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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 June 30, 2004
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
Post Office Box 111
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 6, 2004 there were outstanding 1,000 shares of common stock,
$10,000 par value of the registrant, all of which were owned by
John Hancock Financial Services, Inc.
Reduced Disclosure Format
Registrant meets the conditions set forth in General Instruction H(1) (a) and
(b) of Form 10-Q and is therefore filing this Form with the
Reduced Disclosure Format.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
June 30,
2004 December 31,
(unaudited) 2003
---------------------------
(in millions)
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: December 31--$1,512.8 million) ......................... -- $ 1,488.7
Available-for-sale--at fair value
(cost: June 30--$47,751.0 million; December 31--$43,907.7 million) .. $47,456.7 46,482.1
Equity securities:
Available-for-sale--at fair value
(cost: June 30--$233.4 million; December 31--$249.9 million) ........ 235.5 333.1
Trading securities--at fair value
(cost: June 30--$0.3 million; December 31--$0.3 million) ............ 0.3 0.6
Mortgage loans on real estate ............................................ 11,765.1 10,871.1
Real estate .............................................................. 136.7 123.8
Policy loans ............................................................. 2,020.6 2,019.2
Short-term investments ................................................... 50.2 31.5
Other invested assets .................................................... 3,275.8 2,912.2
--------- ---------
Total Investments ............................................... 64,940.9 64,262.3
Cash and cash equivalents ................................................ 1,244.5 2,626.9
Accrued investment income ................................................ 891.0 700.5
Premiums and accounts receivable ......................................... 105.1 104.1
Goodwill ................................................................. 3,031.7 108.6
Value of business acquired ............................................... 2,858.1 168.5
Deferred policy acquisition costs ........................................ 58.4 3,420.7
Intangible assets ........................................................ 1,351.1 6.3
Reinsurance recoverable .................................................. 3,237.2 2,677.3
Deferred tax asset ....................................................... 401.9 --
Other assets ............................................................. 2,206.0 2,886.2
Separate account assets .................................................. 18,493.0 19,369.6
--------- ---------
Total Assets .................................................... $98,818.9 $96,331.1
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
June 30,
2004 December 31,
(unaudited) 2003
---------------------------
(in millions)
Liabilities and Shareholder's Equity
Liabilities
Future policy benefits ................................ $42,181.1 $38,451.0
Policyholders' funds .................................. 21,322.3 21,693.5
Consumer notes ........................................ 2,101.0 1,550.4
Unearned revenue ...................................... 9.7 406.9
Unpaid claims and claim expense reserves .............. 175.5 166.5
Dividends payable to policyholders .................... 434.9 440.0
Short-term debt ....................................... 51.5 104.0
Long-term debt ........................................ 558.7 609.4
Deferred tax liability ................................ -- 1,534.1
Other liabilities ..................................... 3,963.5 4,417.7
Separate account liabilities .......................... 18,493.0 19,369.6
--------- ---------
Total liabilities ............................ 89,291.2 88,743.1
Minority interest ..................................... 5.1 5.1
Commitments and contingencies - Note 5
Shareholder's Equity
Common stock, at June 30, 2004, $10,000 par value;
1,000 shares authorized, issued and outstanding ..... 10.0 10.0
Additional paid in capital ............................ 9,467.0 4,763.2
Retained earnings ..................................... 169.1 1,332.1
Accumulated other comprehensive income ................ (123.5) 1,477.6
--------- ---------
Total Shareholder's Equity ................... 9,522.6 7,582.9
--------- ---------
Total Liabilities and Shareholder's Equity ... $98,818.9 $96,331.1
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Period From Period From
April 29, 2004 April 1, 2004 Three Months
through through Ended
June 30, 2004 April 28, 2004 June 30, 2003
------------- -------------- -------------
(in millions)
Revenues
Premiums ............................................................ $ 324.9 $ 157.3 $ 484.4
Universal life and investment-type product fees ..................... 104.6 53.9 153.1
Net investment income ............................................... 581.8 301.2 942.3
Net realized investment and other gains (losses), net of
related amortization of deferred policy acquisitions
costs and value of businees acquired credited to
participating pension contract holders and the
policyholder dividend obligation ($(16.3), $29.1
and $49.3 respectively) .......................................... 48.9 198.7 78.3
Investment management revenues, commissions and other fees .......... 84.6 48.3 122.4
Other revenue ....................................................... 37.6 17.0 55.3
-------- -------- --------
Total revenues ......................................................... 1,182.4 776.4 1,835.8
Benefits and expenses
Benefits to policyholders, excluding amounts related to
net realized investment and other gains (losses) credited
to participating pension contract holders and the
policyholder dividend obligation ($(10.8), $22.0,
and $28.4 (respectively)
Benefits to policyholders ........................................... 556.4 341.7 919.7
Other operating costs and expenses .................................. 223.5 112.5 348.7
Amortization of deferred policy acquisition costs and value
of business acquired, excluding amounts related to net
realized investment and other gains (losses) ($(5.5), $7.1
and $20.9, respectively) ......................................... 37.8 15.0 63.6
Dividends to policyholders .......................................... 77.8 40.5 137.5
-------- -------- --------
Total benefits and expenses ......................................... 895.5 509.7 1,469.5
-------- -------- --------
Income before income taxes ............................................. 286.9 266.7 366.3
Income taxes ........................................................... 117.8 91.7 108.6
-------- -------- --------
Net income ............................................................. $ 169.1 $ 175.0 $ 257.7
======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME - (CONTINUED)
Period From Period From
April 29, 2004 January 1, 2004 Six Months
through through Ended
June 30, 2004 April 28, 2004 June 30, 2003
------------- -------------- -------------
(in millions)
Revenues
Premiums .................................................................. $ 324.9 $ 628.0 $ 956.7
Universal life and investment-type product fees ........................... 104.6 230.7 308.1
Net investment income ..................................................... 581.8 1,284.7 1,875.4
Net realized investment and other gains (losses), net of
related amortization of deferred policy acquisitions
costs and value of business acquired credited
to participating pension contract holders and
the policyholder dividend obligation ($(16.3),
$28.3 and $(0.5) respectively) ......................................... 48.9 101.0 183.7
Investment management revenues, commissions and other fees ................ 84.6 180.7 241.6
Other revenue ............................................................. 37.6 88.3 127.4
-------- -------- --------
Total revenues ............................................................... 1,182.4 2,513.4 3,692.9
Benefits and expenses
Benefits to policyholders, excluding amounts related to
net realized investment and other gains (losses)
credited to participating pension contract holders
and the policyholder dividend obligation ($(10.8),
$39.2, $(12.9), respectively)
Benefits to policyholders ................................................. 556.4 1,277.1 1,869.0
Other operating costs and expenses ........................................ 223.5 483.2 665.4
Amortization of deferred policy acquisition costs and
value of business acquired, excluding amounts related
to net realized investment and other gains (losses)($(5.5),
$(10.9) and $12.4, respectively) ..................................... 37.8 121.8 135.4
Dividends to policyholders ................................................ 77.8 157.1 270.0
-------- -------- --------
Total benefits and expenses ............................................... 895.5 2,039.2 2,939.8
-------- -------- --------
Income before income taxes and cumulative effect of
accounting changes ........................................................ 286.9 474.2 753.1
Income taxes ................................................................. 117.8 141.6 224.4
-------- -------- --------
Net income before cumulative effect of accounting change ..................... 169.1 332.6 528.7
Cumulative effect of accounting changes, net of income tax - Note 1 .......... -- (3.3) --
Net income ................................................................... $ 169.1 $ 329.3 $ 528.7
======== ======== ========
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
Accumulated
Additional Other Total Outstanding
Common Paid in Retained Comprehensive Shareholder's Common
Stock Capital Earnings Income (Loss) Equity Shares
------------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at April 1, 2003 ......................... $ 10.0 $4,763.2 $1,227.1 $ 757.1 $6,757.4 1,000
Comprehensive income:
Net income .................................. 257.7 257.7
Other comprehensive income, net of tax:
Net unrealized gains (losses) ............. 637.3 637.3
Net accumulated gains (losses) on cash
flow hedges ............................. 106.5 106.5
Foreign currency translation
adjustment .............................. 0.1 0.1
Minimum pension liability ................... 1.7 1.7
--------
Comprehensive income ............................. 1,003.3
Dividend paid to parent company .................. (100.0) (100.0)
------------------------------------------------------------------------------
Balance at June 30, 2003 ......................... $ 10.0 $4,763.2 $1,384.8 $1,502.7 $7,660.7 1,000
==============================================================================
6
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other Total Outstanding
Common Paid in Retained Comprehensive Shareholder's Common
Stock Capital Earnings Income (Loss) Equity Shares
------------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at April 1, 2004 ......................... $ 10.0 $ 4,763.2 $ 1,486.4 $ 1,942.7 $ 8,202.3 1,000
Comprehensive income:
Net income .................................. 175.0 175.0
Other comprehensive income, net of tax:
Net unrealized gains (losses) ............. (379.3) (379.3)
Net accumulated gains (losses) on cash
flow hedges ............................. (151.0) (151.0)
Foreign currency translation
adjustment .............................. (0.4) (0.4)
Minimum pension liability ................... -- --
---------
Comprehensive income ........................ (355.7)
=======================================================================
Balance at April 28, 2004 ........................ $ 10.0 $ 4,763.2 $ 1,661.4 $ 1,412.0 $ 7,846.6 1,000
-----------------------------------------------------------------------
Acquisition by Manulife Financial Corporation:
Sale of shareholder's equity ................. $ (10.0) $(4,763.2) $(1,661.4) $(1,412.0) $(7,846.6) (1,000)
Manulife Financial Corporation
purchase price ............................. 10.0 9,467.0 -- -- 9,477.0 1,000
=======================================================================
Balance at April 29, 2004 ........................ $ 10.0 $ 9,467.0 -- -- $ 9,477.0 1,000
Comprehensive income:
Net income .................................. 169.1 169.1
Other comprehensive income, net of tax:
Net unrealized gains (losses) ............. (118.7) (118.7)
Net accumulated gains (losses) on cash
flow hedges ............................. (4.6) (4.6)
Foreign currency translation
adjustment .............................. (0.2) (0.2)
Minimum pension liability ................... -- --
---------
Comprehensive income ............................. 45.6
-----------------------------------------------------------------------
Balance at June 30, 2004 ......................... $ 10.0 $ 9,467.0 $ 169.1 $ (123.5) $ 9,522.6 1,000
=======================================================================
7
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME- (CONTINUED)
Accumulated
Additional Other Total Outstanding
Common Paid in Retained Comprehensive Shareholder's Common
Stock Capital Earnings Income (Loss) Equity Shares
------------------------------------------------------------------------------
(in millions, except for outstanding share amounts)
Balance at January 1, 2003 .................... $ 10.0 $4,763.2 $ 956.1 $ 442.2 $6,171.5 1,000
Comprehensive income:
Net income ............................... 528.7 528.7
Other comprehensive income, net of tax:
Net unrealized gains (losses) .......... 944.8 944.8
Net accumulated gains (losses) on
cash flow hedges ..................... 112.3 112.3
Foreign currency translation
adjustment ........................... -- --
Minimum pension liability ................ 3.4 3.4
--------
Comprehensive income .......................... 1,589.2
Dividend paid to parent company ............... (100.0) (100.0)
------------------------------------------------------------------------
Balance at June 30, 2003 ...................... $ 10.0 $4,763.2 $1,384.8 $1,502.7 $7,660.7 1,000
========================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
8
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME- (CONTINUED)
Additional Accumulated Other Total Outstanding
Common Paid In Retained Comprehensive Shareholder's Common
Stock Capital Earnings Income (Loss) Equity Shares
--------------------------------------------------------------------------
Balance at January 1, 2004 ......................... $ 10.0 $4,763.2 $1,332.1 $1,477.6 $7,582.9 1,000
Comprehensive income:
Net income ...................................... 329.3 329.3
Other comprehensive income, net of tax:
Net unrealized gains (losses) ................... (28.6) (28.6)
Net accumulated gains (losses)
on cash flow hedges ........................... (37.3) (37.3)
Foreign currency translation
adjustment .................................... (0.3) (0.3)
Minimum pension liability ....................... 0.6 0.6
--------
Comprehensive income ............................... 263.7
--------------------------------------------------------------------------
Balance at April 28, 2004 .......................... $ 10.0 $4,763.2 $1,661.4 $1,412.0 $7,846.6 1,000
--------------------------------------------------------------------------
Acquisition by Manulife Financial Corporation:
Sale of shareholder's equity .................... (10.0) (4,763.2) (1,661.4) (1,412.0) (7,846.6) --
Manulife Financial Corporation
purchase price ................................ $ 10.0 $9,467.0 -- -- $9,477.0 --
--------------------------------------------------------------------------
Balance at April 29, 2004 .......................... $ 10.0 $9,467.0 -- -- $9,477.0 1,000
Comprehensive income
Net income ...................................... 169.1 169.1
Other comprehensive income, net of tax:
Net unrealized gains (losses) ................... $ (118.7) (118.7)
Net accumulated gains (losses)
on cash flow hedges ........................... (4.6) (4.6)
Foreign currency translation
adjustment .................................... (0.2) (0.2)
--------
Minimum pension liability
Comprehensive income ............................... 45.6
--------------------------------------------------------------------------
Balance at June 30, 2004 ........................... $ 10.0 $9,467.0 $ 169.1 $ (123.5) $9,522.6 1,000
==========================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
9
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
For the period period from For the six
April 29, 2004 January 1, 2004 month period
through through April ended June
June 30, 2004 28, 2004 30, 2003
--------------------------------------------
(in millions)
Cash flows from operating activities:
Net income ....................................................................... $ 169.1 $ 329.3 $ 528.7
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premium (discount) - fixed maturities .......................... 117.9 17.1 (1.8)
Net realized investment and other losses ....................................... (48.9) (101.0) (183.7)
Change in accounting principle ................................................. -- 3.3 --
Change in deferred policy acquisition costs .................................... (58.3) (15.9) (143.6)
Depreciation and amortization .................................................. 42.8 15.0 21.4
Net cash flows from trading securities ......................................... -- 0.3 0.3
Increase in accrued investment income .......................................... (133.3) (57.2) (117.0)
(Increase) decrease in premiums and accounts receivable ........................ (16.9) 15.9 12.8
Increase in other assets and other liabilities, net ............................ (74.9) 62.6 (178.4)
Increase in policy liabilities and accruals, net ............................... 238.6 480.5 1,182.8
Increase in income taxes ....................................................... 95.9 86.0 175.4
---------------------------------------
Net cash provided by operating activities ............................... 332.0 835.9 1,296.9
Cash flows from investing activities:
Sales of:
Fixed maturities available-for-sale .......................................... 572.0 2,731.2 6,484.2
Equity securities available-for-sale ......................................... 1.3 154.9 87.3
Real estate .................................................................. 1.4 97.7 63.6
Home Office properties ....................................................... -- -- 887.6
Short-term investments and other invested assets ............................. 104.8 130.7 103.2
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity ............................................ -- 40.3 136.0
Fixed maturities available-for-sale .......................................... 763.2 1,497.6 1,779.8
Short-term investments and other invested assets ............................. 2.6 32.4 80.2
Mortgage loans on real estate ................................................ 234.1 615.0 530.6
Purchases of:
Fixed maturities held-to-maturity ............................................ -- -- (2.2)
Fixed maturities available-for-sale .......................................... (1,003.1) (5,983.2) (11,245.8)
Equity securities available-for-sale ......................................... (33.5) (39.6) (87.3)
Real estate .................................................................. (1.5) (6.9) (6.7)
Short-term investments and other invested assets ............................. (85.6) (627.8) (514.2)
Mortgage loans on real estate issued ........................................... (524.8) (507.9) (808.8)
Net cash received related to acquisition of business .......................... -- -- 93.7
Other, net ..................................................................... (11.5) (70.2) (180.5)
---------------------------------------
Net cash provided by (used in) in investing activities ..................... $ 19.4 $(1,935.8) $(2,599.3)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
10
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
For the For the
period period from For the
April 29, January 1, 2004 six month
2004 through period
through June April 28, ended June
30, 2004 2004 30, 2003
-----------------------------------------
(in millions)
Cash flows from financing activities:
Dividends paid to parent .................................................. -- $ (100.0) $ (100.0)
Universal life and investment-type contract deposits ...................... $ 688.8 2,307.3 4,562.5
Universal life and investment-type contract maturities and withdrawals .... (1,587.9) (2,379.5) (3,386.9)
Issuance of consumer notes ................................................ 129.5 372.2 389.9
Issuance of short-term debt ............................................... -- -- 70.8
Repayment of short-term debt .............................................. (20.5) (41.8) (114.5)
Issuance of long-term debt ................................................ 0.2 0.3 --
Repayment of long-term debt ............................................... (1.3) (1.2) (4.1)
-----------------------------------------
Net cash provided by (used in) provided by financing activities ....... (791.2) 157.3 1,417.7
-----------------------------------------
Net (decrease) increase in cash and cash equivalents .................. (439.8) (942.6) 115.3
Cash and cash equivalents at beginning of period ...................... 1,684.3 2,626.9 897.0
-----------------------------------------
Cash and cash equivalents at end of period ............................ $ 1,244.5 $ 1,684.3 $1,012.3
=========================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
11
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Change of Control
Effective April 28, 2004, Manulife Financial Corporation ("Manulife") completed
a merger with JHFS, the Company's parent, under which Manulife became the
beneficial owner of all the outstanding common shares of John Hancock Financial
Services, Inc. (JHFS) that were not already beneficially owned by Manulife as
general fund assets and became a wholly owned subsidiary of Manulife. John
Hancock Life Insurance Company remains a wholly owned subsidiary of JHFS.
As a result of the acquisition, the combined company is the largest life
insurance company in Canada and the second largest in North America. The
combined entity has a more diversified product line and distribution
capabilities and expects to have improved operating efficiencies and a leading
position across all its core business lines.
Pursuant to the terms of the acquisition, the holders of JHFS common shares
received 1.1853 shares of Manulife stock for each JHFS common share.
Approximately 342 million Manulife common shares were issued at an ascribed
price of CDN $39.61 per share based on the volume weighted average closing stock
price of the common shares for the period from September 25, 2003 to September
30, 2003. In addition all of the JHFS unvested stock options as of the date of
announcement of the acquisition on September 28, 2003, vested immediately prior
to the closing date and were exchanged for options exercisable for approximately
23 million Manulife common shares.
The acquisition was accounted for using the purchase method under Statement of
Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets". Under the purchase method of
accounting, the assets acquired and liabilities assumed were recorded at
estimated fair value at the date of acquisition. The Company is in the process
of completing the valuations of a portion of the assets acquired and liabilities
assumed; thus, the allocation of the purchase price is subject to refinement.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of April 28, 2004 (in millions):
Assets: Fair Value
----------
Fixed maturity securities ........................ $48,658.9
Equity securities ................................ 230.3
Mortgage loans ................................... 11,563.5
Policy loans ..................................... 2,027.6
Other invested assets ............................ 3,423.8
Goodwill ......................................... 3,031.7
Value of business acquired ....................... 2,864.6
Intangible assets ................................ 1,352.0
Cash and cash equivalents ........................ 1,684.7
Reinsurance recoverable, net ..................... 3,162.0
Deferred tax asset ............................... 436.4
Other assets acquired ............................ 3,067.2
Separate account assets .......................... 18,331.9
---------
Total assets acquired ............. 99,834.6
Liabilities:
Policy liabilities ............................... $66,277.5
Other liabilities ................................ 5,748.2
Separate accounts ................................ 18,331.9
---------
Total liabilities assumed .......... 90,357.6
Net assets acquired .............................. $ 9,477.0
---------
Goodwill of $3,031.7 million has been allocated to the business and geographic
segments refer to Note 9 -- Goodwill and Other Intangible Assets for additional
discussion of the Company's goodwill balances. Of the $3,031.7 million in
Goodwill, no material amount is expected to be deductible for tax purposes.
12
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Change of Control - (Continued)
Intangible assets of $1,352.0 million resulting from the acquisition consist of
brand name, distribution network, licensing agreements and contractual rights.
Refer to Note 9-- Goodwill and Other Intangible Assets for a more complete
discussion of these intangible assets.
Note 2 -- 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 John Hancock Financial Services (JHFS). On April 28,
2004, JHFS completed its merger agreement with Manulife Financial Corporation
(Manulife) and as of the close of business JHFS common stock stopped trading on
the New York Stock Exchange. In accordance with the agreement, each share of
JHFS common stock was converted into 1.1853 shares of Manulife stock. Commencing
on April 28, 2004, the Company operates as a subsidiary of Manulife and the John
Hancock name is Manulife's primary U.S. brand.
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 purchase accounting adjustments resulting from
Manulife's acquisition of the Company, see Note 1- Change of Control, as well as
normal and recurring adjustments necessary for a fair presentation of the
Company's financial position and results of operations. Operating results for
the period from April 29, 2004 through June 30, 2004 (post-merger) and the
periods from April 1, 2004 through April 28, 2004 and January 1, 2004 through
April 28, 2004 (pre-merger) are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004. These unaudited
consolidated financial statements should be read in conjunction with the
Company's annual audited financial statements as of December 31, 2003 included
in the Company's Form 10-K for the year ended December 31, 2003 filed with the
United States Securities and Exchange Commission (hereafter referred to as the
Company's 2003 Form 10-K). The Company's news releases and other information are
available on the internet at www.jhancock.com, and its financial statements are
available at www.manulife.com, under the link labeled "Securities Filings" on
the "Investor Relations" page. In addition, 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.
13
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
The balance sheet at December 31, 2003, presented herein, 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 period amounts have been reclassified to conform to the current
period presentation.
Transactions Affecting Comparability of Results of Operations
In addition to the acquisition of the Company by Manulife, the disposal
described under the table below was conducted in order to execute the Company's
strategy to focus resources on businesses in which it can have a leadership
position. The table below presents actual and proforma data, for comparative
purposes, of revenue and net income for the periods indicated, to demonstrate
the proforma effect of the disposal as if it occurred on January 1, 2003.
Period from April 29 Period from April 1 Three Months Ended
through June 30, through April 28, June 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
-----------------------------------------------------------------
(in millions)
Revenue .......... $1,182.4 $1,182.4 $ 776.4 $ 776.4 $1,822.1 $1,835.8
Net income ....... $ 169.1 $ 169.1 $ 175.0 $ 175.0 $ 255.8 $ 257.7
Period from April 29 Period from January 1 Six Months Ended
through June 30, through April 28, June 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
-----------------------------------------------------------------
(in millions)
Revenue .......... $1,182.4 $1,182.4 $2,513.4 $2,513.4 $3,648.1 $3,692.9
Net income ....... $ 169.1 $ 169.1 $ 329.3 $ 329.3 $ 525.9 $ 528.7
Disposal:
On June 19, 2003, the Company agreed to sell its group life insurance business
through a reinsurance agreement with Metropolitan Life Insurance Company, Inc
(MetLife). The Company is ceding all activity after May 1, 2003 to MetLife. The
transaction was recorded as of May 1, 2003 and closed November 4, 2003. There
was no material impact on the Company's results of operations from the disposed
operations during the first six months of 2003.
Stock-Based Compensation
For stock option grants made to employees prior to January 1, 2003, the Company
applied the recognition and measurement provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which
resulted in no compensation expense recognized for these stock option grants to
employees. Prior to January 1, 2003 the Company recognized compensation expense
at the time of the grant or over the vesting period for grants of non-vested
stock to employees and non-employee board members and grants of stock options to
non-employee general agents and has continued this practice. All options granted
under those plans had an exercise price equal to the market value of the
Company's common stock on the date of grant. Effective January 1, 2003, the
Company adopted the fair value provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the effect
of which is to record compensation expense for grants made subsequent to this
date. The following table illustrates the pro forma effect on net income if the
Company had applied the fair value recognition provisions of SFAS No. 123 to all
stock-based employee compensation.
14
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
Period from Period from
April 29 April 1
through through Three Months
June 30, April 28, Ended June 30,
2004 2004 2003
----------------------------------------------
(in millions)
Net income, as reported ....................................... $169.1 $175.0 $257.7
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects ............ 1.1 1.4 4.0
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects ........................................ 1.1 2.1 9.2
----------------------------------------------
Proforma net income ........................................... $169.1 $174.3 $252.5
==============================================
Period from Period from
April 29 January 1 Six Months
through through Ended
June 30, April 28, June 30,
2004 2004 2003
-----------------------------------------------
(in millions)
Net income, as reported ..................................... $169.1 $329.3 $528.7
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects .......... 1.1 4.8 12.1
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects ............................... 1.1 7.2 25.9
-----------------------------------------------
Proforma net income ......................................... $169.1 $326.9 $514.9
===============================================
Recent Accounting Pronouncements
In May, 2004, the FASB issued FASB Staff Position 106-2 - Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (FSP 106-2). In accordance with FSP 106-2, the
Company recorded a $40.9 million reduction in the accumulated plan benefit
obligation as of the purchase accounting remeasurement date (April 28, 2004) and
a $2.5 million decrease in net periodic postretirement benefit costs for the
period April 29 through June 30, 2004.
On December 8, 2003, President Bush signed into law the bill referenced above,
which expands Medicare, primarily by adding a prescription drug benefit for
Medicare-eligible retirees starting in 2006. The Medicare Prescription Drug
Improvement and Modernization Act of 2003 (the Act) provides for special
tax-free subsidies to employers that offer plans with qualifying drug coverages
beginning in 2006. There are two broad groups of retirees receiving
employer-subsidized prescription drug benefits at the Company. The first group,
those who retired prior to January 1, 1992, receives a subsidy of between 90%
and 100% of total cost. Since this subsidy level will clearly meet the criteria
for qualifying drug coverage, the Company anticipates that the benefits it pays
after 2005 for pre-1992 retirees will be lower as a result of the new Medicare
provisions and has reflected that reduction in the other postretirement benefit
plan liability. With respect to the second group, those who retired on or after
January 1, 1992, the employer subsidy on prescription drug benefits is capped
and currently provides as low as 25% of total cost. Since final authoritative
accounting guidance has not yet been issued on determining whether a benefit
meets the actuarial criteria for qualifying drug coverage, the Company has
deferred recognition as permitted by FSP 106-2 for this group. The final
accounting guidance could require changes to previously reported information.
FASB Interpretation No. 46 (revised December 2003) - Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
In December, 2003, the FASB re-issued Interpretation 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51," (FIN 46R) which
clarifies the consolidation accounting guidance of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," (ARB No. 51) to certain entities
for which controlling financial interests are not measurable by reference to
ownership of the equity of the entity. Such entities are known as variable
interest entities (VIEs).
Controlling financial interests of a VIE are defined as exposure of a party to
the VIE to a majority of either the expected variable losses or expected
variable returns of the VIE, or both. Such party is the primary beneficiary of
the VIE and FIN 46R requires that the primary beneficiary of a VIE consolidate
the VIE. FIN 46R also requires certain disclosures for significant relationships
with VIEs, whether or not consolidation accounting is either used or
anticipated. The consolidation requirements of FIN 46R were applied at December
31, 2003 for entities considered to be special purpose entities (SPEs), and
applied at March 31, 2004 for non-SPE entities.
The Company categorized its FIN 46R consolidation candidates into three
categories- 1) collateral debt obligation funds it manages (CDO funds or CDOs),
which are SPEs, 2) low-income housing properties (the Properties) which are not
SPEs, and 3) assorted other entities (Other Entities) which are not SPEs. The
Company has determined that it should not consolidate any of the CDO funds,
Properties or Other Entities, therefore the adoption of FIN 46R has no impact on
the Company's consolidated financial position, results of operations or cash
flows.
15
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
Additional liabilities recognized as a result of consolidating any VIEs with
which the Company is involved would not represent additional claims on the
general assets of the Company; rather, they would represent claims against
additional assets recognized by the Company as a result of consolidating the
VIEs. Conversely, additional assets recognized as a result of consolidating VIEs
would not represent additional assets which the Company could use to satisfy
claims against its general assets, rather they would be used only to settle
additional liabilities recognized as a result of consolidating the VIEs.
Refer to Note 4--Relationships with Variable Interest Entities for a more
complete discussion of the Company's significant relationships with VIEs, their
assets and liabilities, and the Company's maximum exposure to loss as a result
of its involvement with them.
Statement of Position 03-1 - Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long Duration Contracts and for Separate Accounts
On July 7, 2003, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long Duration Contracts and for Separate Accounts" (SOP 03-1).
SOP 03-1 provides guidance on a number of topics unique to insurance
enterprises, including separate account presentation, interest in separate
accounts, gains and losses on the transfer of assets from the general account to
a separate account, liability valuation, returns based on a contractually
referenced pool of assets or index, accounting for contracts that contain death
or other insurance benefit features, accounting for reinsurance and other
similar contracts, accounting for annuitization benefits, and sales inducements
to contractholders.
The Company adopted SOP 03-1 on January 1, 2004, which resulted in a decrease in
shareholders' equity of $1.5 million (net of tax of $0.8 million). The Company
recorded a reduction in net income of $3.3 million (net of tax of $1.8 million)
partially offset by an increase in other comprehensive income of $1.8 million
(net of tax of $1.0 million) which were recorded as the cumulative effects of an
accounting change, on January 1, 2004. In addition, in conjunction with the
adoption of SOP 03-1 the Company reclassified $933.8 million in separate account
assets and liabilities to the general account balance sheet accounts.
Note 3 -- Segment Information
As a result of Manulife's acquisition of the Company, see Note 1- Change of
Control, the Company renamed and reorganized certain businesses within its
operating segments to better align the Company with its new parent, Manulife.
The Company renamed the Asset Gathering Segment as the Wealth Management
Segment. In addition, the Institutional Investment Management Segment was moved
to the Corporate and Other Segment. Other realignments include moving Signator
Investors, Inc. our agent sales organization, from Wealth Management to
Protection, and Group Life, Retail Discontinued operations, discontinued health
insurance operations and Creditor from Corporate and Other to Protection.
International Group Plans (IGP) remain in international operations in our
Corporate and Other Segment while IGP will be reported in Reinsurance in
Manulife's segment results. The financial results for all periods have been
reclassified to conform to the current period presentation.
The Company operates in the following four business segments: two segments
primarily serve retail customers, one segment serves institutional customers,
and our fourth segment is the Corporate and Other Segment, which includes our
institutional advisory business, the remaining international operations, and the
corporate account. Our retail segments are the Protection Segment and the Wealth
Management Segment, previously called Asset Gathering. Our institutional segment
is the Guaranteed and Structured Financial Products Segment (G&SFP).
Prior to the merger, the Company operated in five business segments: two
segments primarily served retail customers, two segments served domestic
institutional customers, and our fifth segment was the Corporate and Other
Segment, which included our remaining international operations, the corporate
account and several discontinued business lines. For additional information
about the Company's pre-acquisition business segments please refer to the
Company's 2003 Form 10-K.
Subsequent to the merger, the Company changed its methodology for determining
how much capital is needed to support its operating segments and redeployed
capital according to the new methodology. As part of this process the Company
moved certain tax preferenced investments from the operating segments to the
Corporate and Other Segment. These steps were taken as part of the alignment of
the Company's investment and capital allocation processes with those of its
parent, and they could have a material impact on each operating segment's
investment income and net income in future periods.
16
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
The following table summarizes selected financial information by segment for the
periods and dates indicated. 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 6 - Closed Block
in the notes to the unaudited consolidated financial statements and the related
footnote in the Company's 2003 Form 10-K.
Wealth Corporate
Protection Management G&SFP and Other Consolidated
---------------------------------------------------------------
(in millions)
For the period from April 29, 2004
through June 30, 2004
Revenues:
Revenues from external customers ... $ 354.6 $ 64.0 $ 8.7 $ 124.4 $ 551.7
Net investment income .............. 221.9 104.5 200.9 54.5 581.8
Net realized investment and
other gains (losses), net ........ 13.2 (9.2) 48.9 (4.0) 48.9
Inter-segment revenues ............. -- 0.2 0.1 (0.3) --
-------------------------------------------------------------------
Revenues ........................... $ 589.7 $ 159.5 $ 258.6 $ 174.6 $ 1,182.4
===================================================================
Net Income:
Net income ......................... $ 89.2 $ 31.3 $ 55.6 $ (7.0) $ 169.1
===================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method $ 5.3 $ 1.5 $ 4.9 $ (3.0) $ 8.7
Carrying value of investments
accounted for by the equity
method ........................... 431.6 221.6 568.9 644.9 1,867.0
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains
(losses) ......................... 12.4 15.8 9.6 -- 37.8
Segment assets ..................... 40,816.5 19,478.9 35,012.0 3,511.5 98,818.9
17
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Wealth Corporate
Protection Management G&SFP and Other Consolidated
-------------------------------------------------------------
(in millions)
For the period from April 1, 2004
through April 28, 2004
Revenues:
Revenues from external customers ........ $190.2 $ 24.4 $ 11.3 $ 50.6 $276.5
Net investment income ................... 122.6 59.8 128.6 (9.8) 301.2
Net realized investment and other
gains (losses), net ................... (8.0) 5.5 125.4 75.8 198.7
Inter-segment revenues .................. -- 0.1 0.1 (0.2) --
----------------------------------------------------------
Revenues ................................ $304.8 $ 89.8 $265.4 $116.4 $776.4
Net Income:
Net income .............................. $ 25.3 $ 18.2 $ 88.9 $ 42.6 $175.0
Supplemental Information:
Equity in net income of investees
accounted for by the equity method .... $ 2.8 $ 0.1 $ 1.6 $ 2.1 $ 6.6
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains (losses) ... 6.0 8.9 0.1 -- 15.0
18
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Wealth Corporate
Protection Management G&SFP and Other Consolidated
-----------------------------------------------------------
(in millions)
As of or for the three months ended
June 30, 2003
Revenues:
Revenues from external customers ....... $ 520.0 $ 107.4 $ 15.5 $ 172.3 $815..2
Net investment income .................. 357.9 176.7 412.3 (4.6) 942.3
Net realized investment and other
gains (losses), net .................. 27.5 20.2 11.8 18.8 78.3
Inter-segment revenues ................. -- 0.3 -- (0.3) --
----------------------------------------------------------
Revenues ............................... $ 905.4 $ 304.6 $ 439.6 $ 186.2 $ 1,835.8
Net Income:
Net income ............................. $ 109.0 $ 63.7 $ 75.6 $ 9.4 $ 257.7
==========================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ... $ 5.8 $ 3.1 $ 11.8 $ 5.2 $ 25.9
Carrying value of investments
accounted for by the equity method ... 308.9 201.9 505.8 703.2 1,719.8
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains (losses) .. 44.1 19.1 0.6 (0.2) 63.6
Segment assets ......................... 35,956.7 18,189.2 36,927.2 4,754.5 95,827.6
19
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Wealth Corporate
Protection Management G&SFP and Other Consolidated
----------------------------------------------------------------
(in millions)
For the period from April 29
through June 30, 2004
Revenues:
Revenues from external customers ....... $ 354.6 $ 64.0 $ 8.7 $ 124.4 $ 551.7
Net investment income .................. 221.9 104.5 200.9 54.5 581.8
Net realized investment and other
gains (losses), net .................. 13.2 (9.2) 48.9 (4.0) 48.9
Inter-segment revenues ................. -- 0.2 0.1 (0.3) --
----------------------------------------------------------------
Revenues ............................... 589.7 159.5 258.6 174.6 1,182.4
================================================================
Net Income:
Net income ............................. $ 89.2 $ 31.3 $ 55.6 $ (7.0) $ 169.1
================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ............................... $ 5.3 $ 1.5 $ 4.9 $ (3.0) $ 8.7
Carrying amount of investments
accounted for using the equity
method ............................... 431.6 221.6 568.9 644.9 1,867.0
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains (losses) .. 12.4 15.8 9.6 -- 37.8
Segment assets ......................... 40,816.5 19,478.9 35,012.0 3,511.5 98,818.9
20
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Wealth Corporate
Protection Management G&SFP and Other Consolidated
-------------------------------------------------------------------
(in millions)
For the period from January 1, 2004
through April 28, 2004
Revenues:
Revenues from external customers ....... $ 751.6 $ 116.6 $ 26.9 $ 232.6 $1,127.7
Net investment income .................. 492.7 237.5 530.4 24.1 1,284.7
Net realized investment and other
gains (losses), net .................. (9.0) (1.5) 8.8 102.7 101.0
Inter-segment revenues ................. -- 0.4 0.2 (0.6) --
-------------------------------------------------------------------
Revenues ............................... 1,235.3 353.0 566.3 358.8 2,513.4
===================================================================
Net Income:
Net income ............................. $ 110.9 $ 49.5 $ 83.2 $ 85.7 $ 329.3
===================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ............................... 11.4 3.1 11.5 43.3 69.3
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains (losses) .. 71.4 50.0 0.6 (0.2) 121.8
21
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (Continued)
Wealth Corporate
Protection Management G&SFP and Other Consolidated
-------------------------------------------------------------
(in millions)
As of or for the six months ended
June 30, 2003
Revenues:
Revenues from external customers ........ $ 1,064.8 $ 208.5 $ 33.6 $ 326.9 $ 1,633.8
Net investment income ................... 708.2 342.5 839.6 (14.9) 1,875.4
Net realized investment and other
gains (losses), net ................... (5.0) (17.5) (123.5) 329.7 183.7
Inter-segment revenues .................. -- 0.6 -- (0.6) --
-------------------------------------------------------------
Revenues ................................ $ 1,768.0 534.1 $ 749.7 $ 641.1 $ 3,692.9
=============================================================
Net Income:
Net income .............................. $ 174.1 $ 79.0 $ 67.1 $ 208.5 $ 528.7
=============================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ................................ $ 11.0 $ 5.2 $ 19.7 $ 5.2 $ 41.1
Carrying amount of investments
accounted for using the equity
method ................................ 308.9 201.9 505.8 703.2 1,719.8
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding amounts
related to net realized investment
and other gains (losses) .............. 81.4 53.0 1.1 (0.1) 135.4
Segment assets .......................... 35,956.7 18,189.2 36,927.2 4,754.5 95,827.6
22
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities
The Company has relationships with various types of special purpose entities
(SPEs) and other entities, some of which are variable interest entities (VIEs),
in accordance with FIN 46R, as discussed in Note 2--Summary of Significant
Accounting Policies above. Presented below are discussions of the Company's
significant relationships with them, the Company's conclusions about whether the
Company should consolidate them, and certain summarized financial information
for them. As explained in Note 2--Summary of Significant Accounting Policies
above, additional liabilities recognized as a result of consolidating any VIEs
with which the Company is involved would not represent additional claims on the
general assets of the Company; rather, they would represent claims against
additional assets recognized by the Company as a result of consolidating the
VIEs. These additional liabilities would be non-recourse to the general assets
of the Company. Conversely, additional assets recognized as a result of
consolidating these VIEs would not represent additional assets which the Company
could use to satisfy claims against its general assets, rather they would be
used only to settle additional liabilities recognized as a result of
consolidating the VIEs.
Collateralized Debt Obligation Funds (CDOs). Since 1996, the Company has acted
as investment manager to certain asset backed investment vehicles, commonly
known as collateralized debt obligation funds (CDOs). The Company also invests
in the debt and/or equity of these CDOs, and in the debt and/or equity of CDOs
managed by others. CDOs raise capital by issuing debt and equity securities, and
use their capital to invest in portfolios of interest bearing securities. The
returns from a CDO's portfolio of investments are used by the CDO to finance its
operations including paying interest on its debt and paying advisory fees and
other expenses. Any net income or net loss is shared by the CDO's equity owners
and, in certain circumstances where the Company manages the CDO, positive
investment experience is shared by the Company through variable performance
management fees. Any net losses in excess of the CDO equity are borne by the
debt owners in ascending order of subordination. Owners of securities issued by
CDOs that are managed by the Company have no recourse to the Company's assets in
the event of default by the CDO. The Company's risk of loss from any CDO it
manages, or in which it invests, is limited to its investment in the CDO.
In accordance with previous consolidation accounting principles (now superceded
by FIN 46R), the Company formerly consolidated a CDO only if the Company owned a
majority of the CDO's equity. The Company is now required to consolidate a CDO
when, in accordance with FIN 46R, the CDO is deemed to be a VIE, but only if the
Company is deemed to be the primary beneficiary of the CDO. For those CDOs which
are not deemed to be VIEs, the Company determines its consolidation status by
considering the control relationships among the equity owners of the CDOs. The
Company has determined whether each CDO should be considered a VIE, and while
most are VIEs, some are not. The Company has determined that it is not the
primary beneficiary of any CDO which is a VIE, and for those that are not VIEs,
the Company also does not have controlling financial interests. Therefore, the
Company does not use consolidation accounting for any of the CDOs which it
manages.
The Company believes that its relationships with its managed CDOs are
collectively significant, and accordingly provides, in the tables below, summary
financial data for all these CDOs and data relating to the Company's maximum
exposure to loss as a result of its relationships with them. The Company has
determined that it is not the primary beneficiary of any CDO in which it invests
and does not manage and thus will not be required to consolidate any of them,
and considers that its relationships with them are not collectively significant,
therefore the Company does not disclose data for them. Credit ratings are
provided by nationally recognized credit rating agencies, and relate to the debt
issued by the CDOs in which the Company has invested.
June 30, December 31,
2004 2003
--------------------------
(in millions)
Total size of Company-Managed CDOs (1)
Total assets .................................... $3,396.4 $4,922.2
======== ========
Total debt ...................................... $3,404.2 $4,158.2
Total other liabilities ......................... 5.4 712.0
-------- --------
Total liabilities ............................... 3,409.6 4,870.2
Total equity .................................... (13.2) 52.0
-------- --------
Total liabilities and equity .................... $3,396.4 $4,922.2
======== ========
(1) The reduction in size of the Company-Managed CDOs is primarily due to the
liquidation, at maturity, of Declaration Funding 1 LTD, in May 2004
23
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
Maximum exposure of the Company to losses
From Company-Managed CDOs June 30, 2004 December 31, 2003
--------------------------------------------
(in millions, except percents)
Investment in tranches of Company managed CDOs, by
credit rating (Moody's/Standard & Poors):
Aaa/AAA ............................................ $184.2 59.3% $201.0 35.6%
Aa1/AA+ ............................................ 73.8 23.8 75.7 13.4
Baa2/BBB ........................................... -- -- 218.0 38.8
B2 ................................................. -- -- 8.0 1.4
B3/B- .............................................. 7.7 2.5 -- --
Caa1/CCC+ .......................................... 10.4 3.3 13.2 2.3
Not rated (equity) ................................. 34.6 11.1 48.1 8.5
------ ------ ------ ------
Total Company exposure ............................. $310.7 100.0% $564.0 100.0%
====== ====== ====== ======
Low-Income Housing Properties. Since 1995, the Company has generated income tax
benefits by investing in apartment properties (the Properties) that qualify for
low income housing and/or historic tax credits. The Company initially invested
in the Properties directly, but now primarily invests indirectly via limited
partnership real estate investment funds (the Funds), which are consolidated
into the Company's financial statements. The Properties are organized as limited
partnerships or limited liability companies each having a managing general
partner or a managing member. The Company is usually the sole limited partner or
investor member in each Property; it is not the general partner or managing
member in any Property.
The Properties typically raise additional capital by qualifying for long-term
debt, which at times is guaranteed or otherwise subsidized by Federal or state
agencies, or by Fannie Mae. In certain cases, the Company invests in the
mortgages of the Properties. The Company's maximum loss in relation to the
Properties is limited to its equity investment in the Properties, future equity
commitments made, and where the Company is the mortgagor, the outstanding
balance of the mortgages originated for the Properties, and outstanding mortgage
commitments the Company has made to the Properties. The Company receives Federal
income tax credits in recognition of its investment in each of the Properties
for a period of ten years. In some cases, the Company receives distributions
from the Properties which are based on a portion of the Property cash flows.
The Company has determined that it is not the primary beneficiary of any
Property, so the Company does not use consolidation accounting for any of them.
The Company believes that its relationships with the Properties are significant,
and accordingly, the disclosures in the tables below are provided. The tables
below present summary financial data for the Properties, and data relating to
the Company's maximum exposure to loss as a result of its relationships with
them.
June 30, 2004 December 31, 2003
---------------------------------
(in millions)
Total size of the Properties (1)
Total assets .............................. $1,072.6 $ 982.7
======== ========
Total debt ................................ $ 627.0 $ 576.3
Total other liabilities ................... 125.6 116.6
-------- --------
Total liabilities ......................... 752.6 692.9
Total equity .............................. 320.0 289.8
-------- --------
Total liabilities and equity .............. $1,072.6 $ 982.7
======== ========
(1) Property level data reported above is reported with six and three month
delays, respectively due to the delayed availability of financial
statements of the Funds.
24
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
June 30, 2004 December 31, 2003
---------------------------------
(in millions)
Maximum exposure of the Company to losses from the Properties
Equity investment in the Properties (1) .................... $304.0 $291.0
Outstanding equity capital commitments to the Properties ... 101.4 108.2
Carrying value of mortgages for the Properties ............. 67.5 62.8
Outstanding mortgage commitments to the Properties ......... 0.9 5.1
------ ------
Total Company exposure ..................................... $473.8 $467.1
====== ======
(1) Equity investment in the Properties above is reported with six and three
month delays, respectively, due to the delayed availability of financial
statements of the Funds.
Other Entities. The Company has investment relationships with a disparate group
of entities (Other Entities), which result from the Company's direct investment
in their debt and/or equity. This category includes energy investment
partnerships, investment funds organized as limited partnerships, and businesses
which have undergone debt restructurings and reorganizations and various other
relationships. The Company has determined that for each of these Other Entities
which are VIEs, the Company is not the primary beneficiary, and should not use
consolidation accounting for them. The Company believes that its relationships
with the Other Entities are not significant, and is accordingly not providing
summary financial data for them, or data relating to the Company's maximum
exposure to loss as a result of its relationships with them. These potential
losses are generally limited to amounts invested, which are included on the
Company's consolidated balance sheets in the appropriate investment categories.
Note 5 -- Commitments and Contingencies
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 group 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 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 certain disputes, including a number of related 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 June 30, 2004, would not be material to the Company's
financial position, results of operations or liquidity.
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
25
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 -- Commitments and Contingencies - (Continued)
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 with
litigation from time to time with claimants, beneficiaries and others, and a
number of litigation matters were pending as of June 30, 2004. 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, results of operations or liquidity of the Company.
26
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- 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 2003 Form 10-K. The following
tables set forth certain summarized financial information relating to the closed
block as of the dates indicated.
June 30, 2004 December 31, 2003
--------------------------------
(in millions)
Liabilities
Future policy benefits ............................................... $10,680.5 $10,690.6
Policyholder dividend obligation ..................................... 437.1 400.0
Policyholders' funds ................................................. 1,506.6 1,511.9
Policyholder dividends payable ....................................... 415.7 413.1
Other closed block liabilities ....................................... 59.5 37.4
--------------------------------
Total closed block liabilities .................................... $13,099.4 $13,053.0
--------------------------------
Assets
Investments:
Fixed maturities:
Held-to-maturity--at amortized cost
(fair value: December 31--$69.6) ................................ -- $ 66.0
Available-for-sale--at fair value
(cost: June 30--$6,402.9; December 31--$5,847.6) ................ $ 6,354.6 6,271.1
Equity securities:
Available-for-sale--at fair value
(cost: June 30--$7.0 December 31--$9.1) ......................... 6.9 9.1
Mortgage loans on real estate ........................................ 1,716.5 1,577.9
Policy loans ......................................................... 1,543.3 1,554.0
Short-term investments ............................................... -- 1.2
Other invested assets ................................................ 294.0 230.6
--------------------------------
Total investments ................................................. 9,915.3 9,709.9
Cash and cash equivalents ............................................ 98.6 248.3
Accrued investment income ............................................ 146.4 145.1
Other closed block assets ............................................ 319.7 308.6
--------------------------------
Total closed block assets ......................................... $10,480.0 $10,411.9
--------------------------------
Excess of reported closed block liabilities over assets
designated to the closed block .................................... $ 2,619.4 $ 2,641.1
--------------------------------
Portion of above representing other comprehensive income:
Unrealized (depreciation) appreciation , net of tax of ($15.9)
million and ($148.0) million at June 30 and December 31,
respectively .................................................... (28.4) 275.3
Allocated to the policyholder dividend obligation, net of tax of
$(15.9) million and $148.1 million at June 30 and December 31,
respectively .................................................... 29.5 (275.1)
--------------------------------
Total ......................................................... 1.1 0.2
--------------------------------
Maximum future earnings to be recognized from closed block
assets and liabilities ............................................ $ 2,620.5 $ 2,641.3
================================
27
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Closed Block - (Continued)
Period from Period from Twelve
April 29, January 1, Months ended
through June 30, through April 28, December 31,
2004 2004 2003
-----------------------------------------------------
(in millions)
Changes in the policyholder dividend obligation:
Balance at beginning of period ..................... $308.8 $400.0 $288.9
Impact on net income before income taxes ......... (34.9) 23.4 (57.9)
Unrealized investment gains (losses) ............. (45.2) (114.6) 169.0
Purchase equation fair value adjustment .......... 208.4 -- --
--------------------------------------------------
Balance at end of period ........................... $437.1 $308.8 $400.0
==================================================
The following table sets forth certain summarized financial information relating
to the closed block for the periods indicated:
Period from Period from
April 29, April 1, Three Months
through through Ended
June 30, April 28, June 30,
2004 2004 2003
------------------------------------------
(in millions)
Revenues
Premiums ................................................................ $131.9 $ 68.7 $218.8
Net investment income ................................................... 89.2 50.5 161.7
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $(10.7)
million and $18.8 million for the periods April 29 through
June 30, and April 1 through April 28, 2004, respectively,
and $23.8 million for the three months ended June 30, 2003 ............ 0.7 (34.6) (1.1)
Other closed block revenues ............................................. (0.1) 0.1 0.1
------------------------------------------
Total closed block revenues ........................................... 221.7 84.7 379.5
Benefits and Expenses
Benefits to policyholders ............................................... 154.2 78.9 230.3
Change in the policyholder dividend obligation .......................... (24.7) (6.6) (3.2)
Other closed block operating costs and expenses ......................... (0.4) (0.5) (1.9)
Dividends to policyholders .............................................. 69.9 36.3 120.9
------------------------------------------
Total benefits and expenses ........................................... 199.0 108.1 346.1
------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes ................................................... 22.7 (23.4) 33.4
Income taxes, net of amounts credited to the policyholder
dividend obligation of $0.7 million and $0.0 million for
the periods April 29 through June 30, and April 1 through
April 28, 2004, respectively, and $0.6 million for the
three months ended June 30, 2003 ...................................... 7.6 (8.9) 11.9
------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
and income taxes .................................................... $ 15.1 ($14.5) $ 21.5
==========================================
28
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Closed Block - (Continued)
Period from Period from
April 29, January 1, Six Months
through through Ended
June 30, April 28, June 30,
2004 2004 2003
------------------------------------
(in millions)
Revenues
Premiums ............................................................. $131.9 $278.0 $443.2
Net investment income ................................................ 89.2 208.4 326.3
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $(10.7)
million and $33.7 million for the periods from April 29
through June 30, 2004 and January 1 through April 28, 2004,
respectively, and $(11.2) million for the six months ended
June 30, 2003 ...................................................... 0.7 (35.7) (2.3)
Other closed block revenues .......................................... (0.1) (0.2) 0.1
------------------------------------
Total closed block revenues ........................................ 221.7 450.5 767.3
Benefits and Expenses
Benefits to policyholders ............................................ 154.2 310.9 475.9
Change in the policyholder dividend obligation ....................... (24.7) (11.2) (8.7)
Other closed block operating costs and expenses ...................... (0.4) 0.9 (4.4)
Dividends to policyholders ........................................... 69.9 141.1 237.9
------------------------------------
Total benefits and expenses ........................................ 199.0 441.7 700.7
------------------------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes ................................................ 22.7 8.8 66.6
Income taxes, net of amounts credited to the policyholder
dividend obligation of $0.7 million and $0.6 million for the
periods from April 29 through June 30 and January 1 through
April 28, 2004, respectively, and $1.1 million for the six months
ended June 30, 2003 ................................................ 7.6 2.3 23.3
------------------------------------
Closed block revenues, net of closed block benefits and expenses,
and income taxes ................................................. $ 15.1 $ 6.5 $ 43.3
====================================
29
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Restructuring Costs
Following the acquisition of JHFS by Manulife on April 28, 2004, see Note 1 -
Change of Control, Manulife developed a plan to integrate the operations of JHFS
with Manulife's consolidated subsidiaries. Manulife expects the restructuring to
be substantially completed by the end of 2005. Restructuring costs of $85.1
million were recognized by the Company as part of the purchase transaction and
consist primarily of exit and consolidation activities involving operations,
certain compensation costs, and facilities. The accruals for the restructuring
costs are included in other liabilities on the consolidated balance sheets and
in other operating costs and expenses in the income statements.
The following details the amounts and status of restructuring costs (in
millions):
Pre-acquisition Amount Ending
Accrual Accruals Utilized Accrued at Amount Utilized Balance
Type of Cost 1/1/04 1/1/04-4/28/04 1/1/04-4/28/04 acquisition 4/29/04-6/30/04 6/30/04
- --------------------------------------------------------------------------------------------------------------------
Personnel ............ $12.0 $(0.8) $ 2.5 $41.5 $ 2.0 $48.2
Facilities ........... -- -- -- 43.6 1.0 42.6
- --------------------------------------------------------------------------------------------------------------------
Total ........... $12.0 $(0.8) $ 2.5 $85.1 $ 3.0 $90.8
================================================================================================================
Note 8 -- Related Party Transactions
The Company provides JHFS, its parent, 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 service fees of $3.5
million and $4.8 million for the three month periods ended June 30, 2004 and
2003, respectively, and $8.7 million and $11.1 million for the six month periods
ended June 30, 2004 and 2003, respectively. As of June 30, 2004, JHFS was
current in its payments to the Company related to these services.
The Company provides certain administrative and asset management services to its
employee benefit plans (the Plans). Fees paid to the Company by the Plans for
these services were $1.5 million and $1.2 million for the three month periods
ended June 30, 2004 and 2003, respectively, and $3.2 million and $2.6 million
for the six month periods ended June 30, 2004 and 2003, respectively.
During the six month periods ended June 30, 2004 and 2003, the Company paid
$69.0 million and $24.8 million in premiums to an affiliate, John Hancock
Insurance Company of Vermont (JHIC of Vermont) for certain insurance services.
All of these were in Trust Owned Health Insurance (TOHI) premiums, a funding
vehicle for postretirement medical benefit plans, which offers customers an
insured medical benefit-funding program in conjunction with a broad range of
investment options.
The Company has reinsured certain portions of its long term care insurance,
non-traditional life insurance and group pension businesses with John Hancock
Reassurance Company, Ltd. of Bermuda (JHReCo), an affiliate and a 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 $1.309.0 million at
June 30, 2004 and $994.5 million at December 31, 2003, which are included with
other liabilities in the consolidated balance sheets and recorded reinsurance
recoverable from JHReCo of $1,962.0 million at June 30, 2004 and $1,421.1
million at December 31, 2003, respectively, which are included with other
reinsurance recoverables on the consolidated balance sheets. Premiums ceded to
JHReCo were $183.7 million and $166.0 for the three month periods ended June 30,
2004 and 2003, respectively, and $379.1 million and $283.3 million of the six
month periods ended June 30, 2004 and 2003, respectively.
During the year ended 2002, the Company began reinsuring certain portions of its
group pension businesses with JHIC of Vermont. 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 JHIC of
Vermont of $229.2 million at June 30, 2004 and $157.2 million at December 31,
2003, which is included with other liabilities in the consolidated balance
sheets. At June 30, 2004 and December 31, 2003, the Company had not recorded any
reinsurance recoverable from JHIC of Vermont. Reinsurance recoverable is
typically recorded with other reinsurance recoverables on the consolidated
balance sheet. Premiums ceded by the Company to JHIC of Vermont were $0.5
million and $0.2 million for the three month periods
30
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 8 -- Related Party Transactions - (Continued)
ended June 30, 2004 and 2003, respectively, and $0.8 million and $0.4 million
for the six month periods ended June 30, 2004 and 2003, respectively.
Prior to its acquisition by Manulife effective April 28, 2004, the Company
reinsured certain portions of its closed block with Manulife. The Company
entered into these reinsurance contracts in order to facilitate its statutory
capital management process. These reinsurance contracts are primarily written on
a modified coinsurance basis where the related financial assets remain invested
at the Company. The closed block reinsurance agreement is a financial
reinsurance agreement and does not meet the risk transfer definition for U.S.
GAAP reporting purposes. The agreement is accounted for under deposit accounting
with only the reinsurance risk fee being reported on the U.S. GAAP income
statement. The U.S. GAAP financial statement does not report reinsurance ceded
premiums or reinsurance recoverable. The impact on our U.S. GAAP financial
statement represents the fee recorded as payable to Manulife, which appears in
Other Operating Costs and Expenses in the income statements and was $0.8 million
for the period the Company operated as a subsidiary of Manulife, April 29, 2004
through June 30, 2004.
Note 9 -- Goodwill and Other Intangible Assets
The Company recognized several intangible assets which resulted from business
combinations including Manulife's acquisition of the Company (see Note 1 -
Change of Control above).
Non-amortizable assets include; goodwill, which is the excess of the cost over
the fair value of identifiable assets acquired in business combinations, brand
name which is the value in the purchase price of the Company assigned to the
Company's trademark and trade name, and mutual fund investment management
contracts acquired (investment management contracts) which are values assigned
to the investment management relationships between the Company and each of the
mutual funds managed by the Company. Amortizable assets include; value of
business acquired (VOBA) which is the present value of estimated future profits
of insurance policies in force related to businesses acquired, and which has
weighted average lives ranging from 6 to 17 years for the various insurance
products, distribution networks which are the value assigned to the Company's
network of sales agents and producers responsible for procuring business and
which have a weighted average life of 22 years, and other investment management
contracts which are the values assigned to the Company's institutional
investment contracts and which have a weighted average life of 10 years.
Three of these assets were initially recognized at the time of the acquisition
of the Company by MFC (brand name, distribution networks, and other investment
management contracts) while the others were expanded in scope and size as a
result of the merger.
The following tables contain summarized financial information for each of these
intangible assets as of the dates and periods indicated.
Accumulated
Gross Amortization Net
Carrying And Other Carrying
Amount Changes Amount
------------------------------------
(in millions)
June 30, 2004
Unamortizable intangible assets:
Goodwill ............................................. $3,031.7 -- $3,031.7
Brand name ........................................... 600.0 -- 600.0
Investment management contracts ...................... 292.9 -- 292.9
Amortizable intangible assets:
Distribution networks ................................ $ 397.2 $ (0.2) $ 397.0
Other investment management contracts ................ 61.7 -- 61.2
VOBA ................................................. 2,864.6 (6.5) 2,858.1
December 31, 2003
Unamortizable intangible assets:
Goodwill ............................................. $ 166.7 $(58.1) $ 108.6
Mutual fund investment management contracts .......... 13.3 (7.0) 6.3
Amortizable intangible assets:
VOBA ................................................. 205.9 (37.4) 168.5
31
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Period from Period from
April 29, April 1,
2004 2004 Three
through through Months
June 30, April 28, Ended June
2004 2004 30, 2003
-----------------------------------------
(in millions)
Amortization expense:
Distribution networks, net of tax of $0.1 million,
$ - million, and $ - million, respectively .................... $ 0.1 -- --
Other investment management contracts, net of tax
of $0.1 million, $ - million, and $- million, respectively .... 0.3 -- --
VOBA, net of tax of $11.2 million, $0.5 million and $0.7
million, respectively ......................................... 20.8 $ 0.8 $ 1.4
-----------------------------------------
Total amortization expense, net of tax of $11.4 million,
$0.5 million and $0.7 million, respectively ................... $21.2 $ 0.8 $ 1.4
=========================================
Period from Period from
April 29, January 1,
2004 2004
through through Six Months
June 30, April 28, Ended June
2004 2004 30, 2003
------------------------------------------
(in millions)
Amortization expense:
Distribution networks, net of tax of $0.1 million,
$ - million and $- million, respectively ...................... $ 0.1 -- --
Other investment management contracts, net of tax
of $0.1 million, $ - million and $- million, respectively ..... 0.3 -- --
VOBA, net of tax of $11.2 million, $ 1.8 million
and $1.4 million, respectively ................................ 20.8 $ 3.3 $ 2.7
-------------------------------------------
Total amortization expense, net of tax of $11.4 million,
$1.8 million and $1.4 million, respectively ................... $21.2 $ 3.3 $ 2.7
===========================================
Net
Tax Effect Expense
---------- -------
(in millions)
Estimated future aggregate amortization expense for the years ended December 31,
2004....................................................................... $ 42.1 $ 78.3
2005....................................................................... 54.5 101.2
2006....................................................................... 51.5 95.7
2007....................................................................... 47.7 88.5
2008....................................................................... 42.9 79.6
32
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
The following tables present the continuity of each of the Company's
unamortizable and amortizable intangible assets for the periods presented.
Unamortizable intangible assets:
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Goodwill: (in millions)
- ---------
Balance at January 1, 2004 .................... $ 66.1 $ 42.1 -- $ 0.4 $ 108.6
Goodwill derecognized (1) ..................... (66.1) (42.1) -- (0.4) (108.6)
Goodwill recognized (2) ....................... 1,842.3 1,040.0 149.4 3,031.7
-------------------------------------------------------------------
Balance at June 30, 2004 ...................... $1,842.3 $1,040.0 -- $ 149.4 $3,031.7
===================================================================
(1) Goodwill derecognized in the purchase transaction with Manulife.
(2) Goodwill recognized in the purchase transaction with Manulife.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Goodwill: (in millions)
- ---------
Balance at January 1, 2003........................ $ 66.1 $ 42.1 -- $ 0.4 $ 108.6
--------------------------------------------------------------------
Balance at December 31, 2003...................... $ 66.1 $ 42.1 -- $ 0.4 $ 108.6
====================================================================
33
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Brand name: (in millions)
- -----------
Balance at January 1, 2004 .................... -- -- -- -- --
Brand name recognized (1) ..................... $364.4 $209.0 -- $ 26.6 $600.0
Foreign currency translation
adjustment .................................. -- -- -- -- --
Other adjustments ............................. -- -- -- -- --
----------------------------------------------------------------
Balance at June 30, 2004 ...................... $364.4 $209.0 -- $ 26.6 $600.0
================================================================
(1) Brand name recognized in the purchase transaction with Manulife.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Investment management contracts: (in millions)
- --------------------------------
Balance at January 1, 2004 ........................ -- $ 6.3 -- -- $ 6.3
Investment management contracts derecognized (1) .. -- (6.3) -- -- (6.3)
Investment management contracts recognized (2) .... -- 292.9 -- -- 292.9
Acquisitions ...................................... -- -- -- -- --
Other adjustments ................................. -- -- -- -- --
---------------------------------------------------------------------
Balance at June 30, 2004 .......................... -- $292.9 -- -- $292.9
=====================================================================
(1) Investment management contracts derecognized in purchase transaction with
Manulife.
(2) Investment management contracts recognized in the purchase transaction
with Manulife.
34
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate
Wealth and
Protection Management G&SFP Canada Other Consolidated
---------- ---------- ----- ------ ----- ------------
Investment management contracts: (in millions)
- --------------------------------
Balance at January 1, 2003 ................... -- $5.2 -- -- -- $5.2
Acquisitions(1) .............................. -- 1.1 -- -- -- 1.1
Other adjustments ............................ -- -- -- -- -- --
------------------------------------------------------------------------------
Balance at December 31, 2003 ................. -- $6.3 -- -- -- $6.3
==============================================================================
(1) This increase results from JH Fund's purchases of the mutual fund
investment management contracts for the US Global Leaders Fund, Classic
Value Fund, and Large Cap Select Fund in 2003.
Amortizable intangible assets:
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Distribution networks: (in millions)
- ----------------------
Balance at January 1, 2004 .................... -- -- -- -- --
Distribution networks recognized (1) .......... $308.6 $ 88.6 -- -- $397.2
Amortization .................................. (0.2) -- -- -- (0.2)
Other adjustments ............................. -- -- -- -- --
---------------------------------------------------------------------
Balance at June 30, 2004 ...................... $308.4 $ 88.6 -- -- $397.0
=====================================================================
(1) Distribution networks recognized in the purchase transaction with
Manulife.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
Other investment management contracts: (in millions)
- --------------------------------------
Balance at January 1, 2004 .............................. -- -- -- -- --
Other investment management contracts recognized (1) .... -- $20.3 -- $41.4 $61.7
Amortization ............................................ -- -- -- (0.5) (0.5)
Other adjustments ....................................... -- -- -- -- --
--------------------------------------------------------------------
Balance at June 30, 2004 ................................ -- $20.3 -- $40.9 $61.2
====================================================================
(1) Other investment management contracts recognized in the purchase
transaction with Manulife.
35
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
VOBA: (in millions)
- -----
Balance at January 1, 2004 .................... $168.5 -- -- -- $168.5
Amortization .................................. (5.1) -- -- -- (5.1)
Acquisitions .................................. -- -- -- -- --
Adjustment to unrealized gains on
securities available for sale ............... 5.5 -- -- -- 5.5
Other adjustments (1) ......................... (1.4) -- -- -- (1.4)
------------------------------------------------------------------
Balance at April 28, 2004 ..................... $167.5 -- -- -- $167.5
==================================================================
(1) VOBA related to the acquisition of the fixed universal life insurance
business of Allmerica was adjusted to reflect adjustments to the purchase
price equation.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
VOBA: (in millions)
- -----
Balance at April 29, 2004 .................... $ 167.5 -- -- -- $ 167.5
VOBA derecognized (1) ........................ (167.5) -- -- -- (167.5)
VOBA recognized (2) .......................... 2,141.8 474.9 247.9 2,864.6
Amortization ................................. (12.6) (9.8) (9.6) (32.0)
Adjustment to unrealized gains on
securities available for sale .............. 10.2 15.3 -- -- 25.5
-------------------------------------------------------------------
Balance at June 30, 2004 ..................... $2,139.4 $ 480.4 $ 238.3 -- $2,858.1
===================================================================
(1) VOBA derecognized in the purchase transaction with Manulife.
(2) VOBA recognized in the purchase transaction with Manulife.
36
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------- ---------- ----- ----- ------------
VOBA: (in millions)
- -----
Balance at January 1, 2003 .................. $177.2 -- -- -- $177.2
Amortization ................................ (10.1) -- -- -- (10.1)
Acquisitions ................................ -- -- -- -- --
Adjustment to unrealized gains on
securities available for sale ............. (2.8) -- -- -- (2.8)
Other adjustments(1) ........................ 4.2 -- -- -- 4.2
------------------------------------------------------------------
Balance at December 31, 2003 ................ $168.5 -- -- -- $168.5
==================================================================
(1) An adjustment of $4.2 million was made to previously recorded VOBA
relating to acquisition of the fixed universal life insurance business
Allmerica, to reflect refinements in methods and assumptions implemented
upon finalization of transition.
37
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 10 -- Pension and Other Postretirement Benefit Plans
The Company maintains a number of pension and benefit plans for its eligible
employees and agents. The following table demonstrates the components of the
Company's net periodic benefit cost for the periods indicated. Through June 30,
2004, there is no significant difference to the pre-merger and post-merger net
periodic benefit cost values so the following information is presented without
such distinction:
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003 2004 2003 2004 2003
Other Other
Postretirement Postretirement
Pension Benefits Benefits Pension Benefits Benefits
---------------- -------------- ---------------- --------------
(in millions)
Service cost ....................... $ 5.6 $ 6.7 $ 0.3 $ 0.4 $11.2 $13.4 $ 0.7 $ 0.8
Interest cost ...................... 32.0 32.7 9.1 8.8 64.5 65.4 17.9 17.7
Expected return on plan assets ..... (43.5) (39.0) (5.2) (4.3) (87.6) (77.9) (10.4) (8.7)
Amortization of transition asset ... -- -- -- -- -- -- -- --
Amortization of prior service
cost ............................. 0.6 1.9 (0.6) (1.6) 2.2 3.8 (2.5) (3.3)
Recognized actuarial gain .......... 2.1 7.5 1.1 1.6 8.3 15.0 4.2 3.4
Other .............................. -- -- -- -- -- -- -- --
-------------- -------------- ---------------- ----------------
Net periodic benefit cost ... $(3.2) $ 9.8 $ 4.7 $ 4.9 $(1.4) $19.7 $ 9.9 $ 9.9
============== ============== ================ ================
Employer Contributions
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute approximately $2 million to
its qualified pension plan in 2004 and approximately $25 million to its
non-qualified pension plans in 2004. As of June 30, 2004, no contributions have
been made to the qualified plans, and the Company still anticipates contributing
approximately $2 million for the year ended December 31, 2004. As of June 30,
2004, $14.0 million of the contributions have been made to the non-qualified
plans, and the Company anticipates contributing another $11.0 million to reach a
total of $25.0 million for the year ended December 31, 2004.
The Company's policy is to fund its other post retirement benefits in amounts at
or below the annual tax qualified limits. As of June 30, 2004, $25.6 million was
contributed to its other post retirement benefit plans. The Company expects to
contribute approximately $50 million to its other post retirement benefit plans
in 2004.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily by adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) provides for special tax-free subsidies to
employers that offer plans with qualifying drug coverages beginning in 2006.
There are two broad groups of retirees receiving employer-subsidized
prescription drug benefits at the Company. The first group, those who retired
prior to January 1, 1992, receives a subsidy of between 90% and 100% of total
cost. Since this subsidy level will clearly meet the criteria for a qualifying
drug coverage, the Company anticipates that the benefits it pays after 2005 for
pre-1992 retirees will be lower as a result of the new Medicare provisions. In
accordance with Financial Accounting Standards Board Staff Position FAS 106-2
(FSP FAS 106-2), the Company reflected a reduction in the accumulated plan
benefit obligation for this group of $40.9 million as of the purchase accounting
remeasurement (April 28, 2004) and reduced net periodic postretirement benefit
costs by $2.5 million for the period April 29 through June 30,2004. With respect
to the second group, those who retired on or after January 1, 1992, the employer
subsidy on prescription drug benefits is capped and currently provides as low as
25% of total cost. Since final authoritative accounting guidance has not yet
been issued on determining whether a benefit meets the actuarial criteria for
qualifying drug coverage, the Company has deferred recognition as permitted by
FSP FAS 106-2 for this group. The final accounting guidance could require
changes to previously reported information.
38
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 11 -- Certain Separate Accounts
The Company issues variable annuity contracts through its separate accounts for
which investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contract holder (traditional variable
annuities). The Company also issues variable life insurance and variable annuity
contracts which contain certain guarantees (variable contracts with guarantees)
which are discussed more fully below.
During 2004 and 2003, there were no gains or losses on transfers of assets from
the general account to the separate account. The assets supporting the variable
portion of both traditional variable annuities and variable contracts with
guarantees are carried at fair value and reported as summary total separate
account assets with an equivalent summary total reported for liabilities.
Amounts assessed against the contractholders for mortality, administrative, and
other services are included in revenue and changes in liabilities for minimum
guarantees are included in policyholder benefits in the Company's Statement of
Operations. Separate account net investment income, net investment gains and
losses, and the related liability changes are offset within the same line item
in the Company's Statement of Operations.
The deposits related to the variable life insurance contracts are invested in
separate accounts and the company guarantees a specified death benefit if
certain specified premiums are paid by the policyholder, regardless of separate
account performance.
At June 30, 2004 and December 31, 2003, the Company had the following variable
life contracts with guarantees. For guarantees of amounts in the event of death,
the net amount at risk is defined as the excess of the initial sum insured over
the current sum insured for fixed premium variable life contracts, and, for
other variable life contracts, is equal to the sum insured when the account
value is zero and the policy is still in force.
June 30, December 31,
2004 2003
-----------------------------
(in millions, except for age)
Life contracts with guaranteed benefits
In the event of death
Account values............................... $6,475.5 $6,249.4
Net amount at risk related to deposits....... $102.1 $106.2
Average attained age of contractholders ..... 44 46
The variable annuity contracts are issued through separate accounts and the
company contractually guarantees to the contract holder either (a) return of no
less than total deposits made to the contract less any partial withdrawals, (b)
total deposits made to the contract less any partial withdrawals plus a minimum
return, (c) the highest contract value on a specified anniversary date minus any
withdrawals following the contract anniversary or (d) a combination benefit of
(b) and (c) above. Most business issued after May 2003 has a proportional
partial withdrawal benefit instead of a dollar-for-dollar relationship. These
variable annuity contract guarantees include benefits that are payable in the
event of death or annuitization, or at specified dates during the accumulation
period.
At June 30, 2004 and December 31, 2003, the Company had the following variable
contracts with guarantees. (Note that the company's variable annuity contracts
with guarantees may offer more than one type of guarantee in each contract;
therefore, the amounts listed are not mutually exclusive.) For guarantees of
amounts in the event of death, the net amount at risk is defined as the current
guaranteed minimum death benefit in excess of the current account balance at the
balance sheet date. For guarantees of amounts at annuitization, the net amount
at risk is defined as the present value of the minimum guaranteed annuity
payments available to the contract holder determined in accordance with the
terms of the contract in excess of the current account balance. For guarantees
of accumulation balances, the net amount at risk is defined as the guaranteed
minimum accumulation balance minus the current account balance.
39
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 11 -- Certain Separate Accounts - (Continued)
June 30, 2004 December 31,2003
--------------------------------
(in millions, except for age and
percents)
Return of net deposits
In the event of death
Account value .................................................................. $3,303.9 $3,406.4
Net amount at risk ............................................................. $ 136.6 $ 153.8
Average attained age of contractholders ........................................ 62 61
Return of net deposits plus a minimum return
In the event of death
Account value .................................................................. $ 994.3 $1,051.7
Net amount at risk ............................................................. $ 231.5 $ 230.7
Average attained age of contractholders ........................................ 64 63
Guaranteed minimum return rate ................................................. 5% 5%
At annuitization
Account value .................................................................. $ 203.9 $ 169.4
Net amount at risk ............................................................. -- --
Average attained age of contractholders ........................................ 57 57
Range of guaranteed minimum return rates ....................................... 4-5% 4-5%
Highest specified anniversary account value minus withdrawals post anniversary
In the event of death
Account value .................................................................. $1,196.9 $1,224.7
Net amount at risk ............................................................. $ 190.1 $ 214.0
Average attained age of contractholders ........................................ 59 58
Account balances of variable contracts with guarantees were invested in variable
separate accounts in various separate mutual funds at June 30, 2004 which
included foreign and domestic equities and bonds as shown below:
June 30, December 31,
2004 2003
---------------------------
Type of Fund (in millions, except for
number of funds)
Domestic Equity - Growth Funds ............... $ 2,863.8 $ 2,813.4
Domestic Bond Funds .......................... 2,334.3 2,423.5
Domestic Equity - Growth & Income Funds ...... 2,359.6 2,341.2
Balanced Investment Funds .................... 2,165.2 2,167.4
Domestic Equity - Value Funds ................ 958.3 865.0
International Equity Funds ................... 648.3 621.1
International Bond Funds ..................... 107.3 107.3
Hedge Funds .................................. 26.4 22.7
--------- ---------
Total ....................................... $11,463.2 $11,361.6
========= =========
40
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 11 -- Certain Separate Accounts - (Continued)
The following summarizes the liabilities for guarantees on variable contracts
reflected in the general account:
Guaranteed Guaranteed
Minimum Death Minimum Income
Benefit (GMDB) Benefit (GMIB) Totals
--------------------------------------------
(in millions)
Balance at January 1, 2004 $32.9 $ 1.0 $33.9
Incurred guarantee benefits 7.6 0.3 7.9
Fair value adjustment at Manulife acquisition (0.1) 0.0 (0.1)
Paid guarantee benefits (4.8) 0.0 (4.8)
--------------------------------------------
Balance at June 30, 2004 $35.6 $ 1.3 $36.9
============================================
The GMDB liability is determined each period end by estimating the expected
value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used and adjusts
the additional liability balance, with a related charge or credit to benefit
expense, if actual experience or other evidence suggests that earlier
assumptions should be revised. The following assumptions and methodology were
used to determine the GMDB liability at June 30, 2004.
o Data used included 1000 and 200 (for life and annuity contracts,
respectively) stochastically generated investment performance
scenarios.
o Volatility assumptions depended on mix of investments by contract
type and were 19% for annuity and 13.8% for life products.
o Life products used purchase GAAP mortality, lapse, mean investment
performance, and discount rate assumptions included in the related
deferred acquisition cost (DAC) and value of business acquired
(VOBA) models which varied by product
o Mean investment performance assumptions for annuity contracts was
8.67%.
o Annuity mortality was assumed to be 100 percent of the Annuity 2000
table.
o Annuity lapse rates vary by contract type and duration and range
from 1 percent to 20 percent.
o Annuity discount rate was 6.5%.
The guaranteed minimum income benefit (GMIB) liability represents the expected
value of the annuitization benefits in excess of the projected account balance
at the date of annuitization, recognizing the excess ratably over the
accumulation period based on total expected assessments. The Company regularly
evaluates estimates used and adjusts the additional liability balance, with a
related charge or credit to benefit expense, if actual experience or other
evidence suggests that earlier assumptions should be revised.
41
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 is presented in a condensed disclosure format pursuant to General
Instruction H(1)(a) and (b) of Form 10-Q. The management narrative for the
Company that follows should be read in conjunction with the unaudited interim
financial statements and related footnotes to the unaudited interim financial
statements included elsewhere herein, and with the Management's Discussion and
Analysis of Financial Condition and Results of Operations section included in
the Company's 2003 Annual Report on Form 10-K.
The Company's news releases and other information are available on the
internet at www.jhancock.com, and its financial statements are available at
www.manulife.com, under the link labeled "Securities Filings" on the "Investor
Relations" Page. In addition, 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 effects 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.
Merger with Manulife Financial Corporation
On April 28, 2004, JHFS, the parent of the Company, completed its merger
agreement with Manulife Financial Corporation (Manulife) and as of the close of
business JHFS common stock stopped trading on the New York Stock Exchange. In
accordance with the agreement, each share of JHFS common stock was converted
into 1.1853 shares of Manulife stock. Commencing on April 28, 2004, the Company
operates as a subsidiary of Manulife and the John Hancock name is Manulife's
primary U.S. brand.
Critical Accounting Policies
General
We have identified the accounting policies below as critical to our
business operations and understanding of 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 in the Company's 2003 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. We have discussed the identification, selection and disclosure of
critical accounting estimates and policies with the Audit Committee of the Board
of Directors.
Purchase Accounting (PGAAP)
In accordance with SFAS No. 141, "Business Combinations" the merger
transaction was accounted for as a purchase of John Hancock by Manulife. The
purchase method requires that John Hancock, the Company, adjust the cost and
reporting basis of its assets and liabilities to their fair values on the
acquisition date (the purchase adjustments).
42
JOHN HANCOCK LIFE INSURANCE COMPANY
The determination of the purchase adjustments relating to investments
included utilization of independent price quotes where available, and
management's own estimates and assumptions where price quotes were unavailable.
Other purchase adjustments also required significant management estimates and
assumptions. Management must exercise significant judgement in assessing fair
values related to intangible assets, including goodwill, value of business
acquired (VOBA), brand name and others, and to liabilities, including
policyholder reserves and others.
The Company is in the process of completing the valuations of a portion of
the assets acquired and liabilities assumed; thus, allocation of the purchase
price is subject to refinement.
The Company's purchase adjustments resulted in a revalued balance sheet
which may result in future earnings trends which differ significantly from
historical trends. The Company does not anticipate any impact on its liquidity,
or ability to pay claims of policyholders, arising out of the purchase
accounting process related to the merger.
Consolidation Accounting
In December 2003, the Financial Accounting Standards Board re-issued
Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," (FIN 46R) which clarifies the consolidation
accounting guidance of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," (ARB No. 51) to certain entities for which controlling
interests are not measurable by reference to ownership in the equity of the
entity. Such entities are known as variable interest entities (VIEs).
The Company has finalized its FIN 46R analysis for all of the entities
described below. The Company is not the primary beneficiary of any of them. For
many of these, the application of FIN 46R required estimation by the Company of
the future periodic cash flows and changes in fair values for each candidate,
starting as of the Company's original commitment to invest in and/or manage each
candidate, and extending out to the end of the full expected life of each. These
cash flows and fair values were then analyzed for variability, and this expected
variability was quantified and compared to total historical amounts invested in
each candidate's equity to help determine if each candidate is a VIE. The
Company also evaluated quantitative and non-quantitative aspects of control
relationships among the owners and decision makers of each candidate to help
determine if they are VIEs.
For each candidate determined to be a VIE, the expected variable losses
and returns were then theoretically allocated out to the various investors and
other participants in each candidate, in order to determine if any party had
exposure to the majority of the expected variable losses or returns, in which
case that party is the primary beneficiary of the VIE. The Company used
significant levels of judgment while performing these quantitative and
qualitative assessments.
The Company manages invested assets for its customers under various
fee-based arrangements using a variety of entities to hold these assets under
management, and since 1996, this has included investment vehicles commonly known
as collateralized debt obligations funds (CDOs). Various business units of the
Company sometimes invest in the debt or equity securities issued by these and
other CDOs to support their insurance liabilities.
Since 1995, the Company generates income tax benefits by investing in
apartment properties (the Properties) that qualify for low income housing and/or
historic tax credits. The Company invests in the Properties directly, but
primarily invests indirectly via limited partnership real estate investment
funds (The Funds). The Funds are consolidated into the Company's financial
statements. The Properties are organized as limited partnerships or limited
liability companies each having a managing general partner or a managing member.
The Company is usually the sole limited partner or investor member in each
Property; it is not the general partner or managing member in any Property. The
Properties typically raise additional capital by qualifying for long-term debt,
which at times is guaranteed or otherwise subsidized by Federal or state
agencies or Fannie Mae. In certain cases, the Company invests in the mortgages
of the Properties.
The Company has a number of relationships with a disparate group of
entities (Other Entities), which result from the Company's direct investment in
their equity and/or debt. This group includes energy investment partnerships,
investment funds organized as limited partnerships, and manufacturing companies
in whose debt the Company invests, and which subsequently underwent corporate
reorganizations.
Additional liabilities recognized as a result of consolidating any of
these entities would not represent additional claims on the general assets of
the Company; rather, they would represent claims against additional assets
recognized by the Company as a result of these consolidations. Conversely,
43
JOHN HANCOCK LIFE INSURANCE COMPANY
additional assets recognized as a result of these consolidations would not
represent additional assets which the Company could use to satisfy claims
against its general assets, rather they would be used only to settle additional
liabilities recognized as a result of these consolidations.
The Company's maximum exposure to loss in relation to these entities is
limited to its investments in them, future debt and equity commitments made to
them, and where the Company is the mortgagor to the Properties, the outstanding
balance of the mortgages originated for them, and outstanding mortgage
commitments made to them. Therefore, the Company believes that the application
of FIN 46R has no potential impact on the Company's liquidity and capital
resources beyond what is already presented in the consolidated financial
statements and notes thereto.
The Company discloses summary financial data and its maximum exposure to
losses for the CDOs and Properties in Note 4 - Relationships with Variable
Interest Entities in the notes to unaudited consolidated financial statements,
but does not do so for the Other Entities because the Company does not believe
these relationships are collectively significant.
Amortization of Deferred Acquisition Costs (DAC) and Value of Business
Acquired (VOBA) Assets
Costs that vary with, and are related primarily to the production of new
business are 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 amounts assessed as initiation fees or front-end
loads are recorded as unearned revenue. The Company has also recorded intangible
assets representing the present value of estimated future profits of insurance
policies inforce related to business acquired. The Company tests the
recoverability of its DAC and VOBA assets quarterly with a model that uses data
such as market performance, lapse rates and expense levels. We amortize DAC and
VOBA on term life and long-term care insurance ratably with premiums. We
amortize DAC and VOBA on our annuity products and retail life insurance, other
than term life insurance policies, 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 DAC, VOBA and
unearned revenue on these policies such that the percentage of gross profits
realized compared to the amount of DAC, VOBA 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 assumed changes in the remaining gross profits. When
estimated gross profits are adjusted, we also adjust the amortization of DAC and
VOBA to maintain a constant amortization percentage over the life of the
policies. Our current estimated gross profits include certain judgments by our
actuaries 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. Our history
has shown us that the actual results over time for mortality, lapse and the
combination of investment returns and crediting rates (referred in the industry
as interest spread) for the life insurance and annuity products have reasonably
followed the long-term historical trends. As actual results for market
experience, or asset growth fluctuate significantly from historical trends and
the long-term assumptions made in calculating expected gross profits, management
changes these assumptions periodically as necessary.
Benefits to Policyholders
The liability for future policy benefits is the largest liability included
in our consolidated balance sheets, equal to $42,181.1 million, 47.2% of total
liabilities as of June 30, 2004. Changes in this liability are generally
reflected in the benefits to policyholders in our consolidated statements of
income. This liability is primarily comprised of the present value of estimated
future payments to holders of life insurance and annuity products based on
certain management judgments. Reserves for future policy benefits of certain
insurance products are calculated using management's judgments of mortality,
morbidity, lapse, investment performance 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 abilities. 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 or the Company is acquired. 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
44
JOHN HANCOCK LIFE INSURANCE COMPANY
Impairments on our investment portfolio are recorded as a charge to income
in the period when the impairment is judged by management to occur. See the
General Account Investments section of this document for a more detailed
discussion of the investment officers' professional judgments involved in
determining impairments and fair values.
Certain of our fixed income securities classified as available-for-sale
are not publicly traded, and quoted market prices are not available from brokers
or investment bankers on these securities. The changes in the fair values of the
available-for-sale securities are recorded in other comprehensive income as
unrealized gains or losses. 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 professional investment management judgment. Our
approach is based on currently available information, including information
obtained by reviewing similarly traded securities in the market, 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. 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
Security Operations Department. Our pricing analysts take appropriate action to
reduce the valuation of securities where an event occurs that negatively impacts
the securities' value. Certain events that could impact the valuation of
securities include issuer credit ratings, business climate, management changes
at the investee level, litigation, fraud and government actions, among others.
As part of the valuation process we attempt to identify securities which
may have experienced an other than temporary decline in value, and thus require
the recognition of an impairment. To assist in identifying impairments, at the
end of each quarter our Investment Review Committee reviews all securities where
market value is less than ninety percent of amortized cost for three months or
more to determine whether impairments need to be taken. This committee includes
the head of workouts, the head of each industry team, the head of portfolio
management, and the Chief Credit Officer of Manulife. The analysis focuses on
each investee 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 amortized
cost. The results of this analysis are reviewed quarterly by the Credit
Committee at Manulife. This committee includes Manulife's Chief Financial
Officer, Chief Investment Officer, Chief Risk Officer, and the Chief Credit
Officer. 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 reviewed its pension and other post-employment benefit plan
assumptions for the discount rate, the long-term rate of return on plan assets,
and the compensation increase rate for incorporation in the measurements made as
of April 28, 2004 ( the date of the Manulife acquisition of the Company) and for
net periodic costs for the calendar year. These assumptions are normally
incorporated in measurements made annually as of each December 31 and for the
subsequent calendar year resulting thereon. All assumptions are reviewed and
approved by the Chief Financial Officer and reviewed with the Audit Committee of
the Board of Directors.
The assumed discount rate is set based on the published December 31st
Moody's Investor Services long-term corporate bond yield for rating category Aa.
The discount rate used in the April 28, 2004 mark to market of 2004's net
periodic pension cost was 6.0%. The discount rate originally in effect for 2004
was 6.25%. A 0.25% increase in the discount rate would decrease pension benefits
Projected Benefit Obligation (PBO) and 2004 Net Periodic Pension Cost (NPPC) by
approximately $57.6 million and $1.2 million respectively. A 0.25% increase in
the discount rate would decrease other post- employment benefits Accumulated
Postretirement Benefit Obligation (APBO) and 2004 Net Periodic Benefit Cost
(NPBC) by approximately $15.9 million and $1.2 million, respectively.
The assumed long-term rate of return on plan assets is generally set at
the long-term rate expected to be earned (based on the Capital Asset Pricing
Model and similar tools) based on the long-term investment policy of the plans
and the various classes of the invested funds. For 2004, Net Periodic Pension
(and benefit) Cost, an 8.75% long term rate of return assumption is being used.
A 0.25% increase in the long-term rate of return would decrease 2004 NPPC by
approximately $5.3 million and 2004 NPBC by approximately $0.6 million. The
expected return on plan assets prior to the acquisition by Manulife is based on
the fair market value of the plan assets as of December 31, 2003. Post merger,
the expected return on plan assets is based on the fair value of plan assets as
of April 28, 2004.
The compensation rate increase assumption is generally set at a rate
consistent with current and expected long-term compensation and salary policy
including inflation. A change in the compensation rate increase assumption can
be expected to move in the same direction as a change in the discount rate. A
4.0% compensation rate increase assumption is being used. A 0.25% increase in
45
JOHN HANCOCK LIFE INSURANCE COMPANY
the salary scale would increase 2004 pension benefits PBO and NPPC by
approximately $5.8 million and $0.6 million, respectively. Post employment
benefits are independent of compensation.
The Company uses a 10% corridor for the amortization of actuarial
gains/losses. At the date of acquisition, actuarial gains and losses were set to
zero.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily by adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) provides for special tax-free subsidies to
employers that offer plans with qualifying drug coverages beginning in 2006.
There are two broad groups of retirees receiving employer-subsidized
prescription drug benefits at the Company. The first group, those who retired
prior to January 1, 1992, receives a subsidy of between 90% and 100% of total
cost. Since this subsidy level will clearly meet the criteria for a qualifying
drug coverage, the Company anticipates that the benefits it pays after 2005 for
pre-1992 retirees will be lower as a result of the new Medicare provisions. In
accordance with Financial Accounting Standards Board Staff Position FAS 106-2
(FSP FAS 106-2), the Company reflected a reduction in the accumulated plan
benefit obligation for this group of $40.9 million as of the purchase accounting
remeasurement (April 28, 2004) and reduced net periodic postretirement benefit
costs by $2.5 million for the period April 29 through June 30, 2004. With
respect to the second group, those who retired on or after January 1, 1992, the
employer subsidy on prescription drug benefits is capped and currently provides
as low as 25% of total cost. Since final authoritative accounting guidance has
not yet been issued on determining whether a benefit meets the actuarial
criteria for qualifying drug coverage, the Company has deferred recognition as
permitted by FSP FAS 106-2 for this group. The final accounting guidance could
require changes to previously reported information.
Income Taxes
Our reported effective tax rate on net income was 37.8% and 30.0% for the
three month periods ended June 30, 2004 and 2003 and 34.1% and 29.8% for the six
month periods ended June 30, 2004 and 2003, respectively. The increase in the
effective tax rate during the period is due to changes in the recognition of tax
expense as a result of the purchase accounting for leveraged leases as required
by FASB Interpretation No. 21, "Accounting for Leases in a Business Combinatoin"
and FASB Statement of Financial Accounting Standares No. 13, "Accounting for
Leases". Our effective tax rate is based on expected income, statutory tax rates
and tax planning opportunities available to us. Significant judgment is required
in determining our effective tax rate and in evaluating our tax positions. We
establish reserves when, despite our belief that our tax return positions are
fully supportable, we believe that certain positions are likely to be challenged
and that we may not succeed. We adjust these reserves in light of changing facts
and circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve provisions ,changes to reserves that we consider
appropriate, and related interest. This rate is then applied to our year-to-date
operating results.
Tax regulations require certain items to be included in the tax return at
different times than those items are reflected in the financial statements. As a
result, our effective tax rate reflected in our financial statements is
different than that reported in our tax return. Some of these differences are
permanent, such as affordable housing tax credits, and some are temporary
differences, such as depreciation expense. Temporary differences create deferred
tax assets and liabilities. Deferred tax assets generally represent items that
can be used as a tax deduction or credit in our tax return in future years for
which we have already recorded the tax benefit in our income statement. Our
policy is to establish valuation allowances for deferred tax assets when the
amount of expected future taxable income is not likely to support the use of the
deduction or credit. Deferred tax liabilities generally represent tax expense
recognized in our financial statements for which payment has been deferred or
expense for which we have already taken a deduction on our tax return, but have
not yet recognized as expense in our financial statements.
A number of years may elapse before a particular matter, for which we have
established an accrued liability, is audited and finally resolved. The Internal
Revenue Service is currently examining our tax returns for 1999 through 2001.
While it is often difficult to predict the final outcome or the timing of
resolution of any particular tax matter, we believe that our reserves reflect
the probable outcome of known tax contingencies. Our tax reserves are presented
in the balance sheet within other liabilities.
Reinsurance
We reinsure portions of the risks we assume for our protection insurance
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
46
JOHN HANCOCK LIFE INSURANCE COMPANY
reinsurance programs, which limit our exposure to fluctuations in life insurance
claims for individuals for whom the net amount at risk is $3 million or more. As
of January 1, 2001, the Company also entered into an agreements with two
reinsurers covering 50% of its closed block business. One of these reinsurers is
Manulife. Effective April 28, 2004 the Company operates as a subsidiary of
Manulife. Effective December 31, 2003, the Company entered into an agreement
with a third reinsurer covering another 5% of its closed block business. The
reinsurance agreements 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.
In addition, the Company has entered 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 individual life insurance policies
written by all of its U.S. life insurance subsidiaries. Effective July 1, 2003,
the deductible for individual life insurance coverages was reduced from $25
million to $17.5 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 subsidiaries. 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.
47
JOHN HANCOCK LIFE INSURANCE COMPANY
Transactions Affecting Comparability of Results of Operations
The disposal described under the table below was conducted in order to execute
the Company's strategy to focus resources on businesses in which it can have a
leadership position. The table below presents actual and proforma data, for
comparative purposes, of revenue and net income for the periods indicated, to
demonstrate the proforma effect of the disposal as if occurred on January 1,
2003.
Period from April 29 Period from April 1 Three Months Ended
through June 30, through April 28, June 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
---------------------------------------------------------------------------
(in millions)
Revenue ........... $1,182.4 $1,182.4 $ 776.4 $ 776.4 $1,822.1 $1,835.8
Net income ........ $ 169.1 $ 169.1 $ 175.0 $ 175.0 $ 255.8 $ 257.7
Period from April 29 Period from January 1 Six Months Ended
through June 30, through April 28, June 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
------------------------------------------------------------------------
(in millions)
Revenue ........... $1,182.4 $1,182.4 $2,513.4 $2,513.4 $3,648.1 $3,692.9
Net income ........ $ 169.1 $ 169.1 $ 329.3 $ 329.3 $ 525.9 $ 528.7
Disposal:
On June 19, 2003, the Company agreed to sell its group life insurance business
through a reinsurance agreement with Metropolitan Life Insurance Company, Inc
(MetLife). The Company is ceding all activity after May 1, 2003 to MetLife. The
transaction was recorded as of May 1, 2003 and closed November 4, 2003. There
was no material impact on the Company's results of operations from the disposed
operations during the first six months of 2003.
48
JOHN HANCOCK LIFE INSURANCE COMPANY
Results of Operations
To assist in the comparability of our financial results and to make it
easier to discuss and understand our results of operations, the following
discussion combines the predecessor period (April 1 through April 28, 2004) with
the successor period (April 29 through June 30, 2004) to present combined
results for the three months ended June 30, 2004 and combines the predecessor
period (January 1 through April 28, 2004) with the successor period (April 29
through June 30, 2004) to present combined results for the six months ended June
30, 2004.
The tables below present the consolidated results of operations for the
periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------------------------------------------------
(in millions)
Revenues
Premiums ................................................................... $ 482.2 $ 484.4 $ 952.9 $ 956.7
Universal life and investment-type product fees ............................ 158.5 153.1 335.3 308.1
Net investment income ...................................................... 883.0 942.3 1,866.5 1,875.4
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs, and
value of business acquired amounts credited to
participating pensions contractholders and the
policyholder dividend obligation (1) ............................... 247.6 78.3 149.9 183.7
Investment management revenues, commissions, and other fees ................ 132.9 122.4 265.3 241.6
Other revenue .............................................................. 54.6 55.3 125.9 127.4
--------------------------------------------------
Total revenues ........................................... 1,958.8 1,835.8 3,695.8 3,692.9
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 (2) .............................. 898.1 919.7 1,833.5 1,869.0
Other operating costs and expenses ......................................... 336.0 348.7 706.7 665.4
Amortization of deferred policy acquisition costs and value of
business acquired, excluding amounts related to net
realized investment and other gains (losses) (3) .................. 52.8 63.6 159.6 135.4
Dividends to policyholders ................................................. 118.3 137.5 234.9 270.0
--------------------------------------------------
Total benefits and expenses ............................... 1,405.2 1,469.5 2,934.7 2,939.8
Income before taxes and cumulative effect of accounting change ............. 553.6 366.3 761.1 753.1
Income taxes ............................................................... 209.5 108.6 259.4 224.4
--------------------------------------------------
Income before cumulative effect of accounting change ....................... 344.1 257.7 501.7 528.7
Cumulative effect of accounting change ..................................... -- -- 3.3 --
--------------------------------------------------
Net income ................................................. $ 344.1 $ 257.7 $ 498.4 $ 528.7
==================================================
(1) Net of related amortization of deferred policy acquisition costs and value
of business acquired, amounts credited to participating pension
contractholders and the policyholder dividend obligation of $12.8 million
and $(49.3) million for the three months ended June 30, 2004 and 2003,
respectively and $12.0 million and $(0.5) million for the six months ended
June 30, 2004 and 2003, respectively.
(2) Excluding amounts related to net realized investment and other gains
(losses) credited to participating pension contractholders and the
policyholder dividend obligation of $11.2 million and $28.4 million for
the three months ended June 30, 2004 and 2003, respectively and $28.4 and
$(12.9) million for the six months ended June 30, 2004 and 2003,
respectively.
(3) Excluding amounts related to net realized investment and other gains
(losses) of $1.6 million and $20.9 million for the three months ended June
30, 2004 and 2003, respectively and $(16.4) million and $12.4 million for
the six months ended June 30, 2004 and 2003, respectively.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
As a result of Manulife's acquisition of the Company, see Note 1- Change
of Control, the Company renamed and reorganized certain businesses within its
operating segments to better align the Company with its new parent, Manulife.
The Company renamed the Asset Gathering Segment as the Wealth Management
Segment. In addition, the Institutional Investment Management Segment was moved
49
JOHN HANCOCK LIFE INSURANCE COMPANY
to the Corporate and Other Segment. Other realignments include moving Signator
Investors, Inc. our agent sales organization, from Wealth Management to
Protection, and Group Life, Retail Discontinued operations, discontinued health
insurance operations and Creditor from Corporate and Other to Protection.
International Group Plans (IGP) remain in international operations in our
Corporate and Other Segment while IGP will be reported in Reinsurance in
Manulife's segment results. The financial results for all periods have been
reclassified to conform to the current period presentation.
The Company operates in the following four business segments: two segments
primarily serve retail customers, one segment serves institutional customers,
and our fourth segment is the Corporate and Other Segment, which includes our
institutional advisory business, the remaining international operations, and the
corporate account. Our retail segments are the Protection Segment and the Wealth
Management Segment. Our institutional segment is the Guaranteed and Structured
Financial Products Segment (G&SFP).
Consolidated income before income taxes increased 51.1%, or $187.3
million, for the three month period ended June 30, 2004 from the prior year. The
increase was driven by higher net realized investment and other gains, which
increased 216.2%, or $169.3 million, from the prior year. The change in net
realized investment and other gains (losses) is the result of $226.7 million in
derivative hedging adjustments, $74.3 million in gains on the sale of real
estate and $19.6 million in gains on the sale of equity securities. For
additional analysis regarding net realized investment and other gains (losses),
see below and General Account Investments in the MD&A.
Premiums decreased 0.5%, or $2.2 million, from the prior year. The
increase in premiums was due largely to growth in the long-term care insurance
business of $18.1 million, or 14.0%, primarily due to strong renewal premiums.
In addition, Premiums in the G&SFP Segment increased $6.2 million. These
increase were partially offset by a decrease of $11.6 million in premiums in the
Wealth Management Segment on lower sales of single premium immediate annuities.
Universal life and investment-type product fees increased 3.5%, or $5.4
million, from the prior year. Increased product fees was driven by universal
life insurance product fees which increased 31.4%, or $9.6 million, due
primarily to a $6.8 million increase in cost of insurance fees. Partially
offsetting these increases in product fees was a decrease of $2.3 million, or
7.7%, in fees in the retail annuities business.
Net investment income decreased 6.3%, or $59.3 million, from the prior
year. The decrease was driven by lower average yield on invested assets,
partially offset by an increase in invested assets. Investment yields decreased
to 5.20 driven by floating-rate investments and the amortization of the purchase
accounting mark-to-market adjustments on assets due to the Manulife acquisition.
In addition, net investment income varies with market interest rates because the
return on approximately $13 billion of the asset portfolio at June 30, 2004,
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. Partially offsetting these decreases in
yield was an increase in invested assets. In the three month period ended June
30, 2004, weighted-average invested assets grew $2,382.6 million, or 3.6%, from
the prior year. For additional analysis of net investment income and yields see
the General Account Investments section of this MD&A.
Net realized investment and other gains (losses) increased 216.2%, or
$169.3 million. See detail of current period net realized investment and other
gains (losses) in table below. The change in net realized investment and other
gains (losses) is the result of $226.8 million in derivative hedging
adjustments, $74.3 million in gains on the sale of real estate and $19.6 million
in gains on the sale of equity securities. Partially offsetting these gains were
losses of $4.6 million compared to gains of $78.1 million in the prior year on
fixed maturity securities. The prior year's gains included $259.3 million in
gross gains on disposal of fixed maturity securities while the Company generated
only $75.3 million in the current period. In addition, the Company incurred
losses of $26.0 million on mortgage loans, primarily on disposals, and another
$26.0 million on other invested assets, primarily from impairments. The largest
impairments of fixed maturity securities were $9.6 million on a major U.S.
airline, $6.2 million on an asset backed pool of gas station/convenience store
franchise loans, and $5.3 million relating to an airline equipment trust. For
additional analysis of net realized investment and other gains (losses) see the
General Account Investments section of this MD&A.
50
JOHN HANCOCK LIFE INSURANCE COMPANY
Gross Gain Gross Loss Hedging Net Realized Investment
For the Three Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
-----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) ......... (29.8) 75.3 (25.1) (25.0) (4.6)
Equity securities ..................... (1.5) 19.6 -- -- 18.1
Mortgage loans on real estate ......... (23.2) 16.4 (13.9) (5.3) (26.0)
Real estate ........................... -- 74.3 (2.2) -- 72.1
Other invested assets ................. (29.7) 6.2 (2.5) -- (26.0)
Derivatives ........................... -- -- -- 226.8 226.8
-----------------------------------------------------------------------------
Subtotal ............... (84.2) 191.8 (43.7) 196.5 260.4
-----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and value of
business acquired............................................................... (1.6)
Amounts credited to participating pension contractholders.......................... (3.1)
Amounts credited to the policyholder dividend obligation........................... (8.1)
-------------------
Total......................................................................... 247.6
===================
(1) Fixed maturities gain on disposals includes $37.2 million of gains from
previously impaired securities and prepayment gains of $23.7 million.
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged items in a fair value hedge. When an asset or liability is
so designated, its cost basis is adjusted in response to movement in interest
rates. These adjustments are non-cash and reverse with the passage of time as
the asset or liability and derivative mature. The hedging adjustments on the
derivatives represent non-cash adjustments on derivative instruments and on
assets and liabilities designated as hedged items reflecting the change in fair
value of those items.
Investment management revenues, commissions and other fees (advisory fees)
increased 8.6%, or $10.5 million, from the prior year. The increase in advisory
fees was driven by the mutual fund business where fees grew by 8.5%, or $5.9
million, over the prior year due to higher assets under management on higher
sales and market appreciation. In addition, advisory fees in our institutional
asset management business increased 16.7% driven by higher advisory fees
resulting from changes in the asset mix.
Other revenue decreased 1.3%, or $0.7 million, from the prior year. Other
revenue consists principally of the revenues generated by Signature Fruit, a
subsidiary of the Company since April 2, 2001, which acquired certain assets and
assumed liabilities out of Tri Valley Growers, Inc., a cooperative association
on that date. Signature Fruit revenue decreased $1.3 million, to $51.5 million
for the three months ended June 30, 2004 due to lower product sales. Other
revenue includes Federal long-term care business fee revenue of $1.9 million for
the three months ended June 30, 2004.
Benefits to policyholders decreased 2.3%, or $21.6 million, from the prior
year. The decrease in benefits to policyholders was driven by a $31.2 million
decrease in the Wealth Management Segment due to lower sales of single premiums
immediate annuities. In addition, benefits to policyholders decreased $14.4
million in the G&SFP Segment due to lower interest credited on account balances.
Partially offsetting these decreases in benefits to policyholders was an
increase in the variable life insurance business of $19.8 million on higher
interest credited and lower surrenders. In addition, benefits to policyholders
increased in the long-term care insurance business by $9.7 million, driven by
growth in the business.
Operating costs and expenses decreased 3.6%, or $12.7 million. Total
operating costs and expenses was driven by decreases of $8.0 million in the
G&SFP Segment and $5.7 million in the Corporate and Other Segment due to lower
compensation expenses. In addition, operating costs and expenses decreased at
Signature Fruit of $1.4 million to $52.4 million from the prior year and $1.5
million for the sale of the group life business effective May 1 2003. Partially
offsetting these decreases, operating costs and expenses increased 7.2%, or $6.5
million, in the Wealth Management Segment
Amortization of deferred policy acquisition costs and value of business
acquired decreased 16.9%, or $10.8 million, from the prior year. The decrease in
amortization of deferred policy acquisition costs and value of business acquired
was driven by prior year amortization of deferred policy acquisition costs in
the non-traditional life insurance business and the fixed annuity business. The
non-traditional life insurance business increased amortization of deferred
policy acquisition costs in the second quarter of 2003 for experience true-ups
and growth. The fixed annuity business increased amortization of deferred policy
acquisition costs in the second quarter of 2003 for account growth and interest
51
JOHN HANCOCK LIFE INSURANCE COMPANY
spreads. Partially offsetting the decline in amortization of deferred policy
acquisition costs was increased amortization of value of business acquired.
Purchase accounting adjusted the historical deferred policy acquisition asset to
zero and created a new value of business acquired asset at an established return
on equity for the transaction. The impact on amortization was to decrease
deferred policy acquisition costs due to the reduced asset and increase
amortization of value of business acquired.
Dividends to policyholders decreased 14.0%, or $19.2 million from the
prior year. The decrease in dividends to policyholders was driven by traditional
life insurance products which decreased 12.1%, or $14.7 million, due to a
reduction in the dividend scale and a $2.9 million decrease in dividends due to
the sale of the group life business. Group life was sold effective May 1, 2003
and thus generated policyholder dividends in the second quarter of 2003 and none
after the sale of the business. The increase in the effective tax rate during
the period is due to changes in the recognition of tax expense as a result of
the purchase accounting for leveraged leases as required by FASB Interpretation
No. 21 "Accounting for Leases in a Business Combination" and FASB Statement of
Financial Accounting Standards No 13, "Accounting for Leases".
Income taxes were $209.5 million in the second quarter of 2004, compared
to $108.6 million for the second quarter of 2003. Our effective tax rate was
37.8% in the second quarter of 2004, compared to 29.6% in the second quarter of
2003. The increase in the effective tax rate during the period is due to changes
in the recognition of tax expense as a result of the purchase accounting for
leveraged leases as required by FASB Interpretation No. 21, "Accounting for
Leases in a Business Combinatoin" and FASB Statement of Financial Accounting
Standares No. 13, "Accounting for Leases".
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
As a result of Manulife's acquisition of the Company, see Note 1- Change
of Control, the Company renamed and reorganized certain businesses within its
operating segments to better align the Company with its new parent, Manulife.
The Company renamed the Asset Gathering Segment as the Wealth Management
Segment. In addition, the Institutional Investment Management Segment was moved
to the Corporate and Other Segment. Other realignments include moving Signator
Investors, Inc. our agent sales organization, from Wealth Management to
Protection, and Group Life, Retail Discontinued operations, discontinued health
insurance operations and Creditor from Corporate and Other to Protection.
International Group Plans (IGP) remains in international operations in our
Corporate and Other Segment while it will be reported in Other in Manulife's
segment results. The financial results for all periods have been reclassified to
conform to the current period presentation.
The Company operates in the following four business segments: two segments
primarily serve retail customers, one segment serves institutional customers,
and our fourth segment is the Corporate and Other Segment, which includes our
institutional advisory business, the remaining international operations, and the
corporate account. Our retail segments are the Protection Segment and the Wealth
Management Segment. Our institutional segment is the Guaranteed and Structured
Financial Products Segment (G&SFP).
Consolidated income before income taxes and cumulative effect of
accounting pronouncement increased 1.1%, or $8.0 million, for the six month
period ended June 30, 2004 from the prior year. The increase was driven by
higher product fees and advisory fees. The increase in product fees was driven
by a 12.7% increase in average account balance on universal life insurance
products. The increase in advisory fees is driven by 13.9% growth in average
assets under management in the mutual funds business compared to the prior year.
These increase revenues were partially offset by a decrease in net realized
investment and other gains from the sale of Home Office properties in the prior
year. Through June 30, 2003, the Company recognized a gain of $271.4 million
(and a deferred profit of $209.4 million) on the sale of the Company's Home
Office properties in the first quarter of 2003. In addition, operating expenses
increased 6.2%, or $41.3 million. The Company recorded an decrease to net income
of $3.3 million (net of tax) resulting from the adoption of a new accounting
pronouncement, Statement of Position 03-1 - Accounting and Reporting by
Insurance Enterprises for Certain Untraditional Long Duration Contracts for
Separate Accounts (SOP 03-1).
Premiums decreased 0.4%, or $3.8 million, from the prior year. Premiums
were driven by a decrease in the group life business of $29.8 million due to the
sale of the group life insurance business effective May 1, 2003, a decrease in
the sales of single premium annuities of $25.7 million, or 87.4% and a $22.8
million decrease in premiums in the traditional life insurance business.
Partially offsetting these decreases were increased premiums in the long-term
care insurance business, up by $40.9 million, or 16.0%, primarily due to
business growth resulting from strong renewal premiums. In addition, premiums
increased 16.9%, or $24.5 million, in the IGP business.
Universal life and investment-type product fees increased 8.8%, or $27.2
million, over the prior year. In addition, product fees on universal life
products increased 34.4%, or $20.6 million, due primarily to a $12.6 million
increase in cost of insurance fees. Investment-type product fees increased
10.2%, or $16.7 million, in the variable life business due primarily to the
higher amortization of unearned revenue of $10.7 million driven by unlocking for
higher future death claims in the first quarter of 2004. Partially offsetting
these increases in product fees was a decrease in fees in the retail annuities
business.
52
JOHN HANCOCK LIFE INSURANCE COMPANY
Net investment income decreased 0.5%, or $8.9 million, from the prior
year. The decrease in net investment income was driven by lower yields,
partially offset by asset growth and lower investment expenses. Average assets
grew $2,788.7 million, or 4.4%, compared to the prior year. In addition,
investment expenses decreased $12.6 million from the prior year, driven by the
reduction in depreciation expense from the sale of the home office properties.
The average yield on invested assets decreased to 5.61%, driven by the impact of
floating-rate investments and purchase accounting mark-to-market adjustments on
invested assets. Net investment income also varies with market interest rates as
the return on approximately $13 billion of the asset portfolio at June 30, 2004,
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. For additional analysis of net investment
income and yields see the General Account Investments section of this MD&A.
Net realized investment and other gains (losses) decreased 18.4%, or $33.8
million, due to the sale of the Home Office properties in the first quarter of
2003. Through June 30, 2003, the Company recognized a realized gain of $271.4
million (and a deferred profit of $209.4 million) on the sale of the Company's
Home Office properties in the first quarter of 2003. See detail of current
period net realized investment and other gains (losses) in table below.
Offsetting the impact of the non-recurring gain from the sale of the Home Office
properties was lower realized losses on fixed maturity securities of $142.9
million driven by lower levels of impairments and hedging adjustments. In
addition, the Company generated $81.9 million in gains on equity securities and
$75.7 million of gains on real estate. For additional analysis of net realized
investment and other gains (losses) see the General Account Investments section
of this MD&A.
Gross Gain Gross Loss Hedging Net Realized Investment
For the Six Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) ......... (98.1) 150.1 (30.5) (77.0) (55.5)
Equity securities (2) ................. (6.2) 88.8 (0.7) -- 81.9
Mortgage loans on real estate ......... (23.6) 27.9 (14.6) (19.4) (29.7)
Real estate ........................... -- 78.0 (2.3) -- 75.7
Other invested assets ................. (37.2) 8.5 (8.5) -- (37.2)
Derivatives ........................... -- -- -- 126.7 126.7
----------------------------------------------------------------------------
Subtotal ............... (165.1) 353.3 (56.6) 30.3 161.9
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and VOBA............. 16.4
Amounts credited to participating pension contractholders.......................... (5.1)
Amounts credited to the policyholder dividend obligation........................... (23.3)
------------------
Total......................................................................... 149.9
==================
1.) Fixed maturities gain on disposals includes $42.5 million of gains from
previously impaired securities and prepayment gains of $57.2 million.
2.) Equity securities gain on disposal includes $9.3 million of gains from
equity securities received as settlement compensation from an investee
whose securities had previously been impaired.
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged items in a fair value hedge. When an asset or liability is
so designated, its cost basis is adjusted in response to movement in interest
rates. These adjustments are non-cash and reverse with the passage of time as
the asset or liability and derivative mature. The hedging adjustments on the
derivatives represent non-cash adjustments on derivative instruments and on
assets and liabilities designated as hedged items reflecting the change in fair
value of those items.
Investment management revenues, commissions and other fees (advisory fees)
increased 9.8%, or $23.7 million, from the prior year. The increase in advisory
fees was driven by growth in the mutual fund business of 12.7%, or $17.1 million
over the prior year due to higher assets under management. Advisory fees in our
institutional asset management business increased 11.2% on stable assets under
management. The institutional asset management business generated a 11.0%
increase in deposits during the six months ended June 30, 2004 compared to the
prior year.
Other revenue decreased 1.2%, or $1.5 million, from the prior year. Other
revenue consists principally of the revenues generated by Signature Fruit, a
subsidiary of the Company since April 2, 2001, which acquired certain assets and
assumed liabilities out of Tri Valley Growers, Inc., a cooperative association
on that date. Signature Fruit generated $114.4 million in revenue for the six
months ended June 30, 2004. In addition, other revenue includes Federal
53
JOHN HANCOCK LIFE INSURANCE COMPANY
long-term care business fee revenue of $3.7 million for the six months ended
June 30, 2004. The sale of the group life business effective May 1, 2003
decreased other revenue by $1.0 million from the prior year.
Benefits to policyholders decreased 1.9%, or $35.5 million, from the prior
year. Benefits to policyholders was driven by a decrease of $38.9 million in the
fixed annuity business on lower sales of single premium annuity contracts.
Benefits to policyholders decreased $36.0 million in the G&SFP segment on lower
interest credited on account balances. Lower benefits to policyholders in the
traditional life insurance business was offset by growth in the variable life
insurance and universal life insurance businesses. Partially offsetting these
decreases was the long-term care insurance business which increased $31.4
million, driven by growth in the business.
Other operating costs and expenses increased 6.2%, or $41.3 million. Of
this increase, $24.2 million resulted from growth in the long-term care business
and $16.3 million related to the Wealth Management Segment. Partially offsetting
these increases was a decrease at Signature Fruit of $8.8 million to $115.3
million from the prior year and a decrease of $5.5 million for the sale of the
group life business.
Amortization of deferred policy acquisition costs and value of business
acquired increased 17.9%, or $24.2 million, from the prior year. The increase in
amortization of deferred policy acquisition costs and value of business acquired
is driven by amortization of value of business acquired, driven by the
acquisition of the Company by Manulife. Purchase accounting adjusted the
historical deferred policy acquisition asset to zero and created a new value of
business acquired asset at an established return on equity for the transaction.
The impact on amortization was to decrease deferred policy acquisition costs due
to the reduced asset and increase amortization of value of business acquired.
Partially offsetting the increased amortization of value of business acquired is
lower amortization of deferred policy acquisition costs due to prior year
amortization in the traditional life insurance business. Amortization of policy
acquisition costs and value of business acquired increased $12.8 million in the
Wealth Management Segment, $2.6 million in the Protection Segment and $9.1
million in the G&SFP Segment driven by amortization of value of business
acquired established in the Manulife acquisition.
Dividends to policyholders decreased 13.0%, or $35.1 million from the
prior year. The decrease in dividends to policyholders was driven by traditional
life insurance products which decreased 10.5%, or $26.1 million, due to a
reduction in the dividend scale and a $5.4 million decrease in dividends due to
the sale of the group life business. Group life was sold effective May 1, 2003
and thus generated policyholder dividends through that date in 2003 and none
after the sale of the business.
Income taxes were $259.4 million in the first six months of 2004, compared
to $224.4 million for the first six months of 2003. Our effective tax rate was
34.1% in the first six months of 2004, compared to 29.8% in the first six months
of 2003. The increase in the effective tax rate during the period is due to
changes in the recognition of tax expense as a result of the purchase accounting
for leveraged leases as required by FASB Interpretation No. 21, "Accounting for
Leases in a Business Combination" and FASB Statement of Financial Accounting
Standards No. 13, "Accounting for Leases".
Cumulative effect of accounting change, net of tax, was $3.3 million.
During the quarter, the Company adopted SOP 03-1 which requires specialized
accounting for insurance companies related to separate accounts, transfers of
assets, liability valuations, returns based on a contractually referenced pool
of assets or index, accounting for contracts that contain death or other
insurance benefit features, accounting for reinsurance and other similar
contracts, accounting for annuitization benefits and sales inducements to
contractholders.
54
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.
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 includes 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.
Insurance product prices are impacted by investment results as well as
other results (e.g. mortality, lapse). Accordingly, incorporated in insurance
products prices are assumptions 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. We
generally intend to hold all of our fixed maturity investments to maturity to
meet liability payments, and to hold securities with any unrealized gains and
losses over the long term. However, we do sell bonds under certain
circumstances, such as when new information causes us to change our assessment
of whether a bond will recover or perform according to its contractual terms, in
response to external events (such as a merger or a downgrade) that result in
investment guideline violations (such as single issuer or overall portfolio
credit quality limits), in response to extreme catastrophic events (such as
September 11, 2001) that result in industry or market wide disruption, or to
take advantage of tender offers.
55
JOHN HANCOCK LIFE INSURANCE COMPANY
Overall Composition of the General Account
Invested assets, excluding separate accounts totaled $66.2 billion and
$66.9 billion as of June 30, 2004 and December 31, 2003, respectively. On April
28, 2004, as a result of Manulife's acquisition of John Hancock, assets were
marked to market, which became the new cost basis of those assets, in accordance
with purchase accounting guidelines. The January 1, 2004 adoption of the new
accounting pronouncement SOP 03-01, Accounting and Reporting by Insurance
Enterprises for Certain Non Traditional Long Duration Contracts and for Separate
Accounts, increased fixed maturity securities by $0.7 billion as of June 30,
2004. The following table shows the composition of investments in the general
account portfolio.
As of June 30, As of December 31,
2004 2003
-----------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
-----------------------------------------------------------
(in millions)
Fixed maturity securities (1) ...... $ 47,456.7 71.7% $ 47,970.8 71.7%
Mortgage loans (2) ................. 11,765.1 17.8 10,871.1 16.3
Real estate ........................ 136.7 0.2 123.8 0.2
Policy loans (3) ................... 2,020.6 3.0 2,019.2 3.0
Equity securities .................. 235.8 0.4 333.7 0.5
Other invested assets .............. 3,275.8 4.9 2,912.2 4.4
Short-term investments ............. 50.2 0.1 31.5 --
Cash and cash equivalents (4) ...... 1,244.5 1.9 2,626.9 3.9
-----------------------------------------------------------
Total invested assets .............. $ 66,185.4 100.0% $ 66,889.2 100.0%
-----------------------------------------------------------
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $818.9 million and
$600.3 million as of June 30, 2004 and December 31, 2003, respectively.
The total fair value of the fixed maturity security portfolio was
$47,456.7 million and $47,994.9 million, at June 30, 2004 and December 31,
2003, respectively.
(2) The fair value for the mortgage loan portfolio was $11,559.8 million and
$11,791.4 million as of June 30, 2004 and December 31, 2003, 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 in the
table above 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). The fixed maturity securities portfolio also
includes redeemable preferred stock. As of June 30, 2004, fixed maturity
securities represented 71.7% of general account invested assets with a carrying
value of $47.5 billion, comprised of 53.6% public securities and 46.4% private
securities. Each year, the Company directs the majority of 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 9% of invested assets and the majority of that balance in the BB
category. As of June 30, 2004, the below investment grade bonds were 8.4% of
invested assets, and 11.9% of total fixed maturities. Rated fixed maturity
securities exclude redeemable preferred stock. The Company has established a
long-term target of limiting investments in below investment grade bonds to 9%
and 8% of invested assets by year end 2004 and 2005, respectively, for its U.S.
life insurance companies on a statutory accounting basis. Allocations are based
on an assessment of relative value and the likelihood of enhancing risk-adjusted
portfolio 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 total
assets.
The Securities Valuation Office (SVO) of the National Association of
Insurance Commissioners evaluates all public and private bonds purchased as
investments by insurance companies. The SVO assigns one of six investment
categories to each security it reviews. Category 1 is the highest quality
rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of
investment grade debt as defined by rating agencies such as S&P and Moody's
56
JOHN HANCOCK LIFE INSURANCE COMPANY
(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 shows the composition by credit quality of the fixed
maturity securities portfolio.
Fixed Maturity Securities -- By Credit Quality
------------------------------------------------------------
As of June 30, As of December 31,
2004 2003
------------------------------------------------------------
SVO S&P Equivalent Carrying % of Carrying % of
Rating (1) Designation (2) Value (3)(4)(5) Total Value (3)(4)(5) Total
- ---------------------------------------------------------------------------------------------------------
(in millions)
1 AAA/AA/A....................... $19,873.9 42.6% $19,612.6 41.4%
2 BBB............................ 21,195.2 45.5 21,645.6 45.7
3 BB............................. 2,758.3 5.9 2,953.2 6.2
4 B.............................. 1,552.4 3.3 1,919.4 4.1
5 CCC and lower.................. 1,080.7 2.3 841.3 1.8
6 In or near default............. 177.3 0.4 398.4 0.8
-----------------------------------------------------------
Subtotal................ 46,637.8 100.0% 47,370.5 100.0%
Redeemable preferred
Stock..................... 818.9 600.3
-----------------------------------------------------------
Total fixed maturities....... $47,456.7 $47,970.8
===========================================================
(1) For 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) Includes 95 securities that are awaiting an SVO rating, with a carrying
value of $1,690.3 million as of June 30, 2004 and 175 securities that are
awaiting an SVO rating, with a carrying value of $4,032.7 million at
December 31, 2003. Due to lags between the funding of an investment, the
processing 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.
(4) Includes the effect of $150.0 million notional invested in the Company's
credit-linked note program, $130.0 million notional of written credit
default swaps on fixed maturity securities in the AAA/AA/A category and
$20.0 million notional of written credit default swaps on fixed maturity
securities in the BBB category. As of December 31, 2003 the Company had
$130.0 million notional invested in the Company's credit linked note
program, $110.0 million notional written credit default swaps on fixed
maturity securities in the AAA/AA/A category and $20.0 million notional
written credit default swaps on fixed maturity securities in the BBB
category.
(5) The Company entered into a credit enhancement agreement in the form of a
guaranty from an AAA rated financial guarantor in 1996. To reflect the
impact of this guaranty on the overall portfolio, the Company has
presented securities covered in aggregate by the guaranty at rating levels
provided by the SVO and Moody's that reflect the guaranty. As a result,
$22.6 million of SVO Rating 2, $329.4 million of SVO Rating 3, $112.0
million of SVO Rating 4, and $9.2 million of SVO Rating 5 underlying
securities are included as $276.0 million of SVO Rating 1, $147.9 million
of SVO Rating 2 and $49.3 million of SVO Rating 3 as of June 30, 2004 and
$421.0 million of SVO Rating 3, $185.2 million of SVO Rating 4, and $7.6
million of SVO Rating 5 underlying securities are included as $397.6
million of SVO Rating 1, $162.1 million of SVO Rating 2 and $54.1 million
of SVO Rating 3 as of December 31, 2003. The guaranty also contains a
provision that the guarantor can recover from the Company certain amounts
paid over the history of the program in the event a payment is required
under the guaranty. As of June 30, 2004 and December 31, 2003, the maximum
amount that can be recovered under this provision was $123.2 million and
$112.8 million, respectively.
The table above sets forth the SVO ratings for the bond portfolio along
with an equivalent S&P rating agency designation. The majority of the rated
fixed maturity investments are investment grade, with 88.1% and 87.1% of fixed
maturity investments invested in Category 1 and 2 securities as of June 30, 2004
and December 31, 2003, respectively. Below investment grade bonds were 11.9% and
12.9% of the rated fixed maturity investments as of June 30, 2004 and December
31, 2003, respectively, and 8.4% and 9.1% of total invested assets at June 30,
2004 and December 31, 2003, respectively. This allocation reflects the Company
strategy of avoiding the unpredictability of interest rate risk in favor of
relying on the Company's bond analysts' ability to better predict credit or
default risk. The 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.
57
JOHN HANCOCK LIFE INSURANCE COMPANY
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 through 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 Security Operations Department. The Company's
pricing analysts take appropriate actions to reduce valuations of securities
where such an event occurs that negatively impacts the securities' value.
Although the Company believes its estimates reasonably reflect the fair value of
those securities, the key assumptions about risk premiums, performance of
underlying collateral (if any) and other factors involve significant assumptions
and may not reflect those of an active market. 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 Manulife's Credit Committee a group consisting of the
Manulife's Chief Investment Officer, Chief Financial Officer, Chief Risk Officer
and Chief Credit Officer. The valuation of impaired bonds for which there is no
quoted price is typically based on the present value of the future cash flows
expected to be received. If the company is likely to continue operations, the
estimate of future cash flows is typically based on the expected operating cash
flows of the company that are available to make payments on the bonds. If the
company is likely to liquidate, the estimate of future cash flows is based on an
estimate of the liquidation value of its net assets.
As of June 30, 2004 and December 31, 2003, 49.5% and 48.3% of our below
investment grade bonds are in Category 3, the highest quality below investment
grade. Category 6 bonds, those in or near default, represent securities that
were originally acquired as long-term investments, but subsequently became
distressed. The carrying value of bonds in or near default was $177.3 million
and $398.4 million as of June 30, 2004 and December 31, 2003, respectively. As
of June 30, 2004 and December 31, 2003, $0.2 million and $4.1 million,
respectively, of interest on bonds near default were included in accrued
investment income. Unless the Company reasonably expects to collect investment
income on bonds in or near default, the accrual will be ceased and any accrued
income reversed. Management judgment is used and the actual results could be
materially different.
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 our
portfolios without incurring the risk of cash flow variability. The Company
believes the portion of its MBS/ABS portfolio subject to prepayment risk as of
June 30, 2004 and December 31, 2003 was limited to approximately 20.8% and
22.3%, respectively ,of our total MBS/ABS portfolio and 4.1% and 3.4%,
respectively, of our total fixed maturity securities holdings, at each period
end.
The following exhibits show a distribution of gross unrealized loss in the
portfolio. As a result of Manulife's acquisition of the Company, the Company's
portfolio was marked to market through purchase accounting on April 28, 2004.
Market interest rates rose between April 28, 2004 and June 30, 2004. The
increase in market interest rates since marking the portfolio to market has left
a large percent of the portfolio in a gross unrealized loss position. The gross
unrealized loss position of the portfolio is fairly evenly distributed across
the portfolio. 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.
58
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of June 30, 2004
---------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
with with
Total Net Gross Gross Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
---------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ............... $ 5,930.9 $ (51.0) $ 1,014.7 $ 5.4 $ 4,916.2 $ (56.4)
Communications .................... 2,774.0 (20.6) 449.2 1.7 2,324.8 (22.3)
Government ........................ 2,449.4 (16.6) 506.8 1.1 1,942.6 (17.7)
Manufacturing ..................... 5,997.4 (40.2) 1,412.3 5.9 4,585.1 (46.1)
Oil & gas ......................... 3,582.2 (21.6) 633.0 6.5 2,949.2 (28.1)
Services/trade .................... 2,493.4 (16.2) 540.5 2.5 1,952.9 (18.7)
Transportation .................... 2,121.5 (1.2) 480.2 11.9 1,641.3 (13.1)
Utilities ......................... 6,677.5 (38.9) 961.5 6.5 5,716.0 (45.4)
---------------------------------------------------------------------------
Total corporate securities .......... 32,026.3 (206.3) 5,998.2 41.5 26,028.1 (247.8)
Asset-backed and mortgage-backed
securities ......................... 8,896.9 (58.9) 1,965.4 17.9 6,931.5 (76.8)
U.S. Treasury securities and
obligations of U.S. government
agencies ........................... 318.6 (1.4) 9.7 -- 308.9 (1.4)
Debt securities issued by foreign
Governments ........................ 165.1 (0.9) 3.3 -- 161.8 (0.9)
Obligations of states and political
Subdivisions ....................... 326.6 (4.2) 11.0 -- 315.6 (4.2)
---------------------------------------------------------------------------
Total ............................. $41,733.5 $ (271.7) $ 7,987.6 $59.4 $33,745.9 $ (331.1)
===========================================================================
59
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Below Investment Grade as of June 30, 2004
---------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
with with
Total Net Gross Gross Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
---------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ................ $ 12.0 $ 0.2 $ 5.5 $ 0.2 $ 6.5 $ (0.0)
Communications ..................... 227.7 2.7 137.3 3.5 90.4 (0.8)
Government ......................... 9.8 (0.2) 0.7 -- 9.1 (0.2)
Manufacturing ...................... 1,229.9 (8.6) 350.0 7.9 879.9 (16.5)
Oil & gas .......................... 768.7 16.9 336.8 23.4 431.9 (6.5)
Services/trade ..................... 319.9 (9.1) 33.9 0.0 286.0 (9.1)
Transportation ..................... 394.5 (16.0) 171.5 0.6 223.0 (16.6)
Utilities .......................... 2,371.8 (21.8) 455.6 3.5 1,916.2 (25.3)
---------------------------------------------------------------------------
Total corporate securities ........... 5,334.3 (35.9) 1,491.3 39.1 3,843.0 (75.0)
Asset-backed and mortgage-backed
securities .......................... 377.7 13.0 195.4 18.0 182.3 (5.0)
Debt securities issued by foreign
Governments ......................... 11.2 0.3 7.5 0.4 3.7 (0.1)
---------------------------------------------------------------------------
Total .............................. $5,723.2 $ (22.6) $1,694.2 $ 57.5 $4,029.0 $ (80.1)
===========================================================================
60
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of December 31, 2003
---------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
with with
Total Net Gross Gross Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
---------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ............... $ 6,198.6 $ 359.1 $ 5,408.5 $ 370.3 $ 790.1 $ (11.2)
Communications .................... 2,795.5 230.8 2,390.1 239.8 405.4 (9.0)
Government ........................ 3,151.1 132.7 2,112.2 140.0 1,038.9 (7.3)
Manufacturing ..................... 6,199.1 381.3 5,194.4 411.9 1,004.7 (30.6)
Oil & gas ......................... 3,827.5 342.3 3,660.0 347.9 167.5 (5.6)
Services/trade .................... 2,351.1 170.4 2,222.8 174.3 128.3 (3.9)
Transportation .................... 2,252.9 104.8 1,713.1 138.9 539.8 (34.1)
Utilities ......................... 6,943.5 503.7 6,182.4 528.2 761.1 (24.5)
---------------------------------------------------------------------------
Total corporate securities .......... 33,719.3 2,225.1 28,883.5 2,351.3 4,835.8 (126.2)
Asset-backed and mortgage-backed
securities ......................... 6,956.3 223.0 5,155.1 303.3 1,801.2 (80.3)
U.S. Treasury securities and
obligations of U.S. government
agencies ........................... 289.3 2.7 111.1 4.1 178.2 (1.4)
Debt securities issued by foreign
governments ........................ 244.9 20.2 147.0 21.4 97.9 (1.2)
Obligations of states and political
Subdivisions ....................... 429.0 16.0 337.1 17.2 91.9 (1.2)
---------------------------------------------------------------------------
Total ............................. $41,638.8 $ 2,487.0 $34,633.8 $ 2,697.3 $ 7,005.0 $ (210.3)
===========================================================================
Below Investment Grade as of December 31, 2003
---------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
with with
Total Net Gross Gross Gross Gross
Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Gains Gains Losses Losses
---------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance .............. $ 113.4 $ (3.7) $ 84.3 $ 2.6 $ 29.1 $ (6.3)
Communications ................... 203.3 8.2 104.9 17.4 98.4 (9.2)
Government ....................... 11.0 (0.4) 1.5 0.2 9.5 (0.6)
Manufacturing .................... 1,414.6 61.8 992.5 93.0 422.1 (31.2)
Oil & gas ........................ 673.0 (31.7) 413.9 21.4 259.1 (53.1)
Services/trade ................... 431.4 45.7 324.8 51.1 106.6 (5.4)
Transportation ................... 507.3 (14.4) 182.0 29.9 325.3 (44.3)
Utilities ........................ 2,588.2 107.0 1,852.1 153.1 736.1 (46.1)
---------------------------------------------------------------------------
Total corporate securities ......... 5,942.2 172.5 3,956.0 368.7 1,986.2 (196.2)
Asset-backed and mortgage-backed
securities ........................ 380.4 (61.3) 47.0 2.2 333.4 (63.5)
Debt securities issued by foreign
governments ....................... 9.4 0.3 5.7 0.4 3.7 (0.1)
---------------------------------------------------------------------------
Total ............................ $6,332.0 $ 111.5 $4,008.7 $371.3 $2,323.3 $ (259.8)
===========================================================================
61
JOHN HANCOCK LIFE INSURANCE COMPANY
As of June 30, 2004 and December 31, 2003, there were gross unrealized
gains of $116.9 million and $3,068.6 million, and gross unrealized losses of
$411.2 million and $470.1 million on the fixed maturities portfolio. As of June
30, 2004 gross unrealized losses of $411.2 million was fairly evenly distributed
across the sectors as a percent of the exposure to the manufacturing sector. The
tables above show gross unrealized losses before amounts that are allocated to
the closed block policyholders or participating pension contractholders. Of the
$411.2 million of gross unrealized losses in the portfolio at June 30, 2004,
$62.1 million was in the closed block and $25.2 million has been allocated to
participating pension contractholders, leaving $323.9 million of gross
unrealized losses after such allocations. The 2003 gross unrealized losses of
$470.1 million included $413.3 million, or 87.9%, of gross unrealized losses
concentrated in the utilities, manufacturing, oil and gas, transportation, and
asset-backed and mortgage-backed securities. The tables above show gross
unrealized losses before amounts that were allocated to the closed block
policyholders or participating pension contractholders. Of the $470.1 million of
gross unrealized losses in the portfolio at December 31, 2003, $61.8 million was
in the closed block and $20.2 million was allocated to participating pension
contractholders, leaving $388.1 million of gross unrealized losses after such
allocations.
Unrealized losses can be created by rising interest rates or by rising
credit concerns and hence widening credit spreads. Credit concerns are apt to
play a larger role in the unrealized loss on below investment grade bonds and
hence the gross unrealized loss on the portfolio has been split between
investment grade and below investment grade bonds in the above tables. The gross
unrealized loss on below investment grade fixed maturity securities declined
from $259.8 million at December 31, 2003 to $80.1 million primarily due to the
marking to market of the portfolio on April 28, 2004. The gross unrealized loss
on June 30, 2004 was largely due to interest rate changes since April 28, 2004
and is fairly evenly distributed through the fixed maturity portfolio. We remain
most concerned about the airline sector. We lend to this industry almost
exclusively on a secured basis (all of our current holdings 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. When
lending to this industry, we underwrite both the airline and the aircraft. We
have 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 through these cycles. While the airline industry is making positive
strides in reducing its cost structure, a significant recovery in this sector
requires a growing economy and a pick up in business travel. In the most recent
quarter ending June 30, 2004, U.S. carriers have reported mixed results as
increased fuel prices have offset increases in traffic. We do expect the airline
sector to improve barring any new terrorist events or a reversal of the course
of the U.S. economy. We do still expect that the senior secured nature of our
loans to this industry will protect our holdings through this difficult time.
Again, the gross unrealized loss on June 30, 2004 is largely due to
interest rate changes since April 28, 2004 and hence is fairly evenly
distributed throughout the fixed maturity portfolio. The following table shows
the composition by credit quality of the securities with gross unrealized losses
in our fixed maturity securities portfolio. The gross unrealized loss on
investment grade bonds (those rated in categories 1 and 2 by the SVO) increased
by $124.5 million in the six months ending June 30, 2004 to $324.4 million. The
gross unrealized loss on below investment grade bonds (those rated in categories
3, 4, 5, and 6 by the SVO) declined even more over this period, dropping by
$181.0 million to a total of $78.2 million as of June 30, 2004.
62
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of June 30, 2004
---------------------------------------------------------------
Carrying Value of
Securities with
SVO S&P Equivalent Gross Unrealized % of Gross Unrealized
Rating (1) Designation (2) Losses (3) Total Losses (3) % of Total
- ---------------------------------------------------------------------------------------------------------
(in millions)
1 AAA/AA/A................. $16,312.5 43.8% $(162.8) 40.4%
2 BBB...................... 17,010.9 45.7 (161.6) 40.1
3 BB....................... 2,167.3 5.8 (27.8) 6.9
4 B........................ 1,133.9 3.1 (24.0) 6.0
5 CCC and lower............ 521.8 1.4 (17.2) 4.3
6 In or near default....... 60.7 0.2 (9.2) 2.3
---------------------------------------------------------------
Subtotal........... 37,207.1 100.0% (402.6) 100.0%
Redeemable preferred
stock................. 567.8 (8.6)
---------------------------------------------------------------
Total.................... $37,774.9 $(411.2)
===============================================================
(1) With respect to securities that are awaiting 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) Includes 71 securities with gross unrealized losses that are awaiting an
SVO rating with a carrying value of $1,464.9 million and unrealized losses
of $16.0 million. Due to lags between the funding of an investment, the
processing 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 3.9% and 3.9% of the
total carrying value and total gross unrealized losses of securities in a
loss position, including redeemable preferred stock, respectively.
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of December 31, 2003
--------------------------------------------------------------
Carrying Value of
Securities with
SVO S&P Equivalent Gross Unrealized % of Gross Unrealized
Rating (1) Designation (2) Losses (3) Total Losses (3) % of Total
- ----------------------------------------------------------------------------------------------------------------
(in millions)
1 AAA/AA/A......................... $4,631.6 50.8% $ (93.4) 20.3%
2 BBB.............................. 2,168.2 23.8 (106.5) 23.2
3 BB............................... 664.4 7.3 (74.4) 16.2
4 B................................ 1,068.3 11.7 (90.5) 19.7
5 CCC and lower.................... 441.5 4.8 (83.5) 18.2
6 In or near default............... 146.7 1.6 (10.8) 2.4
--------------------------------------------------------------
Subtotal................... 9,120.7 100.0% (459.1) 100.0%
Redeemable preferred stock....... 207.6 (11.0)
--------------------------------------------------------------
Total............................ $9,328.3 $(470.1)
==============================================================
(1) With respect to securities that are awaiting 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) Includes 58 securities with gross unrealized losses that are awaiting an
SVO rating with a carrying value of $1,763.4 million and unrealized losses
of $27.1 million. Due to lags between the funding of an investment, the
processing 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 18.9% and 5.8% of the
total carrying value and total gross unrealized losses of securities in a
loss position, including redeemable preferred stock, respectively.
63
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Quality
Unrealized Losses on Fixed Maturity Securities --
By Investment Grade Category and Age
As of June 30, 2004
---------------------------------------------------------------------------------------
Investment Grade Below Investment Grade
------------------------------------------- ------------------------------------------
Carrying Value of Carrying Value of
Securities Securities
with with
Gross Unrealized Hedging Market Gross Unrealized Hedging Market
Losses Adjustments Depreciation Losses Adjustments Depreciation
------------------------------------------- ------------------------------------------
(in millions)
Three months or less ................... $33,323.3 $ (64.0) $ (260.4) $ 3,883.8 $ (11.0) $ (67.2)
Greater than three months to
six months ......................... -- -- -- -- -- --
Greater than six months to
nine months ........................ -- -- -- -- -- --
Greater than nine months to
twelve months ...................... -- -- -- -- -- --
Greater than twelve months ........... -- -- -- -- -- --
------------------------------------------- ------------------------------------------
Subtotal .......................... 33,323.3 (64.0) (260.4) 3,883.8 (11.0) (67.2)
------------------------------------------- ------------------------------------------
Redeemable preferred stock ............. 422.6 (0.5) (6.2) 145.2 -- (1.9)
------------------------------------------- ------------------------------------------
Total ............................. $33,745.9 $ (64.5) $ (266.6) $ 4,029.0 $ (11.0) $ (69.1)
=========================================== ==========================================
Unrealized Losses on Fixed Maturity Securities --
By Investment Grade Category and Age
As of December 31, 2003
---------------------------------------------------------------------------------------
Investment Grade Below Investment Grade
------------------------------------------ -------------------------------------------
Carrying Value of Carrying Value of
Securities Securities
with with
Gross Unrealized Hedging Market Gross Unrealized Hedging Market
Losses Adjustments Depreciation Losses Adjustments Depreciation
------------------------------------------ -------------------------------------------
(in millions)
Three months or less ................ $1,793.1 $ (12.2) $ (15.6) $ 247.8 $ (3.8) $ (7.5)
Greater than three months to
six months ..................... 1,385.2 (5.6) (27.0) 122.9 (1.8) (1.1)
Greater than six months to
nine months .................... 925.2 (1.0) (32.6) 122.1 (2.5) (10.8)
Greater than nine months to
twelve months .................. 207.4 (14.0) (7.7) 191.6 (1.2) (2.8)
Greater than twelve months ......... 2,488.9 (43.7) (40.5) 1,636.5 (60.1) (167.6)
------------------------------------------ -------------------------------------------
Total .......................... 6,799.8 (76.5) (123.4) 2,320.9 (69.4) (189.8)
------------------------------------------ -------------------------------------------
Redeemable preferred stock .......... 205.2 -- (10.4) 2.4 -- (0.6)
------------------------------------------ -------------------------------------------
Total .......................... $7,005.0 $ (76.5) $ (133.8) $2,323.3 $ (69.4) $ (190.4)
========================================== ===========================================
The tables above shows the Company's investment grade and below investment
grade securities that were in a loss position at June 30, 2004 and December 31,
2003 by the amount of time the security has been in a loss position. Gross
unrealized losses from hedging adjustments represent the amount of the
unrealized loss that results from the security being designated as a hedged item
in a fair value hedge. When a security is so designated, its cost basis is
adjusted in response to movements in interest rates. These adjustments, which
are non-cash and reverse with the passage of time as the asset and derivative
mature, impact the amount of unrealized loss on a security. The remaining
portion of the gross unrealized loss represents the impact of interest rates on
the non-hedged portion of the portfolio and unrealized losses due to
creditworthiness on the total fixed maturity portfolio.
As of June 30, 2004 and December 31, 2003, respectively, the fixed
maturity securities had a total gross unrealized loss of $335.7 million and
$324.2 million, excluding basis adjustments related to hedging relationships. As
of June 30, 2004 the aging of securities reflects the mark to market on April
28, 2004, thus the entire gross unrealized loss is less than three months at
June 30, 2004. Unrealized losses on investment grade securities principally
relate to changes in interest rates or changes in credit spreads since the
securities were acquired. Credit rating agencies statistics indicate that
investment grade securities have been found to be less likely to develop credit
concerns.
64
JOHN HANCOCK LIFE INSURANCE COMPANY
The scheduled maturity dates for securities in an unrealized loss position
at June 30, 2004 and December 31, 2003 is shown below.
Unrealized Losses on Fixed Maturity Securities -- By Maturity
June 30, 2004 December 31, 2003
----------------------------- ----------------------------
Carrying Value Carrying Value
of Securities Gross of Securities Gross
with Gross Unrealized with Gross Unrealized
Unrealized Loss Loss Unrealized Loss Loss
----------------------------- ----------------------------
(in millions)
Due in one year or less ................. $ 1,914.4 $ (12.6) $ 385.1 $ (11.5)
Due after one year through five years ... 8,634.6 (81.7) 1,487.0 (74.5)
Due after five years through ten years .. 12,307.3 (148.8) 1,916.7 (101.8)
Due after ten years ..................... 7,804.8 (86.3) 3,404.8 (138.5)
----------------------------- ----------------------------
30,661.1 (329.4) 7,193.6 (326.3)
Asset-backed and mortgage-backed
securities ............................ 7,113.8 (81.8) 2,134.7 (143.8)
----------------------------- ----------------------------
Total ................................... $37,774.9 $ (411.2) $ 9,328.3 $ (470.1)
============================= ============================
As of June 30, 2004, there were no securities with unrealized losses of
$10 million or more. As of December 31, 2003, there were 59 securities with an
unrealized loss of $10 million or more with an amortized cost of $1,048.3
million and unrealized loss of $136.3 million. The area of most concern
continues to be the airline sector as previously discussed.
Mortgage Loans. As of June 30, 2004 and December 31, 2003, the Company
held mortgage loans with a carrying value of $11.8 billion and $10.9 billion,
including $3.1 billion and $3.0 billion, respectively, of agricultural loans at
each period end and $8.7 billion and $7.9 billion, respectively, of commercial
loans. Impaired loans comprised 0.4% and 1.1% of the mortgage portfolio as of
June 30, 2004 and December 31, 2003, respectively.
The following table shows the Company's agricultural mortgage loan
portfolio by its three major sectors: agri-business, timber and production
agriculture.
As of June 30, 2004 As of December 31, 2003
------------------------------------------- ----------------------------------------
Amortized Carrying % of Total Amortized Carrying % of Total
Cost Value Carrying Value Cost Value Carrying Value
------------------------------------------- ----------------------------------------
(in millions)
Agri-business........... $1,844.7 1,831.3 58.8% $1,861.0 $1,860.6 61.5%
Timber.................. 1,270.8 1,266.0 40.7 1,172.4 1,144.2 37.9
Production agriculture.. 17.0 16.9 0.5 18.9 18.9 0.6
------------------------------------------ ----------------------------------------
Total............... $3,132.5 $3,114.2 100.0% $3,052.3 $3,023.7 100.0%
========================================== ========================================
The following table shows the distribution of our mortgage loan portfolio
by property type as of the dates indicated. Our commercial mortgage loan
portfolio consists primarily of non-recourse fixed-rate mortgages on fully, or
nearly fully, leased commercial properties.
65
JOHN HANCOCK LIFE INSURANCE COMPANY
Mortgage Loans - By Property Type
As of June 30, 2004 As of December 31, 2003
---------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
---------------------------------------------------------------
(in millions)
Apartment.......................... $ 1,609.8 13.7% $ 1,452.9 13.4%
Office Buildings................... 2,557.9 21.7 2,448.4 22.5
Retail............................. 2,452.3 20.8 2,083.6 19.2
Agricultural....................... 3,114.2 26.5 3,023.7 27.8
Industrial......................... 975.1 8.3 938.4 8.6
Hotels............................. 459.6 3.9 435.9 4.0
Multi-Family....................... 0.8 0.0 0.9 --
Mixed Use.......................... 327.2 2.8 284.3 2.6
Other.............................. 268.2 2.3 203.0 1.9
---------------------------------------------------------------
Total......................... $11,765.1 100.0% $10,871.1 100.0%
===============================================================
The following table shows the distribution of our mortgage loan portfolio
by geographical region, as defined by the American Council of Life Insurers
(ACLI).
Mortgage Loans -- By ACLI Region
---------------------------------------------------------------------------
As of June 30, 2004 As of December 31, 2003
---------------------------------------------------------------------------
Number Carrying % of Carrying % of
Of Loans Value Total Value Total
---------------------------------------------------------------------------
(in millions)
East North Central....... 140 $ 1,233.9 10.5% $ 1,117.8 10.3%
East South Central....... 39 448.1 3.8 411.9 3.8
Middle Atlantic.......... 118 1,596.2 13.6 1,449.5 13.3
Mountain................. 97 724.6 6.2 507.6 4.7
New England.............. 95 934.4 7.9 869.1 8.0
Pacific.................. 274 2,547.1 21.6 2,371.2 21.8
South Atlantic........... 201 2,506.6 21.3 2,375.6 21.8
West North Central....... 68 453.7 3.9 434.5 4.0
West South Central....... 112 1,040.5 8.8 1,022.2 9.4
Canada................... 10 280.0 2.4 311.7 2.9
---------------------------------------------------------------------------
Total............... 1,154 $11,765.1 100.0% $10,871.1 100.0%
===========================================================================
The following table shows the carrying values of our mortgage 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. Mortgage loans are classified as delinquent when they are 60 days or
more past due as to the payment of interest or principal. Mortgage loans are
classified as restructured when they are in good standing, but the basic terms,
such as interest rate or maturity date, have been modified as a result of a
prior actual delinquency or an imminent delinquency. All foreclosure decisions
are based on a thorough assessment of the property's quality and location and
market conditions. The decision may also reflect a plan to invest additional
capital in a property to make tenant improvements or renovations to secure a
higher resale value at a later date. Following foreclosure, we rely on our real
estate investment group's ability to manage foreclosed real estate for eventual
return to investment real estate status or outright sale.
66
JOHN HANCOCK LIFE INSURANCE COMPANY
Mortgage Loan Comparisons
As of June 30, As of December 31,
2004 2003
------------------------------- ----------------------------------
Carrying % of Total Carrying % of Total
Value Mortgage Loans (1) Value Mortgage Loans (1)
------------------------------- ----------------------------------
(in millions)
Delinquent, not in foreclosure .. $ 2.2 -- $ 0.2 --
Delinquent, in foreclosure ...... 64.0 0.5% 92.7 0.8%
Restructured .................... 68.7 0.6 87.8 0.8
Loans foreclosed during period .. -- -- 23.9 0.2
Other loans with valuation
allowance (2) ............... 45.3 0.4 5.5 0.1
-------------------------------------------------------------------
Total ........................ $180.2 1.5% $210.1 1.9%
-------------------------------------------------------------------
Valuation allowance ............. $ 5.6 $ 65.9
===================================================================
(1) As of June 30, 2004 and December 31, 2003 the Company held mortgage loans
with a carrying value of $11.8 billion and $10.9 billion, respectively.
The valuation allowance is maintained at a level that is adequate enough
to absorb estimated probable credit losses. Management's periodic evaluation of
the adequacy of the allowance for losses is based on past experience, known and
inherent risks, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of the
underlying security, the general composition of the portfolio, current economic
conditions and other factors. This evaluation is inherently subjective and is
susceptible to significant changes and no assurance can be given that the
allowances taken will in fact be adequate to cover all losses or that additional
valuation allowances or asset write-downs will not be required in the future.
The valuation allowance for the mortgage loan portfolio was $5.6 million, or no
appreciable percent of the carrying value of the portfolio as of June 30, 2004.
Investment Results
Net Investment Income. The following table summarizes the Company's investment
results for the periods indicated:
Three Months Ended Six Months Ended
As of As of As of As of
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
-------------------------------------------------------------------------------------------
Yield Amount Yield Amount Yield Amount Yield Amount
-------------------------------------------------------------------------------------------
(in millions) (in millions) (in millions) (in millions)
General account assets-excluding
Policy loans
Gross income 5.42% $ 892.8 5.99% $ 950.7 5.85% $ 1,885.9 6.17% $ 1,905.1
Ending assets-excluding policy
Loans 64,164.8 64,919.7 64,164.8 64,919.7
Policy loans
Gross income 5.77% 29.1 5.94% 29.9 5.80% 58.5 6.04% 60.9
Ending assets 2,020.6 2,014.5 2,020.6 2,014.5
Total gross income 5.43% 921.9 5.99% 980.6 5.84% 1,944.4 6.17% 1,965.9
Less: investment expenses (38.9) (38.3) (77.9) (90.5)
--------- --------- --------- ---------
Net investment income 5.20% $ 883.0 5.75% $ 942.3 5.61% $ 1,866.5 5.88% $ 1,875.4
========= ========= ========= =========
(1) Cash and cash equivalents are included in invested assets in the table
above for the purposes of calculating yields on income producing assets
for the Company.
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
Net investment income decreased $59.3 million from comparable prior year
period. The decrease was primarily the result of amortization of the mark to
market adjustment on assets as a result of the purchase accounting treatment of
the Manulife acquisition of John Hancock. Overall, the yield for the three
months ended June 30, 2004, net of investment expenses, on the general account
67
JOHN HANCOCK LIFE INSURANCE COMPANY
portfolio decreased to 5.20% from 5.75% for the three months ended June 30,
2003. In summary, the change in yields was driven by the following factors:
o On April 28, 2004, as a result of Manulife's acquisition of John
Hancock, assets were marked to market in accordance with purchase
accounting rules. The impact of the asset adjustment and related
amortization was a reduction in yield of approximately 44 basis
points for the second quarter of 2004 compared to the second quarter
of 2003.
o As of June 30, 2004, the Company's asset portfolio had approximately
$13 billion of floating-rate exposure (primarily LIBOR). This
compares to the same $13 billion level of exposure as of June 30,
2003. This exposure was created mostly through interest rate swaps
designed to match our floating-rate liability portfolio. As of June
30, 2004, approximately 88% of this exposure, excluding cash and
short-term investments, was directly offset by exposure to
floating-rate liabilities. Most of the remaining 12% of exposure is
in floating rate assets acquired for their relative value and is
accounted for in the portfolio's interest rate risk management plan.
The impact was approximately 46 basis points this quarter compared
to 53 basis points a year ago.
o Certain of our tax-preferenced investments (affordable housing
limited partnerships and lease residual management) dilute the
Company's net portfolio yield on a pre-tax basis. For the three
month period ended June 30, 2004, this dilutive effect was 10 basis
points, compared to 10 basis points in the comparable prior year
period. However, adjusting for taxes, these investments increased
the Company's net income by $0.8 million in the second quarter of
2004 compared to the second quarter of 2003.
o The inflow of new cash for the three month period ending June 30,
2004 was invested at rates that were below the portfolio rate. In
addition, maturing assets rolling over into new investments at rates
below the portfolio rate.
Partially offsetting the effects of these events to yields on investments
was an increase in invested assets. In the three month period ended June 30,
2004, weighted-average invested assets grew $2,382.6 million, or 3.6%, from the
prior year. The mark to market of assets, as a result of the Manulife
acquisition of John Hancock, increased the weighted average invested assets by
$1,084.0 million.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Net investment income decreased $8.9 million from comparable prior year
period. Overall, the yield for the six months ended June 30, 2004, net of
investment expenses, on the general account portfolio decreased to 5.61% from
5.88% for the six months ended June 30, 2003. In summary, the change in yields
was driven by the following factors:
o On April 28, 2004, as a result of Manulife's acquisition of John
Hancock, assets were marked to market in accordance with purchase
accounting rules. The impact of the asset adjustment and related
amortization was a reduction in yield of approximately 27 basis
points for the six months ended June 30, 2004 compared to the same
period last year.
o As of June 30, 2004, the Company's asset portfolio had approximately
$13 billion of floating-rate exposure (primarily LIBOR). This
compares to the same $13 billion level of exposure as of June 30,
2003. This exposure was created mostly through interest rate swaps
designed to match our floating-rate liability portfolio. As of June
30, 2004, approximately 88% of this exposure, excluding cash and
short-term investments, was directly offset by exposure to
floating-rate liabilities. Most of the remaining 12% of exposure is
in floating rate assets acquired for their relative value and is
accounted for in the portfolio's interest rate risk management plan.
The impact was approximately 48 basis points this quarter compared
to 54 basis points a year ago.
o Certain of our tax-preferenced investments (affordable housing
limited partnerships and lease residual management) dilute the
Company's net portfolio yield on a pre-tax basis. For the three
month period ended March 31, 2004, this dilutive effect was 9 basis
points, compared to 10 basis points in the comparable prior year
period. However, adjusting for taxes, these investments increased
the Company's net income by $2.2 million for the six months ended
June 20, 2004 compared to the same period last year.
68
JOHN HANCOCK LIFE INSURANCE COMPANY
o The inflow of new cash for the six month period ending June 30, 2004
was invested at rates that were below the portfolio rate. In
addition, maturing assets rolling over into new investments at rates
below the portfolio rate.
Partially offsetting the effects of these decreases to yields on
investments was an increase in invested assets and a reduction in investment
expenses. In the six month period ended June 30, 2004, weighted-average invested
assets grew $2,788.7 million, or 4.4%, from the prior year. The mark to market
of assets, as a result of the Manulife acquisition of John Hancock, increased
the weighted average invested assets by $1,084.0 million. In addition,
investment expenses were reduced $12.6 million in the six month period ended
June 30, 2004 compared to the prior year. Included are reductions in corporate
complex expenses and in depreciation expenses associated with the sale of the
Company's home office real estate in the first quarter of 2003.
Net Realized Investment and Other Gain/(Loss)
The following table shows the Company's net realized investment and other
gains (losses) by asset class for the periods presented:
Gross Gain Gross Loss Hedging Net Realized Investment
For the Three Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) ......... $(29.8) $ 75.3 $(25.1) $(25.0) $ (4.6)
Equity securities ..................... (1.5) 19.6 -- -- 18.1
Mortgage loans on real estate ......... (23.2) 16.4 (13.9) (5.3) (26.0)
Real estate ........................... -- 74.3 (2.2) -- 72.1
Other invested assets ................. (29.7) 6.2 (2.5) -- (26.0)
Derivatives ........................... -- -- -- 226.8 226.8
----------------------------------------------------------------------------
Subtotal ............... $(84.2) $191.8 $(43.7) $196.5 260.4
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and value of business
acquired........................................................................ (1.6)
Amounts credited to participating pension contractholders.......................... (3.1)
Amounts credited to the policyholder dividend obligation........................... (8.1)
----------------------
Total......................................................................... $247.6
======================
(1) Fixed maturities gain on disposals includes $37.2 million of gains
from previously impaired securities and prepayment gains of $23.7
million.
Gross Gain Gross Loss Hedging Net Realized Investment
For the Six Months Ended June 30, 2004 Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) ......... $(98.1) $150.1 $(30.5) $(77.0) $(55.5)
Equity securities (2) ................. (6.2) 88.8 (0.7) -- 81.9
Mortgage loans on real estate ......... (23.6) 27.9 (14.6) (19.4) (29.7)
Real estate ........................... -- 78.0 (2.3) -- 75.7
Other invested assets ................. (37.2) 8.5 (8.5) -- (37.2)
Derivatives ........................... -- -- -- 126.7 126.7
----------------------------------------------------------------------------
Subtotal ............... $(165.1) $353.3 $(56.6) $ 30.3 $161.9
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and value of business
acquired....................................................................... 16.4
Amounts credited to participating pension contractholders.......................... (5.1)
Amounts credited to the policyholder dividend obligation........................... (23.3)
----------------------
Total......................................................................... $149.9
======================
(1) Fixed maturities gain on disposals includes $42.5 million of gains
from previously impaired securities and prepayment gains of $57.2
million.
(2) Equity securities gain on disposal includes $9.3 million of gains
from equity securities received as settlement compensation from an
investee whose securities had previously been impaired.
69
JOHN HANCOCK LIFE INSURANCE COMPANY
The hedging adjustments in the fixed maturities and mortgage loans asset
classes are non-cash adjustments representing the amortization or reversal of
prior fair value adjustments on assets in those classes that were or are
designated as hedged items in fair value hedges. When an asset or liability is
so designated, its cost basis is adjusted in response to movement in interest
rates. These adjustments are non-cash and reverse with the passage of time as
the asset or liability and derivative mature. The hedging adjustments on the
derivatives represent non-cash adjustments on derivative instruments and on
assets and liabilities designated as hedged items reflecting the change in fair
value of those items.
For the three and six month periods ended June 30, 2004 net realized
investment and other gains/(losses) was a gain of $247.6 million and $149.9
million, respectively. For the same time period, gross losses on impairments and
on disposal of investments - including bonds, equities, real estate, mortgages
and other invested assets was $127.9 million and $221.7 million, respectively,
excluding hedging adjustments. This compares to net realized investment and
other gains of $78.3 million and $183.7 million and gross losses on impairments
and disposals of investments of $122.7 million and $409.2 million, for the three
and six month periods ended June 30, 2003, respectively.
For the three and six month periods ended June 30, 2004, respectively, we
realized $75.3 million and $150.1 million of gains on disposal of fixed
maturities excluding hedging adjustments. These gains resulted from managing our
portfolios for tax optimization and ongoing portfolio positioning, as well as
$23.7 million and $57.2 million of prepayments and approximately $37.2 million
and $42.5 million from recoveries on sales of previously impaired securities,
for the three and six month periods ended June 30, 2004, respectively.
For the three and six month period ended June 30, 2004, we realized $25.1
million and $30.5 million of losses upon disposal of fixed maturities excluding
hedging adjustments. We generally intend to hold securities in unrealized loss
positions until they mature or recover. However, we do sell fixed maturities
under certain circumstances such as when new information causes us to change our
assessment of whether a bond will recover or perform according to its
contractual terms, in response to external events (such as a merger or a
downgrade) that result in investment guideline violations (such as single issuer
or overall portfolio credit quality limits), in response to extreme catastrophic
events (such as September 11, 2001) that result in industry or market wide
disruption, or to take advantage of tender offers. Sales generate both gains and
losses.
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 where market value is less than ninety percent of amortized cost for
three months or more to determine whether impairments need to be taken. This
committee includes the head of workouts, the head of each industry team, the
head of portfolio management, and the Chief Credit Officer of Manulife. 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 by the Credit Committee at
Manulife. This committee includes Manulife's Chief Finacial Officer, Chief
Investment Officer, Chief Risk Officer, and Chief Credit Officer. This quarterly
process includes a fresh assessment of the credit quality of each investment in
the entire fixed maturities portfolio.
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, (2)
the risk that the economic outlook will be worse than expected or have more of
an impact on the issuer than anticipated, (3) fraudulent information could be
provided to our investment professionals who determine the fair value estimates
70
JOHN HANCOCK LIFE INSURANCE COMPANY
and other than temporary impairments, and (4) 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.
As disclosed in our discussion of the Results of Operations in this MD&A,
the Company recorded losses due to other than temporary impairments of fixed
maturity securities for three and six month period ended June 30, 2004 of $42.7
million and $112.5 million, respectively, (including impairment losses of $29.8
million and $98.1 million, and $12.9 million and $14.4 million of previously
recognized gains where the bond was part of a hedging relationship, for three
and six month period ended June 30, 2004, respectively).
Impairments and Losses on Disposals - Three Months Ended June 30, 2004
Of the $25.1 million of realized losses on sales of fixed maturity
securities for the three months ended June 30, 2004, there were no significant
credit losses. Most of the sales were related to general portfolio management,
largely due to redeploying high quality, liquid public bonds into more permanent
investments and the losses resulted from increasing interest rates during the
quarter.
The Company recorded losses due to other than temporary impairments of
lease investments and CDO equity of $29.7 million for the three month period
ended June 30, 2004. The impairments on lease investments, primarily in the U.S.
airline industry, of $28.9 million, drove the total impairments on other
invested assets. Although our $0.8 million in impairments on CDO equity were a
small portion of impairments of other invested assets for the period, our equity
in CDOs take the first loss risk in a pool of high yield debt thus under perform
in a high yield default environment. We have a total remaining carrying value of
$48.6 million and $60.0 million of CDO equity as of June 30, 2004 and December
31, 2003, which is currently supported by expected cash flows.
The Company also recognized losses on other than temporary impairments of
common stock of $1.5 million for the three month period ended June 30, 2004 as
the result of market values falling below cost for more than six months.
The Company recorded a net loss of $26.0 million on mortgage loans for the
three month period ended June 30, 2004 (of which $5.3 million was losses on
hedging adjustments). Included is a $26.0 million increase to reserves for a
refrigeration warehouse company and a milling company for the three months ended
June 30, 2004.
There were also gains of $19.6 million on the sale of equity securities as
part of our overall investment strategy of using equity gains to minimize credit
losses in the long term, gains of $6.2 million from the sale of other invested
assets, and gains of $74.3 million resulting from the sale of real estate for
the three month period ended June 30, 2004. Net derivative activity resulted in
a gain of $226.8 million for the three months ended June 30, 2004 resulting from
a slightly larger impact from interest rate changes on the Company's fair value
of hedged and hedging thos items and the change in fair value of its derivatives
with a hedging relationship. items in comparison to the changes in fair value of
its derivatives.
Impairments and Losses on Disposals - Six Months Ended June 30, 2004
Of the $30.5 million of realized losses on sales of fixed maturity
securities for the six months ended June 30, 2004, there was a total of $0.6
million in credit losses. Most of the sales were related to general portfolio
management, largely due to redeploying high quality, liquid public bonds into
more permanent investments and the losses resulted from increasing interest
rates during the quarter.
The Company recorded losses due to other than temporary impairments of
lease investments and CDO equity of $37.2 million for six month period ended
June 30, 2004. The impairments on lease investments, primarily in the U.S.
airline industry, of $33.4 million, drove the total impairments on other
invested assets. Although our $3.8 million in impairments on CDO equity were a
small portion of impairments of other invested assets for the period, our equity
in CDOs take the first loss risk in a pool of high yield debt thus under perform
in a high yield default environment. We have a total remaining carrying value of
$48.6 million and $60.0 million of CDO equity as of June 30, 2004 and December
31, 2003, which is currently supported by expected cash flows.
The Company also recognized losses on other than temporary impairments of
common stock of $6.2 million for the six month period ended June 30, 2004 as the
result of market values falling below cost for more than six months.
71
JOHN HANCOCK LIFE INSURANCE COMPANY
The Company recorded a net loss of $29.7 million on mortgage loans for the
six month period ended June 30, 2004 (of which $19.4 million was losses on
hedging adjustments). Included is a $26 million increase to reserves for a
refrigeration warehouse company and a milling company for the six months ended
June 30, 2004.
There were also gains of $88.8 million on the sale of equity securities as
part of our overall investment strategy of using equity gains to minimize credit
losses in the long term, gains of $8.5 million from the sale of other invested
assets, and gains of $78.0 million resulting from the sale of real estate for
the six month period ended June 30, 2004. Net derivative activity resulted in a
gain of $126.7 million for the six months ended June 30, 2004 resulting from a
slightly larger impact from interest rate changes on the Company's fair value of
hedged and non-hedged items in comparison to the changes in fair value of its
derivatives.
Liquidity and 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 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.
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.
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, its 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. During the first quarter of 2004, the Company paid no dividends to its
parent, JHFS.
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.
On April 28, 2004, JHFS, the parent of the Company, completed its merger
agreement with Manulife Financial Corporation (Manulife) and as of the close of
business JHFS stock stopped trading on the New York Stock Exchange. In
accordance with the agreement, each share of JHFS common stock was converted
into 1.1853 shares of Manulife stock. Commencing on April 28, 2004, the Company
now operates as a subsidiary of Manulife and the John Hancock name is Manulife's
primary U.S. brand. Following the completion of the merger, Standard and Poor's,
Moody's, A.M. Best and Fitch affirmed all ratings. In addition, Standard &
Poor's upgraded the long-term counterparty credit and senior debt ratings on
John Hancock Financial Services, Inc. and the debt ratings John Hancock Canadian
Corp. to A+ from A. Dominion Bond Rating Service upgraded John Hancock Financial
Services' corporate rating to AA (low) from A (high).
The liquidity of our insurance operations is also related to the overall
quality of our investments. As of June 30, 2004, $41,069.1 million, or 88.1% of
the fixed maturity securities held by us and rated by Standard & Poor's Ratings
72
JOHN HANCOCK LIFE INSURANCE COMPANY
Services, (S&P) or the National Association of Insurance Commissioners were
rated investment grade (BBB- or higher by S&P, Baa3 or higher for Moody's, or 1
or 2 by the National Association of Insurance Commissioners). The remaining
$5,568.7 million, or 11.9%, of rated fixed maturity investments were rated
non-investment grade. For additional discussion of our investment portfolio see
the General Account Investments section of 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.
Analysis of Consolidated Statement of Cash Flows
Net cash provided by operating activities was $1,167.9 million and
$1,296.9 million for the six month period ended June 30, 2004 and 2003,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, fees received and investment income. The $129.0 million
decrease in the first six months of 2004 as compared to the same period of 2003
resulted primarily from a $393.1 million increase in policy related costs,
partially offset by a $49.4 million increase in fee and other income.
Net cash used in investing activities was $1,916.4 million and $2,599.3
million for the six month periods ended June 30, 2004 and 2003, 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 $682.9 million
decrease in cash used in the first quarter of 2004 as compared to the same
period in 2003 resulted primarily from an $887.6 million cash inflow from the
sale of Home Office properties in the first quarter of 2003, offset partially by
a $1,466.0 million reduction in net acquisitions of fixed maturities and a $94.6
million increase in net mortgage maturities, prepayments and scheduled
redemptions.
Net cash used in financing activities was $633.9 million for the six month
period ended June 30, 2004 and the net cash provided by financing activities was
$1,417.7 million for the six month periods ended June 30, 2003. 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 $2,051.6 million decrease in net cash
provided by financing activities for the first six months of 2004 as compared to
the same period in 2003 was driven by a decrease in deposits and an increase in
cash payments made on withdrawals of universal life insurance and
investment-type contracts totaling $2,146.9 million. Withdrawals on such
universal life insurance and investment-type contracts exceeded deposits by
$971.3 million for the first six months of 2004, while during the same period in
2003, deposits exceeded withdrawals by $1,175.6 million. The Company's ability
to generate customer deposits in excess of withdrawals is critical to our
long-term growth.
Lines of Credit, Debt and Guarantees
Cash flow requirements are also supported by a committed line of credit of
$500 million, through a syndication of banks including Fleet National Bank,
JPMorgan Chase, Credit Suisse First Boston, The Bank of New York, Barclays, The
Bank of Nova Scotia, Wachovia, Royal Bank of Canada, State Street Bank, Bank of
America, Bank One, BNP Paribas, Deutsche Bank, PNC Bank, Sovereign Bank,
Westdeutsche Landesbank, Comerica Bank and Northern Trust. The line of credit
agreement provides for one facilities: 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 June 30, 2004, we had $610.2 million of principal and interest
amounts of debt outstanding, consisting of $518.1 million of surplus notes and
$92.1 million of other notes payable, including current maturities and a fair
value adjustment for interest rate swaps. A new commercial paper program has
been established at JHFS that has replaced the commercial paper program that was
in place at the Company's indirect subsidiary, John Hancock Capital Corporation,
and there were no commercial paper borrowings outstanding at June 30, 2004.
The risk-based capital standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish a
risk-based capital ratio comparing adjusted surplus to required surplus for each
of our United States domiciled insurance subsidiaries. If the risk-based capital
ratio falls outside of acceptable ranges, regulatory action may be taken ranging
from increased information requirements to mandatory control by the domiciliary
73
JOHN HANCOCK LIFE INSURANCE COMPANY
insurance department. The risk-based capital ratios are reported annually and
monitored continuously. The Company's risk-based capital ratios for all of 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 periodic review of our reinsurers' financial
statements, financial strength ratings 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 recognized in our consolidated financial
statements.
Off Balance Sheet Arrangements
The Company has relationships with a number of entities which are not
consolidated into the Company's consolidated financial statements. These
entities include qualified special purpose entities (QSPEs) and other special
purpose entities. In the course of its business the Company transfers assets to,
and in some cases, retains interests in QSPEs. The Company may also purchase
interests in QSPEs on the open market.
The Company's primary use of QSPEs occurs in its commercial mortgage
banking subsidiary. The Company's commercial mortgage banking subsidiary
originates commercial mortgages and sells them to QSPEs which then issues
mortgage backed securities (MBS). The Company engages in this activity to earn
fees during the origination process, and to generate gains during the
securitization process. The Company maintains a portfolio of MBS securities, in
order to generate net investment income for its general account, and some of
theses MB securities were purchased from QSPEs to which we transferred
mortgages. The majority of the Company's MBS portfolio were purchased from
unrelated QSPEs.
These QSPEs and other special purpose entities also include CDO funds we
manage and may also invest in, which are considered variable interest entities
and are discussed in detail in Note 4 - Relationships with Variable Interest
Entities to our consolidated financial statements. The Company generates fee
income from the CDO funds we manage, and generates net investment income from
CDOs we invest in, whether we manage them or not.
The Company receives Federal income tax benefits from certain investments
made through variable interest entities.
These off balance sheet arrangements also include credit and collateral
support agreements with FNMA and FHMLC, through which the Company securitized
some of its mortgage investments, which provided a potential source of liquidity
to the Company.
The Company's risk of loss from these entities is limited to its
investment in them. Consolidation of unconsolidated accounts from these entities
would inflate the Company's balance sheet but would not be reflective of
additional risk in these entities. In each, there are no potential liabilities
which might arise in the future as a result of these relationships that would
not be completely satisfied by the assets of that entity.
74
JOHN HANCOCK LIFE INSURANCE COMPANY
Forward-Looking Statements
The statements, analyses, and other information contained in this
Management's Discussion and Analysis (MD&A) and elsewhere in this Form 10-Q, in
connection with the merger with John Hancock and Manulife Financial Corporation,
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 proposed Bush
Administration tax and savings initiatives), and the applications and
interpretations given to these laws and regulations, 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) declines 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 trustees 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
over-funding 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 projected; (14) we face investment and
credit losses relating to our investment portfolio, including, without
limitation, the risk associated with the evaluation and determination by our
investment professionals of the fair values of investments as well as whether or
not any investments have been impaired on an other than temporary basis; (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) we may be
unable to retain personnel who are key to our business; (18) we may incur losses
from assumed reinsurance business in respect of personal accident insurance and
the occupational accident component of workers compensation insurance; (19)
litigation and regulatory proceedings may result in financial losses, harm our
reputation and divert management resources; (20) we face unforeseen liabilities
arising from our acquisitions and dispositions of businesses; (21) we may incur
multiple life insurance claims as a result of a catastrophic event which,
because of higher deductibles and lower limits under our reinsurance
arrangements, could adversely affect the Company's future net income and
financial position, and (22) in connection with the merger between JHFS and
Manulife Financial Corporation: we may not achieve the revenue synergies, cost
savings and other synergies contemplated by the merger; we may experience
litigation related to the merger; John Hancock's and Manulife's distributors,
customers and policyholders may react negatively to the transaction; we may
encounter difficulties in promptly and effectively integrating the businesses of
John Hancock and Manulife; we may not be able to retain the professional and
management talent necessary to operate the business; the transaction may result
in diversion of management time on integration-related issues; and we may
experience increased exposure to exchange rate fluctuations and other unknown
risks associated with the merger.
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.
75
JOHN HANCOCK LIFE INSURANCE COMPANY
ITEM 3. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H(1)(a) and (b) of Form 10-Q.
ITEM 4. CONTROLS and PROCEDURES
An evaluation was carried out under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
No change in the Company's internal control over financial reporting (as
defined in Rule 14-15f) of the Securities Exchange Act of 1934, as amended)
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are regularly involved in litigation, both as a defendant and as a
plaintiff. The litigation naming us as a defendant ordinarily involves our
activities as a provider of insurance protection products, as well as an
investment adviser, employer and taxpayer. In addition, state regulatory bodies,
the United States Securities and Exchange Commission (SEC), the National
Association of Securities Dealers, Inc. (NASD) and other government and
regulatory bodies regularly make inquiries and, from time to time conduct
examinations concerning our compliance with, among other things, insurance laws,
securities laws, and laws governing the activities of broker/dealers. As with
many other companies in our industry, the Company has received information
requests from government and regulatory authorities, including the SEC and the
NASD, with respect to market timing and late trading of mutual funds, and
broker/dealer practices, including requests with respect to mutual funds
underlying variable life and annuity products. It is believed that these
inquiries are similar to those made to many financial service companies by
various agencies into practices, policies and procedures relating to trading in
mutual fund shares and broker/dealer practices. We have been and intend to
continue to cooperate fully with government and regulatory authorities in
connection with their respective inquiries. We do not believe at this time that
the ultimate resolution of any of these legal or regulatory matters that are
currently pending, either individually or in the aggregate, will have a material
adverse effect on our financial condition or results of operations.
ITEM 6. EXHIBITS and REPORTS on FORM 8-K
a) Exhibits
Exhibit
Number Description
- ------ -----------
3.2 Amended and Restated By-Laws of John Hancock Life Insurance Company
(As adopted as of July 1, 2004)
31.1 Chief Executive Officer Certification Pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934
31.2 Chief Financial Officer Certification Pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934
32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
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JOHN HANCOCK LIFE INSURANCE COMPANY
b) Reports on Form 8-K
During the Second Quarter of 2004 the Company filed the following Current
Reports on Form 8-K:
On April 6, 2004, the Company filed a Current Report on Form 8-K, dated April 5,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On April 13, 2004, the Company filed a Current Report on Form 8-K, dated April
12, 2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On April 20, 2004, the Company filed a Current Report on Form 8-K, dated April
19, 2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On April 26, 2004, the Company filed a Current Report on Form 8-K, dated April
26, 2004, reporting under Item 12 thereof John Hancock Financial Services (JHFS)
operating and financial results for the first quarter of 2004. JHFS is the
company's parent and sole shareholder.
On April 27, 2004, the Company filed a Current Report on Form 8-K, dated April
26, 2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On April 28, 2004, the Company filed a Current Report on Form 8-K, dated April
28, 2004, reporting under Item 1 thereof the completion of the merger pursuant
to which the Company became an indirect, wholly-owned subsidiary of Manulife
Financial Corporation.
On May 4, 2004, the Company filed a Current Report on Form 8-K, dated May 3,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On May 11, 2004, the Company filed a Current Report on Form 8-K, dated May 10,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On May 18, 2004, the Company filed a Current Report on Form 8-K, dated May 17,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On May 25, 2004, the Company filed a Current Report on Form 8-K, dated May 24,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On June 2, 2004, the Company filed a Current Report on Form 8-K, dated June 1,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On June 8, 2004, the Company filed a Current Report on Form 8-K, dated June 7,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On June 14, 2004, the Company filed a Current Report on Form 8-K, dated June 10,
2004, reporting under Item 5 thereof the resignation of its CEO and appointment
of a new CEO, both effective November 30, 2004.
On June 15, 2004, the Company filed a Current Report on Form 8-K, dated June 14,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
77
JOHN HANCOCK LIFE INSURANCE COMPANY
On June 22, 2004, the Company filed a Current Report on Form 8-K, dated June 21,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
On June 29, 2004, the Company filed a Current Report on Form 8-K, dated June 28,
2004, filing under Item 5 thereof certain exhibits in connection with a
Registration Statement on Form S-3 covering the Company's SignatureNotes Medium
Term Note Program.
78
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: August 9, 2004 By: /s/ THOMAS E. MOLONEY
----------------------
Thomas E. Moloney
Senior Executive Vice President and
Chief Financial Officer