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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 5, 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
The 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
September 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: September 30--$47,899.5 million; December 31--$43,907.7 million) .. $48,529.9 46,482.1
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$212.9 million; December 31--$249.9 million) ....... 214.4 333.1
Trading securities--at fair value
(cost: September 30--$0.1 million; December 31--$0.1 million) ........... 0.3 0.6
Mortgage loans on real estate ................................................. 11,947.5 10,871.1
Real estate ................................................................... 270.7 123.8
Policy loans .................................................................. 2,017.0 2,019.2
Short-term investments ........................................................ -- 31.5
Other invested assets ......................................................... 3,268.5 2,912.2
--------- ---------
Total Investments .................................................... 66,248.3 64,262.3
Cash and cash equivalents ..................................................... 1,084.1 2,626.9
Accrued investment income ..................................................... 977.8 700.5
Premiums and accounts receivable .............................................. 92.6 104.1
Goodwill ...................................................................... 3,031.7 108.6
Value of business acquired .................................................... 2,753.6 168.5
Deferred policy acquisition costs ............................................. 140.3 3,420.7
Intangible assets ............................................................. 1,349.6 6.3
Reinsurance recoverable ....................................................... 3,298.9 2,677.3
Other assets .................................................................. 2,524.8 2,886.3
Separate account assets ....................................................... 18,159.3 19,369.6
--------- ---------
Total Assets ......................................................... $99,661.0 $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)
September 30,
2004 December 31,
(unaudited) 2003
---------------------------
(in millions)
Liabilities and Shareholder's Equity
Liabilities
Future policy benefits ......................................... $42,703.6 $38,451.0
Policyholders' funds ........................................... 20,449.1 21,693.5
Consumer notes ................................................. 2,288.8 1,550.4
Unearned revenue ............................................... 25.9 406.9
Unpaid claims and claim expense reserves ....................... 183.9 166.5
Dividends payable to policyholders ............................. 443.1 440.0
Short-term debt ................................................ 141.9 104.0
Long-term debt ................................................. 598.1 609.4
Deferred tax liability ......................................... 39.1 1,534.1
Other liabilities .............................................. 4,382.7 4,417.7
Separate account liabilities ................................... 18,159.3 19,369.6
--------- ---------
Total liabilities ..................................... 89,415.5 88,743.1
Minority interest .............................................. 5.1 5.1
Commitments and contingencies - Note 5
Shareholder's Equity
Common stock, $10,000 par value; 1,000 shares authorized,
issued and outstanding at September 30, 2004 and
December 31, 2003, respectively ........................... 10.0 10.0
Additional paid in capital ..................................... 9,467.0 4,763.2
Retained earnings .............................................. 228.3 1,332.1
Accumulated other comprehensive income ......................... 535.1 1,477.6
--------- ---------
Total Shareholder's Equity ............................ 10,240.4 7,582.9
--------- ---------
Total Liabilities and Shareholder's Equity ............ $99,661.0 $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
Three Months Ended
September 30,
2004 2003
----------------------
(in millions)
Revenues
Premiums ................................................................. $ 476.1 $ 475.1
Universal life and investment-type product fees .......................... 160.3 155.6
Net investment income .................................................... 836.2 931.5
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 pension
contractholders and the policyholder dividend obligation
($0.4 and $(35.4) for the three months ended September 30, 2004
and 2003, respectively) ............................................... (148.0) (62.7)
Investment management revenues, commissions and other fees ............... 132.7 129.3
Other revenue ............................................................ 60.0 61.6
-------- --------
Total revenues ..................................................... 1,517.3 1,690.4
Benefits and Expenses
Benefits to policyholders, excluding amounts related to net realized
investment and other gains (losses) credited to participating
pension contractholders and the policyholder dividend obligation
($ 9.6 and $(29.7) for the three months ended September 30, 2004
and 2003, respectively) ............................................... 848.3 935.1
Other operating costs and expenses ....................................... 350.8 345.4
Amortization of deferred policy acquisition costs and value of
business acquired, excluding amounts related to net realized
investment and other gains (losses) ($(9.2) and $(5.7) for the
three months ended September 30, 2004 and 2003, respectively) ......... 57.7 61.0
Dividends to policyholders ............................................... 114.2 151.6
-------- --------
Total benefits and expenses ........................................ 1,371.0 1,493.1
-------- --------
Income before income taxes .................................................. 146.3 197.3
Income taxes ................................................................ 87.1 39.6
-------- --------
Net income .................................................................. $ 59.2 $ 157.7
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT OF INCOME-(CONTINUED)
Period From
April 29, 2004 Period From
through January 1, 2004 Nine Months
September 30, through April Ended September
2004 28, 2004 30, 2003
-------------------------------------------------
(in millions)
Revenues
Premiums ..................................................................... $ 801.0 $ 628.0 $1,431.8
Universal life and investment-type product fees .............................. 264.9 230.7 463.7
Net investment income ........................................................ 1,418.0 1,284.7 2,806.9
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisitions costs and value of
business acquired, amounts credited to participating pension
contract holders and the policyholder dividend obligation ($(15.9),
$28.3 and $(35.9) for the periods ended September 30, 2004,
April 28, 2004 and September 30, 2003, respectively) ...................... (99.1) 101.0 121.0
Investment management revenues, commissions and other fees ................... 217.3 180.7 370.9
Other revenue ................................................................ 97.6 88.3 189.0
-------- -------- --------
Total revenues .................................................................. 2,699.7 2,513.4 5,383.3
Benefits and expenses
Benefits to policyholders, excluding amounts related to net realized
investment and other gains (losses) credited to participating pension
contract holders and the policyholder dividend obligation ($(1.2),
$39.2, $(42.6) for the periods ended September 30, 2004,
April 28, 2004 and September 30, 2003, respectively) ...................... 1,404.7 1,277.1 2,804.1
Other operating costs and expenses ........................................... 574.3 483.2 1,010.8
Amortization of deferred policy acquisition costs and value of business
acquired, excluding amounts related to net realized investment and
other gains (losses) ($(14.7), $(10.9) and $6.7 for the periods ended
September 30, 2004, April 28, 2004 and September 30, 2003, respectively) .. 95.5 121.8 196.4
Dividends to policyholders ................................................... 192.0 157.1 421.6
-------- -------- --------
Total benefits and expenses .................................................. 2,266.5 2,039.2 4,432.9
-------- -------- --------
Income before income taxes and cumulative effect of accounting change ........... 433.2 474.2 950.4
Income taxes .................................................................... 204.9 141.6 264.0
-------- -------- --------
Net income before cumulative effect of accounting change ........................ 228.3 332.6 686.4
Cumulative effect of accounting change, net of income tax- Note 2 ............... -- (3.3) --
-------- -------- --------
Net income ...................................................................... $ 228.3 $ 329.3 $ 686.4
======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
---------------------------------------------------------------------------------
(in millions, except for outstanding share data, in thousands)
Balance at July 1, 2003 ...................... $ 10.0 $ 4,763.2 $ 1,384.8 $ 1,502.7 $ 7,660.7 1,000
Comprehensive income:
Net income ................................. 157.7 157.7
Other comprehensive income, net of tax:
Net unrealized gains (losses) .............. (55.8) (55.8)
Net accumulated gains (losses) on cash
flow hedges ............................. (38.3) (38.3)
Foreign currency translation
adjustment .............................. (0.1) (0.1)
Minimum pension liability .................. 1.6 1.6
---------
Comprehensive income .......................... 65.1
Dividend paid to parent company ............... (14.5) (14.5)
---------------------------------------------------------------------------------
Balance at September 30, 2003 ................ $ 10.0 $ 4,763.2 $ 1,528.0 $ 1,410.1 $ 7,711.3 1,000
=================================================================================
Balance at July 1, 2004 ...................... $ 10.0 $ 9,467.0 $ 169.1 $ (123.5) $ 9,522.6 1,000
Comprehensive income:
Net income ................................. 59.2 59.2
Other comprehensive income, net of tax:
Net unrealized gains (losses) ........... 461.0 461.0
Net accumulated gains (losses) on cash
flow hedges ........................... 197.1 197.1
Foreign currency translation
adjustment ............................ 0.5 0.5
Minimum pension liability ............... -- --
---------
Comprehensive income .......................... 717.8
---------------------------------------------------------------------------------
Balance at September 30, 2004 ................ $ 10.0 $ 9,467.0 $ 228.3 $ 535.1 $10,240.4 1,000
=================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME-(CONTINUED)
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
------------------------------------------------------------------------------
(in millions, except for outstanding share data, in thousands)
Balance at January 1, 2003 .................... $ 10.0 $4,763.2 $ 956.1 $ 442.2 $6,171.5 1,000
Comprehensive income:
Net income ................................. 686.4 686.4
Other comprehensive income, net of tax:
Net unrealized gains (losses) ............ 889.0 889.0
Net accumulated gains (losses) on
cash flow hedges ....................... 74.0 74.0
Foreign currency translation
adjustment ............................. (0.1) (0.1)
Minimum pension liability ................ 5.0 5.0
--------
Comprehensive income .......................... 1,654.3
Dividend paid to parent company ............... (114.5) (114.5)
------------------------------------------------------------------------------
Balance at September 30, 2003 ................ $ 10.0 $4,763.2 $1,528.0 $1,410.1 $7,711.3 1,000
==============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT 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
-------------------------------------------------------------------------------
(in millions, except for outstanding share data, in thousands)
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) (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 ................................. 228.3 228.3
Other comprehensive income, net of tax:
Net unrealized gains (losses) .............. 342.3 342.3
Net accumulated gains (losses)
on cash flow hedges ...................... 192.5 192.5
Foreign currency translation
adjustment ............................... 0.3 0.3
Minimum pension liability .................. -- --
---------
Comprehensive income .......................... 763.4
-------------------------------------------------------------------------------
Balance at September 30, 2004 ................. $ 10.0 $ 9,467.0 $ 228.3 $ 535.1 $10,240.4 1,000
===============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
8
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
For the period For the For the nine
April 29, 2004 period from month period
through January 1, ended
September 30, 2004 through September 30,
2004 April 28, 2004 2003
----------------------------------------------
(in millions)
Cash flows from operating activities:
Net income ................................................................ $ 228.3 $ 329.3 $ 686.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of premium - fixed maturities .............................. 290.6 17.1 4.7
Net realized investment and other (gains)losses ......................... 99.1 (101.0) (121.0)
Change in accounting principle .......................................... -- 3.3 --
Change in deferred policy acquisition costs ............................. (140.9) (15.9) (200.4)
Depreciation and amortization ........................................... 98.6 15.0 32.4
Net cash flows from trading securities .................................. -- 0.3 0.3
Increase in accrued investment income ................................... (220.1) (57.2) (138.3)
(Increase) decrease in premiums and accounts receivable ................. (4.4) 15.9 10.4
Increase in other assets and other liabilities, net ..................... (170.0) 62.6 (335.5)
Increase in policy liabilities and accruals, net ........................ 319.1 480.5 1,292.8
Increase in income taxes ................................................ 161.2 86.0 197.6
-------------------------------------------
Net cash provided by operating activities ........................... 661.5 835.9 1,429.4
Cash flows from investing activities:
Sales of:
Fixed maturities available-for-sale ..................................... 1,550.7 2,731.2 8,317.6
Equity securities available-for-sale .................................... 138.6 154.9 129.4
Real estate ............................................................. 4.5 97.7 85.4
Home Office properties .................................................. -- -- 887.6
Short-term investments and other invested assets ........................ 161.7 130.7 155.5
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity ....................................... -- 40.3 190.9
Fixed maturities available-for-sale ..................................... 1,920.7 1,497.6 2,697.6
Short-term investments and other invested assets ........................ 56.0 32.4 337.3
Mortgage loans on real estate ........................................... 500.0 615.0 882.0
Purchases of:
Fixed maturities held-to-maturity ....................................... -- -- (77.3)
Fixed maturities available-for-sale ..................................... (2,762.5) (5,983.2) (14,731.7)
Equity securities available-for-sale .................................... (64.3) (39.6) (91.1)
Real estate ............................................................. (111.0) (6.9) (24.6)
Short-term investments and other invested assets ........................ (187.6) (627.8) (807.3)
Mortgage loans on real estate issued ...................................... (979.1) (507.9) (1,277.4)
Net cash received related to acquisition of business ..................... -- -- 93.7
Other, net ................................................................ (5.1) (70.2) (152.1)
-------------------------------------------
Net cash provided by (used in) in investing activities .............. $ 222.6 $(1,935.8) $(3,384.5)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
9
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS- (CONTINUED)
For the period For the period For the nine
April 29, 2004 from January month period
through 1, 2004 ended
September through April September
30, 2004 28, 2004 30, 2003
-------------------------------------------------
(in millions)
Cash flows from financing activities:
Dividends paid on common stock ........................................... -- $ (100.0) $ (100.0)
Universal life and investment-type contract deposits ..................... $ 1,617.7 2,307.3 6,807.5
Universal life and investment-type contract maturities and withdrawals ... (3,477.3) (2,379.5) (5,117.3)
Issuance of consumer notes ............................................... 317.3 372.2 769.4
Issuance of short-term debt .............................................. 88.7 -- 148.4
Repayment of short-term debt ............................................. (30.4) (41.8) (127.9)
Issuance of long-term debt ............................................... 2.1 0.3 --
Repayment of long-term debt .............................................. (2.4) (1.2) (5.1)
-------------------------------------------------
Net cash (used in) provided by provided by financing activities ...... (1,484.3) 157.3 2,375.0
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents ................. (600.2) (942.6) 419.9
Cash and cash equivalents at beginning of period ..................... 1,684.3 2,626.9 897.0
-------------------------------------------------
Cash and cash equivalents at end of period ........................... $ 1,084.1 $ 1,684.3 $ 1,316.9
=================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
10
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 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. 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.
11
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Change of Control - (Continued)
Aside from goodwill and value of business acquired, intangible assets of
$1,352.0 million resulting from the acquisition consists of the JHFS brand name,
distribution network, investment management contracts and other investments
management contracts (comprised of 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). Since April
28, 2004, JHFS operates as a subsidiary of Manulife. 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 three and nine month periods ended September 30, 2004 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. In addition, all of the Company's United States Securities and
Exchange Commission filings including its financial statements are available on
the internet at www.sec.gov, under the name Hancock John Life.
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.
12
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
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 tables 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.
Three Months Ended September 30,
2004 2003
Proforma 2004 Proforma 2003
--------------------------------------------------------------
(in millions)
Revenue .......................... $1,517.3 $1,517.3 $1,690.4 $1,690.4
Net income ....................... $ 59.2 $ 59.2 $ 157.7 $ 157.7
Period from April 29 through Period from January 1 Nine Months Ended
September 30, through April 28, September 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
--------------------------------------------------------------------------------------
(in millions)
Revenue .................. $2,699.7 $2,699.7 $2,513.4 $2,513.4 $5,338.5 $5,383.3
Net income ............... $ 228.3 $ 228.3 $ 329.3 $ 329.3 $ 683.6 $ 686.4
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.
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.
13
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
Three Months Ended
September 30,
2004 2003
------------------------
(in millions)
Net income, as reported .......................................................... $ 59.2 $ 157.7
Add: Stock-based employee compensation expense included in reported net income,
net of related tax effects .................................................... 1.7 2.9
Deduct: Total stock-based employee compensation expense determined under fair
value method for all awards, net of related tax effects ....................... 1.7 8.8
-------- --------
Proforma net income .............................................................. $ 59.2 $ 151.8
======== ========
Period from Period from Nine Months
April 29 through January 1 Ended
September 30, through April 28, September 30,
-----------------------------------------------------
2004 2004 2003
-----------------------------------------------------
(in millions)
Net income, as reported .......................................... $228.3 $329.3 $686.4
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects ............... 2.9 4.8 15.0
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects ........................................... 2.9 7.2 34.8
-----------------------------------------------------
Proforma net income .............................................. $228.3 $326.9 $666.6
=====================================================
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 re-measurement date (April 28, 2004)
and a $1.0 million decrease in net periodic postretirement benefit costs for the
period April 29, 2004 through September 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
DrugImprovement 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 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.
14
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (Continued)
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) collateralized 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 had no
impact on the Company's consolidated financial position, results of operations
or cash flows.
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.
15
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 the following five business
segments: two segments served primarily domestic retail customers, two segments
served primarily 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. Our
retail segments were the Protection Segment and the Asset Gathering Segment. Our
institutional segments were the Guaranteed and Structured Financial Products
(G&SFP) Segment and the Investment Management Segment. 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.
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.
16
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
September 30, 2004
Revenues:
Revenues from external customers ........... $ 471.2 $ 166.2 $ 11.4 $ 180.3 $ 829.1
Net investment income ...................... 309.6 150.4 300.1 76.1 836.2
Net realized investment and other
gains (losses), net ...................... (43.3) (20.4) (90.3) 6.0 (148.0)
Intersegment Revenues ...................... -- 0.3 0.2 (0.5) --
---------------------------------------------------------------------
Revenues ................................... $ 737.5 $ 296.5 $ 221.4 $ 261.9 $ 1,517.3
=====================================================================
Net Income:
Net income ................................. $ 44.5 $ 43.2 $ (35.8) $ 7.3 $ 59.2
=====================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ....... $ (1.8) $ (0.7) $ 5.8 $ 11.6 $ 14.9
Carrying amount of investments
accounted for using the equity
method ................................... 721.7 299.7 689.9 700.1 2,411.4
Amortization of deferred policy
acquisition costs and value of business
acquired, excluding amounts related to
net realized investment and other
gains (losses) ........................... 24.1 19.4 14.2 -- 57.7
Segment assets ............................. 42,171.5 19,500.8 34,323.6 3,665.1 99,661.0
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)
As of or for the three months ended
September 30, 2003
Revenues:
Revenues from external
customers ............................... $ 530.0 $ 98.3 $ 14.4 $ 178.9 $ 821.6
Net investment income ..................... 361.8 179.0 399.6 (8.9) 931.5
Net realized investment and
other gains (losses), net ............... (3.8) (11.2) (44.3) (3.4) (62.7)
Inter-segment revenues .................... -- 0.3 -- (0.3) --
------------------------------------------------------------------
Revenues .................................. $ 888.0 $ 266.4 $ 369.7 $ 166.3 $ 1,690.4
==================================================================
Net Income:
Net income ................................ $ 90.1 $ 41.9 $ 37.0 $ (11.3) $ 157.7
==================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ...... $ 5.5 $ 2.9 $ 8.9 $ 13.3 $ 30.6
Carrying value of investments
accounted for by the equity
method .................................. 313.5 215.5 565.0 681.7 1,775.7
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains (losses) ..... 35.3 25.4 0.5 (0.2) 61.0
Segment assets ............................ 36,381.1 18,457.9 37,089.3 4,460.3 96,388.6
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)
For the period from April 29, 2004 through
September 30, 2004
Revenues:
Revenues from external customers ......... $ 825.8 $ 230.2 $ 20.1 $ 304.7 $ 1,380.8
Net investment income .................... 531.5 254.9 501.0 130.6 1,418.0
Net realized investment and
other gains (losses), net .............. (30.1) (29.6) (41.4) 2.0 (99.1)
Inter-segment revenues ................... -- 0.5 0.3 (0.8) --
------------------------------------------------------------------
Revenues ................................. $ 1,327.2 $ 456.0 $ 480.0 $ 436.5 $ 2,699.7
==================================================================
Net Income:
Net income ............................... $ 133.7 $ 74.5 $ 19.8 $ 0.3 $ 228.3
==================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity method ..... $ 10.8 $ 2.7 $ 13.4 $ 9.5 $ 36.4
Carrying value of investments
accounted for by the equity
method ................................. 721.7 299.7 689.9 700.1 2,411.4
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding
amounts related to net realized
investment and other gains
(losses) ............................... 36.5 35.2 23.8 -- 95.5
Segment assets ........................... 42,171.5 19,500.8 34,323.6 3,665.1 99,661.0
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 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
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)
As of or for the nine months ended
September 30, 2003
Revenues:
Revenues from external customers ....... $ 1,594.7 $ 306.7 $ 48.2 $ 505.8 $ 2,455.4
Net investment income .................. 1,070.0 521.6 1,239.0 (23.7) 2,806.9
Net realized investment and other
gains (losses), net .................. (8.8) (28.8) (167.8) 326.4 121.0
Inter-segment revenues ................. -- 0.9 -- (0.9) --
----------------------------------------------------------------
Revenues ............................... $ 2,655.9 $ 800.4 $ 1,119.4 $ 807.6 $ 5,383.3
================================================================
Net Income:
Net income ............................. $ 264.2 $ 120.9 $ 104.1 $ 197.2 $ 686.4
================================================================
Supplemental Information:
Equity in net income of investees
accounted for by the equity
method ............................... $ 16.5 $ 8.1 $ 28.6 $ 18.5 $ 71.7
Carrying amount of investments
accounted for using the equity
method ............................... 313.5 215.5 565.0 681.7 1,775.7
Amortization of deferred policy
acquisition costs and value of
business acquired, excluding amounts
related to net realized investment
and other gains (losses) ............. 116.7 78.3 1.6 (0.2) 196.4
Segment assets ......................... 36,381.1 18,457.9 37,089.3 4,460.3 96,388.6
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. 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, 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
21
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
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.
22
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
September 30, December 31,
2004 2003
------------------------------
(in millions)
Total size of Company-Managed CDOs (1)
Total assets .................................. $ 3,404.0 $ 4,922.2
============= =============
Total debt .................................... $ 3,399.1 $ 4,158.2
Total other liabilities ....................... 5.7 712.0
------------- -------------
Total liabilities ............................. 3,404.8 4,870.2
Total equity .................................. (0.8) 52.0
------------- -------------
Total liabilities and equity .................. $ 3,404.0 $ 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.
Maximum exposure of the Company to losses
from Company-Managed CDOs September 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 ........................................................ $ 161.8 57.1% $ 201.0 35.6%
Aa1/AA+ ........................................................ 73.7 26.1 75.7 13.4
Baa2/BBB ....................................................... -- -- 218.0 38.8
B2 ............................................................. -- -- 8.0 1.4
B3/B- .......................................................... 7.5 2.7 -- --
Caa1/CCC+ ...................................................... 13.5 4.8 13.2 2.3
Not rated (equity) ............................................. 26.4 9.3 48.1 8.5
-------- -------- -------- --------
Total Company exposure ......................................... $ 282.9 100.0% $ 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.
23
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Relationships with Variable Interest Entities - (Continued)
September 30, December 31,
2004 2003
----------------------------
(in millions)
Total size of the Properties (1)
Total assets ..................................... $ 1,103.9 $ 982.7
============ ============
Total debt ....................................... $ 653.3 $ 576.3
Total other liabilities .......................... 122.7 116.6
------------ ------------
Total liabilities ................................ 776.0 692.9
Total equity ..................................... 327.9 289.8
------------ ------------
Total liabilities and equity ..................... $ 1,103.9 $ 982.7
============ ============
(1) Property level data reported above is reported with three month delays due
to the delayed availability of financial statements of the Funds.
September 30, December 31,
2004 2003
----------------------------
(in millions)
Maximum exposure of the Company to losses from the Properties
Equity investment in the Properties (1) ......................... $ 313.3 $ 291.0
Outstanding equity capital commitments to the Properties ........ 82.9 108.2
Carrying value of mortgages for the Properties .................. 67.3 62.8
Outstanding mortgage commitments to the Properties .............. 0.9 5.1
------------ ------------
Total Company exposure .......................................... $ 464.4 $ 467.1
============ ============
(1) Equity investment in the Properties above is reported with three month
delays 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 and certain group life insurance
business without related group accident and health business. 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
24
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 -- Commitments and Contingencies - (Continued)
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.
Thedisputes 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
September 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
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 September 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.
25
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.
September 30, 2004 December 31, 2003
--------------------------------------
(in millions)
Liabilities
Future policy benefits .................................................. $10,708.6 $10,690.6
Policyholder dividend obligation ........................................ 570.1 400.0
Policyholders' funds .................................................... 1,506.1 1,511.9
Policyholder dividends payable .......................................... 416.3 413.1
Other closed block liabilities .......................................... 63.3 37.4
---------------------------------
Total closed block liabilities ....................................... $13,264.4 $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: September 30--$6,489.9; December 31--$5,847.6) .............. $ 6,585.2 6,271.1
Equity securities:
Available-for-sale--at fair value
(cost: September 30--$6.8, December 31--$9.1) ...................... 6.7 9.1
Mortgage loans on real estate ........................................... 1,711.6 1,577.9
Policy loans ............................................................ 1,539.5 1,554.0
Short-term investments .................................................. -- 1.2
Other invested assets ................................................... 302.7 230.6
---------------------------------
Total investments .................................................... 10,145.7 9,709.9
Cash and cash equivalents ............................................... 65.4 248.3
Accrued investment income ............................................... 144.3 145.1
Other closed block assets ............................................... 310.6 308.6
---------------------------------
Total closed block assets ............................................ $10,666.0 $10,411.9
---------------------------------
Excess of reported closed block liabilities over assets
designated to the closed block ....................................... $ 2,598.4 $ 2,641.1
---------------------------------
Portion of above representing other comprehensive income:
Unrealized (depreciation) appreciation , net of tax of ($35.5)
million and ($148.0) million at September 30 and December 31,
respectively ....................................................... 66.2 275.3
Allocated to the policyholder dividend obligation, net of tax of
$35.7 million and $148.1 million at September 30 and December 31,
respectively ....................................................... (66.3) (275.1)
---------------------------------
Total ............................................................ (0.1) 0.2
---------------------------------
Maximum future earnings to be recognized from closed block
assets and liabilities ............................................... $ 2,598.3 $ 2,641.3
=================================
26
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Closed Block - (Continued)
Period from Twelve Months
April 29, through Period from ended
September 30, January 1, through December 31,
2004 April 28, 2004 2003
------------------------------------------------------
(in millions)
Changes in the policyholder dividend obligation:
Balance at beginning of period............................... $ 308.8 $ 400.0 $ 288.9
Purchase accounting fair value adjustment.................. 208.4 -- --
Impact on net income before income taxes................... (49.3) 23.4 (57.9)
Unrealized investment gains (losses)....................... 102.2 (114.6) 169.0
------------------------------------------------------
Balance at end of period..................................... $ 570.1 $ 308.8 $ 400.0
======================================================
The following table sets forth certain summarized financial information relating
to the closed block for the periods indicated:
Three Months Ended
September 30,
2004 2003
-----------------------
(in millions)
Revenues
Premiums ............................................................. $205.8 $221.4
Net investment income ................................................ 126.0 161.2
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $12.0 million
and $(22.5) million for the three months ended September 30, 2004
and 2003, respectively ............................................ 0.6 (1.1)
Other closed block revenues .......................................... 0.1 (0.3)
----------------------
Total closed block revenues ........................................ 332.5 381.2
Benefits and Expenses
Benefits to policyholders ............................................ 226.4 237.2
Change in the policyholder dividend obligation ....................... (27.3) (2.6)
Other closed block operating costs and expenses ...................... (0.5) (0.5)
Dividends to policyholders ........................................... 100.0 113.8
----------------------
Total benefits and expenses ........................................ 298.6 347.9
----------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes ................................................ 33.9 33.3
Income taxes, net of amounts credited to the policyholder
dividend obligation of $0.9 million and $0.5 million for the three
months ended September 30, 2004 and 2003 respectively .............. 12.6 12.0
----------------------
Closed block revenues, net of closed block benefits and expenses,
and income taxes ................................................. $ 21.3 $ 21.3
======================
27
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, Nine Months
through through Ended
September 30, April 28, September 30,
2004 2004 2003
---------------------------------------------
(in millions)
Revenues
Premiums ................................................................. $ 337.7 $ 278.0 $ 664.6
Net investment income .................................................... 215.5 208.4 487.5
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $1.3 million
and $33.7 million for the periods from April 29 through
September 30, 2004 and January 1 through April 28, 2004,
respectively, and $(33.7) million for the nine months ended
September 30, 2003 ..................................................... 1.0 (35.7) (3.4)
Other closed block revenues .............................................. -- (0.2) (0.2)
--------------------------------------------
Total closed block revenues ............................................ 554.2 450.5 1,148.5
Benefits and Expenses
Benefits to policyholders ................................................ 380.6 310.9 713.1
Change in the policyholder dividend obligation ........................... (52.0) (11.2) (11.3)
Other closed block operating costs and expenses .......................... (0.9) 0.9 (4.9)
Dividends to policyholders ............................................... 169.9 141.1 351.7
--------------------------------------------
Total benefits and expenses ............................................ 497.6 441.7 1,048.6
--------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
before income taxes .................................................... 56.6 8.8 99.9
Income taxes, net of amounts credited to the policyholder dividend
obligation of $1.6 million and $0.6 million for the periods from
April 29 through September 30 and January 1 through April 28, 2004,
respectively, and $1.6 million for the nine months ended
September 30, 2003 ..................................................... 20.2 2.3 35.3
--------------------------------------------
Closed block revenues, net of closed block benefits and expenses,
and income taxes ..................................................... $ 36.4 $ 6.5 $ 64.6
============================================
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 1/1/04- Utilized Accrued at Amount Utilized Balance
Type of Cost 1/1/04 4/28/04 1/1/04-4/28/04 acquisition 4/29/04-9/30/04 9/30/04
--------------------------------------------------------------------------------------------
Personnel........ $ 12.0 $ (0.8) $ 2.5 $ 41.5 $5.8 $44.4
Facilities....... -- -- -- 43.6 2.5 41.1
--------------------------------------------------------------------------------------------
Total....... $ 12.0 $ (0.8) $ 2.5 $ 85.1 $8.3 $85.5
============================================================================================
28
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 consolidated ctatements of income. The Company charged JHFS service
fees of $3.6 million and $3.9 million for the three month periods ended
September 30, 2004 and 2003, respectively, and $12.3 million and $15.0 million
for the nine month periods ended September 30, 2004 and 2003, respectively. As
of September 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 $1.6 million and $1.4 million for the three month periods
ended September 30, 2004 and 2003, respectively, and $4.7 million and $4.0
million for the nine month periods ended September 30, 2004 and 2003,
respectively.
During the nine month periods ended September 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 $1,401.8 million at
September 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 $2,041.0 million at September 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 $185.2 million and $216.8 for the three month periods ended
September 30, 2004 and 2003, respectively, and $564.3 million and $500.2 million
of the nine month periods ended September 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 $235.0 million at September 30, 2004 and $157.2 million at December
31, 2003, which is included with other liabilities in the Consolidated Balance
Sheets. At September 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 $0.1 million and $0.2 million for the three month periods ended September
30, 2004 and 2003, respectively, and $0.9 million and $0.5 million for the nine
month periods ended September 30, 2004 and 2003, respectively.
The Company, in the ordinary course of business, invests funds deposited with it
by customers and manages the resulting invested assets for growth and income for
customers. From time to time, successful investment strategies of the Company
may attract deposits from affiliates of the Company. At September 30,2004, the
Company managed approximately $12.0 million of investments for Manulife
affiliates which to date generated market-based revenue for the Company.
To effect the efficiencies of the merger with Manulife, the Company has an
arrangement with its parent, Manulife, to share the cost of certain corporate
services including, among others, personnel, property facilities, catastrophic
reinsurance coverage, and directors' and officers insurance. In addition,
synergies of sales agents are being found whereby the Company has an arrangement
for the compensation of its sales agents for cross-selling products of Manulife
affiliates. Operational efficiencies identified in the merger are subject to a
service agreement between the Company and its affiliate Manulife U.S.A., a
U.S.-based life insurance subsidiary of Manulife, whereby the Company is
obligated to provide certain services in support of Manulife U.S.A's business.
Further, under the service agreement Manulife U.S.A. is obligated to provide
compensation to the Company for services provided. Through September 30, 2004,
there had not been a material level of business transacted under the service
agreement and no material receivable is owed to the Company at period end.
29
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 8 -- Related Party Transactions - (Continued)
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 statements do not report reinsurance ceded
premiums or reinsurance recoverable. The impact on our U.S. GAAP financial
statements represent the fee recorded as payable to Manulife, which appears in
other operating costs and expenses in the consolidated statements of income and
was $0.6 million for the period the Company operated as a subsidiary of
Manulife, April 29, 2004 through September 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 for additional discussion of the Manulife acquisition).
Unamortizable assets include goodwill, brand name and investment management
contracts. Goodwill is the excess of the cost over the fair value of
identifiable assets acquired in business combinations. Brand name is the value
in the purchase price of the Company assigned to the Company's trademark and
trade name. Investment management contracts are fair values of 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), distribution
networks and other investment management contracts. VOBA is the present value of
estimated future profits of insurance policies in force related to businesses
acquired. VOBA has weighted average lives ranging from 6 to 17 years for various
insurance businesses. Distribution networks are values assigned to the Company's
networks of sales agents and producers responsible for procuring business.
Distribution networks have weighted average lives of 22 years. Other investment
management contracts are the values assigned to the Company's institutional
investment management contracts managed by its investment management
subsidiaries. Other investment management contracts have weighted average lives
of 10 years. Collectively, these amortizable intangible assets have a weighted
average life of 14.7 years.
Brand name, distribution networks, and other investment management contracts
were initially recognized at the time of the acquisition of the Company by
Manulife. Goodwill, investment management contracts and VOBA were expanded in
scope and size as a result of the merger.
The Company will test non-amortizing intangible assets for impairment on an
annual basis, and also in response to any events which suggest that these assets
may be impaired (triggering events.) Amortizable intangible assets will be
tested only in response to triggering events. The Company will test goodwill
using the two-step impairment testing program set forth in SFAS No. 142
"Goodwill and Other Intangible Assets." VOBA and the Company's other intangible
assets will be evaluated by comparing their fair values to their current
carrying values whenever they are tested. Impairments will be recorded whenever
an asset's fair value is deemed to be less than its carrying value.
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)
September 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 $ (0.5) $ 396.7
Other investment management contracts ............. 61.7 (1.7) 60.0
VOBA .............................................. 2,864.6 (111.0) 2,753.6
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
30
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Three Months Three Months
Ended Ended
September 30, 2004 September 30, 2003
----------------------------------------
(in millions)
Amortization expense:
Distribution networks, net of tax of $0.1 million and $- million,
respectively.................................................................. $ 0.2 --
Other investment management contracts, net of tax of $0.3 million and $-
million, respectively......................................................... 0.7 --
VOBA, net of tax of $13.2 million and $ 0.8 million, respectively............... 24.4 $ 1.5
----------------------------------------
Total amortization expense, net of tax of $13.6 million and $0.8 million,
respectively.................................................................. $ 25.3 $ 1.5
========================================
Period from Period from
April 29, 2004 January 1, Nine Months
through 2004 through Ended
September 30, April 28, September 30,
2004 2004 2003
-------------------------------------------------
(in millions)
Amortization expense:
Distribution networks, net of tax of $0.2 million, $ - million and $- million,
respectively..................................................................... $ 0.3 -- --
Other investment management contracts, net of tax of $0.6 million, $ - million
and $ - million, respectively.................................................... 1.1 -- --
VOBA, net of tax of $24.3 million, $1.8 million and $1.3 million, respectively..... 45.1 $ 3.3 $ 2.4
-------------------------------------------------
Total amortization expense, net of tax of $25.1 million, $1.8 million and
$1.3 million, respectively....................................................... $ 46.5 $ 3.3 $ 2.4
=================================================
Tax Effect Net Expense
---------- -----------
(in millions)
Estimated future amortization expense for the years ended December 31,
2004.................................................................... $ 18.6 $ 34.5
2005.................................................................... 62.6 116.3
2006.................................................................... 57.0 105.9
2007.................................................................... 50.8 94.3
2008.................................................................... 45.0 83.5
31
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:
Wealth Corporate and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
(in millions)
Goodwill:
- ---------
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 September 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.
Wealth Corporate and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
(in millions)
Goodwill:
- ---------
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
============================================================================
32
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Unamortizable intangible assets (continued):
Wealth Corporate and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
(in millions)
Brand name:
- -----------
Balance at January 1, 2004 ..................... -- -- -- -- --
Brand name recognized (1) ...................... $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
----------------------------------------------------------------------------
Balance at September 30, 2004 .................. $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
============================================================================
(1) Brand name recognized in the purchase transaction with Manulife.
Wealth Corporate and
Protection Management G&SFP Other Consolidated
-----------------------------------------------------------------------------
(in millions)
Investment management contracts:
- --------------------------------
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
-------------------------------------------------------------------------
Balance at September 30, 2004 .................... -- $ 292.9 -- -- $ 292.9
=========================================================================
(1) Investment management contracts derecognized in the purchase transaction
with Manulife.
(2) Investment management contracts recognized in the purchase transaction
with Manulife.
33
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 9 -- Goodwill and Other Intangible Assets - (Continued)
Unamortizable intangible assets (continued):
Wealth Corporate and
Protection Management G&SFP Other Consolidated
-----------------------------------------------------------------------------
(in millions)
Investment management contracts:
- --------------------------------
Balance at January 1, 2003 ..................... -- $ 5.2 -- -- $ 5.2
Acquisitions(1) ................................ -- 1.1 -- -- 1.1
--------------------------------------------------------------------------
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:
Wealth Corporate and
Protection Management G&SFP Other Consolidated
-----------------------------------------------------------------------------
(in millions)
Distribution networks:
- ----------------------
Balance at January 1, 2004 ..................... -- -- -- -- --
Distribution networks recognized (1) ........... $ 308.6 $ 88.6 -- -- $ 397.2
Amortization ................................... (0.5) -- -- -- (0.5)
----------------------------------------------------------------------------
Balance at September 30, 2004 .................. $ 308.1 $ 88.6 -- -- $ 396.7
============================================================================
(1) Distribution networks recognized in the purchase transaction with
Manulife.
Wealth Corporate and
Protection Management G&SFP Other Consolidated
-----------------------------------------------------------------------------
(in millions)
Other investment management contracts:
- --------------------------------------
Balance at January 1, 2004 ..................... -- -- -- -- --
Other investment management contracts
recognized (1) ............................... -- $ 20.3 -- $ 41.4 $ 61.7
Amortization ................................... -- (0.5) -- (1.2) (1.7)
-----------------------------------------------------------------------
Balance at September 30, 2004 .................. -- $ 19.8 -- $ 40.2 $ 60.0
=======================================================================
(1) Other 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)
Amortizable intangible assets (continued):
Wealth Corporate and
Protection Management G&SFP Other Consolidated
-----------------------------------------------------------------------------
(in millions)
VOBA:
- -----
Balance at January 1, 2004 ..................... $ 168.5 -- -- -- $ 168.5
Amortization ................................... (5.1) -- -- -- (5.1)
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 accounting for the acquisition of that block of business.
Wealth Corporate and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
(in millions)
VOBA:
- -----
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 ................................... (18.3) (27.3) (23.8) -- (69.4)
Adjustment to unrealized gains on
securities available for sale ................ (20.4) (21.2) -- -- (41.6)
------------------------------------------------------------------------
Balance at September 30, 2004 .................. $2,103.1 $ 426.4 $ 224.1 -- $2,753.6
========================================================================
(1) VOBA derecognized in the purchase transaction with Manulife.
(2) VOBA recognized in the purchase transaction with Manulife.
Wealth Corporate and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
(in millions)
VOBA:
- -----
Balance at January 1, 2003 ..................... $ 177.2 -- -- -- $ 177.2
Amortization ................................... (10.1) -- -- -- (10.1)
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 of Allmerica,
to reflect refinements in methods and assumptions implemented upon
finalization of transition.
35
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 September
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 September 30, Nine Months Ended September 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 $ 0.4 $ 0.4 $ 16.8 $ 20.1 $ 1.1 $ 1.2
Interest cost ....................... 31.9 32.7 9.2 8.8 96.3 98.1 27.1 26.5
Expected return on plan assets ...... (43.2) (39.0) (5.3) (4.4) (130.7) (117.0) (15.6) (13.1)
Amortization of transition asset .... -- -- -- -- -- 0.1 -- --
Amortization of prior service cost .. -- 1.9 -- (1.6) 2.2 5.7 (2.5) (4.9)
Recognized actuarial gain ........... -- 7.5 -- 1.7 8.3 22.5 4.2 5.1
----------------------------------------------------------------------------
Net periodic benefit cost .... $ (5.7) $ 9.8 $ 4.3 $ 4.9 $ (7.1) $ 29.5 $ 14.3 $ 14.8
============================================================================
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 $43 million to its
non-qualified pension plans in 2004. As of September 30, 2004, $2.4 million
contributions have been made to the qualified plans, reaching the Company's
anticipated contribution level for the year ending December 31, 2004. As of
September 30, 2004, $35.9 million of the contributions have been made to the
non-qualified plans, and the Company anticipates contributing another $7.1
million to reach a total of $43.0 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 September 30, 2004, $38.3
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 coverage 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 $1.0 million for the period April 29 through September 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. 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.
36
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 September 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.
September 30, December 31,
2004 2003
-------------------------------
(in millions, except for age)
Life contracts with guaranteed benefits
In the event of death
Account values........................................... $6,381.3 $6,249.4
Net amount at risk related to deposits................... $130.2 $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 September 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.
37
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 11 -- Certain Separate Accounts - (Continued)
September 30, 2004 December 31,2003
----------------------------------------
(in millions, except for age and percents)
Return of net deposits
In the event of death
Account value ................................. $3,182.3 $3,406.4
Net amount at risk ............................ 145.7 $ 153.8
Average attained age of contractholders ....... 62 61
Return of net deposits plus a minimum return
In the event of death
Account value ................................. $ 955.1 $1,051.7
Net amount at risk ............................ $ 246.3 $ 230.7
Average attained age of contractholders ....... 64 63
Guaranteed minimum return rate ................ 5% 5%
At annuitization
Account value ................................. $ 200.3 $ 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 amount value minus
withdrawals post anniversary
In the event of death
Account value ................................. $1,139.6 $1,224.7
Net amount at risk ............................ $ 197.0 $ 214.0
Average attained age of contractholders ....... 59 58
Account balances of variable contracts with guarantees were invested in various
separate accounts in variable separate mutual funds which included foreign and
domestic equities and bonds as shown below:
September 30, December 31,
2004 2003
--------------------------------
Type of Fund (in millions)
Domestic Equity - Growth Funds....................... $ 2,744.4 $ 2,813.4
Domestic Bond Funds.................................. 2,318.2 2,423.5
Domestic Equity - Growth & Income Funds.............. 2,261.0 2,341.2
Balanced Investment Funds............................ 2,092.1 2,167.4
Domestic Equity - Value Funds........................ 978.2 865.0
International Equity Funds........................... 625.7 621.1
International Bond Funds............................. 106.7 107.3
Hedge Funds.......................................... 37.9 22.7
---------- ----------
Total .............................................. $11,164.2 $11,361.6
========== ==========
38
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 Minimum
Death Income
Benefit Benefit
(GMDB) (GMIB) Totals
-------------------------------------------
(in millions)
Balance at January 1, 2004..................................... $ 32.9 $ 1.0 $ 33.9
Incurred guarantee benefits.................................... 4.7 0.5 5.2
Fair value adjustment at Manulife acquisition.................. 4.0 -- 4.0
Paid guarantee benefits........................................ (6.7) -- (6.7)
-------------------------------------------
Balance at September 30, 2004.................................. $ 34.9 $ 1.5 $ 36.4
===========================================
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 September 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% 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.
Note 12 -- Subsequent Event
In October 2004, Manulife restructured its direct ownership of JHFS, the
Company's parent. As part of the restructuring John Hancock Holdings, LLC, a
Delaware LLC, a wholly-owned subsidiary of Manulife, was formed as an
intermediate holding company to hold the shares of JHFS. The transaction had no
financial impact on the Company.
39
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 Annual Report on 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 acquired company, adjust the
cost and reporting basis of its assets and liabilities to their fair values on
the acquisition date (the purchase adjustments).
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 independent price quotes were
unavailable. Other purchase adjustments also required significant management
estimates and assumptions. The purchase adjustments relating to intangible
assets, including goodwill, value of business acquired (VOBA), brand name and
others, and to liabilities, including policyholder reserves, and others,
required management to exercise significant judgment in assessing fair values.
40
JOHN HANCOCK LIFE INSURANCE COMPANY
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 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,
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
41
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Intangible Assets
The Company recognizes several intangible assets, all of which resulted
from business combinations. Valuation, and where applicable, amortization of
these assets require significant management estimates and judgment.
Unamortizable assets include goodwill, brand name and investment management
contracts. Goodwill is the excess of the cost to Manulife over the fair value of
the Company's identifiable assets acquired by Manulife in the recent merger.
Brand name is the fair value assigned to the Company's trademark and trade name.
Investment management contracts are fair values of 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), distribution
networks and other investment management contracts. VOBA is the present value of
estimated future profits of insurance policies in force related to the Company's
businesses acquired by Manulife in the recent merger. VOBA has weighted average
lives ranging from 6 to 17 years for various insurance businesses. Distribution
networks are fair values assigned to the Company's networks of sales agents and
producers responsible for procuring business. Distribution networks have
weighted average lives of 21 years. Other investment management contracts are
the fair values assigned to the Company's Company's institutional investment
management contracts managed by its investment management subsidiaries. Other
investment management contracts have weighted average lives of 9 years.
Collectively, these amortizable intangible assets have a weighted average life
of 14.7 years.
The Company will test unamortizable intangible assets for impairment on an
annual basis, and also in response to any events which both suggest that these
assets may be impaired (triggering events.) Amortizable intangible assets will
be tested only in response to triggering events. The Company will test goodwill
using the two-step impairment testing program set forth in SFAS No. 142
"Goodwill and Other Intangible Assets." VOBA and the Company's other intangible
assets will be evaluated by comparing their fair values to their current
carrying values whenever they are tested. Impairments will be recorded whenever
an asset's fair value is deemed to be less than its carrying value.
Amortization of Deferred Policy 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 lives of the policies. These policy lives are, generally, up to
thirty years for products supporting DAC and VOBA. 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
42
JOHN HANCOCK LIFE INSURANCE COMPANY
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 $42,703.6 million, or 47.8%, of
total liabilities as of September 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
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. Changes in the fair values of the
available-for-sale securities are recorded in other comprehensive income as
unrealized gains and /or losses. We calculate the fair values 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 other than temporary impairment. To assist in identifying
these impairments, at the end of each quarter our Investment Review Committee
reviews all securities where market value has been less than ninety percent of
amortized cost for three months or more to determine whether other than
temporary 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, Chief Credit Officer, and other senior management.
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.
43
JOHN HANCOCK LIFE INSURANCE COMPANY
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
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 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 $1.0 million for the period from April 29 through September 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 59.5% and 20.1% for the
three month periods ended September 30, 2004 and 2003 and 38.2% and 27.8% for
the nine month periods ended September 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 Combination" and FASB Statement of Financial Accounting Standards 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
44
JOHN HANCOCK LIFE INSURANCE COMPANY
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 the deferred tax liability.
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
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 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, 2004,
the Company is covered by its parent's catastrophic reinsurance under its global
catastrophe reinsurance program which covers losses in excess of $50 million up
to $150 million. This global catastrophe reinsurance covers all terrorist acts
in Canada, in the United States and elsewhere nuclear, biological and chemical
terrorist acts are not covered. 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.
45
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Three Months Ended September 30,
2004 2003
Proforma 2004 Proforma 2003
----------------------------------------------------------
(in millions)
Revenue........ $ 1,517.3 $ 1,517.3 $ 1,690.4 $ 1,690.4
Net income..... $ 59.2 $ 59.2 $ 157.7 $ 157.7
Period from April 29 through Period from January 1 Nine Months Ended
September 30, through April 28, September 30,
2004 2004 2003
Proforma 2004 Proforma 2004 Proforma 2003
------------------------------------------------------------------------------------
(in millions)
Revenue........ $ 2,699.7 $ 2,699.7 $2,513.4 $2,513.4 $5,338.5 $5,383.3
Net income..... $ 228.3 $ 228.3 $ 329.3 $ 329.3 $ 683.6 $ 686.4
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.
Subsequent Events
In October 2004, Manulife restructured its direct ownership of JHFS, the
Company's parent. As part of the restructuring John Hancock Holdings, LLC, a
Delaware LLC, a wholly-owned subsidiary of Manulife, was formed as an
intermediate holding company to hold the shares of JHFS. The transaction had no
financial impact on the Company.
46
JOHN HANCOCK LIFE INSURANCE COMPANY
Results of Operations
The tables below present the consolidated results of operations for the
periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------------------------------------------------
(in millions)
Revenues
Premiums ..................................................... $ 476.1 $ 475.1 $1,429.0 $ 1,431.8
Universal life and investment-type product fees .............. 160.3 155.6 495.6 463.7
Net investment income ........................................ 836.2 931.5 2,702.7 2,806.9
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) ................... (148.0) (62.7) 1.9 121.0
Investment management revenues, commissions, and other fees .. 132.7 129.3 398.0 370.9
Other revenue ................................................ 60.0 61.6 185.9 189.0
---------------------- -----------------------
Total revenues ............................. 1,517.3 1,690.4 5,213.1 5,383.3
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) ................... 848.3 935.1 2,681.8 2,804.1
Other operating costs and expenses ........................... 350.8 345.4 1,057.5 1,010.8
Amortization of deferred policy acquisition costs, excluding
amounts related to net realized investment and other
gains (losses) (3) ..................................... 57.7 61.0 217.3 196.4
Dividends to policyholders ................................... 114.2 151.6 349.1 421.6
---------------------- -----------------------
Total benefits and expenses ................. 1,371.0 1,493.1 4,305.7 4,432.9
Income before taxes .......................................... 146.3 197.3 907.4 950.4
Income taxes ................................................. 87.1 39.6 346.5 264.0
---------------------- -----------------------
Net income before cumulative effect of accounting change ..... 59.2 157.7 560.9 686.4
Cumulative effect of accounting change, net of income tax .... -- -- (3.3) --
---------------------- -----------------------
Net income ................................... $ 59.2 $ 157.7 $ 557.6 $ 686.4
====================== =======================
(1) Net of related amortization of deferred policy acquisition costs, amounts
credited to participating pension contractholders and the policyholder
dividend obligation of $0.4 million and $(35.4) million for the three
months ended September 30, 2004 and 2003, and $12.4 million and $(35.9)
million for the nine months ended September 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 $9.6 million and $(29.7) million for
the three months ended September 30, 2004 and 2003, and $38.0 million and
$(42.6) million for the nine months ended September 30, 2003 and 2002,
respectively.
(3) Excluding amounts related to net realized investment and other gains
(losses) of $(9.2) million and $(5.7) million for the three months ended
September 30, 2004 and 2003, and $(25.6) million and $6.7 million for the
nine months ended September 30, 2004 and 2003, respectively.
47
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended September 30, 2004 Compared to Three Months Ended
September 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 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 decreased 25.8%, or $51.0 million,
for the three month period ended September 30, 2004 from the prior year. The
decrease in consolidated income before income taxes was driven by the G&SFP
Segment where earnings declined $107.0 million, driven by net investment and
other realized losses, lower net investment income coupled with lower spreads
and amortization of the VOBA asset. In addition, income before income taxes
decreased $56.9 million in the long-term care insurance business from the prior
year driven by increase net investment and other realized losses, increased
expenses and higher amortization of VOBA. Partially offsetting these decreases
was the impact of purchase accounting on tax preferenced investments held in the
Corporate and Other Segment, where income before taxes increased $120.7 million.
The benefit to income before income taxes of the application of purchase
accounting to tax preferenced investments does not flow through to net income,
or income after taxes. The application of purchase accounting to the Company's
tax preferenced investments in leveraged leases and service contracts created
discounts to cost which are being amortized to net investment income over the
term of the contract while provision for income taxes increased for the higher
earnings. For analysis of consolidated net realized investment and other gains
(losses), see below and General Account Investments in the MD&A.
Premiums increased 0.2%, or $1.0 million, from the prior year. The primary
driver behind this flat performance of premiums is the $15.2 million decrease in
traditional life insurance product premiums due to lower single premiums from a
lower dividend scale and lower renewal premiums from run off of the closed
block. In addition, premiums in the G&SFP Segment declined $1.8 in sales of
structured settlements, and the fixed annuity business premiums declined $1.3
million. Offsetting these declines was premium growth in the long-term care
insurance business of $15.5 million, or 11.2%, primarily due to business growth
resulting from strong renewal premiums. In addition, premiums also increased in
the international business by $2.7 million, or 3.0%.
Universal life and investment-type product fees increased 3.0%, or $4.7
million, from the prior year. The increase in product fees was driven by a $9.1
million increase in the universal life insurance business due primarily to a
$6.7 million increase in cost of insurance fees. In addition, the Company
adopted SOP 03-1 on January 1, 2004. The adoption of this new accounting
standard for long duration contracts requires the reporting of universal life
product fees on a received basis, by replacing an "unearned revenue" reserve
with a reserve for future policyholder benefits. Partially offsetting these
increases in product fees was a decrease in fees in the retail annuities
business of $2.0 million due in part to lower average account balances for
variable annuities. In addition, the variable life insurance business product
fees declined $1.4 million due to lower deposits into this product line.
Net investment income decreased 10.2%, or $95.3 million, from the prior
year. The yield, net of investment expenses, on the general account portfolio
decreased to 5.01% from 5.57% in the prior year. The decrease in yields were
driven by the April 28, 2004 asset mark to market done in accordance with
purchase accounting rules, for Manulife's acquisition of JHFS; lower performance
in the period on hedge fund of fund investments; at period end the Company's
asset portfolio had approximately $12 billion of floating-rate exposure
(primarily LIBOR) compared to $13 billion at September 30, 2003. This exposure
was created mostly through interest rate swaps designed to match our
floating-rate liability portfolio. At quarter end, 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; certain of our
tax-preferenced investments (affordable housing limited partnerships and lease
48
JOHN HANCOCK LIFE INSURANCE COMPANY
residual management) reduce the Company's net portfolio pre-tax yield; the
inflow of new cash and reinvestments within the portfolio for the period were
invested at rates that were below the portfolio rate. For additional analysis
regarding net investment income, see below and General Account Investments in
the MD&A.
Net realized investment and other losses increased $85.3 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 net result of a $30.7 million decrease in gains on the disposals and $48.7
million increase in losses in hedging adjustment driven by derivative
instruments, partially offset by a $20.5 million decrease in losses on disposal.
The Company recorded $45.2 million in impairments of fixed maturity securities
compared to $70.7 million in the prior year. The largest impairments of fixed
maturity securities were $30.4 million on major U.S. airlines, and $14.0
million relating to a manufacturer of parcel delivery vans. For additional
analysis regarding net realized investment and other gains (losses), see below
and General Account Investments in the MD&A.
Impairments Net
For the Three Months Ended and Gross Gain Gross Loss Hedging Realized Investment
September 30, 2004 Reserves on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities .............. $ (45.2) $ 54.9 $ (12.1) $ 6.2 $ 3.8
Equity securities ...................... -- 11.0 (0.6) -- 10.4
Mortgage loans on real estate........... (11.6) 4.5 (7.6) 1.6 (13.1)
Real estate............................. -- 2.4 -- -- 2.4
Other invested assets................... (6.7) 9.5 (2.3) -- 0.5
Derivatives............................. -- -- -- (151.6) (151.6)
----------------------------------------------------------------------------
Subtotal................. $ (63.5) $ 82.3 $ (22.6) $(143.8) $(147.6)
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and
value of business acquired..................................................... 9.2
Amounts credited to participating pension contractholders.......................... 2.4
Amounts credited to the policyholder dividend obligation........................... (12.0)
----------------------
Total......................................................................... $(148.0)
======================
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 2.6%, or $3.4 million, from the prior year. The increase in advisory
fees was driven by the Signator Financial Network's sales of Manulife product
during the period. Signator Financial Network's advisory fees increased $6.5
million, or 19.8%. Since the merger with Manulife, agents of the Company have
had a broader product group from which to sell, the agents have leveraged this
more diverse product base to increase their production, resulting in higher
advisory fee income for the Company. In the mutual fund business, fees grew by
0.5%, or $0.4 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 decreased 4.0% driven by lower advisory
fees resulting from lower assets under management.
Other revenue decreased 2.6%, or $1.6 million, from the prior year. The
Company experienced decreases in other revenues due to the sale of the group
life insurance business of $1.0 million. In addition, other operating costs and
expenses decreased $1.2 million in the institutional investment management
business and $1.2 million in the G&SFP Segment due to lower commissions. 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 increased $2.6 million, to $58.3 million
for the three months ended September 30, 2004 due to higher product sales. In
addition, other revenue includes Federal long-term care business fee revenue of
$1.9 million for the three months ended September 30, 2004, a decrease of $0.3
million from the prior year.
Benefits to policyholders decreased 9.3%, or $86.8 million, from the prior
year. The decrease in benefits to policyholders was driven by a decrease in the
G&SFP Segment, which includes the institutional spread-based products, of 19.5%
or $52.0 million primarily due to lower annuities and structured settlement
sales and lower interest credited. Lower interest credited was driven by
repricing of liability products at the date of the merger with Manulife for
purchase accounting, the result was resetting the crediting rates to a lower
market rate. Despite the 6.5%, or $1.6 billion, growth in the weighted average
49
JOHN HANCOCK LIFE INSURANCE COMPANY
reserves for spread-based products, interest credited on these products
decreased $39.9 million due to a decline in the average interest credited rate
on account balances. Benefits to policyholders declined $34.4 million in the
traditional life insurance business driven by a decrease in the closed block
policyholders dividend obligation. The decrease in the policyholder dividend
obligation is the result of lower than expected investment income partially
offset by lower dividends. In addition, benefits to policyholders decreased
$37.8 million in the fixed annuities business driven by lower interest credited.
Partially offsetting these decreases was the group life business increase of
$20.1 million in benefits to policyholders compared to the prior year due to a
return of claim stabilization reserves to a single customer in the prior year.
The result of this transaction in the prior year was a reduction in benefits to
policyholders and an increase in dividends resulting in no income impact. The
group life business was sold effective May 1, 2003. In addition, benefits to
policyholders increased in the long-term care insurance business by $29.5
million, driven by growth in the business. Demonstrating growth in the business
was an increase in long-term care insurance premiums of $15.5 million.
Operating costs and expenses increased 1.6%, or $5.4 million. Total
operating costs and expenses were driven by increases of $8.1 million in the
universal life insurance business and $15.7 million in the long-term care
insurance business driven by growth in those businesses. The operating costs of
Signature Fruit increased $1.2 million to $59.1 million from the prior year. In
addition, operating costs and expenses decreased $20.1 million in corporate
operations and $1.2 million, in the G&SFP Segment driven by lower commissions
and taxes, licenses and fees.
Amortization of deferred policy acquisition costs and value of business
acquired decreased 5.4%, or $3.3 million, from the prior year. The decrease in
amortization of deferred policy acquisition costs (DAC) and value of business
acquired (VOBA) was driven by a decrease of $46.6 million of DAC amortization,
partially offset by a $43.2 million increase in VOBA amortization. The change in
amortization of these assets was driven by the impact of purchase accounting in
the merger with Manulife. Purchase accounting adjusted the historical deferred
policy acquisition asset to zero and created a new VOBA asset. The purchase
accounting changes in the DAC and VOBA assets and related amortization impacted
certain businesses more significantly than others. The G&SFP Segment
historically had an immaterial DAC asset and low levels of DAC amortization. The
purchase accounting applied to the merger with Manulife created a significant
VOBA asset in the G&SFP Segment, which did not exist previously. As a result
VOBA amortization in the G&SFP Segment increased $14.3 million.
Dividends to policyholders decreased 24.7%, or $37.4 million from the
prior year. The decrease in dividends to policyholders was driven by dividends
in the traditional life insurance products which decreased 12.0%, or $13.7
million, due to a reduction in the dividend scale and a $22.4 million decrease
in dividends in the group life insurance business due to a return of claim
stabilization reserves to a single customer in the prior year. The result of
this transaction in the prior year was a reduction in benefits to policyholder
and an increase in dividends resulting in no income impact. Group life was sold
effective May 1, 2003.
Income taxes were $87.1 million in the third quarter of 2004, compared to
$39.6 million for the third quarter of 2003. Our effective tax rate was 59.5% in
the third quarter of 2004, compared to 20.1% in the third quarter of 2003. The
higher effective tax rate was primarily 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".
50
JOHN HANCOCK LIFE INSURANCE COMPANY
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 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 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 and cumulative effect of
accounting changes decreased 4.5%, or $43.0 million, for the nine month period
ended September 30, 2004 from the prior year. The decrease was driven by lower
net realized investment and other gains. In the first quarter of 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 addition,
operating expenses increased 4.6%, or $46.7 million, driven by $39.9 million
increase in the long-term care insurance business. Partially offsetting these
items was growth in universal life and investment product fees of 6.9%, or $31.9
million, and 7.3%, or $27.1 million, growth in advisory fees from the prior
year. The increase in product fees was driven by an increase in average account
balance on universal life insurance products. The increase in advisory fees is
driven by 11.3% growth in average assets under management in the mutual fund
business compared to the prior year. The Company recorded a 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 Nontraditional Long Duration Contracts and
for Separate Accounts (SOP 03-1).
Premiums decreased 0.2%, or $2.8 million, from the prior year. The
increase in premiums was due largely to a $38.0 million decrease in premiums in
the traditional life insurance business driven by lower single premiums from a
lower dividend scale and lower renewal premiums from run off of the closed
block. Premiums in the group life insurance business decreased $28.1 million due
to the sale of this business in the prior year. In addition, premiums decreased
in the fixed annuity business by $27.0 million due to lower sales of single
premium annuities of driven by the interest rate environment. Partially
offsetting these decreases was an increase in long-term care insurance business
premiums of $56.4 million, or 14.3%, primarily due to business growth resulting
from strong renewal premiums. International operations contributed to the
increase in premiums with growth of $29.0 million compared to the prior year.
Universal life and investment-type product fees increased 6.9%, or $31.9
million, over the prior year. The increase in product fees was driven by a
31.2%, or $29.5 million, in the universal life insurance products due primarily
to an increase in cost of insurance fees. Investment-type product fees increased
6.3%, or $15.4 million, in the variable life insurance business due primarily to
the higher amortization of unearned revenue which increased $8.1 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 of 6.5%, or
$5.7 million, in fees in the retail annuities business and a decrease of 20.4%,
or $7.4 million, in the G&SFP Segment.
Net investment income decreased 3.7%, or $104.2 million, from the prior
year. The yield, net of investment expenses, on the general account portfolio
decreased to 5.36% from 5.86% in the prior year. The decrease in yields was
driven by the April 28, 2004 asset mark to market done in accordance with
purchase accounting rules, for Manulife's acquisition of JHFS; lower performance
in the period on hedge fund of fund investments decreased net portfolio yield;
at period end the Company's asset portfolio had approximately $12 billion of
floating-rate exposure (primarily LIBOR) compared to a $13 billion level of
exposure at September 30, 2003. This exposure was created mostly through
interest rate swaps designed to match our floating-rate liability portfolio. At
period end, 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; certain of our tax-preferenced investments (affordable housing
limited partnerships and lease residual management) reduce the Company's net
portfolio yield on a pre-tax basis; the inflow of new cash and reinvestments
within the portfolio for the period were invested at rates that were below the
portfolio rate. For additional analysis of net investment income and yields see
the General Account Investments section of this MD&A.
51
JOHN HANCOCK LIFE INSURANCE COMPANY
Net realized investment and other gains (losses) decreased 98.4%, or
$119.1 million, due to the sale of the Home Office properties in the first
quarter of 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. The reduction in
realized gains due to the prior year sale of the Home Office was offset by a
$190.1 million decrease in impairments of securities, including a $240.0 million
decrease in impairments of fixed maturity securities. The largest impairments
were: $54.1 million on fixed maturities of major U.S. airlines and $22.8 million
related to other investments in major U.S. airlines, $22.0 million on private
placement securities related to secured lease obligations of a regional retail
food chain, $27.9 million relating to a manufacturer of parcel delivery vans,
$17.5 million relating to one of the world's largest dairy companies, and $9.1
million on an Argentinean water utility. For additional analysis regarding net
realized investment and other gains(losses), see below and General Account
Investments in the MD&A.
Impairments Net
For the Nine Months Ended and Gross Gain Gross Loss Hedging Realized Investment
September 30, 2004 Reserves on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities .............. $ (143.3) $ 204.9 $ (42.5) $ (70.8) $ (51.7)
Equity securities ...................... (6.2) 99.8 (1.3) -- 92.3
Mortgage loans on real estate........... (37.6) 21.6 (9.0) (17.7) (42.7)
Real estate............................. -- 80.4 (2.3) -- 78.1
Other invested assets................... (43.9) 18.0 (11.0) -- (36.9)
Derivatives............................. -- -- -- (24.8) (24.8)
----------------------------------------------------------------------------
Subtotal................. $ (231.0) $ 424.7 $ (66.1) $ (113.3) $ 14.3
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and
value of business acquired...................................................... 25.6
Amounts credited to participating pension contractholders.......................... (2.7)
Amounts credited to the policyholder dividend obligation........................... (35.3)
----------------------
Total......................................................................... $ 1.9
======================
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 7.3%, or $27.1 million, from the prior year. Advisory fees increased
in the mutual fund business by 8.4%, or $17.5 million, over the prior year due
to 11.3% higher assets under management. Advisory fees in our institutional
asset management business increased 5.8% despite a 4.1% decrease in weighted
average assets under management. The institutional asset management business
generated a 12.0% increase in deposits during the nine months ended September
30, 2004 from the prior year. In addition, advisory fees earned in the Signator
Financial Network increased due to sales of the Manulife product since the
merger.
Other revenue decreased 1.6%, or $3.1 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 $172.6 million in revenue for the nine
months ended September 30, 2004, a decrease of $5.6 million from the prior year.
In addition, other revenue includes Federal long-term care business fee revenue
of $5.5 million for the nine months ended September 30, 2004, a decrease of $0.6
million from the prior year. In addition, the sale of the group life insurance
business in the prior year decreased other revenue $2.0 million. Partially
offsetting these decreases was the sale of a run-off business which generated
$5.5 million in other revenue for the nine months ended September 30, 2004.
Benefits to policyholders decreased 4.4%, or $122.3 million, from the
prior year. The decrease in benefits to policyholders was driven by a 10.8%, or
a $88.0 million, decrease in the G&SFP Segment driven by the spread-based
products and lower interest credited on these products. Lower interest credit
was driven by the repricing of the liability products at the date of the merger
and resetting the crediting rates to lower market rates. Benefits to
policyholders decreased in the fixed annuities business by $81.2 million driven
by the amortization of the fixed annuity fair value reserve of $28.1 million, a
reserve established for purchase accounting resulting from Manulife's
acquisition of the Company, and a $41.4 million lower reserve provision for
52
JOHN HANCOCK LIFE INSURANCE COMPANY
life-contingent immediate annuities due to lower sales. In addition, benefits to
policyholders decreased in the traditional life insurance business by $57.6
million, or 7.5%, driven by a decrease in the closed block policyholders
dividend obligation due to lower net investment income. The sale of the group
life insurance business in the prior year decreased benefits to policyholders
$4.1 million from the prior year. Partially offsetting these decreases in
benefits to policyholders was an increased in the long-term care insurance
business of 16.8%, or $61.0 million, driven by growth in the business.
Demonstrating growth in the business was an increase in long-term care insurance
premiums of $56.4 million. Benefits to policyholders increased $27.2 million in
the international business driven by business growth in the international group
plans, international business premiums increased $29.0 million. The
non-traditional life insurance business increased $26.2 million from the prior
year on higher interest credited driven by growth in account values.
Other operating costs and expenses increased 4.6%, or $46.7 million.
Operating costs and expense increased $39.9 million in the long-term care
insurance business and $10.8 million in the non-traditional life insurance
business due to growth in these product lines. In addition, operating costs and
expense in the retail annuity business increased $6.4 million and $8.2 million
in the mutual funds business. Partially offsetting these increases was a
decrease at Signature Fruit of $7.6 million to $174.4 million from the prior
year and a decrease of $7.0 million due to the prior year sale of the group life
insurance business.
Amortization of deferred policy acquisition costs and value of business
acquired increased 10.6%, or $20.9 million, from the prior year. The increase in
amortization of deferred policy acquisition costs (DAC) and value of business
acquired (VOBA) was driven by an increase of $81.6 million of VOBA amortization,
partially offset by a $60.7 million decrease in DAC amortization. The change in
amortization of these assets was driven by the impact of purchase accounting in
the merger with Manulife. Purchase accounting adjusted the historical deferred
policy acquisition asset to zero and created a new VOBA asset at an established
return on equity for the transaction. The purchase accounting changes in the DAC
and VOBA assets and related amortization impacted certain businesses more
significantly than others. The G&SFP Segment historically had an immaterial DAC
asset and low levels of DAC amortization. The purchase accounting accompanying
the merger with Manulife created a significant VOBA asset in the G&SFP Segment,
which did not exist previously. As a result VOBA amortization in the G&SFP
Segment increased $23.8 million, or 100.0%.
Dividends to policyholders decreased 17.2%, or $72.5 million from the
prior year. The decrease in dividends to policyholders was driven by dividends
in the traditional life insurance products which decreased 11.5%, or $40.7
million, due to a reduction in the dividend scale and a $27.8 million decrease
in dividends due to a return of a claim stabilization reserve to a single
customer in the group life business in the prior year. The result of this
transaction in the prior year was a reduction in benefits to policyholders and
an increase in dividends resulting in no income impact. Group life was sold
effective May 1, 2003.
Income taxes were $346.5 million in the first nine months of 2004,
compared to $264.0 million for the first nine months of 2003. Our effective tax
rate was 38.2% in the first nine months of 2004, compared to 27.8% in the first
nine months of 2003. The higher effective tax rate was primarily 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, decreased consolidated
income after income taxes by $3.3 million. During the nine months ended
September 30, 2004, 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.
53
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.
54
JOHN HANCOCK LIFE INSURANCE COMPANY
Overall Composition of the General Account
Invested assets, excluding separate accounts totaled $67.3 billion and
$66.9 billion as of September 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 $0.6 billion as of
September 30, 2004. The following table shows the composition of investments in
the general account portfolio.
As of September 30, As of December 31,
2004 2003
--------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
--------------------------------------------------------------
(in millions)
Fixed maturity securities (1)............ $ 48,529.9 72.1% $ 47,970.8 71.7%
Mortgage loans (2)....................... 11,947.5 17.7 10,871.1 16.3
Real estate.............................. 270.7 0.4 123.8 0.2
Policy loans (3)......................... 2,017.0 3.0 2,019.2 3.0
Equity securities........................ 214.7 0.3 333.7 0.5
Other invested assets.................... 3,268.5 4.9 2,912.2 4.4
Short-term investments................... -- -- 31.5 --
Cash and cash equivalents (4)............ 1,084.1 1.6 2,626.9 3.9
--------------------------------------------------------------
Total invested assets.................... $ 67,332.4 100.0% $ 66,889.2 100.0%
==============================================================
1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $876.8 million and
$600.3 million as of September 30, 2004 and December 31, 2003,
respectively. The total fair value of the fixed maturity security
portfolio was $48,529.9 million and $47,994.9 million, at September 30,
2004 and December 31, 2003, respectively.
2) The fair value for the mortgage loan portfolio was $11,992.4 million and
$11,791.4 million as of September 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 September 30, 2004, fixed maturity
securities represented 72.1% of general account invested assets with a carrying
value of $48.5 billion, comprised of 53.8% public securities and 46.2% 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 September 30, 2004, the below investment grade bonds were 7.4%
of invested assets, and 10.2% of total fixed maturities. Rated fixed maturities
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
55
JOHN HANCOCK LIFE INSURANCE COMPANY
investment grade debt as defined by rating agencies such as S&P and Moody's
(i.e., BBB /Baa3 or higher), while Categories 3-6 are the equivalent of
below-investment grade securities. SVO ratings are reviewed and may be revised
at least once a year.
The following table shows the composition by credit quality of the fixed
maturity securities portfolio.
Fixed Maturity Securities -- By Credit Quality
-------------------------------------------------------------
As of September 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.................. $20,665.5 43.4% $ 19,612.6 41.4%
2 BBB....................... 22,033.2 46.2 21,645.6 45.7
3 BB........................ 2,370.0 5.0 2,953.2 6.2
4 B......................... 1,698.9 3.6 1,919.4 4.1
5 CCC and lower............. 758.3 1.6 841.3 1.8
6 In or near default........ 127.2 0.2 398.4 0.8
-------------------------------------------------------------
Subtotal........... $47,653.1 100.0% 47,370.5 100.0%
Redeemable preferred
stock.................. 876.8 600.3
-------------------------------------------------------------
Total fixed maturities.... $48,529.9 $ 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 77 securities that are awaiting an SVO rating, with a carrying
value of $1,416.7 million as of September 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 $185.0 million notional invested in the Company's
credit-linked note program, $165.0 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,
$37.2 million of SVO Rating 2, $259.3 million of SVO Rating 3, $110.1
million of SVO Rating 4, and $7.3 million of SVO Rating 5 underlying
securities are included as $213.9 million of SVO Rating 1, $150.0 million
of SVO Rating 2 and $50.0 million of SVO Rating 3 as of September 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 September 30, 2004 and December 31, 2003, the
maximum amount that can be recovered under this provision was $125.0
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 89.6% and 87.1% of fixed
maturity investments invested in Category 1 and 2 securities as of September 30,
2004 and December 31, 2003, respectively. Below investment grade bonds were
10.4% and 12.9% of the rated fixed maturity investments as of September 30, 2004
and December 31, 2003, respectively, and 7.4% and 9.1% of total invested assets
at September 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,
56
JOHN HANCOCK LIFE INSURANCE COMPANY
team-oriented structure that permits the evaluation of a wide range of below
investment grade offerings in a variety of industries resulting in a
well-diversified high yield portfolio.
Valuation techniques for the bond portfolio vary by security type and the
availability of market data. Pricing models and their underlying assumptions
impact the amount and timing of unrealized gains and losses recognized, and the
use of different pricing models or assumptions could produce different financial
results. External pricing services are used where available, broker dealer
quotes are used for thinly traded securities, and a spread pricing matrix is
used when price quotes are not available, which typically is the case for our
private placement securities. The spread pricing matrix is based on credit
quality, country of issue, market sector and average investment life and is
created for these dimensions through brokers' estimates of public spreads
derived from their respective publications. When utilizing the spread pricing
matrix, securities are valued 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.
Every quarter, there is a comprehensive review of all impaired securities and
problem loans by Manulife's Credit Committee a group consisting of Manulife's
Chief Investment Officer, Chief Financial Officer, Chief Risk Officer, Chief
Credit Officer, and other senior management. 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 September 30, 2004 and December 31, 2003, 47.8% 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 $127.2 million and $398.4 million as of September 30, 2004 and December 31,
2003, respectively. As of September 30, 2004 and December 31, 2003, $0.3 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
September 30, 2004 and December 31, 2003 was limited to approximately 20.8% and
22.3%, respectively ,of our total MBS/ABS portfolio and 4.2% 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.
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.
57
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of September 30, 2004
--------------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
Net with Gross Gross with Gross Gross
Total Unrealized Unrealized Unrealized Unrealized Unrealized
Carrying Value Gain (Loss) Gains Gains Losses Losses
--------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance.......... $ 6,016.3 $ 80.3 $ 5,018.9 $ 90.1 $ 997.4 $ (9.8)
Communications............... 2,837.9 30.6 2,431.3 35.3 406.6 (4.7)
Government................... 2,684.4 43.9 2,210.4 44.7 474.0 (0.8)
Manufacturing................ 6,092.3 78.2 5,511.9 91.8 580.4 (13.6)
Oil & gas.................... 3,849.3 61.8 3,486.6 66.4 362.7 (4.6)
Services / trade............. 2,594.6 20.3 2,106.0 25.2 488.6 (4.9)
Transportation............... 2,153.7 26.0 1,851.2 28.5 302.5 (2.5)
Utilities.................... 7,042.4 111.2 6,438.6 116.3 603.8 (5.1)
--------------------------------------------------------------------------------
Total corporate securities..... 33,270.9 452.3 29,054.9 498.3 4,216.0 (46.0)
Asset-backed and mortgage-
backed securities............. 9,330.6 103.8 6,826.9 144.3 2,503.7 (40.5)
U.S. Treasury securities and
obligations of U.S. government
agencies...................... 347.6 3.0 215.2 3.1 132.4 (0.1)
Debt securities issued by foreign
governments................... 161.8 0.8 49.5 1.1 112.3 (0.3)
Obligations of states and political
subdivisions.................. 303.2 (0.2) 84.3 1.0 218.9 (1.2)
--------------------------------------------------------------------------------
Total........................ $43,414.1 $559.7 $36,230.8 $647.8 $7,183.3 $(88.1)
================================================================================
Fixed Maturity Securities -- By Industry Classification/Sector
Below Investment Grade as of September 30, 2004
--------------------------------------------------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
Net with Gross Gross with Gross Gross
Total Unrealized Unrealized Unrealized Unrealized Unrealized
Carrying Value Gain (Loss) Gains Gains Losses Losses
--------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance.......... $ 68.7 $ 0.5 $ 54.0 $ 0.6 $ 14.7 $ (0.1)
Communications............... 229.7 2.3 127.9 8.3 101.8 (6.0)
Government................... 10.2 -- 8.5 -- 1.7 --
Manufacturing................ 1,189.5 20.6 740.2 25.4 449.3 (4.8)
Oil & gas.................... 479.7 19.8 472.5 19.9 7.2 (0.1)
Services / trade............. 305.6 (14.2) 147.8 2.4 157.8 (16.6)
Transportation............... 335.1 1.9 153.5 14.7 181.6 (12.8)
Utilities.................... 2,071.4 27.0 1,444.8 35.4 626.6 (8.4)
---------------------------------------------------------------------------------
Total corporate securities..... 4,689.9 57.9 3,149.2 106.7 1,540.7 (48.8)
Asset-backed and mortgage-
backed securities............. 412.6 12.1 175.6 20.1 237.0 (8.0)
Debt securities issued by foreign
governments................... 13.3 0.7 13.3 0.7 -- --
---------------------------------------------------------------------------------
Total........................ $5,115.8 $70.7 $3,338.1 $127.5 $1,777.7 $(56.8)
=================================================================================
58
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of December 31, 2003
------------------------------------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Unrealized Unrealized Unrealized Unrealized Unrealized
Carrying 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 Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Unrealized Unrealized Unrealized Unrealized Unrealized
Carrying 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)
================================================================================
As of September 30, 2004 and December 31, 2003, there were gross
unrealized gains of $775.3 million and $3,068.6 million, and gross unrealized
losses of $144.9 million and $470.1 million on the fixed maturities portfolio.
As of September 30, 2004 gross unrealized losses of $144.9 million was fairly
59
JOHN HANCOCK LIFE INSURANCE COMPANY
evenly distributed across the sectors. The tables above show gross unrealized
losses before amounts that are allocated to the closed block policyholders or
participating pension contractholders. Of the $144.9 million of gross unrealized
losses in the portfolio at September 30, 2004, $17.5 million was in the closed
block and $10.0 million has been allocated to participating pension
contractholders, leaving $117.4 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 $56.8 million as of September 30,
2004 primarily due to the marking to market of the portfolio on April 28, 2004.
The gross unrealized loss on September 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 September 30, 2004, U.S.
carriers have reported disappointing results as continued increases in 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 September 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) decreased
by $122.2 million in the nine months ending September 30, 2004 to $88.1 million.
The gross unrealized loss on below investment grade bonds (those rated in
categories 3, 4, 5, and 6 by the SVO) declined over this period, dropping by
$203.0 million to a total of $56.8 million as of September 30, 2004.
60
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of September 30, 2004
-------------------------------------------------------
Carrying Value of
Securities with
SVO S&P Equivalent Gross Unrealized % of Gross Unrealized % of
Rating (1) Designation (2) Losses (3) Total Losses (3) Total
- -------------------------------------------------------------------------------------------------
(in millions)
1 AAA/AA/A................. $4,211.9 47.9% $ (50.5) 35.1%
2 BBB...................... 2,914.1 33.1 (37.5) 26.1
3 BB....................... 796.4 9.1 (27.1) 18.8
4 B........................ 528.4 6.0 (9.8) 6.8
5 CCC and lower............ 332.7 3.8 (17.3) 12.0
6 In or near default....... 11.4 0.1 (1.7) 1.2
-------------------------------------------------------
Subtotal........... 8,794.9 100.0% (143.9) 100.0%
Redeemable preferred
stock.............. $166.1 (1.0)
-------------------------------------------------------
Total.................... $8,961.0 $(144.9)
=======================================================
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 12 securities with gross unrealized losses that are awaiting an
SVO rating with a carrying value of $109.7 million and unrealized losses
of $1.8 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 1.2% of the total
carrying value as well as the total gross unrealized losses of securities
in a loss position, including redeemable preferred stock.
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 % of
Rating (1) Designation (2) Losses (3) Total Losses (3) 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
61
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Unrealized Losses on Fixed Maturity Securities --
By Investment Grade Category and Age
As of September 30, 2004
------------------------------------------------------------------------------------------
Investment Grade Below Investment Grade
------------------------------------------- ---------------------------------------------
Carrying Value of Carrying Value of
Securities with Securities with
Gross Unrealized Hedging Market Gross Unrealized Hedging Market
Losses Adjustments Depreciation Losses Adjustments Depreciation
------------------------------------------- ---------------------------------------------
(in millions)
Three months or less...................... $ 831.5 $ (2.1) $(25.4) $ 431.6 $ (2.4) $ (9.8)
Greater than three months to six months... 6,294.5 (9.1) (51.4) 1,237.3 (5.4) (38.3)
Greater than six months to nine months.... -- -- -- -- -- --
Greater than nine months to twelve
Months............................... -- -- -- -- -- --
Greater than twelve months................ -- -- -- -- -- --
------------------------------------------- ---------------------------------------------
Subtotal............................. 7,126.0 (11.2) (76.8) 1,668.9 (7.8) (48.1)
------------------------------------------- ---------------------------------------------
Redeemable preferred stock................ 57.3 (0.1) -- 108.8 -- (0.9)
------------------------------------------- ---------------------------------------------
Total................................ $7,183.3 $(11.3) $(76.8) $1,777.7 $ (7.8) $(49.0)
=========================================== =============================================
Unrealized Losses on Fixed Maturity Securities --
By Investment Grade Category and Age
As of December 31, 2003
-----------------------------------------------------------------------------------
Investment Grade Below Investment Grade
----------------------------------------- ----------------------------------------
Carrying Carrying
Value of Value of
Securities Securities
with Gross with Gross
Unrealized Hedging Market 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 September 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 September 30, 2004 and December 31, 2003, respectively, the fixed
maturity securities had a total gross unrealized loss of $125.8 million and
$324.2 million, excluding basis adjustments related to hedging relationships. As
of September 30, 2004 the aging of securities reflects the mark to market on
April 28, 2004, thus the entire gross unrealized loss is less than six months at
September 30, 2004. Unrealized losses on investment grade securities principally
relate to changes in interest rates or changes in credit spreads since the
62
JOHN HANCOCK LIFE INSURANCE COMPANY
securities were acquired. Credit rating agencies statistics indicate that
investment grade securities have been found to be less likely to develop credit
concerns.
The scheduled maturity dates for securities in an unrealized loss position
at September 30, 2004 and December 31, 2003 is shown below.
Unrealized Losses on Fixed Maturity Securities -- By Maturity
September 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..................... $ 860.0 $ (4.8) $ 385.1 $ (11.5)
Due after one year through five years....... 2,466.6 (33.9) 1,487.0 (74.5)
Due after five years through ten years...... 1,492.7 (32.7) 1,916.7 (101.8)
Due after ten years......................... 1,401.0 (25.0) 3,404.8 (138.5)
----------------------------- -------------------------------
6,220.3 (96.4) 7,193.6 (326.3)
Asset-backed and mortgage-backed
Securities............................... 2,740.7 (48.5) 2,134.7 (143.8)
----------------------------- -------------------------------
Total....................................... $ 8,961.0 $(144.9) $ 9,328.3 $(470.1)
============================= ===============================
As of September 30, 2004 there were 35 securities, with an urealized loss
totaling $26.9 million, representing 2 credit exposures with unrealized losses
of $10 million or more. These credit exposures are in a recreation and real
estate-based company and a federally sponsored credit agency whose unrealized
loss is interest rate driven.
As of December 31, 2003 there were 59 securities representing 9 credit
exposures with unrealized losses of $10 million or more, with an amortized cost
of $1,048.3 million and unrealized losses of $136.3 million. All of the above
securities have undergone thorough analysis by our investment professionals, and
at this time we believe that the borrowers have the financial capacity to make
all required contractual payments on the notes when due. We intend to hold these
securities until they either mature or recover in value.
Mortgage Loans. As of September 30, 2004 and December 31, 2003, the
Company held mortgage loans with a carrying value of $11.9 billion and $10.9
billion, including $3.1 billion and $3.0 billion, respectively, of agricultural
loans at each period end and $8.8 billion and $7.9 billion, respectively, of
commercial loans. Impaired loans comprised 0.6% and 1.1% of the mortgage
portfolio as of September 30, 2004 and December 31, 2003, respectively.
63
JOHN HANCOCK LIFE INSURANCE COMPANY
The following table shows the Company's agricultural mortgage loan
portfolio by its three major sectors: agri-business, timber and production
agriculture.
As of September 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............ $1,807.7 $1,794.7 58.8% $ 1,861.0 $ 1,860.6 61.5%
Timber................... 1,243.2 1,242.9 40.7 1,172.4 1,144.2 37.9
Production agriculture... 15.3 15.3 0.5 18.9 18.9 0.6
------------------------------------------- -----------------------------------------
Total................ $3,066.2 $3,052.9 100.0% $ 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.
Mortgage Loans - By Property Type
As of September 30, 2004 As of December 31, 2003
------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
------------------------------------------------------------
(in millions)
Apartment.......... $ 1,652.4 13.8% $ 1,452.9 13.4%
Office Buildings... 2,494.1 20.8 2,448.4 22.5
Retail............. 2,648.8 22.2 2,083.6 19.2
Agricultural....... 3,052.9 25.5 3,023.7 27.8
Industrial......... 987.0 8.3 938.4 8.6
Hotels............. 441.3 3.7 435.9 4.0
Multi-Family....... 0.7 -- 0.9 --
Mixed Use.......... 401.5 3.4 284.3 2.6
Other.............. 268.8 2.3 203.0 1.9
------------------------------------------------------------
Total......... $11,947.5 100.0% $ 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 September 30, 2004 As of December 31, 2003
---------------------------------------------------------------------------
Number Carrying % of Carrying % of
Of Loans Value Total Value Total
---------------------------------------------------------------------------
(in millions)
East North Central....... 141 $ 1,248.9 10.5% $ 1,117.8 10.3%
East South Central....... 40 447.2 3.7 411.9 3.8
Middle Atlantic.......... 119 1,669.2 14.0 1,449.5 13.3
Mountain................. 96 731.7 6.1 507.6 4.7
New England.............. 93 934.5 7.8 869.1 8.0
Pacific.................. 272 2,595.0 21.7 2,371.2 21.8
South Atlantic........... 209 2,523.2 21.1 2,375.6 21.8
West North Central....... 69 450.1 3.8 434.5 4.0
West South Central....... 118 1,066.7 8.9 1,022.2 9.4
Canada/Other............. 11 281.0 2.4 311.7 2.9
---------------------------------------------------------------------------
Total............... 1,168 $11,947.5 100.0% $10,871.1 100.0%
===========================================================================
64
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Mortgage Loan Comparisons
As of September 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........ 58.5 0.5% 92.7 0.8%
Restructured...................... 67.3 0.6 87.8 0.8
Loans foreclosed during period.... -- -- 23.9 0.2
Other loans with valuation
allowance .................... 60.0 0.5 5.5 0.1
-------------------------------------------------------------------------
Total.......................... $188.0 1.6% $210.1 1.9%
-------------------------------------------------------------------------
Valuation allowance............... 20.0 $ 65.9
=========================================================================
1) As of September 30, 2004 and December 31, 2003 the Company held mortgage
loans with a carrying value of $11.9 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 $20.0 million, or no
appreciable percent of the carrying value of the portfolio as of September 30,
2004.
Investment Results
Net Investment Income. The following table summarizes the Company's investment
results for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 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....................... 5.19% $ 839.7 5.81% $ 942.1 5.57% $ 2,725.5 6.13% $ 2,847.1
Ending assets-excluding policy
loans (1)...................... 65,315.4 64,908.3 65,315.4 64,908.3
Policy loans
Gross income....................... 5.63% 28.4 6.17% 31.0 5.73% 87.0 6.07% 91.9
Ending assets...................... 2,017.0 2,012.5 2,017.0 2,012.5
Total gross income.......... 5.20% 868.1 5.82% 973.1 5.57% 2,812.5 6.13% 2,939.0
Less: investment expenses... (31.9) (41.6) (109.8) (132.1)
----------- ----------- ----------- -----------
Net investment income ...... 5.01% $ 836.2 5.57% $ 931.5 5.36% $ 2,702.7 5.86% $ 2,806.9
=========== =========== =========== ===========
65
JOHN HANCOCK LIFE INSURANCE COMPANY
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 September 30, 2004 Compared to Three Months Ended
September 30, 2003
Net investment income decreased $95.3 million from comparable prior year
period. The yield for the three months ended September 30, 2004, net of
investment expenses, on the general account portfolio decreased to 5.01% from
5.57% for the three months ended September 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 43 basis points for the third quarter
of 2004 compared to the third quarter of 2003.
o Lower performance in the quarter on hedge fund of fund investments had a
dilutive effect on the net portfolio yield on a pre-tax basis. The impact
was approximately a 15 basis point reduction in portfolio yield in the
third quarter of 2004 compared to the third quarter of 2003.
o As of September 30, 2004, the Company's asset portfolio had approximately
$12 billion of floating-rate exposure (primarily LIBOR). This compares to
a $13 billion level of exposure as of September 30, 2003. This exposure
was created mostly through interest rate swaps designed to match our
floating-rate liability portfolio. As of September 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 a reduction of 56 basis
points this quarter compared to 55 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
September 30, 2004, this dilutive effect was 8 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 $0.5
million in the third quarter of 2004 compared to the third quarter of
2003.
o Investment expenses were reduced $9.7 million in the three month period
ended September 30, 2004 compared to the prior year. Included are
reductions in state income tax, home office real estate expenses (the
majority of the home office real estate which was sold in March 2003), and
miscellaneous expenses.
o The inflow of new cash for the three month period ending September 30,
2004 was invested at rates that were below the portfolio rate. In
addition, maturing assets are rolling over into new investments at rates
below the portfolio rate. In the three month period ended September 30,
2004, weighted-average invested assets declined $168.6 million, or 0.25%,
from the prior year.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended
September 30, 2003
Net investment income decreased $104.2 million from comparable prior year
period. The yield for the nine months ended September 30, 2004, net of
investment expenses, on the general account portfolio decreased to 5.36% from
5.86% for the nine months ended September 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 35 basis points for the nine months
ended September 30, 2004 compared to the same period last year.
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JOHN HANCOCK LIFE INSURANCE COMPANY
o Lower performance in the quarter on hedge fund of fund investments had a
dilutive effect on the net portfolio yield on a pre-tax basis. The impact
was approximately a 4 basis point reduction in portfolio yield for the
nine months ended September 30, 2004 compared to the same period last
year.
o As of September 30, 2004, the Company's asset portfolio had approximately
$12 billion of floating-rate exposure (primarily LIBOR). This compares to
a $13 billion level of exposure as of September 30, 2003. This exposure
was created mostly through interest rate swaps designed to match our
floating-rate liability portfolio. As of September 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 a reduction of 50 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 nine month period ended
September 30, 2004, this dilutive effect was 9 basis points, compared to 9
basis points in the comparable prior year period. However, adjusting for
taxes, these investments increased the Company's net income by $2.6
million for the nine months ended September 20, 2004 compared to the same
period last year.
o Investment expenses were reduced $22.3 million in the nine month period
ended September 30, 2004 compared to the prior year. Included are
reductions in state income tax, home office real estate expenses (the
majority of the home office real estate was sold in March 2003), and
miscellaneous expenses.
o The inflow of new cash for the nine month period ending September 30, 2004
was invested at rates that were below the portfolio rate. In addition,
maturing assets are rolling over into new investments at rates below the
portfolio rate. In the nine month period ended September 30, 2004,
weighted-average invested assets grew $3,369.0 million, or 5.29%, from the
prior year.
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:
Impairments Net
For the Three Months Ended and Gross Gain Gross Loss Hedging Realized Investment
September 30, 2004 Reserves on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1) .......... $ (45.2) $ 54.9 $ (12.1) $ 6.2 $ 3.8
Equity securities ...................... -- 11.0 (0.6) -- 10.4
Mortgage loans on real estate........... (11.6) 4.5 (7.6) 1.6 (13.1)
Real estate............................. -- 2.4 -- -- 2.4
Other invested assets................... (6.7) 9.5 (2.3) -- 0.5
Derivatives............................. -- -- -- (151.6) (151.6)
----------------------------------------------------------------------------
Subtotal................. $ (63.5) $ 82.3 $ (22.6) $(143.8) (147.6)
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and
value of business acquired..................................................... 9.2
Amounts credited to participating pension contractholders.......................... 2.4
Amounts credited to the policyholder dividend obligation........................... (12.0)
----------------------
Total......................................................................... $(148.0)
======================
1) Fixed maturities gain on disposals includes prepayment gains of $28.6
million.
67
JOHN HANCOCK LIFE INSURANCE COMPANY
Impairments Net
For the Nine Months Ended and Gross Gain Gross Loss Hedging Realized Investment
September 30, 2004 Reserves on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1)........... $ (143.3) $ 204.9 $ (42.5) $ (70.8) $ (51.7)
Equity securities (2)................... (6.2) 99.8 (1.3) -- 92.3
Mortgage loans on real estate........... (37.6) 21.6 (9.0) (17.7) (42.7)
Real estate............................. -- 80.4 (2.3) -- 78.1
Other invested assets................... (43.9) 18.0 (11.0) -- (36.9)
Derivatives............................. -- -- -- (24.8) (24.8)
----------------------------------------------------------------------------
Subtotal................. $ (231.0) $ 424.7 $ (66.1) $ (113.3) 14.3
----------------------------------------------------------------------------
Amortization adjustment for deferred policy acquisition costs and
value of business acquired...................................................... 25.6
Amounts credited to participating pension contractholders.......................... (2.7)
Amounts credited to the policyholder dividend obligation........................... (35.3)
----------------------
Total......................................................................... $ 1.9
======================
1) Fixed maturities gain on disposals includes $42.5 million of gains from
previously impaired securities and prepayment gains of $85.8 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 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 nine month periods ended September 30, 2004 net realized
investment and other gains was a loss of $148.0 million and a gain of $1.9
million, respectively. For the same time periods, gross losses on impairments
and on disposal of investments - including bonds, equities, real estate,
mortgages and other invested assets was $86.1 million and $297.1 million,
respectively, excluding hedging adjustments. For the three and nine month
periods ended September 30, 2003, net realized investment and other
gains/(losses) were a loss of $62.7 million and a gain of $121.0 million,
respectively. Gross losses on impairments and disposals of investments,
excluding hedging adjustments, were $116.0 million and $529.6 million for the
three and nine month periods ended September 30, 2003, respectively.
For the three and nine month periods ended September 30, 2004,
respectively, realized gains on disposal of fixed maturities, excluding hedging
adjustments, were $54.9 million and $204.9 million, respectively. These gains
resulted from managing the portfolios for tax optimization and ongoing portfolio
positioning, as well as $28.6 million and $85.8 million, of prepayments for the
three and nine month periods ended September 30, 2004, respectively. There were
no recoveries on sales of previously impaired securities and $42.5 million of
recoveries on sales of previously impaired securities, for the three and nine
month periods ended September 30, 2004, respectively.
For the three and nine month periods ended September 30, 2004, realized
losses on the disposal of fixed maturities, excluding hedging adjustments, were
$12.1 million and $42.5 million, respectively. The Company generally intends to
hold securities in unrealized loss positions until they mature or recover.
However, fixed maturities are sold under certain circumstances such as when new
information causes a change in the 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.
68
JOHN HANCOCK LIFE INSURANCE COMPANY
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 Financial Officer, Chief
Investment Officer, Chief Risk Officer, Chief Credit Officer, and other senior
management. 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
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 nine month period ended September 30, 2004 of
$45.1 million and $157.6 million, respectively, (including impairment losses of
$45.2 million and $143.3 million, and a gain of $0.1 million and a loss of $14.3
million of previously recognized gains where the bond was part of a hedging
relationship, for three and nine month period ended September 30, 2004,
respectively).
Impairments and Losses on Disposals - Three Months Ended September 30, 2004
Of the $12.1 million of realized losses on sales of fixed maturity
securities for the three months ended September 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 $45.2 million of other than temporary impairments on
fixed maturity securities for the three months ended September 30, 2004. These
impairments primarily relate to securities in the airline industry ($30.4
million) and manufacturer of parcel delivery vans ($14.0 million).
The Company recorded losses due to other than temporary impairments of
lease investments and CDO and CBO equity investments of $6.7 million for the
three month period ended September 30, 2004. Equity investments in CDOs and CBOs
take the first loss risk in a pool of high yield debt. We have a total remaining
carrying value of $39.3 million and $60.0 million of CDO equity as of September
30, 2004 and December 31, 2003, which is currently supported by expected cash
flows.
The Company did not recognize any losses on other than temporary
impairments of common stock for the three month period ended September 30, 2004.
The Company recorded a net loss of $13.1 million on mortgage loans for the
three month period ended September 30, 2004 (of which $1.6 million was gains on
hedging adjustments). Included in this loss is an $11.6 million increase to
reserves for a retailer and an agricultural products company, for the three
months ended September 30, 2004.
69
JOHN HANCOCK LIFE INSURANCE COMPANY
There were also gains of $11.0 million on the sale of equity securities as
part of our overall investment strategy of using equity gains to offset credit
losses in the long term, gains of $9.5 million from the sale of other invested
assets, and gains of $2.4 million resulting from the sale of real estate for the
three month period ended September 30, 2004. Net derivative activity resulted in
a loss of $151.6 million for the three months ended September 30, 2004 resulting
from a slightly larger impact from interest rate changes on the Company's fair
value of hedged items in comparison to the changes in fair values of derivatives
hedging those items and the change in fair value of its derivatives that do not
qualify for hedge accounting.
Impairments and Losses on Disposals - Nine Months Ended September 30, 2004
Of the $42.5 million of realized losses on sales of fixed maturity
securities for the nine months ended September 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 period.
The Company recorded $143.3 million of other than temporary impairments of
fixed maturity securities for the nine months ended September 30, 2004. These
impairments relate primarily to: securities in the airline industry ($54.1
million), a manufacturer of parcel delivery vans ($27.9 million), private
placement securities related to secured lease obligations of a regional retail
food chain ($21.9 million) and one of the world's largest dairy companies ($17.5
million).
The Company recorded losses due to other than temporary impairments of
lease investments and CDO and CBO equity investments of $43.9 million for nine
month period ended September 30, 2004. The impairments on lease investments of
$37.0 million, primarily in the U.S. airline industry, drove the total
impairments on other invested assets. There were $6.9 million in impairments on
CDO and CBO equity investments for the period. Equity investments in CDOs and
CBOs take the first loss risk in a pool of high yield debt. We have a total
remaining carrying value of $39.3 million and $60.0 million of CDO equity as of
September 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 nine month period ended September 30, 2004
as the result of market values falling below cost for more than nine months.
The Company recorded a net loss of $42.7 million on mortgage loans for the
nine month period ended September 30, 2004 (of which $17.7 million was losses on
hedging adjustments). Included is a $37.6 million increase to reserves for a
refrigeration warehouse company, a milling company, a retailer and an
agricultural products company, for the nine months ended September 30, 2004.
There were also gains of $99.8 million on the sale of equity securities as
part of our overall investment strategy of using equity gains to offset credit
losses in the long term, gains of $18.0 million from the sale of other invested
assets, and gains of $80.4 million resulting from the sale of real estate for
the nine month period ended September 30, 2004. Net derivative activity resulted
in a loss of $24.8 million for the nine months ended September 30, 2004
resulting from a slightly larger impact from interest rate changes on the
Company's fair value of hedged items in comparison to the changes in the fair
value of derivatives hedging those items and the change in fair value of
derivatives that do not qualify for hedge accounting.
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.
70
JOHN HANCOCK LIFE INSURANCE COMPANY
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. Since April 28, 2004, the Company 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 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'
counter party credit 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 September 30, 2004, $42,698.7 million, or
89.6% of the fixed maturity securities held by us and rated by Standard & Poor's
Ratings 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
$4,954.4 million, or 10.4%, 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 $1,497.4 million and
$1,429.4 million for the nine month period ended September 30, 2004 and 2003,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, fees received and investment income. The $68.0 million
increase in the first nine months of 2004 as compared to the prior year resulted
primarily from a $114.0 million increase in cash inflows from fee and investment
income, a decrease of cash outflows for expenses of $57.2 million, and a
decrease in cash outflows in other assets and other liabilities of
$228.1 million. Partially offsetting these increases in cashflows was a $298.4
million increase in cash outflows for policy related costs and an increase in
cash outflows of $32.9 million for income taxes..
Net cash used in investing activities was $1,713.2 million and $3,384.5
million for the nine month periods ended September 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 $1,671.3 million decrease in cash used in the first quarter of 2004 as
compared to the same period in 2003 resulted primarily from a $2,597.7 million
reduction in net acquisitions, sales and maturities of fixed investments
partially offset by an $887.6 million cash decrease in cash inflows due to the
sale of Home Office properties in the first quarter of 2003.
71
JOHN HANCOCK LIFE INSURANCE COMPANY
Net cash used in financing activities was $1,327.0 million for the nine
month period ended September 30, 2004 and the net cash provided by financing
activities was $2,375.0 million for the nine month period ended September 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 $3,702.0 million
decrease in net cash provided by financing activities for the first nine 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 $3,622.0 million. Withdrawals
on such universal life insurance and investment-type contracts exceeded deposits
by $1,931.8 million for the first nine months of 2004, while during the same
period in 2003, deposits exceeded withdrawals by $1,690.2 million. In addition,
the consumer notes program experienced $79.9 million decrease in deposits
compared to the prior year. 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 facility: for $500 million (renewable in 2005). The
line of credit is available for general corporate purposes. The line of credit
agreement contains various covenants, among these being that statutory total
capital and surplus plus asset valuation reserve meet certain requirements. To
date, we have not borrowed any amounts under the line of credit.
As of September 30, 2004, we had $740.0 million of principal and interest
amounts of debt outstanding, consisting of $517.1 million of surplus notes,
$33.0 million of other notes payable (excluding $166.3 million in non-recourse
debt for Signature Fruit and an Australian farm management subsidiary). Also not
included in these amounts is the $23.6 million SFAS No. 133 fair value
adjustment to interest rate swaps held for the Surplus Notes.
The risk-based capital standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish a
risk-based capital ratio comparing adjusted surplus to required surplus for each
of our United States domiciled insurance subsidiaries. If the risk-based capital
ratio falls outside of acceptable ranges, regulatory action may be taken ranging
from increased information requirements to mandatory control by the domiciliary
insurance department. The risk-based capital ratios 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 was purchased from
unrelated QSPEs.
72
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
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 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 proceedings by regulatory or governmental authorities may result
in financial losses, harm our reputation and divert management resources; (20)
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JOHN HANCOCK LIFE INSURANCE COMPANY
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.
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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 6. EXHIBITS
Exhibit
Number Description
- ------ -----------
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JOHN HANCOCK LIFE INSURANCE COMPANY
Date: November 8, 2004 By: /s/ THOMAS E. MOLONEY
----------------------
Thomas E. Moloney
Senior Executive Vice President and
Chief Financial Officer