Taxes
The provision for federal income taxes includes amounts currently payable or
recoverable and deferred income taxes, computed under the liability method,
resulting from temporary differences between the tax basis and book basis of
assets and liabilities. A valuation allowance is established for deferred tax
assets when it is more likely than not that an amount will not be realized.
Foreign subsidiaries and U.S. subsidiaries operating outside of the United
States are taxed under applicable foreign statutory rates.
Foreign Currency Translation
The assets and liabilities of operations in foreign currencies are translated
into United States dollars at current exchange rates. Revenues and expenses are
translated at average rates during the year. The resulting net translation
adjustments for each year are accumulated and included in policyholders' equity.
Gains or losses on foreign currency transactions are reflected in earnings.
Severance
During 1999, the Company initiated a restructuring plan to reduce costs and
increase future operating efficiency by consolidating portions of its
operations. The plan consists primarily of reducing staff in the home office
and terminating certain operations outside the home office.
In connection with the restructuring plan, approximately 250 employees have been
or will be terminated. These employees are or have been associated with
operations in our Boston office and outside the home offices. Estimated
employee termination costs of a pretax charge of $26.3 million have been accrued
in 1999. Of the total number of employees affected, approximately 125 have been
terminated in 1999, having received benefit payments of approximately $5.5
million.
F-17
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Extraordinary Item
The accompanying consolidated statements of income reflect extraordinary
expenses of $93.6 million and $11.7 million (net of tax of $2.6 million and $6.3
million) for the year ended December 31, 1999 and 1998, respectively, relating
to costs associated with the Company's demutualization.
Reclassification
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which was adopted by the Company in the
fourth quarter of 1997 on a retroactive basis. Under SFAS No. 131, business
segments are defined on the same basis that the Company is managed versus the
product or market approach. Data shown for all periods has been presented to
conform to the requirements of SFAS No. 131.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, was adopted
by the Company during the fourth quarter of 1997 on a retroactive basis as
permitted by SFAS No. 130. SFAS No. 130 requires that selected changes in
policyholders' equity be added to net income and reported as comprehensive
income. The Company reported this information within the consolidated
statements of changes in policyholders' equity and the footnotes to the
consolidated financial statements.
SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits," was adopted by the Company during the fourth quarter of 1998. SFAS
No. 132 does not change the recognition or measurement of pension or
postretirement benefit plans, but standardizes disclosure requirements for
pensions and other postretirement benefits. Data shown for all periods has been
presented to conform to the requirements of SFAS No. 132.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 provides guidance for determining whether computer
software is for internal use and when costs incurred for internal use software
are to be capitalized. SOP 98-1 was adopted by the Company on January 1, 1999.
The adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up
Activities." The SOP, which was adopted by the Company on January 1, 1999,
requires that start-up costs capitalized prior to January 1, 1999 be written-off
and any future start-up costs be expensed as incurred. The adoption of SOP 98-5
resulted in a charge to operations of $9.7 million (net of tax of $5.9 million)
and was accounted for as a cumulative effect of an accounting change.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance for
assessments related to insurance activities and requirements for disclosure of
certain information. SOP 97-3 was adopted on January 1, 1999. The adoption of
SOP 97-3 did not have a material impact on the Company's consolidated financial
statements.
F-18
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivatives to be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in the fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be recognized
immediately in earnings.
While SFAS No. 133 originally was effective for fiscal years beginning after
June 15, 1999, the FASB deferred the effective date of SFAS No. 133 until 2001.
The Company plans to adopt SFAS No. 133 effective January 1, 2001 and currently
is evaluating the effect that the implementation of SFAS No. 133 will have on
its results of operations and financial position. The impact is not known at
this time.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," provides guidance on how to
account for insurance and reinsurance contracts that do not transfer insurance
risk under a method referred to as deposit accounting. SOP 98-7 is effective
for fiscal years beginning after June 15, 1999. SOP 98-7 is not expected to
have a material impact on the Company's consolidated financial statements.
F-19
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS
The following information summarizes the components of net investment income and
realized investment gains, net:
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------
(IN MILLIONS)
NET INVESTMENT INCOME
Fixed maturities................................................... $2,500.7 $2,210.2 $2,097.3
Equity securities.................................................. 62.6 18.7 27.8
Mortgage loans on real estate...................................... 831.7 781.2 808.6
Real estate........................................................ 158.4 415.7 430.9
Policy loans....................................................... 109.8 111.9 107.7
Short-term investments............................................. 92.6 45.3 71.7
Other.............................................................. 165.3 181.3 144.5
------------------------------
Gross investment income............................................ 3,921.1 3,764.3 3,688.5
Less investment expenses........................................ 347.1 433.6 497.8
------------------------------
Net investment income........................................... $3,574.0 $3,330.7 $3,190.7
==============================
NET REALIZED INVESTMENT GAINS (LOSSES), NET OF RELATED
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND
AMOUNTS CREDITED TO PARTICIPATING PENSION
CONTRACTHOLDERS
Fixed maturities................................................... $ (34.6) $ 110.6 $ 101.3
Equity securities.................................................. 113.5 115.2 23.6
Mortgage loans on real estate and real estate...................... 143.5 (15.6) 64.2
Derivatives and other invested assets.............................. 38.5 16.5 28.4
Amortization adjustment for deferred policy acquisition
costs.......................................................... (50.5) (41.2) (31.2)
Amounts credited to participating pension contractholders.......... (35.3) (79.1) (29.3)
------------------------------
Net realized investment gains, net of related amortization
for deferred policy acquisition costs and amounts
credited to participating pension contractholders................ $ 175.1 $ 106.4 $ 157.0
==============================
F-20
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - INVESTMENTS - (CONTINUED)
Gross gains of $192.3 million in 1999, $268.1 million in 1998 and $143.8 million
in 1997 and gross losses of $176.9 million in 1999, $92.9 million in 1998 and
$35.4 million in 1997 were realized on the sale of available-for-sale
securities.
The Company's investments in held-to-maturity securities and available-for-sale
securities are summarized below:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------
(IN MILLIONS)
DECEMBER 31, 1999
HELD-TO-MATURITY:
Corporate securities...................... $12,533.1 $390.3 $680.7 $12,242.7
Mortgage-backed securities................ 1,188.4 5.0 68.5 1,124.9
Obligations of states and
political subdivisions.................. 59.7 1.8 4.4 57.1
Debt securities issued by foreign
governments............................. 5.0 5.0 - 10.0
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............... 14.1 - 0.4 13.7
------------------------------------------------------------------------
Total.................................. $13,800.3 $402.1 $754.0 $13,448.4
========================================================================
AVAILABLE-FOR-SALE:
Corporate securities...................... $11,191.5 $304.7 $437.8 $11,057.3
Mortgage-backed securities................ 4,190.7 18.8 110.6 4,100.0
Obligations of states and
political subdivisions.................. 68.9 5.0 - 73.9
Debt securities issued by foreign
governments............................. 1,525.3 79.2 49.3 1,555.2
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............... 291.3 1.6 9.7 283.2
------------------------------------------------------------------------
Total fixed maturities.................... 17,267.7 409.3 607.4 17,069.6
Equity securities......................... 1,088.1 305.9 161.9 1,232.1
------------------------------------------------------------------------
Total.................................. $18,355.8 $715.2 $769.3 $18,301.7
========================================================================
F-21
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS - (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------
(IN MILLIONS)
DECEMBER 31, 1998
HELD-TO-MATURITY:
Corporate securities...................... $11,617.0 $1,041.2 $150.3 $12,507.9
Mortgage-backed securities................ 1,318.1 43.2 0.5 1,360.8
Obligations of states and
political subdivisions.................. 29.4 3.4 - 32.8
Debt securities issued by foreign
governments............................. 6.0 6.5 - 12.5
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............... 7.7 - - 7.7
------------------------------------------------------------------------
Total.................................. $12,978.2 $1,094.3 $150.8 $13,921.7
========================================================================
AVAILABLE-FOR-SALE:
Corporate securities...................... $ 9,358.3 $ 734.6 $230.3 $ 9,862.6
Mortgage-backed securities................ 4,361.2 156.2 5.4 4,512.0
Obligations of states and
political subdivisions.................. 69.3 7.0 - 76.3
Debt securities issued by foreign
governments............................. 387.2 62.4 5.3 444.3
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............... 315.5 11.6 0.1 327.0
------------------------------------------------------------------------
Total fixed maturities.................... 14,491.5 971.8 241.1 15,222.2
Equity securities......................... 756.8 321.5 82.5 995.8
------------------------------------------------------------------------
Total.................................. $15,248.3 $1,293.3 $323.6 $16,218.0
========================================================================
F-22
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS - (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1999, by
contractual maturity, are shown below:
AMORTIZED FAIR
COST VALUE
----------------------------------------
(IN MILLIONS)
Held-to-Maturity:
Due in one year or less................................................. $ 947.3 $ 942.3
Due after one year through five years................................... 4,082.7 4,081.6
Due after five years through ten years.................................. 3,502.5 3,445.5
Due after ten years..................................................... 4,079.4 3,854.1
----------------------------------------
12,611.9 12,323.5
Mortgage-backed securities.............................................. 1,188.4 1,124.9
----------------------------------------
Total................................................................... $13,800.3 $13,448.4
========================================
Available-for-sale:
Due in one year or less................................................. $ 864.7 $ 851.9
Due after one year through five years................................... 2,883.6 2,878.4
Due after five years through ten years.................................. 4,413.5 4,331.6
Due after ten years..................................................... 4,915.2 4,907.7
----------------------------------------
13,077.0 12,969.6
Mortgage-backed securities.............................................. 4,190.7 4,100.0
----------------------------------------
Total................................................................... $17,267.7 $17,069.6
========================================
Expected maturities may differ from contractual maturities because eligible
borrowers may exercise their right to call or prepay obligations with or without
call or prepayment penalties.
The sale of fixed maturities held-to-maturity relate to certain securities, with
amortized cost of $24.3 million, $8.5 million and $98.1 million, for the years
ended December 31, 1999, 1998 and 1997, respectively, which were sold as part of
the sale of our property and casualty operations in 1999 or specifically due to
a significant decline in the issuers' credit quality. The related realized
gains (losses), net on the sales were $0.9 million and $(63.1) million in 1999
and 1997, respectively. There were no such gains in 1998.
The change in net unrealized gains (losses) on trading securities that has been
included in earnings during 1999, 1998 and 1997 amounted to $15.4 million,
($6.6) million and $5.0 million, respectively.
The Company participates in a securities lending program for the purpose of
enhancing income on securities held. At December 31, 1999 and 1998, $278.1
million and $421.5 million, respectively, of the Company's bonds and stocks, at
market value, were on loan to various brokers/dealers, but were fully
collateralized by cash and U.S. government securities in an account held in
trust for the Company. The market value of the loaned securities is monitored
on a daily basis, and the Company obtains additional collateral when deemed
appropriate.
F-23
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS - (CONTINUED)
For 1999, 1998 and 1997, investment results passed through to participating
pension contractholders as interest credited to policyholders' account balances
amounted to $170.8 million, $178.1 million and $168.8 million, respectively.
Mortgage loans on real estate are evaluated periodically as part of the
Company's loan review procedures and are considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. The allowance for losses is maintained at a level believed adequate
by management to absorb estimated probable credit losses that exist at the
balance sheet date. Management's periodic evaluation of the adequacy of the
allowance for losses is based on the Company's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), the
estimated value of the underlying collateral, composition of the loan portfolio,
current economic conditions and other relevant factors. This evaluation is
inherently subjective as it requires estimating the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to
significant change.
Changes in the allowance for probable losses on mortgage loans on real estate
and real estate to be disposed of were as follows:
BALANCE AT BALANCE AT
BEGINNING END OF
OF YEAR ADDITIONS DEDUCTIONS YEAR
--------------------------------------------------------------------------------
(IN MILLIONS)
Year ended December 31, 1999
Mortgage loans on real estate............ $111.0 $ 39.3 $ 39.9 $110.4
Real estate to be disposed of............ 112.0 22.5 76.4 58.1
--------------------------------------------------------------------------------
Total..................................... $223.0 $ 61.8 $116.3 $168.5
================================================================================
Year ended December 31, 1998
Mortgage loans on real estate............ $127.3 $ 15.9 $ 32.2 $111.0
Real estate to be disposed of............ 25.5 97.0 10.5 112.0
--------------------------------------------------------------------------------
Total..................................... $152.8 $112.9 $ 42.7 $223.0
================================================================================
Year ended December 31, 1997
Mortgage loans on real estate............ $142.0 $ 19.5 $ 34.2 $127.3
Real estate to be disposed of............ 54.5 1.5 30.5 25.5
--------------------------------------------------------------------------------
Total..................................... $196.5 $ 21.0 $ 64.7 $152.8
================================================================================
F-24
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS - (CONTINUED)
At December 31, 1999 and 1998, the total recorded investment in mortgage loans
that are considered to be impaired under SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," along with the related provision for losses were as
follows:
DECEMBER 31
1999 1998
-----------------------------------------
(IN MILLIONS)
Impaired mortgage loans on real estate with provision for losses........ $147.1 $210.6
Provision for losses.................................................... (43.2) (38.8)
-----------------------------------------
Net impaired mortgage loans on real estate.............................. $103.9 $171.8
=========================================
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------------
(IN MILLIONS)
Average recorded investment in impaired loans.............. $137.9 $210.8 $293.3
Interest income recognized on impaired loans............... 4.9 2.7 18.4
The payment terms of mortgage loans on real estate may be restructured or
modified from time to time. Generally, the terms of the restructured mortgage
loans call for the Company to receive some form or combination of an equity
participation in the underlying collateral, excess cash flows or an effective
yield at the maturity of the loans sufficient to meet the original terms of the
loans.
Restructured commercial mortgage loans aggregated $133.1 million and $241.8
million as of December 31, 1999 and 1998, respectively. The expected gross
interest income that would have been recorded had the loans been current in
accordance with the original loan agreements and the actual interest income
recorded were as follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------------
(IN MILLIONS)
Expected................................................... $12.0 $23.7 $35.3
Actual..................................................... 7.9 12.6 26.0
F-25
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS - (CONTINUED)
At December 31, 1999, the mortgage portfolio was diversified by geographic
region and specific collateral property type as displayed below:
CARRYING GEOGRAPHIC CARRYING
PROPERTY TYPE AMOUNT CONCENTRATION AMOUNT
- ------------------------------------------------------------------------------------------------------------
(IN MILLIONS) (IN MILLIONS)
Apartments....................... $ 2,507.8 East North Central............... $ 1,116.1
Hotels........................... 428.5 East South Central............... 300.8
Industrial....................... 1,015.8 Middle Atlantic.................. 1,692.8
Office buildings................. 2,586.7 Mountain......................... 358.0
Retail........................... 1,862.8 New England...................... 902.8
1-4 Family....................... 80.7 Pacific.......................... 2,148.3
Mixed Use........................ 141.3 South Atlantic................... 1,944.9
Agricultural..................... 1,921.3 West North Central............... 380.2
Other............................ 301.9 West South Central............... 765.2
Canada/Other..................... 1,237.7
Allowance for losses............. (110.4) Allowance for losses............. (110.4)
-------------------- ------------------
Total............................ $10,736.4 Total............................ $10,736.4
==================== ==================
Mortgage loans with outstanding principal balances of $51.2 million, bonds with
amortized cost of $59.5 million and real estate with a carrying value of $14.7
million were non-income producing for the year ended December 31, 1999.
Depreciation expense on investment real estate was $8.1 million, $41.7 million
and $73.1 million in 1999, 1998 and 1997, respectively. Accumulated
depreciation was $60.5 million and $189.4 million at December 31, 1999 and 1998,
respectively.
Investments in unconsolidated joint ventures and partnerships accounted for by
using the equity method of accounting totaled $201.7 million and $286.0 million
at December 31, 1999 and 1998, respectively. Total combined assets of these
joint ventures and partnerships were $1,134.2 million and $1,819.9 million
(consisting primarily of investments), and total combined liabilities were
$267.1 million and $774.5 million (including $133.2 million and $349.2 million
of non-recourse notes payable to banks) at December 31, 1999 and 1998,
respectively. Total combined revenues and expenses of such joint ventures and
partnerships were $346.7 million and $145.2 million, respectively, resulting in
$201.5 million of total combined income from operations before income taxes in
1999. Total combined revenues of such joint ventures and partnerships were
$1,435.6 million and $1,524.1 million, and total combined expenses were $1,128.0
million and $1,275.5 million, respectively, resulting in $307.6 million and
$248.6 million of total combined income from operations before income taxes in
1998 and 1997, respectively. Net investment income on investments accounted for
on the equity method totaled $65.1 million, $70.0 million and $54.6 million in
1999, 1998 and 1997, respectively.
F-26
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 -- DERIVATIVES
The notional amounts, carrying values and estimated fair values of the Company's
derivative instruments are as follows:
ASSETS (LIABILITIES)
NUMBER OF CONTRACTS/ ----------------------------------------
NOTIONAL AMOUNTS 1999 1998
-----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
1999 1998 VALUE VALUE VALUE VALUE
-----------------------------------------------------------------
(IN MILLIONS)
ASSET HEDGES:
Futures contracts to sell
securities........................... 19,288 12,477 $32.2 $ 32.2 $ (3.7) $ (3.7)
Interest rate swap agreements
Notional.......................... $5,824.0 $5,485.0 82.9 94.7 (127.4) (411.0)
Average fixed rate-paid........... 6.91% 6.74% - - - -
Average float rate-received....... 6.06% 5.07% - - - -
Interest rate cap agreements......... $ 80.0 $ 80.0 0.2 0.2 0.4 0.4
Interest rate swaption
agreements........................... 30.0 30.0 (3.6) (3.6) (1.9) (1.9)
Currency rate swap
agreements........................... 541.0 439.5 9.1 9.1 (19.5) (19.5)
Equity collar agreements............. - - 53.0 53.0 28.6 28.6
LIABILITY HEDGES:
Futures contracts to acquire
securities........................... 4,075 1,470 (0.9) (0.9) (0.3) (0.3)
Interest rate swap agreements
Notional.......................... $3,780.0 $2,483.3 - (113.0) - 235.9
Average fixed rate-received....... 6.97% 6.42% - - - -
Average float rate-paid........... 6.06% 5.07% - - - -
Interest rate swaps (receive CMT
rate).............................. $ 648.7 $ 609.7 - 1.9 - (0.2)
Interest rate cap agreements......... 279.4 129.4 5.6 5.6 3.2 3.2
Interest rate floor agreements....... 125.0 125.0 0.1 0.1 0.7 0.7
Currency rate swap
agreements.......................... 5,470.2 2,597.4 - (57.4) - 21.8
Financial futures contracts are used principally to hedge risks associated with
interest rate fluctuations on sales of guaranteed investment contracts. The
Company is subject to the risks associated with changes in the value of the
underlying securities; however, such changes in value generally are offset by
opposite changes in the value of the hedged items. The contracts or notional
amounts of the contracts represent the extent of the Company's involvement but
not the future cash requirements, as the Company intends to close the open
positions prior to settlement. The futures contracts expire in March 2000.
F-27
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 -- DERIVATIVES - (CONTINUED)
The interest rate swap agreements expire in 2000 to 2029. The interest rate cap
agreements expire in 2000 to 2008 and interest rate floor agreements expire in
2003. Interest rate swaption agreements expire in 2025. The currency rate swap
agreements expire in 2000 to 2021. The equity collar agreements expire in 2003.
Fair values for futures contracts are based on quoted market prices. Fair
values for interest rate swap, cap and floor agreements, swaptions, and currency
swap agreements and equity collar agreements are based on current settlement
values. The current settlement values are based on quoted market prices, which
utilize pricing models or formulas using current assumptions.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform to the terms of the contract. The Company continually
monitors its position and the credit ratings of the counterparties to these
derivative instruments. To limit exposure associated with counterparty
nonperformance on interest rate and currency swap agreements, the Company enters
into master netting agreements with its counterparties. The Company believes
the risk of incurring losses due to nonperformance by its counterparties is
remote and that such losses, if any, would be immaterial. Futures contracts
trade on organized exchanges and, therefore, have minimal credit risk.
NOTE 4 -- INCOME TAXES
Four of the Company's domestic life insurance companies (John Hancock Mutual
Life Insurance Company, John Hancock Variable Life Insurance Company, Investors
Partner Life Insurance Company and Investors Guaranty Life Insurance Company)
file consolidated federal income tax returns with the Company's non-life
insurance company subsidiaries (John Hancock Subsidiaries, Inc. and John Hancock
International Holdings, Inc.).
In addition to taxes on operations, mutual life insurance companies are charged
an equity base tax. The equity base tax is determined by application of an
industry based earnings rate to the Mutual Company's average equity base, as
defined by the Internal Revenue Code. The industry earnings rate is determined
by the Internal Revenue Service (IRS) and is not finalized until the subsequent
year. The Mutual Company estimates income taxes based on estimated industry
earnings rates and revises these estimates up or down when the earnings rates
are finalized and published by the IRS.
Income before income taxes, extraordinary item and cumulative effect of
accounting change includes the following:
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
(IN MILLIONS)
Domestic....................................................... $310.2 $611.9 $566.8
Foreign........................................................ 48.2 32.2 22.9
------------------------------------------------------
Income before income taxes, extraordinary item and
cumulative effect of accounting change....................... $358.4 $644.1 $589.7
======================================================
F-28
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- INCOME TAXES - (CONTINUED)
The components of income taxes were as follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------------
(IN MILLIONS)
Current taxes:
Federal....................................................... $(58.0) $234.9 $144.2
Foreign....................................................... 2.6 1.9 9.5
State......................................................... 5.8 6.3 7.3
--------------------------------------------------------------
(49.6) 243.1 161.0
Deferred taxes:
Federal....................................................... 137.2 (66.0) (45.6)
Foreign....................................................... 15.4 7.7 (1.9)
State......................................................... (1.1) (0.9) (7.1)
--------------------------------------------------------------
151.5 (59.2) (54.6)
--------------------------------------------------------------
Total income taxes............................................. $101.9 $183.9 $106.4
==============================================================
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------------------------
(IN MILLIONS)
Tax at 35%..................................................... $125.4 $225.4 $206.4
Add (deduct):
Equity base tax........................................... 22.2 (19.9) (25.3)
Prior year taxes.......................................... 2.1 5.8 9.0
Tax credits............................................... (12.9) (13.0) (20.0)
Foreign taxes............................................. 1.0 2.5 4.5
Tax exempt investment income.............................. (19.4) (24.4) (18.5)
Non-taxable gain on sale of subsidiary.................... (15.4) - -
Use of loss carryforwards.................................. - - (51.0)
Other..................................................... (1.1) 7.5 1.3
--------------------------------------------------------------
Total income taxes..................................... $101.9 $183.9 $106.4
==============================================================
F-29
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- INCOME TAXES - (CONTINUED)
The significant components of the Company's deferred tax assets and liabilities
were as follows:
DECEMBER 31
1999 1998
------------------------------------------
(IN MILLIONS)
Deferred tax assets:
Policy reserve adjustments......................................... $ 803.1 $ 673.7
Other postretirement benefits...................................... 151.1 151.2
Investment valuation reserves...................................... 119.7 175.8
Dividends payable to policyholders................................. 129.0 132.9
Unearned premium................................................... 58.3 49.1
Loss on sale of foreign subsidiary................................. - 68.0
Interest........................................................... 38.3 37.8
Other.............................................................. 68.1 79.8
------------------------------------------
Total deferred tax assets...................................... 1,367.6 1,368.3
Valuation allowance................................................ - (17.0)
------------------------------------------
Net deferred tax assets........................................ 1,367.6 1,351.3
------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs.................................. 805.1 684.6
Depreciation....................................................... 232.1 268.4
Basis in partnerships.............................................. 159.2 142.0
Market discount on bonds........................................... 59.2 48.7
Pension plan expense............................................... 82.5 60.6
Capitalized charges related to mutual funds........................ 71.8 98.4
Unrealized gains................................................... 32.3 204.2
------------------------------------------
Total deferred tax liabilities................................. 1,442.2 1,506.9
------------------------------------------
Net deferred tax liabilities................................... $ 74.6 $ 155.6
==========================================
The Company made income tax payments of $86.7 million, $163.3 million and $223.1
million in 1999, 1998 and 1997, respectively.
F-30
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- DEBT AND LINE OF CREDIT
Short-term and long-term debt consists of the following:
DECEMBER 31
1999 1998
-------------------------------------
(IN MILLIONS)
Short-term debt:
Commercial paper........................................................... $380.6 $ 411.1
Current maturities of long-term debt....................................... 73.2 16.7
-------------------------------------
Total short-term debt....................................................... 453.8 427.8
-------------------------------------
Long-term debt:
Surplus notes, 7.38% maturing in 2024...................................... 447.1 446.9
Notes payable, interest ranging from 5.43% to 9.60%, due in varying
amounts to 2004........................................................... 163.0 172.5
-------------------------------------
Total long-term debt........................................................ 610.1 619.4
Less current maturities..................................................... (73.2) (16.7)
-------------------------------------
Long-term debt.............................................................. 536.9 602.7
-------------------------------------
Total debt.............................................................. $990.7 $1,030.5
=====================================
The Company issues commercial paper primarily to take advantage of current
investment opportunities, balance operating cash flows and existing commitments
and meet working capital needs. The weighted average interest rate for
outstanding commercial paper at December 31, 1999 and 1998 was 6.28% and 5.22%,
respectively. The weighted average life for outstanding commercial paper at
December 31, 1999 and 1998 was approximately 11 days and 14 days, respectively.
Commercial paper borrowing arrangements are supported by a syndicated line of
credit.
The issuance of surplus notes was approved by the Commonwealth of Massachusetts
Division of Insurance, and any payments of interest or principal on the surplus
notes requires the prior approval of the Commissioner of the Commonwealth of
Massachusetts Division of Insurance.
At December 31, 1999, the Company had two syndicated lines of credit with a
group of banks totaling $1.0 billion, $500.0 million of which expires on July
29, 2000 and $500.0 million of which expires on June 30, 2001. The banks will
commit, when requested, to loan funds at prevailing interest rates as determined
in accordance with each line of credit agreement. Under the terms of the
agreements, the Company is required to maintain certain minimum levels of net
worth and comply with certain other covenants, which were met at December 31,
1999. At December 31, 1999, the Company had no outstanding borrowings under
either agreement.
Aggregate maturities of long-term debt are as follows: 2000--$73.2 million;
2001--$23.0 million; 2002--$38.0 million; 2003--$22.9 million; 2004--$5.9
million and thereafter--$447.1 million.
F-31
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- DEBT AND LINE OF CREDIT - (CONTINUED)
Interest expense on debt, included in other operating costs and expenses, was
$70.1 million, $76.7 million and $76.9 million in 1999, 1998 and 1997,
respectively. Interest paid amounted to $70.1 million in 1999, $76.7 million in
1998 and $76.9 million in 1997.
NOTE 6 -- MINORITY INTEREST
Minority interest relates to preferred stock issued by The Maritime Life
Assurance Company (Maritime), an indirect majority owned subsidiary of the
Company. For financial reporting purposes, the assets, the liabilities, and
earnings of Maritime are consolidated in the Company's financial statements.
In 1986, Maritime issued $25.3 million of series A Cumulative Redeemable
Preferred Stock (Preferred Stock). Dividends on the Preferred Stock are payable
quarterly at 18% of the average of two prime rates of two specified Canadian
banks. The Preferred Stock is nonvoting and redeemable at Maritime's sole
option at a price of 25 Canadian dollars per share.
On November 19, 1999, Maritime issued $68.2 million of Non-Cumulative Redeemable
Second Preferred Shares, Series 1 (Series 1 Preferred Shares) at a price of 25
Canadian dollars per share. Dividends on the Series 1 Preferred Shares are
payable quarterly, through December 31, 2004, at a rate of 0.38125 Canadian
dollars per share. Commencing on January 1, 2005 the Series 1 Preferred Shares
dividends will be calculated by applying 25 Canadian dollars to the greater of
one quarter of 90% of prime rate and 5.85%. The Series 1 Preferred Shares are
nonvoting and redeemable at Maritime's sole option any time after December 31,
2004 at a price of 25.50 Canadian dollars plus all declared and unpaid
dividends. In addition, shareholders as of December 31, 2004 have the option to
convert their Series 1 Preferred Shares to Non-Cumulative Redeemable Second
Preferred Shares, Series 2 (Series 2 Preferred Shares). The Series 2 Preferred
Shares will have a dividend rate of not less than 95% of the yield of certain
bonds of the Government of Canada.
The investors' preferred stock interests have been reported as Minority Interest
on the consolidated balance sheets.
NOTE 7 -- REINSURANCE
The effect of reinsurance on premiums written and earned was as follows:
1999 1998 1997
PREMIUMS PREMIUMS PREMIUMS
---------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------------------------------------------------------------------
(IN MILLIONS)
Life, Health and Annuity:
Direct............................. $ 3,437.1 $ 3,435.2 $2,830.4 $2,828.4 $2,931.6 $2,929.8
Assumed............................ 312.5 312.5 351.9 351.9 417.1 417.1
Ceded.............................. (1,030.5) (1,030.5) (982.5) (982.4) (874.0) (874.0)
-------------------------------------------------------------------
Net life, health and
annuity premiums................ 2,719.1 2,717.2 2,199.8 2,197.9 2,474.7 2,472.9
-------------------------------------------------------------------
Property and Casualty:
Direct............................. - - 0.4 7.1 37.5 65.0
Assumed............................ 0.3 0.3 - 1.9 6.2 6.2
Ceded.............................. - - (0.4) (9.0) (43.0) (70.5)
-------------------------------------------------------------------
Net property and
casualty premiums............... 0.3 0.3 - - 0.7 0.7
-------------------------------------------------------------------
Net premiums.................... $ 2,719.4 $ 2,717.5 $2,199.8 $2,197.9 $2,475.4 $2,473.6
===================================================================
F-32
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7 -- REINSURANCE - (CONTINUED)
For the years ended December 31, 1999, 1998 and 1997, benefits to policyholders
under life, health and annuity ceded reinsurance contracts were $556.3 million,
$810.8 million and $800.4 million, respectively.
On February 28, 1997, the Company sold a major portion of its group insurance
business to UNICARE Life & Health Insurance Company (UNICARE), a wholly owned
subsidiary of WellPoint Health Networks, Inc. The business sold included the
Company's group accident and health business and related group life business and
Cost Care, Inc., Hancock Association Services Group and Tri-State, Inc., all of
which were indirect wholly-owned subsidiaries of the Company. The Company
retained its group long-term care operations. Assets equal to liabilities of
approximately $686.7 million at February 28, 1997 were transferred to UNICARE in
connection with the sale. Income from operations in 1997 was not significant.
The insurance business sold was transferred to UNICARE through a 100%
coinsurance agreement.
The Company has secured a $397.0 million letter of credit facility with a group
of banks. The banks have agreed to issue a letter of credit to the Company
pursuant to which the Company may draw up to $397.0 million for any claims not
satisfied by UNICARE under the coinsurance agreement after the Company has
incurred the first $113.0 million of losses from such claims. The amount
available pursuant to the letter of credit agreement and any letter of credit
issued thereunder automatically will be reduced on a scheduled basis consistent
with the anticipated runoff of liabilities related to the business reinsured
under the coinsurance agreement. The letter of credit and any letter of credit
issued thereunder are scheduled to expire on March 1, 2002. The Company remains
liable to its policyholders to the extent that UNICARE does not meet its
contractual obligations under the coinsurance agreement.
Through the Company's group health insurance operations, the Company entered
into a number of reinsurance arrangements in respect of personal accident
insurance and the occupational accident component of workers compensation
insurance, a portion of which was originated through a pool managed by Unicover
Managers, Inc. Under these arrangements, the Company both assumed risks as a
reinsurer, and also passed 95% of these risks on to other companies. This
business had originally been reinsured by a number of different companies, and
has become the subject of widespread disputes. The disputes concern the
placement of the business with reinsurers and recovery of the reinsurance. The
Company is engaged in disputes, including a number of legal proceedings, in
respect of this business. The risk to the Company is that other companies that
reinsured the business from the Company may seek to avoid their reinsurance
obligations. However, the Company believes that it has a reasonable legal
position in this matter. During the fourth quarter of 1999 and early 2000, the
Company received additional information about its exposure to losses under the
various reinsurance programs. As a result of this additional information and in
connection with global settlement discussions initiated in late 1999 with other
parties involved in the reinsurance programs, during the fourth quarter the
Company recognized a charge for uncollectible reinsurance of $133.7 million,
after tax, as its best estimate of its remaining loss exposure. The Company
believes that any exposure to loss from this issue, in addition to amounts
already provided for as of December 31, 1999, would not be material.
Reinsurance ceded contracts do not relieve the Company from its obligations to
policyholders. The Company remains liable to its policyholders for the portion
reinsured to the extent that any reinsurer does not meet its obligations for
reinsurance ceded to it under the reinsurance agreements. Failure of the
reinsurers to honor their obligations could result in losses to the Company;
consequently, estimates are established for amounts deemed or estimated to be
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentration of credit risk arising from similar characteristics
of the reinsurers.
F-33
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- PENSION BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company provides pension benefits to substantially all employees and general
agency personnel. These benefits are provided through both qualified defined
benefit and defined contribution pension plans. In addition, through
nonqualified plans, the Company provides supplemental pension benefits to
employees with salaries and/or pension benefits in excess of the qualified plan
limits imposed by federal tax law. Pension benefits under the defined benefit
plans are based on years of service and average compensation generally during
the five years prior to retirement. Benefits related to the Company's defined
benefit pension plans paid to employees and retirees covered by annuity
contracts issued by the Company amounted to $97.6 million in 1999, $92.6 million
in 1998 and $89.7 million in 1997. Plan assets consist principally of listed
equity securities, corporate obligations and U.S. government securities.
The Company's funding policy for qualified defined benefit plans is to
contribute annually an amount in excess of the minimum annual contribution
required under the Employee Retirement Income Security Act (ERISA). This amount
is limited by the maximum amount that can be deducted for federal income tax
purposes. Because the qualified defined benefit plans are overfunded, no
amounts were contributed to these plans in 1999 or 1998. The funding policy for
nonqualified defined benefit plans is to contribute the amount of the benefit
payments made during the year. The projected benefit obligation and accumulated
benefit obligation for the non-qualified defined benefit pension plans, which
are underfunded, for which accumulated benefit obligations are in excess of plan
assets were $257.4 million, and $239.3 million, respectively, at December 31,
1999, and $221.3 million and $194.8 million, respectively, at December 31, 1998.
Non-qualified plan assets, at fair value, were $1.0 million and $1.2 million at
December 31,1999 and 1998, respectively.
Defined contribution plans include The Investment Incentive Plan and the Savings
and Investment Plan. The expense for defined contribution plans was $9.4
million, $8.1 million, and $6.2 million in 1999, 1998 and 1997, respectively.
In addition to the Company's defined benefit pension plans, the Company has
employee welfare plans for medical, dental, and life insurance covering most of
its retired employees and general agency personnel. Substantially all employees
may become eligible for these benefits if they reach retirement age while
employed by the Company. The postretirement health care and dental coverages
are contributory based on service for post January 1, 1992 non-union retirees.
A small portion of pre-January 1, 1992 non-union retirees also contribute. The
applicable contributions are based on service.
The Company's policy is to fund postretirement benefits in amounts at or below
the annual tax qualified limits. As of December 31, 1999 and 1998, plan assets
related to non-union employees were comprised of an irrevocable health insurance
contract to provide future health benefits to retirees. Plan assets related to
union employees were comprised of approximately 70% equity securities and 30%
fixed income investments.
F-34
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- PENSION BENEFIT PLANS AND
OTHER POSTRETIREMENT BENEFIT PLANS - (CONTINUED)
The changes in benefit obligation and plan assets related to the Company's
qualified and nonqualified benefit plans are summarized as follows:
YEAR ENDED DECEMBER 31
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
-------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------
(IN MILLIONS)
Change in benefit obligation:
Benefit obligation at beginning of year........... $1,839.8 $1,734.5 $ 441.1 $ 452.7
Service cost...................................... 35.7 34.6 7.5 7.1
Interest cost..................................... 121.2 117.5 28.7 29.1
Amendments........................................ 19.9 - - -
Actuarial loss (gain)............................. 32.6 55.5 (4.7) (19.2)
Translation loss (gain)........................... 2.1 (2.1) - -
Benefits paid..................................... (115.1) (100.2) (29.4) (28.6)
Acquisition of subsidiary......................... 44.6 - - -
Curtailment....................................... (13.2) - - -
-------------------------------------------------------
Benefit obligation at end of year................. 1,967.6 1,839.8 443.2 441.1
-------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning
of year......................................... 2,251.1 2,044.6 215.2 172.7
Actual return on plan assets...................... 281.5 298.5 17.7 39.9
Employer contribution............................. 11.5 11.5 - 2.6
Benefits paid..................................... (108.4) (100.2) - -
Translation gain (loss)........................... 3.5 (3.3) - -
Acquisition of subsidiary......................... 50.2 - - -
Curtailment....................................... (12.9) - - -
-------------------------------------------------------
Fair value of plan assets at end of year.......... 2,476.5 2,251.1 232.9 215.2
-------------------------------------------------------
Funded status........................................ 508.9 411.3 (210.3) (225.9)
Unrecognized actuarial gain.......................... (366.0) (301.6) (182.8) (187.2)
Unrecognized prior service cost...................... 39.1 23.1 (1.6) (1.8)
Unrecognized net transition asset.................... (11.8) (23.9) - -
-------------------------------------------------------
Prepaid (accrued) benefit cost, net.................. $ 170.2 $ 108.9 $(394.7) $(414.9)
=======================================================
Amounts recognized in balance sheet
consist of:
Prepaid benefit cost........................... $ 299.4 $ 229.6
Accrued benefit liability...................... (238.9) (193.6)
Intangible asset............................... 7.9 8.3
Accumulated other comprehensive
income....................................... 101.8 64.6
----------------------
Prepaid benefit cost, net............................ $ 170.2 $ 108.9
======================
F-35
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 -- PENSION BENEFITS PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS -
(CONTINUED)
The assumptions used in accounting for the Company's qualified and nonqualified
benefit plans were as follows:
YEAR ENDED DECEMBER 31
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------
(IN MILLIONS)
Discount rate......................................... 7.0% 6.8% 7.0% 6.8%
Expected return on plan assets........................ 8.5% 8.5% 8.5% 8.5%
Rate of compensation increase......................... 4.8% 4.6% 4.8% 4.6%
For measurement purposes, a 5.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5.3% in 2001 and remain at that level thereafter.
The net periodic benefit (credit) cost related to the Company's qualified and
nonqualified benefit plans includes the following components:
YEAR ENDED DECEMBER 31
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------------------------------------------
1999 1998 1997 1999 1998 1997
--------------------------------------------------------
(IN MILLIONS)
Service cost.............................. $ 35.7 $ 34.6 $ 32.6 $ 7.5 $ 7.1 $ 7.6
Interest cost............................. 121.2 117.5 111.3 28.7 29.1 31.1
Expected return on plan assets............ (186.6) (168.5) (150.7) (18.3) (14.7) (11.3)
Amortization of transition asset.......... (12.1) (11.7) (11.7) - - -
Amortization of prior service cost........ 3.9 6.5 6.6 (0.2) (0.3) (0.2)
Recognized actuarial gain................. (8.1) (2.6) (1.0) (8.5) (7.8) (5.4)
Other..................................... (3.8) (1.2) (20.2) - - (5.2)
--------------------------------------------------------
Net periodic benefit (credit) cost... $ (49.8) $ (25.4) $ (33.1) $ 9.2 $ 13.4 $ 16.6
========================================================
Assumed health care cost trend rates have a significant effect on the amounts
reported for the healthcare plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
----------------------------------------------------------
(IN MILLIONS)
Effect on total of service and interest costs
in 1999............................................ $ 4.3 $ (3.3)
Effect on postretirement benefit obligations
as of December 31, 1999............................ 37.9 (33.7)
F-36
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
The Company has extended commitments to purchase fixed maturity investments,
preferred and common stock, and other invested assets and issue mortgage loans
on real estate totaling $762.0 million, $6.1 million, $281.1 million and $216.4
million, respectively, at December 31, 1999. If funded, loans related to real
estate mortgages would be fully collateralized by related properties. The
Company monitors the creditworthiness of borrowers under long-term bond
commitments and requires collateral as deemed necessary. The estimated fair
values of the commitments described above aggregate $1.3 billion at December 31,
1999. The majority of these commitments expire in 2000.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal National Mortgage Association (FNMA). Under the
agreement, the Company sold $532.8 million of commercial mortgage loans and
acquired an equivalent amount of FNMA securities. The Company completed similar
transactions with FNMA in 1991 for $1.04 billion and in 1993 for $71.9 million.
FNMA is guaranteeing the full face value of the bonds of the three transactions
to the bondholders. However, the Company has agreed to absorb the first 12.25%
of original principal and interest losses (less buy-backs) for the pool of loans
involved in the three transactions, based on the total outstanding principal
balance of $1.04 billion at July 1, 1996, but is not required to commit
collateral to support this loss contingency. Historically, the Company has
experienced losses of less than one percent on its multi-family mortgage
portfolio. At December 31, 1999, the aggregate outstanding principal balance of
all the remaining pools of loans from 1991, 1993 and 1996 is approximately
$493.4 million.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal Home Loan Mortgage Corporation (FHLMC). Under the
agreement, the Company sold $535.3 million of multi-family loans and acquired an
equivalent amount of FHLMC securities. FHLMC is guaranteeing the full face
value of the bonds to the bondholders. However, the Company has agreed to
absorb the first 10.5% of original principal and interest losses (less buy-
backs) for the pool of loans involved but is not required to commit collateral
to support this loss contingency. Historically, the Company has experienced
total losses of less than one percent on its multi-family loan portfolio. At
December 31, 1999, the aggregate outstanding principal balance of the pools of
loans was $365.2 million. There have been no mortgage buy-backs since 1996.
The Company is subject to insurance guaranty fund laws in the states in which it
does business. These laws assess insurance companies amounts to be used to pay
benefits to policyholders and claimants of insolvent insurance companies. Many
states allow these assessments to be credited against future premium taxes. The
Company believes such assessments in excess of amounts accrued would not
materially affect its financial position or results of operations.
In the normal course of its business operations, the Company is involved with
litigation from time to time with claimants, beneficiaries and others, and a
number of litigation matters were pending as of December 31, 1999. It is the
opinion of management, after consultation with counsel, that the ultimate
liability with respect to these claims, if any, will not materially affect the
financial position or results of operations of the Company.
During 1997, the Company entered into a court-approved settlement relating to a
class action lawsuit involving certain individual life insurance policies sold
from 1979 through 1996. In entering into the settlement, the Company
specifically denied any wrongdoing. The reserve held in connection with the
settlement to provide for relief to class members and for legal and
administrative costs associated with the settlement amounted to $496.6 million
and $436.6 million at December 31, 1999 and 1998, respectively. Costs incurred
related to the settlement were $140.2 million, $230.8 million, and $173.1
million in 1999, 1998 and 1997, respectively. The estimated reserve is based on
a number of factors, including the estimated number of claims, the expected type
of relief to be sought by class members (general relief or alternative dispute
resolution), the estimated cost per claim and the estimated costs to administer
the claims.
F-37
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES - (CONTINUED)
During 1996, management determined that is was probable that a settlement would
occur and that a minimum loss amount could be reasonably estimated.
Accordingly, the Company recorded its best estimate based on the information
available at the time. The terms of the settlement agreement were negotiated
throughout 1997 and approved by the court on December 31, 1997. In accordance
with the terms of the settlement agreement, the Company contacted class members
during 1998 to determine the actual type of relief to be sought by class
members. The majority of the responses from class members were received by the
fourth quarter of 1998. The type of relief sought by class members differed
from the Company's previous estimates, primarily due to additional outreach
activities by regulatory authorities during 1998 encouraging class members to
consider alternative dispute resolution relief. In 1999, the Company updated
its estimate of the cost of claims subject to alternative dispute resolution
relief and revised its reserve estimate accordingly.
Given the uncertainties associated with estimating the reserve, it is reasonably
possible that the final cost of the settlement could differ materially from the
amounts presently provided for by the Company. The Company will continue to
update its estimate of the final cost of the settlement as the claims are
processed and more specific information is developed, particularly as the actual
cost of the claims subject to alternative dispute resolution becomes available.
However, based on information available at this time, and the uncertainties
associated with the final claim processing and alternative dispute resolution,
the range of any additional costs related to the settlement cannot be reasonably
estimated.
NOTE 10 -- STATUTORY FINANCIAL INFORMATION
John Hancock Mutual Life Insurance Company and its domestic insurance
subsidiaries prepare their statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the state of domicile.
Prescribed statutory accounting practices include state laws, regulations and
administrative rules, as well as guidance published by the NAIC. Permitted
accounting practices encompass all accounting practices that are not prescribed
by the sources noted above. Since 1988, the Commonwealth of Massachusetts
Division of Insurance has provided the Company with approval to recognize the
pension plan prepaid expense in accordance with the requirements of SFAS No. 87,
"Employers' Accounting for Pensions." The Company furnishes the Massachusetts
Division of Insurance with an actuarial certification of the prepaid expense
computation on an annual basis.
In addition, during 1999 and 1998, the Company received permission from the
Commonwealth of Massachusetts Division of Insurance to record its Asset
Valuation Reserve in excess of the prescribed maximum reserve level by $48.0
million and $111.3 million at December 31, 1999 and 1998, respectively. There
are no other material permitted practices.
Statutory net income and surplus include the accounts of the Mutual Company and
its variable life insurance subsidiary, John Hancock Variable Life Insurance
Company, including its wholly-owned subsidiary, Investors Partners Life
Insurance Company, and Investors Guaranty Life Insurance Company.
1999 1998 1997
---------------------------------------------------------------
(IN MILLIONS)
Statutory net income............... $ 573.2 $ 627.3 $ 414.0
Statutory surplus.................. 3,456.7 3,388.7 3,157.8
Massachusetts has enacted laws governing the payment of dividends by insurers.
Under Massachusetts insurance law, no insurer may pay any shareholder dividends
from any source other than statutory unassigned funds without the prior approval
of the Massachusetts Commissioner of Insurance. Massachusetts statute limits the
dividends an insurer may pay in any twelve month period, without the prior
permission of the Commonwealth of Massachusetts Insurance Commissioner, to the
greater of (i) 10% of its statutory policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year, if such insurer is a life company.
F-38
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 -- POLICYHOLDERS' EQUITY
The components of accumulated other comprehensive income are as follows:
FOREIGN
NET CURRENCY MINIMUM
UNREALIZED TRANSLATION PENSION ACCUMULATED OTHER
GAINS (LOSSES) ADJUSTMENT LIABILITY COMPREHENSIVE INCOME
-----------------------------------------------------------------------------
(IN MILLIONS)
Balance at January 1, 1997................... $ 389.4 $(15.7) $(21.3) $ 352.4
-----------------------------------------------------------------------------
Gross unrealized gains (losses) (net of
deferred income tax expense of $145.8
million).................................... 274.5 - - 274.5
Less reclassification adjustment for (gains)
losses, realized in net income (net of tax
expense of $37.9 million)................... (70.5) - - (70.5)
Participating group annuity contracts (net
of deferred income tax benefit of $22.5
million).................................... (41.9) - - (41.9)
Adjustment to deferred policy acquisition
costs and present value of future profits
(net of deferred income tax benefit of
$16.7 million).............................. (31.1) - - (31.1)
-----------------------------------------------------------------------------
Net unrealized gains (losses)................ 131.0 - - 131.0
Foreign currency translation
adjustment................................... - (28.4) - (28.4)
Minimum pension liability (net of
deferred income tax benefit of
$4.4 million)................................ - - ( 8.2) (8.2)
-----------------------------------------------------------------------------
Balance at December 31, 1997................. 520.4 (44.1) (29.5) 446.8
-----------------------------------------------------------------------------
Gross unrealized gains (losses) (net of
deferred income tax benefit of $56.7
million).................................... (121.3) - - (121.3)
Less reclassification adjustment for
(gains) losses, realized in net
income (net of tax expense of
$61.4 million)............................... (113.9) - - (113.9)
Participating group annuity contracts (net
of deferred income tax expense of $31.1
million).................................... 57.7 - - 57.7
Adjustment to deferred policy acquisition
costs and present value of future profits
(net of deferred income tax expense of
$15.5 million).............................. 28.9 - - 28.9
-----------------------------------------------------------------------------
Net unrealized gains (losses)................ (148.6) - - (148.6)
Foreign currency translation adjustment...... - (6.0) - (6.0)
Minimum pension liability (net of deferred
income tax benefit of $6.2 million)......... - - (8.8) (8.8)
-----------------------------------------------------------------------------
Balance at December 31, 1998................. $ 371.8 $(50.1) $(38.3) $ 283.4
-----------------------------------------------------------------------------
F-39
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 -- POLICYHOLDERS' EQUITY - (CONTINUED)
FOREIGN
NET CURRENCY MINIMUM
UNREALIZED TRANSLATION PENSION ACCUMULATED OTHER
GAINS (LOSSES) ADJUSTMENT LIABILITY COMPREHENSIVE INCOME
-----------------------------------------------------------------------------
(IN MILLIONS)
Balance at December 31, 1998................. $ 371.8 $(50.1) $(38.3) $ 283.4
Gross unrealized gains (losses) (net of
deferred income tax benefit of $277.9
million).................................... (508.2) - - (508.2)
Less reclassification adjustment for
(gains) losses, realized in net
income (net of tax expense of
$5.4 million)................................ (10.0) - - (10.0)
Participating group annuity contracts (net
of deferred income tax expense of $40.1
million).................................... 74.6 - - 74.6
Adjustment to deferred policy acquisition
costs and present value of future profits
(net of deferred income tax expense of
$71.3 million).............................. 132.3 - - 132.3
-----------------------------------------------------------------------------
Net unrealized gains (losses)................ (311.3) - - (311.3)
Foreign currency translation adjustment...... - 16.9 - 16.9
Minimum pension liability (net of deferred
income tax benefit of $12.3 million)........ - - (22.9) (22.9)
-----------------------------------------------------------------------------
Balance at December 31, 1999................. $ 60.5 $(33.2) $(61.2) $ (33.9)
=============================================================================
Net unrealized investment gains (losses), included in the consolidated balance
sheets as a component of policyholders' equity, are summarized as follows:
1999 1998 1997
---------------------------------------------------------------
(IN MILLIONS)
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities................................... $(198.1) $ 730.7 $ 885.6
Equity investments................................. 144.0 239.0 359.7
Derivatives and other.............................. 110.8 (111.5) (33.8)
---------------------------------------------------------------
Total.................................................... 56.7 858.2 1,211.5
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts.............. (24.0) (138.7) (227.5)
Deferred policy acquisition cost and
present value of future profits.................. 60.1 (143.5) (187.9)
Deferred federal income taxes...................... (32.3) (204.2) (275.7)
---------------------------------------------------------------
Total.................................................... 3.8 (486.4) (691.1)
---------------------------------------------------------------
Net unrealized investment gains.......................... $ 60.5 $ 371.8 $ 520.4
===============================================================
F-40
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 - SEGMENT INFORMATION
The Company offers financial products and services in two major groups: (i) its
retail business, which offers protection and asset gathering products and
services primarily to retail consumers; and (ii) the institutional business,
which offers guaranteed and structured financial products and investment
management products and services primarily to institutional customers. In
addition, there is a corporate and other segment. The Company's reportable
segments are strategic business units offering different products and services.
The reportable segments are managed separately, as they focus on different
products, markets or distribution channels.
In the Retail-Protection segment, the Company offers a variety of individual
life insurance and individual and group long-term care insurance products,
including participating whole life, term life, universal life, variable life,
and retail and group long-term care insurance. Products are distributed through
multiple distribution channels, including insurance agents and brokers and
alternative distribution channels that include banks, financial planners, direct
marketing and the Internet.
In the Retail-Asset Gathering segment, the Company offers individual annuities
and mutual fund products and services. Individual annuities consist of fixed
deferred annuities, fixed immediate annuities, single premium immediate
annuities, and variable annuities. Mutual fund products and services primarily
consist of open-end mutual funds, closed-end funds, and 401(k) services. This
segment distributes its products through distribution channels including
insurance agents and brokers affiliated with the Company, securities brokerage
firms, financial planners, and banks.
In the Institutional-Guaranteed and Structured Financial Products (G&SFP)
segment, the Company offers a variety of retirement products to qualified
defined benefit plans, defined contribution plans and non-qualified buyers. The
Company's products include guaranteed investment contracts, funding agreements,
single premium annuities, and general account participating annuities and fund
type products. These contracts provide non-guaranteed, partially guaranteed,
and fully guaranteed investment options through general and separate account
products. The segment distributes its products through a combination of
dedicated regional representatives, pension consultants and investment
professionals.
The Institutional-Investment Management segment offers a wide range of
investment management products and services to institutional investors covering
a variety of private and publicly traded asset classes including fixed income,
equity, mortgage loans, and real estate. The Investment Management segment
distributes its products through a combination of dedicated sales and marketing
professionals, independent marketing specialists, and investment professionals.
The Corporate and Other segment primarily consists of the Company's
international insurance operations, certain corporate operations, and businesses
that are either disposed or in run-off. Corporate operations primarily include
certain financing activities, income on capital not specifically allocated to
the reporting segments and certain non-recurring expenses not allocated to the
segments. The disposed businesses primarily consist of group health insurance
and related group life insurance, property and casualty insurance, and selected
broker/dealer operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Allocations of net investment
income are based on the amount of assets allocated to each segment. Other costs
and operating expenses are allocated to each segment based on a review of the
nature of such costs, cost allocations utilizing time studies, and other
relevant allocation methodologies.
F-41
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION - (CONTINUED)
Management of the Company evaluates performance based on segment after-tax
operating income which excludes the effect of net realized investment gains or
losses and unusual or non-recurring events and transactions. Segment after-tax
operating income is determined by adjusting GAAP net income for net realized
investment gains and losses, including gains and losses on disposals of
businesses, extraordinary items, and certain other items which management
believes are not indicative of overall operating trends. While these items may
be significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of after-tax operating
income enhances its understanding of the Company's results of operations by
highlighting net income attributable to the normal, recurring operations of the
business.
Amounts reported as segment adjustments in the tables below primarily relate to:
(i) certain realized investment gains (losses), net of related amortization
adjustment for deferred policy acquisition costs and amounts credited to
participating pension contractholder accounts. The adjustment for realized
investment gains (losses) excludes gains and losses from mortgage
securitizations and investments backing short-term funding agreements because
management views the related gains and losses as an integral part of the core
business of those operations; (ii) benefits to policyholders and expenses
incurred relating to the settlement of a class action lawsuit against the
Company involving certain individual life insurance policies sold from 1979
through 1996; (iii) restructuring costs related to our distribution systems,
retail operations and mutual fund operations; (iv) the surplus tax on mutual
life insurance companies which as a stock company will no longer be applicable
to the Company; (v) a fourth quarter charge for uncollectible reinsurance
related to certain assumed reinsurance business; (vi) a fourth quarter charge
for a group pension dividend resulting from demutualization related asset
transfers and the formation of a corporate account; (vii) a charge for certain
one time costs associated with the demutualization process; (viii) extraordinary
item and cumulative effect of accounting change; and (ix) benefits obtained in
1997 in connection with a participating pension reinsurance contract
modification.
F-42
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION - (CONTINUED)
The following table summarizes selected financial information by segment for the
year ended or as of December 31 and reconciles segment revenues and segment
after-tax operating income to amounts reported in the consolidated statements of
income (in millions):
RETAIL INSTITUTIONAL
RETAIL ASSET INSTITUTIONAL INVESTMENT CORPORATE
PROTECTION GATHERING G&SFP MANAGEMENT AND OTHER CONSOLIDATED
----------- ---------- -------------- -------------- ---------- ------------
1999
REVENUES:
Segment revenues........................... $ 2,903.0 $ 1,057.3 $ 2,194.0 $ 189.9 $ 1,310.5 $ 7,654.7
Realized investment gains (losses), net.... 173.5 (11.0) 93.3 3.1 (56.1) 202.8
-------------------------------------------------------------------------------
Revenues................................... 3,076.5 1,046.3 2,287.3 193.0 1,254.4 7,857.5
===============================================================================
Net investment income...................... $ 1,107.3 $ 388.6 $ 1,681.4 $ 45.9 $ 350.8 $ 3,574.0
NET INCOME:
Segment after-tax operating income......... 190.6 115.1 202.4 37.3 67.8 613.2
Realized investment gains (losses), net.... 108.5 (6.9) 58.4 2.0 (42.1) 119.9
Class action
lawsuit................................... - - - - (91.1) (91.1)
Restructuring charges...................... (8.6) (7.3) (0.6) - (0.5) (17.0)
Surplus tax................................ (12.5) (1.0) (6.5) - (2.2) (22.2)
Workers' compensation reinsurance reserve.. - - - - (133.7) (133.7)
Group pension dividend transfer............ - - (205.8) - - (205.8)
Other demutualization related costs........ (4.6) (0.9) (1.1) - (0.2) (6.8)
Extraordinary item......................... (61.3) (13.0) (16.1) - (3.2) (93.6)
CumuIative effect of accounting
change.................................... - (9.6) - (0.1) - (9.7)
-------------------------------------------------------------------------------
Net income................................. $ 212.1 $ 76.4 $ 30.7 $ 39.2 $ (205.2) $ 153.2
===============================================================================
SUPPLEMENTAL INFORMATION:
Inter-segment revenues..................... - - - 43.6 (43.6) -
Equity in net income of investees
accounted for by the equity method........ 46.2 (0.3) 14.3 3.5 1.4 65.1
Amortization of deferred policy
acquisition costs......................... 71.8 53.5 3.1 - 38.4 166.8
Interest expense........................... 0.7 6.2 - 5.3 57.9 70.1
Income tax expense (credit)................ 142.5 52.6 (7.8) 26.5 (111.9) 101.9
Segment assets............................. 25,378.4 14,297.2 30,231.5 3,531.4 11,017.2 84,455.7
NET REALIZED INVESTMENT GAINS DATA:
Net realized investment gains (losses).... $ 228.3 $ (16.1) $ 97.4 $ 6.6 $ (55.3) $ 260.9
Less amortization of deferred
policy acquisition costs related to
net realized investment (losses) gains... (54.8) 5.1 - - (0.8) (50.5)
Less amounts credited to participating
pension contractholder accounts.......... - - (35.3) - - (35.3)
-------------------------------------------------------------------------------
Net realized investment gains (losses),
net of related amortization of deferred
policy acquisition costs and amounts
credited to participating pension
contractholders--per consolidated
financial statements..................... 173.5 (11.0) 62.1 6.6 (56.1) 175.1
Less realized investment (losses) gains
attributable to mortgage
securitizations and investments
backing short-term funding
agreements............................... - - (31.2) 3.5 - (27.7)
Less gain on sale of business.............. - - - - (33.0) (33.0)
-------------------------------------------------------------------------------
Realized investment gains (losses),
net--pre-tax adjustment made to
calculate segment operating income........ 173.5 (11.0) 93.3 3.1 (89.1) 169.8
Less income tax effect..................... (65.0) 4.1 (34.9) (1.1) 47.0 (49.9)
-------------------------------------------------------------------------------
Realized investment gains (losses),
net--after-tax adjustment made to
calculate segment operating income........ $ 108.5 $ (6.9) $ 58.4 $ 2.0 $ (42.1) $ 119.9
===============================================================================
F-43
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION - (CONTINUED)
RETAIL INSTITUTIONAL
RETAIL ASSET INSTITUTIONAL INVESTMENT CORPORATE
PROTECTION GATHERING G&SFP MANAGEMENT AND OTHER CONSOLIDATED
----------- ---------- -------------- -------------- ---------- -------------
1998
REVENUES:
Segment revenues........................... $ 2,759.2 $ 1,015.3 $ 1,731.2 $ 143.9 $1,103.9 $ 6,753.5
Realized investment gains, net............. 75.6 18.3 30.7 0.2 23.7 148.5
----------------------------------------------------------------------------------
Revenues................................... $ 2,834.8 $ 1,033.6 $ 1,761.9 $ 144.1 $1,127.6 $ 6,902.0
==================================================================================
Net investment income...................... $ 1,063.9 $ 378.0 $ 1,576.3 $ 24.1 $ 288.4 $ 3,330.7
NET INCOME:
Segment after-tax operating income......... $ 172.3 $ 111.1 $ 145.7 $ 15.4 $ 56.3 $ 500.8
Realized investment gains, net............. 49.2 12.0 17.2 0.1 15.4 93.9
Class action lawsuit....................... - - - - (150.0) (150.0)
Surplus tax................................ 11.7 0.3 2.0 - 1.5 15.5
Extraordinary item......................... (7.9) (1.8) (1.5) - (0.5) (11.7)
----------------------------------------------------------------------------------
Net income................................. $ 225.3 $ 121.6 $ 163.4 $ 15.5 $ ( 77.3) $ 448.5
==================================================================================
SUPPLEMENTAL INFORMATION:
Inter-segment revenues..................... $ - $ - $ - $ 34.3 $ (34.3) $ -
Equity in net income of investees
accounted for by the equity method....... 54.9 - 12.7 0.9 1.5 70.0
Amortization of deferred policy
acquisition costs........................ 153.9 46.8 3.7 - 45.3 249.7
Interest expense........................... 0.3 8.5 - 7.0 60.9 76.7
Income tax expense (credit)................ 88.6 62.2 68.4 10.7 (46.0) 183.9
Segment assets............................. 25,703.7 12,715.7 29,315.2 3,439.6 5,792.5 76,966.7
NET REALIZED INVESTMENT GAINS DATA:
Net realized investment gains
(losses)................................... $ 113.2 $ 21.9 $ 72.1 $ (4.2) $ 23.7 $ 226.7
Less amortization of deferred
policy acquisition costs related
to net realized investment gains........... (37.6) (3.6) - - - (41.2)
Less amounts credited to participating
pension contractholder accounts - - (79.1) - - (79.1)
-----------------------------------------------------------------------------
Net realized investment gains
(losses), net of related amortization
of deferred policy acquisition costs
and amounts credited to participating
pension contractholders--per
consolidated financial statements.......... 75.6 18.3 (7.0) (4.2) 23.7 106.4
Less realized investment gains
(losses) attributable to mortgage
securitizations and investments
backing short-term funding
agreements................................. - - (37.7) (4.4) - (42.1)
-----------------------------------------------------------------------------
Realized investment gains, net--pre-
tax adjustment made to calculate
segment operating income................... 75.6 18.3 30.7 0.2 23.7 148.5
Less income tax effect...................... (26.4) (6.3) (13.5) (0.1) (8.3) (54.6)
-----------------------------------------------------------------------------
Realized investment gains, net--after-
tax adjustment made to calculate
segment operating income................... $ 49.2 $12.0 $ 17.2 $ 0.1 $15.4 $ 93.9
============================================================================
F-44
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION - (CONTINUED)
RETAIL INSTITUTIONAL
RETAIL ASSET INSTITUTIONAL INVESTMENT CORPORATE
PROTECTION GATHERING G&SFP MANAGEMENT AND OTHER CONSOLIDATED
----------- ---------- -------------- -------------- ---------- -----------
1997
REVENUES:
Segment revenues........................... $ 2,631.8 $ 904.9 $ 1,814.4 $ 118.5 $1,315.1 $ 6,784.7
Realized investment gains, net............. 82.3 6.8 7.6 0.1 64.8 161.6
------------------------------------------------------------------------------
Revenues................................... $ 2,714.1 $ 911.7 $ 1,822.0 $ 118.6 $1,379.9 $ 6,946.3
==============================================================================
Net investment income...................... $ 983.4 $ 353.3 $ 1,545.2 $ 4.0 $ 304.8 $ 3,190.7
NET INCOME:
Segment after-tax operating income......... $ 158.1 $ 93.3 $ 139.9 $ 17.2 $ 39.4 $ 447.9
Realized investment gains, net............. 53.5 4.4 4.8 0.1 42.1 104.9
Class action lawsuit....................... - - - - (112.5) (112.5)
Surplus tax................................ 16.9 0.3 5.5 - 12.6 35.3
Benefit from pension participating
contract modification..................... - - 7.7 - - 7.7
------------------------------------------------------------------------------
Net income................................. $ 228.5 $ 98.0 $ 157.9 $ 17.3 $ (18.4) $ 483.3
==============================================================================
SUPPLEMENTAL INFORMATION:
Inter-segment revenues..................... $ - $ - $ - $ 31.0 $ (31.0) $ -
Equity in net income of investees..........
accounted for by the equity method........ 42.3 - 8.8 0.8 2.7 54.6
Amortization of deferred policy
acquisition costs, excluding amounts
related to realized investment gains...... 224.7 38.9 5.2 - 43.2 312.0
Interest expense........................... 0.3 9.2 - 1.3 66.1 76.9
Income tax expense (credit)................ 90.2 43.9 55.2 13.0 ( 95.9) 106.4
Segment assets............................. 23,173.9 11,070.3 28,110.0 3,286.8 5,776.5 71,417.5
NET REALIZED INVESTMENT GAINS DATA:
Net realized investment gains
(losses).................................. $ 110.8 $ 9.5 $ 36.3 $ (3.9) $ 64.8 $ 217.5
Less amortization of deferred
policy acquisition costs related
to net realized investment gains.......... (28.5) (2.7) - - - (31.2)
Less amounts credited to participating
pension contractholder accounts........... - - (29.3) - - (29.3)
------------------------------------------------------------------------------
Net realized investment gains
(losses), net of related amortization
of deferred policy acquisition costs
and amounts credited to participating
pension contractholders--per
consolidated financial statements......... 82.3 6.8 7.0 (3.9) 64.8 157.0
Less realized investment gains
(losses) attributable to mortgage
securitizations and investments
backing short-term funding
agreements................................ - - (0.6) (4.0) - (4.6)
------------------------------------------------------------------------------
Realized investment gains, net--pre-tax
adjustment made to calculate segment
operating income.......................... 82.3 6.8 7.6 0.1 64.8 161.6
Less income tax effect..................... (28.8) (2.4) (2.8) - (22.7) (56.7)
------------------------------------------------------------------------------
Realized investment gains, net--after-tax
adjustment made to calculate segment
operating income.......................... $ 53.5 $ 4.4 $ 4.8 $ 0.1 $ 42.1 $ 104.9
==============================================================================
F-45
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 -- SEGMENT INFORMATION - (CONTINUED)
The Company operates primarily in the United States, Canada and the Pacific Rim
(Malaysia, Singapore, Thailand, Indonesia, and the Philippines). The following
table summarizes selected financial information by geographic location for the
year ended or at December 31:
INCOME BEFORE
INCOME TAXES,
EXTRAORDINARY
ITEM, AND CUMULATIVE
EFFECT OF
LONG-LIVED ACCOUNTING
LOCATION REVENUES ASSETS ASSETS CHANGE
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
1999
- ----
United States...................... $6,878.9 $440.0 $75,644.9 $310.2
Canada............................. 741.9 28.8 8,461.7 41.8
Foreign - other.................... 236.7 2.2 349.1 6.4
---------------------------------------------------------------------------------
$7,857.5 $471.0 $84,455.7 $358.4
=================================================================================
1998
- ----
United States...................... $6,161.4 $442.5 $71,744.6 $611.9
Canada............................. 512.0 24.9 4,941.6 30.2
Foreign - other.................... 228.6 2.1 280.5 2.0
---------------------------------------------------------------------------------
$6,902.0 $469.5 $76,966.7 $644.1
=================================================================================
1997
- ----
United States...................... $6,207.5 $445.8 $66,589.4 $566.8
Canada............................. 535.0 29.1 4,588.5 31.5
Foreign - other.................... 203.8 2.0 239.6 (8.6)
---------------------------------------------------------------------------------
$6,946.3 $476.9 $71,417.5 $589.7
=================================================================================
The Company has no reportable major customers and revenues are attributed to
countries based on the location of customers.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the fair value of the Company's financial instruments. The aggregate
fair value amounts presented herein do not represent the underlying value of the
Company and, accordingly, care should be exercised in drawing conclusions about
the Company's business or financial condition based on the fair value
information presented herein.
F-46
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The following methods and assumptions were used by the Company to determine the
fair values of financial instruments:
Fair values for publicly traded fixed maturities (including redeemable
preferred stocks) are obtained from an independent pricing service. Fair
values for private placement securities and fixed maturities not provided by
the independent pricing service are estimated by the Company by discounting
expected future cash flows using a current market rate applicable to the
yield, credit quality and maturity of the investments. The fair value for
equity securities is based on quoted market prices.
The fair value for mortgage loans on real estate is estimated using discounted
cash flow analyses using interest rates adjusted to reflect the credit
characteristics of the loans. Mortgage loans with similar characteristics and
credit risks are aggregated into qualitative categories for purposes of the
fair value calculations. Fair values for impaired mortgage loans are measured
based either on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the underlying
collateral for loans that are collateral dependent.
The carrying amount in the balance sheet for policy loans, short-term
investments and cash and cash equivalents approximates their respective fair
values.
The fair value of the Company's long-term debt is estimated using discounted
cash flows based on the Company's incremental borrowing rates for similar
types of borrowing arrangements. Carrying amounts for commercial paper and
short-term borrowings approximate fair value.
Fair values for the Company's guaranteed investment contracts are estimated
using discounted cash flow calculations based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued. The fair value for fixed-rate
deferred annuities is the cash surrender value, which represents the account
value less applicable surrender charges. Fair values for immediate annuities
without life contingencies and supplementary contracts without life
contingencies are estimated based on discounted cash flow calculations using
current market rates.
The Company's derivatives include futures contracts, interest rate swap, cap
and floor agreements, swaptions, currency rate swap agreements and equity
collar agreements. Fair values for these contracts are based on current
settlement values. These values are based on quoted market prices for the
financial futures contracts and brokerage quotes that utilize pricing models
or formulas using current assumptions for all swaps and other agreements.
The fair value for commitments approximates the amount of the initial
commitment.
F-47
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The following table presents the carrying amounts and fair values of the
Company's financial instruments:
DECEMBER 31
1999 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------------------- -----------------------
(in millions)
ASSETS:
Fixed maturities:
Held-to-maturity................................. $13,800.3 $13,448.4 $12,978.2 $13,921.7
Available-for-sale............................... 17,069.6 17,069.6 15,222.2 15,222.2
Equity securities:.................................
Available-for-sale............................... 1,232.1 1,232.1 995.8 995.8
Trading securities............................... 84.1 84.1 67.9 67.9
Mortgage loans on real estate...................... 10,736.4 10,685.2 9,616.1 10,204.4
Policy loans....................................... 1,938.8 1,938.8 1,879.7 1,879.7
Short-term investments............................. 166.9 166.9 279.8 279.8
Cash and cash equivalents.......................... 1,817.9 1,817.9 1,876.4 1,876.4
LIABILITIES:
Debt............................................... 990.7 962.8 1,030.5 1,077.2
Guaranteed investment contracts.................... 13,203.5 12,709.1 12,796.2 12,729.0
Fixed rate deferred and immediate annuities........ 4,801.1 4,656.9 4,458.4 4,367.5
Supplementary contracts
without life contingencies....................... 56.6 55.7 43.3 44.7
Derivatives assets/(liabilities) relating to:
Futures contracts, net............................. 31.3 31.3 (4.0) (4.0)
Interest rate swap agreements...................... 82.9 (18.3) (127.4) (175.3)
Interest rate cap agreements....................... 5.8 5.8 3.6 3.6
Interest rate floor agreements..................... 0.1 0.1 0.7 0.7
Interest rate swaption agreements.................. (3.6) (3.6) (1.9) (1.9)
Currency rate swap agreements...................... 9.1 (48.3) (19.5) 2.3
Equity collar agreements........................... 53.0 53.0 28.6 28.6
Commitments........................................... - (1,273.5) - (1,202.5)
NOTE 14-- SUBSEQUENT EVENTS
Reorganization and Initial Public Offering
In connection with the Mutual Company's Plan of Reorganization, effective
February 1, 2000, the Mutual Company converted from a mutual life insurance
company to a stock life insurance company (i.e., demutualized) and became a
wholly owned subsidiary of the Company, which is a holding company. All
policyholder membership interests in the Mutual Company were extinguished on
that date and eligible policyholders of the Mutual Company received, in the
aggregate, approximately 212.8 million shares of common stock, $1,438.7 million
of cash and $43.7 million policy credits as compensation. In connection with the
reorganization, the Mutual Company changed its name to John Hancock Life
Insurance Company.
F-48
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14-- SUBSEQUENT EVENTS - (CONTINUED)
In addition, on February 1, 2000, the Company completed its IPO and 102.0
million shares of common stock were issued at an initial public offering price
of $17.00 per share. Net proceeds from the offering were $1,657.7 million, of
which $105.7 million was retained by the Company and $1,552.0 million was
contributed to John Hancock Life Insurance Company.
Establishment of the Closed Block (Unaudited)
Under the plan of Reorganization, effective February 1, 2000, John Hancock Life
Insurance Company created a closed block for the benefit of policies included
therein. The policies included in the closed block are individual and joint
traditional whole life insurance policies of the Mutual Company that are paying
or are expected to pay dividends, and individual term life insurance policies
that were in force on February 1, 2000. The purpose of the closed block is to
protect the policy dividend expectations of these policies after the
demutualization. Unless the Massachusetts Commissioner of Insurance and, in
certain circumstances, the New York Superintendent of Insurance, consent to an
earlier termination, the closed block will continue in effect until the date
none of such policies is in force. Had the Closed Block been established as of
December 31, 1999, John Hancock Life Insurance Company would have segregated to
the Closed Block assets of $9,306.4 million that would be expected to produce
cash flows which, together with anticipated revenues from the policies included
in the closed block, would be expected to be reasonably sufficient to provide
for the payment of policy benefits, taxes, and direct asset acquisition cost,
and for continuation of policy dividend scales payable in 1999, if the
experience underlying such dividend scales continues. Had the Closed Block been
established as of December 31, 1999, total closed block liabilities would have
been $12,081.6 million.
Adoption of Incentive Stock Plan
On January 5, 2000 John Hancock Mutual Life Insurance Company, as sole
shareholder of John Hancock Financial Services, Inc., approved and adopted the
1999 Long-Term Stock Incentive Plan which had been originally approved by the
Board of Directors of John Hancock Financial Services, Inc. on August 31, 1999
(the "Plan"). Under the Plan which became effective on February 1, 2000, options
granted may be either non-qualified options or incentive stock options
qualifying under Section 422 of the Internal Revenue Code. The maximum number
shares of common stock available under the Plan is 5% of the total number of
shares of common stock that are outstanding following the initial public
offering of the common stock ("Total Shares Outstanding"). In addition, no more
than 4% of The Total Shares Outstanding shall be available for awards of
incentive stock options under the Plan, and no more than 1% of the Total Shares
Outstanding shall be available for stock awards. The aggregate number of shares
that may be covered by awards for any one participant over the period that the
Plan is in effect shall not exceed 1% of the Total Shares Outstanding. Subject
to these overall limits, there is no annual limit on the number of stock options
or stock awards which may be granted in any one year.
Acquisition of Long-term Care Business
On January 3, 2000, the Company signed an agreement to purchase the individual
long-term care insurance business of Fortis, Inc. The business to be acquired
had earned premiums of approximately $124.4 million in 1999 and included
approximately 97,000 policies in force as of December 31, 1999. During 1999 the
Company's individual long-term care earned premium was $276.6 million and
approximately 164,000 individual long-term care policies were in force.
NOTE 15 -- PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Subsequent to its IPO, the Company adopted SFAS No. 128, "Earnings per Share,"
which requires disclosure of basic and diluted earnings per share. Basic
earnings per shares excludes any dilutive effects of options, warrants or
convertible securities. Diluted earnings per share is very similar to the
previously required fully diluted earnings
F-49
JOHN HANCOCK FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 -- PRO FORMA EARNINGS PER SHARE (UNAUDITED) - (CONTINUED)
per share. For purposes of the Company's unaudited pro forma earnings per share
calculations, the weighted average number of shares outstanding during the year
was assumed to be 314.8 million shares, which represents 212.8 million shares
provided to eligible policyholders in connection with the demutualization and
102.0 million shares sold in the IPO.
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for 1999
and 1998:
1999
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
(IN MILLIONS)
Premiums.............................................. $ 554.3 $ 884.0 $ 595.0 $ 684.2
Net investment income................................. 843.3 873.6 864.1 993.0
Realized investment gains (losses), net of
related amortization of deferred policy
acquisition costs and amounts credited to
participating pension contractholders................ 101.8 140.0 (63.8) (2.9)
Investment management revenues,
commissions and other fees........................... 168.7 168.3 167.6 176.3
Total revenues........................................ 1,823.5 2,261.1 1,733.5 2,039.4
Benefits and expenses................................. 1,525.2 1,918.0 1,660.3 2,395.6
Income before income taxes, extraordinary
item and cumulative effect of accounting
change............................................... 298.3 343.1 73.2 (356.2)
Extraordinary item - demutalization expenses,
net.................................................. 9.5 21.2 25.9 37.0
Cumulative effect of accounting change, net........... 9.7 - - -
Net income............................................ 188.0 202.0 19.1 (255.9)
1998
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------
(IN MILLIONS)
Premiums.............................................. $ 559.6 $ 525.1 $ 563.0 $ 550.2
Net investment income................................. 801.7 831.3 808.4 889.3
Realized investment gains (losses), net of
related amortization of deferred policy
acquisition costs and amounts credited to
participating pension contractholders................ 27.1 86.3 (48.5) 41.5
Investment management revenues,
commissions and other fees........................... 156.5 170.7 160.7 171.8
Total revenues........................................ 1,686.8 1,765.2 1,633.8 1,816.2
Benefits and expenses................................. 1,486.4 1,476.6 1,485.6 1,809.3
Income before income taxes and
extraordinary item................................... 200.4 288.6 148.2 6.9
Extraordinary item - demutualization
expenses, net........................................ - 1.7 3.1 6.9
Net income............................................ 143.1 192.2 108.3 4.9
F-50
JOHN HANCOCK FINANCIAL SERVICES, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1999
(in millions of dollars)
AMOUNT AT WHICH
SHOWN IN THE
CONSOLIDATED
TYPE OF INVESTMENT COST (2) VALUE BALANCE SHEET
- ----------------------------------------------------------- ---------- -------- -----------------
Fixed maturity securities available-for-sale:
Bonds
United States Government and government agencies
and authorities....................................... $ 291.3 $ 283.2 $ 283.2
States, municipalities and political subdivisions...... 195.8 196.3 196.3
Foreign governments.................................... 1,525.3 1,555.2 1,555.2
Public utilities....................................... 1,196.7 1,197.2 1,197.2
Convertibles and bonds with warrants attached.......... 502.1 511.9 511.9
All other corporate bonds.............................. 12,920.4 12,693.9 12,693.9
Certificates of deposits................................... - - -
Redeemable preferred stock................................. 636.1 631.9 631.9
--------- --------- ---------
Total fixed maturity securities available-for-sale $17,267.7 $17,069.6 $17,069.6
--------- --------- ---------
Equity securities, available-for-sale:
Common stocks:
Public utilities....................................... $ 17.0 $ 19.0 $ 19.0
Banks, trust and insurance companies................... 8.8 11.5 11.5
Industrial, miscellaneous and all other................ 707.0 917.3 917.3
Non-redeemable preferred stock......................... 355.3 284.3 284.3
--------- --------- ---------
Total equity securities available-for-sale $ 1,088.1 $ 1,232.1 $ 1,232.1
--------- --------- ---------
Fixed maturity securities held-to-maturity:
Bonds:
United States Government and government agencies
and authorities....................................... $ 14.1 $ 13.7 $ 14.1
States, municipalities and political subdivisions...... 915.4 858.3 915.4
Foreign governments.................................... 5.0 10.0 5.0
Public utilities....................................... 1,177.5 1,128.2 1,177.5
Convertibles and bonds with warrants attached.......... 236.3 235.3 236.3
All other corporate bonds.............................. 11,452.0 11,202.9 11,452.0
Certificates of deposits -
Redeemable preferred stock -
--------- --------- ---------
Total fixed maturity securities held-to-maturity $13,800.3 $13,448.4 $13,800.3
--------- --------- ---------
Equity securities, trading:
Common stocks:
Public utilities....................................... $ 5.3 $ 12.7 $ 12.7
Banks, trust and insurance companies................... 7.6 11.7 11.7
Industrial, miscellaneous and all other................ 40.9 59.7 59.7
Non-redeemable preferred stock......................... -
--------- --------- ---------
Total equity securities trading $ 53.8 $ 84.1 $ 84.1
--------- --------- ---------
Mortgage loans on real estate (1).......................... $10,846.8 xxxx $10,736.4
Real estate, net:
Investment properties (1)................................ 415.2 xxxx 398.3
Acquired in satisfaction of debt (1)..................... 191.4 xxxx 150.2
Policy loans............................................... 1,938.8 xxxx 1,938.8
Other long-term investments................................ 1,311.1 xxxx 1,311.1
Short-term investments..................................... 166.9 xxxx 166.9
--------- --------- ---------
Total investments $47,080.1 xxxx $46,887.8
========= ========= =========
(1) Difference is due to valuation allowances on mortgage loans on real estate
and real estate. See note 3 to the consolidated financial statements.
(2) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or accrual
of discounts.
F-51
JOHN HANCOCK FINANCIAL SERVICES, INC. and SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1999, 1998 and 1997 and for each of the years then ended
(in millions of dollars)
FUTURE POLICY OTHER POLICY
BENEFITS, LOSSES, CLAIMS AND
DEFERRED POLICY CLAIMS AND LOSS UNEARNED BENEFITS PREMIUM
SEGMENT ACQUISITION COSTS EXPENSES PREMIUMS (1) PAYABLE (1) REVENUE
1999:
Protection $ 2,383.8 $ 15,035.0 $ 217.4 $ 112.1 $ 1,431.7
Asset Gathering 521.5 5,166.8 - 0.2 17.2
Guaranteed & Structured Financial
Products 8.4 20,310.4 56.1 0.5 463.7
Investment Management - - - - -
Corporate & Other 321.2 6,629.1 216.7 246.1 804.9
----------------- ---------------- ------------ ----------- ---------
Total $ 3,234.9 $ 47,141.3 $ 490.2 $ 358.9 $ 2,717.5
----------------- ---------------- ------------ ----------- ---------
1998:
Protection $ 2,073.8 $ 14,093.6 $ 219.5 $ 85.5 $ 1,351.4
Asset Gathering 425.2 4,850.0 - 0.2 19.8
Guaranteed & Structured Financial
Products 8.7 19,366.4 48.4 0.3 121.4
Investment Management - - - - -
Corporate & Other 251.0 3,865.0 105.9 800.3 705.3
----------------- ---------------- ------------ ----------- ---------
Total $ 2,758.7 $ 42,175.0 $ 373.8 $ 886.3 $ 2,197.9
----------------- ---------------- ------------ ----------- ---------
1997:
Protection $ 1,957.6 $ 13,001.7 $ 200.5 $ 82.0 $ 1,343.0
Asset Gathering 376.7 4,765.1 - 0.1 55.0
Guaranteed & Structured Financial
Products 10.0 18,306.9 46.9 0.3 201.0
Investment Management - - - - -
Corporate & Other 218.7 3,795.9 93.1 875.5 874.6
----------------- ---------------- ------------ ----------- ---------
Total $ 2,563.0 $ 39,869.6 $ 340.5 $ 957.9 $ 2,473.6
----------------- ---------------- ------------ ----------- ---------
AMORTIZATION OF
DEFERRED POLICY
ACQUISITION COSTS,
BENEFITS, CLAIMS, EXCLUDING
LOSSES, AND AMOUNTS RELATED OTHER
NET INVESTMENT SETTLEMENT TO REALIZED OPERATING
SEGMENT INCOME EXPENSES INVESTMENT GAINS EXPENSES
1999:
Protection $ 1,107.3 $ 1,709.4 $ 71.8 $ 427.3
Asset Gathering 388.6 299.3 53.5 542.1
Guaranteed & Structured Financial
Products 1,681.4 2,130.9 3.1 88.3
Investment Management 45.9 - - 127.2
Corporate & Other 350.8 1,278.8 38.4 227.4
----------------- ---------------- ------------ -----------
Total $ 3,574.0 $ 5,418.4 $ 166.8 $ 1,412.3
----------------- ---------------- ------------ -----------
1998:
Protection $ 1,063.9 $ 1,493.8 $ 153.9 $ 442.4
Asset Gathering 378.0 296.3 46.8 504.9
Guaranteed & Structured Financial
Products 1,576.3 1,411.5 3.7 92.6
Investment Management 24.1 - - 117.8
Corporate & Other 288.4 950.4 45.3 225.3
----------------- ---------------- ------------ -----------
Total $ 3,330.7 $ 4,152.0 $ 249.7 $ 1,383.0
----------------- ---------------- ------------ -----------
1997:
Protection $ 983.4 $ 1,399.1 $ 224.7 $ 375.7
Asset Gathering 353.3 314.5 38.9 416.2
Guaranteed & Structured Financial
Products 1,545.2 1,481.1 5.2 81.0
Investment Management 4.0 - - 88.4
Corporate & Other 304.8 1,108.4 43.2 322.4
----------------- ---------------- ------------ -----------
Total $ 3,190.7 $ 4,303.1 $ 312.0 $ 1,283.7
----------------- ---------------- ------------ -----------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
F-52
JOHN HANCOCK FINANCIAL SERVICES, INC. and SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
As of December 31, 1999, 1998 and 1997 and for each of the years then ended:
(IN MILLIONS OF DOLLARS)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
-------------- -------------- -------------- -------------- --------------
1999
Life insurance in force $ 409,233.9 $ 83,232.3 $ 29,214.6 $ 355,216.2 8.2%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 2,292.8 $ 302.0 $ 139.4 $ 2,130.2 6.5%
Accident and health insurance 1,142.4 728.5 173.1 587.0 29.5%
P&C - - 0.3 0.3 100.0%
-------------- -------------- -------------- -------------- --------------
Total $ 3,435.2 $ 1,030.5 $ 312.8 $ 2,717.5 $ 11.5%
============== ============== ============== ============== ==============
1998
Life insurance in force $ 353,807.8 $ 88,662.6 $ 29,210.1 $ 294,355.3 9.9%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 1,871.9 $ 327.6 $ 221.0 $ 1,765.3 12.5%
Accident and health insurance 956.5 654.8 130.9 432.6 30.3%
P&C 7.1 9.0 1.9 - 0.0%
-------------- -------------- -------------- -------------- --------------
Total $ 2,835.5 $ 991.4 $ 353.8 $ 2,197.9 16.1%
============== ============== ============== ============== ==============
1997
Life insurance in force $ 371,627.9 $ 82,752.3 $ 1,411.6 $ 290,287.2 0.5%
============== ============== ============== ============== ==============
Premiums:
Life insurance $ 2,177.7 $ 452.7 $ 287.2 $ 2,012.2 14.3%
Accident and health insurance 752.1 421.3 129.9 460.7 28.2%
P&C 65.0 70.5 6.2 0.7 885.7%
-------------- -------------- -------------- -------------- --------------
Total $ 2,994.8 $ 944.5 $ 423.3 $ 2,473.6 17.1%
============== ============== ============== ============== ==============
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and excludes
deposits on investment products and universal life insurance products.
See accompanying independent auditors' report.
F-53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JOHN HANCOCK FINANCIAL SERVICES, INC.
By: /s/ Thomas E. Moloney
------------------------
Thomas E. Moloney
Chief Financial Officer
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------------ --------------------
/s/ Stephen L. Brown Chairman of the Board, Chief March 24, 2000
- ------------------------------ Executive Officer and Director
Stephen L. Brown
* Vice Chairman of the Board, Chief March 24, 2000
- ------------------------------ Investment Officer and Director
Foster L. Aborn
* President and Chief Operations March 24, 2000
- ------------------------------ Officer and Director
David F. D'Alessandro
* Director March 24, 2000
- ------------------------------
Samuel W. Bodman
* Director March 24, 2000
- ------------------------------
I. MacAllister Booth
* Director March 24, 2000
- ------------------------------
Wayne A. Budd
* Director March 24, 2000
- ------------------------------
John M. Connors, Jr.
* Director March 24, 2000
- ------------------------------
Robert E. Fast, Esq.
* Director March 24, 2000
- ------------------------------
Dr. Kathleen Foley Feldstein
* Director March 24, 2000
- ------------------------------
Nelson S. Gifford
* Director March 24, 2000
- ------------------------------
Michael C. Hawley
* Director March 24, 2000
- ------------------------------
Edward H. Linde
* Director March 24, 2000
- ------------------------------
Judith A. McHale
* Director March 24, 2000
- ------------------------------
Richard F. Syron
* Director March 24, 2000
- ------------------------------
Robert J. Tarr, Jr.
* By: /s/ Thomas E. Moloney March 24, 2000
---------------------------
Thomas E. Moloney
Attorney-in-Fact