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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number: 333-45862
JOHN HANCOCK LIFE INSURANCE COMPANY
Exact name of registrant as specified in charter
MASSACHUSETTS 04-1414660
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
John Hancock Place
Boston, Massachusetts 02117
(Address of principal executive offices)
(617) 572-6000
(Registrant's telephone number, including area code)
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 [X] No [ ]
Number of shares outstanding of our only class of common stock as of
November 8, 2002:
1,000
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
September 30,
2002 December 31,
(Unaudited) 2001
----------------------------
(in millions)
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: September 30--$1,865.7; December 31--$1,908.2) .. $ 1,806.3 $ 1,923.5
Available-for-sale--at fair value
(cost: September 30--$40,056.1; December 31--$35,778.0) ...... 40,645.0 36,072.1
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$306.9; December 31--$433.1) ............ 354.0 562.3
Trading securities--at fair value
(cost: September 30--$0.9; December 31--$2.7) ................ 0.8 1.4
Mortgage loans on real estate ..................................... 10,311.3 9,667.0
Real estate ....................................................... 291.7 380.4
Policy loans ...................................................... 1,937.1 1,927.0
Short-term investments ............................................ 24.8 78.6
Other invested assets ............................................. 2,212.6 1,676.9
--------- ---------
Total Investments ........................................ 57,583.6 52,289.2
Cash and cash equivalents ......................................... 708.3 1,025.3
Accrued investment income ......................................... 808.0 745.9
Premiums and accounts receivable .................................. 229.1 117.2
Deferred policy acquisition costs ................................. 3,272.5 3,186.3
Reinsurance recoverable ........................................... 2,868.8 2,464.3
Other assets ...................................................... 2,525.3 2,298.4
Separate account assets ........................................... 16,382.9 18,998.1
--------- ---------
Total Assets ............................................. $84,378.5 $81,124.7
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
September 30,
2002 December 31,
(Unaudited) 2001
----------------------------
(in millions)
Liabilities and Shareholder's Equity
Liabilities
Future policy benefits............................................. $32,667.9 $29,715.0
Policyholders' funds............................................... 22,095.5 20,530.3
Unearned revenue................................................... 356.2 346.0
Unpaid claims and claim expense reserves........................... 155.3 203.8
Dividends payable to policyholders................................. 474.1 472.8
Short-term debt.................................................... 98.7 124.6
Long-term debt..................................................... 598.5 618.7
Income taxes....................................................... 884.9 803.9
Other liabilities.................................................. 4,670.0 3,675.5
Separate account liabilities....................................... 16,382.9 18,998.1
--------- ---------
Total Liabilities......................................... 78,384.0 75,488.7
Minority interest.................................................. 28.8 28.8
Commitments and contingencies - Note 4
Shareholder's Equity
Common stock, $10,000 par value; 1,000 shares authorized........... 10.0 10.0
Additional paid in capital......................................... 4,763.2 4,763.4
Retained earnings.................................................. 863.9 608.2
Accumulated other comprehensive income............................. 328.6 225.6
--------- ---------
Total Shareholder's Equity................................ 5,965.7 5,607.2
--------- ---------
Total Liabilities and Shareholder's Equity................ $84,378.5 $81,124.7
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------
(in millions)
Revenues
Premiums ....................................................................... $ 482.9 $ 435.4 $1,432.2 $1,362.0
Universal life and investment-type product charges ............................. 160.7 148.9 459.0 444.3
Net investment income .......................................................... 878.4 920.3 2,654.9 2,752.2
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs, amounts credited to
participating pension contractholders and the policyholder dividend
obligation ($25.8 and $21.7 for the three months ended September 30, 2002
and 2001 and $(9.1) and $12.1 for the nine months
ended September 30, 2002 and 2001, respectively) ............................ (37.8) (58.9) (249.3) (96.5)
Investment management revenues, commissions and other fees ..................... 120.1 139.1 391.5 436.5
Other revenue .................................................................. 54.2 54.6 173.7 113.2
-------------------- --------------------
Total revenues ........................................................... 1,658.5 1,639.4 4,862.0 5,011.7
Benefits and Expenses
Benefits to policyholders, excluding amounts related to net realized
investment and other gains (losses) credited to participating pension
contractholders and the policyholder dividend obligation ($10.9 and $22.7
for the three months ended September 30, 2002 and 2001 and $0.4 and $14.4
for the nine months ended September 30, 2002
and 2001, respectively) ..................................................... 937.6 946.4 2,806.1 2,852.3
Other operating costs and expenses ............................................. 281.7 285.5 906.2 896.1
Amortization of deferred policy acquisition costs, excluding amounts
related to net realized investment and other gains (losses) ($14.9 and
$(1.0) for the three months ended September 30, 2002 and
2001and $(9.5) and $(2.3) for the nine months ended September 30,
2002 and 2001, respectively) ................................................ 135.1 66.4 257.6 193.4
Dividends to policyholders ..................................................... 135.7 122.2 417.5 392.8
-------------------- --------------------
Total benefits and expenses .............................................. 1,490.1 1,420.5 4,387.4 4,334.6
-------------------- --------------------
Income before income taxes and cumulative effect
of accounting changes ...................................................... 168.4 218.9 474.6 677.1
Income taxes ...................................................................... 35.1 60.2 107.9 195.1
-------------------- --------------------
Income before cumulative effect of accounting changes ............................. 133.3 158.7 366.7 482.0
Cumulative effect of accounting changes, net of tax - Note 1 ...................... -- -- -- 7.2
-------------------- --------------------
Net income ........................................................................ $ 133.3 $ 158.7 $ 366.7 $ 489.2
==================== ====================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
----------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at July 1, 2001..................... $ 10.0 $ 4,764.1 $ 364.8 $ 294.0 $ 5,432.9 1,000
Demutualization transaction................. (0.3) (0.3)
Comprehensive income:
Net income............................. 158.7 158.7
Other comprehensive income, net of tax:
Net unrealized gains (losses)........ 6.8 6.8
Net accumulated gains (losses) on
cash flow hedges................... 34.2 34.2
Foreign currency translation
adjustment......................... 0.4 0.4
-----------
Comprehensive income........................ 200.1
-----------------------------------------------------------------------------
Balance at September 30, 2001............... $ 10.0 $ 4,763.8 $ 523.5 $ 335.4 $ 5,632.7 1,000
=============================================================================
Balance at July 1, 2002..................... $ 10.0 $ 4,763.2 $ 730.6 $ 274.4 $ 5,778.2 1,000
Comprehensive income:
Net income............................. 133.3 133.3
Other comprehensive income, net of tax:
Net unrealized gains (losses)........ (108.4) (108.4)
Net accumulated gains (losses) on
cash flow hedges................... 161.6 161.6
Foreign currency translation
adjustment......................... (0.2) (0.2)
Minimum pension liability.............. 1.2 1.2
-----------
Comprehensive income........................ 187.5
-----------------------------------------------------------------------------
Balance at September 30, 2002............... $ 10.0 $ 4,763.2 $ 863.9 $ 328.6 $ 5,965.7 1,000
=============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME - (CONTINUED)
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
--------------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at January 1, 2001................... $ 10.0 $ 4,764.6 $ 284.3 $ 66.7 $ 5,125.6 1,000
Demutualization transactions................. (0.8) (0.8)
Comprehensive income:
Net income.............................. 489.2 489.2
Other comprehensive income, net of tax:
Net unrealized gains (losses)......... 25.8 25.8
Net accumulated gains (losses) on
cash flow hedges.................... 14.2 14.2
Foreign currency translation
adjustment.......................... 1.1 1.1
--------------
Comprehensive income......................... 530.3
Dividend paid to parent company.............. (250.0) (250.0)
Change in accounting principle -- Note 1..... 227.6 227.6
--------------------------------------------------------------------------------
Balance at September 30, 2001................ $ 10.0 $ 4,763.8 $ 523.5 $ 335.4 $ 5,632.7 1,000
================================================================================
Balance at January 1, 2002................... $ 10.0 $ 4,763.4 $ 608.2 $ 225.6 $ 5,607.2 1,000
Demutualization transactions................. (0.2) (0.2)
Comprehensive income:
Net income.............................. 366.7 366.7
Other comprehensive income, net of tax:
Net unrealized gains (losses)......... (78.1) (78.1)
Net accumulated gains (losses) on
cash flow hedges.................... 177.4 177.4
Minimum pension liability............... 3.7 3.7
--------------
Comprehensive income......................... 469.7
Dividend paid to parent company.............. (111.0) (111.0)
--------------------------------------------------------------------------------
Balance at September 30, 2002................ $ 10.0 $ 4,763.2 $ 863.9 $ 328.6 $ 5,965.7 1,000
================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2002 2001
-----------------------
(in millions)
Cash flows from operating activities:
Net income ......................................................................... $ 366.7 $ 489.2
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discount - fixed maturities ...................................... (61.3) (100.9)
Net realized investment and other losses ......................................... 249.3 96.5
Change in deferred policy acquisition costs ...................................... (118.1) (127.6)
Depreciation and amortization .................................................... 37.9 54.6
Net cash flows from trading securities ........................................... 0.6 0.2
Increase in accrued investment income ............................................ (62.1) (105.8)
Premiums and accounts receivable ................................................. (111.9) 19.3
Increase in other assets and other liabilities, net .............................. (107.2) (400.3)
Increase in policy liabilities and accruals, net ................................. 1,498.2 1,610.4
Increase in income taxes ......................................................... 29.1 232.6
--------- ---------
Net cash provided by operating activities .................................... 1,721.2 1,768.2
Cash flows from investing activities:
Sales of:
Fixed maturities available-for-sale .............................................. 3,136.7 14,144.0
Equity securities available-for-sale ............................................. 289.1 315.5
Real estate ...................................................................... 68.4 0.9
Short-term investments and other invested assets ................................. 88.8 108.4
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity ................................................ 130.0 179.3
Fixed maturities available-for-sale .............................................. 2,157.5 2,254.7
Short-term investments and other invested assets ................................. 145.0 145.3
Mortgage loans on real estate .................................................... 882.2 988.6
Purchases of:
Fixed maturities held-to-maturity ................................................ (11.8) (31.9)
Fixed maturities available-for-sale .............................................. (9,392.8) (22,306.4)
Equity securities available-for-sale ............................................. (91.3) (121.5)
Real estate ...................................................................... (8.3) (5.1)
Short-term investments and other invested assets ................................. (537.8) (341.2)
Mortgage loans on real estate issued ............................................... (1,456.2) (873.1)
Net cash paid related to acquisition of business ................................... -- (28.2)
Other, net ......................................................................... (139.1) 300.8
--------- ---------
Net cash used in investing activities ........................................ $(4,739.6) $(5,269.9)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Nine Months Ended
September 30,
2002 2001
-----------------------
(in millions)
Cash flows from financing activities:
Dividends paid to parent company ................................................... $ (111.0) $ (250.0)
Universal life and investment-type contract deposits ............................... 6,984.2 8,150.5
Universal life and investment-type contract maturities and withdrawals ............. (4,128.6) (6,032.1)
Issuance of long-term debt ......................................................... -- 6.5
Issuance of short-term debt ........................................................ 69.0 105.4
Repayment of short-term debt ....................................................... (91.6) --
Repayment of long-term debt ........................................................ (20.6) (14.0)
Net increase in commercial paper ................................................... -- (222.2)
--------- ---------
Net cash provided by financing activities ...................................... 2,701.4 1,744.1
--------- ---------
Net decrease in cash and cash equivalents ...................................... (317.0) (1,757.6)
Cash and cash equivalents at beginning of year ................................. 1,025.3 2,966.3
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 708.3 $ 1,208.7
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
8
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Business
John Hancock Life Insurance Company, (the Company) is a diversified financial
services organization that provides a broad range of insurance and investment
products and investment management and advisory services. The Company is a
wholly owned subsidiary of its Parent John Hancock Financial Services, Inc.
(JHFS, or, the Parent).
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, these unaudited consolidated financial statements contain all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair presentation of the Company's financial position and results of
operations. Operating results for the three and nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. These unaudited consolidated
financial statements should be read in conjunction with the Company's annual
audited financial statements as of December 31, 2001 included in the Company's
Form 10-K for the year ended December 31, 2001 filed with the United States
Securities and Exchange Commission (hereafter referred to as the Company's 2001
Form 10-K). All of the Company's United States Securities and Exchange
Commission filings are available on the internet at www.sec.gov, under the name
Hancock John Life.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
During the fourth quarter of 2001, the Company transferred its remaining
ownership interest of both John Hancock Canadian Holdings Limited and certain
other international subsidiaries held by the Company, with a combined carrying
value at December 31, 2001 of $300.1 million, to JHFS in the form of a dividend.
The transfer has been accounted for as a transfer of entities under common
control. As a result of the transfer, all prior period consolidated financial
data has been restated to exclude the results of operations, financial position,
and cash flows of these transferred foreign subsidiaries from the Company's
financial statements. No gain or loss was recognized on the transaction.
On April 2, 2001, a subsidiary of the Company, Signature Fruit Company, LLC
(Signature Fruit) purchased certain assets and assumed certain liabilities out
of bankruptcy proceedings of Tri Valley Growers, Inc., a cooperative
association, for approximately $53.0 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. The unaudited pro forma
revenues, for the three and nine month periods ended September 30, 2001,
assuming the transaction had taken place at the beginning of the year of
acquisition, were approximately $1,692.7 million and $5,065.0 million, changes
of $53.3 million and $53.3 million, respectively, from reported balances. The
unaudited pro forma net income for the three and nine month periods ended
September 30, 2001 was approximately $157.5 million and $488.0 million, changes
of $(1.2) million and $(1.2) million from reported balances, respectively. The
net losses related to the acquired operations included in the Company's results
for the three and nine month periods ended September 30, 2002 were $(2.3)
million and $(3.6) million, respective.
9
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
Deferred Policy Acquisition Costs and Unearned Revenue
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. The Company tests the recoverability of its deferred
policy acquisition costs quarterly with a model that uses data such as market
performance, lapse rates and expense levels. As of September 30, 2002, the
Company's deferred policy acquisition costs are deemed recoverable. Similarly,
any amounts assessed for services to be provided over future periods are
recorded as unearned revenue. For non-participating term life and long-term care
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 benefits reserves. 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 and revenues are being amortized generally
in proportion to the present value of expected gross profits arising principally
from surrender charges, investment results, and mortality and expense margins.
In the development of expected gross profits, the Company is required to
estimate the growth in the policyholder account balances upon which certain
asset based fees are charged. In doing so, the Company assumes that, over the
long term, account balances will grow from investment performance. The rate of
growth takes into account the current fixed income/equity mix of account
balances as well as historical fixed income and equity returns. The Company also
assumes that historical variances from the long term rate will reverse over the
next five year period. The resulting rates for the next five years are reviewed
for reasonableness, and they are raised or lowered if they produce an annual
growth rate that the Company believes to be unreasonable.
The effects on the amortization of deferred policy acquisition costs and
unearned revenues of revisions to estimated gross margins and profits are
reflected in earnings in the period such revisions are made expected gross
profits or expected gross margins are discounted at periodically revised
interest rates and are applied to the remaining benefit period. At September 30,
2002, the average discount rate was 8.4% for participating traditional life
insurance products and 6.2% for universal life products, and the total
amortization period life was 30 years for both participating traditional life
insurance products and universal life products.
As of September 30, 2002, the Company changed several future assumptions with
respect to the expected gross profits in its variable life and variable annuity
business. First, we lowered the long-term growth rate assumption from 9%, to 8%,
gross of fees. Second, we lowered the average rates for the next five years from
the mid-teens to 13%. Finally, we increased certain fee rates on these policies
(the variable series trust (VST) fee increase). These three changes are referred
to collectively elsewhere in this document as the Q3 unlocking The result of
these changes in assumptions at September 30, 2002 was a net write-off of
deferred policy acquisition costs of $36.1 million in the variable annuity
business in the Asset Gathering Segment and $13.1 million (net of $12.3 million
of unearned revenue and $2.5 million in policy benefit reserves) in the variable
life business in the Protection Segment. The impact on net income of the Q3
unlocking was approximately $27.5 million. Total amortization of deferred policy
acquisition costs, including the write-offs mentioned previously, was $135.1
million and $66.2 million for the three month periods ended September 30, 2002
and 2001, respectively, and $257.6 million and $193.4 million for the nine month
periods ended September 30, 2002 and 2001, respectively.
Amortization of deferred policy acquisition costs is allocated to: (1) net
realized investment and other gains (losses) for those products in which such
gains (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 assets 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.
10
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
Net realized investment and other gains (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 net realized
investment and other gains (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.
Severance
During the three and nine month periods ended September 30, 2002, the Company
continued its ongoing Competitive Position Project. This project was initiated
in the first quarter of 1999 to reduce costs and increase future operating
efficiency by consolidating portions of the Company's operations and is expected
to continue through 2003. The project consists primarily of reducing staff in
the home office and terminating certain operations outside the home office.
Since the inception of the project, approximately 1,280 employees have been
terminated. As of September 30, 2002 and December 31, 2001, the liability for
employee termination costs, included in other liabilities was $11.8 million and
$18.0 million, respectively. Employee termination costs net of related pension
and other post employment benefit curtailment gains, are included in other
operating costs and expenses and were $6.6 million and $2.6 million for the
three month periods ended September 30, 2002 and 2001 and $15.0 million and
$33.2 million for nine month periods ended September 30, 2002 and 2001,
respectively. Benefits paid since the inception of the project were $94.5
million through September 30, 2002.
Cumulative Effect of Accounting Changes
During the first quarter of 2001, the Company changed the method of accounting
for the recognition of deferred gains and losses considered in the calculation
of the annual expense for its employee pension plan under Statement of Financial
Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions," and
for its postretirement health and welfare plans under SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Company changed
the method of recognizing gains and losses from deferral within a 10% corridor
and amortization of gains (losses) outside this corridor over the future working
careers of the participants to a deferral within a 5% corridor and amortization
of gains and losses outside this corridor over the future working careers of the
participants. The new method is preferable because in the Company's situation,
it produces results that respond more quickly to changes in the market value of
the plan assets while providing some measure to mitigate the impact of extreme
short term swings in those market values. As a result, the Company recorded a
credit of $18.6 million (net of tax of $9.9 million), related to its employee
benefit pension plans, and a credit of $4.7 million (net of tax of $2.6
million), related to its postretirement health and welfare plans. The total
credit recorded as a cumulative effect of an accounting change was $23.3 million
(net of tax of $12.5 million).
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement 133." The adoption of SFAS No. 133, as amended, resulted in a
charge to operations accounted for as a cumulative effect of accounting change
of $16.1 million (net of tax benefit of $8.3 million) as of January 1, 2001. In
addition, as of January 1, 2001, a $227.6 million (net of tax of $122.6 million)
cumulative effect of accounting change was recorded in accumulated other
comprehensive income for (1) the transition adjustment in the adoption of SFAS
No. 133, as amended, an increase of $40.5 million (net of tax of $21.8 million),
and (2) the reclassification of $12.1 billion in securities from the
held-to-maturity category to the available-for-sale category, an increase of
$187.1 million (net of tax of $100.8 million).
Recent Accounting Pronouncements
On October 1, 2002, the FASB issued SFAS No. 146 - "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires recognition
of liabilities for exit or disposal costs, including restructuring costs, when
the costs are actually incurred, instead of when a formal plan of action is
committed to. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company's Competitive Positioning Project
is expected to continue through at least 2003. The Company intends to continue
its restructuring activities in 2003, however, the Company cannot estimate the
amounts, or the timing of recognition, of these future restructuring
liabilities, nor can it estimate the impact of any changes to the timing of
recognition of these liabilities as a result of adopting SFAS No. 146 in 2003.
11
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and other intangible
assets deemed to have indefinite lives no longer be amortized to earnings, but
instead be reviewed at least annually for impairment. Intangible assets with
definite lives will continue to be amortized over their useful lives. The
Company has performed the required initial impairment tests of goodwill as of
January 1, 2002 based on the guidance in SFAS No. 142. The Company evaluated the
goodwill of each reporting unit for impairment using valuations of reporting
units based on earnings and book value multiples and by reference to similar
multiples of publicly traded peers. No goodwill impairments resulted from these
required impairment tests. The Company plans on performing the first annual
goodwill impairment tests in the fourth quarter of 2002.
In December 2000, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises
for Demutualizations and Formations of Mutual Insurance Holding Companies and
Certain Long-Duration Participating Contracts." The SOP details accounting
requirements for the demutualization of mutual insurance companies. The SOP
required demutualized insurance companies to standardize the presentation of
demutualization expenses and presentation of the closed block in their financial
statements. The adoption of SOP 00-3 also resulted in the recognition of a
policyholder dividend obligation, which represents cumulative actual closed
block earnings in excess of expected periodic amounts calculated at the date of
the demutualization. Adoption of SOP 00-3 resulted in a decrease of net income
of $5.9 million and $3.4 million, for the three and nine month periods ended
September 30, 2001, respectively. Previously reported net income for the three
month period ended September 30, 2001 included net investment income and net
realized investment and other gains (losses) that were better than expected at
the date of demutualization, offset by lower than expected gains from mortality
and lapse. Previously reported net income for the nine month period ended
September 30, 2001 included better than expected net investment income and
mortality and lapse experience, offset by lower net realized investment and
other gains (losses).
12
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 -- Related Party Transactions
Certain directors of the Company are members or directors of other entities that
periodically perform services for or have other transactions with Company. Such
transactions are either subject to bidding procedures or are otherwise entered
into on terms comparable to those that would be available to unrelated third
parties and are not material to the Company's results of operations or financial
condition.
The Company provides JHFS with personnel, property, and facilities in carrying
out certain of its corporate functions. The Company annually determines a fee
(the parent company service fee) for these services and facilities based on a
number of criteria, which are periodically revised to reflect continuing changes
in the Company's operations. The parent company service fee is included in other
operating costs and expenses within the Company's income statements. The Company
charged JHFS a service fee of $5.3 million and $5.9 million for the three month
periods ended September 30, 2002 and 2001, respectively and $17.1 million and
$22.6 million for the nine month periods ended September 30, 2002 and 2001,
respectively. As of September 30, 2002, JHFS was current in its payment to the
Company related to these services.
During the nine month period ended September 30, 2002, the Company purchased
$100.0 million of corporate owned life insurance (COLI) from an affiliate and
wholly owned subsidiary of JHFS, John Hancock Insurance Company of Vermont (JHIC
of Vermont), to provide insurance coverage on key management employees. The
death benefit on this COLI product would cover the cost of replacing these
employees, including recruiting, training, and development. There were no such
purchases for the three months ended September 30, 2002.
The Company has reinsured certain portions of its long term care insurance and
group pension businesses with John Hancock Reassurance Company, Ltd. of Bermuda
(JHReCo), an affiliate and wholly owned subsidiary of JHFS. The Company entered
into these reinsurance contracts in order to facilitate its capital management
process. These reinsurance contracts are primarily written on a funds withheld
basis where the related financial assets remain invested at the Company. As a
result, the Company recorded a liability for coinsurance amounts withheld from
JHReCo of $1,551.6 million and $1,158.9 million at September 30, 2002 and
December 31, 2001, respectively, which are included with other liabilities in
the consolidated balance sheets. Included in other reinsurance recoverables on
the consolidated balance sheets are $1,945.5 million and $1,504.6 million at
September 30, 2002 and December 31, 2001, respectively, due from JHReCo.
Premiums ceded to JHReCo were $113.7 million and $96.3 million for the three
month periods ended September 30, 2002 and 2001, respectively and $488.8 million
and $651.1 million for the nine month periods ended September 30, 2002 and 2001,
respectively.
In the first quarter of 2002, the Company began reinsuring certain portions of
its group pension business with JHIC of Vermont. The Company entered into this
reinsurance contract in order to facilitate its capital management process. This
reinsurance contract is primarily written on a funds withheld basis where the
related financial assets remain invested at the Company. As a result, the
Company recorded a liability for coinsurance amounts withheld from JHIC of
Vermont of $0.5 million at September 30, 2002, which is included with other
liabilities in the consolidated balance sheets. At September 30, 2002, the
Company had not recorded any reinsurance recoverable from JHIC of Vermont. The
reinsurance recoverable from JHIC of Vermont is typically recorded with other
reinsurance recoverables on the consolidated balance sheet. Premiums ceded by
the Company to JHIC of Vermont were $0.2 million and $0.6 million for the three
and nine month periods ended September 30, 2002, respectively.
13
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 -- Segment Information
The Company operates in the following five business segments: two segments
primarily serve retail customers, two segments serve institutional customers and
our fifth segment is the Corporate and Other Segment, which includes our
international operations. Our retail segments are the Protection Segment and the
Asset Gathering Segment. Our institutional segments are the Guaranteed and
Structured Financial Products Segment (G&SFP) and the Investment Management
Segment. For additional information about the Company's business segments please
refer to the Company's 2001 Form 10-K.
The following table summarizes selected financial information by segment for the
periods and dates indicated, and reconcile segment revenues and segment
after-tax operating income to amounts reported in the unaudited consolidated
statements of income. Included in the Protection Segment for all periods
presented are the assets, liabilities, revenues and expenses of the closed
block. For additional information on the closed block, see Note 5 -- Closed
Block in the notes to the unaudited consolidated financial statements and the
related footnote in the Company's 2001 Form 10-K.
Amounts reported as segment adjustments in the tables below primarily relate to:
(i) certain net realized investment and other gains (losses), net of related
amortization adjustment for deferred policy acquisition costs, amounts
credited to participating pension contractholder accounts and policyholder
dividend obligation (the adjustment for net realized investment and other
gains (losses) excludes gains and losses from mortgage securitizations
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 a dispute
regarding disclosure of costs on various modes of life insurance policy
premium payment;
(iii) restructuring costs related to reducing staff in the home office and
terminating certain operations outside the home office;
(iv) cumulative effect of accounting changes; and
(v) the surplus tax on mutual life insurance companies which as a stock
company is no longer applicable to the Company.
14
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 - Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
-------------------------------------------------------------------------------
(in millions)
As of or for the three months ended
September 30, 2002
Revenues:
Revenues from external customers ......... $ 483.3 $ 132.1 $ 18.4 $ 21.6 $ 163.4 $ 818.8
Net investment income .................... 329.5 147.9 427.4 3.3 (29.7) 878.4
Inter-segment revenues ................... -- 0.8 -- 5.6 (6.4) --
-------------------------------------------------------------------------------
Segment revenues ......................... 812.8 280.8 445.8 30.5 127.3 1,697.2
Net realized investment and other
gains (losses) ......................... (19.2) 52.6 (74.8) -- 2.7 (38.7)
-------------------------------------------------------------------------------
Revenues ................................. $ 793.6 $ 333.4 $ 371.0 $ 30.5 $ 130.0 $ 1,658.5
===============================================================================
Net Income:
Segment after-tax operating income ....... $ 65.7 $ 14.6 $ 68.3 $ 4.5 $ 7.4 $ 160.5
Net realized investment and other
gains (losses) ......................... (11.8) 34.5 (47.4) (0.1) 1.6 (23.2)
Restructuring charges .................... (0.6) (3.1) -- -- (0.3) (4.0)
-------------------------------------------------------------------------------
Net income ............................... $ 53.3 $ 46.0 $ 20.9 $ 4.4 $ 8.7 $ 133.3
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................. $ 2.9 $ 0.8 $ 5.9 $ (0.1) $ (3.0) $ 6.5
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) ............... 67.8 66.9 0.5 -- (0.1) 135.1
Segment assets ........................... $30,135.0 $15,350.0 $33,903.9 $ 2,258.0 $ 2,731.6 $84,378.5
15
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
-------------------------------------------------------------------------------
(in millions)
As of or for the three months ended
September 30, 2001
Revenues:
Revenues from external customers ........ $ 443.5 $ 165.3 $ 18.9 $ 17.8 $ 133.4 $ 778.9
Net investment income ................... 317.9 130.9 455.3 8.9 7.3 920.3
Inter-segment revenues .................. -- -- -- 6.5 (6.5) --
-------------------------------------------------------------------------------
Segment revenues ........................ 761.4 296.2 474.2 33.2 134.2 1,699.2
Net realized investment and other
gains (losses) ........................ (4.6) 9.7 (57.8) -- (7.1) (59.8)
-------------------------------------------------------------------------------
Revenues ................................ $ 756.8 $ 305.9 $ 416.4 $ 33.2 $ 127.1 $ 1,639.4
===============================================================================
Net Income:
Segment after-tax operating income ...... $ 64.1 $ 41.0 $ 62.9 $ 7.0 $ 19.0 $ 194.0
Net realized investment and other
gains (losses) ........................ (2.8) 6.6 (36.9) -- (4.3) (37.4)
Restructuring charges ................... (1.0) (0.3) -- (0.2) (0.2) (1.7)
Surplus tax ............................. 1.5 -- 2.1 -- 0.2 3.8
-------------------------------------------------------------------------------
Net income .............................. $ 61.8 $ 47.3 $ 28.1 $ 6.8 $ 14.7 $ 158.7
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method .... $ 5.1 $ 2.2 $ 7.9 $ 3.4 $ (7.3) $ 11.3
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) .............. 43.3 22.5 0.4 -- 0.2 66.4
Segment assets .......................... $27,841.6 $13,835.4 $32,373.3 $ 2,792.9 $ 3,188.9 $80,032.1
16
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
-------------------------------------------------------------------------------
(in millions)
As of or for the nine months ended
September 30, 2002
Revenues:
Revenues from external customers ......... $ 1,419.0 $ 419.5 $ 49.5 $ 61.4 $ 508.9 $ 2,458.3
Net investment income .................... 975.9 418.9 1,275.6 10.9 (26.4) 2,654.9
Inter-segment revenues ................... -- 0.8 -- 22.1 (22.9) --
-------------------------------------------------------------------------------
Segment revenues ......................... 2,394.9 839.2 1,325.1 94.4 459.6 5,113.2
Net realized investment and other
gains (losses) ......................... (76.4) 8.2 (183.0) 0.6 (0.6) (251.2)
-------------------------------------------------------------------------------
Revenues ................................. $ 2,318.5 $ 847.4 $ 1,142.1 $ 95.0 $ 459.0 $ 4,862.0
===============================================================================
Net Income:
Segment after-tax operating income ....... $ 215.2 $ 95.2 $ 204.5 $ 16.8 $ 22.1 $ 553.8
Net realized investment and other
gains (losses) ......................... (48.7) 6.5 (116.8) 0.4 (0.6) (159.2)
Class action lawsuit ..................... (18.7) -- -- -- (0.8) (19.5)
Restructuring charges .................... (4.7) (5.0) (0.5) (0.2) 2.0 (8.4)
-------------------------------------------------------------------------------
Net income ............................... $ 143.1 $ 96.7 $ 87.2 $ 17.0 $ 22.7 $ 366.7
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................. $ 12.4 $ 5.9 $ 24.7 -- $ 8.4 $ 51.4
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) ............... 138.9 117.3 1.6 -- (0.2) 257.6
Segment assets ........................... $30,135.0 $15,350.0 $33,903.9 $ 2,258.0 $ 2,731.6 $84,378.5
17
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3 -- Segment Information - (Continued)
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
-------------------------------------------------------------------------------
(in millions)
As of or for the nine months ended
September 30, 2001
Revenues:
Revenues from external customers ......... $ 1,289.5 $ 506.5 $ 76.1 $ 60.4 $ 426.9 $ 2,359.4
Net investment income .................... 940.2 373.5 1,386.5 18.1 33.9 2,752.2
Inter-segment revenues ................... -- -- -- 21.2 (21.2) --
-------------------------------------------------------------------------------
Segment revenues ......................... 2,229.7 880.0 1,462.6 99.7 439.6 5,111.6
Net realized investment and other
gains (losses) ......................... (38.5) (1.5) (81.3) (0.1) 21.5 (99.9)
-------------------------------------------------------------------------------
Revenues ................................. $ 2,191.2 $ 878.5 $ 1,381.3 $ 99.6 $ 461.1 $ 5,011.7
===============================================================================
Net Income:
Segment after-tax operating income ....... $ 209.2 $ 109.9 $ 180.2 $ 17.0 $ 44.7 $ 561.0
Net realized investment and other
gains (losses) ......................... (23.5) -- (51.3) (0.1) 13.1 (61.8)
Restructuring charges .................... (3.8) (15.4) (0.7) (0.7) (0.4) (21.0)
Surplus tax .............................. 1.5 -- 2.1 -- 0.2 3.8
Cumulative effect of accounting
changes, net of tax .................... 11.7 (0.5) (1.2) (0.2) (2.6) 7.2
-------------------------------------------------------------------------------
Net income ............................... $ 195.1 $ 94.0 $ 129.1 $ 16.0 $ 55.0 $ 489.2
===============================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ..... $ 9.9 $ 6.1 $ 16.0 $ 3.8 $ 21.0 $ 56.8
Amortization of deferred policy
acquisition costs, excluding amounts
related to net realized investment
and other gains (losses) ............... 131.7 59.5 1.9 -- 0.3 193.4
Segment assets ........................... $27,841.6 $13,835.4 $32,373.3 $ 2,792.9 $ 3,188.9 $80,032.1
18
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 -- Contingencies
Class Action
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 total 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 $16.8 million
and $52.7 million at September 30, 2002 and December 31, 2001, respectively.
There were no costs related to the settlement incurred for the three and nine
months ended September 30, 2002. An adjustment of $19.5 million, after-tax, was
recorded to the settlement reserve in the fourth quarter of 2001. The estimated
reserve is based on a number of factors, including the estimated cost per claim
and the estimated costs to administer the claims.
During 1996, management determined that it 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 initial
estimates. In 1999, the Company updated its estimate of the cost of claims
subject to alternative dispute resolution (ADR) relief and revised its reserve
estimate accordingly. The reserve estimate was further evaluated quarterly, and
was adjusted in the fourth quarter of 2001. The adjustment to the reserve in the
fourth quarter of 2001 was the result of the Company being able to better
estimate the cost of settling the remaining claims, which on average tend to be
larger, more complicated claims. The better estimate comes from experience with
actual settlements on similar claims.
Administration of the ADR component of the settlement continues to date. We
continue to evaluate the reserve estimate quarterly. Although some uncertainty
remains as to the cost of claims in the final phase (i.e., arbitration) of the
ADR process, it is expected that the final cost of the settlement will not
differ materially from the amounts presently provided for by the Company.
Harris Trust
Since 1983, the Company has 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). After
successive appeals to the Second Circuit and to the U.S. Supreme Court, the case
was remanded to the District Court and tried by a Federal District Court judge
in 1997. The judge issued an opinion in November 2000.
In that opinion the Court found against the Company and awarded the Trust
approximately $13.8 million in relation to this claim together with unspecified
additional pre-judgment interest on this amount from October 1988. The Court
also found against the Company on issues of liability valuation and ERISA law.
Damages in the amount of approximately $5.7 million, together with unspecified
pre-judgment interest from December 1996, were awarded on these issues. As part
of the relief, the judge ordered the removal of Hancock as a fiduciary to the
plan. On April 11, 2001, the Court entered a judgment against the Company for
approximately $84.9 million, which includes damages to the plaintiff,
pre-judgment interest, attorney's fees and other costs.
On May 14, 2001 the Company filed an appeal in this case. On August 20, 2002,
the Second Circuit Court of Appeals issued a ruling, affirming in part,
reversing in part, and vacating in part the District Court's judgment in this
case. The Second Circuit Court of Appeals' opinion overturned substantial
portions of the District Court's opinion, representing the vast majority of the
lower court's award of damages and fees, and sent the matter back to the
District Court for further proceedings. The matter remains in litigation, and no
final judgment has been entered.
19
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 -- Contingencies - (Continued)
Notwithstanding what the Company believes to be the merits of its position in
this case, if unsuccessful, its ultimate liability, including fees, costs and
interest could have a material adverse impact on net income. However, the
Company does not believe that any such liability would be material in relation
to its financial position or liquidity.
Reinsurance Recoverable
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 long-term care operations. The insurance business sold was
transferred to UNICARE through a 100% coinsurance agreement. 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 of 1999
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 September 30, 2002, 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.
Other Matters
In the normal course of its business operations, the Company is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of litigation matters were pending as of September 30, 2002. 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.
20
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 -- Closed Block
In connection with the Company's plan of reorganization for its demutualization
and initial public offering, the Company created a closed block for the benefit
of policies included therein. Additional information regarding the creation of
the closed block and relevant accounting issues is contained in the notes to
consolidated financial statements of the Company's December 31, 2001 Form 10-K.
The following table sets forth certain summarized financial information relating
to the closed block as of the dates indicated.
September 30,
2002 December 31,
(unaudited) 2001
---------------------------
(in millions)
Liabilities
Future policy benefits ................................................. $10,403.8 $10,198.7
Policyholder dividend obligation ....................................... 319.0 251.2
Policyholders' funds ................................................... 1,493.9 1,460.9
Policyholder dividends payable ......................................... 443.4 433.4
Other closed block liabilities ......................................... 125.1 53.7
---------------------------
Total closed block liabilities ...................................... 12,785.2 12,397.9
---------------------------
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: September 30--$98.7; December 31--$100.7) ............ 92.8 103.3
Available-for-sale--at fair value
(cost: September 30--$ 5,506.7; December 31--$5,204.0) ............ 5,729.4 5,320.7
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$ 10.8; December 31--$8.8) ................... 13.4 13.4
Mortgage loans on real estate .......................................... 1,813.7 1,837.0
Policy loans ........................................................... 1,553.1 1,551.9
Other invested assets .................................................. 175.5 83.1
---------------------------
Total investments ................................................... 9,377.9 8,909.4
Cash and cash equivalents .............................................. 171.4 192.1
Accrued investment income .............................................. 160.7 158.9
Other closed block assets .............................................. 309.0 297.5
---------------------------
Total closed block assets ........................................... 10,019.0 9,557.9
---------------------------
Excess of reported closed block liabilities over assets
designated to the closed block ...................................... 2,766.2 2,840.0
---------------------------
Portion of above representing other comprehensive income:
Unrealized appreciation (depreciation), net of tax of $77.2
million and $43.3 million at September 30 and December 31,
respectively ...................................................... 143.2 80.1
Allocated to the policyholder dividend obligation, net of tax of
$84.2 million and $50.8 million at September 30 and December 31,
respectively ...................................................... (156.3) (94.4)
---------------------------
Total ........................................................... (13.1) (14.3)
---------------------------
Maximum future earnings to be recognized from closed block
assets and liabilities .............................................. $ 2,753.1 $ 2,825.7
===========================
21
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 -- Closed Block - (Continued)
September 30,
2002 December 31,
(unaudited) 2001
---------------------------
(in millions)
Change in the policyholder dividend obligation:
Balance at beginning of period ............................. $251.2 $ 77.0
Impact on net income before income taxes ................. (27.5) 42.5
Unrealized investment gains (losses) ..................... 95.3 67.1
Cumulative effect of change in accounting principle (1) .. -- 64.6
---------------------------
Balance at end of period ................................... $319.0 $251.2
===========================
(1) The cumulative effect of change in accounting principle represents the
impact of transferring fixed maturities from held-to-maturity to
available-for-sale as part of the adoption of SFAS No. 133 effective
January 1, 2001.
22
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 -- Closed Block - (Continued)
The following table sets forth certain summarized financial information relating
to the closed block for the period indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------
(in millions)
Revenues
Premiums ............................................................... $ 236.1 $ 226.8 $ 704.1 $ 672.1
Net investment income .................................................. 166.2 167.6 499.4 500.0
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $21.9 million
and $8.7 million for the three months ended September 30, 2002
and 2001, respectively and $19.3 million and $0.9 million for
the nine months ended September 30, 2002 and 2001, respectively ...... (1.2) (1.5) (3.9) (4.4)
Other closed block revenues ............................................ 0.1 0.1 0.1 0.4
-----------------------------------------------
Total closed block revenues .......................................... 401.2 393.0 1,199.7 1,168.1
Benefits and Expenses
Benefits to policyholders .............................................. 252.7 248.6 762.2 717.3
Change in the policyholder dividend obligation ......................... (7.7) 0.4 (43.4) 5.4
Other closed block operating costs and expenses ........................ (1.7) (2.7) (3.9) (6.6)
Dividends to policyholders ............................................. 121.1 108.1 374.6 336.2
-----------------------------------------------
Total benefits and expenses .......................................... 364.4 354.4 1,089.5 1,052.3
-----------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes and cumulative effect of accounting change ....... 36.8 38.6 110.2 115.8
Income taxes, net of amounts credited to the policyholder dividend
obligation of $(0.3) million and $3.3 million for the three months
ended September 30, 2002 and 2001, respectively and $(3.4) million
and $2.0 million for the nine months ended September 30, 2002 and
2001, respectively ................................................... 12.5 13.1 37.5 39.3
-----------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
income taxes before the cumulative effect of accounting change ..... 24.3 25.5 72.7 76.5
-----------------------------------------------
Cumulative effect of accounting change, net of tax, and net of
amounts credited to policyholder dividend obligation of $(1.4)
million for the nine months ended September 30, 2001 (1) ........... -- -- -- --
-----------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
income taxes and the cumulative effect of accounting change ........ $ 24.3 $ 25.5 $ 72.7 $ 76.5
===============================================
(1) The cumulative effect of change in accounting principle represents the
adoption of SFAS No. 133, effective January 1, 2001.
23
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 -- Goodwill and Value of Business Acquired
The Company's purchased intangible assets include goodwill and the value of
business acquired. The excess of the cost over the fair value of identifiable
assets acquired in business combinations is recorded as goodwill. The present
value of estimated future profits of insurance policies in force related to
businesses acquired is recorded as the value of business acquired (VOBA).
The following tables set forth certain summarized financial information relating
to goodwill and VOBA as of the dates and periods indicated.
Accumulated
Amortization
Gross Carrying and Other Net Carrying
Amount Changes Amount
----------------------------------------------
(in millions)
September 30, 2002
Unamortizable intangible assets:
Goodwill............................ $ 166.7 $ (58.1) $ 108.6
Amortizable intangible assets:
VOBA................................ $ 97.4 $ (23.9) $ 73.5
September 30, 2001
Unamortizable intangible assets:
Goodwill............................ $ 174.1 $ (55.3) $ 118.8
Amortizable intangible assets:
VOBA................................ $ 97.4 $ (22.1) $ 75.3
Three Months Ended Nine Months Ended
Amortization expense September 30, September 30,
2002 2001 2002 2001
---------------------------------------------
(in millions)
Goodwill, net of tax of $0.9 million and $2.7 million
for the three and nine month periods ended September
30, 2001, respectively ................................... -- $ 1.9 -- $ 5.8
VOBA, net of tax of $0.3 million and $0.1 million for
the three month periods ended September 30, 2002
and 2001, respectively, and net of tax of
$0.8 million and $0.5 million for the nine month periods
ended September 30, 2002 and 2001, respectively .......... $ 0.6 $ 0.3 $ 1.5 $ 1.0
24
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Goodwill and Value of Business Acquired - (Continued)
Estimated future amortization expense
for the years ended December 31,
Tax Effect Net Expense
----------------------------------
(in millions)
2002..................................... $ 1.1 $ 2.1
2003..................................... $ 1.3 $ 2.4
2004..................................... $ 1.4 $ 2.6
2005..................................... $ 1.5 $ 2.8
2006..................................... $ 1.6 $ 3.0
2007..................................... $ 1.6 $ 2.9
The changes in the carrying value of goodwill, presented for each business
segment, for the periods indicated, are as follows:
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
------------------------------------------------------------------------------
(in millions)
Goodwill balance at July 1, 2002.... $ 66.1 $ 42.1 -- $ 0.4 -- $ 108.6
Changes to goodwill:
Adjustment..................... -- -- -- -- -- --
------------------------------------------------------------------------------
Goodwill balance at
September 30, 2002.................. $ 66.1 $ 42.1 -- $ 0.4 -- $ 108.6
==============================================================================
Asset Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
------------------------------------------------------------------------------
(in millions)
Goodwill balance at January 1, 2002 $ 73.5 $ 42.1 -- $ 0.4 -- $ 116.0
Changes to goodwill:
Adjustment (1)................ (7.4) -- -- -- -- (7.4)
------------------------------------------------------------------------------
Goodwill balance at
September 30, 2002................. $ 66.1 $ 42.1 -- $ 0.4 -- $ 108.6
==============================================================================
(1) Purchase price negotiations with Fortis, Inc. were concluded during the
first quarter of 2002, resulting in an adjustment of $(7.3) million to the
goodwill related to the Company's 1999 acquisition of Fortis' long term
care insurance business. Legal fees associated with these negotiations
were finalized in the second quarter of 2002, resulting in a further
adjustment to goodwill of $(0.1) million.
25
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Goodwill and Value of Business Acquired - (Continued)
The changes in the carrying value of VOBA, presented for each business segment
and in total, for the periods indicated, are as follows:
Asset Investment Corporate
Protection Gathering G&SFP Management And Other Consolidated
------------------------------------------------------------------------------
(in millions)
VOBA balance at July 1, 2002........ $74.9 -- -- -- -- $74.9
Amortization and other changes:
Amortization.................... (0.9) -- -- -- -- (0.9)
Change in unrealized
gains on securities
available-for-sale............ (0.5) -- -- -- -- (0.5)
------------------------------------------------------------------------------
VOBA balance at
September 30, 2002.................. $73.5 -- -- -- -- $73.5
==============================================================================
Asset Investment Corporate
Protection Gathering G&SFP Management And Other Consolidated
------------------------------------------------------------------------------
(in millions)
VOBA balance at January 1, 2002..... $76.2 -- -- -- -- $76.2
Amortization and other changes:
Amortization.................... (2.3) -- -- -- -- (2.3)
Change in unrealized
gains on securities
available-for-sale............ (0.4) -- -- -- -- (0.4)
------------------------------------------------------------------------------
VOBA balance at
September 30, 2002.................. $73.5 -- -- -- -- $73.5
==============================================================================
The net income of the Company, if the Company had not amortized goodwill prior
to the adoption of SFAS No. 142, would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------------------
(in millions)
Net income:
As reported.............................. $ 133.3 $ 158.7 $ 366.7 $ 489.2
Goodwill amortization, net of tax........ -- 1.9 -- 5.8
---------------------------------------------------------------------
Pro forma (unaudited).................... $ 133.3 $ 160.6 $366.7 $ 495.0
=====================================================================
26
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Subsequent Events
On October 31, 2002 JHFS announced its plans to implementation a prospective
basis, the fair value based method of accounting for stock-based compensation
plans in keeping with emerging industry practices. The impact of the adoption to
the Company will be the compensation related to the employees of the Company
that participate in the Parent's stock-based compensation program.
On October 31, 2002, the Company announced that it anticipates higher employee
pension costs in 2003, driven by the impact of the weak equity marked on plan
assets and potential adjustments to plan assumptions.
On November 8, 2002, the Company announced its mutual fund business' acquisition
of the Pzena Focused Value Fund. The Company will rename it the John Hancock
Classic Value Fund. As of October 31, 2002, the acquired mutual fund had
approximately $22 million in assets.
27
JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS
of OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of John Hancock Life
Insurance Company (John Hancock or the Company) as of September 30, 2002,
compared with December 31, 2001, and its consolidated results of operations for
the three and nine month periods ended September 30, 2002 and September 30,
2001, and, where appropriate, factors that may affect future financial
performance. This discussion should be read in conjunction with the Company's
MD&A and annual audited financial statements as of December 31, 2001 included in
the Company's Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission (hereafter referred to as the Company's 2001
Form 10-K) and unaudited consolidated financial statements and related notes
included elsewhere in this Form 10-Q. All of the Company's United States
Securities and Exchange Commission filings are available on the internet at
www.sec.gov, under the name Hancock John Life.
Statements, analyses, and other information contained in this report
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," "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
potential effects on the Company. Future events and their effect on the Company
may not be these anticipated by management. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements" included herein for a
discussion of factors that could cause or contribute to such material
differences.
Critical Accounting Policies
General
We have identified the policies below as critical to our business
operations and understanding our results of operations. For a detailed
discussion of the application of these and other accounting policies, see Note 1
- -- Summary of Significant Accounting Policies in the notes to consolidated
financial statements of the Company's 2001 Form 10-K. Note that the application
of these accounting policies in the preparation of this report requires
management to use judgments involving assumptions and estimates concerning
future results or other developments including the likelihood, timing or amount
of one or more future transactions or events. There can be no assurance that
actual results will not differ from those estimates. These judgments are
reviewed frequently by senior management, and an understanding of them may
enhance the reader's understanding of the Company's financial statements.
Amortization of Deferred Policy Acquisition Costs and Unearned Revenue
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. Similarly, any amount accessed for services to be
provided over future periods are recorded as unearned revenue. The Company tests
the recoverability of its deferred policy acquisition costs quarterly with a
model that uses data such as market performance, lapse rates and expense levels.
We amortize our deferred acquisition costs on term life and long-term care
insurance ratably with premiums. We amortize our deferred policy acquisition
costs on our annuity products and retail life insurance, other than term, based
on a percentage of the estimated gross profits over the life of the policies,
which are generally twenty years for annuities and thirty years for life
policies. Our estimated gross profits are computed based on assumptions related
to the underlying policies including mortality, lapse, expenses, and asset
growth rates. We amortize deferred policy acquisition costs and unearned revenue
on these policies such that the percentage of gross profits to the amount of
deferred policy acquisition costs and unearned revenue amortized is constant
over the life of the policies.
Estimated gross profits, including net realized investment and other gains
(losses), are adjusted periodically to take into consideration the actual
experience to date and changes in the remaining gross profits. When estimated
gross profits are adjusted, we also adjust the amortization of deferred
acquisition policy costs to maintain a constant
28
JOHN HANCOCK LIFE INSURANCE COMPANY
amortization percentage over the life of the policies. Our current estimated
gross profits include certain judgments concerning mortality, lapse and asset
growth that are based on a combination of actual Company experience and
historical market experience of equity and fixed income returns. Short-term
variances of actual results from the judgments made by management can impact
quarter to quarter earnings.
Q3 unlockings: As of September 30, 2002, the Company changed several
future assumptions with respect to the expected gross profits in its variable
life business in the Protection Segment and variable annuity business in the
Asset gathering Segment. First, we lowered the long-term growth rate assumption
from 9%, to 8% gross of fees, which are approximately 1% to 2%. Second, we
lowered the average rates for the next five years from the mid-teens to 13%
gross of fees. Finally, we increased certain fee rates on these policies (the
variable series trust (VST) fee increase"). These three changes are referred to
collectively elsewhere in this document as the Q3 unlocking. The results of
these changes in assumptions was a net write-off of deferred policy acquisition
cost of $36.1 million in the variable annuity business in the Asset Gathering
Segment and $13.1 million (net of $12.3 million of unearned revenue and $2.5
million in policy benefit reserves) in the variable life business in the
Protection Segment. The impact on net income of the Q3 unlocking was
approximately $27.5 million.
The accelerated amortization will reduce the total amortization of DAC in
future period, but will accelerate the amortization in the short term. We
estimate that in the fourth quarter of 2002, DAC amortization will be
accelerated by $0.9 million in the Protection Segment and $0.5 million in the
Asset Gathering Segment.
As a result of the recent equity market declines and the Q3 unlocking, the
sensitivity of future DAC and unearned revenue amortization to equity and fixed
income market performance has changed from the amounts that were previously
disclosed. As mentioned above, our assumptions for the next five years are an
average rate of 13%. To the extent that actual performance varies from that
assumption, DAC and unearned revenue amortization will be adjusted. The table
below shows the estimated additional/(reduced) amortization that would be
expected in the next quarter under various asset growth scenarios.
Estimated Accelerated (reduced) amortization in Q4 of 2002
Annualized Q4 2002 returns
Asset
Protection Gathering Total
------------------------------------------
(in millions)
20%............................... $ (1.2) $ (2.2) $ (3.4)
13%............................... -- -- --
8%............................... 0.9 1.6 2.5
0%............................... 2.4 4.7 7.1
Benefits to Policyholders
Reserves for future policy benefits are calculated using management's
judgments of mortality, morbidity, lapse, investment experience and expense
levels that are based primarily on the Company's past experience and are
therefore reflective of the Company's proven underwriting and investing
experience. Once these assumptions are made for a given policy or group of
policies, they will not be changed over the life of the policy unless the
Company recognizes a loss on the entire line of business. The Company
periodically reviews its policies for loss recognition and based on management's
judgment the Company from time to time may recognize a loss on certain lines of
business. Short-term variances of actual results from the judgments made by
management are reflected in current period earnings and can impact quarter to
quarter earnings.
Investment in Debt and Equity Securities
Impairments of our investment portfolio are recorded as a charge to income
in the period when the impairment is judged by management to occur. See
"Quantitative and Qualitative Information About Market Risk - Credit Risk"
section of this document for a more detailed discussion of the judgments
involved in determining impairments.
Certain of our fixed income securities classified as held-to-maturity and
available-for-sale are not publicly traded, and quoted market prices are not
available from brokers or investment bankers on these securities. The change in
the fair value of the available-for-sale securities is recorded in other
comprehensive income as an unrealized gain or loss. We calculate the fair value
of these securities ourselves through the use of pricing models and discounted
cash flows calling for a substantial level of management's judgment. Our
approach is based on currently available information, and we believe it to be
appropriate and fundamentally sound. However, different pricing models or
assumptions or changes in relevant current information could produce different
valuation results.
29
JOHN HANCOCK LIFE INSURANCE COMPANY
The Company's pricing model takes into account a number of factors based on
current market conditions and trading levels of similar securities. These
include current market based factors related to credit quality, country of
issue, market sector and average investment life. The resulting prices are then
reviewed by the pricing analysts and members of the Controller's Department. Our
pricing analysts take appropriate action to reduce valuation of securities where
an event occurs which negatively impacts the securities' value. Certain events
that could impact the valuation of securities include issuer credit ratings,
business climate, management changes, litigation and government actions, among
others. Then, every quarter, there is a comprehensive review of all impaired
securities and problem loans by a group consisting of the Chief Investment
Officer and the Bond Investment Committee. See "Management's Discussion and
Analysis of Financial Condition and Analysis of Financial Condition and Results
of Operations - General Account Investments" section of this document for a more
detailed discussion of this process and the judgments used therein.
Benefit Plans
The Company annually reviews its pension and other employee benefit plan
assumptions concerning the discount rate, the long-term growth rate on plan
assets and the expected rate of compensation increase. The discount rate is
generally set as an average of the prior year's discount rate and current year
December daily average of long-term corporate bond yields, as published by
Moody's Investor Services less a 5% allowance for expenses and default. The
long-term rate on plan assets reflects the long-term rate expected to be earned
based on the investment policy and the various classes of the invested funds.
The compensation rate increase is the average of the expected rates of
compensation increase, which are based on current and expected long-term salary
and compensation policy. In 2001, we changed the method of recognizing deferred
gains and losses considered in the calculation of the annual expense from a
deferral within a 10% corridor and amortization of gains outside this corridor
over the future working careers of the participants to a deferral within 5%
corridor and amortization of gains and losses outside this corridor over the
future working careers of the participants. The new method is preferable
because, in our situation, it produces results that respond more quickly to the
changes in the market value of the plan's assets while providing some measure to
mitigate the impact of extreme short term swings in those market values, Since
the plan assets had net unamortized gains at the time of this change, pension
expense will be lower in the short term and therefore higher in the long term as
a result of this change, assuming that the plan's assets do not change in value
and that all other assumptions made by management remain the same. Any variation
of actual results from management's judgments may result in future earnings
being materially different than anticipated.
Income Taxes
We establish reserves for possible penalty and interest payments to
various taxing authorities with respect to the admissibility and timing of tax
deductions. Management makes judgments concerning the eventual outcome of these
items and reviews those judgments on an ongoing basis.
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. As of January 1, 2001, we established additional
reinsurance programs, which limit our exposure to fluctuations in life claims
for individuals for whom the net amount at risk is $3 million or more. As of
January 1, 2001, the Company entered into an agreement with two reinsurers
covering 50% of its closed block business. The treaties are structured so they
will not affect policyholder dividends or any other financial items reported
within the closed block, which was established at the time of the Life Company's
demutualization to protect the reasonable dividend expectations of certain
participating life insurance policyholders.
The Company enters into reinsurance agreements to specifically address
insurance exposure to multiple life insurance claims as a result of a
catastrophic event. The Company has put into place, effective July 1, 2002,
catastrophic reinsurance covering both individual and group policies written by
itself and all of its U.S. life insurance subsidiaries. The deductible for
individual and group coverages combined is $25 million per occurrence and the
limit of coverage is $40 million per occurrence. Both the deductible and the
limit apply to the combined U.S. insurance companies. The Company has
supplemented this coverage by reinsuring all of its accidental death exposures
in excess of $100,000 per life under its group life insurance coverages, and 50%
of such exposures below
30
JOHN HANCOCK LIFE INSURANCE COMPANY
$100,000. Should catastrophic reinsurance become unavailable to the Company in
the future, the absence of, or further limitations on, reinsurance coverage,
could adversely affect the Company's future net income and financial position.
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.
Economic Trends
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.
Overall financial market conditions have a significant impact on all of these
profit drivers. The Company estimates that if equity markets remain flat in the
fourth quarter of 2002, the impact to segment after-tax operating income in the
fourth quarter of 2002 would be a decline of $1.5 million. If equity markets
fall 5% in the fourth quarter of 2002, segment after-tax operating income in the
fourth quarter of 2002 would decline by $3.0 million. The Company estimates that
if equity markets remain flat for a full year the impact to segment after-tax
operating income over that full year would be a of $9.2 million. If equity
markets fall 5% for a full year, segment after-tax operating income would
decline by $18.4 million.
The sales and other financial results of our retail business over the last
several years have been affected by general economic and industry trends. The
appreciation of equity markets in the 1990's resulted in variable products,
including variable life insurance and variable annuities, accounting for the
majority of increases in total premiums and deposits for the insurance industry.
This trend reversed in 2001 and 2002 due to declines in equity market
performance and we have seen investors return to stable investment products. We
believe our diverse distribution network and product offerings will assist in
the maintenance of assets and provide for sales growth. Although sales of
traditional life insurance products and, more recently, variable annuity
products have experienced declines, sales of fixed annuity products, single life
insurance, universal life insurance and term life insurance and corporate life
insurance have increased. 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 55.4%
to $890.5 million and 74.3% to $2,684.5 million for the three and nine month
periods ended September 30, 2002 from the prior year periods. Our core life
insurance sales (on a LIMRA basis) of $166.8 million increased 28.8% or $37.3
million, for the nine months ended September 30, 2002 from prior year. This
growth was primarily in term life insurance products and single life insurance
products, offset by a 14.6%, or $6.3 million, decline in survivorship life
insurance products due to continued uncertainty about estate planning
legislation. Premiums on our long-term care insurance increased 20.4%, to $114.4
million and 35.0% to $334.3 million for the three and nine months ended
September 30, 2002 from the prior year periods, driven by increasing renewal
premiums from sales growth of prior years and growth in new premiums in the
individual long term care insurance business. Primarily due to the creation of a
new closed end fund in the portfolio, the acquisition of U.S. Global Leaders
Growth Fund, and two significant institutional deposits, mutual fund deposits
and reinvestments increased $703.7 million, or 74.5%, to $1,648.6 million for
the three months ended September 30, 2002 and while decreasing $509.0 million,
or 12.8%, to $3,465.4 million for the nine months ended September 30, 2002. The
sale of the full service retirement plan business during 2001 contributed to the
decrease in deposits in the current period. In addition, redemptions increased
$390.3 million, or 41.4%, to $1,332.5 million for the quarter, while decreasing
$142.6 million, or 3.7%, to $3,705.9 million for the nine month period ended
September 30, 2002. The increase in redemptions in the third quarter of 2002 is
primarily due to continued volatility of the equity markets in the current
period. We have reduced operating expenses to protect profit margins as we work
to stabilize and grow assets under management in the mutual fund business.
However, our mutual fund operations are impacted by general market trends, and a
downturn in the mutual fund market may negatively affect our future operating
results. Assets under management in the mutual fund business decreased due to
market depreciation by approximately $1.7 billion and $4.0 billion for the three
and nine month periods ended September 30, 2002.
Recent economic and industry trends also have affected the sales and
financial results of our institutional business. Sales of fund-type products
decreased $437.9 million, or 39.8%, to $661.8 million and $777.6 million, or
20.4%, to $3,035.3 million for the three and nine month periods ended September
30, 2002 compared to the prior year. The decrease was driven by a decline in
demand for GICs and funding agreements. Sales of annuities for the quarter in
the Guaranteed and Structured increased 66.1%, or $12.1 million, from the prior
year, while sales of annuities for the nine month period decreased 38.1%, or
$166.4 million. Our investment management services provided to domestic and
international institutions include services and products such as investment
advisory client portfolios, individually managed and pooled separate accounts,
registered investment company funds, bond and mortgage securitizations,
collateralized bond obligation funds and mutual fund management capabilities.
Assets under management of our Investment Management Segment decreased to
$25,535.2 million for the nine months
31
JOHN HANCOCK LIFE INSURANCE COMPANY
ended September 30, 2002 from $27,125.9 million for the prior year period end,
primarily due to market depreciation.
Transaction Affecting Comparability of Results of Operations
On April 2, 2001, a subsidiary of the Company, Signature Fruit Company,
LLC (Signature Fruit), purchased certain assets and assumed certain liabilities
out of bankruptcy proceedings of Tri Valley Growers, Inc., a cooperative
association, for approximately $53.0 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
applicable date of acquisition. The purchase price was allocated to the assets
acquired and the liabilities assumed based on estimated fair values. The
unaudited pro forma revenues, for the six month period ended June 30, 2001,
assuming the transaction had taken place at the beginning of the year of
acquisition, were approximately $3,425.6 million, a change of $53.3 million from
reported balances. The unaudited pro forma net income for the six month period
ended June 30, 2001 was approximately $329.3 million, a change of $(1.2) million
from reported balances. The net loss related to the acquired operations included
in the Company's results for the three and six month periods ended June 30, 2002
were $2.1 million and $1.2 million, respectively.
32
JOHN HANCOCK LIFE INSURANCE COMPANY
Results of Operations
The table below presents the consolidated results of operations for the periods
presented.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------------------------------
(in millions)
Revenues ................................................. $1,658.5 $1,639.4 $4,862.0 $5,011.7
Benefits and expenses .................................... 1,490.1 1,420.5 4,387.4 4,334.6
-------------------- --------------------
Income before income taxes and cumulative effect of
accounting changes .................................... 168.4 218.9 474.6 677.1
Income taxes ............................................. 35.1 60.2 107.9 195.1
-------------------- --------------------
Income before cumulative effect of
accounting changes .................................... 133.3 158.7 366.7 482.0
Cumulative effect of accounting changes, net of tax (1) .. -- -- -- 7.2
-------------------- --------------------
Net income ............................................... $ 133.3 $ 158.7 $ 366.7 $ 489.2
==================== ====================
(1) Cumulative effect of accounting changes is shown net of taxes of $4.2
million for the nine month period ended September 30, 2001, respectively.
There was no cumulative effect of accounting change for the three and nine
month periods ended September 30, 2002, nor in the three month period
ended September 30, 2001.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
The following discussion reflects adjustments to the prior year results
for the adoption of Statement of Position (SOP) 00-3, "Accounting by Insurance
Enterprises for Demutualizations and Formation of Mutual Holding Companies and
Certain Long-Duration Participating Contracts" for all periods presented. In
addition, in the fourth quarter of 2001 the Company transferred its remaining
ownership interest in both John Hancock Canadian Holdings Limited and certain
other international subsidiaries, with a total carrying value of $300.1 million
at December 31, 2001, to its Parent, JHFS, in the form of a dividend. The
transfer has been accounted for as a transfer of entities under common control.
As a result of the transfer of entities under common control, all current and
prior period consolidated financial data has been restated to exclude the
results of operations, financial position, and cash flows of these transferred
foreign subsidiaries from the Company's financial statements. No gain or loss
was recognized on the transfer transaction. Consolidated pre-tax income
decreased 23.1%, or $50.5 million from the prior year. The change in
consolidated pre-tax income was recognized by segment as follows: the Corporate
and Other Segment decreased 490.5%, or $32.3 million, the Guaranteed and
Structured Financial Products Segment (G&SFP) decreased 29.7%, or $10.9 million,
the Protection Segment decreased 9.7%, or $9.7 million, and the Investment
Management Segment decreased 24.6%, or $2.7 million, while the Asset Gathering
Segment increased 7.8%, or $5.1 million.
Consolidated pre-tax income decreased primarily due to the $64.0 million
Q3 unlocking of the Company's deferred policy acquisition costs (DAC) asset,
which increased the amortization of the DAC asset. Total amortization of DAC
increased 103.5%, or $68.7 million. This decreases in pre-tax income was
partially offset by an increase in investment-type product charges of 7.9%, or
$11.8 million and lower other operating costs and expenses which decreased 1.3%,
or $3.8 million. Amortization of deferred policy acquisition costs increased due
to the Q3 unlocking of the DAC asset based on changes in the future investment
return assumptions and lowering the long-term growth rate assumption from 9%, to
8%, gross of fees (which are approximately 1% to 2%). In addition, we lowered
the average rates for the next five years from the mid-teens to 13%, gross of
fees. We also increased certain
33
JOHN HANCOCK LIFE INSURANCE COMPANY
fee rates on these policies ( the VST fee increase). These changes in
assumptions resulted in the Q3 unlocking of the DAC asset, which impacted the
Asset Gathering and Protection Segments (See Note 1 - Summary of Significant
Accounting Policies in the notes to unaudited consolidated financial statements
and Critical Accounting Policies in this MD&A). The Company recognized net
realized investment and other losses of $37.8 million compared to $58.9 million
in the prior year. Net realized investment and other losses in the current
period were driven by losses recognized on other than temporary declines in
value and sales of fixed maturity securities of $103.9 million. The two largest
impairments were, additional write-downs on Enron related entities, based on new
information provided during the third quarter, and US Airways, as a result of
negotiations over lease renewals as part of the US Airways bankruptcy process.
In addition, the Company wrote down CBO equity investments totaling $19.9
million and equity securities totaling $17.8 million. Partially offsetting these
losses on investments were gains on disposal of fixed income investments of
$34.2 million, gains of $27.1 million generated primarily on changes in the fair
value of derivative securities used to provide flexibility in a low interest
rate environment to meet the fixed rate guarantees on certain company
liabilities, gains on the disposal of equity securities of $26.5 million and
prepayment gains of $14.4 million, as borrowers took advantage of lower interest
rates (See General Accounts Investments in this MD&A). Investment-type product
charges increased primarily due to higher amortization of deferred revenue was
driven by the Protection Segment. The increase in amortization of deferred
revenue primarily resulted in $12.3 million of amortization associated with the
Q3 unlocking, mentioned previously. (See Note 1 - Summary of Significant
Accounting Policies in the notes to unaudited consolidated financial statements
and the Critical Accounting Policies section of this MD&A). Other operating
costs and expenses decreased from the prior year due to company-wide cost
cutting measures, most notably resulting in a $14.7 million decrease in other
operating cost and expenses in the mutual funds business.
Revenues increased 1.2%, or $19.1 million, from the prior year.
Investment-type product charges increased 7.9%, or $11.8 million, primarily due
to amortization of deferred revenue of $12.3 million, in the Protection Segment
related to the Q3 unlocking, discussed above. As mentioned previously, net
realized investment and other losses decreased 35.8%, or $21.1 million, from the
prior year, which also contributed to higher total revenues in the current
period. Offsetting these increases to revenues, were a decrease in net
investment income and a decrease in investment management revenues, commissions
and other fees. Net investment income decreased 4.6%, or $41.9 million, from the
prior year primarily due to decreases in the Corporate and Other and G&SFP
Segments. Corporate and Other Segment net investment income decreased $37.0
million, driven by investment losses and transfer of capital to business
segments to support growth in the fixed annuity and G&SFP spread-based product
lines. G&SFP Segment net investment income decreased 6.1%, or $27.7 million from
the prior year, where the return on approximately $10 billion, or 43%, of the
asset portfolio floats with market rates, which back liabilities with floating
crediting rates. Approximately $12 billion, or 24%, of total Company average
invested assets are invested in floating rate investments, which back
liabilities with floating crediting rates. Average invested assets were
$49,914.0 million at September 30, 2002, an decrease of 3.0% from the prior
year. Partially offsetting these decreases to net investment income were
increases in the Asset Gathering Segment, 12.9%, or $16.9 million and the
Protection Segment, 3.6%, or $11.5 million. Investment management revenues,
commission and other fees decreased 13.7%, or $19.0 million driven by a decrease
in third party advisory assets under management due to market depreciation.
Benefits and expenses increased 4.9%, or $69.6 million, from the prior
year. The increase was driven by the $64.0 million Q3 unlocking of the Company's
DAC asset, which increased the amortization of the DAC asset. Total amortization
of DAC increased 103.5%, or $68.7 million from the prior year due to the
Company's Q3 unlocking of the DAC asset based on changes in assumptions
mentioned previously. Dividends to policyholders increased 11.0%, or $13.5
million, driven by the Protection Segment. The increase in the Protection
Segment was primarily due to increased dividends of $13.0 million on traditional
life insurance products due to reserve growth and an increase in the dividend
scale. Offsetting these increases to benefits and expenses, were decreased
benefits to policyholders of $8.8 million, driven by a decrease of 13.4%, or
$46.0 million, in the G&SFP Segment. This decrease is due to lower interest
credited on account balances for spread-based products. Lower interest credited
in the spread-based product business is the result the decline in the average
interest credited rate from the reset of the floating rate liabilities at
current market rates. Offsetting this decrease were increased benefits to
policyholders in the Corporate and Other Segment, $18.9 million and the
Protection Segment, $15.9 million. In addition, operating
34
JOHN HANCOCK LIFE INSURANCE COMPANY
costs and expenses decreased $3.8 million, from the prior year primarily due to
company-wide cost cutting measures, most notably in the mutual funds business.
Mutual fund operating costs and expenses decreased due to lower compensation
expense and lower variable commissions and distribution expense.
Nine months Ended September 30, 2002 Compared to Nine months Ended
September 30, 2001
The following discussion reflects adjustments to the prior year results
for the adoption of Statement of Position (SOP) 00-3, "Accounting by Insurance
Enterprises for Demutualizations and Formation of Mutual Holding Companies and
Certain Long-Duration Participating Contracts." In addition, in the fourth
quarter of 2001 the Company transferred its remaining ownership interest in both
John Hancock Canadian Holdings Limited and certain other international
subsidiaries, with a total carrying value of $300.1 million at December 31,
2001, to its Parent, JHFS, in the form of dividend. The transfer has been
accounted for as a transfer of entities under common control. As a result of the
transfer of entities under common control, all current and prior period
consolidated financial data has been restated to exclude the results of
operations, financial position, and cash flows of these transferred foreign
subsidiaries from the Company's financial statements. No gain or loss was
recognized on the transfer transaction. Consolidated pre-tax income decreased
29.9%, or $202.5 million from the prior year. The change in consolidated pre-tax
income was recognized by segment as follows: the Corporate and Other Segment
decreased 185.0%, or $89.6 million, and the Guaranteed and Structured Financial
Products Segment (G&SFP) decreased 36.6%, or $68.8 million, the Protection
Segment decreased 19.0%, or $53.6 million while the Asset Gathering Segment
increased 6.1%, or $8.1 million, and the Investment Management Segment increased
5.2%, or $1.4 million, from the prior year.
Consolidated pre-tax income decreased primarily due to an increase in net
realized investment and other losses of 158.3%, or $152.8 million. In addition,
amortization of deferred policy acquisition cost increased 33.2% or $64.2
million, driven by the Q3 unlocking of $64.0 million of its DAC asset mentioned
previously. Investment management revenues, commissions and other fees decreased
10.3%, or $45.0 million. In addition, the Company recorded a $30.0 million
reserve for the "Modal Premium" class action lawsuit during the second quarter
to provide relief to class members and for legal and administrative costs
associated with the settlement. Net realized investment and other losses in the
current period were driven by losses recognized on other than temporary declines
in value and sales of fixed maturity securities of $334.4 million. The largest
impairments were, additional write-downs on Enron related entities, based on new
information provided during the third quarter, and US Airways, as a result of
negotiations over lease renewals as part of the US Airways bankruptcy process,
NRG Energy, Worldcom and High Voltage Engineering. In addition, the Company
wrote down CBO equity investments totaling $58.6 million and equity STET
securities totaling $33.6 million. Partially offsetting these losses on
investments were gains on disposal of and prepayments of fixed income
investments of $122.0 million, gains on disposal of equity securities of $121.9
million and losses of $18.6 million and $15.3 million, respectively, allocated
to the participating pension contractholders and the policyholder dividend
obligation (See General Accounts Investments in this MD&A). Amortization of DAC
increased from the prior year due to the Q3 unlocking of the DAC asset totaling
$64.0 million which impacted the Asset Gathering and Protection Segments (See
Note 1 - Summary of Significant Accounting Policies in the notes to unaudited
consolidated financial statements and the Critical Accounting Policies section
of this MD&A). Investment management revenues, commissions and other fees
decreased 10.3%, or $45.0 million, in the current period due to a decrease in
third party advisory assets under management, resulting from market
depreciation. Offsetting the impact of the above, were increased universal life
and investment-type product charges of 3.3%, or $14.7 million, driven by higher
amortization of deferred revenue in the Protection Segment associated with the
Q3 unlocking. The increase in amortization of deferred revenue included $12.3
million related to the changes in the future investment return assumptions. In
addition, other revenues increased 53.4%, or $60.5 million, driven by the
acquisition of Signature Fruit in the Corporate and Other Segment and the
inclusion of $169.6 million in Signature Fruit revenue compared to $111.1
million in the prior year. Signature Fruit began operations in April 2001 and
therefore was not part of the Corporate and Other Segment during the first
quarter of the prior year.
Revenues decreased 3.0%, or $149.7 million, from the prior year. The
decrease in revenues was driven by a 3.5%, or $97.3 million, decrease in net
investment income primarily due to a decrease in the G&SFP Segment where the
return on approximately 39%, or $9 billion, of the asset portfolio floats with
market, which back liabilities with floating crediting rates. Approximately $12
billion, or 23%, of total Company average invested assets are invested in
floating rate investments, which back liabilities with floating crediting rates.
Average invested assets were $51,599.9 million at September 30, 2002, an
increase of 4.3% from the prior year. The previously discussed $152.8 million
increase in net realized investment and other losses also contributed to lower
revenues in the current period. The majority of the investments underlying these
losses were on fixed income investments on which the Company was not accruing
investment income. Investment management revenues,
35
JOHN HANCOCK LIFE INSURANCE COMPANY
commission and other fees decreased 10.3%, or $45.0 million, from the prior
year, driven by a decrease of an 8.8% in third party advisory assets under
management. Offsetting the decreases to revenues was an increase of $60.5
million in other revenue, driven by revenues from Signature Fruit of $69.4
million, which began operations on April 1, 2001.
Benefits and expenses increased 1.2%, or $52.8 million, from the prior
year. The increase was offset by a decrease in benefits to policyholders of
1.6%, or $46.2 million, which includes a 18.2%, or $199.0 million decrease in
benefits to policyholders in the G&SFP Segment. G&SFP's benefits to
policyholders decreased due to a lower change in annuity reserves reflecting
lower sales of single premium annuity contracts and lower interest credited.
Benefits to policyholders in the Protection Segment increased 11.9%, or $139.8
million, from the prior year primarily due to an increase in benefits to
policyholders of $88.6 million in the long term care insurance business due to
growth in the business on higher renewal premiums from the prior year sales,
higher current year sales and a $30.0 million charge related to the "Modal
Premium" class action lawsuit settlement. Amortization of deferred policy
acquisition costs increased 33.2%, or $64.2 million, due to the Q3 unlocking of
the DAC asset, as discussed previously. Dividends to policyholders increased
6.3%, or $24.7 million, driven by the Protection Segment as a result of
increased dividends in the traditional life insurance business due to reserve
growth and an increase in the dividend scale. Operating costs and expenses
increased 1.1%, or $10.1 million, primarily due to an increase in the Corporate
and Other Segment of $77.1 million driven by the inclusion of $175.1 million in
Signature Fruit benefits and expenses compared tp $117.0 million in the prior
year. Signature Fruit began operations on April 1, 2001 and therefore was
not part of the Corporate and Other Segment during the first quarter of the
prior year. Partially offsetting these increases in operating costs and expenses
was a decrease of $87.3 million in the Asset Gathering Segment due to
approximately $58.6 million in cost reductions in the mutual funds business.
Mutual fund operating expense decrease due to lower compensation expense, lower
variable commission and distribution expenses. In addition, during 2001 the
mutual fund business incurred restructuring costs primarily related to the sale
of the full-service retirement plan business.
36
JOHN HANCOCK LIFE INSURANCE COMPANY
Results of Operations by Segment
We operate our business in five segments. Two segments primarily serve
retail customers, two segments serve institutional customers and our fifth
segment is the Corporate and Other Segment, which includes our international
operations. Our retail segments are the Protection Segment and the Asset
Gathering Segment. Our institutional segments are the Guaranteed and Structured
Financial Products Segment and the Investment Management Segment.
We evaluate segment performance and base management's incentives on
segment after-tax operating income, which excludes the effect of net realized
investment and other gains and losses and other unusual or non-recurring events
and transactions. Segment after-tax operating income is determined by adjusting
GAAP net income for net realized investment and other 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 the table below. A reconciliation of
segment after-tax operating income, as adjusted, to GAAP reported net income
precedes each segment discussion.
Three Months Ended Nine Months Ended,
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------
(in millions)
Segment Data: (1)
Segment after-tax operating income:
Protection Segment......................................... $ 65.7 $ 64.1 $ 215.2 $209.2
Asset Gathering Segment.................................... 14.6 41.0 95.2 109.9
------------------- ------------------
Total Retail Segments.................................... 80.3 105.1 310.4 319.1
Guaranteed and Structured Financial Products
Segment.................................................. 68.3 62.9 204.5 180.2
Investment Management Segment.............................. 4.5 7.0 16.8 17.0
------------------- ------------------
Total Institutional Segments............................. 72.8 69.9 221.3 197.2
Corporate and Other Segment................................ 7.4 19.0 22.1 44.7
------------------- ------------------
Total segment after-tax operating income................. 160.5 194.0 553.8 561.0
After-tax adjustments: (1)
Net realized investment and other gains (losses)......... (23.2) (37.4) (159.2) (61.8)
Class action lawsuit..................................... -- -- (19.5) --
Surplus tax.............................................. -- 3.8 -- 3.8
Restructuring charges.................................... (4.0) (1.7) (8.4) (21.0)
------------------- ------------------
Total after-tax adjustments.......................... (27.2) (35.3) (187.1) (79.0)
GAAP Reported:
Income before cumulative effect of accounting
changes................................................ 133.3 158.7 366.7 482.0
Cumulative effect of accounting changes, net of tax...... -- -- -- 7.2
------------------- ------------------
Net income............................................... $133.3 $158.7 $ 366.7 $489.2
=================== ==================
(1) See "Adjustments to GAAP Reported Net Income" set forth below.
37
JOHN HANCOCK LIFE INSURANCE COMPANY
Adjustments to GAAP Reported Net Income
Our GAAP reported net income was significantly affected by net realized
investment and other gains and losses and unusual or non-recurring events and
transactions presented in the reconciliation of GAAP reported net income to
segment after-tax operating income in Note 3 -- Segment Information in the notes
to the unaudited consolidated financial statements. A description of these
adjustments follows.
In both periods, net realized investment and other gains (losses), except
for gains (losses) from mortgage securitizations have been excluded from segment
after-tax operating income because such data are often excluded by analysts and
investors when evaluating the overall financial performance of insurers. Net
realized investment and other gains (losses) from mortgage securitizations are
not excluded from segment after-tax operating income because we view the related
gains (losses) as in integral part of the core business of those operations.
Net realized investment and other gains (losses) have been reduced by: (1)
amortization of deferred policy acquisition costs to the extent that such
amortization results from net realized investment and other gains (losses) (2)
the portion of net realized investment and other gains (losses) credited to
participating pension contractholder accounts and (3) the portion of the net
realized investment and other gains (losses) credited to the policyholder
dividend obligation. We believe presenting net realized investment and other
gains (losses) in this format provide 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 and other gains (losses) per the unaudited consolidated financial
statements and (b) the adjustment made for net realized investment and other
gains (losses) to calculate segment after-tax operating income for the periods
indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------------------
(in millions)
Net realized investment and other gains (losses) .................... $(12.0) $(37.2) $(258.4) $(84.4)
Add (less) amortization of deferred policy acquisition costs
related to net realized investment and other gains (losses) ...... (14.9) 1.0 9.5 2.3
Add (less) amounts credited to participating pension
contractholder accounts .......................................... 11.0 (14.1) 18.9 (15.0)
Add (less) amounts credited to policyholder dividend obligation ..... (21.9) (8.6) (19.3) 0.6
-------------------------------------------
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs and amounts
credited to participating pension contractholders per unaudited
consolidated financial statements ................................ (37.8) (58.9) (249.3) (96.5)
Add net realized investment and other gains (losses)
attributable to mortgage securitizations ......................... (0.9) (0.9) (1.9) (3.4)
-------------------------------------------
Net realized investment and other gains (losses) net - pre-tax
adjustment to calculate segment operating income ................. (38.7) (59.8) (251.2) (99.9)
Less income tax effect .............................................. 15.5 22.4 92.0 38.1
-------------------------------------------
Net realized investment and other gains (losses) - after-tax
adjustment to calculate segment operating income ................. $(23.2) $(37.4) $(159.2) $(61.8)
===========================================
The Company incurred after-tax restructuring charges to reduce costs and
increase future operating efficiency by consolidating portions of our
operations. Additional information regarding restructuring costs is included in
Note 1 -- Summary of Significant Accounting Policies in the notes to the
unaudited consolidated financial statements. After-tax restructuring costs net
of related curtailment pension and other post employment benefit related gains,
were $4.0 million and $1.7 million for the three month periods ended September
30, 2002 and 2001, respectively, and $8.4 million and $21.0 million for the nine
month periods ended September 30, 2002 and 2001, respectively. The nine month
period ended September 30, 2001 included $9.0 million of restructuring charges
related to the sale of our full service retirement plan business. There were no
restructuring charges related to the sale of our full service retirement plan
business for the three month period ended September 30, 2001.
The Company incurred a $19.5 million after-tax charge related to the
settlement of the Modal Premium class action lawsuit. The settlement agreement
involves policyholders who paid premiums on a monthly, quarterly, or semi-annual
basis rather than annually. The settlement costs are intended to provide for
relief to class members and
38
JOHN HANCOCK LIFE INSURANCE COMPANY
for legal and administrative costs associated with the settlement. In entering
into the settlement, the Company specifically denied any wrongdoing. Although
some uncertainty remains as to the entire cost of claims, it is expected that
the final cost of the settlement will not differ materially from the amounts
presently provided by the Company.
Effective within the year 2000, the Company is no longer subject to the
surplus tax imposed on mutual life insurance companies. During the three and
nine month periods ended September 30, 2001, the Company recognized a reduction
in equity based taxes of $3.8 million, respectively, resulting from a revised
estimate related to prior years. This after-tax credit was excluded from
after-tax operating income for these periods.
39
JOHN HANCOCK LIFE INSURANCE COMPANY
Protection Segment
The following table presents certain summary financial data relating to the
Protection Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------------- ---------------------
(in millions)
Revenues ................................................. $ 812.8 $ 761.4 $2,394.9 $2,229.7
Benefits and expenses (2) ................................ 703.0 655.8 2,054.2 1,903.4
Income taxes (2) ......................................... 44.1 41.5 125.5 117.1
--------------------- ---------------------
Segment after-tax operating income (1) ................... 65.7 64.1 215.2 209.2
--------------------- ---------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) (2) .. (11.8) (2.8) (48.7) (23.5)
Restructuring charges ................................. (0.6) (1.0) (4.7) (3.8)
Class action lawsuit ................................ -- -- (18.7) --
Surplus tax ......................................... -- 1.5 -- 1.5
--------------------- ---------------------
Total after-tax adjustments .............................. (12.4) (2.3) (72.1) (25.8)
--------------------- ---------------------
GAAP Reported:
Income before cumulative effect of accounting changes .... 53.3 61.8 143.1 183.4
Cumulative effect of accounting changes, net of tax ...... -- -- -- 11.7
--------------------- ---------------------
Net income ............................................... $ 53.3 $ 61.8 $ 143.1 $ 195.1
===================== =====================
Other Data:
Segment after-tax operating income: (1)
Non-traditional life (variable and universal life) .... $ 22.0 $ 29.1 $ 79.4 $ 91.0
Traditional life ...................................... 25.0 23.6 81.9 79.2
Long-term care ........................................ 20.4 14.6 57.4 43.6
Other ................................................. (1.7) (3.2) (3.5) (4.6)
--------------------- ---------------------
Segment after-tax operating income: (1) .................. $ 65.7 $ 64.1 $ 215.2 $ 209.2
===================== =====================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
(2) Certain 2001 amounts were adjusted for the adoption of the provisions of
SOP 00-3, "Accounting by Insurance Enterprises for Demutualization and
Formations of Mutual Insurance Holding Companies and Certain Long-Duration
Participating Contracts" as outlined in Note 1 -- Summary of Significant
Accounting Principles in the notes to the unaudited consolidated financial
statements.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Segment after-tax operating income increased 2.4%, or $1.6 million, from
the prior year. Non-traditional life insurance business after-tax operating
income decreased 24.4%, or $7.1 million, primarily due to higher amortization of
deferred policy acquisition costs, driven by unlocking of deferred policy
acquisition costs partially offset by increased universal life and product-type
fee income and higher net investment income. Traditional life insurance business
after-tax operating income increased 5.9%, or $1.4 million, primarily due to
lower operating costs and expenses, partially offset by lower net investment
income. Long-term care insurance business after-tax operating income increased
39.7%, or $5.8 million, resulting from growth of the business.
Revenues increased 6.7%, or $51.4 million, from the prior year. Premiums
increased 8.5%, or $28.5 million, primarily due to the long-term care insurance
and traditional life insurance businesses. Long-term care insurance premiums
increased 20.4%, or $19.4 million, driven by continued overall growth in the
business. Traditional life
40
JOHN HANCOCK LIFE INSURANCE COMPANY
insurance business premiums increased 3.8%, or $9.1 million, primarily due to
the return of renewal premiums in the prior year as part of the resolution of
the class action lawsuit which amounted to $6.0 million. This increase in
premiums was offset by a corresponding change in benefit reserves. Universal and
investment-type product charges increased 12.1%, or $12.8 million, primarily due
to higher amortization of unearned revenue of $7.2 million and increased expense
charges of $5.1 million. The increase in amortization of unearned revenue
included $12.3 million associated with the Q3 unlocking (See Note 1 - Summary of
Significant Accounting Policies in the notes to the unaudited consolidated
financial statements and the Critical Accounting Policies in this MD&A. The
Segment's net investment income increased 3.6%, or $11.5 million, primarily due
to increased asset balances.
Benefits and expenses increased 7.2%, or $47.2 million from the prior
year. Benefits to policyholders increased 3.8%, or $16.0 million, primarily due
to long-term care insurance and non-traditional life insurance businesses. The
long-term care insurance business had an increase in benefits to policyholders
of 22.4%, or $19.3 million, primarily due to additions for reserves for premium
growth and higher claim volume from business growth. Long-term care insurance
policies have increased to 582.6 thousand from 524.6 thousand in the prior year
and open claims increased to 5,190 from 4,228 in the prior year. The
non-traditional life insurance business had an increase in benefits to
policyholders of 3.5%, or $2.3 million, from the prior year. Other operating
costs and expenses decreased 7.0%, or $5.2 million, primarily due to a decrease
of $5.7 million in operating expenses on traditional products for expense
reductions. Amortization of deferred policy acquisition costs increased 56.4%,
or $24.4 million, primarily due to non-traditional life insurance business
driven by the $27.9 million Q3 unlocking of the DAC asset (See Note 1 - Summary
of Significant Accounting Policies in the notes to the unaudited consolidated
financial statements and Critical Accounting Policies in this MD&A). Dividends
to policyholders increased 10.5%, or $12.0 million, primarily due to increased
dividends of $13.0 million on traditional life insurance business within the
closed block, as a result of an increase in the dividend scale and normal aging
of the policies. The Segment's effective tax rate on operating income was 40.2%
compared to 39.3% for the prior year. The increase was primarily due to
decreased deductions for general account dividends received on common stock and
from market fluctuations in corporate owned life insurance programs.
Nine months Ended September 30, 2002 Compared to Nine months Ended
September 30, 2001
Segment after-tax operating income increased 2.9%, or $6.0 million, from
the prior year. Non-traditional life insurance after-tax operating income
decreased 12.7%, or $11.6 million, due to increases in benefits to policyholders
and amortization of deferred policy acquisition costs driven by the Q3 unlocking
of the DAC asset, as mentioned previously, partially offset by higher universal
life and investment-type product charges and net investment income. Traditional
life insurance business after-tax operating income increased 3.4%, or $2.7
million, primarily due to higher premiums offset by lower net investment income.
Long-term care insurance business after-tax operating income increased 31.7%, or
$13.8 million, as a result of growth in the business.
Revenues increased 7.4%, or $165.2 million, from the prior year. Premiums
increased 11.4%, or $111.2 million, primarily due to long-term care insurance
premiums, which increased 35.0%, or $86.7 million, driven by continued growth in
the business. The prior year long-term care insurance premium was reduced by
$43.2 million of reserves transferred to John Hancock Reassurance Company, LTD.
In addition, traditional life insurance premiums increased 3.3%, or $24.4
million, primarily due to the return of renewal premiums in the prior year as
part of the resolution of the class action lawsuit of $35.0 million, offset by a
corresponding change in benefit reserves. Universal life and investment-type
product charges increased 8.0%, or $24.6 million due primarily to higher
amortization of unearned revenue of $8.7 million and increased expense charges
of $10.0 million. The increase in amortization of unearned revenue included
$12.3 million associated with the Q3 unlocking mentioned previously. Segment net
investment income increased 3.8%, or $35.7 million, primarily due to increased
asset balances.
Benefits and expenses increased 7.9%, or $150.8 million from the prior
year. Benefits to policyholders increased 10.7%, or $125.6 million, primarily
due to growth in the long-term insurance business. Long-term care insurance
benefits to policyholders increased $87.7 million primarily due to additions to
reserves for premium growth and to higher claim volume driven by business
growth. Long-term care policies have increased to 582.6 thousand from 524.6
thousand in the prior year and open claims increased from to 5,190 to 4,228 in
the prior year. The non-traditional life insurance business had in increase in
benefits to policyholders of 26.8%, or $47.3 million, primarily due to a $22.6
million increase in death claims, net of reserves released and a $23.0 million
increase in interest credited on higher current year account balances, driven by
an increase in insurance in-force. In addition,
41
JOHN HANCOCK LIFE INSURANCE COMPANY
the prior year includes the transfer of $43.2 million of reserves to John
Hancock Reassurance Company, LTD. Other operating costs and expenses decreased
7.4%, or $18.1 million, primarily due to a decrease of $10.8 million for
non-traditional insurance products mainly attributable expense reductions.
Amortization of deferred policy acquisition costs increased 5.5%, or $7.3
million, primarily due to the non-traditional life insurance business driven by
the $27.9 million Q3 unlocking of DAC asset, as mentioned previously. This
increase was partially offset by a decrease in the amortization of deferred
policy acquisition costs in the traditional life insurance business of $18.8
million, due to improved persistency on term insurance, and lower margins.
Dividends to policyholders increased 10.2%, or $36.1 million due to increased
dividends of $38.3 million on traditional life insurance products within the
closed block, due to both an increase in dividend scale and normal aging of the
policies. The Segment's effective tax rate on operating income was 36.8%
compared to 35.9% for the prior year. This increase was primarily due to
decreased deductions for general account dividends received on common stock and
market fluctuations in corporate-owned life insurance programs.
42
JOHN HANCOCK LIFE INSURANCE COMPANY
Asset Gathering Segment
The following table presents certain summary financial data relating to the
Asset Gathering Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------- -----------------
(in millions)
Revenues ............................................... $280.8 $296.2 $839.2 $880.0
Benefits and expenses .................................. 258.2 240.0 698.8 721.6
Income taxes ........................................... 8.0 15.2 45.2 48.5
----------------- -----------------
Segment after-tax operating income (1) ................. 14.6 41.0 95.2 109.9
----------------- -----------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) .... 34.5 6.6 6.5 --
Restructuring charges ............................... (3.1) (0.3) (5.0) (15.4)
----------------- -----------------
Total after-tax adjustments ............................ 31.4 6.3 1.5 (15.4)
GAAP Reported:
Income before cumulative effect of accounting changes .. 46.0 47.3 96.7 94.5
Cumulative effect of accounting changes, net of tax .... -- -- -- (0.5)
----------------- -----------------
Net income ............................................. $ 46.0 $ 47.3 $ 96.7 $ 94.0
================= =================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Segment after-tax operating income decreased 64.4%, or $26.4 million from
the prior year. The decrease in segment after-tax operating income was driven by
a $29.0 million decrease in the variable annuity business. The variable annuity
business suffered due to significant declines in the equity markets leading to
increased amortization of deferred policy acquisition costs driven by the Q3
unlocking. Partially offsetting the losses in the variable annuity business was
growth of 19.1%, or $3.7 million, in after-tax operating income in the fixed
annuity business driven by growth in assets backing fixed annuity products.
Essex, a distribution subsidiary primarily serving the financial institution
channel, experienced a decrease in after-tax operating income of $1.8 million.
Signature Services, the Company's record keeping and servicing company,
after-tax operating income decreased $0.3 million. First Signature Bank's
after-tax operating income decreased $0.2 million. The mutual funds business
after-tax operating income increased 0.7%, or $0.1 million. Earnings remained
basically flat primarily due to a decrease in management advisory fees, offset
by a decrease in operating expenses. Signator Investors, the Company's
broker-dealer distribution subsidiary, after-tax operating income increased by
$1.1 million.
Revenues decreased 5.2%, or $15.4 million, from the prior year. The
decrease in revenue was due to a $17.9 million decline in investment management
revenues primarily driven by the mutual fund business, a $12.4 million decline
in premiums in the fixed annuity business on lower life-contingent fixed annuity
sales and a $1.9 million decline in investment product charges in the variable
annuity business on lower average fund values. These declines in revenues were
partially offset by an increase of 12.9%, or $16.9 million in net investment
income. The increase in net investment income was primarily due to increases in
invested assets backing fixed annuity products, partially offset by lower earned
yields in the portfolio. Average invested assets backing fixed annuity products
increased 29.6% to $8,304.4 million while the average investment yield decreased
113 basis points. Investment-type product charges decreased 6.1%, or $1.9
million, due to a decline in the average variable annuity reserves that
decreased 13.9%, or $871.4 million, to $5,412.3 million from the prior year.
This decrease in average variable annuity reserves is driven by both market
depreciation of $501.9 million and net outflows of $240.6 million since
September
43
JOHN HANCOCK LIFE INSURANCE COMPANY
30, 2001. For variable annuities, the mortality and expense fees as a percentage
of average account balances were 1.34% and 1.26% for the current and prior year
periods.
Investment management revenues, commissions, and other fees decreased
16.0%, or $17.9 million from the prior year. Average mutual fund assets under
management were $25,440.7 million for the three months ended September 30, 2002,
a decrease of $3,731.5 million, or 12.8%, from the prior year. The decrease in
average mutual fund assets under management is primarily due to market
depreciation of $2,537.1 million from September 30, 2001. The mutual fund
business experienced net deposits of $51.0 million since September 30, 2001,and
net deposits of $273.1 million for the three months ended September 30, 2002
compared to net redemptions of $11.2 million in the prior year, an improvement
of $284.3 million. This change was primarily due to an increase in deposits of
$703.7 million driven by the John Hancock Preferred Income closed-end fund
offering, which generated $622.2 million in sales and the acquisition of the
U.S. Global Leaders Growth Fund, which had $72.6 million in sales. Also, there
were $378.8 million institutional advisory account deposit in the current year
compared to $151.5 million in the prior year. Investment advisory fees were
$35.3 million for the three months ended September 30, 2002, a decrease of $7.5
million, or 17.6%, from the prior year and were 0.56% and 0.59% of average
mutual fund assets under management for the three months ended September 30,
2002 and 2001. Underwriting and distribution fees decreased 16.0%, or $9.2
million, to $48.2 million for the three months ended September 30, 2002,
primarily due to a decrease in front end load charge mutual fund sales,
resulting in a decrease of $9.1 million in fees and accordingly, commission
revenue. The decrease also included a $0.1 million decrease in distribution and
other fees. Shareholder service and other fees were $10.4 million for the three
months ended September 30, 2002 compared to $11.4 million in the prior year.
Benefits and expenses increased 7.6%, or $18.2 million from the prior
year. Benefits to policyholders increased 1.9%, or $2.2 million, primarily due
to an increase in payments in the variable annuity business for guaranteed
minimum death benefits of $1.7 million. Other operating costs and expenses
decreased 27.6%, or $28.5 million, from the prior year period. The decrease was
primarily due to cost savings in the mutual fund business as well as company
wide cost reduction programs, which also drove the decline in expenses in the
other Asset Gathering segment businesses. Amortization of deferred policy
acquisition costs increased $44.5 million, primarily due to the variable annuity
business driven by the $36.1 million Q3 unlocking of the DAC asset (See Note 1 -
Significant Accounting Policies in the notes to the unaudited consolidated
financial statements and the Critical Accounting Policies in this MD&A). The
Segment's effective tax rate on operating income was 35.4% for the three months
ended September 30, 2002 and 27.0% for the prior year. The increase in the rate
is due to lower dividends received deductions in the current period compared to
2001 associated with lower dividends received on stocks in the variable annuity
separate account investment funds.
Nine months Ended September 30, 2002 Compared to Nine months Ended
September 30, 2001
Segment after-tax operating income decreased 13.4%, or $14.7 million from
the prior year. The variable annuity business after-tax operating income
decreased 18.7%, or $26.5 million, from the prior year, primarily driven by a
$43.6 million increase in amortization of deferred acquisition costs driven by
the Q3 unlocking. This decrease was partially offset by an increase in fixed
annuity after-tax operating income of 15.0%, or $7.9 million, driven by a
decrease in benefits to policyholders. Mutual funds after-tax operating income
was $41.3 million, decreasing 2.6%, or $1.1 million primarily due to a 14.9%, or
$41.4 million decrease in management advisory fees, partially offset by a 18.6%,
or $40.3 million, decrease in operating expenses. Signature Services after-tax
operating income increased $2.4 million, driven by an increase in management
advisory fees from the same period in 2001. Signator Investors had after-tax
operating income of $0.8 million, an increase of $3.7 million.
Revenues decreased 4.6%, or $40.8 million, from the prior year. The
decrease in revenue was due to a $46.0 million decline in premiums in the fixed
annuity business on lower life-contingent fixed annuity sales, a $35.2 million
decline in investment management revenues driven by the mutual fund business and
a $6.0 million decrease in investment product charges in the variable annuity
business on lower average fund values. These declines in revenues were partially
offset by an increase of 12.2%, or $45.4 million in net investment income. The
increase in net investment income was primarily due to increases in invested
assets backing fixed annuity products, partially offset by lower earned yields
in the portfolio. Average invested assets backing fixed annuity products
increased 24.7% to $7,512.4 million while the average investment yield decreased
75 basis points. Investment-type product charges decreased 6.2%, or $6.0
million, due to a decline in the average variable annuity
44
JOHN HANCOCK LIFE INSURANCE COMPANY
reserves that decreased 12.3%, or $801.1 million, to $5,732.4 million from the
prior year. This decrease in average variable annuity reserves is driven by both
market depreciation of $501.9 million and net outflows of $240.6 million since
September 30, 2001. For variable annuities the mortality and expense fees as a
percentage of average account balances were 1.35% and 1.28% for the current and
prior year period.
Investment management revenues, commissions, and other fees decreased
10.2%, or $35.2 million from the prior year. Average mutual fund assets under
management were $27,327.0 million for the nine months ended September 30, 2002,
a decrease of $2,630.3 million, or 8.8%, from the prior year period. The
decrease in average mutual fund assets under management is primarily due to
market depreciation of approximately $2,537.1 million since September 30, 2001.
The mutual fund business experienced net deposits of $51.0 million since
September 30, 2001, and net redemptions of $390.7 million for the nine months
ended September 30, 2002 compared to net deposits of $112.8 million in the prior
year, a decline of $503.5 million. This change was primarily due to a decrease
in deposits of $509.0 million driven by a decrease in retail open-end fund sales
and institutional advisory account deposits in the current year compared to the
prior year. The decrease was partially offset by $622.2 million in sales of the
John Hancock Preferred Income closed-end fund, the acquisition of the U.S.
Global Leaders Growth Fund, which had $122.4 million in sales, and a $92.8
million increase in private managed account sales. In addition, the sale of the
full service retirement plan business during 2001 contributed to the decrease in
deposits in the current period. Investment advisory fees were $116.9 million for
the nine months ended September 30, 2002, a decrease of 14.0%, or $19.1 million,
from the prior year and were 0.57% and 0.61% of average mutual fund assets under
management for the nine months ended September 30, 2002 and 2001. Underwriting
and distribution fees decreased 7.1%, or $12.3 million, to $161.7 million for
the nine months ended September 30, 2002, primarily due to a decrease in front
end load mutual fund sales, resulting in a decrease of $8.9 million in
distribution and other fees. The decrease also included a $3.4 million decrease
in fees. Shareholder service and other fees were $32.4 million for the nine
months ended September 30, 2002 compared to $36.3 million in the prior year.
Benefits and expenses decreased 3.2%, or $22.8 million from the prior
year. Benefits to policyholders decreased 2.9%, or $9.7 million, primarily due
to $42.9 million lower life-contingent immediate fixed annuity reserves on new
business, partially offset by a $34.8 million increase in interest credited on
fixed annuity account balances due to higher average account balances. Other
operating costs and expenses decreased 21.6%, or $71.0 million, from the prior
year. The decrease was primarily due to cost savings in the mutual fund business
as well as company wide cost reduction programs, which drove the decline in
expenses in the other Asset Gathering segment businesses. Amortization of
deferred policy acquisition costs increased 97.1%, or $57.8, primarily due to
the variable annuity business driven by the $36.1 million Q3 unlocking of the
DAC asset mentioned previously. The Segment's effective tax rate on operating
income was 32.2% for the nine months ended September 30, 2002 and 30.6% for the
prior year. The increase in the rate is due to lower dividends received
deductions in the period compared to 2001 associated with lower dividends
received on stocks in the variable annuity separate account investment funds.
45
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------------------
(in millions)
Revenues ............................................... $445.8 $474.2 $1,325.1 $1,462.6
Benefits and expenses .................................. 345.3 379.2 1,022.3 1,192.2
Income taxes ........................................... 32.2 32.1 98.3 90.2
----------------- ---------------------
Segment after-tax operating income (1) ................. 68.3 62.9 204.5 180.2
----------------- ---------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) .... (47.4) (36.9) (116.8) (51.3)
Restructuring charges ............................... -- -- (0.5) (0.7)
Surplus Tax ......................................... -- 2.1 -- 2.1
----------------- ---------------------
Total after-tax adjustments ............................ (47.4) (34.8) (117.3) (49.9)
----------------- ---------------------
GAAP Reported:
Income before cumulative effect of accounting changes .. 20.9 28.1 87.2 130.3
Cumulative effect of accounting changes, net of tax .... -- -- -- (1.2)
----------------- ---------------------
Net income ............................................. $ 20.9 $ 28.1 $ 87.2 $ 129.1
================= =====================
Other Data:
Segment after-tax operating income: (1)
Spread-based products ............................... $ 61.5 $ 57.4 $ 186.4 $ 161.8
Fee-based products .................................. 6.8 5.5 18.1 18.4
----------------- ---------------------
Segment after-tax operating income (1) ................. $ 68.3 $ 62.9 $ 204.5 $ 180.2
================= =====================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Segment after-tax operating income increased 8.6%, or $5.4 million from the
prior year. Spread-based products after-tax operating income increased 7.1%, or
$4.1 million from the prior year, driven by a 14.8%, or $43.3 million decrease
in benefits to policyholders. Lower benefits to policyholders reflect an
increased level of reinsurance arrangements, resulting in a lower increase in
policy reserves. The decrease in benefits to policyholders in the spread-based
business was partially offset by a decline in net investment income of 6.0%, or
$23.7 million, and increased operating costs, of 71.0%, or $13.2 million.
Fee-based products after-tax operating income increased $1.3 million compared to
the prior year, primarily due to fees earned on a large structured separate
account withdrawal in the prior year which lowered assets under management in
the current period, partially offset by lower risk-based capital and
underwriting gains.
Revenues decreased 6.0%, or $28.4 million from the prior year, driven by a
decline in net investment income of 6.1%, or $27.7 million. Spread-based net
investment income decreased 6.0%, or $23.7 million from the prior year, despite
growth of 11.7%, or $2.5 billion in the average invested asset base. Net
investment income declined as the average investment yield fell to 6.31% from
7.54% in the prior year. The decrease in the average investment yield is a
reflection of the declining interest rate environment in the current period. Net
investment income varies with market interest rates because the return on
approximately $10 billion, or 43% of the asset portfolio floats with market
rates. Matching the interest rate exposure on our asset portfolio to the
exposure on our liabilities is a central feature of our asset/liability
management process. Premiums decreased 21.7%, or $1.3 million from the prior
year reflecting the increased level of reinsurance arrangements. Partially
offsetting these decreases to revenues was an
46
JOHN HANCOCK LIFE INSURANCE COMPANY
increase of $0.9 million in investment-type product charges from the prior year
due to increased general account fees.
Benefits and expenses decreased 8.9%, or $33.9 million from the prior
year, driven by lower benefits to policyholders in the current year.
Spread-based benefits to policyholders decreased 14.8%, or $43.3 million due to
increased level of reinsurance arrangements and lower interest credited.
Interest credited decreased 13.1%, or $38.9 million from the prior year. This
decrease resulted from the decline in the average interest credited rate on
account balances, due to the reset of liabilities with floating rates and new
business added at current market rates. The average interest credited rate fell
to 4.80% from 6.07% in the prior year. Other operating costs and expenses
increased 39.3%, or $10.3 million from the prior year. This increase was
primarily due to the increased level of reinsurance arrangements. The increase
in operating expenses for these arrangements is partially offset in lower
benefits to policyholders. Dividends to policyholders increased $1.4 million to
$10.2 million, from the prior year. The Segment's effective tax rate on
operating income was 32.0% compared to 33.8% in the prior year due to increased
affordable housing tax credits and an increase in the dividends received
deduction that resulted from higher dividends being received.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
Segment after-tax operating income increased 13.5%, or $24.3 million from
the prior year. Spread-based after-tax operating income increased 15.2%, or
$24.6 million, due to the increased investment spreads partially offset by the
increased costs associated with the growing level of reinsurance arrangements.
Fee-based products after-tax operating income decreased $0.3 million from the
prior year primarily due to lower risk-based capital and lower underwriting
gains.
Revenues decreased 9.4%, or $137.5 million from the prior year, driven by
a decline in net investment income of 8.0%, or $110.8 million. Spread-based net
investment income decreased 7.9%, or $94.3 million from the prior year, despite
growth of 11.2%, or $2.3 billion in the average invested asset base. Net
investment income declined as the average investment yield fell to 6.54% from
8.01% in the prior year. The decrease in the average investment yield is a
reflection of the declining interest rate environment in the current period. Net
investment income varies with market interest rates because the return on
approximately $9 billion, or 39% of the asset portfolio, floats with market
rates that have decreased since the prior year. Matching the interest rate
exposure on our asset portfolio to the exposure on our liabilities is a central
feature of our asset/liability management process. Premiums decreased 62.2%, or
$23.0 million from the prior year, reflecting the increased level of reinsurance
arrangements. Investment type product charges decreased 9.8%, or $3.8 million
from the prior year due to lower asset-based fees from separate accounts.
Benefits and expenses decreased 14.3%, or $169.9 million from the prior
year, driven by lower benefits to policyholders in the current year.
Spread-based benefits to policyholders decreased 19.4%, or $180.1 million from
the prior year due to an increased level of reinsurance arrangements and lower
interest credited on account balances. Interest credited decreased 16.7%, or
$153.5 million from the prior year. This decrease resulted from the decline in
the average interest credited rate on account balances, due to the reset of
liabilities with floating rates and new business added at current market rates.
The average interest credited rate fell to 4.94% from 6.59% in the prior year.
Other operating costs and expenses increased 40.4%, or $28.9 million from the
prior year. This increase was primarily due to the increased level of
reinsurance arrangements. The increase in operating expenses for these
arrangements is partially offset in lower benefits to policyholders. Dividends
to policyholders increased $0.6 million to $26.8 million from the prior year.
The Segment's effective tax rate on operating income was 32.5% compared to 33.4%
in the prior year due to increased affordable housing tax credits and an
increased benefit for changes in the estimate of prior year balances.
47
JOHN HANCOCK LIFE INSURANCE COMPANY
Investment Management Segment
The following table presents certain summary financial data relating to the
Investment Management Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------ ------------------
(in millions)
Revenues .................................. $30.5 $33.2 $94.4 $99.7
Benefits and expenses ..................... 22.2 22.2 66.8 71.9
Income taxes .............................. 3.8 4.0 10.8 10.8
------------------ ------------------
Segment after-tax operating income (1) ... 4.5 7.0 16.8 17.0
------------------ ------------------
After-tax adjustments: (1)
Net realized investment and other
gains (losses) ....................... (0.1) -- 0.4 (0.1)
Restructuring charges .................. -- (0.2) (0.2) (0.7)
------------------ ------------------
Total after-tax adjustments ............... (0.1) (0.2) 0.2 (0.8)
------------------ ------------------
GAAP Reported:
Income before cumulative effect of
accounting changes ..................... 4.4 6.8 17.0 16.2
Cumulative effect of accounting changes,
net of tax ............................. -- -- -- (0.2)
------------------ ------------------
Net income ................................ $ 4.4 $ 6.8 $17.0 $16.0
================== ==================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Segment after-tax operating income decreased $2.5 million, or 35.7%, from
the prior year. The decrease was primarily due to a decrease of $5.6 million, or
62.9%, in net investment income offset by a $3.1 million increase, or 13.3%, in
revenue, commissions and other fees. Expenses and realized investment and other
gains (losses) were flat overall. The decrease in net investment income resulted
primarily from non-recurring prior year income on investments at John Hancock
Energy Resources Management and from a lower level of commercial mortgages held
for sale this year at John Hancock Real Estate Finance. The increase in revenue,
commissions and other fees resulted from higher fees earned from new investment
initiatives at our Bond & Corporate Finance Group and higher acquisition fees
earned at John Hancock Realty Advisors based on higher acquisition activity
offset by lower advisory fees at Independence Investment LLC. Independence
Investment LLC advisory fees declined due to continued market depreciation
partially offset by net sales.
Revenues decreased $2.7 million, or 8.1%, from the prior year. Net
investment income declined $5.6 million, or 62.9%, to $3.3 million. Net
investment income at John Hancock Real Estate Finance decreased $2.9 million, or
60.4%, on lower commercial mortgages held for sale, and in the prior year
period, John Hancock Energy Resources Management recognized $3.4 million of
non-recurring income on limited partnerships' sales of investments. Investment
management revenues, commissions and other fees increased $3.1 million, or
13.3%, over the prior year, mostly due to increases in advisory and acquisition
fees. Bond & Corporate Finance fees increased $2.7 million, mainly from new
investment initiatives. John Hancock Realty Advisors revenue increased $1.9
million based on an increase in acquisition fee income of $1.8 million, from
$0.7 million in the prior year, resulting from a fourfold increase in
acquisition activity to $44.1 million of acquisitions placed this quarter.
Independence Investment LLC advisory fees decreased $1.8 million based on $2.0
billion in lower average assets under management compared to the prior year,
resulting from market declines of $2.0 billion, partially offset by net sales of
$175.0 million. Net realized investment and other gains (losses) were flat
overall, down $0.1 million, to $0.9 million at September 30,
48
JOHN HANCOCK LIFE INSURANCE COMPANY
2002. Investment management revenues, commissions and other fees were 0.40% and
0.33% of average advisory assets under management for the current and prior year
quarters, respectively.
Benefits and expenses were unchanged from the prior year. John Hancock
Real Estate Finance interest expenses declined $1.9 million, based on lower
interest rates and lower borrowings to fund commercial mortgage sheld for sale,
offset by $0.4 million higher operating expenses at Bond & Corporate Finance
related to a planned mezzanine fund, $0.4 million higher acquisition costs at
John Hancock Realty Advisors, and $0.4 million higher compensation expenses at
John Hancock Real Estate Finance and other smaller increases throughout the
segment. Other operating costs and expenses were 0.33% and 0.31% of average
advisory assets under management for the current and prior year quarters,
respectively. The Segment's effective tax rate on operating income increased to
45.8% from 36.4% in the prior year period, primarily due to a one-time
adjustment to 2001. The underlying effective tax rate for the Investment
Management Segment remains higher than for our other business segments due to
state taxes on certain investment management subsidiaries, and fewer tax
benefits from portfolio holdings in this segment.
Nine Months Ended September 30, 2002 Compared to Nine months Ended
September 30, 2001
Segment after-tax operating income decreased $0.2 million, or 1.2% from
the prior year. The decrease was due to $7.2 million, or 39.8%, in lower net
investment income and $1.6 million, or 45.7%, of lower realized investment and
other gains (losses) offset by $3.5 million, or 4.5%, of higher revenue,
commissions and other fees and $5.1 million, or 7.1%, of lower benefits and
expenses. Net investment income declined primarily due to lower levels of
mortgages held for sale at John Hancock Real Estate Finance and non-recurring
income from limited partnerships in the prior year period at John Hancock Energy
Resources Management. Revenue, commissions and other income increased due to
higher acquisition fees at John Hancock Realty Advisors and higher fees at our
Bond & Corporate Finance Group from new investment initiatives offset by lower
advisory fees at Independence Investment LLC. Independence Investment LLC
advisory fees declined due to continued market depreciation partially offset by
net sales.
Revenues decreased $5.3 million, or 5.3% from the prior year. Net
investment income decreased $7.2 million, or 39.8%, primarily due to lower
prevailing short-term interest rates and a lower level of warehoused mortgages
at John Hancock Real Estate Finance in the current year period, and in the prior
year period, John Hancock Energy Resources Management recognized $3.8 million of
non-recurring income on limited partnerships' sales of investments. Net realized
investment and other gains (losses) on mortgage securitizations decreased $1.6
million, or 45.7%, based on lower average profitability of the securitizations
and lower levels of securitization activity in the current year. Investment
management revenues, commissions, and other fees increased $3.5 million, or
4.5%, primarily due to an increase in real estate acquisition fee income at John
Hancock Realty Advisors and increased fees from new investment initiatives at
our Bond & Corporate Finance Group, offset by lower advisory fees at
Independence Investment LLC on lower average assets under management. Average
assets under management at Independence Investment LLC declined from the prior
year, primarily due to market declines of $2.0 billion partially offset by net
sales of $175.0 million. Investment management revenues, commissions and other
fees were 0.39% and 0.35% of average advisory assets under management in 2002
and 2001, respectively.
Benefits and expenses decreased $5.1 million, or 7.1%, from the prior
year. The decrease was primarily due to $2.2 million of lower interest expense
in the segment resulting mostly from lower prevailing interest rates and a lower
level of warehoused mortgages at John Hancock Real Estate Finance and savings
from ongoing cost cutting efforts across the Investment Management Segment
subsidiaries. Offsetting these reductions was an increase in commission expenses
of $1.2 million at Hancock Natural Resource Group as a result of signing new
timber investors in 2002 and $1.0 million in higher acquisition costs due to
higher real estate acquisition activity at John Hancock Realty Advisors. Other
operating costs and expenses were 0.31% and 0.32% of average advisory assets
under management for 2002 and 2001, respectively. The Segment's effective tax
rate on operating income rose to 39.1% from 38.8% from the prior year, primarily
due to a one-time adjustment to 2001. The underlying effective tax rate for the
Investment Management Segment remains higher than for our other business
segments due to state taxes on certain investment management subsidiaries, and
fewer tax benefits from portfolio holdings in this segment.
49
JOHN HANCOCK LIFE INSURANCE COMPANY
Corporate and Other Segment
The following table presents certain summary financial data relating to
the Corporate and Other Segment for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------- -------------------
(in millions)
Revenues ............................................... $127.3 $134.1 $459.6 $439.6
Benefits and expenses .................................. 154.9 120.4 501.8 412.3
Income taxes ........................................... (35.0) (5.3) (64.3) (17.4)
------------------- -------------------
Segment after-tax operating income (1) ................. 7.4 19.0 22.1 44.7
------------------- -------------------
After-tax adjustments: (1)
Net realized investment and other gains (losses) .... 1.6 (4.3) (0.6) 13.1
Restructuring charges ............................... (0.3) (0.2) 2.0 (0.4)
Surplus tax ......................................... -- 0.2 -- 0.2
Class action lawsuit ................................ -- -- (0.8) --
------------------- -------------------
Total after-tax adjustments ............................ 1.3 (4.3) 0.6 12.9
------------------- -------------------
GAAP Reported:
Income before cumulative effect of accounting changes .. 8.7 14.7 22.7 57.6
Cumulative effect of accounting changes, net of tax .... -- -- -- (2.6)
------------------- -------------------
Net income ............................................. $ 8.7 $ 14.7 $ 22.7 $ 55.0
=================== ===================
(1) See "Adjustments to GAAP Reported Net Income" included in this MD&A.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Corporate and Other Segment after-tax operating income consists of three
sub-segments: International Operations, $1.9 million and $1.2 million, Corporate
Operations, $4.7 million and $16.0 million and Non-Core Operations, or
businesses in run-off, $0.8 million and $1.8 million, for the three months ended
September 30, 2002 and 2001. The following discussion focuses on Corporate
Operations.
Segment after-tax operating income from corporate operations decreased
$11.3 million or 70.6% from the prior year. The decrease was due to lower
investment income of $5.3 million from partnership and lease funds as well as a
decrease in net periodic pension plan credits of $5.1 million. Signature Fruit's
results were $0.6 million favorable due to reductions in fixed expenses of $2.3
million that offset lower profit margins of $1.7 million. The Group Life
insurance business improved $1.6 million due to a favorable claim experience.
Our corporate-owned life insurance program was $3.7 million unfavorable due to
the performance of the underlying assets.
The Segment generated a tax credit of $35.0 million, an increase of $29.7
million for the three months ended September 30, 2002, compared to the prior
year.. The Segment's effective tax rate decreased primarily due to increased tax
benefits generated by increased affordable housing tax credits, lease residual
management investment strategy, dividends received deduction, and the Company's
corporate-owned life insurance program.
50
JOHN HANCOCK LIFE INSURANCE COMPANY
Nine months Ended September 30, 2002 Compared to Nine months Ended
September 30, 2001
Corporate and Other Segment after-tax operating income consists of three
sub-segments: International Operations, $5.3 million and $2.4 million, Corporate
Operations, $13.2 million and $36.9 million and Non-Core Operations, or
businesses in run-off, $3.6 million and $5.4 million, for the nine months ended
September 30, 2002 and 2001. The following discussion focuses on Corporate
Operations.
Segment after-tax operating income from corporate operations decreased by
$23.7 million or 64.2% from the prior year. The decrease was due to lower
investment income of $13.0 million due to prior year adjustments to partnership
and lease funds. Income from equity investment was $3.1 million lower. There was
a decrease in net periodic pension plan credits of $15.5 million. The Group Life
insurance business improved $3.2 million due to a favorable claim experience.
Our corporate owned life insurance program was $10.9 million favorable due to
both an increase in the asset base and to improved performance of the underlying
assets which were reallocated from equity to fixed income investments.
The Segment generated a tax credit of $64.3 million, an increase of $46.9
million for the nine months ended September 30, 2002 compared to the prior year.
The Segment's effective tax rate decreased due to increased tax benefits
generated by increased affordable housing tax credits, lease residual management
investment strategy, dividends received deduction, and the Company's
corporate-owned life insurance program.
51
JOHN HANCOCK LIFE INSURANCE COMPANY
General Account Investments
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.
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:
o Interest rate risk, meaning changes in the market value of fixed
maturity securities as interest rates change over time, and
o Credit risk, meaning uncertainties associated with the continued
ability of an obligor to make timely payments of principal and
interest
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. Assets are invested predominantly in fixed income securities, and
the asset portfolio is matched with the liabilities so as to eliminate the
company's exposure to changes in the overall level of interest rates. Each
investment segment holds bonds, mortgages, and other asset types that will
satisfy the projected cash needs of its underlying liabilities. 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
combined portfolios of assets and liabilities. For a more complete discussion of
our interest rate risk management practices, please see the Interest Rate Risk
section in the Quantitative and Qualitative Disclosures about Market Risk
section of this document.
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 requirements. In
addition, when investing in private fixed maturity securities, we rely upon
broad access to proprietary 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:
o material declines in the issuer's revenues or margins;
o significant management or organizational changes;
o significant uncertainty regarding the issuer's industry;
o debt service coverage or cash flow ratios that fall below
industry-specific thresholds;
o violation of financial covenants; and
o other business factors that relate to the issuer.
Product prices are set on the basis of expected default losses over the
long term. Actual losses therefore vary above and below this average, and the
market value of the portfolio as a whole also changes as market credit spreads
move up and down during an economic cycle.
John Hancock is able to hold to this investment strategy over the long
term, both because of its strong capital position, the fixed nature of its
liabilities and the matching of those liabilities with assets, and because of
the experience gained through many decades of a consistent investment
philosophy. Despite the current high levels of market default rates and widened
credit spreads, we expect losses on our investment portfolio to approximate
losses assumed in product pricing over the economic cycle. We generally intend
to hold all of our fixed maturity investments to maturity to meet liability
payments, and to ride out any unrealized gains and losses over the long term.
52
JOHN HANCOCK LIFE INSURANCE COMPANY
Overall Composition of the General Account
Invested assets, excluding separate accounts, totaled $58.3 billion and
$53.3 billion as of September 30, 2002 and December 31, 2001, respectively.
Although the composition of the portfolio has not significantly changed at
September 30, 2002 as compared to December 31, 2001, the majority of the $5.0
billion increase in the invested assets is attributable to an increase in the
fixed maturity security portfolio where the Company directs a majority of its
net cash flow. The following table shows the composition of investments in the
general account portfolio.
As of September 30, 2002 As of December 31, 2001
----------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
----------------------------------------------------------
(in millions) (in millions)
Fixed maturity securities (1).............. $ 42,451.3 72.8% $ 37,995.6 71.3%
Mortgage loans (2)......................... 10,311.3 17.7 9,667.0 18.1
Real estate................................ 291.7 0.5 380.4 0.7
Policy loans (3)........................... 1,937.1 3.3 1,927.0 3.6
Equity securities.......................... 354.8 0.6 563.7 1.1
Other invested assets...................... 2,212.6 3.8 1,676.9 3.1
Short-term investments..................... 24.8 0.1 78.6 0.2
Cash and cash equivalents (4).............. 708.3 1.2 1,025.3 1.9
----------------------------------------------------------
Total invested assets...................... $ 58,291.9 100.0% $ 53,314.5 100.0%
==========================================================
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $674.9 million and
$691.8 million as of September 30, 2002 and December 31, 2001,
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 the fixed maturity security portfolio was $42,510.7
million and $37,980.3 million, at September 30, 2002 and December 31,
2001, respectively.
(2) The fair value of the mortgage loan portfolio was $11,243.4 million and
$10,215.0 million as of September 30, 2002 and December 31, 2001,
respectively.
(3) Policy loans are secured by the cash value of the underlying life
insurance policies and do not mature in a conventional sense, but expire
in conjunction with the related policy liabilities.
(4) Cash and cash equivalents are included in total invested assets for the
purposes of calculating yields on the income producing assets for the
Company.
Consistent with the nature of the Company's product liabilities, assets
are heavily oriented toward fixed maturity securities. The Company determines
the allocation of assets primarily on the basis of cash flow and return
requirements of its products and by the level of investment risk.
Fixed Maturity Securities. The 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.
The fixed maturity securities portfolio also includes redeemable preferred
stock. As of September 30, 2002, fixed maturity securities represented 72.8% of
general account investment assets with a carrying value of $42.5 billion,
roughly comprised of 57% public securities and 43% private securities. Each year
the Company directs the majority of its net cash inflows into investment grade
fixed maturity securities. Typically between 5% and 15% of funds allocated to
fixed maturity securities are invested in below-investment-grade bonds, while
maintaining a policy to limit the overall level of these bonds to no more than
10% of invested assets, and to target two thirds of that balance in the BB
category. Allocations are based on an assessment of relative value and the
likelihood of enhancing risk-adjusted portfolio
53
JOHN HANCOCK LIFE INSURANCE COMPANY
returns. While the Company 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 the Company's assets.
The following table shows the composition by our internal industry
classification of the fixed maturity securities portfolio and the unrealized
gains and losses contained therein.
Fixed Maturity Securities -- By Industry Classification
As of September 30, 2002
-----------------------------------------------------------------------------------------
Carrying Value
of Securities Carrying Value of
Total Net with Gross Gross Securities with Gross
Carrying Unrealized Unrealized Unrealized Gross Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
- --------------------------------------------------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance............. $ 5,113.0 $ 172.1 $ 3,775.4 $ 269.9 $ 1,337.6 $ (97.8)
Communications.................. 1,938.1 (71.6) 1,065.9 90.0 872.2 (161.6)
Government...................... 1,118.9 81.4 1,031.8 93.5 87.1 (12.1)
Manufacturing................... 7,267.1 118.7 5,181.4 396.3 2,085.7 (277.6)
Oil & gas....................... 4,974.5 39.3 3,597.8 306.1 1,376.7 (266.8)
Services / trade................ 2,424.0 108.2 1,855.8 142.3 568.2 (34.1)
Transportation.................. 3,445.6 (47.7) 2,339.7 185.1 1,105.9 (232.8)
Utilities....................... 8,094.2 (144.4) 4,949.7 392.8 3,144.5 (537.2)
-----------------------------------------------------------------------------------------
Total Corporate Securities........ 34,375.4 256.0 23,797.5 1,876.0 10,577.9 (1,620.0)
Asset-backed and mortgage-backed
securities........................ 7,301.7 346.7 5,812.0 467.1 1,489.7 (120.4)
U.S. Treasury securities and
Obligations of U.S. government
Agencies.......................... 134.5 9.3 134.3 9.3 0.2 (0.0)
Debt securities issued by foreign
Governments....................... 375.5 15.3 249.0 40.1 126.5 (24.8)
Obligations of states and political
Subdivisions...................... 264.2 21.0 238.8 21.6 25.4 (0.6)
-----------------------------------------------------------------------------------------
Total........................... $42,451.3 $ 648.3 $30,231.6 $2,414.1 $12,219.7 $(1,765.8)
=========================================================================================
As of September 30, 2002, there were $2,414.1 million of gross unrealized
gains and $1,765.8 million of gross unrealized losses on the fixed maturity
portfolio. The table above shows gross losses before amounts that are allocated
to the closed block policyholders or participating pension contractholders. Of
the $1,765.8 million of gross losses in the portfolio at September 30, $208.4 is
in the closed block and $61.6 million had been allocated to participating
pension contractholders, leaving $1,495.8 of unrealized losses after such
allocations. The gross unrealized losses of $1,765.8 million include $1,476.0
million, or 83.6%, concentrated in the manufacturing, oil and gas,
transportation, utility and communications industries. Only the communications,
transportation and utilities industries have net unrealized losses.
Manufacturing: Manufacturing is a large, diverse sector encompassing
cyclical industries. Low commodity prices continue to pressure the subsectors of
mining, chemicals, metals, and forest products. When the economy recovers, these
cyclical subsectors should recover and the bonds of companies in these
subsectors should recover as well. We have financed these subsectors though
several economic cycles and have the ability and intent to hold our investments
until they recover in value or mature. Our portfolio should also benefit from
our underwriting process where we stress test each company's financial
performance through a recession scenario.
Oil & Gas: In the Oil & Gas industry much of our unrealized loss arises
from companies in emerging markets, primarily Latin America. Our philosophy in
emerging markets is to generally lend to those companies with dollar based
export products such as oil companies. The emerging markets continue to
experience significant stress and bond prices across most emerging market
countries are down. However, our oil & gas investments are faring well. The
companies have dollar based revenues to pay their debts and have continued to do
so. In many cases, investments are structured so that all export revenues first
pass through an offshore trust and our debt service is then paid before any
dollars are released back to the company. This type of transaction is known as
an export receivables investment. All of our Venezuelan transactions are
structured in this manner.
54
JOHN HANCOCK LIFE INSURANCE COMPANY
Transportation: The Transportation sector consists largely of air, rail,
and automotive manufacturers and service companies. All of these subsectors are
experiencing cyclical downturns, particularly the airline industry, having been
impacted both by the recession and the fallout from September 11. While most
airlines are losing money, we lend to this industry almost exclusively on a
secured basis (approximately 99% of our loans are secured). These secured
airline financings are of two types: Equipment Trust Certificates (ETC's) and
Enhanced Equipment Trust Certificates (EETC's). The ETC's initially have an 80%
loan-to-value ratio and the EETC senior tranches initially have a 40-50%
loan-to-value and include a provision for a third party to pay interest for
eighteen months from a default. For us to lose money on an ETC, three things
must happen: the airline must default, the airline must decide it does not want
to fly our aircraft, and the aircraft must be worth less than our loan (losses
my also arise in a renegotiation if we anticipate this chain of events). When
lending to this industry, we underwrite both the airline and the aircraft. We've
been lending to this industry in this fashion for 25 years through several
economic cycles and have seen values on our secured airline bonds fall and
recover thorough these cycles.
Utilities: The Utility sector has faced a number of challenges over the
past few years including the California Power Crisis, the Enron bankruptcy, and
the recession which has resulted in a drop in demand. More recently, there have
been issues around energy trading activities and the financial liquidity of some
large merchant industry players. These events caused a general widening in
utility and project finance bond spreads over the course of the quarter. We
expect continued stress in this sector as the owners of merchant plants work
through their liquidity issues with the banks. Investors are likely to see
continued restructurings and/or bankruptcy filings from those companies unable
to reach agreement with the banks. Longer term we believe the reduction in power
supply from reduced capital expenditures and the shutting of inefficient plants
will support a gradual rise in power prices that will help this sector recover.
We currently intend to hold our positions until they recover.
Communications: The Communication sector, which includes media, publishing
and other activities in addition to telecommunications, has experienced
aggressive expansion, which has resulted in considerable excess capacity. There
have been high profile companies which have filed for bankruptcy. Among the
remaining players, further pressure has resulted. Our strategy has been to focus
on operating companies with strong balance sheets and diversified product
offerings. As in past recessions, we see pressure on these bonds. We would
expect improvement when the economy begins to recover.
The following table shows the composition by credit quality of the
securities with gross unrealized losses in our fixed maturity securities
portfolio.
Unrealized Fixed Maturity Securities -- By Quality
As of September 30, 2002
--------------------------------------------------------------------
Carrying Value Of
Securities with
SVO S&P Equivalent Gross Unrealized % of Unrealized % of
Rating (1) Designation (2) Losses (3) (4) Total Loss (3) (4) Total
- -------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A............... $ 2,815.5 23.6% $ 181.1 10.4%
2 BBB.................... 6,086.2 51.0 718.3 41.3
3 BB..................... 1,698.4 14.2 389.3 22.4
4 B...................... 900.9 7.5 304.9 17.6
5 CCC and lower.......... 315.5 2.7 139.1 8.0
6 In or near default..... 122.1 1.0 5.8 0.3
--------------------------------------------------------------------
Total.................. $11,938.6 100.0% $1,738.5 100.0%
====================================================================
(1) With respect to securities that are awaiting an SVO rating, the Company
has assigned a rating based on an analysis that it believes 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
$281.1 million and unrealized losses of $27.3 million.
55
JOHN HANCOCK LIFE INSURANCE COMPANY
(4) Includes 129 securities that are awaiting an independent rating with a
carrying value of $1,092.2 million and unrealized losses of $56.5 million.
Due to lags between the funding of an investment, the process of final
legal documents, the filing with the SVO, and the rating by the SVO, there
will always be a number of unrated securities at each statement date.
Unrated securities comprised 8.9% and 3.2% of the total carrying value and
total gross unrealized losses of securities in a loss position, including
redeemable stock, respectively.
At September 30, 2002, $899.4 million, or 51.7%, of the gross unrealized
losses are on securities that are rated investment grade. Unrealized losses on
investment grade securities principally relate to changes in interest rates or
changes in credit spreads since the securities were acquired. Any such
unrealized losses are recognized in income if, and when, we decide to sell such
securities (note that such a decision only would be made with respect to our
available-for-sale portfolio). We believe that the discussion of securities with
ongoing unrealized losses should focus on below investment grade securities that
generally are more likely to develop credit concerns.
As of September 30, 2002, there are $839.1 million of the gross unrealized
losses on below investment grade securities in the fixed maturity portfolios. Of
this amount, 72.0% have been in place for six months. Based on information
available at this time, the Company believes that after a comprehensive review
of each borrower's ability to meet the obligations of the notes, these
securities will continue to pay as scheduled. The Company has the ability and
the intent to hold these securities until they recover in value or mature. The
scheduled maturity dates for the securities in an unrealized loss position at
September 30, 2002 are shown below.
Unrealized Losses on Fixed Maturity Securities -- By Maturity
September 30, 2002
-------------------------------------------
Carrying Value of
Securities with Gross Gross
Unrealized Loss Unrealized Loss
-------------------------------------------
(in millions)
Due in one year or less........................... $ 596.9 $ 34.2
Due after one year through five years............. 3,268.3 406.0
Due after five years through ten years............ 3,713.0 659.8
Due after ten years............................... 3,151.8 545.4
-------------------------------------------
10,730.0 1,645.4
Asset-backed and mortgage-backed securities....... 1,489.7 120.4
-------------------------------------------
Total............................................. $ 12,219.7 $1,765.8
===========================================
56
JOHN HANCOCK LIFE INSURANCE COMPANY
As of September 30, 2002 we had 41 securities that had an unrealized loss of $10
million or more. They include:
Carrying Unrealized
Description of Issuer Value Loss
- -------------------------------------------------------------------------------------------------------
(in millions)
Secured financings to large US airline ................................ $ 239.0 $ 57.0
Unregulated power/pipeline energy company ............................. 19.6 56.8
Unregulated energy generator and supplier ............................. 71.5 48.6
Large US based merchant energy generator .............................. 117.6 43.9
US power generator with multiple plants ............................... 60.6 36.0
Oilfield service company .............................................. 29.3 32.8
Notes secured by leases on a pool of aircraft ......................... 49.6 32.5
Large integrated energy company ....................................... 89.5 31.9
US telecommunications company ......................................... 34.8 31.1
US based farmer owned cooperative ..................................... 26.6 30.9
Venezuelean oil company with US dollar based flows .................... 129.6 29.6
Lease financing with US fossil fuel power generator ................... 56.2 28.0
US telecommunications company ......................................... 81.7 27.4
Large US wireless telecommunication company .......................... 124.6 26.5
Joint venture in three US gas fired cogeneration power plants ........ 26.1 23.9
Argentinean trust holding rights to oil and gas royalty producer ...... 21.0 21.0
US integrated producer of petrochemicals and related products ......... 45.0 20.9
Large chemical related producer of synthetic products ................. 111.0 20.2
Holding company of large US integrated power generator ................ 59.1 19.2
Joint venture with Venezuelan oil company and two large US oil
companies ........................................................... 39.2 17.4
Financing of a restructured power contract with a major US utility .... 36.5 17.3
Joint venture with a Venezuelan oil company that produces fertilizer .. 21.2 16.9
US telecommunications company ......................................... 56.6 16.3
US merchant energy generator .......................................... 71.6 15.6
Large Mexican copper producer ......................................... 20.0 15.5
Large US housing builder .............................................. 7.7 15.1
Large US auto manufacturer ............................................ 169.8 15.0
Franchise loan backed transaction ..................................... 25.2 13.9
Merchant energy generation and trading company ........................ 16.7 13.8
Joint venture of two large US chemical companies ...................... 73.7 13.8
Argentinean oil company with US dollar based flows .................... 17.6 12.8
Joint venture between a large Venezuelean company and a large US oil
company ............................................................. 47.0 12.2
Mid size US multi-line insurance company .............................. 9.0 12.1
Subordinated investment in international water projects ............... 3.4 11.8
Large US electric utility holding company ............................. 42.3 11.4
Private toll road and bridge operator ................................. 30.3 11.4
US natural gas fired power generator .................................. 65.0 11.2
Brazilian national oil company ........................................ 30.6 11.0
Energy generator and supplier ......................................... 41.1 10.9
Norwegian subsidiary of US oilfield service company .................. 19.3 10.6
Great Britain pump storage facility ................................... 59.4 10.0
A major driver in the valuation of the fixed income portfolio at September
30, 2002 is the recent reduction in the traded or quoted bond prices across most
industries, especially in the below investment grade categories where, in the
current environment, bond market investors are very risk averse and have
severely penalized issues where there is any uncertainty. This effect was most
pronounced in the reduction in the traded or quoted prices of the bonds of many
energy companies with merchant exposure. In the third quarter, the rating
agencies downgraded a number of companies that have exposure to the merchant
energy sector. These downgrades in turn created liquidity issues for a few
companies and uncertainty at many others. In the current environment, bond
market investors are very risk averse and have severely penalized issues where
there is any uncertainty. This market sentiment, which we believe to be
temporary, has led to significant reductions in the prices of virtually every
energy company that has any merchant exposure, including several in our
portfolio and 15 on the list above. We believe these issuers are taking the
right steps to strengthen their balance sheets through a combination of actions
such as reducing capital expenditures, scaling back trading operations, reducing
dividends, and issuing equity. All of the above securities have undergone
thorough analysis by our investment professionals, and at this time we believe
that the borrowers have the financial capacity to make all required contractual
payments on the notes when due, and we intend to hold these securities until
they either mature or recover in value.
57
JOHN HANCOCK LIFE INSURANCE COMPANY
In keeping with the investment philosophy of tightly managing interest
rate risk the Company's MBS & ABS holdings are heavily concentrated in
commercial MBS where the underlying loans are largely call protected, which
means they are not pre-payable without penalty prior to maturity at the option
of the issuer. By investing in MBS and ABS securities with relatively
predictable repayments, the Company adds high quality, liquid assets to the
portfolios without incurring the risk of cash flow variability. The portion of
the MBS/ABS portfolio subject to prepayment risk as of September 30, 2002 and
December 31, 2001 was limited to 12.3% and 10.4% of total MBS/ABS portfolio and
2.1% and 1.7% of total fixed maturity securities holdings, respectively.
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 (See the SVO website at
www.naic.org/1svo/, for more information). 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 Standard & Poor's
(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 the Company's bond
portfolio along with an equivalent S&P rating agency designation. The majority
of bonds are investment grade, with 88.4% and 87.4% invested in Category 1 and 2
securities as of September 30, 2002 and December 31, 2001, respectively. Below
investment grade bonds were 11.6% and 12.6% of fixed maturity investments
excluding redeemable preferred stock and 8.3% and 8.8% of total invested assets
as of September 30, 2002 and December 31, 2001, respectively. This allocation
reflects the Company's strategy of avoiding the unpredictability of interest
rate risk in favor of relying on the ability of bond analysts to better predict
credit or default risk. The Company's 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 resulting
in a well-diversified high yield portfolio.
Valuation techniques for the bond portfolio vary by security type and the
availability of market data. Pricing models and their underlying assumptions
impact the amount and timing of unrealized gains and losses recognized, and the
use of different pricing models or assumptions could produce different financial
results. External pricing services are used where available, broker dealer
quotes are used for thinly traded securities, and a spread pricing matrix is
used when price quotes are not available, which typically is the case for our
private placement securities. The spread pricing matrix is based on credit
quality, country of issue, market sector and average investment life and is
created for these dimensions through brokers' estimates of public spreads
derived from their respective publications. When utilizing the spread pricing
matrix, securities are valued by utilizing a discounted cash flow method where
each bond is assigned a spread, that is added to the current U.S. Treasury rates
to discount the cash flows of the security. The spread assigned to each security
is changed from month to month based on changes in the market. Certain market
events that could impact the valuation of securities include issuer credit
ratings, business climate, management changes, litigation, and government
actions among others. The resulting prices are then reviewed by the pricing
analysts and members of the Controller's Department. The Company's pricing
analysts take appropriate actions to reduce valuations of securities where such
an event occurs which negatively impacts the securities' value. To the extent
that bonds have longer maturity dates, management's estimate of fair value may
involve greater subjectivity since they involve judgment about events well into
the future. Then, every quarter, there is a comprehensive review of all impaired
securities and problem loans by a group consisting of the Chief Investment
Officer and Bond Investment Commitee.
The majority (53.7%) of below investment grade bonds is in category 3, the
highest quality below investment grade. Category 6 bonds represent securities
that were originally acquired as long-term investments, but subsequently became
distressed. The carrying value of bonds in or near default was $480.4 million
and $388.7 million as of September 30, 2002 and December 31, 2001, respectively.
As of September 30, 2002 and December 31, 2001, $6.5 million and $2.4 million,
respectively of interest on bonds in or near default was included in accrued
investment income, respectively Unless the Company reasonable expects to collect
investment income on bonds in or near default, the accrual will be ceased and
any accrued income reversed. Management judgement is used and the actual results
could be materially different.
58
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Quality
As of September 30, 2002 As of December 31, 2001
----------------------------------------------------------------
SVO S&P Equivalent Carrying % of Carrying % of
Rating (1) Designation (2) Value (3)(4) Total Value (3) Total
- ----------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A................. $16,494.9 39.5% $14,336.9 38.4%
2 BBB...................... 20,432.3 48.9 18,275.9 49.0
3 BB....................... 2,602.3 6.2 2,771.9 7.4
4 B........................ 1,188.0 2.9 1,095.1 2.9
5 CCC and lower............ 578.5 1.4 435.3 1.2
6 In or near default....... 480.4 1.1 388.7 1.1
----------------------------------------------------------------
Total.................... $41,776.4 100.0% $37,303.8 100.0%
================================================================
(1) With respect to securities that are awaiting an SVO rating, the Company
has assigned a rating based on an analysis that it believes 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
$674.9 million and $691.8 million as of September 30, 2002 and December
31, 2001, respectively.
(4) Includes 368 securities that are awaiting an SVO rating with a carrying
value of $3,251.8 million at September 30, 2002. Due to lags between the
funding of an investment, the process of final legal documents, the filing
with the SVO, and the rating by the SVO, there will always be a number of
unrated securities at each statement date.
Mortgage Loans. As of September 30, 2002 and December 31, 2001, the
Company held mortgage loans with a carrying value of $10.3 billion and $9.7
billion, respectively, including $7.7 billion and $7.2 billion respectively, of
commercial loans and $2.6 billion and $2.5 billion respectively, of agricultural
loans. Impaired loans comprised of 1% of the mortgage portfolio at September 30,
2002. The Company's average historical impaired loan percentage during the
period of 1996 through 2001, is 2.1%. This historical percentage is higher than
the current 1% because it includes some remaining problem ass of the 1990's real
estate downturn.
The following table shows the Company's agricultural mortgage loan
portfolio by its three major sectors: agribusiness, timber and production
agriculture.
As of September 30, 2002 As of December 31, 2001
------------------------------------- --------------------------------------
Amortized Carrying % of Total Amortized Carrying % of Total
Cost Value Carrying Value Cost Value Carrying Value
------------------------------------- --------------------------------------
(in millions) (in millions)
Agri-business.............. $1,456.0 $1,441.9 55.7% $1,480.6 $ 1,432.7 57.9%
Timber..................... 1,122.9 1,119.3 43.3 1,017.5 1,009.5 40.8
Production agriculture..... 26.9 26.7 1.0 34.1 33.8 1.3
------------------------------------- --------------------------------------
Total.................. $2,605.8 $2,587.9 100.0% $2,532.2 $2,476.0 100.0%
===================================== ======================================
The following table shows the carrying values of our commercial loan
portfolio that are delinquent but not in foreclosure, delinquent and in
foreclosure, restructured and foreclosed. The table also shows the respective
ratios of these items to the total carrying value of our mortgage loan
portfolio. Commercial mMortgage loans are classified as delinquent when they are
60 days or more past due as to the payment of interest or principal. Commercial
mMortgage 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. 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
59
JOHN HANCOCK LIFE INSURANCE COMPANY
real estate investment group's ability to manage foreclosed real estate for
eventual return to investment real estate status or outright sale.
Since the 1990's real estate downturn, our commercial mortgage delinquency
rate has declined from a high of 4.9% to 0.3% as of December 31, 2001 leading to
a decrease in our impaired loans. This compares to industry delinquency rates of
7.1% and 0.2% for the comparable periods, respectively. In addition, we
strengthened our underwriting standards following the last downturn. As of
September 30, 2002, we had 7 loans delinquent more than 60 days or in process of
foreclosure. We believe the recent economic downturn, unlike the last real
estate recession, has had more discipline in that the construction of new assets
was limited, keeping supply in balance.
Commercial Mortgage Loan Comparisons
As of September 30, As of December 31,
2002 2001
---------------------------------- --------------------------------------
Carrying % of Total Carrying % of Total
Value Mortgage Loans Value Mortgage Loans
---------------------------------- --------------------------------------
(in millions) (in millions)
Delinquent, not in foreclosure........ $ 0.1 0.0% $ 5.5 0.1%
Delinquent, in foreclosure............ 62.7 0.6 13.0 0.1
Restructured.......................... 26.8 0.3 56.0 0.6
---------------------------------- --------------------------------------
Subtotal........................... $ 89.6 0.9% $ 74.5 0.8%
---------------------------------- --------------------------------------
Loans foreclosed during period........ 3.0 0.0 -- --
---------------------------------- --------------------------------------
Total............................. $ 92.6 0.9% $ 74.5 0.8%
================================== ======================================
Investment Results
Overall, the yield, net of investment expenses, on the general account
portfolio decreased from the third quarter of the prior year. The lower yield
was driven primarily by the sharp drop in short-term rates during the year. As
of September 30, 2002, the Company had approximately $12 billion of net exposure
to the short-term floating rates (primarily LIBOR), mostly created through
interest rate swaps designed to match our portfolio with an increasing volume of
floating rate liabilities. Approximately 90% of the decline in investment
income, caused by lower short term rates, was off set by a decline in
floating-rate liability payments. In addition, a less favorable interest rate
environment in which to invest new cash contributed to the decline. The inflow
of new cash for the twelve month period between the third quarter of 2001 and
the third quarter of 2002 was invested at rates that were lower than the overall
portfolio earnings rate during the third quarter of 2001. Finally, growth in our
portfolio of tax-preferenced investments (affordable housing and the lease
residual management) reduced the Company's net investment income by $10.2
million and $13.4 million, for the three and nine month periods ended September
30, 2002, compared to the prior year. The result of these tax-preferenced
investments is an increase in the Company's after-tax income of $2.7 million and
$5.5 million, for the three and nine month periods compared to the prior year.
The following table summarizes the Company's investment results for the periods
indicated.
60
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended Nine months Ended
As of As of As of As of
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------------------------------------------------------------------------------
Yield Amount Yield Amount Yield Amount Yield Amount
------------------------------------------------------------------------------------------
(in millions) (in millions) (in millions) (in millions)
General account assets-excluding
Policy loans
Gross income........................ 6.72% $ 905.6 8.20% $ 943.2 6.73% $ 2,727.7 7.88% $ 2,839.6
Ending assets-excluding policy
Loans............................. 56,354.8 51,387.5 56,354.8 51,387.5
Policy loans
Gross income........................ 6.26% 30.2 5.96% 28.4 6.13% 89.0 6.12% 87.8
Ending assets....................... 1,937.1 1,927.0 1,937.1 1,927.0
Total gross income................ 6.71% 935.8 8.11% 971.6 6.71% 2,816.7 7.82% 2,927.4
Less: investment expenses......... (57.4) (51.3) (161.8) (175.2)
---------- ---------- ---------- ----------
Net investment income ............ 6.30% $ 878.4 7.39% $ 920.3 6.33% $ 2,654.9 7.35% $ 2,752.2
========== ========== ========== ==========
Impairments: The Company has a process in place to identify securities
that could potentially have an impairment that is other than temporary. This
process involves monitoring market events that could impact issuers' credit
ratings, business climate, management changes, litigation and government
actions, and other similar factors. This process also involves monitoring late
payments, downgrades by rating agencies, key financial ratios, financial
statements, revenue forecasts and cash flow projections as indicators of credit
issues.
At the end of each quarter, our Investment Review Committee reviews all
securities trading below ninety cents on the dollar, to determine whether
impairments need to be taken. This committee includes the head of workouts, the
head of each industry team, and the head of portfolio management. The analysis
focuses on each company's or project's ability to service its debts in a timely
fashion and the length of time the security has been trading below cost. To
supplement this process, a bi-annual review is made of the entire fixed maturity
portfolio to assess credit quality, including a review of all impairments with
the Committee of Finance, a subcommittee of the Board of Directors.
The Company considers relevant facts and circumstances in evaluating
whether the impairment of a security is other than temporary. Relevant facts and
circumstances considered include (1) the length of time the fair value has been
below cost; (2) the financial position of the issuer, including the current and
future impact of any specific events; and (3) the Company's ability and intent
to hold the security to maturity or until it recovers in value. To the extent
the Company determines that a security is deemed to be other than temporarily
impaired, the difference between amortized cost and fair value would be charged
to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer, or
(2) the risk that the economic outlook will be worse than expected or have more
of an impact on the issuer than anticipated, and (3) the risk that new
information obtained by us or changes in other facts and circumstances lead us
to change our intent to hold the security to maturity or until it recovers in
value.
Any of these situations could result in a charge to earnings in a future
period to the extent of the impairment charge recorded. Because the majority of
our portfolio is classified as available-for-sale and held at fair value with
the related unrealized gains (losses) recorded in shareholders' equity, the
charge to earnings would not have a significant impact on shareholders' equity.
As disclosed in our MD&A, the Company recorded losses on fixed maturity
securities of $103.9 and $334.4 million in the three and nine month periods
ended September 30, 2002, respectively, which were driven primarily
61
JOHN HANCOCK LIFE INSURANCE COMPANY
by write-downs and sales of securities. The following list shows the largest
losses recongnized during the quarter, the related circumstances giving rise to
the loss and a discussion of how those circumstances impacted other material
investments held. Unless noted otherwise, all of the items shown are impairments
of securities held at September 30, 2002.
o $33.2 million on redeemable preferred stock due to new information
received on a large energy company that filed for Chapter 11 under
the Bankruptcy Code in late 2001. This redeemable preferred stock is
secured by equity investments in energy storage and transportation
assets in Latin America, predominately Argentina. Continued economic
weakness and devaluation of the currency of Argentina suggested the
value of the investments securing the Company's redeemable preferred
stock had dropped significantly. Consequently, we impaired the
redeemable preferred stock investments and have now assigned no
value to these assets. The remaining $26.3 million carrying value of
this investment is based solely on its senior, unsecured claim to
the US based parent, the value of which is based on trading levels
of the Parent's senior unsecured debt. We have no other investments
secured by equity in energy assets in Latin America.
o $27.6 million (including an impairment loss of $22.5 million and
$5.1 million previously recognized gains where the bonds were part
of a hedging relationship) on secured financings backed by an
airline, or its subsidiaries, that filed for Chapter 11 of the
Bankruptcy Code during the quarter. With the bankruptcy filing, the
airline had the right to affirm or reject certain leases on
aircraft, which underlie these collateralized structured financing
investments. We have resolved most of the lease terms, including
rates, but continue to negotiate lease rates on any aircraft leases
that were rejected and have written down these loans to the fair
value based on the appraised value of the underlying aircraft. We
have $56.3 million of other secured investments with this airline
where the leases were affirmed in the bankruptcy and $137.1 million
of secured investments with this airline that are guaranteed by AA
or higher rated guarantors. Hence, we expect no payment defaults and
no loss on these investments.
62
JOHN HANCOCK LIFE INSURANCE COMPANY
Liquidity & Capital Resources
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the immediate capital needs to facilitate business operations. The
assets of the Company consist of a diversified investment portfolio and
investments in operating subsidiaries. The Company's cash flow consists
primarily of premiums, deposits, investment income, results of its operating
subsidiaries and proceeds from the Company's debt offerings (see Note 7 - Debt
and Line of Credit in the Company's 2001 Form 10-K), offset by benefits paid to
contractholders, operating expenses, policyholder dividends to its participating
policyholders and shareholder dividends to it parent company. All of the
outstanding common stock of John Hancock Life Insurance Company is owned by its
Parent, an insurance holding company, John Hancock Financial Services, Inc.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of prescribed limitations without prior
approval. The Company's limit is the greater of 10% of the statutory surplus at
prior year-end or the prior calendar year's statutory net gain from operations
of the Company. The ability of the Company to pay shareholder dividends is and
will continue to be subject to restrictions set forth in the insurance laws and
regulations of Massachusetts, it domiciliary state. The Massachusetts insurance
law limits how and when the Company can pay shareholder dividends. The 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. The Company currently does not expect such
regulatory requirements to impair its ability to meet its liquidity and capital
needs.
In March and May of 2002, in accordance with files made with the
Commissioner of Insurance for the Commonwealth of Massachusetts, the Company
paid dividends to its Parent, John Hancock Financial Services, Inc., in the
amount of $11.0 million and $100.0 million, respectively. None of these
dividends were classified as extraordinary by state regulators.
Sources of cash for the Company include 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 various life insurance, annuity, and structured
investment products, and to the funding of investments in new products,
processes, and technologies. 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. The Company periodically
adjusts its investment policy to respond to changes in short-term and long-term
cash requirements and provide adequate funds to pay benefits without forced
sales of investments.
The liquidity of our insurance operations is also related to the overall
quality of our investments. As of September 30, 2002, $36,927.2 million, or
88.4% 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 $4,849.2 million, or 11.6%, of fixed maturity
investments were rated non-investment grade. For additional discussion of our
investment portfolio see the General Account Investments section in this
Management's Discussion and Analysis of Financial Condition and Results of
Segment Operations.
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.
Net cash provided by operating activities was $1,712.2 million and
$1,768.2 million for the nine months ended September 30, 2002 and 2001,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, fees received and investment income. The decrease in the nine
months ended September 30, 2002 compared to 2001 resulted primarily from
decreased premiums received and investment income, partially offset by increased
expense payments, higher benefit payments and a smaller increase to income
taxes.
63
JOHN HANCOCK LIFE INSURANCE COMPANY
Net cash used in investing activities was $4,739.6 million compared to
$5,269.9 million for the nine months ended September 30, 2002 and 2001,
respectively. Changes in the cash provided by investing activities primarily
relate to the management of the Company's investment portfolios and the
investment of excess capital generated by operating and financing activities.
The $530.3 decrease in cash used in the nine months ended September 30, 2002 as
compared to 2001 is primarily due to fewer net acquisitions of fixed maturities
than during the period. Somewhat offsetting the Company's decreased net
acquisition of fixed maturities (including maturities, prepayments and scheduled
redemptions) of $1,779.9 million, were increases to net acquisitions of
short-term securities, mortgages and other assets net of other liabilities.
Net cash provided by financing activities was $2,701.4 million and
$1,744.1 million for the nine months ended September 30, 2002 and 2001,
respectively. Changes in cash provided by financing activities primarily relate
to excess deposits or withdrawals under investment type contracts, the issuance
of debt and borrowings or re-payments of the Company's debt. The $957.3 million
increase in net cash provided by financing activities for the nine months ended
September 30, 2002 as compared to 2001 was driven primarily by a $737.2 million
increase in deposits in universal life and investment-type contracts in 2002 net
of maturities and withdrawals as compared to the prior year period. Additional
sources of cash from financing activities derived from a reduction to the
dividend payments made to John Hancock Financial Services, Inc., the parent
holding company of John Hancock Life Insurance Company in the first nine months
of 2002 as compared to same period in 2001 and moving the Commercial Paper
program to the Parent in 2001.
Cash flow requirements also are supported by a committed line of credit of
$1.0 billion, through a syndication of banks including Fleet National Bank,
JPMorgan Chase, Citicorp USA, Inc., The Bank of Nova Scotia, Fleet Securities,
Inc., and J.P. Morgan Securities Inc. The line of credit agreement provides for
two facilities: one for $500 million pursuant to a 364-day commitment (renewed
effective July 26, 2002) and a second for $500 million (renewable in 2005). The
line of credit is available for general corporate purposes. The line of credit
agreement contains various covenants, among these being that statutory total
capital and surplus plus asset valuation reserve meet certain requirements. To
date, we have not borrowed any amounts under the line of credit.
As of September 30, 2002, we had $697.2 million of debt outstanding
consisting of $98.7 million of debt classified as short-term and $598.5 million
classified as long-term, including $447.4 million of surplus notes. A new
commercial paper program has been established at John Hancock Financial
Services, Inc., the Company's parent, that has replaced the commercial paper
program that was in place at John Hancock Capital Corporation, the Company's
subsidiary. As of May 1, 2001, all commercial paper issued by John Hancock
Capital Corporation had been retired.
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 the
Company and 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 Company's risk-based
capital ratios of all our insurance subsidiaries as of year end were
significantly 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
uncollectible reinsurance in excess of uncollectible amounts already recognized
in our unaudited 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.
64
JOHN HANCOCK LIFE INSURANCE COMPANY
Forward-Looking Statements
The statements, analyses, and other information contained herein relating
to trends in the John Hancock Life Insurance Company's (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. Future
events and their effects on the Company may not be those anticipated by
management. The Company'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)
new laws and regulations, including the recently-enacted Sarbanes-Oxley Act of
2002, or changes to existing laws or regulations, (including, but not limited
to, those relating to the Federal Estate Tax Laws), and the applications and
interpretations given to these laws, may adversely affect the Company's sales of
insurance and investment advisory products (3) Massachusetts insurance law may
restrict the ability of John Hancock Variable Life Insurance Company to pay
dividends to us; (4) we face increasing competition in our retail 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) due to acts of terrorism or other
hostilities, there could be business disruption, economic contraction, increased
mortality, morbidity and liability risks, generally, or investment losses that
could adversely affect our business; (7) our life insurance sales are highly
dependent on a third party distribution relationship; (8) customers may not be
responsive to new or existing products or distribution channels, (9) interest
rate volatility may adversely affect our profitability; (10) 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; (11) 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; (12) 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. 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 sole shareholder; (13) 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; (14) we face investment and
credit losses relating to our investment portfolio (15) we may experience
volatility in net income due to changes in standards for accounting for
derivatives and other changes; (16) we are subject to risk-based capital
requirements and possible guaranty fund assessments; (17) the National
Association of Insurance Commissioners' codification of statutory accounting
practices affected our statutory surplus; (18) we may be unable to retain
personnel who are key to our business; (19) we may incur losses 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; (21) we face unforeseen liabilities
arising from our acquisitions and dispositions of businesses; and (22) we may
incur multiple life insurance claims as a result of a catastrophic event which,
because of higher deductibles and lower limits, could adversely affect the
Company's future net income and financial position.
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
that may be filed by the Company with the United States Securities and Exchange
Commission from time to time. 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.
65
JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Capital Markets Risk Management
The Company maintains a disciplined, comprehensive approach to managing
capital market risks inherent in its business operations. To mitigate these
risks, and effectively support Company objectives, investment operations are
organized and staffed to focus investment management expertise on specific
classes of investments, with particular emphasis placed on private placement
markets. In addition, a dedicated unit of asset / liability risk management
(ALM) professionals centralizes the implementation of its interest rate risk
management program. As an integral component of its ALM program, derivative
instruments are used in accordance with risk reduction techniques established
through Company policy and with formal approval granted from the New York
Insurance Department. The Company's use of derivative instruments is monitored
on a regular basis by senior management and reviewed quarterly with the
Company's Committee of Finance.
The Company's principal capital market exposures are credit and interest
rate risk, although we have certain exposures to changes in equity prices and
foreign currency exchange rates. Credit risk pertains to the uncertainty
associated with the ability of an obligor or counterparty to continue to make
timely and complete payments of contractual principal and/or interest. Interest
rate risk pertains to the market value fluctuations that occur within fixed
maturity securities or liabilities as market interest rates move. Equity and
foreign currency risk pertain to price fluctuations, associated with the
Company's ownership of equity investments or non-US dollar denominated
investments, driven by dynamic market environments.
Credit Risk
The Company manages the credit risk inherent in its fixed maturity
securities by applying strict credit and underwriting standards, with specific
limits regarding the proportion of permissible below investment grade holdings.
We also diversify our fixed maturity securities with respect to investment
quality, issuer, industry, geographical, and property-type concentrations. Where
possible, consideration of external measures of creditworthiness, such as
ratings assigned by nationally recognized rating agencies, supplement our
internal credit analysis. The Company uses simulation models to examine the
probability distribution of credit losses to ensure that it can readily
withstand feasible adverse scenarios. In addition, the Company periodically
examines, on various levels of aggregation, its actual default loss experience
on significant asset classes to determine if the losses are consistent with the
(1) levels assumed in product pricing, (2) ACLI loss experience and (3) rating
agencies' quality-specific cohort default data. These tests have generally found
the Company's aggregate experience to be favorable relative to these external
benchmarks and consistent with priced for levels.
The Company has a process in place to identify securities that could
potentially have an impairment that is other than temporary. This process
involves monitoring market events that could impact issuers' credit ratings,
business climate, management changes, litigation and government actions, and
other similar factors. This process also involves monitoring late payments,
downgrades by rating agencies, key financial ratios, financial statements,
revenue forecasts and cash flow projections as indicators of credit issues.
At the end of each quarter, our Investment Review Committee reviews all
securities trading below ninety cents on the dollar, to determine whether
impairments need to be taken. This committee includes the head of workouts, the
head of each industry team, and the head of portfolio management. The analysis
focuses on each company's or project's ability to service its debts in a timely
fashion and the length of time the security has been trading below cost. The
results of this analysis are reviewed with the Committee of Finance each
quarter. To supplement this process, a bi-annual review is made of the entire
fixed maturity portfolio to assess credit quality, including a review of all
impairments with the committee of finance.
The Company considers relevant facts and circumstances in evaluating
whether the impairment of a security is other than temporary. Relevant facts and
circumstances considered include (1) the length of time the fair value has been
below cost; (2) the financial position of the issuer, including the current and
future impact of any specific events; and (3) the Company's ability and intent
to hold the security to maturity or until it recovers in value. To the
66
JOHN HANCOCK LIFE INSURANCE COMPANY
extent the Company determines that a security is deemed to be other than
temporarily impaired, the difference between amortized cost and fair value would
be charged to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include (1) the risk that our
assessment of an issuer's ability to meet all of its contractual obligations
will change based on changes in the credit characteristics of that issuer, (2)
the risk that the economic outlook will be worse than expected or have more of
an impact on the issuer than anticipated and (3) the risk that new information
obtained by us or changes in other facts and circumstances lead us to change our
intent to hold the security to maturity or until it recovers in value.
Any of these situations could result in a charge to earnings in a future
period to the extent of the impairment charge recorded. Because the majority of
our portfolio is classified as available-for-sale and held at fair value with
the related unrealized gains (losses) recorded in shareholders' equity, the
charge to earnings would not have a significant impact on shareholders' equity.
As of September 30, 2002 and December 31, 2001, the Company's fixed
maturity portfolio was comprised of 88.4% and 87.4% investment grade securities
and 11.6% and 12.6% below-investment-grade securities, respectively. These
percentages are consistent with recent experience and indicative of the
Company's long-standing investment philosophy of pursuing moderate amounts of
credit risk in return for higher expected returns. We believe that credit risk
can be successfully managed given our proprietary credit evaluation models and
experienced personnel.
Interest Rate Risk
The Company maintains a tightly controlled approach to managing its
potential interest rate risk. Interest rate risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets to
support the issuance of our various interest-sensitive liabilities, primarily
within our Protection, Asset Gathering and Guaranteed & Structured Financial
Products Segments.
The Company manages interest rate sensitive segments of the business, and
the supporting investments, under one of two broadly defined risk management
methods designed to provide an appropriate matching of assets and liabilities.
For guaranteed rate products, where contractual liability cash flows are highly
predictable (e.g., GICs or immediate annuities) sophisticated duration-matching
techniques are utilized to manage the segment's exposure to both parallel and
non-parallel yield curve movements. Typically this type of management is
expressed as a targeted duration mismatch of zero with an operational tolerance
of only +/- 18 days, with other measures used for limiting exposure to
non-parallel risk. For non-guaranteed rate products, such as whole life
insurance or single premium deferred annuities, liability cash flows are less
predictable. Therefore, a conventional duration-matching strategy is less
effective at managing the inherent risk. For these products, we manage interest
rate risk based on scenario-based portfolio modeling that seeks to identify the
most appropriate investment strategy given probable policyholder behavior and
liability crediting needs under a wide range of interest rate environments.
We project asset and liability cash flows on guaranteed rate products and
then discount them against credit-specific interest rate curves to attain fair
values. Duration is then calculated by re-pricing these cash flows against a
modified or "shocked" interest rate curve and evaluating the change in fair
value versus the base case. As of September 30, 2002 and December 31, 2001, the
fair value of fixed maturity securities and mortgage loans supporting duration
managed liabilities was approximately $29,718.9 million and $27,788.4 million,
respectively. Based on the information and assumptions we use in our duration
calculations in effect as of December 31, 2001, we estimate that a 100 basis
point immediate, parallel increase in interest rates ("rate shock") would have
no effect on the net fair value, or surplus, of our duration managed assets and
liabilities based on our targeted mismatch of zero, but could be -/+ $14.9
million based on our operational tolerance of +/- 18 days years.
The risk management method for non-guaranteed rate products, such as whole
life insurance or single premium deferred annuities, is less formulaic, but more
complex, due to the less predictable nature of the liability cash flows. For
these products, we manage interest rate risk based on scenario-based portfolio
modeling that seeks to identify the most appropriate investment strategy given
probable policyholder behavior and liability crediting needs under a wide range
of interest rate environments. As of September 30, 2002 and December 31, 2001,
the fair value of fixed maturity securities and mortgage loans supporting
liabilities managed under this modeling was approximately
67
JOHN HANCOCK LIFE INSURANCE COMPANY
$26,632.2 million and $23,091.2 million, respectively. A rate shock (as defined
above) would decrease the fair value of these assets by $922.0 million, which we
estimate would be offset by a comparable change in the fair value of the
associated liabilities, thus minimizing the impact on surplus.
As of September 30, 2002, there have been no material changes to the
interest rate exposures as reported in the Company's 2001 Form 10-K, as amended.
Derivative Instruments
The Company uses a variety of derivative financial instruments, including
swaps, caps, floors, and exchange traded futures contracts, in accordance with
Company policy. Permissible derivative applications include the reduction of
economic risk (i.e., hedging) related to changes in yields, price, cash flows,
and currency exchange rates. In addition, certain limited applications of
"income generation" are allowed. Examples of this type of use include the
purchase of call options to offset the sale of embedded options in Company
liability issuance or the purchase of swaptions to offset the purchase of
embedded put options in certain investments. The Company does not make a market
or trade derivatives for the purpose of speculation.
The Company's Investment Compliance Unit monitors all derivatives activity
for consistency with internal policies and guidelines. All derivatives trading
activity is reported monthly to the Company's Committee of Finance for review,
with a comprehensive governance report provided jointly each quarter by the
Company's Derivatives Supervisory Officer and Chief Investment Compliance
Officer. The table below reflects the Company's derivative positions that are
managing interest rate risk as of September 30, 2001. The notional amounts in
the table represent the basis on which pay or receive amounts are calculated and
are not reflective of credit risk. These exposures represent only a point in
time and will be subject to change as a result of ongoing portfolio and risk
management activities.
As of September 30, 2002
-----------------------------------------------------------------------------------
Fair Value
-------------------------------------------------
Weighted
Notional Average Term -100 Basis Point As of +100 Basis Point
Amount (Years) Change (2) 9/30/02 Change (2)
-----------------------------------------------------------------------------------
(in millions, except for weighted average term)
Interest rate swaps............... $19,737.9 8.9 $(1,008.2) $(841.4) $(661.3)
CMT swaps......................... 210.7 0.7 1.1 2.7 1.0
Futures contracts (1)............. 254.5 5.4 0.0 0.0 0.0
Interest rate caps................ 382.3 4.2 2.8 2.5 3.7
Interest rate floors.............. 8,203.0 7.6 396.5 209.5 105.6
Swaptions......................... 30.0 22.7 (0.3) (3.6) (5.1)
--------- -------------------------------------------------
Totals......................... $28,818.4 8.4 $ (608.1) $(630.3) $(556.1)
========= =================================================
(1) Represents the notional value of open contracts as of September 30, 2002.
(2) The selection of a 100 basis point immediate change in interest rates
should not be considered as a prediction by us of future market events but
rather as an illustration of the potential impact of such an event.
Our non-exchange-traded derivatives are exposed to the possibility of loss
from a counterparty failing to perform its obligations under terms of the
derivative contract. We believe the risk of incurring losses due to
nonperformance by our counterparties is remote. To manage this risk, Company
procedures include the (a) on-going evaluation of each counterparty's credit
ratings, (b) the application of credit limits and monitoring procedures based on
an internally developed, scenario-based, risk assessment system, (c) monthly
reporting of each counterparty's "potential exposure", (d) master netting
agreements and, where appropriate, (e) collateral agreements. Futures contracts
trade on organized exchanges and, therefore, have effectively no credit risk.
68
JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 4. CONTROLS and PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS and REPORTS on FORM 8-K
(a) Exhibits
NONE
(b) Reports on Form 8-K.
On July 19, 2002, the Company filed a Current Report on Form 8-K, dated
July 19, 2002, reporting under Item 5 thereof the Company's press release
regarding settlement of a class action lawsuit against the Company.
On August 6, 2002, the Company filed a Current Report on Form 8-K, dated
August 6, 2002, reporting under Item 7 thereof the Company's Selling Agent
Agreement to be used in connection with the SignatureNotes, Medium-Term Note
program.
On August 14, 2002, the Company filed a Current Report on Form 8-K, dated
August 14, 2002, furnishing under Item 9 thereof the Company's two signed forms
of Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002
for the quarter ended June 30, 2002.
On August 21, 2002, the Company filed a Current Report on Form 8-K, dated
August 21, 2002, reporting under Item 5 thereof a change in the Company's
counterparty and insurer financial strength ratings and the senior debt ratings
of the Company's parent, John Hancock Financial Services, Inc., as evaluated by
Standard & Poor's Ratings Services as of August 20, 2002.
On August 22, 2002, the Company filed a Current Report on Form 8-K, dated
August 22, 2002, reporting under Item 5 thereof developments in pending
litigation.
69
JOHN HANCOCK LIFE INSURANCE COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
JOHN HANCOCK LIFE INSURANCE COMPANY
Date: November 13, 2002 By: /s/ THOMAS E. MOLONEY
---------------------
Thomas E. Moloney
Senior Executive Vice President and
Chief Financial Officer
70
JOHN HANCOCK LIFE INSURANCE COMPANY
CERTIFICATIONS
I, David F. D'Alessandro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John Hancock Life
Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
By: /s/ DAVID F. D'ALESSANDRO
- -----------------------------
David F. D'Alessandro
Chairman, President and
Chief Executive Officer and Director
71
JOHN HANCOCK LIFE INSURANCE COMPANY
CERTIFICATIONS
I, Thomas E. Moloney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of John Hancock Life
Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
By: /s/ THOMAS E. MOLONEY
- -------------------------
Thomas E. Moloney
Senior Executive Vice President and
Chief Financial Officer
72