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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 March 31, 2005
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 3 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 May 9, 2005 there were outstanding 33,000 shares of common stock,
$10,000 par value per share, of the registrant, all of which were
owned by John Hancock Financial Services, Inc.
Reduced Disclosure Format
Registrant meets the conditions set forth in General Instruction H(1) (a)
and(b) of Form 10-Q and is therefore filing this Form with the
Reduced Disclosure Format.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
(unaudited)
-------------------------------
(in millions)
Assets
Investments
Fixed maturities:
Available-for-sale--at fair value
(cost: March 31--$46,321.4; December 31--$47,037.2) .. $46,532.0 $47,863.2
Equity securities:
Available-for-sale--at fair value
(cost: March 31--$441.1; December 31--$321.5) ........ 451.8 330.5
Trading securities--at fair value
(cost: March 31--$4.3; December 31--$4.2) ............ 4.3 4.2
Mortgage loans on real estate ............................. 11,600.6 11,792.6
Real estate ............................................... 272.9 277.2
Policy loans .............................................. 2,018.4 2,012.0
Short-term investments .................................... 0.2 0.2
Other invested assets ..................................... 3,371.6 3,359.3
--------- ---------
Total Investments ................................ 64,251.8 65,639.2
Cash and cash equivalents ................................. 666.8 1,073.3
Accrued investment income ................................. 787.1 683.0
Premiums and accounts receivable .......................... 93.7 67.2
Goodwill .................................................. 3,031.7 3,031.7
Value of business acquired ................................ 2,713.2 2,700.3
Deferred policy acquisition costs ......................... 317.7 181.4
Intangible assets ......................................... 1,346.1 1,348.5
Reinsurance recoverable ................................... 3,451.2 3,345.5
Other assets .............................................. 2,948.8 2,937.6
Separate account assets ................................... 18,370.5 18,753.0
--------- ---------
Total Assets ..................................... $97,978.6 $99,760.7
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
JOHN HANCOCK LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
March 31, December 31,
2005 2004
(unaudited)
-------------------------------
(in millions)
Liabilities and Shareholder's Equity
Liabilities
Future policy benefits .................................... $43,053.6 $42,962.8
Policyholders' funds ...................................... 18,137.6 19,385.8
Consumer notes ............................................ 2,456.0 2,379.1
Unearned revenue .......................................... 63.1 43.3
Unpaid claims and claim expense reserves .................. 171.3 187.8
Dividends payable to policyholders ........................ 435.1 441.3
Short-term debt ........................................... 96.4 137.7
Long-term debt ............................................ 568.2 577.6
Income taxes .............................................. 49.6 5.9
Other liabilities ......................................... 4,208.2 4,588.2
Separate account liabilities .............................. 18,370.5 18,753.0
--------- ---------
Total liabilities ................................ 87,609.6 89,462.5
Minority interests ........................................ 5.1 5.1
Commitments and contingencies - Note 4
Shareholder's Equity
Common stock, $10,000 par value; 33,000 and 1,000 shares
authorized and outstanding at March 31, 2005 and
December 31, 2004, respectively ........................ 330.0 10.0
Additional paid in capital ................................ 9,467.0 9,467.0
Retained earnings ......................................... 127.8 172.7
Accumulated other comprehensive income .................... 439.1 643.4
--------- ---------
Total Shareholder's Equity ....................... 10,363.9 10,293.1
--------- ---------
Total Liabilities and Shareholder's Equity ....... $97,978.6 $99,760.7
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Predecessor
Company Company
----------- -------------
Three Months Ended
March 31,
2005 2004
--------------------------
(in millions)
Revenues
Premiums ............................................................ $ 490.4 $ 470.7
Universal life and investment-type product fees ..................... 165.4 176.8
Net investment income ............................................... 864.3 983.5
Net realized investment and other gains (losses), net of related
amortization of deferred policy acquisition costs, amounts
credited to participating pension contractholders and the
policyholder dividend obligation $(64.8) and $(72.5) for the
three months ended March 31, 2005 and 2004, respectively) ........ 157.3 (97.7)
Investment management revenues, commissions and other fees .......... 136.3 132.4
Other revenue ....................................................... 63.5 71.2
-------- --------
Total revenues ................................................ 1,877.2 1,736.9
Benefits and Expenses
Benefits to policyholders, excluding amounts related to net
realized investment and other gains (losses) credited to
participating pension contractholders and the policyholder
dividend obligation $(60.8) and $(90.5) for the three months
ended March 31, 2005 and 2004, respectively) ..................... 903.7 935.3
Other operating costs and expenses .................................. 381.9 370.7
Amortization of deferred policy acquisition costs and value of
business acquired, excluding amounts related to net realized
investment and other gains (losses) $(4.0) and $18.0 for the
three months ended March 31, 2005 and 2004, respectively) ........ 47.8 106.8
Dividends to policyholders .......................................... 118.1 116.6
-------- --------
Total benefits and expenses ................................... 1,451.5 1,529.4
Income before income taxes and cumulative effect of accounting change .. 425.7 207.5
Income taxes ........................................................... 150.6 49.9
-------- --------
Income before cumulative effect of accounting change ................... 275.1 157.6
Cumulative effect of accounting change, net of tax ..................... -- (3.3)
-------- --------
Net income ............................................................. $ 275.1 $ 154.3
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other Total
Common Paid in Retained Comprehensive Shareholder's Outstanding
Stock Capital Earnings Income (Loss) Equity Shares
-----------------------------------------------------------------------------
(in millions, except for outstanding share data in thousands)
Predecessor Company
- -------------------
Balance at January 1, 2004..................... $10.0 $4,763.2 $1,332.1 $1,477.6 $ 7,582.9 1.0
Comprehensive income:
Net income.................................. 154.3 154.3
Other comprehensive income, net of tax:
Net unrealized gains (losses)............. 350.9 350.9
Net accumulated gains (losses) on cash
flow hedges............................. 113.7 113.7
Minimum pension liability................. 0.5 0.5
---------
Comprehensive income........................... 619.4
-----------------------------------------------------------------------------
Balance at March 31, 2004...................... $10.0 $4,763.2 $1,486.4 $1,942.7 $ 8,202.3 1.0
=============================================================================
Company
- -------
Balance at January 1, 2005.................... $ 10.0 $9,467.0 $ 172.7 $ 643.4 $10,293.1 1.0
Comprehensive income:
Net income.................................. 275.1 275.1
Other comprehensive income, net of tax:
Change in unrealized appreciation......... (262.8) (262.8)
Net accumulated gains (losses) on
cash flow hedges........................ 59.9 59.9
Foreign currency translation
adjustment.............................. (1.4) (1.4)
---------
Comprehensive income........................... 70.8
Contribution from parent company 320.0 320.0 32.0
Dividend paid to parent company (320.0) (320.0)
-----------------------------------------------------------------------------
Balance at March 31, 2005..................... $330.0 $9,467.0 $ 127.8 $ 439.1 $10,363.9 33.0
=============================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor
Company Company
----------- -------------
Three Months Ended
March 31,
2005 2004
--------------------------
(in millions)
Cash flows from operating activities:
Net income ......................................................................... $ 275.1 $ 154.3
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premium - fixed maturities ...................................... 158.4 11.4
Net realized investment and other (gains) losses ................................ (157.3) 97.7
Cumulative effect of accounting change .......................................... -- 3.3
Change in deferred policy acquisition costs ..................................... (71.2) --
Depreciation and amortization ................................................... 50.1 11.4
Decrease (increase) in accrued investment income ................................ (104.1) (50.6)
Net cash flows from trading securities .......................................... (0.1) --
Decrease (increase) in premiums and accounts receivable ......................... (26.5) (9.4)
Increase in other assets and other liabilities, net ............................. (145.2) (59.2)
Increase in policy liabilities and accruals, net ................................ 426.9 356.4
Increase in income taxes ........................................................ 148.8 21.3
-------- --------
Net cash provided by operating activities ................................... 554.9 536.6
Cash flows from investing activities:
Sales of:
Fixed maturities available-for-sale ............................................. 1,547.5 1,849.2
Equity securities available-for-sale ............................................ 11.8 79.2
Real estate ..................................................................... 0.3 8.2
Short-term investments and other invested assets ................................ 162.6 79.5
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity ............................................... -- 35.7
Fixed maturities available-for-sale ............................................. 1,202.6 996.4
Short-term investments and other invested assets ................................ -- 24.7
Mortgage loans on real estate ................................................... 389.7 507.8
Purchases of:
Fixed maturities available-for-sale ............................................. (2,414.0) (3,620.8)
Equity securities available-for-sale ............................................ (141.2) (38.6)
Real estate ..................................................................... (5.2) (2.4)
Short-term investments and other invested assets ................................ (122.5) (291.8)
Mortgage loans on real estate issued ............................................ (288.5) (309.2)
Other, net ......................................................................... 5.3 (77.9)
-------- --------
Net cash provided by (used in) investing activities ......................... 348.4 (760.0)
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
JOHN HANCOCK LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Predecessor
Company Company
----------- -------------
Three Months Ended
March 31,
2005 2004
--------------------------
(in millions)
Cash flows from financing activities:
Universal life and investment-type contract deposits ............................. $ 797.3 $ 1,766.4
Universal life and investment-type contract maturities and withdrawals ........... (2,142.1) (1,978.1)
Issuance of consumer notes ....................................................... 77.0 274.7
Issuance of long-term debt ....................................................... 0.3 0.2
Repayment of short-term debt ..................................................... (41.2) (37.9)
Repayment of long-term debt ...................................................... (1.1) (0.9)
--------- ---------
Net cash (used in) provided by financing activities .......................... (1,309.8) 24.4
--------- ---------
Net decrease in cash and cash equivalents .................................... (406.5) (199.0)
Cash and cash equivalents at beginning of year ............................... 1,073.3 2,626.9
--------- ---------
Cash and cash equivalents at end of period ................................... $ 666.8 $ 2,427.9
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Change of Control
John Hancock Life Insurance Company, (the Company) is a wholly owned
subsidiary of John Hancock Financial Services, Inc. (JHFS). Effective April 28,
2004, Manulife Financial Corporation ("Manulife") acquired all of the
outstanding common shares of JHFS that were not already beneficially owned by
Manulife as general fund assets and JHFS became a wholly owned subsidiary of
Manulife (the "acquisition" or "merger"). 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 of JHFS's shares by Manulife was effected through the
merger of JHFS with Jupiter Merger Corporation (Jupiter), a subsidiary of
Manulife, which was organized solely for the purpose of effecting the merger
with JHFS. Prior to the merger, Jupiter had a note payable to MLI Resources
Inc., an affiliated Manulife entity in the amount of $260.7 million in
consideration for previously purchased shares of JHFS, which were cancelled upon
merger.
The merger 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 merger and these values were "pushed down"
to the Company's financial statements in accordance with push down accounting
rules. 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 and
liabilities recorded as of April 28, 2004:
Fair Value
-------------
(in millions)
Assets:
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
Deferred tax asset................................. 436.4
Cash and cash equivalents.......................... 1,684.7
Reinsurance recoverable, net....................... 3,162.0
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
=============
8
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 1 -- Change of Control - (continued)
Goodwill of $3,031.7 million has been allocated to the Company's business
and geographic segments. Of the $3,031.7 million in goodwill, no material amount
is expected to be deductible for tax purposes. Value of business acquired is the
present value of estimated future profits of insurance policies in force related
to businesses acquired by Manulife, and has been allocated to the Company's
business and geographic segments.
Aside from goodwill and value of business acquired, intangible assets of
$1,352.0 million resulting from the acquisition consists of the "John Hancock"
brand name, distribution network, investment management contracts in the mutual
funds business and other investments management contracts in the institutional
investment advisory business. Refer to Note 7 -- Goodwill and Other Intangible
Assets for a more complete discussion of these intangible assets.
Restructuring Costs
Prior to the merger, the Company continued its Competitive Positioning
Project, which involved reducing costs and increasing future operating
efficiencies by consolidating portions of the Company's operations. The Project
consisted primarily of reducing staff in the home office and terminating certain
operations outside the home office. Following the acquisition of the Company by
Manulife on April 28, 2004, as previously discussed, Manulife developed a plan
to integrate the operations of the Company with its 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
Company's Consolidated Balance Sheets and in other operating costs and expenses
on the consolidated income statements.
The following details the amounts and status of restructuring costs:
Amount Utilized Amount Utilized
Pre-merger January 1, 2004 April 29, 2004
accrual at through through Accrual at
Type of Cost January 1, 2004 April 28, 2004 Accrued at merger December 31, 2004 December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------------
(in millions)
Personnel ....... $12.0 $ 3.3 $41.5 $ 9.6 $40.6
Facilities ...... -- -- 43.6 7.8 35.8
---------------------------------------------------------------------------------------------------
Total ........ $12.0 $ 3.3 $85.1 $17.4 $76.4
===================================================================================================
Amount Utilized
January 1, 2005
Accrual at through Accrual at
Type of Cost January 1, 2005 March 31, 2005 March 31, 2005
- -------------------------------------------------------------------------------------------------------------
(in millions)
Personnel ....... $40.6 $ 4.0 $36.6
Facilities ...... 35.8 4.1 31.7
-------------------------------------------------------------------------------
Total ........ $76.4 $ 8.1 $68.3
===============================================================================
9
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. These unaudited consolidated financial statements should be
read in conjunction with the Company's annual audited financial statements as of
December 31, 2004 included in the Company's Form 10-K for the year ended
December 31, 2004 filed with the United States Securities and Exchange
Commission (hereafter referred to as the Company's 2004 Form 10-K). The
Company's news releases, financial statements and other information are
available on the internet at www.manlife.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, 2004, 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.
10
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (continued)
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 as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to all stock-based employee compensation.
Three Months Ended March 31,
2005 2004
-------- --------
(in millions)
Net income, as reported ....................................... $ 275.1 $ 154.3
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects ............ 1.2 3.4
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects ........................................ 1.2 5.1
-------- --------
Pro-forma net income .......................................... $ 275.1 $ 152.6
======== ========
In the merger all of the JHFS unvested stock options as of the date of
announcement of the merger on September 28, 2003, vested immediately prior to
the closing date and were exchanged for options exercisable for approximately 23
million Manulife common shares. In addition, substantially all outstanding
grants of restricted stock as of the date of the announcement of the merger on
September 28, 2003, vested immediately prior to the closing date. The Company
granted approximately 29,000 shares of Manulife restricted stock subsequent to
the merger. Subsequent to the merger the Company continues to incur compensation
expense related to stock compensation issued by Manulife.
Cumulative Effect of Accounting Change
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 corresponding general account
balance sheet accounts.
11
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 2 -- Summary of Significant Accounting Policies - (continued)
Recent Accounting Pronouncements
FSP 46(R)-5 - Implicit Variable Interests under FASB Interpretation No.46
(FIN46R- revised December 2003), Consolidation of
Variable Interest Entities
In March, 2005, the staff of the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) 46(R) - 5, which requires the Company to
consider whether it holds implicit variable interests in variable interest
entities and potential variable interest entities, pursuant to determining if
the Company is the primary beneficiary of any such entity. Implicit variable
interests result when the Company may be indirectly exposed to expected losses
of a variable interest entity, instead of, or in addition to, being directly
exposed.
FSP 46(R)-5 is effective for the Company on April 1, 2005. The Company is
currently re-evaluating its relationships with variable interest entities and
potential variable interest entities.
Note 3 -- Segment Information
As a result of Manulife's merger with JHFS, 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. Further efforts at reorganization of JHFS included the movement of the
Investment Management Segment to the Corporate and Other Segment. Other
realignments include moving Signator Investors, Inc., the Company's 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 Program (IGP)
remains in international operations and John Hancock Accident (workers
compensation insurance) remains in the non-core business in the Corporate and
Other Segment while in Manulife's segment results IGP and John Hancock Accident
will be reported in Reinsurance. The financial results for all periods have been
reclassified to conform to the current period presentation.
During the majority of 2004, the Company operated in the following four
business segments: two segments primarily served retail customers, one segment
served institutional customers and the fourth segment was the Corporate and
Other Segment, which includes the institutional advisory business, the remaining
international operations, and the corporate account. The retail segments are the
Protection Segment and the Wealth Management Segment, previously called Asset
Gathering. The institutional segment is the Guaranteed and Structured Financial
Products Segment (G&SFP). In addition, in January 2005, the Company announced
the transfer of the G&SFP Segment to the Wealth Management Segment with an
intended focus on retail customers in the future. G&SFP is presented as its own
operating segment for the discussion of results below. See below for a more
detailed description of the Company's reportable segments.
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 the fifth segment was the
Corporate and Other Segment, which included the remaining international
operations, the corporate account and run-off from several discontinued business
lines. The retail segments were the Protection Segment and the Asset Gathering
Segment. The 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 2004 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.
12
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 3 -- Segment Information - (continued)
The accounting policies of the segments are the same as those described in
Note 2 -- Summary of Significant Accounting Policies in the Company's 2004 Form
10-K. Allocations of net investment income are based on the amount of assets
allocated to each segment. Other costs and operating expenses are allocated to
each segment based on a review of the nature of such costs, cost allocations
utilizing time studies, and other relevant allocation methodologies.
The following tables summarize 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 5 --
Closed Block in the notes to the consolidated financial statements.
Wealth Corporate
Protection Management G&SFP and Other Consolidated
-------------------------------------------------------------------
(in millions)
As of or for the three months ended March 31, 2005
Revenues from external customers ................... $ 527.9 $ 116.2 $ 19.5 $ 192.0 $ 855.6
Net investment income .............................. 347.7 160.3 312.1 44.2 864.3
Net realized investment and other gains (losses) ... 24.2 (19.8) 151.9 1.0 157.3
Inter-segment revenues .......................... -- 0.3 0.1 (0.4) --
-----------------------------------------------------------------
Revenues ........................................ $ 899.8 $ 257.0 $ 483.6 $ 236.8 $ 1,877.2
=================================================================
Net income ...................................... $ 122.2 $ 49.5 $ 128.4 $ (25.0) $ 275.1
=================================================================
Supplemental Information:
Equity in net income of investees accounted
for by the equity method ...................... $ 21.4 $ 5.6 $ 11.8 $ 8.2 $ 47.0
Carrying value of investments accounted for
under the equity method ....................... 805.1 333.6 689.3 659.6 2,487.6
Amortization of deferred policy acquisition
costs and value of business acquired,
excluding amounts related to net realized
investment and other gains (losses) ........... 21.7 18.3 7.8 -- 47.8
Segment assets .................................. $43,892.3 $19,563.3 $32,806.3 $ 1,716.7 $97,978.6
13
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 March 31, 2004
Revenues from external customers ................. $ 561.4 $ 92.2 $ 15.6 $ 181.9 $ 851.1
Net investment income ............................ 370.1 177.7 401.8 33.9 983.5
Inter-segment revenues ........................... -- 0.3 0.1 (0.4) --
Net realized investment and other
gains (losses), net ............................ (0.2) (7.0) (116.6) 26.1 (97.7)
-----------------------------------------------------------------
Revenues ......................................... $ 931.3 $ 263.2 $ 300.9 $ 241.5 $ 1,736.9
=================================================================
Net Income .......................................... $ 83.2 $ 31.6 $ (5.7) $ 45.2 $ 154.3
=================================================================
Supplemental Information:
Equity in net income of investees accounted
for by the equity method ....................... $ 8.6 $ 3.0 $ 9.9 $ 41.2 $ 62.7
Carrying value of investments accounted for
under the equity method ........................ 441.8 230.5 591.1 695.8 1,959.2
Amortization of deferred policy acquisition
costs, excluding amounts related to net
realized investment and other gains (losses) ... 65.4 41.1 0.5 (0.2) 106.8
Segment assets ................................... $38,180.3 $18,178.5 $36,520.2 $ 4,772.9 $98,651.9
14
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 4 -- Contingencies
Guarantees. In the course of business the Company enters into guarantees
which vary in nature and purpose and which are accounted for and disclosed under
accounting principles generally accepted in the U.S. specific to the insurance
industry. The Company has no material guarantees outstanding outside the scope
of insurance accounting at March 31, 2005.
Contingencies. Through the Company's group health insurance operations,
the Company entered into a number of reinsurance arrangements in respect to
personal accident insurance and the occupational accident component of workers
compensation insurance, a portion of which was originated through a pool managed
by Unicover Managers, Inc. Under these arrangements, the Company both assumed
risks as a reinsurer, and also passed 95% of these risks on to other companies.
This business had originally been reinsured by a number of different companies,
and has become the subject of widespread disputes. The disputes concern the
placement of the business with reinsurers and recovery of the reinsurance. The
Company is engaged in disputes, including a number of legal proceedings, in
respect to 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. During 2004 and the first quarter 2005, the Company received
additional information about its exposure and recognized additional charges of
$92.4 million and $30.9 million, respectively, as its best estimate of its
exposure as of March 31, 2005.
Legal Proceedings. The Company is regularly involved in litigation, both
as a defendant and as a plaintiff. The litigation naming it as a defendant
ordinarily involves activities as a provider of insurance protection and wealth
management products, as well as an investment adviser, employer and taxpayer. In
addition, state regulatory bodies, state attorneys general, the United States
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc. and other government and regulatory bodies regularly make
inquiries and, from time to time, require the production of information or
conduct examinations concerning compliance with, among other things, insurance
laws, securities laws, and laws governing the activities of broker-dealers. As
with many other companies in the financial services industry, the Company has
been requested or required by such government and regulatory authorities to
provide information with respect to market timing and late trading of mutual
funds and sales compensation and broker-dealer practices, including with respect
to mutual funds underlying variable life and annuity products. It is believed
that these inquiries are similar to those made to many financial service
companies by various agencies into practices, policies and procedures relating
to trading in mutual fund shares and sales compensation and broker-dealer
practices. Management intends to continue to cooperate fully with government and
regulatory authorities in connection with their respective inquiries. Management
does not believe that the conclusion of any current legal or regulatory matters,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial condition or results of operations.
15
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 -- Closed Block
In connection with the Company's plan of reorganization for its
demutualization and initial public offering, the Company created a closed block
for the benefit of policies included therein. Additional information regarding
the creation of the closed block and relevant accounting issues is contained in
the notes to consolidated financial statements of the Company's 2004 Form 10-K.
The following tables set forth certain summarized financial information relating
to the closed block as of the dates and periods indicated.
March 31, December 31,
2005 2004
---------------------------
(in millions)
Liabilities
Future policy benefits ................................................. $10,768.1 $10,759.5
Policyholder dividend obligation ....................................... 390.1 540.1
Policyholders' funds ................................................... 1,508.0 1,506.7
Policyholder dividends payable ......................................... 421.6 419.3
Other closed block liabilities ......................................... 96.2 64.4
-------------------------
Total closed block liabilities ...................................... $13,184.0 $13,290.0
-------------------------
Assets
Investments:
Fixed maturities:
Available-for-sale--at fair value
(cost: March 31--$6,587.3; December 31--$6,474.1) ................. $ 6,590.6 $ 6,585.6
Equity securities:
Available-for-sale--at fair value
(cost: March 31--$6.4 December 31--$7.0) .......................... 6.4 7.0
Mortgage loans on real estate .......................................... 1,617.2 1,662.0
Policy loans ........................................................... 1,535.0 1,534.3
Other invested assets .................................................. 332.8 324.3
-------------------------
Total investments ................................................... 10,082.0 10,113.2
Cash and cash equivalents .............................................. 74.3 142.9
Accrued investment income .............................................. 148.0 140.2
Other closed block assets .............................................. 323.6 317.2
-------------------------
Total closed block assets ........................................... $10,627.9 $10,713.5
-------------------------
Excess of reported closed block liabilities over assets
designated to the closed block ...................................... $ 2,556.1 $ 2,576.5
-------------------------
Portion of above representing other comprehensive income:
Unrealized appreciation (depreciation), net of tax of $(1.5)
million and ($39.7) million at March 31 and December 31,
respectively ...................................................... $ 3.6 $ 74.3
Allocated to the policyholder dividend obligation, net of tax of
$1.9 million and $40.1 million at March 31 and December 31,
respectively ...................................................... (3.6) (74.4)
-------------------------
Total ........................................................... -- (0.1)
-------------------------
Maximum future earnings to be recognized from closed block
assets and liabilities .............................................. $ 2,556.1 $ 2,576.4
=========================
16
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 5 -- Closed Block - (continued)
March 31, December 31,
2005 2004
---------------------------
(in millions)
Changes in the policyholder dividend obligation:
Balance at beginning of period ...................................... $ 540.1 $ 400.0
Impact on net income before income taxes .......................... (41.0) (68.4)
Unrealized investment gains (losses) .............................. (109.0) 0.1
Purchase Equation Fair value adjustment ........................... -- 208.4
--------------------------
Balance at end of period ............................................ $ 390.1 $ 540.1
==========================
The following table sets forth certain summarized financial information
relating to the closed block for the periods indicated:
Three Months Ended March 31,
2005 2004
----------------------------
(in millions)
Revenues
Premiums .............................................................. $ 199.4 $ 209.3
Net investment income ................................................. 132.4 157.9
Net realized investment and other gains (losses), net of amounts
credited to the policyholder dividend obligation of $14.9
million and $14.9 million, respectively ............................. 1.0 (1.1)
Other closed block revenues ........................................... -- (0.3)
----------------------------
Total closed block revenues ......................................... 332.8 365.8
Benefits and Expenses
Benefits to policyholders ............................................. 221.6 232.0
Change in the policyholder dividend obligation ........................ (26.7) (4.6)
Other closed block operating costs and expenses ....................... (0.2) 1.4
Dividends to policyholders ............................................ 106.9 104.8
----------------------------
Total benefits and expenses ......................................... 301.6 333.6
----------------------------
Closed block revenues, net of closed block benefits and expenses
and before income taxes ............................................. 31.2 32.2
Income taxes, net of amounts credited to the policyholder
dividend obligation of $0.6 million and $0.6 million, respectively .. 10.9 11.2
----------------------------
Closed block revenues, net of closed block benefits and expenses
and income taxes .................................................... $ 20.3 $ 21.0
============================
17
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Related Party Transactions
The Company provides JHFS, its parent, with personnel, property, and
facilities in carrying out certain of its corporate functions. The Company
annually determines a fee (the parent company service fee) for these services
and facilities based on a number of criteria, which are periodically revised to
reflect continuing changes in the Company's operations. The parent company
service fee is included in other operating costs and expenses within the
Company's income statements. The Company charged JHFS no service fees for the
three month period ended March 31, 2005 and $5.2 million for the three month
period ended March 31, 2004. As of March 31, 2005, JHFS was current in its
payments to the Company related to these services.
The Company has service agreements with an affiliate, John Hancock Life
Insurance Company (U.S.A) ("John Hancock U.S.A."), a subsidiary of the
Manufacturer's Life Insurance Company, to provide and/or receive administrative
services. For the period ended March 31, 2005, the Company was charged by John
Hancock U.S.A. for net services received totaling $16 million. In addition, the
Company and its subsidiaries received $15 million of commission revenues from
John Hancock U.S.A. for the sale of insurance and variable annuity products.
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 $1.2 million and $1.6 million for the three month
periods ended March 31, 2005 and 2004, respectively.
During the three month periods ended March 31, 2005 and 2004, the Company
paid $5.4 million and $19.0 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 $1,579.6
million at March 31, 2005 and $1,529.0 million at December 31, 2004, which are
included with other liabilities in the consolidated balance sheets and recorded
reinsurance recoverable from JHReCo of $2,228.6 million at March 31, 2005 and
$2,169.2 million at December 31, 2004, respectively, which are included with
other reinsurance recoverables on the consolidated balance sheets. Premiums
ceded to JHReCo were $124.0 million and $195.4 million for the three month
periods ended March 31, 2005 and 2004, 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 $290.0 million at March 31, 2005 and $286.5 million at
December 31, 2004, which is included with other liabilities in the consolidated
balance sheets. At March 31, 2005 and December 31, 2004, 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 $0.9 million and $0.3 million for the three month periods ended March 31,
2005 and 2004, 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 March 31, 2005,
the Company managed approximately $39.4 million of investments for Manulife
affiliates which to date generated market-based revenue for the Company.
Prior to its merger with Manulife, the Company reinsured certain portions
of its closed block with Manulife. During the fourth quarter of 2004, the Life
Company entered into an additional agreement covering closed block policies with
a Manulife affiliate. The Company entered into these reinsurance contracts in
order to facilitate its statutory capital management process. Both the original
and the revised reinsurance contracts are primarily written on a modified
18
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 6 -- Related Party Transactions - (continued)
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 consolidated statements of income.
The Company's Consolidated Financial Statements do not report reinsurance ceded
premiums or reinsurance recoverable. The Company's Consolidated Financial
Statements report a risk fee that was paid to the Manulife reinsurance companies
for the first quarter of 2005. This appears in other operating costs and
expenses in the Consolidated Statements of Income and was $0.4 million for the
three month period ending March 31, 2005.
On March 8, 2005, the Company issued 32,000 shares of Common Stock to its
sole shareholder, JHFS, for consideration of $320.0 million. The transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933.
Following notification to the Massachusetts Insurance Commissioner, the Company
paid a $320.0 million dividend to JHFS on March 7, 2005.
Note 7 -- Goodwill and Other Intangible Assets
The Company recognized several intangible assets which resulted from
business combinations during Manulife's merger with JHFS. See Note 1 -- Change
of Control for additional discussion of the merger.
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 net assets acquired by Manulife in the
recent merger. Brand name is the fair value of the Company's trademark and trade
name acquired by Manulife in the recent merger. Investment management contracts
are the fair values of the investment management relationships between the
Company and each of the mutual funds managed by the Company acquired by Manulife
in the recent merger.
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 by Manulife in the recent merger. VOBA had weighted average lives
ranging from 6 to 17 years for various insurance businesses at the merger.
Distribution networks are values assigned to the Company's networks of sales
agents and producers responsible for procuring business acquired by Manulife in
the recent merger. Distribution networks had weighted average lives of 22 years
at the merger. 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 at the merger. Collectively, these
amortizable intangible assets have a weighted average life of 15 years at the
merger.
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 unamortizable 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." 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
intangible asset's fair value is deemed to be less than its carrying value.
19
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Goodwill and Other Intangible Assets - (continued)
The following tables set forth certain summarized financial information
relating to the Company's intangible assets as of the dates and periods
indicated.
Accumulated
Gross Carrying Amortization
Amount and Other Changes Net Carrying Amount
-------------------------------------------------------------
(in millions)
March 31, 2005
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 $ (1.8) 395.4
Other investment management contracts .. 61.7 (3.9) 57.8
VOBA ................................... 2,864.6 (151.4) 2,713.2
December 31, 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 $ (0.7) 396.5
Other investment management contracts .. 61.7 (2.6) 59.1
VOBA ................................... 2,864.6 (164.3) 2,700.3
Three months ended March 31,
2005 2004
----------------------------
Aggregate amortization expense (in millions)
Distribution networks, net of tax of $ 0.4 million and
$ - million, respectively................................................ $ 0.7 --
Other management contract amortization, net of tax of $ 0.5 million
and $ - million, respectively............................................ 0.8 --
VOBA, net of tax of $ 12.9 million and $ 1.7 million,
respectively............................................................. 23.9 $3.1
----------------------------
Aggregate amortization expense, net of tax of $ 13.8 million and $ 1.7
million, respectively.................................................... $25.4 $3.1
============================
20
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Goodwill and Other Intangible Assets - (continued)
Tax Net
Effect Expense
------------------
(in millions)
Estimated future aggregate amortization expense for the years ending December 31,
2005........................................................................... $60.2 $111.8
2006........................................................................... 61.8 114.9
2007........................................................................... 53.0 98.5
2008........................................................................... 45.8 85.0
2009........................................................................... 43.5 80.8
The following tables present the continuity of each of the Company's
unamortizable and amortizable intangible assets for the periods presented.
Unamortizable intangible assets:
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Goodwill:
Balance at January 1, 2005.................... $ 1,842.3 $ 1,040.0 -- $ 149.4 $ 3,031.7
----------------------------------------------------------------------------
Balance at March 1, 2005...................... $ 1,842.3 $ 1,040.0 -- $ 149.4 $ 3,031.7
============================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
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 December 31, 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.
21
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Goodwill and Other Intangible Assets - (continued)
Unamortizable intangible assets - (continued):
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Brand name:
Balance at January 1, 2005 .................. $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
----------------------------------------------------------------------------
Balance at March 31, 2005 .................... $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
============================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Brand name:
Balance at January 1, 2004 ................... -- -- -- -- --
Brand name recognized (1) .................... $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
----------------------------------------------------------------------------
Balance at December 31, 2004 ................. $ 364.4 $ 209.0 -- $ 26.6 $ 600.0
============================================================================
(1) Brand name recognized in the purchase transaction with Manulife.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Investment management contracts:
Balance at January 1, 2005 ................... -- $ 292.9 -- -- $ 292.9
----------------------------------------------------------------------------
Balance at March 31, 2005 .................... -- $ 292.9 -- -- $ 292.9
============================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
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 December 31, 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.
22
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Goodwill and Other Intangible Assets - (continued)
Amortizable intangible assets:
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Distribution networks:
Balance at January 1, 2005 ................... $ 307.9 $ 88.6 -- -- $ 396.5
Amortization ................................. (1.0) (0.1) -- -- (1.1)
----------------------------------------------------------------------------
Balance at March 31, 2005 .................... $ 306.9 88.5 -- -- $ 395.4
============================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Distribution networks:
Balance at January 1, 2004 ................... -- -- -- -- --
Distribution networks recognized (1) ......... $ 308.6 $ 88.6 -- -- $ 397.2
Amortization ................................. (0.7) -- -- -- (0.7)
----------------------------------------------------------------------------
Balance at December 31, 2004 ................. $ 307.9 $ 88.6 -- -- $ 396.5
============================================================================
(1) Distribution networks recognized in the purchase transaction with
Manulife.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------------------------------------------------------------------------
Other investment management contracts:
Balance at January 1, 2005 ................... -- $ 19.5 -- $ 39.6 $ 59.1
Amortization ................................. -- (0.4) -- (0.9) (1.3)
---------------------------------------------------------------------------
Balance at March 31, 2005 .................... -- $ 19.1 -- $ 38.7 $ 57.8
===========================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
Other investment management contracts:
Balance at January 1, 2004 ................... -- -- -- -- --
Other investment management contracts
recognized (1) ............................. -- $ 20.3 -- $ 41.4 $ 61.7
Amortization ................................. -- (0.8) -- (1.8) (2.6)
----------------------------------------------------------------------------
Balance at December 31, 2004 ................. -- $ 19.5 -- $ 39.6 $ 59.1
============================================================================
(1) Other investment management contracts recognized in the purchase
transaction with Manulife.
23
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 7 -- Goodwill and Other Intangible Assets - (continued)
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
VOBA:
VOBA balance at January 1, 2005 .............. $2,084.1 $ 406.4 $209.8 -- $2,700.3
Amortization ................................. (17.8) (11.2) (7.8) -- (36.8)
Adjustment to unrealized gains (losses) on
securities available for sale .............. 22.5 27.2 -- -- 49.7
----------------------------------------------------------------------------
VOBA balance at March 31, 2005 ............... $2,088.8 $ 422.4 $202.0 -- $2,713.2
============================================================================
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
----------------------------------------------------------------------------
VOBA:
VOBA balance at January 1, 2004 .............. $ 168.5 -- -- -- $ 168.5
Amortization ................................. (5.1) -- -- -- (5.1)
Adjustment to unrealized gains (losses) on
securities available for sale .............. 5.5 -- -- -- 5.5
Other adjustments (1) ........................ (1.4) -- -- -- (1.4)
----------------------------------------------------------------------------
VOBA balance at April 28, 2004 ............... $ 167.5 -- -- -- $ 167.5
============================================================================
(1) VOBA existing prior to the merger with Manulife related to the acquisition
of the fixed universal life insurance business of Allmerica was adjusted
to reflect adjustments to the purchase equation.
Corporate
Wealth and
Protection Management G&SFP Other Consolidated
---------------------------------------------------------------------------
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 ................................. (35.4) (47.1) (38.1) -- (120.6)
Adjustment to unrealized gains (losses) on
securities available for sale ............. (22.3) (21.4) -- -- (43.7)
---------------------------------------------------------------------------
Balance at December 31, 2004 ................. $2,084.1 $ 406.4 $209.8 -- $2,700.3
===========================================================================
(1) VOBA derecognized in the purchase transaction with Manulife.
(2) VOBA recognized in the purchase transaction with Manulife.
24
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 8 -- Pension and Other Postretirement Benefit Plans
The following table demonstrates the components of the Company's net periodic
benefit cost for the periods indicated:
Net Periodic Benefit Cost
Three Months Ended March 31,
-----------------------------------------------
Other Postretirement
Pension Benefits Benefits
-----------------------------------------------
2005 2004 2005 2004
-----------------------------------------------
(in millions)
Service cost ........................... $ 6.2 $ 5.6 $ 0.4 $ 0.4
Interest cost .......................... 30.6 32.4 9.0 9.2
Expected return on plan assets ......... (43.8) (44.1) (5.4) (5.2)
Amortization of transition asset ....... -- -- -- --
Amortization of prior service cost ..... -- 1.7 -- (1.9)
Recognized actuarial gain .............. 0.2 6.2 -- 3.1
Other .................................. -- -- -- --
---------------------------------------------
Net periodic benefit cost ......... $ (6.8) $ 1.8 $ 4.0 $ 5.6
=============================================
Employer Contributions
The Company provides pension benefits to substantially all employees and
general agency personnel. These benefits are provided through both funded
qualified and unfunded non-qualified defined benefit and qualified defined
contribution pension plans. Through the non-qualified defined benefit plans, the
Company provides supplemental pension benefits to employees with salaries and/or
pension benefits in excess of the qualified plan limits under applicable law.
Prior to 2002, pension benefits under the defined benefit plans were also based
on years of service and final average compensation (generally during the three
years prior to retirement). In 2001, the defined benefit pension plans were
amended to a cash balance basis under which benefits are based on career average
compensation. Under grandfathering rules, employees within 5 years of early
retirement eligibility or employees over age 40 and with at least 10 years of
service will receive pension benefits based on the greater of the benefit from
the cash balance basis or the prior final average salary basis. This amendment
became effective on January 1, 2002.
Benefits related to the defined benefit pension plans paid to employees
and retirees were $49.5 million and $64.8 million for the first three months of
2005 and 2004 respectively.
The Company uses a December 31 measurement date.
The Company's policy is to fund its US other post retirement benefits in
amounts at or below the annual tax qualified limits. As of March 31, 2005, $13.4
million was contributed to its US other post retirement benefit plans. The
Company expects to contribute approximately $53.4 million to its US other post
retirement benefit plans in 2005.
Defined contribution plans include the Investment Incentive Plan and the
Savings and Investment Plan. The expense for defined contribution plans was $3.1
million and $3.4 million for the first three months of 2005 and 2004,
respectively.
In addition to the Company defined benefit pension plans, the Company has
employee welfare plans for medical and life insurance covering most of its
retired employees and general agency personnel. Substantially all employees may
become eligible for these benefits if they reach certain age and service
requirements while employed by the Company. The postretirement health care
coverages are contributory based for post January 1, 1992 non-union retirees. A
small portion of pre-January 1, 1992 non-union retirees also contribute. The
applicable contributions are based on the number of years of service. Dental
insurance is provided to eligible pre-January 1, 1992 retired employees.
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
25
JOHN HANCOCK LIFE INSURANCE COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Note 8 -- Pension and Other Postretirement Benefit Plans - (continued)
Modernization Act of 2003 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 from John Hancock. 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 Medicare's 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 FASB Staff Position FAS 106-2, the Company
reflected a reduction in liability for this group of $40.9 million as of the
purchase accounting remeasurement (April 28, 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 regulations on determining whether a benefit meets the
actual criteria for qualifying drug coverage have not been issued by Medicare as
of March 31, 2005, the Company will address the impact of the Act with respect
to post-1991 retirees once these clarifying regulations have been issued.
26
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 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 condensed 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 2004 Annual Report on Form 10-K. All of the Company's United
States Securities and Exchange Commission filings are available on the internet
at www.sec.gov under the name John Hancock 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 those 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
now operates as a subsidiary of Manulife and the John Hancock name is Manulife's
primary U.S. brand.
Critical Accounting Policies
General
Management has identified the accounting policies below as critical to the
Company's business operations and understanding of its results of operations.
For a detailed discussion of the application of these and other accounting
policies, see Note 2--Summary of Significant Accounting Policies in the notes to
consolidated financial statements of the Company's 2004 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. Management has discussed the identification, selection and
disclosure of critical accounting estimates and policies with the Audit
Committee of the Board of Directors.
27
JOHN HANCOCK LIFE INSURANCE COMPANY
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. In
accordance with "push down accounting", John Hancock, the acquired company,
adjusted 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
reflected management's reliance on independent price quotes where available.
Other purchase adjustments required significant management estimates and
assumptions. The purchase adjustments relating to intangible assets, including
brand name and VOBA, and liabilities, including policyholder reserves, required
management to exercise significant judgment to assess the value of these items.
The Company is in the process of completing the valuation of a portion of
the assets required 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 paragraphs below describe the Company's
relationships with, and the general nature of each major category of entity
analyzed by the Company under FIN 46R.
The Investment Management Segment of 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.
28
JOHN HANCOCK LIFE INSURANCE COMPANY
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, among others, 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
of FIN 46R will have no 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 these entities in Note 4 - Relationships with Variable Interest
Entities in the notes to its consolidated financial statements included in the
Company's 2004 Annual Report on Form 10-K.
Amortization of Deferred Acquisition Costs and Value of Business Added
(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 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
in force 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. DAC and VOBA are amortized on term
life and long-term care insurance ratably with premiums. DAC and VOBA on annuity
products and retail life, other than term life, insurance policies, are
amortized based on a percentage of the estimated gross profits over the life of
the policies, which are generally twenty years for annuities and thirty years
for life policies. Estimated gross profits are computed based on assumptions
related to the underlying policies including mortality, lapse, expenses, and
asset growth rates. DAC and VOBA and unearned revenue are amortized on these
policies such that the percentage of gross profits realized to the amount of DAC
and 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, the amortization of DAC and VOBA is also
adjusted to maintain a constant amortization percentage over the life of the
policies. The current estimated gross profits include certain judgments by the
Company's 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. History
has shown that the actual results over time for mortality, lapse and the
combination of investment returns and crediting rates (referred in the industry
as interest spread) for the life insurance and annuity products have reasonably
followed the long-term historical trends. As actual results for market
experience, or asset growth, fluctuate significantly from historical trends and
the long-term assumptions made in calculating expected gross profits, management
changes these assumptions periodically, as necessary.
Benefits to Policyholders
The liability for future policy benefits is the largest liability included
in the Company's consolidated balance sheets, equal to $43,053.6 million, or
49.1%, of total liabilities as of March 31, 2005. Changes in this liability are
generally reflected in the benefits to policyholders in the consolidated
statements of income. This liability is primarily comprised of the present value
of estimated future payments to holders of life insurance, long-term care
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. The Company
periodically reviews its policies for loss
29
JOHN HANCOCK LIFE INSURANCE COMPANY
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 the Company's 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 the Company's 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. The fair values of
these securities are calculated through the use of pricing models and discounted
cash flows calling for a substantial level of professional investment management
judgment. The Company's approach is based on currently available information,
including information obtained by reviewing similarly traded securities in the
market, and management believes 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. The 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 attempts are made 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 the Company's
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 and Chief Credit Officer.
See "Management's Discussion and Analysis of Financial Condition and Analysis of
Financial Condition and Results of Operations--General Account Investments"
section of this document for a more detailed discussion of this process and the
judgments used therein.
Benefit Plans
The Company annually reviews 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
annually as of each December 31 and for net periodic costs for the subsequent
calendar year resulting therefrom. The Company also performed this review as of
April 28, 2004, the date of JHFSs' merger with Manulife. All assumptions are
reviewed and approved by the Chief Financial Officer and reviewed with the Audit
Committee of the Board of Directors. Please refer to "Benefit Plans" in the
Critical Accounting Policies section of the Management's Discussion and Analysis
of Financial Condition and Results of Operations section included in the
Company's 2004 Annual Report on Form 10-K for further discussion of the
accounting policies the company uses for its employee benefit plans.
Income Taxes
The Company's reported effective tax rate on net income was 35.4% and
24.0% for the three month periods ending March 31, 2005 and 2004, respectively.
The increase in the effective tax rate between periods was 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". The effective tax rate is based on expected income,
statutory tax rates and tax planning opportunities available and requires
significant judgment in determining and in evaluating the Company's tax
positions. Despite the belief that the Company's tax return positions are fully
supportable, management believes that certain positions are likely to be
challenged and certain reserves are established in the event the Company may not
succeed. The reserves are adjusted in light of changing facts and circumstances,
30
JOHN HANCOCK LIFE INSURANCE COMPANY
such as the progress of a tax audit. The effective tax rate includes the impact
of reserve provisions and changes to reserves that management considers
appropriate.
Tax regulations require certain items to be included in the tax return at
different times than the items are reflected in the financial statements. As a
result, the effective tax rate reflected in the financial statements is
different than that reported in the Company's tax return. Some of these
differences are permanent, such as affordable housing tax credits, and some are
temporary differences, such as depreciation expense. Temporary differences
create deferred tax assets and liabilities. Deferred tax assets generally
represent items that can be used as tax deductions or credits in future tax
returns for which the related tax benefit has already been recognized in the
Company's income statement. The Company's 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 expenses recognized in the financial
statements for which payment has been deferred or for which deductions have been
taken on the tax return but have not yet recognized in the financial statements.
The Internal Revenue Service is currently examining the Company's 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, management believes that the current
reserves reflect the probable outcome of known tax contingencies. Tax reserves
are presented in the balance sheet within other liabilities.
Reinsurance
As part of the Manulife group of companies' subsequent to the merger, the
Company reinsures portions of the risks it assumes for its Protection Segment
insurance products. The maximum amount of individual ordinary life insurance
retained on any life is $20 million under an individual policy and $25 million
under a second-to-die policy. As of January 1, 2001, the Company established
additional reinsurance programs, which limit its 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. During the fourth quarter of 2004, the Company entered into an
additional agreement covering closed block policies with a Manulife affiliate in
order to facilitate its statutory capital management process. This transaction
increased the amount of reinsurance of the closed block with Manulife by 20%.
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 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
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 the entire Manulife group of companies for 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.
By entering into reinsurance agreements with a diverse group of highly
rated reinsurers, the Company seeks to control its exposure to losses.
Reinsurance, however, does not discharge the Company's legal obligations to pay
policy claims on the policies reinsured. As a result, it enters into reinsurance
agreements only with highly rated reinsurers. Nevertheless, there can be no
assurance that all reinsurers will pay the claims made against them. Failure of
reinsurers to pay claims or limitations or lack of catastrophic reinsurance in
the future, could adversely affect the Company's future net income and financial
position.
The long-term care insurance business units reinsure with John Hancock
Reassurance Company, LTD (JHReCo), a wholly owned subsidiary of JHFS. In 2001,
Group Long Term Care ceded 50% of their in force business prior to 1997 to
JHReCo (up from 40% in 2000 and 30% in 1999) and 50% of all new business
effective in 1997 and later. Retail Long-Term Care cedes to JHReCo 50% of all
new business effective 1997 and later and 50% of business assumed from the
acquisition of the Fortis long-term care insurance business in March of 2000.
Fortis was retro-ceded to JHReCo. The non-traditional life insurance business
reinsures with JHReCo 100% of the risk associated with the no lapse guarantee
benefit present in the protection universal life insurance products. This
reinsurance agreement was effective in 2001 and includes policies issued in
years 2001 and later. In addition, the traditional life insurance business
entered into a reinsurance agreement with JHReCo to reinsure 50% of its retained
31
JOHN HANCOCK LIFE INSURANCE COMPANY
level premium term business written by the Company's subsidiary, John Hancock
Variable Life Insurance Company. The agreement was effective in 2002 and
includes in force policies.
Results of Operations
JHFS, the Company's parent was merged with Manulife Financial Corporation
effective April 28, 2004. The following discussion provides an assessment of the
consolidated results of operations and liquidity and capital resources for the
Company and the Predecessor Company. As further discussed in Note 1 to the
Consolidated Financial Statements the merger was accounted for as a purchase.
Accordingly, the operating results for the three months ended March 31, 2005
reflect the results of operations of the Company subsequent to the merger and
include the impact of adjustments required under the purchase method of
accounting.
The table below presents the consolidated results of operations for the periods
presented.
Predecessor
Company Company
---------- ----------
Three Months Ended
March 31,
2005 2004
-----------------------
(in millions)
Revenues
Premiums ............................................................................. $ 490.4 $ 470.7
Universal life and investment-type product fees ...................................... 165.4 176.8
Net investment income ................................................................ 864.3 983.5
Net realized investment and other gains (losses), net of related amortization of
deferred policy acquisition costs, amounts credited to participating pension
contractholders and the policyholder dividend obligation (1) ...................... 157.3 (97.7)
Investment management revenues, commissions and other fees ........................... 136.3 132.4
Other revenue ........................................................................ 63.5 71.2
-------- --------
Total revenues ................................................................. 1,877.2 1,736.9
Benefits and Expenses
Benefits to policyholders, excluding amounts related to net realized
investment and other gains (losses) credited to participating pension
contractholders and the policyholder dividend obligation (2) ...................... 903.7 935.3
Other operating costs and expenses ................................................... 381.9 370.7
Amortization of deferred policy acquisition costs and value of business
acquired, excluding amounts related to net realized investment and
other gains (losses)(3) ........................................................... 47.8 106.8
Dividends to policyholders ........................................................... 118.1 116.6
-------- --------
Total benefits and expenses .................................................... 1,451.5 1,529.4
Income before income taxes and cumulative effect of accounting change ................... 425.7 207.5
Income taxes ............................................................................ 150.6 49.9
-------- --------
Income before cumulative effect of accounting change .................................... 275.1 157.6
Cumulative effect of accounting change, net of tax ..................................... -- (3.3)
-------- --------
Net income .............................................................................. $ 275.1 $ 154.3
======== ========
(1) Net of related amortization of deferred policy acquisition costs, amounts
credited to participating pension contractholders and the policyholder
dividend obligation of $(64.8) million and $(72.5) million for the three
months ended March 31, 2005 and 2004.
(2) Excluding amounts related to net realized investment and other gains
(losses) credited to participating pension contractholders and the
policyholder dividend obligation of $(60.8) million and $(90.5) million
for the three months ended March 31, 2005 and 2004, respectively.
(3) Excluding amounts related to net realized investment and other gains
(losses) of $(4.0) million and $18.0 million for the three months ended
March 31, 2005 and 2004, respectively.
32
JOHN HANCOCK LIFE INSURANCE COMPANY
Three Months Ended March 31, 2005 Compared with Three Months Ended
March 31, 2004
The Company operates in the following four business segments: two segments
primarily serve retail customers, one segment serves institutional customers,
and the fourth segment is the Corporate and Other Segment, which includes the
institutional advisory business, the remaining international operations, and the
corporate account. The retail segments are the Protection Segment and the Wealth
Management Segment, previously called Asset Gathering. The institutional segment
is the Guaranteed and Structured Financial Products Segment (G&SFP).
Consolidated income before income taxes increased $218.2 million, for the
three-month period ended March 31, 2005 from the prior year. The increase was
driven by $157.3 million in net realized investment and other gains in 2005
compared with $97.7 million in losses for the prior year period. This was
primarily due to increased gains on hedging instruments and fewer impairments of
securities. Other factors contributing to increase in income before taxes
included improved market appreciation, favorably impacting the Company's
variable product lines, and lower amortization of DAC and VOBA driven by
purchase accounting (see further discussion in the amortization of DAC and VOBA
paragraph below) on all segments. For additional analysis regarding net realized
investment and other gains (losses), see below and General Account Investments
in the MD&A.
Total revenues increased $140.3 million during the quarter compared with
the corresponding period in 2004. Premiums increased $19.7 million from the
prior year due largely to higher sales in the IGP segment, and higher in force
LTC business, partially offset by normal run off of business in the Closed
Block. Universal life and investment-type product fees decreased $11.4 million
from the prior year primarily due to not repeating higher amortization of
unearned revenue in 2004 driven by unlocking for higher future death claims and
lower sales in 2005. Net investment income decreased $119.2 million from the
prior year reflecting a decrease in yield on the general account portfolio
driven by the April 28, 2004 asset mark to market done in accordance with
purchase accounting guidelines and a decrease in average assets. (For additional
analysis of net investment income and yields see the General Account Investments
section of this MD&A.) Net realized investment and other gains (losses)
increased $255.0 million for the three months ended March 31, 2005 primarily due
to an increase in gains related to hedging adjustments and lower impairments.
(For additional analysis of Net realized investment and other gains (losses) see
the General Account Investments section of this MD&A.)
Total benefits and expenses decreased $77.9 million from the prior year.
Benefits to policyholders decreased $31.6 million due to a decline in the
average interest credited rate on account balances and a decrease in the
policyholder dividend obligation. Approximately $9 billion of spread-based
liabilities have floating rates which reset and reflect the lower interest rate
environment. Operating costs and expenses increased $11.2 million. Amortization
of value of business added (VOBA) and deferred policy acquisition costs (DAC)
decreased $59.0 million from the prior year primarily as a result of purchase
accounting on all segments. Purchase accounting adjusted the historical DAC
asset to zero and created a new VOBA asset. Dividends to policyholders increased
$1.5 million from the prior year.
Income taxes increased $100.7 million in the first quarter of 2005
compared with the first quarter of 2004 due to higher income before taxes
discussed previously and a higher effective tax rate. The effective tax rate
increased to 35.4% compared with 24.0% in the prior quarter 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, was a charge of $3.3
million in the first quarter of 2004 reflecting the adoption of 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.
33
JOHN HANCOCK LIFE INSURANCE COMPANY
General Account Investments
The Company manages its general account assets in investment segments that
support specific classes of product liabilities. These investment segments
facilitate the implementation of investment policies that both support the
financial characteristics of the underlying liabilities and provide returns on
invested capital. The investment segments also enable the monitoring of the
performance and profitability of the various businesses.
Asset/Liability Risk Management
The Company's primary investment objective is to maximize after-tax
returns within acceptable risk parameters. It is exposed to two primary types of
investment risk:
o Interest rate risk, meaning changes in the market value of 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.
A variety of techniques are used to control interest rate risk in the
portfolio of assets and liabilities. In general, risk management procedures are
designed to limit the net impact of interest rate changes on both assets and
liabilities. Assets are invested predominantly in fixed income securities, and
the asset portfolio is substantially 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 the asset-liability management efforts is the use of
interest rate derivatives. Select derivative instruments, such as interest rate
swaps and futures, are utilized to reduce the interest rate risk inherent in
combined portfolios of assets and liabilities.
Management of credit risk is also central to the business and considerable
resources are devoted to the credit analysis underlying each investment
acquisition. The corporate bond management group includes a staff of highly
specialized, experienced, and well-trained credit analysts. Management relies on
these analysts' ability to analyze complex private financing transactions and to
acquire the investments needed to profitably fund liability requirements. In
addition, when investing in private fixed maturity securities, broad access to
proprietary management information, negotiated protective covenants, call
protection features and collateral protection are used to minimize credit risk.
The 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 the
Company's 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.
The Company is able to hold to this investment strategy over the long term
because of its strong capital position, the fixed nature of its liabilities, the
matching of those liabilities with assets, and the experience gained through
many decades of a consistent investment philosophy. Generally all of the fixed
maturity investments are held to maturity to meet liability payments, and to
hold securities with any unrealized gains and losses over the long term.
However, bonds are sold under certain circumstances, such as when new
information causes changes in assessments of whether a bond will recover or
perform according to its contractual terms, in response to external events (such
34
JOHN HANCOCK LIFE INSURANCE COMPANY
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.
Overall Composition of the General Account
Invested assets, excluding separate accounts totaled $64.9 billion and
$66.7 billion as of March 31, 2005 and December 31, 2004, 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 following table shows the composition
of investments in the general account portfolio.
As of March 31, As of December 31,
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
-------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1)............ $46,532.0 71.7% $47,863.2 71.8%
Mortgage loans (2)....................... 11,600.6 17.9 11,792.6 17.7
Real estate.............................. 272.9 0.4 277.2 0.4
Policy loans (3)......................... 2,018.4 3.1 2,012.0 3.0
Equity securities........................ 456.1 0.7 334.7 0.5
Other invested assets ................... 3,371.6 5.2 3,359.3 5.0
Short-term investments................... 0.2 0.0 0.2 0.0
Cash and cash equivalents (4)............ 666.8 1.0 1,073.3 1.6
-------------------------------------------------------------------------
Total invested assets............. $64,918.6 100.0% $66,712.5 100.0%
=========================================================================
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $896.8 million and
$902.4 million as of March 31, 2005 and December 31, 2004, respectively.
The total fair value of the fixed maturity security portfolio was
$46,532.0 million and $47,863.2 million, at March 31, 2005 and December
31, 2004, respectively.
(2) The fair value for the mortgage loan portfolio was $11,469.4 million and
$11,873.1 million as of March 31, 2005 and December 31, 2004,
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. 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.
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 March 31, 2005, fixed maturity
securities represented 71.7% of general account invested assets with a carrying
value of $46.5 billion, comprised of 52.7% public securities and 47.3% private
securities. Each year, the Company directs the majority of net cash inflows into
investment grade fixed maturity securities. Typically, less than 10% 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 8% of invested assets and the majority of that balance in the BB
category. As of March 31, 2005, the below investment grade bonds were 6.7% of
invested assets, and 9.7% of total rated fixed maturities. Rated fixed maturity
securities exclude redeemable preferred stock. 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.
35
JOHN HANCOCK LIFE INSURANCE COMPANY
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 securty it reviews. Category 1 is the highest quality rating,
and Category 6 is the lowest. Categories 1 and 2 are the equivalent of
investment grade debt as defined by rating agencies such as S&P and Moody's
(i.e., BBB /Baa3 or higher), while Categories 3-6 are the equivalent of
below-investment grade securities. SVO ratings are reviewed and may be revised
at least once a year.
The following table shows the composition by credit quality of the fixed
maturity securities portfolio.
Fixed Maturity Securities -- By Credit Quality
As of March 31, As of December 31,
2005 2004
----------------------------------------------------------------
SVO S&P Equivalent Carrying % of Carrying % of
Rating (1) Designation (2) Value (3)(4) Total Value (3)(4) Total
- ----------------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A....................... $21,155.2 46.3% $20,826.0 44.4%
2 BBB............................ 20,109.5 44.0 21,409.2 45.6
3 BB............................. 2,532.9 5.6 2,548.5 5.4
4 B.............................. 1,212.1 2.7 1,423.8 3.0
5 CCC and lower.................. 419.1 0.9 526.2 1.1
6 In or near default............. 206.4 0.5 227.1 0.5
----------------------------------------------------------------
Subtotal................... 45,635.2 100.0% 46,960.8 100.0%
Redeemable preferred stock..... 896.8 902.4
----------------------------------------------------------------
Total fixed maturities..... $46,532.0 $47,863.2
================================================================
(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 47 securities that are awaiting an SVO rating, with a carrying
value of $536.8 million as of March 31, 2005 and 61 securities that are
awaiting an SVO rating, with a carrying value of $876.6 million at
December 31, 2004. 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) As of March 31, 2005 and December 31, 2004, 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.
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 90.3% and 90.0% of rated
fixed maturity investments invested in Category 1 and 2 as of March 31, 2005 and
December 31, 2004, respectively. Below investment grade bonds were 9.7% and
10.0% of fixed maturity investments rated by the SVO and 6.7% and 7.1% of total
invested assets at March 31, 2005 and December 31, 2004, respectively. This
allocation reflects the Company strategy of avoiding the unpredictability of
interest rate risk in favor of relying on the Company's bond analysts' ability
to better predict credit or default risk. The bond analysts operate in an
industry-based, team-oriented structure that permits the evaluation of a wide
range of below investment grade offerings in a variety of industries resulting
in a well-diversified high yield portfolio.
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, 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 the
Company's 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, which is added to the current U.S. Treasury rates to
36
JOHN HANCOCK LIFE INSURANCE COMPANY
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 and Chief
Credit Officer. The valuation of impaired bonds for which there is no quoted
price is typically based on the present value of the future cash flows expected
to be received. If the company is likely to continue operations, the estimate of
future cash flows is typically based on the expected operating cash flows of the
company that are available to make payments on the bonds. If the company is
likely to liquidate, the estimate of future cash flows is based on an estimate
of the liquidation value of its net assets.
As of March 31, 2005 and December 31, 2004, 58.0% and 53.9% of the
Company's below investment grade bonds were 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 $206.4 million and $227.1 million as of March 31, 2005 and December 31,
2004, respectively. As of March 31, 2005 and December 31, 2004, $0.9 million and
$0.5 million, of interest on bonds near default were included in accrued
investment income, respectively. 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.
In keeping with the investment philosophy of tightly managing interest
rate risk, the Company's MBS & ABS holdings are heavily concentrated in
commercial MBS where the underlying loans are largely call protected, which
means they are not pre-payable without penalty prior to maturity at the option
of the issuer. By investing in MBS and ABS securities with relatively
predictable repayments, the Company adds high quality, liquid assets to the
Company's 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 March 31, 2005 and December 31, 2004 was limited to approximately 25.3%
and 24.0% of its total MBS/ABS portfolio and 5.2% and 4.8% of its total fixed
maturity securities holdings, respectively.
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 following tables show the composition by the Company's internal industry
classification of the fixed maturity securities portfolio and the unrealized
gains and losses contained therein.
37
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade As of March 31, 2005
------------------------------------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Losses Gains Losses Losses
------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ................... $ 5,832.3 $ 22.0 $ 2,689.1 $ 67.2 $ 3,143.2 $ (45.2)
Communications ........................ 2,557.9 0.9 1,142.3 17.1 1,415.6 (16.2)
Government ............................ 2,729.3 21.1 1,348.8 34.5 1,380.5 (13.4)
Manufacturing ......................... 5,828.8 24.0 3,539.3 59.8 2,289.5 (35.8)
Oil & gas ............................. 3,602.0 38.9 2,285.8 65.6 1,316.2 (26.7)
Services/trade ........................ 2,422.9 (11.0) 1,039.1 9.6 1,383.8 (20.6)
Transportation ........................ 1,996.9 (0.6) 995.1 13.7 1,001.8 (14.3)
Utilities ............................. 7,070.0 62.8 4,566.6 97.7 2,503.4 (34.9)
-----------------------------------------------------------------------------------
Total corporate securities .............. 32,040.1 158.1 17,606.1 365.2 14,434.0 (207.1)
Asset-backed and mortgage-backed
securities ............................ 9,199.0 (14.0) 3,827.0 64.9 5,372.0 (78.9)
U.S. Treasury securities and obligations
of U.S. government agencies ........... 308.6 (2.4) 97.8 1.0 210.8 (3.4)
Debt securities issued by foreign
Governments ........................... 180.9 10.5 161.8 10.7 19.1 (0.2)
Obligations of states and political
subdivisions .......................... 294.8 (3.9) 27.7 0.2 267.1 (4.1)
-----------------------------------------------------------------------------------
Total ............................... $42,023.4 $ 148.3 $21,720.4 $ 442.0 $20,303.0 $ (293.7)
===================================================================================
Below Investment Grade As of March 31, 2005
------------------------------------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Losses Gains Losses Losses
------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ................ $ 73.5 $ (1.4) $ 18.1 $ 0.1 $ 55.4 $ (1.5)
Communications ..................... 157.6 0.1 103.9 4.9 53.7 (4.8)
Government ......................... 16.1 0.1 16.1 0.1 -- --
Manufacturing ...................... 1,084.4 18.1 599.0 37.9 485.4 (19.8)
Oil & gas .......................... 445.0 13.1 347.4 14.2 97.6 (1.1)
Services/trade ..................... 168.0 7.4 122.7 8.0 45.3 (0.6)
Transportation ..................... 412.5 (0.4) 183.2 8.4 229.3 (8.8)
Utilities .......................... 1,815.2 20.5 1,096.8 49.1 718.4 (28.6)
-----------------------------------------------------------------------------------
Total corporate securities ........... 4,172.3 57.5 2,487.2 122.7 1,685.1 (65.2)
Asset-backed and mortgage-backed
securities ......................... 324.1 4.0 217.2 8.4 106.9 (4.4)
Debt securities issued by foreign
Governments ........................ 12.2 0.6 11.3 0.6 0.9 --
-----------------------------------------------------------------------------------
Total ............................ $4,508.6 $ 62.1 $2,715.7 $ 131.7 $1,792.9 $ (69.6)
===================================================================================
38
JOHN HANCOCK LIFE INSURANCE COMPANY
Fixed Maturity Securities -- By Industry Classification/Sector
Investment Grade as of December 31, 2004
------------------------------------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Losses Gains Losses Losses
------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ................... $ 6,051.8 $ 84.0 $ 4,465.3 $ 96.7 $ 1,586.5 $ (12.7)
Communications ........................ 2,673.8 38.2 2,215.0 43.4 458.8 (5.2)
Government ............................ 2,783.5 45.8 2,097.3 47.7 686.2 (1.9)
Manufacturing ......................... 5,797.9 104.1 4,695.2 116.8 1,102.7 (12.7)
Oil & gas ............................. 3,748.3 90.0 3,306.8 93.5 441.5 (3.5)
Services / trade ...................... 2,569.9 25.0 1,971.3 30.1 598.6 (5.1)
Transportation ........................ 2,039.1 27.0 1,734.0 29.5 305.1 (2.5)
Utilities ............................. 7,296.3 149.3 6,234.4 154.6 1,061.9 (5.3)
-----------------------------------------------------------------------------------
Total corporate securities .............. 32,960.6 563.4 26,719.3 612.3 6,241.3 (48.9)
Asset-backed and mortgage-backed
securities ............................ 9,242.1 72.9 6,251.4 119.0 2,990.7 (46.1)
U.S. Treasury securities and obligations
of U.S. government agencies ........... 342.2 1.2 231.5 1.6 110.7 (0.4)
Debt securities issued by foreign
Governments ........................... 168.4 10.4 158.2 10.5 10.2 (0.1)
Obligations of states and political
Subdivisions .......................... 287.4 (0.9) 46.0 0.8 241.4 (1.7)
-----------------------------------------------------------------------------------
Total ............................... $43,000.7 $ 647.0 $33,406.4 $ 744.2 $ 9,594.3 (97.2)
===================================================================================
Below Investment Grade as of December 31, 2004
------------------------------------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
Net with Gross Gross with Gross Gross
Total Carrying Unrealized Unrealized Unrealized Unrealized Unrealized
Value Gain (Loss) Losses Gains Losses Losses
------------------------------------------------------------------------------------
(in millions)
Corporate securities:
Banking and finance ................... $ 77.0 $ (0.6) $ 18.4 $ 0.5 $ 58.6 $ (1.1)
Communications ........................ 148.9 8.7 101.6 9.1 47.3 (0.4)
Government ............................ 16.1 0.1 6.6 0.1 9.5 --
Manufacturing ......................... 1,189.0 53.6 733.8 57.4 455.2 (3.8)
Oil & gas ............................. 476.5 22.1 434.5 22.7 42.0 (0.6)
Services/trade ........................ 222.0 5.9 182.4 6.2 39.6 (0.3)
Transportation ........................ 474.6 14.4 370.6 17.8 104.0 (3.4)
Utilities ............................. 1,900.9 65.9 1,516.3 71.3 384.6 (5.4)
------------------------------------------------------------------------------------
Total corporate securities .............. 4,505.0 170.1 3,364.2 185.1 1,140.8 (15.0)
Asset-backed and mortgage-backed
securities ............................ 341.9 8.0 286.4 11.0 55.5 (3.0)
Debt securities issued by foreign
Governments ........................... 15.6 0.9 15.6 0.9 -- --
------------------------------------------------------------------------------------
Total ............................... $4,862.5 $ 179.0 $3,666.2 $ 197.0 $1,196.3 $ (18.0)
====================================================================================
39
JOHN HANCOCK LIFE INSURANCE COMPANY
As of March 31, 2005 and December 31, 2004, there were gross unrealized
gains of $573.7 million and $941.2 million, respectively, and gross unrealized
losses of $363.3 million and $115.2 million, respectively, on the fixed
maturities portfolio. As of March 31, 2005, gross unrealized losses of $363.3
million included $249.1 million, or 68.6%, concentrated in asset-backed/ and
mortgage-backed securities, manufacturing, banking & finance and utilities
securities. The tables above show gross unrealized losses before amounts that
are allocated to the closed block policyholders or participating pension
contractholders. Of the $363.3 million of gross unrealized losses in the
portfolio at March 31, 2005, $63.4 million was in the closed block and $19.5
million has been allocated to participating pension contractholders, leaving
$280.4 million of gross unrealized losses after such allocations. The December
31, 2004 gross unrealized losses of $115.2 million included $90.1 million, or
78.2%, concentrated in the utilities, manufacturing, banking & finance, and
asset-backed and mortgage-backed securities. Of the $115.2 million of gross
unrealized losses in the portfolio at December 31, 2004, $12.3 million was in
the closed block and $6.7 million was allocated to participating pension
contractholders, leaving $96.2 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 fixed maturities in the above
tables. The gross unrealized loss on investment grade fixed maturities (those
rated in categories 1 and 2 by the SVO) increased by $196.5 million in the
period ended March 31, 2005 to $293.7 million. The gross unrealized loss on
below investment grade fixed maturities (those rated in categories 3, 4, 5 and 6
by the SVO) increased over this period, by $51.6 million, to a total of $69.6
million as of March 31, 2005. The increased gross unrealized losses as of March
31, 2005 compared to December 31, 2004 were largely due to an increasing
interest rate environment since December 31, 2004.
The following table shows the composition by credit quality of the
securities with gross unrealized losses in the fixed maturity securities
portfolio.
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of March 31, 2005
--------------------------------------------------------------
Carrying Value of
SVO S&P Equivalent Securities with Gross % of Gross Unrealized % of
Rating (1) Designation (2) Unrealized Losses (3) Total Losses (3) Total
- ---------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A....................... $11,771.7 54.0% $(167.8) 47.7%
2 BBB............................ 8,330.7 38.3 (121.8) 34.6
3 BB............................. 1,121.3 5.2 (40.9) 11.6
4 B.............................. 402.7 1.8 (16.0) 4.6
5 CCC and lower.................. 126.2 0.6 (3.1) 0.9
6 In or near default............. 20.0 0.1 (2.3) 0.6
-------------------------------------------------------------
Subtotal.................. $21,772.6 100.0% $(351.9) 100.0%
=========== ============
Redeemable preferred stock..... 323.3 (11.4)
------------------ --------------
Total..................... $22,095.9 $(363.3)
================== ==============
(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 25 securities with gross unrealized losses that are awaiting an
SVO rating with a carrying value of $275.5 million and unrealized losses
of $6.2 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% and 1.7% of the
total carrying value and total gross unrealized losses of securities in a
loss position, including redeemable preferred stock, respectively.
40
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities -- By Quality
As of December 31, 2004
--------------------------------------------------------------
Carrying Value of
SVO S&P Equivalent Securities with Gross % of Gross Unrealized % of
Rating (1) Designation (2) Unrealized Losses (3) Total Losses (3) Total
- ---------------------------------------------------------------------------------------------------------------
(in millions) (in millions)
1 AAA/AA/A......................... $ 5,774.2 55.5% $ (63.8) 56.7%
2 BBB.............................. 3,547.8 34.1 (32.7) 29.0
3 BB............................... 720.7 6.9 (9.5) 8.4
4 B................................ 302.6 2.9 (4.1) 3.6
5 CCC and lower.................... 42.2 0.4 (1.2) 1.1
6 In or near default............... 23.1 0.2 (1.3) 1.2
-------------------------------------------------------------
Subtotal.................. $10,410.6 100.0% $(112.6) 100.0%
========== ==========
Redeemable preferred stock....... 380.0 (2.6)
---------------- ---------------
Total..................... $10,790.6 $(115.2)
================ ===============
(1) With respect to securities that are awaiting rating, the Company has
assigned a rating based on an analysis that it believes is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Includes 20 securities with gross unrealized losses are awaiting an SVO
rating with a carrying value of $213.6 million and unrealized losses of
$2.9 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 2.0% and 2.5% 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 March 31, 2005
-----------------------------------------------------------------------------------------
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) (in millions)
Three months or less ................. $12,888.7 $ 38.2 $ (201.2) $ 1,022.8 $ 2.2 $ (44.2)
Greater than three months to
six months ......................... 3,162.6 7.0 (59.4) 270.5 0.5 (7.2)
Greater than six months to
nine months ........................ 437.7 0.5 (11.0) 22.4 0.1 (1.4)
Greater than nine months to
twelve months ...................... 3,613.4 4.6 (68.3) 354.5 2.4 (14.7)
------------------------------------------- --------------------------------------------
Subtotal ........................ 20,102.4 50.3 (339.9) 1,670.2 5.2 (67.5)
Redeemable preferred stock ........... 200.6 0.3 (4.4) 122.7 -- (7.3)
------------------------------------------- --------------------------------------------
Total ........................... $20,303.0 $ 50.6 $ (344.3) $ 1,792.9 $ 5.2 $ (74.8)
=========================================== ============================================
41
JOHN HANCOCK LIFE INSURANCE COMPANY
Unrealized Losses on Fixed Maturity Securities --
By Investment Grade Category and Age
As of March 31, 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) (in millions)
Three months or less ................. $4,136.3 $ 3.5 $ (33.2) $ 351.3 $ (0.8) $ (1.9)
Greater than three months to
six months ......................... 652.3 (1.5) (16.6) 126.7 (0.5) (0.9)
Greater than six months to
nine months ........................ 4,533.5 0.7 (49.4) 610.5 (1.7) (10.3)
------------------------------------------- --------------------------------------------
Subtotal ........................ 9,322.1 2.7 (99.2) 1,088.5 (3.0) (13.1)
Redeemable preferred stock ........... 272.2 -- (0.7) 107.8 -- (1.9)
------------------------------------------- --------------------------------------------
Total ........................... $9,594.3 $ 2.7 $ (99.9) $1,196.3 $ (3.0) $ (15.0)
=========================================== ============================================
The tables above show the Company's investment grade and below investment
grade securities that were in a loss position at March 31, 2005 and December 31,
2004 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 March 31, 2005 and December 31, 2004, respectively, fixed maturity
securities had a total gross unrealized loss of $363.3 million and $115.2
million. The aging of securities reflects the mark to market on April 28, 2004.
Unrealized losses on investment grade securities principally relate to changes
in interest rates or changes in credit spreads since the securities were
acquired. Credit rating agencies statistics indicate that investment grade
securities have been found to be less likely to develop credit concerns.
The scheduled maturity dates for securities in an unrealized loss position
at March 31, 2005 and December 31, 2004 are shown below.
Unrealized Losses on Fixed Maturity Securities -- By Maturity
March 31, 2005 December 31, 2004
---------------------------------------------------------
Carrying Value Carrying Value
of Securities of Securities
with Gross Gross with Gross Gross
Unrealized Unrealized Unrealized Unrealized
Losses Losses Losses Losses
---------------------------------------------------------
(in millions) (in millions)
Due in one year or less................................... $ 1,571.8 $ (17.9) $ 1,178.5 $ $(4.8)
Due after one year through five years..................... 6,789.7 (108.4) 3,704.4 (25.0)
Due after five years through ten years.................... 5,688.4 (90.5) 1,418.5 (17.0)
Due after ten years....................................... 2,567.1 (63.2) 1,443.0 (19.3)
---------------------------------------------------------
16,617.0 (280.0) 7,744.4 (66.1)
Asset-backed and mortgage-backed securities............... 5,478.9 (83.3) 3,046.2 (49.1)
---------------------------------------------------------
Total................................................ $22,095.9 $(363.3) $10,790.6 $(115.2)
=========================================================
42
JOHN HANCOCK LIFE INSURANCE COMPANY
Mortgage Loans. As of March 31, 2005 and December 31, 2004, the Company
held mortgage loans with a carrying value of $11.6 billion and $11.8 billion,
respectively, including $2.7 billion and $2.9 billion, respectively, of
agricultural loans and $8.9 billion of commercial loans for both periods.
Impaired loans comprised 1.4% of the mortgage portfolio as of March 31, 2005 and
December 31, 2004.
The following table shows the Company's agricultural mortgage loan
portfolio by its three major sectors: agri-business, timber and production
agriculture.
As of March 31, 2005 As of December 31, 2004
------------------------------------- -----------------------------------------
Amortized Carrying % of Total Amortized Carrying % of Total
Cost Value Carrying Value Cost Value Carrying Value
------------------------------------- -----------------------------------------
(in millions) (in millions)
Agri-business .............. $1,685.3 $1,647.2 60.2% $1,821.9 $1,793.8 61.5%
Timber ..................... 1,077.7 1,077.7 39.4 1,110.4 1,110.4 38.1
Production agriculture ..... 10.4 10.4 0.4 13.5 13.5 0.4
------------------------------------- -----------------------------------------
Total ................... $2,773.4 $2,735.3 100.0% $2,945.8 $2,917.7 100.0%
===================================== =========================================
The following table shows the distribution of the Company's mortgage loan
portfolio by property type as of the dates indicated. The 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 March 31, 2005 As of December 31, 2004
-------------------------------------------------------------
Carrying % of Carrying % of
Value Total Value Total
-------------------------------------------------------------
(in millions) (in millions)
Apartment.......................... $ 1,633.5 14.1% $ 1,645.0 13.9%
Office Buildings................... 2,308.5 19.9 2,396.8 20.3
Retail............................. 2,814.8 24.3 2,677.7 22.8
Agricultural....................... 2,735.3 23.6 2,917.7 24.7
Industrial......................... 988.9 8.5 1,004.5 8.5
Hotels............................. 432.0 3.7 437.6 3.7
Mixed Use.......................... 418.5 3.6 433.0 3.7
Other.............................. 269.1 2.3 280.3 2.4
-------------------------------------------------------------
Total......................... $11,600.6 100.0% $11,792.6 100.0%
=============================================================
The following table shows the distribution of the mortgage loan portfolio
by geographical region, as defined by the American Council of Life Insurers
(ACLI).
Mortgage Loans -- By ACLI Region
As of March 31, 2005 As of December 31, 2004
--------------------------------------------------------------------------
Number Carrying % of Carrying % of
Of Loans Value Total Value Total
--------------------------------------------------------------------------
(in millions) (in millions)
East North Central....... 139 $ 1,201.6 10.4% $ 1,229.0 10.4%
East South Central....... 37 457.7 4.0 473.1 4.0
Middle Atlantic.......... 120 1,684.5 14.5 1,690.1 14.4
Mountain................. 94 747.6 6.4 746.4 6.3
New England.............. 95 947.9 8.2 932.0 7.9
Pacific.................. 271 2,580.0 22.2 2,529.7 21.5
South Atlantic........... 203 2,363.0 20.4 2,535.9 21.5
West North Central....... 69 409.6 3.5 408.4 3.5
West South Central....... 116 936.9 8.1 972.2 8.2
Canada/Other............. 11 271.8 2.3 275.8 2.3
--------------------------------------------------------------------------
Total............... 1,155 $11,600.6 100.0% $11,792.6 100.0%
==========================================================================
43
JOHN HANCOCK LIFE INSURANCE COMPANY
The following table shows the carrying values of the 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 the 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, management relies on
its 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
2005 2004
------------------------------------- ------------------------------------
Carrying % of Total Carrying % of Total
Value Mortgage Loans (1) Value Mortgage Loans (1)
------------------------------------- ------------------------------------
(in millions) (in millions)
Delinquent, not in foreclosure ............... $ -- -- $ 0.5 --
Delinquent, in foreclosure ................... 1.4 -- 1.4 --
Restructured ................................. 92.5 0.8% 107.3 0.9%
All other loans with a valuation allowance ... 25.7 0.2 25.8 0.2
------------------------------------- ------------------------------------
Total ..................................... $119.6 1.0% $135.0 1.1%
===================================== ====================================
Valuation allowance .......................... $ 55.3 $ 45.3
============= ============
(1) As of March 31, 2005 and December 31, 2004 the Company held mortgage loans
with a carrying value of $11.6 billion and $11.8 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 $55.3 million, or
0.5% of the carrying value of the portfolio as of March 31, 2005. There were no
foreclosed loans during the three months ended March 31, 2005 and March 31,
2004.
44
JOHN HANCOCK LIFE INSURANCE COMPANY
Investment Results
Net Investment Income. The following table summarizes the Company's
investment results for the periods indicated.
For the Three Months Ended March 31 ,
------------------------------------------------------
2005 2004
Yield Amount Yield Amount
------------------------------------------------------
(in millions) (in millions)
General account assets-excluding policy loans
Gross income ......................................... 5.43% $ 866.2 6.00% $ 993.1
Ending invested assets, excluding policy loans (1) ... 62,900.2 67,565.9
Policy loans
Gross income ......................................... 6.18% 31.1 5.83% 29.4
Ending assets ........................................ 2,018.4 2,014.2
------------ ------------
Total gross income ................................... 5.45% 897.3 5.99% 1,022.5
Less: investment expenses ............................ (33.0) (39.0)
------------ ------------
Net investment income .............................. 5.25% $ 864.3 5.77% $ 983.5
============ ============
(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 March 31, 2005 Compared to Three Months Ended March 31, 2004
Net investment income decreased $119.2 million from comparable prior year
period. The yield for the three months ended March 31, 2005, net of investment
expenses, on the general account portfolio decreased to 5.25% from 5.77% for the
three months ended March 31, 2004. 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 56 basis
points for the three months ended March 31, 2005 compared to the
prior year.
o As of March 31, 2005 and March 31, 2004, the Company's asset
portfolio had approximately $12 billion of floating-rate exposure
(primarily LIBOR). This exposure was created mostly through interest
rate swaps designed to match the floating-rate liability portfolio.
As of March 31, 2005, approximately 84% of this exposure, excluding
cash and short-term investments, was directly offset by exposure to
floating-rate liabilities. Most of the remaining 16% 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 approximately 14 basis points for the
first quarter of 2005 compared to a reduction of 50 basis points for
the first quarter of 2004.
o In 2005, weighted-average invested assets decreased $1,007.4
million, or 1.5%, from the prior year. These declines have occurred
in higher-yielding investments. Additionally, new investments have
been at rates below the existing portfolio rates. These two factors
account for the majority of the remaining decline in the portfolio
yield.
o Investment expenses were reduced $6.0 million in the three month
period ended March 31, 2005 compared to the prior year as a result
of synergies created subsequent to the Manulife acquisition.
45
JOHN HANCOCK LIFE INSURANCE COMPANY
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:
For the Three Months ended March 31, 2005 Gross Gain Gross Loss Hedging Net Realized Investment
Impairment on Disposal on Disposal Adjustments and Other Gain/(Loss)
----------------------------------------------------------------------------
(in millions)
Fixed maturity securities (1)........... $ (28.0) $ 82.8 $ (9.9) $ 5.3 $ 50.2
Equity securities....................... (0.6) 1.3 (0.5) -- 0.2
Mortgage loans on real estate........... (10.0) 2.4 (0.7) 1.9 (6.4)
Real estate............................. -- -- (0.8) -- (0.8)
Other invested assets................... (13.2) 2.3 (0.3) -- (11.2)
Derivatives............................. -- -- -- 60.5 60.5
----------------------------------------------------------------------------
Subtotal................. $ (51.8) $ 88.8 $ (12.2) $ 67.7 $ 92.5
============================================================================
Amortization adjustment for deferred policy acquisition costs...................... 4.0
Amounts credited to participating pension contractholders.......................... 45.9
Amounts credited to the policyholder dividend obligation........................... 14.9
----------------------
Total......................................................................... $ 157.3
======================
(1) Fixed maturities loss on disposals includes $0.2 million of credit related
losses.
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.
For the three months ended March 31, 2005 the Company's net realized
investment and other gains and losses was a gain of $157.3 million compared to a
loss of $97.7 million for the three months ended March 31, 2004. For the three
months ended March 31, 2005 gross losses on impairments and on disposal of
investments - including bonds, equities, real estate, mortgages and other
invested assets was $64.0 million, excluding hedging adjustments, compared to
$96.4 million for the three months ended March 31, 2004.
For the three months ended March 31, 2005, realized gains on disposal of
fixed maturities, excluding hedging adjustments, were $82.8 million. These gains
resulted from prepayments with make-whole provisions and from ongoing portfolio
positioning. There were no recoveries on sales of previously impaired securities
for the three months ended March 31, 2005.
For the three months ended March 31, 2005, the Company realized losses on
the disposal of fixed maturities, excluding hedging adjustments, of $9.9
million. 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.
At the end of each quarter, the Company's 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
46
JOHN HANCOCK LIFE INSURANCE COMPANY
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, and Chief Credit Officer.
This quarterly process includes a fresh assessment of the credit quality of each
investment in the entire fixed maturities portfolio.
The Company considers relevant facts and circumstances in evaluating
whether the impairment of a security is other than temporary. Relevant facts and
circumstances considered include (1) the length of time the fair value has been
below cost; (2) the financial position of the issuer, including the current and
future impact of any specific events; and (3) the company's ability and intent
to hold the security to maturity or until it recovers in value. To the extent
the Company determines that a security is deemed to be other than temporarily
impaired the difference between amortized cost and fair value would be charged
to earnings.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if an impairment is other than
temporary. These risks and uncertainties include (1) the risk that the
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 the Company's investment professionals who determine the fair value
estimates and other than temporary impairments, and (4) the risk that new
information obtained or changes in other facts and circumstances lead to change
management's 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.
Realized Gains, Losses and Impairments on Disposals - Three Months Ended
March 31, 2005
Of the $9.9 million of realized losses on sales of fixed maturity
securities for the three months ended March 31, 2005, there was a total of $0.2
million in credit losses. Most of the sales were related to general portfolio
management, and the losses resulted from increasing interest rates during the
period.
The Company recorded $28.0 million of other than temporary impairments of
fixed maturity securities for the three months ended March 31, 2005. These
impairments relate to: a privately held pharmaceutical company ($19.8 million),
private fixed maturities of a power company ($5.0 million), and private fixed
maturities of a company in the resort industry ($3.2 million).
The Company recorded losses due to other than temporary impairments of
other invested assets of $13.2 million for three months ended March 31, 2005.
These impairments relate to investments in: an electricity generating project
($8.9 million) and a company in the entertainment industry ($4.3 million). There
were no impairments on CBO and CDO equity for the period. Equity in these CBOs
and CDOs take the first loss risk in a pool of high yield debt. The total
remaining carrying value was $34.1 million and $34.9 million of CBO and CDO
equity as of March 31, 2005 and December 31, 2004, respectively, which is
currently supported by expected cash flows.
The Company also recognized losses on other than temporary impairments of
common stock of $0.6 million for the three months ended March 31, 2005 as a
result of market values falling below cost for more than six months.
The Company recorded a net loss of $6.4 million on mortgage loans for the
three months ended March 31, 2005 (which is net of $1.9 million in hedging
adjustment gains). Also included in this loss is $10.0 million in impairments.
These impairments relate to mortgages on a refrigeration warehouse company.
There were also gains of $1.3 million on the sale of equity securities as
part of the Company's overall investment strategy of using equity gains to
offset credit losses in the long term, and gains of $2.3 million from the sale
of other invested assets for the three months ended March 31, 2005. Net
derivative activity resulted in a gain of $60.5 million for the three months
ended March 31, 2005 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 value of its derivatives hedging those items and the change in the fair
value of derivatives that do not qualify for hedge accounting
47
JOHN HANCOCK LIFE INSURANCE COMPANY
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 include 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 its parent company. All of the
outstanding common stock of John Hancock Life Insurance Company is owned by its
Parent, an insurance holding company, John Hancock Financial Services, Inc.
State insurance laws generally restrict the ability of insurance companies
to pay cash dividends in excess of prescribed limitations without prior
approval. The Company's limit is the greater of 10% of its 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.
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, the Company's liquidity requirements relate principally to
the liabilities associated with various life insurance, annuity, and structured
investment products, and to the funding of investments in new products,
processes, and technologies. Product liabilities include the payment of benefits
under life insurance, annuity and structured investment products and the payment
of policy surrenders, withdrawals and policy loans. The Company periodically
adjusts its investment policy to respond to changes in short-term and long-term
cash requirements and provide adequate funds to pay benefits without forced
sales of investments.
The Company's relative liquidity is reflected in its credit ratings
assigned by the major credit rating agencies. At March 31, 2005, The Company's
financial strength / claims paying abilities were all rated AA+ by Standard &
Poor's Rating Services, a division of the McGraw-Hill Companies, Inc. (S&P), Aa3
by Moody's Investors Service (Moody's), A++ by A.M. Best Company and AA+ by
Fitch Ratings (Fitch). The Company's senior unsecured debt rating was AA+ from
S&P and A1 from Moody's.
The liquidity of the Company's insurance operations is also related to the
overall quality of its investments. As of March 31, 2005, $41,264.7 million, or
90.3% of the fixed maturity securities held by the Company and rated by 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 $4,370.5 million or 9.7%
of fixed maturity investments were rated non-investment grade. For additional
discussion of the Company's investment portfolio see the General Account
Investments section of this Management's Discussion and Analysis of Financial
Condition and Results of Segment Operations.
The Company employs an asset/liability management approach tailored to the
specific requirements of each of its 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, the Company develops 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.
48
JOHN HANCOCK LIFE INSURANCE COMPANY
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 the Company's United States domiciled insurance subsidiaries. If the
risk-based capital ratio falls outside of acceptable ranges, regulatory action
may be taken ranging from increased information requirements to mandatory
control by the domiciliary insurance department. The risk-based capital ratios
of all the Company and its insurance subsidiaries as of March 31, 2005, were
above the ranges that would require regulatory action.
The Company maintains reinsurance programs designed to protect against
large or unusual losses. Based on the Company's periodic review of its
reinsurers' financial statements, financial strength ratings and reputations in
the reinsurance marketplace, the Company believes that its reinsurers are
financially sound, and, therefore, that the Company has no significant exposure
to uncollectible reinsurance in excess of uncollectible amounts recognized in
its consolidated financial statements.
Analysis of Consolidated Statement of Cash Flows
Net cash provided by operating activities was $ 554.9 million and $ 536.6
million for the three month periods ended March 31, 2005 and 2004, respectively.
Cash flows from operating activities are affected by the timing of premiums
received, fees received, investment income and the payment of policy related
costs. The $ 18.3 million increase in the first three months of 2005 as compared
to the same period in 2004 is largely attributable to a $ 100.6 million decrease
in policyholder benefits and dividends paid, and a $ 26.8 million decrease in
income taxes paid, offset by a $ 86.0 million change to other assets net of
other liabilities, and a $ 25.8 million decrease in investment income received.
Net cash provided by investing activities was $348.4 million and $ (760.0)
million for the three month periods ended March 31, 2005 and 2004, 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 $1,108.4 million
increase in cash provided in the first three months of 2005 as compared to the
same period in 2004 is largely attributable to a $ 1,075.6 million decrease in
net acquisition of fixed maturity securities, a $ 227.7 million decrease in net
acquisition of short-term investments and other invested assets, offset by a $
170.0 million increase in net acquisition of equity securities, and a $ 97.4
million increase in net acquisition of mortgage loans.
Net cash provided by financing activities was $ (1,309.8) million and $
24.4 million for the three month periods ended March 31, 2005 and 2004,
respectively. Changes in cash provided by financing activities primarily relate
to excess deposits or withdrawals under investment type contracts, the issuance
of debt and borrowings or re-payments of the Company's debt. The $ 1,334.2
million decrease in net cash provided by financing activities in the first three
months of 2005 as compared to the same period in 2004 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 $ 1,133.1 million, and a
decrease in funds from the issuance of consumer notes of $ 197.7 million. The
Company's ability to generate customer deposits in excess of maturities and
withdrawals on universal life insurance and investment-type contracts is
critical to long-term growth. Withdrawals exceeded deposits by $ 1,344.8 million
and by $ 211.7 million for the three months ended March 31, 2005 and 2004,
respectively.
49
JOHN HANCOCK LIFE INSURANCE COMPANY
Lines of Credit, Debt and Guarantees
At March 31, 2005 the Company had two separate committed lines of credit:
one of $500 million, through a syndication of banks including Fleet National
Bank, JPMorgan Chase, Citicorp USA, 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
"external line of credit"); the second of $1.0 billion with the Company's
parent, Manulife (the "Manulife line of credit"). The external line of credit
agreement provides for a multi-year facility for $500 million which expires on
August 3, 2005 and will not be renewed. The external line of credit is available
for general corporate purposes. The external line of credit agreement has no
material adverse change clause, and includes, among others, the following
covenants: minimum requirements for JHFS shareholder's equity, maximum limit on
the capitalization ratio and a negative pledge clause (with exceptions) as well
as limitations on subsidiary debt, none of which were triggered as of March 31,
2005. The external line of credit also contains cross-acceleration provisions,
none of which were triggered as of March 31, 2005. The fee structure of the
external line of credit is determined by the rating levels of JHFS or the
Company. To date, the Company has not borrowed any amounts under the external
lines of credit as of March 31, 2005.
The Manulife line of credit agreement provides for a 364-day credit
facility for $1.0 billion. Manulife will commit, when requested, to loan funds
at prevailing interest rates as determined in accordance with the line of credit
agreement. Under the terms of the agreement, the Company is required to maintain
certain minimum levels of net worth and comply with certain other covenants,
which were met at March 31, 2005. To date, the Company has not borrowed any
amounts under the external or Manulife lines of credit as of March 31, 2005.
As of March 31, 2005, the Company had $ 664.6 million of principal and
interest amounts of debt outstanding consisting of $516.4 million of surplus
notes, $ 21.7 million of other notes payable, $112.8 million non-recourse debt
for Signature Fruit and an Australian farm management subsidiary, and $ 13.7
million SFAS No. 133 fair value adjustment to interest rate swaps held for the
surplus notes.
In addition, the Company has outstanding $ 2,456.0 million of consumer
notes which are redeemable upon the death of the holder, subject to an annual
overall program redemption limitation of 1% of the aggregate securities
outstanding, or an individual redemption limitation of $ 200,000 of aggregate
principal, and mature at a various dates in the future. Covenants in this
program include, among others, limitations on liens.
In the course of business the Company enters into guarantees which vary in
nature and purpose and which are accounted for and disclosed under accounting
principles generally accepted in the U.S. specific to the insurance industry.
The Company has no material guarantees outstanding outside the scope of
insurance accounting at March 31, 2005.
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 some 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 arises in its commercial mortgage
banking subsidiary. The Company's commercial mortgage banking subsidiary
originates commercial mortgages and sells them to QSPEs which then issue
mortgage backed securities (MBS). The Company engages in this activity to earn
fees during the origination process, and to generate realized gains during the
securitization process. The Company may purchase MBS from the QSPEs which buy
the Company's mortgages, in order to generate net investment income. The
majority of the Company's MBS portfolio was purchased from QSPEs to which the
Company has not sold mortgages.
50
JOHN HANCOCK LIFE INSURANCE COMPANY
These QSPEs and other special purpose entities also include CDO funds the
Company manages and may also invest in, which are considered variable interest
entities and are discussed in detail in Note 4 - Relationships with the Variable
Interest Entities in the Company's Consolidated Financial Statements in the
Company's 2004 Annual Report on Form 10-K. The Company generates fee income from
the CDO funds it manages, and generates net investment income from CDOs it
invests in, whether it manage them or not.
The Company receives Federal income tax benefits from certain investments
made through variable interest entities. These relationships 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.
These 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 the entity involved.
Given the historical cash flows of the Company and its current financial
results, management believes that the cash flow from the operating activities
over the next year will provide sufficient liquidity for its operations, its
debt service obligations and other operating expenses. Although it anticipates
that it will be able to meet its cash requirements, the Company can give no
assurances in this regard.
51
JOHN HANCOCK LIFE INSURANCE COMPANY
Forward-Looking Statements
The statements, analyses, and other information contained in this
Management's Discussion and analysis (MD&A) and elsewhere in this Form 10-Q, in
connection with the merger with John Hancock and Manulife Financial Corporation,
relating to trends in the John Hancock Life Insurance Company's (the Company's)
operations and financial results, the markets for the Company's products, the
future development of the Company's business, and the contingencies and
uncertainties to which the Company may be subject, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend," "will," "should," "may," and other similar expressions, are
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. Such statements are made based upon management's current expectations
and beliefs concerning future events and their effects on the Company. Future
events and their effects on the Company may not be those anticipated by
management. The Company's actual results may differ materially from the results
anticipated in these forward-looking statements.
These forward-looking statements are subject to risks and uncertainties
including, but not limited to, the risks that (1) a significant downgrade in the
Company's ratings for claims-paying ability and financial strength may lead to
policy and contract withdrawals and materially harm its ability to market its
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) the Company
faces increasing competition in its 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 the Company's business,
particularly its 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 business; (7) the Company's 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 profitability; (10) the Company's net
income and revenues will suffer if customers surrender annuities and variable
and universal life insurance policies or redeem shares of its open-end mutual
funds; (11) the independent trustees of the Company's variable series trusts and
of its mutual funds could reduce the compensation paid or could terminate the
Company's contracts to manage the funds; (12) under the Plan of Reorganization,
the Company was required to establish the closed block, a special arrangement
for the benefit of a group of its policyholders. It may have to fund
deficiencies in the closed block, and any over-funding of the closed block will
benefit only the holders of policies included in the closed block, not the sole
shareholder; (13) the Company faces investment and credit losses relating to its
investment portfolio, including, without limitation, the risk associated with
the evaluation and determination by its 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; (14) the Company may experience
volatility in net income due to changes in standards for accounting for
derivatives and other changes; (15) the Company is subject to risk-based capital
requirements and possible guaranty fund assessments; (16) it may be unable to
retain personnel who are key to the business; (17) the Company may incur losses
from assumed reinsurance business in respect of personal accident insurance and
the occupational accident component of workers compensation insurance; (18)
litigation and regulatory proceedings may result in financial losses, harm its
reputation and divert management resources; (19) the Company may face unforeseen
liabilities arising from its acquisitions and dispositions of businesses, and
(20) the Company may incur multiple life insurance claims as a result of a
catastrophic event which, because of higher deductibles and lower limits under
reinsurance arrangements, could adversely affect its future net income and
financial position
Readers are also directed to other risks and uncertainties discussed, as
well as to further discussion of the risks described above, in other documents
that may be filed by the Company with the United States Securities and Exchange
Commission from time to time. The Company specifically disclaims any obligation
to update or revise any forward-looking information, whether as a result of new
information, future developments, or otherwise.
52
JOHN HANCOCK LIFE INSURANCE COMPANY
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 *
- ----------
* Filed herewith.
53
JOHN HANCOCK LIFE INSURANCE COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
JOHN HANCOCK LIFE INSURANCE COMPANY
Date: May 16, 2005 By: /s/ STEVEN FINCH
-----------------
Steven Finch
Senior Vice President and
Chief Financial Officer
54