<PAGE>
As filed with the Securities and Exchange Commission on December 10, 1999.
Registration No. 333-87271
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
[JOHN HANCOCK LOGO APPEARS HERE]
JOHN HANCOCK FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 6719 04-3483032
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
John Hancock Place
Boston, Massachusetts 02117
(617) 572-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Thomas E. Moloney
Chief Financial Officer
John Hancock Financial Services, Inc.
John Hancock Place
Boston, Massachusetts 02117
(617) 572-0600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
Wolcott B. Dunham, Jr., Esq. William J. Whelan III, Esq.
Thomas M. Kelly, Esq. Cravath, Swaine & Moore
Debevoise & Plimpton 825 Eighth Avenue
875 Third Avenue New York, NY 10019
New York, NY 10022 (212) 474-1000
(212) 909-6000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
registration statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
The prospectus relating to the shares of common stock to be used in
connection with a United States and Canadian offering, the U.S. prospectus, is
set forth following this page. The prospectus to be used in connection with a
concurrent international offering, the international prospectus, will consist
of the alternate page set forth following the U.S. prospectus and the balance
of the pages included in the U.S. prospectus for which no alternate is
provided. The U.S. prospectus and the international prospectus are identical
except that they contain different front cover pages.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
102,000,000 Shares
[JOHN HANCOCK LOGO APPEARS HERE]
John Hancock Financial Services, Inc.
COMMON STOCK
-----------
This is an initial public offering of 102,000,000 shares of common stock of
John Hancock Financial Services, Inc. The offering is being made in connection
with the reorganization of John Hancock Mutual Life Insurance Company from a
mutual life insurance company to a stock life insurance company in a process
called a demutualization.
In addition to these shares, an estimated 231,200,000 shares of our common
stock will be issued to eligible policyholders of John Hancock Mutual Life
Insurance Company in the reorganization.
-----------
Prior to this offering there has been no public market for our common stock. We
anticipate that the initial public offering price will be between $15.00 and
$25.00 per share.
-----------
We will apply to list our common stock on the New York Stock Exchange under the
symbol "JHF."
-----------
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 13.
-----------
PRICE $ A SHARE
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<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Discounts and to
Public Commissions Company
------ ------------- --------
<S> <C> <C> <C>
Per Share......................................... $ $ $
Total............................................. $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
John Hancock Financial Services, Inc. has granted the underwriters the right to
purchase up to an additional 15,300,000 shares to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
2000.
-----------
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
(Co-Lead Manager) (Co-Lead Manager)
CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO. FOX-PITT, KELTON
</TABLE>
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 13
The Reorganization.................. 23
Use of Proceeds..................... 36
Stockholder Dividend Policy......... 37
Certain Information................. 38
Capitalization...................... 39
Selected Historical Financial Data.. 40
Unaudited Pro Forma Condensed
Consolidated Financial
Information........................ 45
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 54
Business............................ 93
Management.......................... 144
Regulation.......................... 153
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Ownership of Common Stock........... 161
Description of Capital Stock and
Change-of-Control Related
Provisions of Our Plan of
Reorganization, Restated
Certificate of Incorporation and
By-Laws, Insurance Holding Company
Laws, and Our Stockholder Rights
Plan............................... 162
Common Stock Eligible For Future
Sale............................... 167
United States Federal Tax
Consequences for Non-U.S.
Holders............................ 168
Underwriters........................ 170
Legal Matters....................... 173
Experts............................. 173
Additional Information.............. 173
Index to Consolidated Financial
Statements......................... F-1
Opinion of Godfrey Perrott.......... A-1
</TABLE>
----------------
Until [ ], 2000, all dealers that effect transactions in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
----------------
The Plan of Reorganization governing our reorganization and our restated
certificate of incorporation each prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more of
the outstanding shares of our common stock until two years after the
effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire beneficial
ownership of 10% or more of the outstanding shares of our common stock
during the one year period following the two-year period described
above.
There is an exception to the foregoing prohibitions for acquisitions by a
person that becomes a beneficial owner of 10% or more of our common stock as a
result of our issuance of such common stock to such person as consideration in
an acquisition of another entity that was initiated by us by authority of our
board of directors. Any such acquisition initiated by us by authority of our
board of directors would require the approval of the Massachusetts
Commissioner of Insurance and the Commissioners of Insurance of California and
Delaware, the Office of the Superintendent of Financial Institutions in Canada
and, potentially, the New York Superintendent of Insurance. If any person
acquires or offers to acquire 10% or more of the outstanding shares of our
common stock in violation of our Plan of Reorganization, we and the
Massachusetts Commissioner of Insurance would be entitled to injunctive
relief. By virtue of these provisions of the Plan of Reorganization and our
restated certificate of incorporation, John Hancock Financial Services, Inc.
may not be subject to an acquisition by another company during the two years
following the effective date of the reorganization and may only be subject to
acquisition in the third year following the effective date of the
reorganization with the approval of our board of directors and the
Massachusetts Commissioner of Insurance.
2
<PAGE>
PROSPECTUS SUMMARY
[JOHN HANCOCK LOGO APPEARS HERE]
AN INTRODUCTION
We are a financial services company with a strong record of profitable growth.
John Hancock is one of the nation's leading financial services companies,
providing a broad array of insurance and investment products and services to
retail and institutional customers.
By diversifying from traditional
life insurance products to include
investment-oriented savings
products demanded by consumer and
institutional markets, we have
generated strong revenue and
earnings growth. Our net income [GRAPHIC]
grew at a compound annual rate of
21.3% from $207.2 million in 1994
to $448.5 million in 1998. Net
income of $409.1 million for the
nine months ended September 30,
1999 declined 7.8% over net income
of $443.6 million for the nine
months ended September 30, 1998
primarily due to non-recurring
demutualization expenses, charges
in connection with our court
approved settlement relating to a
class action lawsuit and an
increase in the mutual company surplus tax. Our 1998 return on equity ("ROE")
was 10.2%, calculated as net income divided by average equity excluding net
unrealized investment gains and losses. We also evaluate our overall
performance and base management's incentives on segment income. Total segment
income differs from net income because it excludes items which management
believes are not indicative of overall operating trends, including the effects
of net realized investment gains and losses and unusual or non-recurring events
and transactions. Total segment income grew at a compound annual rate of 15.0%,
from $286.6 million in 1994 to $500.8 million in 1998. Total segment income of
$473.3 million for the nine months ended September 30, 1999 grew 30.9% over
total segment income of $361.7 million for the nine months ended September 30,
1998. Our 1998 total segment return on equity was 11.4%. The accompanying chart
demonstrates our strong ROE as a result of our strategy of diversified products
and distribution.
In addition to product diversification, we have strategically expanded
distribution channels to capture a broader share of the consumer market.
Today's multi-distribution network includes associated sales personnel,
broker/dealers, direct brokerage, financial planners, banks, direct marketing
and e-commerce.
With our broad product diversity and distribution reach linked to the
valuable John Hancock name, we believe we are positioned to continue our growth
in revenue and profitability.
Our brand is a key competitive asset.
The John Hancock brand is one of the most well recognized names in the
financial services industry. We have used distinctive advertising strategies to
expand our brand recognition both as a quality provider of insurance and as an
expert in investment management. The very strong claims paying ratings we hold
from each of the four major rating agencies further strengthen the John Hancock
brand. We believe a strong brand and recognized financial strength are
competitive advantages, and thus they continue to be key elements of our
corporate strategy.
3
<PAGE>
We operate in five segments.
We operate and report results in two retail and two institutional segments,
as well as in a Corporate and Other Segment, as illustrated below.
[JOHN HANCOCK LOGO APPEARS HERE]
[CHART APPEARS HERE]
Our retail products and distribution channels are diversified.
We recognize that different consumer groups have different financial planning
needs and preferences. Our retail strategy of diversifying products and
distribution, which has been in place for more than five years, is designed to
meet these changing consumer needs.
Demand for our variable life insurance and other asset gathering products has
accelerated significantly. Today, sales of variable life insurance account for
nearly 68% of our total life insurance sales. Sales of variable annuities
represented more than 70% of our total annuity sales in 1998. Although sales of
variable annuities have decreased relative to fixed annuities through the first
nine months of 1999, our total annuity sales have remained at the same level as
the first nine months of 1998. From 1996 through 1998, total long-term care
insurance premium increased at a compound annual rate of 25% reaching $291.2
million. For the nine months ended September 30, 1999, long-term care premiums
increased 21.9% to $259.5 million. Given our expertise in product design, we
most recently developed an innovative new product that combines the benefits of
variable annuities and long-term care protection.
In 1998, net deposits and reinvestments of our mutual funds were $3.1
billion, and total mutual fund assets under management were $34.9 billion. So
far in 1999, we, like many mutual fund companies, have experienced net
redemptions. For the first nine months of 1999, there were net redemptions of
$2.1 billion attributable primarily to our financial industries and regional
bank funds, the performance of which reflected weakness in these sectors. We
have taken steps to restore growth in assets under management, including the
development of new fund offerings and refocusing our sales organization on
regional distributors.
In terms of distribution, we have been diversifying our channels to address
the consumers' preferences for selecting financial services and products
through a variety of sources. In addition to about 3,000 associated sales
personnel, we sell through financial planners, broker/dealers, banks and direct
channels including e-commerce. Over the past three and three quarter years, an
average of 43% of our total annuity sales, nearly 86% of our mutual fund sales
and 38% of our life insurance sales were made through alternative channels.
With respect to life insurance sales, alternative channels include the M
Financial Group, a national producer group of firms operating exclusively in
the upper end of the wealth transfer and executive benefit markets.
4
<PAGE>
In addition to diversification of distribution, we are also making
fundamental changes in our career agency system to improve productivity, reduce
fixed costs and enhance service. As a key component of this strategy, in early
1999 we created a distribution subsidiary, Signator Financial Network
("Signator"), which will provide tailored financial planning tools and
marketing support to further enable our current agents, as well as new, top-
producing experienced agents, to sell products of multiple companies. Signator
will also be making significant investments in agent training, expanded
licensing and enhanced service and product support.
Our institutional businesses are backed by a strong track record.
Our institutional segments offer investment products and services to
retirement plans and institutional investors including 60 of the largest 100
U.S. corporate pension plans. Major products of our Guaranteed and Structured
Financial Products Segment include a variety of GICs, funding agreements and
other investment products. The Investment Management Segment offers investments
in a variety of asset classes, including fixed maturity securities, equities,
natural resources, collateralized bond obligations and mezzanine financings. We
distribute institutional products through dedicated sales professionals,
independent marketing specialists, consultants and investment banks.
We have built our institutional asset management businesses on the foundation
of our core investment expertise, including our global investment expertise. In
addition to managing $47.5 billion of general account investments, we also
managed advisory assets of $39.7 billion and separate account assets of $26.0
billion which back our variable product lines. We continue to work to enhance
our collaborative approach across all retail and institutional product segments
to streamline the development of new asset management products and services.
OUR STRATEGY FOR THE FUTURE
Our strategy is focused on continued growth in revenue and profitability and
on providing greater returns to our shareholders. Demutualization will support
this strategy because, by converting from a mutual to a stockholder-owned
company, we will have access to capital for acquisitions, which will, among
other things, facilitate lowering unit costs and broadening distribution. As a
stock company, we will also be better able to attract and retain talented
staff.
Our major strategic initiatives are:
. Support and extend the John Hancock brand
We will continue to commit the financial and creative resources
necessary to ensure our brand leadership.
. Meet changing customer needs through additional product choice
To meet the needs of increasingly sophisticated consumers, we will
manufacture a comprehensive portfolio of competitive, innovative
products and provide superior service to all of our retail and
institutional product lines and distribution channels.
. Expand distribution channel options for our customers
Expansion of our multi-distribution network will continue to be a key to
our success. We will, where appropriate, continue to own distribution;
for example, our new Investors Partner Life subsidiary is an innovative
vehicle to provide life insurance through broker/dealers. We have also
recently acquired Essex Corporation, one of the nation's leading
distributors of annuities through banks.
. Provide customized and superior distribution channel service
We will continue our customized approach to supporting and servicing our
distributors. We will also expand our presence in the on-line area via
delivery to portals, consumer web sites and Internet partnerships.
5
<PAGE>
. Expand in key international markets
We recognize the increasingly global nature of the financial services
business and intend to build on our presence in Canada and selected
Asian markets, including China.
. Build on our investment management strength
We will build on our asset management capabilities, strong
asset/liability management and financial engineering skills to expand
both product offerings and fee-based asset management businesses.
. Become more efficient
We recognize the imperative to be an efficient provider of products,
distribution and services. We have already taken significant steps to
reduce costs and to further that aim we are assessing all major
initiatives and have engaged outside consulting services to identify
major savings opportunities.
. Continue to invest in technology
We expect to make significant investments in technology over the next
several years to improve operational efficiency and enhance service.
These initiatives include automated underwriting, digital signature
processes, on-line shopping and electronic servicing. We intend to
expand our capabilities as an efficient provider and servicing agent of
multiple products to multiple channels.
6
<PAGE>
THE REORGANIZATION
On August 31, 1999, the board of directors of John Hancock Mutual Life
Insurance Company unanimously adopted the Plan of Reorganization, under which
John Hancock Mutual Life Insurance Company would convert from a mutual life
insurance company to a stock life insurance company and become a wholly-owned
subsidiary of John Hancock Financial Services, Inc.
Our reorganization is governed by the Massachusetts insurance law. The
Massachusetts Commissioner of Insurance held a hearing on the Plan of
Reorganization on November 17 and 18, 1999. At a special meeting of the
policyholders of John Hancock Mutual Life Insurance Company held on November
30, 1999, the policyholders voted to approve the Plan of Reorganization. On
December 9, 1999, the Massachusetts Commissioner of Insurance issued an order
approving the Plan of Reorganization.
The unsatisfied conditions to the effectiveness of the Plan of Reorganization
are the completion of this offering, the contribution of substantially all of
the net proceeds of the offering to John Hancock Life Insurance Company, and
the delivery to us by outside counsel of a legal opinion as to the tax
consequences of the reorganization. The reorganization will become effective on
the date of the closing of the offering. See "The Reorganization" and "Use of
Proceeds."
Under the Plan of Reorganization, policyholders' membership interests in John
Hancock Mutual Life Insurance Company will be extinguished and in exchange
eligible policyholders of John Hancock Mutual Life Insurance Company will
receive shares of our common stock, policy credits or cash. See "The
Reorganization--Payment of Consideration to Eligible Policyholders."
Under the Plan of Reorganization, as of the effective date of the
reorganization, John Hancock Life Insurance Company will be obligated to
establish and operate a closed block for the benefit of the policies included
therein. The policies included in the closed block are individual or joint
traditional whole life insurance policies currently paying or expected to pay
policy dividends and individual term life insurance policies which are in force
on the effective date of the reorganization. The purpose of the closed block is
to protect the policy dividend expectations of these policies after the
reorganization. Unless the Massachusetts Commissioner of Insurance and, in
certain circumstances, the New York Superintendent of Insurance, consent to an
earlier termination, the closed block will continue in effect until the date
none of the policies included in the closed block is in force. On the effective
date of the reorganization, John Hancock Life Insurance Company will allocate
assets to the closed block that are expected to produce cash flows which,
together with anticipated revenues (principally premiums and investment income)
from the policies included in the closed block, are expected to be sufficient
to support those policies. The total cash flows are intended to be sufficient
to provide for payment of policy benefits, taxes and direct asset acquisition
and disposition costs, and for continuation of policy dividend scales payable
in 1999, so long as the experience underlying such dividend scales continues.
See "The Reorganization--Establishment and Operation of the Closed Block."
7
<PAGE>
THE OFFERING
Common stock offered........ 102,000,000 shares.
Common stock outstanding
after the offering......... 333,200,000 shares.
Use of proceeds............. We expect the net proceeds of the offering to
be approximately $1,940 million. All of the
net proceeds (including any proceeds received
pursuant to exercise of the underwriters'
over-allotment option) other than the portion
to be retained by John Hancock Financial
Services, Inc., as described below, will be
contributed to John Hancock Life Insurance
Company and will, subject to a limited
exception, be used to make cash payments to,
and establish reserves with respect to policy
credits for, eligible policyholders and to
pay expenses related to the reorganization.
We expect that the amount of net proceeds to
be retained by John Hancock Financial
Services, Inc. will be $200 million. We
intend to use these net proceeds for general
corporate purposes and to pay a dividend to
our stockholders in the year following the
effective date of the reorganization.
However, provisions of our Plan of
Reorganization may serve to reduce the amount
retained to an amount less than $200 million,
unless specific approval is received from the
Massachusetts Commissioner of Insurance. If
this amount is reduced, John Hancock
Financial Services, Inc. may require
additional funds, to be obtained through
dividends from John Hancock Life Insurance
Company or borrowings, in order to pay our
first year stockholder dividend, if declared.
Dividend policy............. Subject to our financial condition and
declaration by our board of directors, we
currently intend to pay regular annual cash
dividends on our common stock. We currently
intend to declare an initial annual cash
dividend of $ . per share in [date]. See
"Stockholder Dividend Policy."
Proposed New York Stock
Exchange symbol............ JHF
Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 15,300,000 shares of our common
stock which the underwriters have the option to purchase from us to cover over-
allotments.
8
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth certain summary historical consolidated
financial data. The summary income statement data for each of the three years
ended December 31, 1998 and balance sheet data as of December 31, 1998 and 1997
have been derived from our audited consolidated financial statements and notes
thereto included elsewhere in this prospectus (the "Consolidated Financial
Statements"). The following summary income statement data for the years ended
December 31, 1995 and 1994 and balance sheet data as of December 31, 1996,
1995, and 1994 have been derived from our audited consolidated financial
statements not included herein. The summary income statement data for the nine
months ended September 30, 1999 and 1998 and balance sheet data as of September
30, 1999 have been derived from our unaudited interim consolidated financial
statements included in this prospectus. The summary balance sheet data as of
September 30, 1998 has been derived from our unaudited interim consolidated
financial statements not included herein. All unaudited interim consolidated
financial data presented in the tables below reflect all adjustments
(consisting of normal, recurring accruals) necessary for a fair presentation of
our consolidated financial position and results of operations for such periods.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. The
following summary historical consolidated financial data has been prepared in
accordance with generally accepted accounting principles ("GAAP"), except that
the statutory data presented below has been prepared in accordance with
applicable statutory accounting practices and was taken from our annual
statements filed with insurance regulatory authorities.
The following is a summary, and in order to fully understand our consolidated
financial data, you should also read "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus. In particular, those other sections of
this prospectus contain information about the adoption of GAAP accounting
standards and transactions affecting comparability of results of operations
between periods that is not included in this summary.
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, For the Year Ended December 31,
------------------ ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues
Premiums................ $2,033.3 $1,647.7 $2,197.9 $2,473.6 $2,922.5 $2,657.1 $2,473.6
Universal life and
investment-type product
charges................ 509.4 441.3 597.0 512.0 466.3 414.0 379.7
Net investment income... 2,581.0 2,441.5 3,330.7 3,190.7 3,223.1 3,099.4 2,910.7
Realized investment
gains (losses), net.... 177.4 64.9 97.9 115.8 110.7 52.3 (79.4)
Investment management
revenues, commissions
and other fees......... 504.6 487.9 659.7 554.7 751.3 660.0 588.7
Other revenue........... 12.4 2.6 18.8 99.5 230.9 248.3 194.7
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 5,818.1 5,085.9 6,902.0 6,946.3 7,704.8 7,131.1 6,468.0
Benefits and expenses
Benefits to
policyholders.......... 3,600.4 2,944.1 4,152.0 4,303.1 4,676.7 4,226.5 3,925.2
Other operating costs
and expenses........... 991.7 955.8 1,383.0 1,283.7 1,694.1 1,568.3 1,536.9
Amortization of deferred
policy acquisition
costs.................. 150.4 200.4 249.7 312.0 230.9 229.1 219.7
Dividends to
policyholders.......... 361.0 348.4 473.2 457.8 435.1 496.5 416.6
-------- -------- -------- -------- -------- -------- --------
Total benefits and
expenses.............. 5,103.5 4,448.7 6,257.9 6,356.6 7,036.8 6,520.4 6,098.4
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes, extraordinary
item and cumulative
effect of accounting
change................. 714.6 637.2 644.1 589.7 668.0 610.7 369.6
Income taxes............ 239.2 188.8 183.9 106.4 247.5 261.2 142.2
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item and
cumulative effect of
accounting change...... 475.4 448.4 460.2 483.3 420.5 349.5 227.4
Extraordinary item--
demutualization
expenses, net of tax... (56.6) (4.8) (11.7) -- -- -- --
Cumulative effect of
accounting change...... (9.7) -- -- -- -- -- (20.2)
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 409.1 $ 443.6 $ 448.5 $ 483.3 $ 420.5 $ 349.5 $ 207.2
======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
As of or for the
Nine Months Ended
September 30, As of or for the Year Ended December 31,
------------------- -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
General account assets.. $54,157.6 $52,011.2 $52,000.1 $49,906.4 $48,420.6 $47,485.7 $43,778.2
Separate accounts
assets................. 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8
Total assets............ 80,206.1 74,702.0 76,966.7 71,417.5 66,502.7 63,320.9 56,688.0
General account
liabilities............ 48,460.5 46,417.9 46,416.9 44,667.7 43,265.9 42,770.6 40,224.6
Long-term debt.......... 536.8 647.5 602.7 543.3 1,037.0 934.3 605.4
Separate accounts
liabilities............ 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8
Total liabilities....... 75,045.8 69,756.2 71,986.2 66,722.1 62,385.0 59,540.1 53,739.8
Policyholders' equity... 5,160.3 4,945.8 4,980.5 4,695.4 4,117.7 3,780.8 2,948.2
Statutory Data:
Capital and surplus
(1).................... $ 3,811.7 $ 3,413.3 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5 $ 2,330.0
Asset valuation reserve
("AVR")................ 1,198.0 1,280.1 1,316.9 1,191.0 1,088.4 1,035.6 852.8
--------- --------- --------- --------- --------- --------- ---------
Capital and surplus plus
AVR.................... $ 5,009.7 $ 4,693.4 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1 $ 3,182.8
========= ========= ========= ========= ========= ========= =========
Statutory net income.... $ 483.6 $ 353.4 $ 627.3 $ 414.0 $ 313.8 $ 340.8 $ 182.6
</TABLE>
We evaluate segment performance and base management's incentives on after-tax
operating income, which excludes the effect of net realized investment gains
and losses and unusual or non-recurring events and transactions. Segment after-
tax operating income is determined by adjusting GAAP net income for net
realized investment gains and losses, including gains and losses on disposals
of businesses, extraordinary items, and certain other items which we believe
are not indicative of overall operating trends. While these items may be
significant components in understanding and assessing our consolidated
financial performance, we believe that the presentation of segment after-tax
operating income enhances the understanding of our results of operations by
highlighting net income attributable to the normal, recurring operations of the
business. However, segment after-tax operating income and total segment income
are not a substitute for net income determined in accordance with GAAP.
10
<PAGE>
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
September 30, December 31,
-------------- ------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Segment Data: (2)
Segment after-tax operating income:
Protection Segment................. $137.3 $133.8 $ 172.3 $ 158.1 $197.3
Asset Gathering Segment............ 97.5 87.9 111.1 93.3 55.7
------ ------ ------- ------- ------
Total Retail..................... 234.8 221.7 283.4 251.4 253.0
Guaranteed and Structured Financial
Products Segment.................. 165.8 101.8 145.7 138.5 155.4
Investment Management Segment...... 27.6 6.4 15.4 17.2 21.6
------ ------ ------- ------- ------
Total Institutional.............. 193.4 108.2 161.1 155.7 177.0
Corporate and Other Segment........ 45.1 31.8 56.3 39.4 20.2
------ ------ ------- ------- ------
Total segment income................. 473.3 361.7 500.8 446.5 450.2
After-tax adjustments:
Realized investment gains, net..... 118.0 75.1 93.9 104.9 80.6
Class action lawsuit............... (91.1) -- (150.0) (112.5) (90.0)
Restructuring charges.............. (7.5) -- -- -- --
Benefit from pension participating
contract modification............. -- -- -- 9.1 --
Surplus tax........................ (17.3) 11.6 15.5 35.3 (20.3)
------ ------ ------- ------- ------
Total after-tax adjustments...... 2.1 86.7 (40.6) 36.8 (29.7)
------ ------ ------- ------- ------
GAAP Reported:
Income before extraordinary item
and cumulative effect of
accounting change................. 475.4 448.4 460.2 483.3 420.5
Extraordinary item-demutualization
expenses, net of tax.............. (56.6) (4.8) (11.7) -- --
Cumulative effect of accounting
change............................ (9.7) -- -- -- --
------ ------ ------- ------- ------
Net income......................... $409.1 $443.6 $ 448.5 $ 483.3 $420.5
====== ====== ======= ======= ======
</TABLE>
- --------
(1) In accordance with accounting practices prescribed or permitted by the
Massachusetts Division of Insurance, statutory capital and surplus
includes $450.0 million in total principal amount of our surplus notes
outstanding.
(2) Our GAAP reported net income was significantly affected by net realized
investment gains and losses and unusual or non-recurring events and
transactions presented above as after-tax adjustments. In all periods,
net realized investment gains and losses, including gains and losses on
our disposed businesses, and the surplus tax have been excluded from
segment income. We have been subject to the surplus tax imposed on
mutual life insurance companies which disallows a portion of a mutual
life insurance company's policyholder dividends as a deduction from
taxable income. As a stock company, we will no longer be subject to
surplus tax.
During 1997, we entered into a court approved settlement relating to a
class action lawsuit involving individual life insurance policies sold
from 1979 through 1996, as specified elsewhere in this prospectus. In
entering into the settlement, we specifically denied any wrongdoing. The
reserve held in connection with the settlement to provide for relief to
class members and for legal and administrative costs associated with the
settlement amounted to $522.5 million, $436.6 million and $308.8 million
at September 30, 1999, December 31, 1998 and December 31, 1997,
respectively. Given the uncertainties associated with estimating the
reserve, it is reasonably possible that the final cost of the settlement
could differ materially from the amount previously provided.
11
<PAGE>
During the first nine months of 1999, we recorded $7.5 million in after-
tax restructuring charges in accordance with our plans to reduce the
cost structure of our mutual fund operations and career agency
distribution system. These charges primarily included accruals for
severance and related benefits. The restructuring liability at September
30, 1999 was $11.2 million and is expected to be paid by March 2002.
During 1997, a participating pension reinsurance contractholder
requested the distribution of a portion of contract funds. At the time
of the request, the contract stated that these funds were to be paid out
over a specified number of years. However, we agreed to distribute a
portion of the contractholder's funds in exchange for the right to
retain the tax credits that resulted from the distribution. The
contractual amendment resulted in the recognition of a $9.1 million
after-tax gain.
12
<PAGE>
RISK FACTORS
An investment in our common stock involves a number of risks. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before investing in shares
of our common stock. Any of the risks described below could result in a
significant or material adverse effect on our business, financial condition or
results of operations, and a corresponding decline in the market price of our
common stock.
A significant downgrade in our ratings for claims-paying ability and financial
strength may lead to policy and contract withdrawals and materially harm our
ability to market our products.
We believe ratings for claims paying ability and financial strength are one
of the most important factors in maintaining a competitive position in the
markets in which we do business. A significant downgrade in ratings, or the
potential for such a downgrade, might:
. result in our existing retail policyholders withdrawing the cash
surrender value of their policies, which would require us to liquidate
long-term assets, possibly at a loss;
. cause potential new customers to select other companies from which to
purchase their financial products or services; and
. adversely affect our relationships with distributors of our products.
In our institutional business, single premium annuities, GICs and funding
agreements are significant products for our Guaranteed and Structured
Financial Products Segment. The Department of Labor requires pension plans to
purchase single premium annuities from the "safest available" insurer. Ratings
are also generally an important consideration in the purchase of GICs and
funding agreements by pension plans and other institutions. Accordingly, a
ratings downgrade would materially harm our ability to sell single premium
annuities, GICs and funding agreements in these markets. See "Business--
Ratings."
Elimination of Federal tax benefits for our products and other changes in laws
and regulations may adversely affect sales of our insurance and investment
advisory products.
The attractiveness to our customers of many of our products is due, in part,
to favorable tax treatment. Changes to tax laws may affect the attractiveness
of these products. From time to time, governments in the jurisdictions in
which we do business, including particularly the United States Federal
government, have considered proposals for tax law changes that could adversely
affect our products. These proposals have included, for example, proposals to
tax the undistributed increase in value of life insurance policies and
proposals to eliminate or significantly reduce the Federal estate tax. The
enactment of any such tax legislation would likely result in a significant
reduction in sales of our currently tax-favored products.
State insurance authorities supervise and regulate our business throughout
the United States. State insurance laws and regulations are generally intended
to protect policyholders, not holders of our common stock. These laws
establish state insurance departments with broad powers to regulate many
aspects of our insurance business. State legislatures and the National
Association of Insurance Commissioners are continually re-examining existing
insurance laws and regulations and may impose changes in the future that
materially affect the manner in which we conduct our business and the products
we may offer. State legislatures often consider other issues that may
adversely affect our business, such as proposed community reinvestment
legislation in California and other states that could cause us to allocate
assets in a manner that results in lower returns or greater risks than we
would otherwise choose.
The U.S. Federal government does not directly regulate the insurance
business. However, Federal legislation and administrative policies can
significantly and adversely affect the insurance industry generally, and us in
particular. These areas include pension and employee benefit plan regulation,
financial services regulation,
13
<PAGE>
taxation, and the regulation of securities products and transactions. Changes
in the interpretations of existing laws and the passage of new legislation,
including the recently passed Financial Services Modernization Act of 1999,
may intensify competition within the financial services industry or adversely
affect our ability to sell new policies and our claims exposure on existing
policies.
Our variable life insurance and annuity businesses, our mutual fund business
and our investment advisory business are subject to Federal, state and foreign
securities laws and regulations. The laws and regulations governing these
operations are primarily intended to protect investors in the securities
markets or investment advisory or brokerage clients and generally grant
supervisory agencies broad administrative powers, including the power to limit
or restrict the conduct of business for failure to comply with such laws and
regulations. Changes to these laws and regulations could have a material
adverse effect on our investment advisory, broker/dealer or transfer agent
operations and the profitability of our company as a whole.
See "Regulation" for a detailed discussion of the regulations that are
applicable to our business.
As a holding company, we will depend on dividends from our subsidiaries and
the Massachusetts insurance law may restrict the ability of John Hancock Life
Insurance Company to pay dividends to us.
After the effective date of the reorganization, John Hancock Financial
Services, Inc. will be an insurance holding company. The assets of John
Hancock Financial Services, Inc. will consist initially of 100% of the
outstanding capital stock of John Hancock Life Insurance Company and a portion
of the net proceeds of the offering. We will depend principally on dividends
from John Hancock Life Insurance Company to satisfy our financial obligations,
pay operating expenses and pay dividends to our stockholders. Following the
reorganization, John Hancock Life Insurance Company will remain a
Massachusetts domestic life insurer subject to Massachusetts law and regulated
by the Massachusetts Division of Insurance. The Massachusetts insurance law
limits how and when John Hancock Life Insurance Company can pay shareholder
dividends. Following the reorganization, John Hancock Life Insurance Company
may be commercially domiciled in New York and, if so, dividend payments may
also be subject to New York's holding company act as well as Massachusetts
law. If John Hancock Life Insurance Company is unable to pay shareholder
dividends in the future, our ability to pay dividends to our stockholders and
meet our cash obligations would be jeopardized. See "Stockholder Dividend
Policy," "Regulation--Regulation of Dividends and Other Payments from
Insurance Subsidiaries" and Note 10 to our Consolidated Financial Statements
for more information on the legal limitations on the ability of John Hancock
Life Insurance Company to pay dividends to us.
We face increasing competition in our retail and institutional businesses from
mutual fund companies, banks and investment management firms as well as from
other insurance companies.
We face strong and increasing competition in all our business lines. Our
competitors include mutual fund companies, banks, investment management firms
and other insurance companies, many of whom are larger, have greater financial
and other resources, are regulated differently and offer alternative products
or more competitive pricing than us. Recent industry consolidation, including
acquisitions of insurance and other financial services companies in the United
States by international companies, has resulted in larger competitors with
even greater financial resources. This increasing competition may harm our
ability to maintain or increase our profitability.
In our retail businesses, we also compete for productive agents and other
distributors. We believe that our success in competing for agents and
distributors depends on factors such as our financial strength and on the
services we provide to, and the relationships we develop with, these agents
and distributors. We cannot guarantee that in the future we will be able to
recruit and retain productive agents and distributors of our insurance,
annuity and mutual fund products, and if we are not able to do so our sales
and net income would suffer. See "Business--Protection Segment--Competition"
and "Business--Asset Gathering Segment--Competition."
We believe that investment returns and risk management are key factors to
our growth in our guaranteed and structured financial products and
institutional investment management businesses. We will not be able to
accumulate and retain assets under management if our investment results
underperform the market or the competition. Such underperformance would likely
result in asset withdrawals and reduced sales.
14
<PAGE>
National banks, with their pre-existing customer bases for financial
services products, may increasingly compete with insurers, as a result of
recently-enacted legislation removing restrictions on bank affiliations with
insurers. This legislation, the Gramm-Leach-Bliley Act of 1999, permits
mergers that combine commercial banks, insurers and securities firms under one
holding company. Until passage of the Gramm-Leach-Bliley Act, the Glass-
Steagall Act of 1933, as amended, had limited the ability of banks to engage
in securities-related businesses, and the Bank Holding Company Act of 1956, as
amended, had restricted banks from being affiliated with insurance companies.
With the passage of the Gramm-Leach-Bliley Act, bank holding companies may
acquire insurers, and insurance holding companies may acquire banks. The
ability of banks to increase their securities-related business or to affiliate
with insurance companies may materially and adversely affect sales of all of
our products by substantially increasing the number and financial strength of
potential competitors. Banks may also pose increasing competition for our
annuity business because, as a result of recent decisions of the Supreme Court
and a number of Federal District Courts, national banks are now permitted to
sell annuity products of life insurance companies in certain circumstances.
See "Regulation--Federal Insurance Initiatives and Litigation."
A decline or increased volatility in the securities markets, and other
economic factors, may adversely affect our business, particularly our variable
life insurance, mutual fund, variable annuity and investment management
businesses.
Fluctuations in the securities markets and other economic factors may
adversely affect sales of our variable annuities and mutual funds, our
variable life insurance policies and our institutional investment products. In
particular, a protracted and/or steep decline in the stock or bond markets
would likely reduce the popularity of these products.
The level of volatility in the markets in which we invest and the overall
investment returns earned in those markets also affect our profitability. In
particular, our assets, our earnings and our ability to generate new sales in
recent years have increased due to significant growth in the retirement-
oriented investment market and uncommonly strong stock market appreciation,
coupled with solid bond market appreciation spurred by declining interest
rates. We cannot guarantee that these economic and market trends will
continue, and if they do not, our net income, revenues and assets will likely
decline significantly.
Our life insurance sales are highly dependent on a third-party distribution
relationship.
We distribute our life insurance products through a variety of distribution
channels, including our own internal sales force and independent producers and
brokers. Certain independent producers and brokers have contributed
significantly to our sales in recent years. In particular, we have a
relationship with M Financial Holding, Inc. and its member firms (the "M
Financial Group"), a national producer group founded in 1978 of approximately
100 life insurance producing firms with over 400 individual producers
operating exclusively in the upper end of the wealth transfer and executive
benefit markets. M Financial Group member firms have accounted for
approximately 36% of our total life insurance sales on average over the past
three and three-quarter years. We provide many services to M Financial Group
producers and our relationship with the M Financial Group includes a
reinsurance agreement under which M Life Insurance Company reinsures 50% of
most of our policies that its members sell. During the first nine months of
1999, and over the last three full years, we believe John Hancock has been
either the first or second largest provider of products to the M Financial
Group. However, there can be no assurance that our relationship with the M
Financial Group will continue in its current form, and an interruption in this
relationship could significantly reduce our life insurance sales and our net
income.
Interest rate volatility may adversely affect our profitability.
Changes in interest rates affect many aspects of our business and can
significantly affect our profitability. In periods of increasing interest
rates, withdrawals of life insurance policies and fixed annuity contracts,
including policy loans and surrenders, and transfers to separate account
variable options may increase as policyholders choose to forego insurance
protection and seek higher investment returns. Obtaining cash to satisfy these
15
<PAGE>
obligations may require us to liquidate fixed income investment assets at a
time when the market prices for those assets are depressed because interest
rates have increased. This may result in realized investment losses.
Regardless of whether we realize an investment loss, these cash payments would
result in a decrease in total invested assets, and a decrease in net income.
Premature withdrawals may cause us to accelerate amortization of policy
acquisition costs, which would also reduce our net income. As of September 30,
1999, we had approximately $16.5 billion in cash values on individual life
insurance policies in which policyholders have rights to policy loans.
Moreover, as of September 30, 1999, approximately 51.6% of our invested assets
consisted of private placement fixed maturity securities and mortgage loans,
which are relatively illiquid investment classes. This concentration of
investments in these asset classes increases the risk that we will incur
losses if we need to sell assets to raise cash during a period of rising
interest rates.
Conversely, during periods of declining interest rates, life insurance and
annuity products may be relatively more attractive to consumers, resulting in
increased premium payments on products with flexible premium features,
repayment of policy loans and increases in persistency, or a higher percentage
of insurance policies remaining in force from year to year. During such a
period, our investment earnings will be lower because the interest earnings on
our fixed income investments likely will have declined in parallel with market
interest rates. In addition, mortgages and bonds in our investment portfolio
will be more likely to be prepaid or redeemed as borrowers seek to borrow at
lower interest rates, and we may be required to reinvest the proceeds in
securities bearing lower interest rates. Accordingly, during periods of
declining interest rates, our profitability may suffer as the result of a
decrease in the spread between interest rates credited to policyholders and
returns on our investment portfolio.
The profitability of our spread-based businesses depends in large part upon
our ability to manage interest rate spreads, and the credit and other risks
inherent in our investment portfolio. We cannot guarantee, however, that we
will successfully manage our interest rate spreads or the potential negative
impact of those risks.
Our net income and revenues will suffer if customers surrender annuities and
variable and universal life insurance policies or redeem shares of our open-
end mutual funds.
Surrenders of our annuities and variable and universal life insurance
policies, and redemption of our open-end mutual fund shares, can result in
losses and decreased revenues. Of our variable and universal life insurance
and annuity policy reserves and deposit fund liabilities, as of September 30,
1999, approximately 88% (with respect to variable and universal life
insurance) and 39% (with respect to annuity) are not subject to any surrender
penalties, and approximately 61.2% of total mutual fund assets under
management are not subject to contingent deferred sales charges. The surrender
charges that are imposed on our annuities and variable and universal life
insurance policies typically decline over a period of years and ultimately
expire after six or seven years. The deferred sales charges on our Class B
open-end mutual fund shares typically decline to zero over a six-year period.
Surrenders and redemptions could require us to dispose of assets earlier than
we had planned, possibly at a loss. Redemptions of open-end mutual fund shares
would decrease our assets under management, and thus decrease our mutual fund
fee income. Moreover, surrenders and redemptions require faster amortization
of the acquisition costs or commissions associated with the original sale of a
product, thus reducing our net income.
The independent directors of our variable series trust (VST) and of our mutual
funds could reduce the compensation paid to us, or could terminate our
contracts to manage the funds.
Our VST and each of the mutual funds for which we act as adviser or sub-
adviser is registered under the Investment Company Act of 1940 (the
"Investment Company Act") and governed by a board of directors. The Investment
Company Act requires that at least 40% of these directors be unaffiliated with
us. The independent directors have the duty of annually renewing the contract
with the adviser or sub-adviser to manage the fund. Under these contracts, we
are paid advisory and management fees. Directors have a fiduciary duty to act
in the best interests of the shareholders of the investment companies. Either
the directors or the shareholders may terminate the advisory contract with us
and move the assets to another adviser. They may also deem it to be in
16
<PAGE>
the best interests of shareholders to make decisions adverse to John Hancock
Financial Services, Inc., including reducing the compensation paid to us or
limiting our ability to transfer the contract. Should any of these events
occur, they could reduce the net income of our retail variable life insurance
and asset gathering businesses.
Under our Plan of Reorganization, we will be required to establish the "closed
block," a special arrangement for the benefit of a group of our policyholders.
We may have to fund deficiencies in our closed block, and any overfunding of
the closed block will benefit only the holders of policies included in the
closed block, not our stockholders.
On the effective date of the reorganization, John Hancock Life Insurance
Company will allocate assets to the "closed block," a special arrangement
designed to protect the reasonable policy dividend expectations of a group of
our policyholders. These assets are expected to produce cash flows which,
together with anticipated revenues from the life insurance policies included
in the closed block, are expected to be reasonably sufficient to support the
policies included in the closed block. The policies included in the closed
block are individual or joint traditional whole life insurance policies of
John Hancock Mutual Life Insurance Company that are currently paying or
expected to pay policy dividends, and individual term life insurance policies
that are in force on the effective date of the reorganization.
However, if the closed block assets, the cash flows generated by the closed
block assets, and the anticipated revenues from the policies included in the
closed block, are not sufficient to support those policies, as required under
the Plan of Reorganization, we will be required to fund the shortfall.
Even if they are sufficient, we may choose, for business reasons, to support
dividend payments on policies in the closed block with our general account
funds.
If we were to make substantial payments to the benefit of the closed block
policies for either reason, less assets and net income would be available to
our stockholders and the market price of our common stock may decline. See
"The Reorganization" for a description of the establishment and funding of the
closed block and the policies included in the closed block.
The closed block assets, the cash flows generated by the closed block assets
and the anticipated revenues from the closed block business will benefit only
the holders of the policies in the closed block.
To the extent the closed block has been overfunded, dividends payable in
respect of the policies included in the closed block may be greater than they
would be in the absence of a closed block. Any excess earnings or excess
funding will be available for distribution over time to closed block
policyholders but will not be available to our stockholders.
There are a number of provisions of our Plan of Reorganization, our restated
certificate of incorporation and by-laws, laws applicable to us, agreements
that we have entered into with our senior management and our stockholder
rights plan that will prevent or discourage takeovers and business
combinations that our stockholders might otherwise consider to be in their
best interest.
The Plan of Reorganization governing our reorganization and our restated
certificate of incorporation each prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more of
the outstanding shares of our common stock until two years after the
effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire beneficial
ownership of 10% or more of the outstanding shares of our common stock
during the one year period following the two-year period described
above.
By virtue of these provisions of the Plan of Reorganization and our restated
certificate of incorporation, John Hancock Financial Services, Inc. may not be
subject to an acquisition by another company during the two years following
the effective date of the reorganization and may only be subject to
acquisition in the third year
17
<PAGE>
following the effective date of the reorganization with the approval of our
board of directors and the Massachusetts Commissioner of Insurance.
Other anti-takeover measures that may deter or impede an acquisition of John
Hancock Financial Services, Inc. include:
. the Massachusetts, California, Delaware and, potentially, New York
insurance holding company laws and similar laws in Canada;
. provisions of our restated certificate of incorporation and by-laws;
. Section 203 of the Delaware General Corporation Law;
. termination agreements with members of senior management; and
. our stockholder rights plan.
See "Description of Capital Stock and Change-of-Control Related Provisions
of Our Plan of Reorganization, Restated Certificate of Incorporation and By-
Laws, Insurance Holding Company Laws and our Stockholder Rights Plan" for a
more complete summary of the antitakeover measures applicable to us.
We will face losses if the claims on our insurance products, or reductions in
rates of mortality on our annuity products, are greater than we projected.
Our insurance and annuity products may be priced inadequately to support the
amount of claims ultimately required to be paid or the longevity of our
annuitants. The profitability of these products is based in large part on the
accuracy of our pricing assumptions. Some of our relatively newer product
offerings, including our long-term care insurance products, do not have the
claims experience history of our traditional life insurance products. As a
result, our ability to predict claims for these products is limited.
Our results of operations depend significantly on the amount of claims paid
under our insurance policies, and vary from period to period depending on the
amount of claims incurred. Under some of our life insurance policies, we
retain $10 million of mortality risk, or $20 million for a second-to-die
policy. The number and magnitude of claims incurred in any period is outside
of our control and material variances, including a small number of large
claims, in any given period may adversely affect our net income and the price
of our common stock. In addition, reductions in rates of mortality occur
continuously, and we price our annuity products anticipating future
improvement in longevity. However, medical research or new technology may
produce longevity improvements that are greater than we have anticipated.
We cannot guarantee that our actual claims or longevity experience will
match the assumptions made in our pricing. If our actual claims experience is
materially worse than assumed, or improvements in longevity are materially
greater than anticipated, our profitability would be reduced.
We may be adversely affected if our Year 2000 efforts are not successful.
Any failure to identify all of our Year 2000 issues, or to complete our
scheduled modifications and conversions in a timely and cost-effective manner,
could disrupt our business. Year 2000 issues result from computer programs
being written using two digits rather than four to define the applicable year
and century. Many of our computer programs that have date sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in an information technology ("IT") system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. In addition, non-IT systems including,
but not limited to, security alarms, elevators and telephones are subject to
malfunction due to their dependence on embedded technology such as
microcontrollers for proper operation. The correction of our Year 2000 issues
in IT and non-IT systems will be complex and costly. In addition, we cannot
guarantee that the systems of other companies upon which we rely will be
timely converted, or that a failure to convert by another company, or a
18
<PAGE>
conversion that is incompatible with our systems, would not disrupt our
business. If our Year 2000 issues were unresolved, potential consequences
would include, among other possibilities, the inability to accurately and
timely process claims or update customers' accounts; process financial
transactions; bill customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management, customers, regulators and
others; as well as business interruptions or shutdowns; financial losses;
reputational harm; increased scrutiny by regulators; and litigation related to
Year 2000 issues. We are attempting to limit the potential impact of the Year
2000 issue by monitoring the progress of our own Year 2000 project and those
of our material business partners and by developing contingency plans.
However, we cannot guarantee that we will be able to resolve all of our Year
2000 issues. Any critical unresolved Year 2000 issues could have a material
adverse effect on our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
We face risks relating to our investment portfolio.
The market value of our investments may fluctuate.
As of September 30, 1999, 65.5% of our general account investment portfolio
consisted of fixed maturity securities and 21.6% consisted of commercial and
agricultural mortgages. The market values of these assets vary with changing
economic and market conditions and interest rates.
Defaults on fixed maturity securities in our portfolio may reduce our net
income.
Issuers of the fixed maturity securities that we own in our general account
may fail to make scheduled payments of interest and principal on time or
altogether. As of September 30, 1999 and December 31, 1998 and 1997,
respectively, 65.5% ($31,087.5 million), 61.9% ($28,200.4 million) and 62.4%
($27,174.9 million) of our total invested assets consisted of fixed maturity
securities, and approximately 8.2% ($3,897.0 million) as of September 30,
1999, 8.3% ($3,766.9 million) as of December 31, 1998 and 8.3% ($3,601.7
million) as of December 31, 1997, of our total invested assets consisted of
below investment grade fixed maturity securities. Below investment grade
securities generally provide higher expected returns, but also present
increased potential for default. A major economic downturn could produce
higher than average issuer defaults which could cause our investment returns
and our net income to decline.
Delinquencies and balloon payments on mortgage loans may adversely affect
our profitability.
Our mortgage loans face both delinquency and default risk. Mortgage loans of
$10,233.6 million as of September 30, 1999 represented approximately 21.6% of
our total invested assets. As of September 30 and June 30, 1999, loans that
were either delinquent or in foreclosure totaled 0.45% and 0.60% of our
mortgage loan portfolio, respectively, compared to an industry average of
0.30% as of June 30, 1999, as reported by the American Council of Life
Insurance. The delinquency rate of our mortgage loan portfolio may increase,
resulting in investment losses greater than projected by us.
As of September 30, 1999, approximately 91.0% of our mortgage portfolio had
balloon payment maturity features, meaning that the loans do not fully
amortize over the term of the loan and the unamortized principal amount is due
at maturity of the loan. Where most or all of the principal is to be repaid at
maturity, the risk of default is greater. While we believe the risk of loss of
principal on these loans is not materially greater than it is on fully
amortizing mortgage loans that default, the high concentration of mortgages
with balloon payment maturity features increases the likelihood of defaults in
our mortgage portfolio.
Privately placed fixed maturity securities and mortgage loans typically are
significantly less liquid than public investments.
The secondary market for private fixed maturity securities and mortgage
loans is generally limited to qualified institutional buyers. As of September
30, 1999 these asset classes represented approximately 51.6% of the carrying
value of our total invested assets. If we require significant amounts of cash
at short notice, we may have difficulty selling these investments at
attractive prices or in a timely manner or both.
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Our "other invested assets" are subject to income volatility.
While the investment assets included in our "other invested assets"
category, primarily leases, private equity and independent power projects
where we invest through joint ventures or partnerships, have performed
unusually well over the past three years, their performance is highly
contingent upon the economic performance of the underlying entities or assets.
There can be no assurance that we will continue to earn income from our "other
invested assets" at levels comparable to the past three years.
The market price of our common stock may decline if persons receiving common
stock as compensation in the reorganization sell their stock in the public
market.
Policyholders who receive shares in the reorganization will not be required
to pay any cash purchase price for those shares, and can generally freely sell
their shares in the public market after receiving those shares.
The sale of substantial amounts of common stock in the public market, or the
perception that such sales could occur, could harm prevailing market prices
for our common stock. We believe the following factors may increase selling
pressure on our common stock:
. Some policyholders, in particular owners of larger policies, who do not
elect to receive common stock compensation in the reorganization are
nevertheless highly likely to receive common stock compensation because
of limits on the amount of cash available for cash payments to eligible
policyholders. See "The Reorganization--Payment of Consideration to
Eligible Policyholders--Limit on Amounts Available for Cash
Compensation." Those policyholders who did not elect to receive common
stock may be especially likely to sell the shares of common stock they
receive in the reorganization in order to realize cash proceeds.
. We will provide a program for the public sale of our common stock, at
prevailing market prices and without paying brokerage commissions or
similar expenses, to allow each of our stockholders who owns 99 or fewer
shares of common stock to sell those shares. This program will begin no
sooner than the first business day after the six-month anniversary, and
no later than the first business day after the twelve-month anniversary,
of the effective date of the reorganization, and will continue for at
least 90 days. Policyholders who receive 100 or more shares of common
stock in the reorganization are not eligible for the commission-free
sales program and therefore might not delay selling their shares until
the commencement of that program.
. Some policyholders may be fiduciaries of pension plans that are subject
to ERISA. Those policyholders, particularly if they originally did not
elect to receive common stock compensation, may determine that the
exercise of their fiduciary duties requires them to sell promptly the
shares of common stock received in the reorganization.
We may experience volatility in net income due to changes in standards for
accounting for derivatives.
We may experience volatility in net income due to changes in standards for
accounting for derivatives. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The FASB deferred the effective date of SFAS No. 133
until 2001. SFAS No. 133 will require us to report all derivatives on the
balance sheet at fair value. The accounting for changes in the fair value of a
derivative depends on its intended use. Derivatives not used in hedging
activities must be adjusted to fair value through earnings. If the derivative
is a hedge, changes in the fair value of the derivative will either be offset
in earnings against the change in the fair value of the hedged item or
recognized in other comprehensive income until the hedged item affects
earnings. The portion of a derivative's change in fair value that is not
offset by the change in fair value of the hedged item will be recognized
immediately in earnings.
We anticipate that we will adopt SFAS No. 133 effective January 1, 2001. We
are currently evaluating the effect of adoption and presently cannot predict
its likely impact on our financial condition or results of operations.
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Our United States insurance companies are subject to risk-based capital
requirements and possible guaranty fund assessments.
The National Association of Insurance Commissioners has established risk-
based capital standards for life insurance companies as well as a model act to
apply such standards at the state level. If an insurer's risk-based capital
falls below specified levels, the insurer would be subject to different
degrees of regulatory action depending upon the level. Possible regulatory
actions range from requiring the insurer to propose actions to correct the
risk-based capital deficiency to placing the insurer under regulatory control.
If the risk-based capital level of any of our United States insurance company
subsidiaries falls below the specified risk-based capital levels, we may be
required to allocate additional capital to the subsidiary.
All fifty states of the United States, the District of Columbia and Puerto
Rico have insurance laws requiring companies licensed to do life or health
insurance business within those jurisdictions to participate as members of the
state's life and health insurance guaranty associations. These associations
levy assessments on all member insurers based on the proportionate share of
the premiums written by each member in the lines of business in which an
impaired or insolvent insurer is engaged. While the amount of future
assessments cannot be accurately predicted, we or John Hancock Life Insurance
Company may be required to allocate funds to satisfy unanticipated assessments
in the future. This may adversely affect our results of operations for the
period when the assessment occurs.
The National Association of Insurance Commissioners' codification of statutory
accounting practices may adversely affect the statutory surplus of John
Hancock Life Insurance Company.
Proposed changes in states' statutory accounting practices for insurance
companies may adversely affect the statutory surplus of John Hancock Life
Insurance Company. In March 1998, the National Association of Insurance
Commissioners adopted model statutory accounting practices, which are
effective in 2001. The adoption of the new statutory accounting practices will
likely change, to some extent, prescribed statutory accounting practices that
we use to prepare our statutory financial statements. Statutory accounting
practices determine, among other things, the amount of surplus of our
insurance subsidiaries and thus determine, in part, the amount of funds
available to pay dividends to us. Each state must adopt this model before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated in that state. Accordingly, before the new statutory accounting
practices apply to John Hancock Life Insurance Company, the Massachusetts
Division of Insurance must adopt the model. At this time the impact of any
such changes on John Hancock Life Insurance Company is not expected to be
material. However, work continues by insurance regulators, public accounting
firms, and the insurance industry to finalize interpretations of the model.
The ongoing implementation work could cause changes in final interpretations
that could ultimately lead to an adverse effect on the statutory surplus or
statutory net income of John Hancock Life Insurance Company.
We may be unable to retain personnel who are key to our business.
The success of our business is dependent, to a large extent, on our ability
to attract and retain key employees, in particular our senior officers,
experienced portfolio managers, mutual fund managers and sales executives.
Competition for such persons is intense. In general, our employees are not
subject to employment contracts or non-compete arrangements.
We face risks from assumed reinsurance business in respect of personal
accident insurance and the occupational accident component of workers
compensation insurance.
Through our group health insurance operations, which we sold in 1997, we
entered into a number of reinsurance arrangements in respect of personal
accident insurance and the occupational accident component of workers
compensation insurance, a portion of which was originated through a pool
managed by Unicover Managers, Inc. Under these arrangements, we both assumed
risks as a reinsurer, and also passed 95% of these risks on to other
companies. This business had originally been reinsured by a number of
different companies, and has become the subject of wide-spread disputes. The
disputes concern the placement of the business with
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reinsurers and recovery of the reinsurance. We are engaged in disputes,
including a number of legal proceedings, in respect of this business. We
cannot predict the outcome of these disputes because we, like the other
companies involved, are still in the fact-gathering and investigative stages.
The risk to us is that the companies that reinsured the business from us may
seek to avoid their reinsurance obligations. We believe that we have a
reasonable legal position in this matter. However, if our reinsurers are
successful in avoiding the liabilities under their reinsurance contracts, and
we are not similarly successful in avoiding these liabilities under the
business reinsured by us, or if we become subject to or determine to
participate in a global settlement of these disputes, we may suffer losses
which, should they arise, could have a material adverse effect on our
financial condition or results of operations.
Litigation and regulatory proceedings may result in financial losses, harm our
reputation and divert management resources.
We are regularly involved in litigation, both as a defendant and as a
plaintiff. The litigation naming us as a defendant ordinarily involves our
activities as a provider of annuities or insurance protection, as well as an
investment adviser, employer and taxpayer. In addition, state regulatory
bodies, the Securities and Exchange Commission, the National Association of
Securities Dealers, Inc. and other regulatory bodies regularly make inquiries
and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws
governing the activities of broker/dealers. However, litigation and
investigations may arise in the future that result in financial losses, harm
our reputation or require the dedication of significant management resources.
On December 31, 1997 the United States District Court for the District of
Massachusetts approved a settlement of a nationwide class action lawsuit
against John Hancock Mutual Life Insurance Company, John Hancock Variable Life
Insurance Company and John Hancock Distributors, Inc. The lawsuit alleged
various market conduct and sales practice-related matters. See "Business--
Legal Proceedings" for a more complete description of this lawsuit. We have
established reserves based upon an estimate of the costs of the class action
settlement. With respect to the approximately three percent of class members
who have elected alternative dispute resolution, the majority of claims have
been evaluated. Final calculation and distribution of the resulting awards are
underway. Once such distribution of awards is complete, which we currently
expect to occur in late 2000, and alternative dispute resolution participants
choosing to arbitrate awards have done so, the cost of the class action
settlement may prove to be greater than currently estimated.
In addition, other market conduct or sales practice-related litigation may
arise in the future with respect to classes of insurance policies or annuity
contracts, or time periods not covered by the class action settlement.
Accordingly, there can be no assurance that claims of the nature covered by
the class action settlement will not arise in the future, or that if they do
that they will not result in a material adverse effect on our business,
financial condition or results of operations.
We face unforeseen liabilities arising from our acquisitions and dispositions
of businesses.
We have engaged in numerous dispositions and acquisitions of businesses in
the past, and expect to continue to do so in the future. The businesses we
have sold include property and casualty insurance operations, broker/dealer
operations and our group benefits operations. There could be unforeseen
liabilities that arise out of the sold businesses or out of businesses that we
acquire in the future.
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THE REORGANIZATION
In the following section, we provide a summary of the reorganization and of
the Plan of Reorganization. The following is just a summary and is qualified
by reference to the actual terms of the Plan of Reorganization. A copy of the
Plan of Reorganization has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
The Plan of Reorganization
Adoption and Approval of the Plan of Reorganization
The board of directors of John Hancock Mutual Life Insurance Company
unanimously adopted the Plan of Reorganization on August 31, 1999. The
principal feature of the Plan of Reorganization is the conversion of John
Hancock Mutual Life Insurance Company from a mutual life insurance company to
a stock life insurance company, a form of conversion known as
"demutualization."
Because John Hancock Mutual Life Insurance Company is an insurance company
organized under the laws of Massachusetts, the reorganization is governed by
Massachusetts law. Massachusetts law requires that the Plan of Reorganization
be approved by the policyholders of John Hancock Mutual Life Insurance Company
by a vote of two-thirds of the votes cast by those voting, and also by the
Massachusetts Commissioner of Insurance.
. The policyholders of John Hancock Mutual Life Insurance Company approved
the Plan of Reorganization at a special meeting held on November 30,
1999. The vote at the special meeting was 3,211,843 votes in favor,
215,134 votes opposed.
. The Massachusetts Commissioner of Insurance held a hearing on the Plan
of Reorganization on November 17 and 18, 1999, and issued an order
approving the Plan of Reorganization on December 9, 1999. In approving
the Plan of Reorganization, the Massachusetts Commissioner of Insurance
found that the Plan of Reorganization conforms to the requirements of
the Massachusetts insurance law governing demutualization of domestic
life insurance companies and is not prejudicial to policyholders or the
insuring public.
. The sole conditions to the effectiveness of the Plan of Reorganization
that remain unsatisfied are the completion of the offering, the
contribution of substantially all of the net proceeds of the offering to
John Hancock Life Insurance Company, and the delivery to us by outside
counsel of a legal opinion as to the tax consequences of the
reorganization.
Steps to the Reorganization
The reorganization of John Hancock Mutual Life Insurance Company includes
the following steps, all of which will occur on the effective date:
. John Hancock Mutual Life Insurance Company will convert from a mutual
life insurance company to a stock life insurance company and become a
wholly owned subsidiary of John Hancock Financial Services, Inc., which
is a holding company;
. all membership interests of John Hancock Mutual Life Insurance Company's
policyholders in John Hancock Mutual Life Insurance Company will be
extinguished;
. eligible policyholders of John Hancock Mutual Life Insurance Company
will be entitled to receive shares of our common stock, cash or policy
credits as compensation for the extinguishment of their John Hancock
Mutual Life Insurance Company membership interests;
. John Hancock Mutual Life Insurance Company will change its name to John
Hancock Life Insurance Company;
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. John Hancock Life Insurance Company will surrender to John Hancock
Financial Services, Inc., and John Hancock Financial Services, Inc. will
cancel, all of the common stock previously issued by John Hancock
Financial Services, Inc. to John Hancock Mutual Life Insurance Company
(given that John Hancock Financial Services, Inc. was originally
established as a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company);
. John Hancock Life Insurance Company will issue to John Hancock Financial
Services, Inc. shares of John Hancock Life Insurance Company common
stock;
. shares of our stock will be sold to the public pursuant to the offering;
and
. John Hancock Financial Services, Inc. will contribute to John Hancock
Life Insurance Company all of the net proceeds from the offering, other
than the portion to be retained by John Hancock Financial Services,
Inc., as set forth in "Use of Proceeds."
When the reorganization is complete, John Hancock Financial Services, Inc.
will be a publicly held holding company. John Hancock Financial Services, Inc.
will own 100% of the stock of John Hancock Life Insurance Company, and John
Hancock Life Insurance Company will continue to own each of the subsidiaries
that John Hancock Mutual Life Insurance Company owned prior to the
reorganization, other than John Hancock Financial Services, Inc.
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The following chart illustrates our corporate structure prior to and
immediately following the reorganization.
[CURRENT STRUCTURE APPEARS HERE]
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Purposes of the Reorganization
Our primary reason for converting to a stock company through demutualization
is to improve our access to the capital markets in order to expand our
business in a changing marketplace.
Access to the capital markets will allow us to:
. make acquisitions using stock as currency;
. develop and grow business opportunities;
. invest in new technology, customer service, new products and
distribution channels;
. reduce unit expenses through economies of scale made possible by growth;
. increase financial flexibility to maintain financial ratings and
stability; and
. better attract, retain, and provide incentives to management in a
fashion consistent with other stock life insurance companies.
The holding company structure adopted as part of the reorganization should
provide several benefits. This structure affords increased flexibility in
raising additional debt and equity capital and provides the opportunity to
pursue growth, either internally or through acquisitions which we continue to
pursue, in John Hancock's current and future insurance and non-insurance
businesses. We also expect that, in the future, the structure will increase
flexibility in allocating capital and resources among the various subsidiaries
of John Hancock Financial Services, Inc., and facilitate consolidation of
administrative and other functions of our subsidiaries.
The reorganization will also provide eligible policyholders with shares of
common stock, cash or policy credits as compensation for the extinguishment of
their otherwise illiquid membership interests in John Hancock Mutual Life
Insurance Company.
Effective Date
The reorganization will become effective on the date of the closing of the
offering. The Plan of Reorganization provides that the effective date will
occur after the approval by the Massachusetts Commissioner of Insurance and
the policyholders entitled to vote on the Plan of Reorganization, but on or
before December 31, 2000. With the approval of the Massachusetts Commissioner
of Insurance, the December 31, 2000 deadline may be extended for up to an
additional six months.
Additional Approvals
The Plan of Reorganization was also subject to the review of the New York
Superintendent of Insurance as to its fairness to New York policyholders.
While the New York Superintendent of Insurance has raised comments concerning
the Plan of Reorganization, we anticipate that we will reach an agreement with
the New York Superintendent of Insurance that will resolve those comments. The
reorganization is also subject to approval or exemption under the insurance
holding company statutes of Delaware, Massachusetts and California and similar
laws in Canada, the domiciliary jurisdictions of our insurance subsidiaries.
We have applied for exemptions or approvals under each of these statutes or
laws, as applicable, and we have received approvals from Delaware and
Massachusetts. We have also received from the Department of Labor prohibited
transaction exemptions under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). A more complete description of these exemptions is
set forth under the heading "--ERISA Considerations."
Payment of Consideration to Eligible Policyholders
Amount and Form of Consideration
Until the effective date of the reorganization, John Hancock Mutual Life
Insurance Company is a mutual life insurance company owned by its
policyholders. In connection with the reorganization, the membership interests
of policyholders will be extinguished, and eligible policyholders will receive
compensation in exchange for the extinguishment of their membership interests.
Policyholders who are not "eligible policyholders" will not receive any
compensation in the reorganization.
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Policyholders eligible to receive compensation are those persons who own on
the effective date of the reorganization a John Hancock Mutual Life Insurance
Company voting policy that was in force on August 31, 1999 and on the December
31 before the effective date of the reorganization. Whether or not a policy is
in force is determined based upon our records. In general, a policy is in
force on a given day if it has been issued and is in effect, has not been
surrendered or otherwise terminated, and notice of the insured's death has not
been received by us. A policy is generally not in force until it is issued and
is in effect. However, a policy is considered to be in force if we have
received at our administrative office: (1) an application, complete on its
face, together with all required underwriting information (including all
required medical information); and (2) payment of the full initial premium (or
such lesser amount required by our normal administrative procedures for
coverage to become effective); provided that such policy is later issued in
accordance with the terms of its application.
We are aware of only one significant dispute concerning eligibility. This
dispute involves Mutual of America Life Insurance Company ("MOA"), a long-
standing holder of a reinsurance contract. MOA has asserted that the
Massachusetts demutualization law entitles MOA to be treated as an eligible
policyholder. We have disputed this assertion and, on October 22, 1999, we
brought an action for declaratory judgment in this matter before the Suffolk
Superior Court in Massachusetts.
The compensation will consist of a fixed component equal to 17 shares of
common stock for each voting policy owned by an eligible policyholder, and a
variable component of additional shares allocated, based on contributions to
surplus, in respect of each participating policy eligible for a variable
component owned by an eligible policyholder.
The compensation will be in the form of either policy credits, cash or
common stock. Policy credits are, depending on the type of policy, an increase
in the cash value and death benefit, an increase in the account value, or
crediting of policy dividends. The form of compensation will be determined as
follows:
Policy Credits. The following types of policies will be eligible solely for
policy credits in order to preserve their tax status:
. Individual retirement annuity contracts which are tax qualified under
Section 408(b) of the Internal Revenue Code.
. Individual tax sheltered annuity contracts under Section 403(b) of the
Internal Revenue Code.
. Individual annuity contracts issued directly to a plan participant
pursuant to a tax qualified plan under Section 401(a) of the Internal
Revenue Code.
. Individual life insurance policies issued directly to a plan participant
pursuant to a tax qualified plan under Section 401(a) of the Internal
Revenue Code.
Cash. The following types of policies will be eligible solely for cash:
. Policies subject to a creditor's lien (other than a policy loan made by
John Hancock) or bankruptcy proceeding.
. Policies for which the mailing address of the policyholder on our
records is located outside the United States (including states,
territories or possessions).
. Policies for which the mailing address of the policyholder on our
records is one at which mail is undeliverable.
All policyholders who are eligible for, but do not expressly elect, common
stock will be assumed to prefer cash. Cash will be distributed to such
policyholders to the extent available. See "--Limit on Amounts Available for
Cash Compensation."
Common Stock. Except for policies which are eligible solely for policy
credits or cash, all eligible policies will be eligible for common stock.
Common stock will be distributed to all such eligible policyholders who
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expressly elect common stock and to certain other eligible policyholders if
the compensation for eligible policyholders who did not expressly elect common
stock exceeds the limitation described under "--Limit on Amounts Available for
Cash Compensation."
Calculation of Cash and Policy Credit Compensation
Policyholders receiving cash or policy credits will receive an amount of
cash or policy credits equal to the number of shares of common stock they are
allocated in the reorganization multiplied by the greater of the price at
which the common stock is sold in the offering and the average closing price
of the stock for the first 20 trading days, subject to a maximum of 120% of
the price at which the common stock is sold in the offering.
Limit on Amounts Available for Cash Compensation
There will be a limit to the amount of funds available to pay cash to
eligible policyholders who do not elect stock. We currently estimate that cash
in an amount sufficient to convert a total of 68.8 million shares allocated to
policyholders not eligible for stock or who did not elect stock will be
available to pay cash and fund policy credits. It is highly likely that the
total funds available will not be sufficient to make cash payments to all
eligible policyholders who prefer cash.
Each policyholder who is eligible to receive common stock or cash will have
an opportunity to elect common stock. If common stock is not elected by such
policyholder, a preference for cash will be assumed. However, because there
will be a limit to the amount of funds available to pay cash and fund policy
credits, it is highly likely that the total funds available will not be
sufficient to make cash payments to all eligible policyholders who wish to
receive cash. In the event that the total available funds are not sufficient,
the funds will be used first for cash and policy credits for eligible
policyholders who are not eligible to receive common stock.
When distributing cash to policyholders who have not elected stock, priority
will generally be given to policyholders with smaller allocations.
Specifically, priority will be given:
First, to pay or credit cash or policy credits in connection with
eligible policies that are eligible only for cash or policy credits;
Second, to pay cash to all eligible policyholders who, with respect to
policies that are eligible for stock or cash, are allocated the minimum
allocation of 17 shares; and
Third, to pay cash to all eligible policyholders who, with respect to
policies that are eligible for stock or cash, are allocated a number of
shares beginning with 18 and continuing to the highest level of share
allocation possible at which cash preferences can be completely satisfied
given the funds available.
Eligible policyholders for whom cash is not available will receive common
stock, regardless of any preference they may have for cash.
The maximum number of allocated shares for which cash will be available will
depend on a number of factors. These factors include the number of
policyholders eligible for stock or cash, the size of the initial public
offering, the initial public offering stock price, the average closing price
of the stock during the first 20 trading days and the percentage of
policyholders who elect to receive stock instead of cash. Based on preliminary
estimates of these factors, we believe that cash will be available to honor
cash preferences for policyholders allocated up to at least 65 shares. We
cannot guarantee our ability to honor cash preferences up to this allocation
level because of the number and complexity of these changeable factors. At the
same time, it is possible that the allocation level for which cash will be
available will be higher; however, this should be regarded as unlikely.
Actuarial Opinion
John Hancock Mutual Life Insurance Company retained Milliman & Robertson,
Inc., an independent actuarial consulting firm, to advise it in connection
with actuarial matters involved in the development of the Plan of
Reorganization and the payment of consideration to eligible policyholders. The
opinion of Godfrey
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Perrott, an independent consulting actuary associated with Milliman &
Robertson, Inc., dated August 31, 1999, states (in reliance upon the matters
described in such opinion) that the formula provided in the Plan of
Reorganization to allocate the consideration to be given to eligible
policyholders for the extinguishment of their membership interests in John
Hancock Mutual Life Insurance Company is fair and reasonable. A copy of the
opinion is attached as Annex A to this prospectus.
Establishment and Operation of the Closed Block
Establishment of the Closed Block
Under the Plan of Reorganization, as of the effective date, John Hancock
Life Insurance Company will be obligated to create and operate the closed
block for the benefit of the policies included therein. The policies included
in the closed block are individual or joint traditional whole life insurance
policies of John Hancock Mutual Life Insurance Company that are currently
paying or expected to pay policy dividends, and individual term life insurance
policies that are in force on the effective date of the reorganization. The
purpose of the closed block is to protect the policy dividend expectations of
these policies after the demutualization. Unless the Massachusetts
Commissioner of Insurance and, in certain circumstances, the New York
Superintendent of Insurance, consents to an earlier termination, the closed
block will continue in effect until the date none of such policies is in
force. On the effective date of the reorganization, John Hancock Life
Insurance Company will allocate to the closed block assets that are expected
to produce cash flows which, together with anticipated revenues from the
policies included in the closed block, are expected to be reasonably
sufficient to provide for payment of policy benefits, taxes, and direct asset
acquisition and disposition costs, and for continuation of policy dividend
scales payable in 1999, if the experience underlying such dividend scales
continues.
Effect of the Closed Block on our Results of Operations
The closed block is a mechanism whereby we will separately account for the
individual or joint life insurance policies of John Hancock Life Insurance
Company included in the closed block on the effective date. We will include
the contribution of the closed block in our financial statements, although it
will be reported under a separate caption. We will reflect future income from
the closed block business in our operating results over the period the closed
block policies are in force. Many operating costs and expenses associated with
the closed block business, which we will pay, are not included as closed block
expenses, and therefore the contribution from the closed block will not
accurately reflect the profitability of the closed block business.
The assets allocated to the closed block and any cash flows provided by
these assets will solely benefit the holders of policies included in the
closed block. These assets will not revert to the benefit of John Hancock Life
Insurance Company or John Hancock Financial Services, Inc. However, these
closed block assets will be available to satisfy claims of John Hancock Life
Insurance Company's creditors and of all John Hancock Life Insurance Company's
policyholders in the same priority in liquidation as the other assets in John
Hancock Life Insurance Company's general account.
See Note 1 of Notes to "Unaudited Pro Forma Condensed Consolidated Financial
Information" for a more detailed description of the manner in which the
financial results of the closed block will affect the results of continuing
operations of John Hancock Financial Services, Inc. For a description of the
risks to stockholders arising out of the creation and operation of the closed
block, see "Risk Factors--Under our Plan of Reorganization, we will be
required to establish the "closed block," a special arrangement for the
benefit of a group of our policyholders. We may have to fund deficiencies in
our closed block, and any overfunding of the closed block will benefit only
the holders of policies included in the closed block, not our stockholders."
Effect of Closed Block Profitability on Holders of Closed Block Policies
The excess of closed block liabilities over closed block assets at the
effective date of the reorganization represents the expected future post-tax
contribution from operation of the closed block. Under GAAP, this contribution
may be recognized as income over the period the policies in the closed block
remain in force. Actual cash flows from the assets allocated to the closed
block and other experience relating to the closed block
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business, in the aggregate, may be more favorable than we assumed in setting
up the closed block. In that case, total policy dividends paid to closed block
policyholders in future years will be greater than the total policy dividends
that would have been paid to such policyholders if the policy dividend scales
payable in 1999 had been continued without adjustment. Conversely, to the
extent that such cash flows and other experience are, in the aggregate, less
favorable than we assumed in setting up the closed block, total policy
dividends paid to closed block policyholders in future years will be less than
the total dividends that would have been paid to such policyholders if the
policy dividend scales payable in 1999 had been continued unless, for
competitive reasons, we chose to support dividend payments with our general
account funds.
In addition, if the assets allocated to the closed block, the cash flows
therefrom and the revenues from the closed block business prove to be
insufficient to pay the benefits guaranteed under the policies included in the
closed block, John Hancock Life Insurance Company will be required to make
payments from its general funds in an amount equal to the shortfall. We will
fund the closed block to provide for payment of guaranteed benefits on such
policies and for continuation of dividends paid under 1999 policy dividend
scales (assuming the experience underlying such dividend scales continues).
Therefore, we do not believe it will be necessary to use general funds to pay
guaranteed benefits on closed block business unless the closed block business
experiences very substantial adverse deviations in investment, mortality,
persistency or other experience factors.
Allocation of Closed Block Cash Flows and Expenses
We will credit or charge to the closed block the insurance cash flows (such
as premiums and policy benefits) and investment cash flows from the operations
of the closed block as provided in the Plan of Reorganization. We will charge
state and local taxes, federal income taxes and guaranty funds assessments in
respect of the closed block business to the closed block in accordance with
the tax sharing procedures set forth in the Plan of Reorganization.
We will not charge to the closed block expenses (including investment
management expenses) of operating and administering the closed block, other
than direct asset acquisition and disposition costs and taxes. At the same
time, assets which otherwise would have been allocated to the closed block had
such operating and administrative expenses been chargeable to the closed
block, will remain outside the closed block. Our operating results outside the
closed block will include the investment results of such assets. Our operating
results will also reflect the cost of increases in, and the benefit of
decreases of, these closed block operating and administrative expenses.
Reallocation of Closed Block Assets
The Plan of Reorganization permits the borrowing of cash through our
financing subsidiary, John Hancock Capital Corporation, at market rates of
interest based on the proposed term of the borrowing. The Plan of
Reorganization prohibits any other reallocation, transfer, borrowing or
lending of assets between the closed block and other portions of John Hancock
Life Insurance Company's general account, any of its separate accounts or to
any affiliate of John Hancock Life Insurance Company without the approval of
the Massachusetts Commissioner of Insurance.
Policies not Included in the Closed Block
Participating policies not included in the closed block will continue to be
eligible for the payment of dividends after the reorganization to the same
extent as prior to the reorganization.
Closed Block Assets and Liabilities
Closed Block Assets
Under the Plan of Reorganization, certain assets will be allocated to the
closed block. Based upon the allocations of specifically identified investment
assets held by John Hancock Mutual Life Insurance Company as of September 30,
1999, assets with the following carrying values were allocated to the closed
block as of September 30, 1999:
30
<PAGE>
<TABLE>
<CAPTION>
Carrying Value
--------------
(in millions)
<S> <C>
Fixed maturity securities..................................... $4,597.2
Mortgage loans................................................ 1,874.6
Policy loans.................................................. 1,554.8
Other invested assets......................................... 15.2
--------
Total....................................................... $8,041.8
========
</TABLE>
Additional assets that would have been allocated to the closed block at
September 30, 1999 if the closed block had been effective as of that date
include deferred policy acquisition costs of $959.6 million, accrued
investment income of $83.8 million, reinsurance recoverable of $47.3 million,
premiums and accounts receivable of $16.3 million, and other assets of $13.9
million.
Closed Block Investment Policy
The Plan of Reorganization requires that new investments for the closed
block acquired on and after January 1, 1999 be made in accordance with the
investment policy set forth in the Plan of Reorganization. The investment
policy in the Plan of Reorganization requires that all new investments
acquired with closed block cash flows shall consist only of:
. "Fixed Income Investments," which are fixed maturity securities,
commercial mortgages, agricultural mortgages, short-term securities and
cash; and
. real estate, common stock, financial futures and interest rate options,
currency swaps and certain other eligible assets.
We will target acquisitions of fixed income investments to achieve a
weighted average life of not less than five years and not more than ten years.
In the future, however, we may target a weighted average life of less than
five years if appropriate to reflect the remaining liabilities of the closed
block. We will further manage such acquisitions so that the weighted average
quality of the Fixed Income Investment portfolio is at least "Baa2" as rated
by Moody's Investors Service, Inc. ("Moody's") or its equivalent.
The closed block investment policy places a number of additional limitations
on our acquisitions of closed block assets. These limitations include minimum
ratings for fixed income investments, the maximum proportion of below
investment grade fixed maturity securities and asset-backed securities, the
maximum amount of securities of any issuer or industry, the maximum amount
invested in commercial and agricultural mortgages, and the maximum amount of
investments in jurisdictions other than the United States or Canada. The
closed block investment policy may be changed only with the prior approval of
the Massachusetts Commissioner of Insurance.
Closed Block Liabilities
Had the closed block been effective as of September 30, 1999, the policy
liabilities and accruals associated with the closed block would have
aggregated approximately $11,727.1 million. This amount would have included
$11,018.7 million of future policy benefits and policyholders' funds, $377.6
million of dividends payable to policyholders, unpaid claims and claim expense
reserves of $82.8 million, income taxes of $4.7 million and other liabilities
of $243.3 million. See "Unaudited Pro Forma Condensed Consolidated Financial
Information--Unaudited Pro Forma Condensed Consolidated Balance Sheet." The
assets and liabilities allocated to the closed block will be recorded in our
consolidated financial statements at their historical carrying values. The
carrying values of the assets allocated to the closed block will be less than
the carrying value of the closed block liabilities at the effective date of
the reorganization. The excess of the closed block liabilities over the closed
block assets at the effective date represents the estimated future post-tax
contribution expected from the operation of the closed block, which will be
recognized in our consolidated income over the period the policies in the
closed block remain in force.
31
<PAGE>
Actuarial Opinion Concerning the Sufficiency of Closed Block Assets
John Hancock Mutual Life Insurance Company also retained Milliman &
Robertson, Inc. to advise it in connection with actuarial matters involved in
the establishment and operation of the closed block. The opinion of Godfrey
Perrott, an independent consulting actuary associated with Milliman &
Robertson, Inc., dated August 31, 1999, states (in reliance upon the matters
described in such opinion) that the arrangement for establishment and
operation of the closed block set forth in the Plan of Reorganization
allocates assets to the closed block which are reasonably sufficient to enable
the closed block to provide for the guaranteed benefits, certain expenses and
taxes associated with closed block policies, and to provide for the
continuation of the 1999 dividend scale if the experience underlying such
scale continues. This opinion concerning the sufficiency of closed block
assets is expressed in terms of statutory assets and liabilities and not in
terms of assets and liabilities accounted for on a GAAP basis as shown in the
GAAP presentation above and under "Unaudited Pro Forma Condensed Consolidated
Financial Information." A copy of this opinion is attached as Annex A to this
Prospectus.
Commission-Free Sales Program
Pursuant to the Plan of Reorganization, we will establish a commission-free
sales program that will commence no sooner than the first business day after
the six-month anniversary, and no later than the first business day after the
twelve-month anniversary, of the effective date of the reorganization, and
will continue for at least 90 days. We may extend the 90-day period with the
approval of the Massachusetts Commissioner of Insurance. Under this program,
each of our stockholders who owns 99 or fewer shares of our common stock on
the record date for the commission-free sales program will have the
opportunity at any time during the 90-day period to sell all, but not less
than all, of those shares in one transaction at prevailing market prices
without paying brokerage commissions or other similar expenses. We will also
offer each eligible stockholder entitled to participate in the commission-free
sales program the opportunity to purchase shares of common stock as necessary
to increase their holdings to 100 share round lots without paying brokerage
commissions or other similar expenses. This stock purchase program will occur
simultaneously and in conjunction with the commission-free sales program.
Limitations on Acquisitions of Our Common Stock
The Plan of Reorganization governing our reorganization and our restated
certificate of incorporation each prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more of
the outstanding shares of our common stock until two years after the
effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire beneficial
ownership of 10% or more of the outstanding shares of our common stock
during the one year period following the two-year period described
above.
There is an exception to the foregoing prohibitions for acquisitions by a
person that becomes a beneficial owner as a result of our issuance of such
common stock to such person as consideration in an acquisition of another
entity that was initiated by us by authority of our board of directors. Any
such acquisition initiated by us by authority of our board of directors would
require the approval of the Massachusetts Commissioner of Insurance and the
Commissioners of Insurance of California and Delaware, the Office of the
Superintendent of Financial Institutions in Canada, and, potentially, the New
York Superintendent of Insurance. If any person acquires or offers to acquire
10% or more of the outstanding shares of our common stock in violation of our
Plan of Reorganization, we and the Massachusetts Commissioner of Insurance
would be entitled to injunctive relief.
By virtue of these provisions of the Plan of Reorganization and our restated
certificate of incorporation, John Hancock Financial Services, Inc., may not
be subject to an acquisition by another company during the two years following
the effective date of the reorganization and may only be subject to an
acquisition by another company in the third year following the effective date
of the reorganization with the approval of our Board of Directors and the
Massachusetts Commissioner of Insurance.
32
<PAGE>
Limitations on Acquisition and Disposition of Securities by Officers and
Directors
Until one year after completion of the offering, we may not award any stock
options or stock grants to any executive officer or director. Any common stock
or securities convertible into common stock beneficially owned by an executive
officer or director may not be sold for a period of at least two years
following the offering; and common stock or securities convertible into common
stock beneficially owned by an elected officer may not be sold for a period of
at least one year following the offering, in each case except in the event of
death or disability.
Executive officers and directors and elected officers are also subject to
the following restrictions on their ability to purchase any common stock
following the offering:
. executive officers and directors may not purchase or enter into any
contract, agreement or other arrangement to purchase any of our common
stock prior to the later of (1) the twenty-first day during which our
common stock is publicly traded and (2) if applicable, the last day of
any restricted trading period with respect to our common stock; and
. elected officers may not purchase or enter into any contract, agreement
or other arrangement to purchase any of our common stock prior to the
later of (1) the second day during which our common stock is publicly
traded and (2) if applicable, the last day of any restricted trading
period with respect to our common stock.
These limitations do not prevent us from issuing common stock (1) in
connection with an employee stock ownership plan and/or other employee benefit
plan established for the benefit of our employees and qualified under the
Internal Revenue Code or (2) to match contributions by employees to any such
plan. Further, we may issue shares of common stock pursuant to a stock
incentive plan (other than to executive officers or directors during the first
year after completion of the offering).
Amendments to the Plan
We may amend the Plan of Reorganization at any time before the effective
date with the approval of the Massachusetts Commissioner of Insurance. The
Plan of Reorganization cannot be amended after the effective date without the
affirmative vote of at least three-quarters of the directors serving on the
board of directors of John Hancock Financial Services, Inc. and the approval
of the Massachusetts Commissioner of Insurance. The Massachusetts Commissioner
of Insurance may condition her approval of any material amendment to the Plan
of Reorganization, such as by requiring that a new public hearing be held.
ERISA Considerations
We provide a variety of fiduciary and other services to employee benefit
plans that are also policyholders. The provision of such services may cause us
to be a "party in interest" or "disqualified person," as such terms are
defined in ERISA, and the Internal Revenue Code, with respect to such plans.
Unless an exemption is obtained from the Department of Labor, certain
transactions between parties in interest or disqualified persons and those
plans are prohibited by ERISA and the Internal Revenue Code. We have applied
to the Department of Labor for a prohibited transaction exemption under ERISA,
which would, if granted, provide relief from the restrictions of ERISA and the
Internal Revenue Code to permit eligible policyholders to receive common
stock, cash or policy credits pursuant to the Plan of Reorganization.
On October 22, 1999, the Department of Labor published notice in the Federal
Register of a proposed order granting the requested prohibited transaction
exemption with respect to the payment of compensation under the Plan of
Reorganization to eligible policyholders as to which we are a "party in
interest" or "disqualified person." Such exemption would be subject to various
conditions, including the implementation of the Plan of Reorganization in
accordance with procedural and substantive safeguards that are imposed under
the Massachusetts demutualization law and supervised by the Massachusetts
Commissioner of Insurance. Based upon discussions with the Department of
Labor, we believe that the Department of Labor will issue an exemption prior
to the effective date. However, there can be no assurance that the Department
of Labor will take such action. If the Department of Labor does not issue the
requested exemption prior to the effective date, we may, with the approval of
the Massachusetts Commissioner of Insurance, either pay such consideration to
eligible policyholders or delay such payment and place such consideration in
an escrow or similar arrangement.
33
<PAGE>
Federal Income Tax Consequences to Policyholders
It is a condition to the effectiveness of the Plan of Reorganization that we
receive an opinion reconfirming as of the closing date the opinion we have
received from our special tax counsel, Debevoise & Plimpton, to the effect
that:
. Policies issued by John Hancock Mutual Life Insurance Company prior to
the effective date will not be treated as newly issued policies for any
material federal income tax purpose as a result of the conversion of
John Hancock Mutual Life Insurance Company from a mutual to a stock life
insurance company under the Plan of Reorganization;
. The crediting of consideration in the form of policy credits to tax
sheltered annuities, individual retirement annuities or individual life
insurance policies or annuity contracts issued to participants in
qualified retirement plans will not adversely affect the tax-favored
status of such policies and contracts under the Internal Revenue Code,
will not be a taxable transaction to the holder and will not be treated
as a contribution or distribution that will result in penalties to the
holder;
. Policyholders receiving solely common stock will not recognize gain or
loss for federal income tax purposes as a result of the consummation of
the Plan of Reorganization; and
. The summary of principal federal income tax consequences to
policyholders of the receipt of consideration under the Plan of
Reorganization set forth under the heading "Federal Income Tax
Consequences to Policyholders" in the information statement provided to
policyholders is, to the extent it describes matters of law or legal
consequences, and subject to the limitations and assumptions set forth
in the policyholder information statement, an accurate summary in all
material respects of the federal income tax consequences to
policyholders of the consummation of the Plan of Reorganization.
Federal Income Tax Consequences to the Company
We have received an opinion from Debevoise & Plimpton, our special tax
counsel, to the effect that:
. No income, gain or loss will be recognized by John Hancock Financial
Services, Inc. or John Hancock Mutual Life Insurance Company for federal
income tax purposes as a result of John Hancock Mutual Life Insurance
Company's conversion from a mutual to a stock life insurance company or
the distribution of common stock to eligible policyholders in exchange
for their membership interests in John Hancock Mutual Life Insurance
Company;
. Federal income tax attributes of John Hancock Mutual Life Insurance
Company, including its tax basis and holding period of its assets,
carryforwards of tax losses or other tax benefits (if any) and
accounting methods should not be affected by its conversion from a
mutual to a stock life insurance company;
. The affiliated federal income tax group of which John Hancock Mutual
Life Insurance Company is the common parent immediately before the
reorganization will remain in existence and will continue to be able to
file a consolidated federal income tax return, with John Hancock
Financial Services, Inc. as the new common parent of the group and John
Hancock Life Insurance Company as an eligible member for inclusion in
the group; and
. The consummation of the Plan of Reorganization will not be deemed to
result in any reinsurance arrangements for purposes of Section 848 of
the Internal Revenue Code or the Treasury Regulations promulgated
thereunder.
Based on the opinions and advice of our special tax counsel, we believe that
John Hancock Financial Services, Inc. will not realize significant income,
gain or loss for federal income tax purposes as a result of John Hancock
Mutual Life Insurance Company's conversion from a mutual to a stock life
insurance company, the formation of John Hancock Financial Services, Inc. or
the distribution of common stock to policyholders pursuant to the Plan of
Reorganization.
34
<PAGE>
The opinions of special tax counsel described above are under the Internal
Revenue Code, the regulations thereunder, and administrative interpretations
thereof and judicial interpretations with respect thereto, all as in effect on
the date hereof, and based on the accuracy of representations, statements and
undertakings made by us. We have not sought a private letter ruling from the
Internal Revenue Service regarding the federal income tax consequences of the
consummation of the Plan of Reorganization.
35
<PAGE>
USE OF PROCEEDS
The following table summarizes the estimated use of the $1,940.0 million
total net proceeds of the offering (assuming the underwriters' over-allotment
option is not exercised):
<TABLE>
<CAPTION>
In
Use of Proceeds: Millions
---------------- --------
<S> <C>
Cash contributed to John Hancock Life Insurance Company............ $1,740.0
Proceeds retained by John Hancock Financial Services, Inc. ........ 200.0
--------
Total net proceeds............................................... $1,940.0
========
</TABLE>
Our net proceeds from the offering are estimated to be $1,940.0 million (or
$ . million if the underwriters exercise their over-allotment option in full)
assuming that our common stock is offered at $20.00 per share, the midpoint of
the range set forth on the cover page of this prospectus, and after deducting
underwriting discounts and commissions and the estimated expenses of the
offering. We intend to contribute approximately $1,740.0 million of net
proceeds to John Hancock Life Insurance Company.
The Plan of Reorganization requires us to contribute all of the net cash
proceeds of the offering to John Hancock Life Insurance Company other than a
working capital allowance of $50.0 million plus an amount determined by John
Hancock Financial Services, Inc. to be reasonably necessary to provide for
regular cash dividends to stockholders in the year following the effective
date. We expect that the amount of net proceeds to be retained by John Hancock
Financial Services, Inc. will total $200.0 million. John Hancock Financial
Services, Inc. intends to use these net proceeds for general corporate
purposes and to pay a dividend to the stockholders of John Hancock Financial
Services, Inc. in the year following the effective date of the reorganization.
However, provisions of our Plan of Reorganization may serve to reduce the
amount retained to an amount less than $200.0 million, unless specific
approval is received from the Massachusetts Commissioner of Insurance. If this
amount is reduced, John Hancock Financial Services, Inc. may require
additional funds, to be obtained through dividends from John Hancock Life
Insurance Company or borrowings, in order to pay the first year stockholder
dividend, if declared.
In connection with the reorganization, John Hancock Life Insurance Company
will require funds to satisfy the following needs, which will be satisfied
with a combination of internal funds and cash contributed by John Hancock
Financial Services, Inc. As of the date hereof:
(1) $60.0 million is estimated to be required for the cost of a portion of
the nonrecurring expenses of John Hancock Mutual Life Insurance Company
directly related to the transaction;
(2) $1,564.3 million is estimated to be used to make cash payments to
eligible policyholders; and
(3) $86.9 million is estimated to be necessary to establish reserves for
policy credits to eligible policyholders.
In addition to the shares of our common stock distributed in the offering,
for which we will receive cash proceeds, many eligible policyholders will
receive shares of common stock as compensation for extinguishment of their
membership interests in the reorganization. Neither John Hancock Financial
Services, Inc. nor John Hancock Life Insurance Company will receive any
proceeds from the issuance of our common stock to eligible policyholders as
compensation for the extinguishment of their membership interests in
connection with the reorganization.
36
<PAGE>
STOCKHOLDER DIVIDEND POLICY
We currently intend to pay regular annual cash dividends on our common
stock. We currently intend to declare an initial annual cash dividend of $ .
per share in [date]. Although we intend to pay dividends, the declaration and
payment of dividends is subject to the discretion of our board of directors.
The declaration, payment and amount of dividends will be dependent upon our
results of operations, financial condition, cash requirements, future
prospects, regulatory and other restrictions on the payment of dividends by
our subsidiaries and other factors deemed relevant by our board of directors.
There can be no assurance that we will declare and pay any dividends.
After the effective date of the reorganization, John Hancock Financial
Services, Inc. will be an insurance holding company. The assets of John
Hancock Financial Services, Inc. will consist initially of 100% of the
outstanding capital stock of John Hancock Life Insurance Company and a portion
of the net proceeds of the offering. As an insurance holding company, we will
depend principally on dividends from John Hancock Life Insurance Company to
satisfy our financial obligations, pay operating expenses and pay dividends to
our stockholders (other than dividends, if any, in the first year following
the effective date of the reorganization).
If John Hancock Life Insurance Company is unable to pay stockholder
dividends in the future, our ability to pay dividends to our stockholders and
meet our cash obligations will be limited. The payment of dividends by John
Hancock Life Insurance Company is subject to the discretion of its board of
directors. In addition, the Massachusetts insurance law limits how and when
John Hancock Life Insurance Company can pay stockholder dividends. After
giving effect to the reorganization, John Hancock Life Insurance Company would
be able to pay approximately $607.1 million in dividends in 1999 based on its
1998 statutory results without being subject to the restrictions on payment of
extraordinary stockholder dividends. Following the reorganization, John
Hancock Life Insurance Company may be commercially domiciled in New York and,
if so, dividend payments may also be subject to New York's insurance holding
company act as well as Massachusetts law. The payment of dividends by our
other insurance subsidiaries also is limited by the laws of their respective
jurisdictions of incorporation. See "Risk Factors--As a holding company, we
will depend on dividends from our subsidiaries and the Massachusetts insurance
law may restrict the ability of John Hancock Life Insurance Company to pay
dividends to us," "Regulation--Regulation of Dividends and Other Payments from
Insurance Subsidiaries" and Note 10 to our Consolidated Financial Statements.
37
<PAGE>
CERTAIN INFORMATION
This prospectus includes statistical data regarding the insurance, annuity
and mutual fund industries.
Statistical data regarding the individual life insurance industry are based
on information obtained by A.M. Best Company ("A.M. Best"), an independent
rating agency for the insurance industry.
Statistical data regarding the group long-term care insurance, annuity, GIC
and funding agreement industries are based on information reported to LIMRA
International, Inc. ("LIMRA"), a financial services industry marketing
research organization. LIMRA rankings are based on data provided by U.S.
companies in connection with LIMRA-conducted surveys.
. LIMRA group long-term care rankings are based on total in force premium.
. LIMRA individual annuity rankings are based on total sales.
. LIMRA GIC, funding agreement and annuity data is based on annualized new
deposits.
Statistical data regarding the mutual fund industry is based on information
included in publications of Financial Research Corporation ("FRC"), a mutual
fund industry research and consulting firm.
. FRC rankings used in this prospectus exclude short-term (cash
equivalent) assets and any funds closed to new sales, and total assets
under management includes individual investor, institutional and
retirement assets sold through all channels.
Statistical information regarding the variable life insurance industry is
based on the Tillinghast-Towers Perrin VALUE(R) Variable Life-IV Quarter 1998
Survey, conducted by Tillinghast-Towers Perrin, an actuarial firm
("Tillinghast").
Statistical information regarding the individual long-term care insurance
industry is based on the 1998 Long-Term Care Individual and Group Association
Top Writers Survey conducted by LifePlans, Inc., a long-term care insurance
industry research and consulting firm.
These industry sources generally indicate that they have obtained
information from sources believed to be reliable, but do not guarantee the
accuracy and completeness of such information. While we believe this
information to be reliable, we have not independently verified such data.
Unless otherwise stated or the context otherwise requires, references in
this prospectus to "we," "our," "us," or "John Hancock" refer to John Hancock
Financial Services, Inc., together with its direct and indirect subsidiaries.
When referring to periods prior to the effective date of the reorganization,
the terms "we," "our," "us" and "John Hancock" refer to John Hancock Mutual
Life Insurance Company together with its direct and indirect subsidiaries.
38
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, (1) our actual
consolidated capitalization and (2) our pro forma capitalization after giving
effect to:
. the reorganization and the issuance of [231,200,000] shares of common
stock to eligible policyholders;
. the sale of [102,000,000] shares of common stock in the offering at an
initial public offering price of [$20.00] per share; and
. the application of the estimated net proceeds from the offering as set
forth under "Use of Proceeds," as if the reorganization and the offering
had occurred as of September 30, 1999.
The table has been prepared based on the terms of the Plan of Reorganization
and should be read in conjunction with the Unaudited Pro Forma Condensed
Consolidated Financial Information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30,
1999
-------------------
Pro
Historical Forma
---------- --------
(in millions)
<S> <C> <C>
Short-term debt......................................... $ 354.6 $ 354.6
Long-term debt.......................................... 536.8 536.8
-------- --------
Total debt.......................................... 891.4 891.4
Equity:
Common stock, $0.01 par value; 2,000,000,000 shares
authorized; [333,200,000] shares issued and
outstanding.......................................... -- 3.3
Additional paid-in capital............................ -- 5,360.0
Retained earnings..................................... 5,106.2 --
Accumulated other comprehensive income................ 54.1 54.1
-------- --------
Total equity........................................ 5,160.3 5,417.4
-------- --------
Total capitalization.............................. $6,051.7 $6,308.8
======== ========
</TABLE>
39
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial data. The selected income statement data for each of the three years
ended December 31, 1998 and balance sheet data as of December 31, 1998 and
1997 have been derived from our audited consolidated financial statements and
notes thereto included elsewhere in this prospectus. The following selected
income statement data for the years ended December 31, 1995 and 1994 and
balance sheet data as of December 31, 1996, 1995, and 1994 have been derived
from our audited consolidated financial statements not included herein. The
selected income statement data for the nine months ended September 30, 1999
and 1998 and balance sheet data as of September 30, 1999 have been derived
from our unaudited interim consolidated financial statements included
elsewhere in this prospectus. The selected balance sheet data as of September
30, 1998 has been derived from our unaudited interim consolidated financial
statements not included herein. All unaudited interim consolidated financial
data presented in the table below reflect all adjustments (consisting of
normal, recurring accruals) necessary for a fair presentation of our
consolidated financial position and results of operations for such periods.
The results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. The
following selected consolidated financial data has been prepared in accordance
with GAAP, except that the statutory data presented below has been prepared in
accordance with applicable statutory accounting practices and was taken from
our annual statements filed with insurance regulatory authorities.
The following selected historical consolidated financial data should be read
in conjunction with other information including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements and the notes thereto, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, For the Year Ended December 31,
------------------ ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
(1)(2)
Revenues
Premiums................ $2,033.3 $1,647.7 $2,197.9 $2,473.6 $2,922.5 $2,657.1 $2,473.6
Universal life and
investment-type product
charges................ 509.4 441.3 597.0 512.0 466.3 414.0 379.7
Net investment income... 2,581.0 2,441.5 3,330.7 3,190.7 3,223.1 3,099.4 2,910.7
Realized investment
gains (losses), net.... 177.4 64.9 97.9 115.8 110.7 52.3 (79.4)
Investment management
revenues, commissions
and other fees......... 504.6 487.9 659.7 554.7 751.3 660.0 588.7
Other revenue........... 12.4 2.6 18.8 99.5 230.9 248.3 194.7
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 5,818.1 5,085.9 6,902.0 6,946.3 7,704.8 7,131.1 6,468.0
Benefits and expenses
Benefits to
policyholders.......... 3,600.4 2,944.1 4,152.0 4,303.1 4,676.7 4,226.5 3,925.2
Other operating costs
and expenses........... 991.7 955.8 1,383.0 1,283.7 1,694.1 1,568.3 1,536.9
Amortization of deferred
policy acquisition
costs.................. 150.4 200.4 249.7 312.0 230.9 229.1 219.7
Dividends to
policyholders.......... 361.0 348.4 473.2 457.8 435.1 496.5 416.6
-------- -------- -------- -------- -------- -------- --------
Total benefits and
expenses.............. 5,103.5 4,448.7 6,257.9 6,356.6 7,036.8 6,520.4 6,098.4
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes, extraordinary
item and cumulative
effect of accounting
change................. 714.6 637.2 644.1 589.7 668.0 610.7 369.6
Income taxes............ 239.2 188.8 183.9 106.4 247.5 261.2 142.2
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item and
cumulative effect of
accounting change...... 475.4 448.4 460.2 483.3 420.5 349.5 227.4
Extraordinary item --
demutualization
expenses, net of tax... (56.6) (4.8) (11.7) -- -- -- --
Cumulative effect of
accounting change...... (9.7) -- -- -- -- -- (20.2)
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 409.1 $ 443.6 $ 448.5 $ 483.3 $ 420.5 $ 349.5 $ 207.2
======== ======== ======== ======== ======== ======== ========
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
As of or for
the Nine Months
Ended September 30, As of or for the Year Ended December 31,
------------------- -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
General account assets.. $54,157.6 $52,011.2 $52,000.1 $49,906.4 $48,420.6 $47,485.7 $43,778.2
Separate accounts
assets................. 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8
Total assets............ 80,206.1 74,702.0 76,966.7 71,417.5 66,502.7 63,320.9 56,688.0
General account
liabilities............ 48,460.5 46,417.9 46,416.9 44,667.7 43,265.9 42,770.6 40,224.6
Long-term debt.......... 536.8 647.5 602.7 543.3 1,037.0 934.3 605.4
Separate accounts
liabilities............ 26,048.5 22,690.8 24,966.6 21,511.1 18,082.1 15,835.2 12,909.8
Total liabilities....... 75,045.8 69,756.2 71,986.2 66,722.1 62,385.0 59,540.1 53,739.8
Policyholders' equity... 5,160.3 4,945.8 4,980.5 4,695.4 4,117.7 3,780.8 2,948.2
Statutory Data:
Capital and surplus
(3).................... $ 3,811.7 $ 3,413.3 $ 3,388.7 $ 3,157.8 $ 2,856.1 $ 2,533.5 $ 2,330.0
Asset valuation reserve
("AVR")................ 1,198.0 1,280.1 1,316.9 1,191.0 1,088.4 1,035.6 852.8
--------- --------- --------- --------- --------- --------- ---------
Capital and surplus plus
AVR.................... $ 5,009.7 $ 4,693.4 $ 4,705.6 $ 4,348.8 $ 3,944.5 $ 3,569.1 $ 3,182.8
========= ========= ========= ========= ========= ========= =========
Statutory net income.... $ 483.6 $ 353.4 $ 627.3 $ 414.0 $ 313.8 $ 340.8 $ 182.6
</TABLE>
We evaluate segment performance and base management's incentives on after-
tax operating income, which excludes the effect of net realized investment
gains and losses and unusual or non-recurring events and transactions. Segment
after-tax operating income is determined by adjusting GAAP net income for net
realized investment gains and losses, including gains and losses on disposals
of businesses, extraordinary items, and certain other items which we believe
are not indicative of overall operating trends. While these items may be
significant components in understanding and assessing our consolidated
financial performance, we believe that the presentation of segment after-tax
operating income enhances the understanding of our results of operations by
highlighting net income attributable to the normal, recurring operations of
the business. However, segment after-tax operating income and total segment
income are not a substitute for net income determined in accordance with GAAP.
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
September 30, December 31,
-------------- ------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Segment Data: (4)
Segment after-tax operating income:
Protection Segment.................. $137.3 $133.8 $ 172.3 $ 158.1 $197.3
Asset Gathering Segment............. 97.5 87.9 111.1 93.3 55.7
------ ------ ------- ------- ------
Total Retail....................... 234.8 221.7 283.4 251.4 253.0
Guaranteed and Structured Financial
Products Segment................... 165.8 101.8 145.7 138.5 155.4
Investment Management Segment....... 27.6 6.4 15.4 17.2 21.6
------ ------ ------- ------- ------
Total Institutional................ 193.4 108.2 161.1 155.7 177.0
Corporate and Other Segment......... 45.1 31.8 56.3 39.4 20.2
------ ------ ------- ------- ------
Total segment income................. 473.3 361.7 500.8 446.5 450.2
After-tax adjustments:
Realized investment gains, net...... 118.0 75.1 93.9 104.9 80.6
Class action lawsuit................ (91.1) -- (150.0) (112.5) (90.0)
Restructuring charges............... (7.5) -- -- -- --
Benefit from pension participating
contract modification.............. -- -- -- 9.1 --
Surplus tax......................... (17.3) 11.6 15.5 35.3 (20.3)
------ ------ ------- ------- ------
Total after-tax adjustments........ 2.1 86.7 (40.6) 36.8 (29.7)
------ ------ ------- ------- ------
GAAP Reported:
Income before extraordinary item and
cumulative effect of accounting
change............................. 475.4 448.4 460.2 483.3 420.5
Extraordinary item-demutualization
expenses, net of tax............... (56.6) (4.8) (11.7) -- --
Cumulative effect of accounting
change............................. (9.7) -- -- -- --
------ ------ ------- ------- ------
Net income.......................... $409.1 $443.6 $ 448.5 $ 483.3 $420.5
====== ====== ======= ======= ======
</TABLE>
- --------
(1) Prior to 1996, we prepared our financial statements in conformity with
accounting practices prescribed or permitted by the Massachusetts Division
of Insurance which accounting practices were considered to be
41
<PAGE>
GAAP for mutual life insurance companies. As of January 1, 1996, we adopted
Financial Accounting Standards Board ("FASB") Interpretation No. 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises and Statement of Financial Accounting
Standards ("SFAS") No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Policies. Interpretation No. 40 and SFAS No. 120
require mutual life insurance companies to adopt all applicable
authoritative GAAP pronouncements in their general purpose financial
statements. Accordingly, the financial information presented in the
Selected Historical Financial Data for periods prior to 1996 has been
derived from our financial information which has been retroactively
restated to reflect the adoption of all applicable authoritative GAAP
pronouncements. All such applicable pronouncements were adopted as of the
effective date originally specified in each such pronouncement. The
following sets forth the significant accounting pronouncements with
effective dates subsequent to the earliest financial information presented
herein, the effective dates of their adoption by us and, if applicable, a
description of the accounting followed by us for periods presented herein
prior to the effective date of such pronouncements.
. SFAS No. 112, Employers' Accounting for Postemployment Benefits, was
adopted for the year ended December 31, 1994 and subsequent years. For
periods prior to the adoption of SFAS No. 112, we recognized
postemployment benefits on a pay-as-you-go basis.
. SFAS No. 114, Accounting by Creditors for Impairment of a Loan, was
adopted for the year ended December 31, 1995 and subsequent years. For
periods prior to the adoption of SFAS No. 114, we established a policy
to record impairment losses for troubled loans based on discounted cash
flows or the fair value of the collateral. The policy was substantially
consistent with SFAS No. 114. The adoption of SFAS No. 114 did not have
a material effect on the level of the allowances for losses on loans or
on our consolidated results of operations or financial position.
. SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, was adopted on a retroactive basis as of January 1, 1994 and
subsequent years.
. SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, was adopted for the year ended
December 31, 1996 and subsequent years. For periods prior to the
adoption of SFAS No. 121, writedowns on impaired real estate were
established if the undiscounted cash flows were less than the carrying
value. In such cases, the asset was written down to the discounted cash
flow amount. Real estate held for sale was carried at the lower of cost
or fair value. Accordingly, there was no material effect on our
financial statements as a result of the adoption of SFAS No. 121.
. SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was adopted for the year ended December 31, 1997,
retroactive to December 31, 1994. SFAS No. 131 establishes standards for
the way that public business enterprises report information about
operating segments in financial statements. The segment data presented
herein reflects the adoption of SFAS No. 131.
(2) We completed a number of transactions which have affected the
comparability of our results of operations.
On March 31, 1999, we completed the sale of Unigard Security Insurance
Company ("USIC") and John Hancock Insurance Co. of Bermuda Ltd. ("John
Hancock Bermuda"). The sale of USIC was completed by entering into a 100%
quota share reinsurance agreement with a third party reinsurer and then
through a stock sale. We also sold 100% of the stock of John Hancock
Bermuda, which offered reinsurance products and services. Assets and
liabilities transferred in connection with both sales amounted to $381.0
million and $161.8 million, respectively. The sale of USIC resulted in an
after-tax loss of $21.4 million. John Hancock Bermuda was sold for its net
book value which resulted in the recognition of no gain or loss.
On February 28, 1997, we sold a major portion of our group insurance
business to UNICARE Life & Health Insurance Company ("UNICARE"), a wholly-
owned subsidiary of WellPoint Health Networks, Inc. ("WellPoint"). The
business sold included our group accident and health business and related
group life insurance business and three indirectly wholly-owned
subsidiaries: Cost Care, Inc., Hancock Association
42
<PAGE>
Services Group and Tri-State Inc. Assets equal to liabilities of $686.7
million at February 28, 1997, subject to agreement on asset and liability
values, were transferred to UNICARE in connection with the sale. The
insurance business sold was transferred to UNICARE through a 100%
coinsurance agreement. A pre-tax gain of $59.6 million was realized on the
sale, comprised of a $33.9 million gain on the sale of the underlying
business and a $25.7 million gain related to the curtailment of our pension
and other postretirement benefit plans. The business sold primarily
consisted of short duration contracts, and $.6 million, $8.5 million and
$15.5 million of the gain was recognized in the nine months ended September
30, 1999, and in 1998 and 1997, respectively, as the underlying claims were
settled. The remaining gain realized on the sale of the underlying business
of $9.3 million is being recognized over the remaining lives of the
contracts in accordance with SFAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts. The $25.7
million curtailment gain was recognized in 1997.
On November 29, 1996, we closed the sale of 95% of John Hancock Freedom
Securities Corporation ("Freedom Securities"), a holding company, and its
subsidiaries, primarily Tucker Anthony Incorporated and Sutro and Co., both
broker/dealers. Net assets transferred were approximately $164.3 million
and the sale resulted in the recognition of a $25.1 million pre-tax gain in
1996. We sold the remaining 5% of Freedom Securities during 1998 and
recognized a pre-tax gain of $4.3 million.
Effective July 1, 1996, John Hancock Property and Casualty Insurance
Company ("JHP&C") and its wholly-owned subsidiary, John Hancock Indemnity
Company ("Indemnity") each entered into a quota share reinsurance agreement
with a third party reinsurer under which they ceded 100% of their loss,
loss adjustment expense and unearned premium reserves at June 30, 1996,
relating to continuing operations. Under the terms of the quota share
reinsurance agreement, JHP&C cedes 100% of all continuing operations
business written subsequent to June 30, 1996. Net assets transferred were
approximately $12.0 million and no gain or loss was recognized on the
transaction. On September 12, 1996, JHP&C sold 100% of the stock of
Indemnity. Net assets transferred were approximately $6.0 million and the
sale resulted in the recognition of a $6.0 million pre-tax gain. On
September 9, 1999, we sold 100% of the stock of JHP&C. Net assets
transferred were approximately $21.0 million and no gain or loss was
recognized on the sale.
The disposed businesses' results of operations for each of the three years
in the three-year period ended December 31, 1998 and for the nine months
ended September 30, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
For the
Nine Months
Ended For the Year Ended
September 30, December 31,
-------------------------------------
1999 1998 1998 1997 1996
------- ------------ ------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues
Premiums........................... $ -- $ -- $ -- $101.4 $ 536.8
Net investment income.............. 7.4 21.4 29.9 37.4 120.9
Realized investment (losses) gains,
net............................... (22.6) 4.1 12.0 2.8 17.1
Investment management revenues,
commissions and other fees........ -- -- -- -- 301.0
Other (expense) revenue............ (2.0) -- 7.8 77.3 221.2
------- ------ ----- ------ --------
Total revenues..................... (17.2) 25.5 49.7 218.9 1,197.0
Benefits and expenses
Benefits to policyholders.......... 34.8 13.5 11.2 132.7 496.0
Other operating costs and
expenses.......................... 9.0 1.0 -- 42.1 614.1
Amortization of deferred policy
acquisition costs................. -- -- -- -- 6.3
Dividends to policyholders......... -- -- -- 2.3 15.2
------- ------ ----- ------ --------
Total benefits and expenses........ 43.8 14.5 11.2 177.1 1,131.6
------- ------ ----- ------ --------
(Loss) income before income taxes.. (61.0) 11.0 38.5 41.8 65.4
Income (benefit) taxes............. (37.5) 2.8 7.5 4.6 25.2
------- ------ ----- ------ --------
Net (loss) income.................. $ (23.5) $ 8.2 $31.0 $ 37.2 $ 40.2
======= ====== ===== ====== ========
</TABLE>
43
<PAGE>
(3) In accordance with accounting practices prescribed or permitted by the
Massachusetts Division of Insurance, statutory capital and surplus
includes $450.0 million in total principal amount of our surplus notes
outstanding.
(4) Our GAAP reported net income was significantly affected by net realized
investment gains and losses and unusual or non-recurring events and
transactions presented above as after-tax adjustments. In all periods,
net realized investment gains and losses, including gains and losses on
our disposed businesses, and the surplus tax have been excluded from
segment income. We have been subject to the surplus tax imposed on mutual
life insurance companies which disallows a portion of mutual life
insurance company's policyholder dividends as a deduction from taxable
income. As a stock company, we will no longer be subject to surplus tax.
During 1997, we entered into a court approved settlement relating to a
class action lawsuit involving individual life insurance policies sold from
1979 through 1996, as specified elsewhere in this prospectus. In entering
into the settlement, we specifically denied any wrongdoing. The reserve
held in connection with the settlement to provide for relief to class
members and for legal and administrative costs associated with the
settlement amounted to $522.5 million, $436.6 million and $308.8 million at
September 30, 1999, December 31, 1998 and December 31, 1997, respectively.
Given the uncertainties associated with estimating the reserve, it is
reasonably possible that the final cost of the settlement could differ
materially from the amount previously provided.
During the first nine months of 1999, we recorded $7.5 million in after-tax
restructuring charges in accordance with our plans to reduce the cost
structure of our mutual fund operations and career agency distribution
system. These charges primarily included accruals for severance and related
benefits. The restructuring liability at September 30, 1999 was $11.2
million and is expected to be paid by March 2002.
During 1997, a participating pension reinsurance contractholder requested
the distribution of a portion of contract funds. At the time of the
request, the contract stated that these funds were to be paid out over a
specified number of years. However, we agreed to distribute a portion of
the contractholder's funds in exchange for the right to retain the tax
credits that resulted from the distribution. The contractual amendment
resulted in the recognition of a $9.1 million after-tax gain.
44
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information
presented below for John Hancock Financial Services, Inc. gives effect to (1)
the reorganization, (2) the establishment of the closed block, (3) the sale of
shares of common stock in the offering to the public, and (4) the application
of the estimated net proceeds from the offering as set forth in "Use of
Proceeds," as if the reorganization, the establishment of the closed block and
the offering had occurred as of September 30, 1999, for purposes of the
unaudited pro forma condensed consolidated balance sheet and as of January 1,
1998 for purposes of the unaudited pro forma condensed consolidated statements
of income for the nine months ended September 30, 1999 and the year ended
December 31, 1998.
The principal assumptions used in the pro forma information are as follows:
(1) the pro forma closed block liabilities exceed the pro forma closed block
assets as of September 30, 1999 by $2,564.4 million, (2) 102,000,000 shares of
common stock are sold to investors in the offering at the initial public
offering price of $20.00 per share, the midpoint of the range set forth on the
cover page of this prospectus, (3) 231,200,000 shares of common stock are
allocated and issued to eligible policyholders under the Plan of
Reorganization, (4) 68,800,000 shares of common stock are allocated but not
issued to eligible policyholders who receive payments in the form of cash or
policy credits at an assumed conversion price of $24.00 per share (which
assumes conversion from shares to cash or policy credits at 120% of the
initial public offering price) rather than in shares of common stock, and (5)
a federal income tax rate of 35% is used to show the income tax effects of the
pro forma adjustments.
The pro forma information reflects gross and net proceeds of the offering of
$2,040.0 million and $1,940.0 million, respectively. Of the estimated net
proceeds, we have assumed that $200.0 million will be retained by John Hancock
Financial Services, Inc. to be used for general corporate purposes and for
payment of a dividend to our stockholders in the first year after the
effective date of the reorganization, if any, and the remaining $1,740.0
million will be contributed to John Hancock Life Insurance Company. For
purposes of the pro forma balance sheet, $52.2 million is estimated to be
required for the cost of additional nonrecurring expenses related to the
reorganization, $1,564.3 million is estimated to be used to make cash payments
to eligible policyholders and $86.9 million is estimated to be necessary to
support policy credits to eligible policyholders. Provisions of our Plan of
Reorganization may serve to reduce the amount of net proceeds retained by John
Hancock Financial Services, Inc. to an amount less than $200.0 million, unless
specific approval is received from the Massachusetts Commissioner of
Insurance. If this amount is so reduced, John Hancock Financial Services, Inc.
may require additional funds, to be obtained through dividends from John
Hancock Life Insurance Company or borrowings, in order to pay the first year
stockholder dividend, if any. See "The Reorganization" and "Use of Proceeds."
The pro forma information is based on available information and on
assumptions management believes are reasonable. The pro forma information is
provided for informational purposes only and should not be construed to be
indicative of our consolidated financial position or our consolidated results
of operations had these transactions been consummated on the dates assumed and
does not in any way represent a projection or forecast of our consolidated
financial position or consolidated results of operations for any future date
or period.
The pro forma information should be read in conjunction with our
Consolidated Financial Statements and the accompanying notes included
elsewhere in this prospectus and with the other information included in this
prospectus including the information set forth under "The Reorganization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
45
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------------------------
Establishment
of Closed Transaction
Historical Block (1) (8) Adjustments Pro Forma (9)
---------- ------------- ----------- -------------
(in millions)
<S> <C> <C> <C> <C>
Assets
Investments:
Fixed maturities........ $31,087.5 $(4,597.2) $26,490.3
Equity securities....... 1,114.2 1,114.2
Mortgage loans on real
estate................. 10,233.6 (1,874.6) 8,359.0
Real estate............. 572.8 572.8
Policy loans............ 1,905.7 (1,554.8) 350.9
Short-term investments.. 249.1 249.1
Other invested assets... 1,303.5 (15.2) 1,288.3
--------- --------- --------- ---------
Total Investments....... 46,466.4 (8,041.8) 38,424.6
Cash and cash
equivalents............. 1,065.9 $(1,564.3)(2)
1,940.0 (3)
(31.7)(6) 1,409.9
Accrued investment
income.................. 698.5 (83.8) 614.7
Premiums and accounts
receivable.............. 257.8 (16.3) 241.5
Deferred policy
acquisition costs....... 3,000.3 (959.6) 2,040.7
Reinsurance recoverable.. 1,368.5 (47.3) 1,321.2
Other assets............. 1,300.2 (13.9) 1,286.3
Closed block assets...... 9,162.7 9,162.7
Separate accounts
assets.................. 26,048.5 26,048.5
--------- --------- --------- ---------
Total Assets............ $80,206.1 $ -- $ 344.0 $80,550.1
========= ========= ========= =========
Liabilities and Equity
Liabilities:
Future policy benefits.. $28,201.7 $(9,640.3) $ 86.9 (2) $18,648.3
Policyholders' funds.... 16,194.9 (1,378.4) 14,816.5
Unearned revenue........ 384.5 384.5
Unpaid claims and claim
expense reserves....... 458.6 (82.8) 375.8
Dividends payable to
policyholders.......... 423.2 (377.6) 45.6
Short-term debt......... 354.6 354.6
Long-term debt.......... 536.8 536.8
Income taxes............ 294.8 (4.7) 290.1
Other liabilities....... 2,148.2 (243.3) 1,904.9
Closed block
liabilities............ 11,727.1 11,727.1
Separate accounts
liabilities............ 26,048.5 26,048.5
--------- --------- --------- ---------
Total Liabilities....... 75,045.8 -- 86.9 75,132.7
Equity:
Common stock, $0.01 par
value; 2 billion shares
authorized; 333.2
million shares issued
and outstanding........ 1.0 (3)
2.3 (4) 3.3
Additional paid-in
capital................ 1,939.0 (3)
3,421.0 (4) 5,360.0
Retained earnings....... 5,106.2 (1,651.2)(2)
(3,423.3)(4)
(31.7)(6) --
Accumulated other
comprehensive income... 54.1 54.1
--------- --------- --------- ---------
Total Equity............ 5,160.3 257.1 5,417.4
--------- --------- --------- ---------
Total Liabilities and
Equity................. $80,206.1 $ -- $ 344.0 $80,550.1
========= ========= ========= =========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
46
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Income
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
----------------------------------------------------
Establishment
of Closed Transaction
Historical Block (1) Adjustments Pro Forma (9)
---------- ------------- ----------- -------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Premiums................. $2,033.3 $(743.7) $1,289.6
Universal life and
investment-type product
charges................. 509.4 509.4
Net investment income.... 2,581.0 (454.1) 2,126.9
Realized investment
gains, net.............. 177.4 (5.1) 172.3
Investment management
revenues, commissions,
and other fees.......... 504.6 504.6
Other revenue............ 12.4 (10.9) 1.5
Contribution from the
closed block............ 47.8 47.8
-------- -------- ------ --------
Total revenues......... 5,818.1 (1,166.0) 4,652.1
Benefits and expenses
Benefits to
policyholders........... 3,600.4 (801.9) 2,798.5
Other operating costs and
expenses................ 991.7 (8.1) 983.6
Amortization of deferred
policy acquisition
costs................... 150.4 (44.6) 105.8
Dividends to
policyholders........... 361.0 (311.4) 49.6
-------- -------- ------ --------
Total benefits and
expenses.............. 5,103.5 (1,166.0) 3,937.5
-------- -------- ------ --------
Income before income taxes,
extraordinary item and
cumulative effect of
accounting change......... 714.6 714.6
Income taxes............... 239.2 $(17.3)(5) 221.9
-------- -------- ------ --------
Income before extraordinary
item and cumulative effect
of accounting change (6).. $ 475.4 $ -- $ 17.3 $ 492.7
======== ======== ====== ========
Income before extraordinary
item and cumulative effect
of accounting change per
share..................... $ 1.48
========
Shares used in calculating
per share amount (7)...... 333.2
========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
47
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Income
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-----------------------------------------------
Establishment Pro
of Closed Transaction Forma
Historical Block (1) Adjustments (9)
---------- ------------- ----------- --------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Premiums...................... $2,197.9 $(1,031.4) $1,166.5
Universal life and investment-
type product charges......... 597.0 597.0
Net investment income......... 3,330.7 (582.2) 2,748.5
Realized investment gains,
net.......................... 97.9 97.9
Investment management
revenues, commissions, and
other fees................... 659.7 659.7
Other revenue................. 18.8 (13.9) 4.9
Contribution from the closed
block........................ 78.4 78.4
-------- --------- ------ --------
Total revenues.............. 6,902.0 (1,549.1) 5,352.9
Benefits and expenses
Benefits to policyholders..... 4,152.0 (1,027.8) 3,124.2
Other operating costs and
expenses..................... 1,383.0 (7.9) 1,375.1
Amortization of deferred
policy acquisition costs..... 249.7 (116.7) 133.0
Dividends to policyholders.... 473.2 (396.7) 76.5
-------- --------- ------ --------
Total benefits and
expenses................... 6,257.9 (1,549.1) 4,708.8
-------- --------- ------ --------
Income before income taxes and
extraordinary item............. 644.1 644.1
Income taxes.................... 183.9 $ 15.5 (5) 199.4
-------- --------- ------ --------
Income before extraordinary item
(6)............................ $ 460.2 $ -- $(15.5) $ 444.7
======== ========= ====== ========
Income before extraordinary item
per share...................... $ 1.33
========
Shares used in calculating per
share amount (7)............... 333.2
========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
48
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(1) The Plan of Reorganization provides for the establishment of the closed
block. See "The Reorganization--Establishment and Operation of the Closed
Block" and "--Closed Block Assets and Liabilities."
Under the Plan of Reorganization, as of the effective date of the
reorganization, John Hancock Life Insurance Company will be obligated to
create and operate the closed block for the benefit of the policies
included therein. The policies included in the closed block are individual
or joint traditional whole life insurance policies of John Hancock Mutual
Life Insurance Company that are currently paying or expected to pay policy
dividends, and individual term life insurance policies that are in force on
the effective date of the reorganization. The closed block will include
approximately 3.2 million policies. The purpose of the closed block is to
protect the dividend expectations of the holders of the policies included
in the closed block after demutualization. The establishment of the closed
block, including the policy liabilities and the assets included therein, is
subject to the review and approval of the Massachusetts Division of
Insurance. Unless the Massachusetts Commissioner of Insurance and, in
certain circumstances, the New York Superintendent of Insurance, consent to
an earlier termination, the closed block will continue in effect until the
date none of such policies is in force.
On the effective date of the reorganization, John Hancock Mutual Life
Insurance Company will allocate to the closed block assets that are
expected to produce cash flows which, together with anticipated revenues
from the closed block business (principally premiums and investment
income), are reasonably sufficient to support the closed block business.
The cash flows are intended to be sufficient to provide for payment of
policy benefits, taxes and direct asset acquisition and disposition costs,
and for continuation of policy dividend scales payable in 1999, so long as
the experience underlying such dividend scales continues (including the
portfolio yield of approximately 8%). The assets allocated to the closed
block and any cash flows provided by these assets will solely benefit the
holders of policies included in the closed block.
The unaudited pro forma condensed consolidated statements of income reflect
an allocation of revenues and expenses to the closed block based on
estimates and assumptions that we believe are reasonable based on the Plan
of Reorganization and gives effect to the establishment of the closed block
as if the reorganization and the establishment of the closed block had
occurred as of January 1, 1998. Premiums, benefits and expenses relating to
the policies to be included in the closed block were derived from our
actual records for the respective periods (such amounts were adjusted to
exclude revenues and benefits relating to new business written during the
year ended December 31, 1998 and the nine-month period ended September 30,
1999, respectively, because after the reorganization, which for purposes of
the pro forma income statements was assumed to have occurred as of January
1, 1998, new business will be written on policies and contracts outside of
the closed block). Net investment income and realized gains were allocated
to the closed block based on the composition of assets identified to fund
the closed block and the expected yields on those assets.
The contribution from the closed block reflected in the unaudited pro forma
condensed consolidated statement of income is not necessarily indicative of
the closed block's income had the closed block been established as of
January 1, 1998 or of the closed block's expected income for any future
period.
The unaudited pro forma condensed consolidated balance sheet at September
30, 1999 gives effect to the reorganization, the establishment of the
closed block and the initial public offering as if the reorganization, the
establishment of the closed block and the initial public offering had
occurred as of September 30, 1999. The unaudited pro forma condensed
consolidated balance sheet reflects an allocation of assets necessary to
fund the closed block liabilities. The closed block liabilities reflect the
GAAP policyholder benefit reserves derived from our records for all
policies to be included in the closed block under the Plan of
Reorganization. Assets necessary to fund the closed block liabilities are
determined based on actuarial cash flow models and related assumptions that
we believe are reasonable and will be consistent with the funding
allocation procedures of the Plan of Reorganization. Cash flow models are
used to project all insurance cash flows from the policies included in the
closed block, which include premiums plus interest on policy loans, less
49
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information--
continued
policy benefits, dividends and expenses. The actuarial cash flow models
contain various assumptions which include mortality, persistency, expense
and investment experience. After projecting the insurance cash flows,
assets were initially identified so that cash flows from the assets
(principal and income), together with insurance cash flows and assets
purchased by reinvested cash would fund all closed block liabilities,
assuming the experience underlying the 1999 dividend scales continues
(including the portfolio yield of approximately 8%). The final funding and
selection of assets included in the closed block is subject to the approval
of the Massachusetts Division of Insurance.
Actual cash flows from the assets allocated to the closed block and other
experience relating to the closed block business, in the aggregate, may be
more favorable than we assumed in setting up the closed block. In that
case, total policy dividends paid to closed block policyholders in future
years will be greater than the total policy dividends that would have been
paid to such policyholders if the policy dividend scales payable in 1999
had been continued without adjustment. Conversely, to the extent that such
cash flows and other experience are, in the aggregate, less favorable than
we assumed in setting up the closed block, total policy dividends paid to
closed block policyholders in future years will be less than the total
dividends that would have been paid to such policyholders if the policy
dividend scales payable in 1999 had been continued unless, for business
reasons, we chose to support dividend payments with our general account
funds.
In addition, if the assets allocated to the closed block, the cash flows
therefrom and the revenues from the closed block business prove to be
insufficient to support the policies included in the closed block as
required by the Plan of Reorganization, John Hancock Life Insurance Company
will be required to make payments from its general funds in an amount equal
to the shortfall. We will fund the closed block to provide for payment of
guaranteed benefits on such policies and for continuation of dividends paid
under 1999 policy dividend scales, assuming the experience underlying such
dividend scales continues (including the portfolio yield of approximately
8%). Therefore, we do not believe it will be necessary to use general funds
to pay guaranteed benefits on closed block business unless the closed block
business experiences substantial adverse deviations in investment,
mortality, persistency or other experience factors.
Assets and liabilities allocated to the closed block on the unaudited pro
forma condensed consolidated balance sheet are reflected at their September
30, 1999 GAAP values. The closed block will not be formed completely until
the effective date of the reorganization and, accordingly, the actual
assets and liabilities ultimately allocated to the closed block and their
GAAP carrying values will not be known until such date. However, the
allocation of assets and liabilities to the closed block as of the
effective date of the reorganization is not expected to differ materially
from the allocation reflected in the unaudited pro forma condensed
consolidated balance sheet.
The assumptions used for the pro forma financial information relating to
the closed block include only those revenues, benefit payments,
policyholder dividends, investment expenses and taxes considered in funding
the closed block and exclude many costs and expenses associated with
operating the closed block and administering the policies included therein,
all of which will be paid by us. Federal income taxes applicable to the
closed block, which will be funded in the closed block, are reflected as a
component of federal income taxes. Because many operating costs and
expenses associated with the closed block business, which we will pay, are
not included as closed block expenses, the contribution from the closed
block does not represent the historical or future profitability of the
closed block business. Operating costs and expenses outside of the closed
block associated with closed block business are reflected in our operating
results outside of the closed block.
The assets and liabilities allocated to the closed block will be recorded
in our consolidated financial statements at their historical carrying
values. The carrying value of the assets allocated to the closed block will
be less than the carrying value of the closed block liabilities at the
effective date of the reorganization. The excess of the closed block
liabilities over the closed block assets at the effective date represents
the estimated future post-tax contribution expected from the operation of
the closed block, which will be recognized in our consolidated income over
the period the policies in the closed block remain in force.
50
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information--
continued
Prior to the establishment of the closed block, the results from the
underlying business were reported in various line items in our consolidated
income statements, including premiums, net investment income and benefits
to policyholders. As a result of the establishment of the closed block,
these line items will reflect material reductions in reported amounts, as
compared to years prior to the establishment of the closed block. These
changes will have no effect on net income. The actual results of the closed
block business are expected to be reflected as a single line item in our
consolidated statements of income entitled, "Contribution from the closed
block." In addition, all assets and liabilities allocated to the closed
block are expected to be reported in our consolidated balance sheet
separately under the captions "Closed block assets" and "Closed block
liabilities," respectively.
(2) Represents (in millions):
<TABLE>
<S> <C>
(i) Cash assumed to be paid to eligible policyholders who are
eligible for
but do not elect to receive common stock....................... $1,151.3
(ii) Cash payments assumed to be paid to eligible policyholders who
must
receive cash as consideration................................. 413.0
--------
Total assumed cash payments.................................... 1,564.3
(iii) Policy credits assumed to be provided to eligible
policyholders................................................ 86.9
--------
Total.......................................................... $1,651.2
========
</TABLE>
(3) Represents gross proceeds of $2,040.0 million from the sale of 102,000,000
shares of common stock at an assumed initial offering price of $20.00 per
share, the midpoint of the range set forth on the cover page of this
prospectus, less underwriting discounts and offering expenses of $100.0
million.
(4) Represents the reclassification of the residual retained earnings
($3,423.3 million) of John Hancock Mutual Life Insurance Company to common
stock ($2.3 million) and additional paid-in capital ($3,421.0 million) to
reflect the conversion to a stock life insurance company.
(5) Represents the elimination of the surplus tax for the nine months ended
September 30, 1999 and the year ended December 31, 1998, which is
applicable only to mutual life insurance companies.
(6) Non-recurring expenses related to the reorganization in total are
estimated to be $142.0 million ($100.0 million after-tax). Approximately
$71.8 million and $18.0 million of such expenses ($56.6 million and $11.7
million after-tax) were incurred on behalf of John Hancock Mutual Life
Insurance Company and reported as extraordinary expenses in our
consolidated statement of income for the nine months ended September 30,
1999 and the year ended December 31, 1998, respectively.
The estimated additional nonrecurring expenses of $52.2 million ($31.7
million after-tax) related to the reorganization, assumed to be incurred as
of the date of the unaudited pro forma condensed consolidated balance
sheet, were charged to equity. Such expenses will be reported as
extraordinary charges.
(7) The assumed number of shares used in the calculation of unaudited pro
forma income before extraordinary item per common share was determined as
follows:
<TABLE>
<CAPTION>
Number of
Shares
-----------
<S> <C>
Assumed shares allocated to eligible policyholders............. 300,000,000
Less: assumed shares allocated to eligible policyholders who
receive cash or policy credits (a)............................ 68,800,000
-----------
Assumed shares issued to eligible policyholders................ 231,200,000
Assumed shares issued in this offering......................... 102,000,000
-----------
Total outstanding shares of common stock....................... 333,200,000
===========
</TABLE>
51
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information--
continued
- --------
(a) Gives effect to (1) $1,151.3 million to pay cash to eligible
policyholders who are eligible for but do not elect to receive stock,
(2) cash in the amount of $413.0 million distributed to eligible
policyholders who are not eligible to receive common stock and (3)
$86.9 million of policy credits provided to eligible policyholders.
The Plan of Reorganization provides that the amount of consideration paid
in cash or provided as policy credits to an eligible policyholder will
equal the number of shares allocated to such eligible policyholder
multiplied by the greater of the initial public offering price or the
average closing price of the common stock for the first twenty days for
which it is traded, but not more than 120% of the initial public offering
price. The above computation assumes conversion from shares to cash or
policy credits is at 120% of the initial public offering price. The actual
conversion price will be a function of the trading price of the common
stock and therefore cannot be predicted.
(8) The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and preferred stock securities allocated to the
closed block at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(in millions)
<S> <C> <C> <C> <C>
Held-to-Maturity:
Corporate securities.............. $2,227.3 $71.3 $37.6 $2,261.0
Mortgage-backed securities........ 49.2 1.3 0.2 50.3
Obligations of states and
political subdivisions........... 46.7 0.5 1.0 46.2
-------- ----- ----- --------
Total........................... $2,323.2 $73.1 $38.8 $2,357.5
======== ===== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(in millions)
<S> <C> <C> <C> <C>
Available-for-Sale:
Corporate securities............... $1,181.8 $27.4 $59.2 $1,150.0
Mortgage-backed securities......... 864.3 9.2 13.0 860.5
Obligations of states and political
subdivisions...................... 75.2 3.3 1.7 76.8
Debt securities issued by foreign
governments....................... 21.8 2.6 1.1 23.3
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... 19.8 0.3 -- 20.1
Preferred stock securities......... 141.4 2.5 0.6 143.3
-------- ----- ----- --------
Total............................ $2,304.3 $45.3 $75.6 $2,274.0
======== ===== ===== ========
</TABLE>
The amortized cost and fair value of fixed maturities at September 30, 1999
by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
(in millions)
<S> <C> <C>
Held-to-Maturity:
Due in one year or less.................................. $ 213.7 $ 216.1
Due after one year through five years.................... 822.7 835.0
Due after five years through ten years................... 606.1 610.7
Due after ten years...................................... 631.5 645.4
-------- --------
2,274.0 2,307.2
Mortgage-backed securities............................... 49.2 50.3
-------- --------
Total.................................................. $2,323.2 $2,357.5
======== ========
</TABLE>
52
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information--
continued
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
(in millions)
<S> <C> <C>
Available-for-Sale:
Due in one year or less.................................. $ 55.6 $ 56.3
Due after one year through five years.................... 236.1 235.6
Due after five years through ten years................... 443.1 441.4
Due after ten years...................................... 563.8 536.9
-------- --------
1,298.6 1,270.2
Mortgage-backed securities............................... 864.3 860.5
Preferred stock securities............................... 141.4 143.3
-------- --------
Total.................................................. 2,304.3 2,274.0
======== ========
</TABLE>
The following table sets forth the carrying value of mortgage loans on real
estate allocated to the closed block as of September 30, 1999 by
contractual maturity:
<TABLE>
<CAPTION>
Principal Balance
Maturing % of Total
----------------- ----------
(in millions)
<S> <C> <C>
1999............................................ $ 0.3 0.0%
2000............................................ 114.1 6.0
2001............................................ 110.2 5.8
2002............................................ 144.5 7.6
2003............................................ 234.4 12.4
2004............................................ 161.2 8.5
2005............................................ 146.5 7.8
2006............................................ 179.3 9.5
2007............................................ 169.6 9.0
2008............................................ 182.6 9.7
Over 10 years................................... 446.9 23.7
-------- -----
1,889.6 100.0%
=====
Less allowance for loan losses.................. (15.0)
--------
$1,874.6
========
</TABLE>
(9) The unaudited pro forma financial statements do not reflect the estimated
fourth quarter charge to operations of $224.3 million (after-tax)
anticipated in connection with the corporate account asset transfer (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Corporate Account Asset Transfer"). The charge has not been
included in the unaudited pro forma financial statements because it is a
non-recurring charge.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis reviews our consolidated financial
condition as of September 30, 1999 and December 31, 1998 and 1997, the
consolidated results of operations for the nine months ended September 30,
1999 and 1998 and the years ended December 31, 1998, 1997, and 1996 and, where
appropriate, factors that may affect future financial performance. This
discussion should be read in conjunction with the Selected Historical
Financial Data, Unaudited Pro Forma Condensed Consolidated Financial
Information, and the Consolidated Financial Statements and related notes
included elsewhere in this prospectus.
Forward-Looking Information
Our narrative analysis contains forward-looking statements that are intended
to enhance the reader's ability to assess our future financial performance.
Forward-looking statements include, but are not limited to, statements that
represent our beliefs concerning future operations, strategies, financial
results or other developments, and contain words and phrases such as "may,"
"expects," "should" or similar expressions. Because these forward-looking
statements are based on estimates and assumptions that are subject to
significant business, economic and competitive uncertainties, many of which
are beyond our control or are subject to change, actual results could be
materially different. The following uncertainties, among others, may have such
an impact: changes in economic conditions, including changes in interest rates
and the performance of financial markets; changes in domestic and foreign
laws, regulations and taxes; competitive pressures on product pricing and
services; industry consolidation; and the relative success and timing of our
business strategies.
Overview
We are a leading financial services company providing a broad range of
products and services in two major businesses: (1) the retail business, which
offers insurance protection and asset gathering products and services
primarily to retail consumers; and (2) the institutional business, which
offers guaranteed and structured financial products and investment management
products and services primarily to institutional customers. In addition, we
have a Corporate and Other Segment.
Our revenues are derived principally from:
. premiums on individual life insurance, individual and group long-term
care insurance, annuities with life contingencies, single premium
annuity contracts and group life insurance;
. product charges from variable and universal life insurance products and
annuities;
. asset management fees from mutual fund and institutional investment
management products;
. sales charges and commissions derived from sales of investment and
insurance products and distribution fees; and
. net investment income and realized investment gains on general account
assets.
Our expenses consist principally of insurance benefits provided to
policyholders, interest credited on policyholders' general account balances,
dividends to policyholders, other operating costs and expenses, which include
commissions and general business expenses, net of expenses deferred,
amortization of deferred policy acquisition costs, and premium and income
taxes.
Our profitability depends in large part upon: (1) the adequacy of our
product pricing, which is primarily a function of competitive conditions, our
ability to assess and manage trends in mortality and morbidity experience, our
ability to generate investment earnings and our ability to maintain expenses
in accordance with pricing assumptions; (2) the amount of assets under
management; and (3) the maintenance of our target spreads between the rate of
earnings on our investments and credited rates on policyholders' general
account balances.
54
<PAGE>
Our sales and financial results of our retail business over the last several
years have been affected by general economic and industry trends. Variable
products, including variable life insurance and variable annuities, have
accounted for the majority of recent increases in total premiums and deposits
for the insurance industry as a result of the strong equity market growth in
recent years and the "baby boom" generation reaching its high-earnings years
and seeking tax-advantaged investments to prepare for retirement. As sales of
variable products have increased, sales of traditional life insurance products
have experienced continued declines. With respect to our long-term care
insurance products, premiums have increased due to the aging of the population
and the expected inability of government entitlement programs to meet
retirement needs.
Deposits of our variable annuity products have increased at a compound
annual rate of 18.4% from 1996 through 1998 and were $882.7 million in 1998.
Moreover, deposits of our variable life insurance products have grown at a
compound annual rate of 17.9% during this same period and were $810.8 million
in 1998. Deposits and reinvestments of our mutual fund products have grown at
an annual compound rate of 20.8% from 1996 through 1998 and were $8,427.2
million in 1998. Premiums on our individual and group long-term care insurance
products have increased at a compound annual rate of 25.0% from 1996 through
1998, and were $291.2 million in 1998.
More recently, premiums and deposits of our individual annuity products
increased 5.2% to $1,055.7 million for the nine months ended September 30,
1999 as compared to the nine months ended September 30, 1998. While variable
annuity deposits declined, fixed annuity deposits increased 51.7% to $445.5
million for the nine months ended September 30, 1999. Our variable life
insurance product deposits for the nine months ended September 30, 1999 have
remained relatively consistent with those for the nine months ended September
30, 1998 at $603.0 million, while premiums on our individual and group long-
term care insurance increased 21.9%, to $259.5 million for the nine months
ended September 30, 1999. Primarily due to lower sales in our financial
industries sector mutual funds, mutual fund deposits and reinvestments were
$3,371.0 million for the nine months ended September 30, 1999 compared to
$6,949.0 million for the nine months ended September 30, 1998.
Recent economic and industry trends also have affected the sales and
financial results of our institutional business. Due to declining demand for
general account GICs in the 401(k) plan market, deposits on our general
account GICs have remained relatively level over the past three years and were
$2,578.9 million in 1998. In response to such trends, we have created new
products for the non-qualified institutional marketplace. Deposits of our
guaranteed funding agreements to non-qualified institutional investors in the
domestic and the international marketplace grew 99.3%, to $2,395.2 million for
the nine months ended September 30, 1999 and have grown at an average compound
annual rate of 245.4% from 1996 through 1998. We are currently not selling any
funding agreements with less than one year termination provisions. In
addition, in the fourth quarter, we plan to exercise our termination rights on
all funding agreements containing 30 or 90 day termination provisions which
totaled approximately $1.2 billion at September 30, 1999. We estimate that the
cost of exercising our right to terminate under these agreements will result
in an after-tax charge to operations of $10 million to $15 million in the
fourth quarter of 1999. After-tax operating income for funding agreements
containing 30 or 90 day termination provisions was $13.0 million for the nine
months ended September 30, 1999 compared to a loss of $11.5 million for the
year ended December 31, 1998.
Premiums from single premium annuity contracts increased to $410.9 million
for the nine months ended September 30, 1999 from $70.7 million for the nine
months ended September 30, 1998, primarily due to the sale of one single
premium annuity contract for $339.0 million. Moreover, our investment
management services provided to domestic and international institutions have
increased through our introduction of new products including collateralized
bond obligations, mortgage securitizations, and sub-advisory services for
mutual funds. Assets under management of our Investment Management Segment
increased to $39,706.6 million as of September 30, 1999 and have increased at
a compound annual rate of 9.8% from 1996 through 1998.
The Reorganization
The board of directors of John Hancock Mutual Life Insurance Company
unanimously adopted the Plan of Reorganization on August 31, 1999. Under the
terms of the Plan of Reorganization, on the effective date of the
reorganization, John Hancock Mutual Life Insurance Company would convert from
a mutual life insurance
55
<PAGE>
company to a stock life insurance company and become a wholly owned subsidiary
of John Hancock Financial Services, Inc., which is a holding company.
The reorganization would become effective on the date of the closing of the
offering. The Plan of Reorganization provides that the effective date would
occur after the approval by the Massachusetts Commissioner of Insurance and
the policyholders entitled to vote on the Plan of Reorganization, but on or
before December 31, 2000. With the approval of the Massachusetts Commissioner
of Insurance, the December 31, 2000 deadline may be extended for up to an
additional six months.
Under the Plan of Reorganization, as of the effective date, John Hancock
Life Insurance Company will be obligated to create and operate a closed block
for the benefit of holders of certain individual insurance policies of John
Hancock Mutual Life Insurance Company, as specified elsewhere in this
prospectus. The purpose of the closed block is to protect the policy dividend
expectations of the policies included in the closed block after
demutualization. Unless the Massachusetts Commissioner of Insurance and, in
certain circumstances, the New York Superintendent of Insurance, consent to an
earlier termination, the closed block will continue in effect until the date
none of such policies is in force. On the effective date of the
reorganization, John Hancock Mutual Life Insurance Company will allocate to
the closed block assets in an amount that is expected to produce cash flows
which, together with anticipated revenues from policies included in the closed
block, are expected to be reasonably sufficient to provide for payment of
policy benefits, taxes and direct asset acquisition and disposal costs, and
for continuation of policy dividend scales payable in 1999, so long as the
experience underlying such dividend scales continues. The assets allocated to
the closed block and any cash flows provided by these assets will solely
benefit the holders of policies included in the closed block.
The assets and liabilities allocated to the closed block will be recorded in
our consolidated financial statements at their historical carrying values. The
carrying value of the assets allocated to the closed block will be less than
the carrying value of the closed block liabilities at the effective date of
the reorganization. The excess of the closed block liabilities over the closed
block assets at the effective date represents the estimated future post-tax
contribution expected from the operation of the closed block, which will be
recognized in our consolidated income over the period the policies in the
closed block remain in force.
Actual cash flows from the assets allocated to the closed block and other
experience relating to the closed block business, in the aggregate, may be
more favorable than we assumed in setting up the closed block. In that case,
total policy dividends paid to closed block policyholders in future years will
be greater than the total policy dividends that would have been paid to such
policyholders if the policy dividend scales payable in 1999 had been continued
without adjustment. Conversely, to the extent that such cash flows and other
experience are, in the aggregate, less favorable than we assumed in setting up
the closed block, total policy dividends paid to closed block policyholders in
future years will be less than the total dividends that would have been paid
to such policyholders if the policy dividend scales payable in 1999 had been
continued without adjustment, unless we choose, for competitive reasons, to
use our general account assets to support the dividends.
In addition, if the assets allocated to the closed block, the cash flows
therefrom and the revenues from the closed block business prove to be
insufficient to pay the benefits guaranteed under the policies included in the
closed block, John Hancock Life Insurance Company will be required to make
payments from its general funds in an amount equal to the shortfall. We will
fund the closed block to provide for payment of guaranteed benefits on such
policies and for continuation of dividends paid under 1999 policy dividends
scales, assuming the experience underlying such dividend scales continues.
Therefore, we do not believe it will be necessary to use general funds to pay
guaranteed benefits on closed block business unless the closed block business
experiences substantial adverse deviations in investment, mortality,
persistency or other experience factors.
We estimate that costs relating to the demutualization, excluding costs
relating to the offering, will be approximately $100.0 million, net of income
taxes, of which $68.3 million was recognized through September 30, 1999.
Demutualization expenses consist of printing and mailing costs and our
aggregate cost of engaging independent accounting, actuarial, financial,
investment banking, legal and other consultants to advise us. In
56
<PAGE>
addition, our costs include the costs of the staff and advisors of the
Massachusetts Division of Insurance, the New York Insurance Department, and
potentially other regulatory authorities as to the demutualization process and
related matters.
Corporate Account Asset Transfer
Background
We will establish a "corporate account" as part of our Corporate and Other
Segment to facilitate our capital management process. The corporate account
will contain capital not allocated to support the operations of our business
segments.
Prior to our reorganization, we plan to transfer certain assets from the
business segments to the corporate account. These assets include investments
in certain subsidiaries and the home office real estate complex (collectively
referred to as "corporate purpose assets"). Historically, we have allocated
the investment performance or other earnings of corporate purpose assets among
all of our business segments. However, as we proceed with our plan to convert
to a stock life insurance company, we plan to centrally manage the performance
of corporate purpose assets through the corporate account.
Implications to Contractholders and Policyholders
The asset transfer will directly affect group pension participating
contractholders and participating individual life insurance policyholders
because those contracts have participating features, under which crediting
rates or dividends are affected directly by portfolio earnings. Our
nonparticipating contracts have guaranteed crediting rates, dividends and
other contract values that are unaffected by earnings on specific portfolio
assets. We will compensate the group pension participating contractholders and
participating individual life policyholders for the impact of the transfer as
follows:
Group Pension Participating Products. Certain group pension products have
participating features, under which crediting rates and dividends are affected
directly by portfolio earnings. Group pension participating contractholders
participate in contract experience related to net investment income and
realized capital gains and losses in the general account. Group pension
participating contractholders will be compensated for transferred assets based
on the fair value of the assets transferred. The difference between the fair
value and carrying value of the assets transferred will be credited to pension
participating contractholders through the crediting rates and dividends on
their contracts.
Participating Individual Life Insurance. As part of the reorganization, we
plan to establish and operate a closed block for our participating individual
life insurance business. The closed block will be established to support the
continuation of policyholder dividend scales in effect for 1999, assuming
continuation of the experience underlying those dividend scales. The assets
included in the closed block will not include any corporate purpose assets.
Moreover, our Plan of Reorganization contemplates that the fair value of
corporate purpose assets will be included in the calculation of consideration
payable to our participating individual life insurance policyholders upon our
demutualization. As a result, our participating individual life policyholders
are not expected to be impacted unfavorably by the transfer of the corporate
purpose assets.
Accounting and Timing
We will account for the transfer of the corporate purpose assets between the
business segments and the corporate account at historical cost.
Because of the participating features of the group pension participating
contracts, we believe that the transfer of corporate purpose assets from the
segment is analogous to their sale from the segment. Group pension
participating contractholders are entitled to receive the proceeds from assets
sold from the segment. As a result, we will recognize an expense to increase
our liability to group pension participating contractholders for their
proportionate share of the appreciation of the corporate purpose assets
transferred. For the other business segments, differences between the
historical cost of the assets transferred and the fair value of amounts
received by the business segments will be recorded as a capital adjustment by
each segment.
57
<PAGE>
We intend to execute the transfer during the fourth quarter of 1999 and
estimate that the resulting charge to operations will approximate $224.3
million, net of tax.
Transactions Affecting Comparability of Results of Operations--Disposed
Businesses
We have completed a number of transactions which have affected the
comparability of our results of operations. On March 31, 1999, we completed
the sale of Unigard Security Insurance Company ("USIC") and John Hancock
Bermuda. The sale of USIC was completed by entering into a 100% quota share
reinsurance agreement with a third party reinsurer and then through a stock
sale. We also sold 100% of the stock of John Hancock Bermuda, which offered
reinsurance products and services. Assets and liabilities transferred in
connection with both sales amounted to $381.0 million and $161.8 million,
respectively. The sale of USIC resulted in an after-tax loss of $21.4 million.
John Hancock Bermuda was sold for its net book value which resulted in the
recognition of no gain or loss.
On February 28, 1997, we sold a major portion of our group insurance
business to UNICARE, a wholly owned subsidiary of WellPoint. The business sold
included our group accident and health business and related group life
insurance business and three indirectly wholly-owned subsidiaries: Cost Care,
Inc., Hancock Association Services Group and Tri-State, Inc. Assets equal to
liabilities of $686.7 million as of February 28, 1997, subject to agreement on
asset and liability values, were transferred to UNICARE in connection with the
sale. The insurance business sold was transferred to UNICARE through a 100%
coinsurance agreement. A pre-tax gain of $59.6 million was realized on the
sale, comprised of $33.9 million gain on the sale of the underlying business
and a $25.7 million gain related to the curtailment of our pension and other
postretirement benefit plans. The business sold primarily consisted of short
duration contracts, and $.6 million, $8.5 million and $15.5 million of the
gain was recognized in the nine months ended September 30, 1999, and in 1998
and 1997, respectively, as the underlying claims were settled. The remaining
gain realized on the sale of the underlying business of $9.3 million is being
recognized over the remaining lives of the contracts in accordance with SFAS
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts." The $25.7 million curtailment gain was recognized in
1997.
On November 29, 1996, we closed the sale of 95% of Freedom Securities, a
holding company, and its subsidiaries, primarily Tucker Anthony Incorporated
and Sutro and Co., both broker/dealers. Net assets transferred were $164.3
million and the sale resulted in the recognition of a $25.1 million pre-tax
gain in 1996. We sold the remaining 5% of Freedom Securities during the second
quarter of 1998 and recognized a pre-tax gain of $4.3 million.
Effective July 1, 1996, JHP&C and its wholly owned subsidiary, Indemnity,
each entered into a quota share reinsurance agreement with a third party
reinsurer under which they ceded 100% of their loss, loss adjustment expense
and unearned premium reserves at June 30, 1996 relating to continuing
operations. Under the terms of the quota share reinsurance agreement, JHP&C
cedes 100% of all continuing operations business written subsequent to June
30, 1996. Net assets transferred to the reinsurer were approximately $12.0
million and no gain or loss was recognized on the transaction. On September
12, 1996, JHP&C sold 100% of the stock of Indemnity. Net assets transferred
were approximately $6.0 million and the sale resulted in the recognition of a
$6.0 million pre-tax gain. On September 9, 1999, we sold 100% of the stock of
JHP&C. Net assets transferred were approximately $21.0 million and no gain or
loss was recognized on the sale.
In order to enhance comparability, the following discussion of our results
of operations is supplemented, where appropriate, by financial information of
the disposed businesses in each period presented. The financial information of
the disposed businesses is presented for informational purposes only.
58
<PAGE>
Results of Operations
The table below presents the results of operations of our ongoing
businesses, disposed businesses, and consolidated financial information for
the nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Ongoing Disposed Ongoing Disposed
Businesses Businesses Consolidated Businesses Businesses Consolidated
---------- ---------- ------------ ---------- ---------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premiums.............. $2,033.3 $ -- $2,033.3 $1,647.7 $-- $1,647.7
Universal life and
investment-type
product charges...... 509.4 -- 509.4 441.3 -- 441.3
Net investment
income............... 2,573.6 7.4 2,581.0 2,420.1 21.4 2,441.5
Realized investment
gains (losses), net.. 200.0 (22.6) 177.4 60.8 4.1 64.9
Investment management
revenues,
commissions, and
other fees........... 504.6 -- 504.6 487.9 -- 487.9
Other revenue
(expense)............ 14.4 (2.0) 12.4 2.6 -- 2.6
-------- ------ -------- -------- ---- --------
Total revenues
(expenses)......... 5,835.3 (17.2) 5,818.1 5,060.4 25.5 5,085.9
Benefits and expenses
Benefits to
policyholders........ 3,565.6 34.8 3,600.4 2,930.6 13.5 2,944.1
Other operating costs
and expenses......... 982.7 9.0 991.7 954.8 1.0 955.8
Amortization of
deferred policy
acquisition costs.... 150.4 -- 150.4 200.4 -- 200.4
Dividends to
policyholders........ 361.0 -- 361.0 348.4 -- 348.4
-------- ------ -------- -------- ---- --------
Total benefits and
expenses........... 5,059.7 43.8 5,103.5 4,434.2 14.5 4,448.7
-------- ------ -------- -------- ---- --------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of
accounting change...... 775.6 (61.0) 714.6 626.2 11.0 637.2
Income taxes (benefit).. 276.7 (37.5) 239.2 186.0 2.8 188.8
-------- ------ -------- -------- ---- --------
Income (loss) before
extraordinary item and
cumulative effect of
accounting change...... 498.9 (23.5) 475.4 440.2 8.2 448.4
Extraordinary item--
demutualization
expenses, net of tax... (56.6) -- (56.6) (4.8) -- (4.8)
Cumulative effect of
accounting change...... (9.7) -- (9.7) -- -- --
-------- ------ -------- -------- ---- --------
Net income (loss)....... $ 432.6 $(23.5) $ 409.1 $ 435.4 $8.2 $ 443.6
======== ====== ======== ======== ==== ========
</TABLE>
59
<PAGE>
The table below presents the results of operations of our ongoing
businesses, disposed businesses, and consolidated financial information for
the years ended 1998, 1997 and 1996.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------------- ----------------------------------
Ongoing Disposed Ongoing Disposed Ongoing Disposed
Businesses Businesses Consolidated Businesses Businesses Consolidated Businesses Businesses Consolidated
---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums........ $2,197.9 $ -- $2,197.9 $2,372.2 $101.4 $2,473.6 $2,385.7 $ 536.8 $2,922.5
Universal life
and investment-
type product
charges........ 597.0 -- 597.0 512.0 -- 512.0 466.3 -- 466.3
Net investment
income......... 3,300.8 29.9 3,330.7 3,153.3 37.4 3,190.7 3,102.2 120.9 3,223.1
Realized
investment
gains, net..... 85.9 12.0 97.9 113.0 2.8 115.8 93.6 17.1 110.7
Investment
management
revenues,
commissions,
and other
fees........... 659.7 -- 659.7 554.7 -- 554.7 450.3 301.0 751.3
Other revenue... 11.0 7.8 18.8 22.2 77.3 99.5 9.7 221.2 230.9
-------- ----- -------- -------- ------ -------- -------- -------- --------
Total revenues.. 6,852.3 49.7 6,902.0 6,727.4 218.9 6,946.3 6,507.8 1,197.0 7,704.8
Benefits and
expenses
Benefits to
policyholders.. 4,140.8 11.2 4,152.0 4,170.4 132.7 4,303.1 4,180.7 496.0 4,676.7
Other operating
costs and
expenses....... 1,383.0 -- 1,383.0 1,241.6 42.1 1,283.7 1,080.0 614.1 1,694.1
Amortization of
deferred policy
acquisition
costs.......... 249.7 -- 249.7 312.0 -- 312.0 224.6 6.3 230.9
Dividends to
policyholders.. 473.2 -- 473.2 455.5 2.3 457.8 419.9 15.2 435.1
-------- ----- -------- -------- ------ -------- -------- -------- --------
Total benefits
and expenses... 6,246.7 11.2 6,257.9 6,179.5 177.1 6,356.6 5,905.2 1,131.6 7,036.8
-------- ----- -------- -------- ------ -------- -------- -------- --------
Income before
income taxes and
extraordinary
item............ 605.6 38.5 644.1 547.9 41.8 589.7 602.6 65.4 668.0
Income taxes..... 176.4 7.5 183.9 101.8 4.6 106.4 222.3 25.2 247.5
-------- ----- -------- -------- ------ -------- -------- -------- --------
Income before
extraordinary
item............ 429.2 31.0 460.2 446.1 37.2 483.3 380.3 40.2 420.5
Extraordinary
item--
demutualization
expenses, net of
tax............. (11.7) -- (11.7) -- -- -- -- -- --
-------- ----- -------- -------- ------ -------- -------- -------- --------
Net income....... $ 417.5 $31.0 $ 448.5 $ 446.1 $ 37.2 $ 483.3 $ 380.3 $ 40.2 $ 420.5
======== ===== ======== ======== ====== ======== ======== ======== ========
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Consolidated income before income taxes, extraordinary item and cumulative
effect of accounting change of $714.6 million for the nine months ended
September 30, 1999 increased by $77.4 million, or 12.1%, as compared to
consolidated income before income taxes and extraordinary item of $637.2
million for the nine months ended September 30, 1998. The increase was
primarily attributable to increases in income before taxes, extraordinary item
and cumulative effect of accounting change of $178.1 million in the Guaranteed
and Structured Financial Products Segment, $41.7 million in the Protection
Segment, and $35.8 million in the Investment Management Segment. These
increases were offset by decreases of $175.6 million in the Corporate and
Other Segment and $2.6 million in the Asset Gathering Segment. The increase in
the Guaranteed and Structured Financial Products Segment was primarily
attributable to higher realized investment gains on sales of
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<PAGE>
real estate relating to the program to sell more than 150 of the properties in
our real estate portfolio and higher interest margins on spread-based
products. The increase in the Protection Segment was primarily due to higher
realized investment gains on real estate, higher fee income on variable life
insurance products, and favorable claims experience on long-term care
insurance products. The increase in the Investment Management Segment was
primarily due to higher investment advisory fees resulting from growth in
assets under management and higher realized investment gains on sales of
mortgage loans. The decrease in the Corporate and Other Segment was primarily
due to the recognition of a $140.2 million pre-tax charge in connection with
revised estimates related to the class action lawsuit settlement. The decrease
in the Asset Gathering Segment was due primarily to lower investment advisory
fees earned from our mutual fund operations due to lower assets under
management.
Ongoing Businesses. Premium revenue from ongoing businesses was $2,033.3
million for the nine months ended September 30, 1999, an increase of $385.6
million, or 23.4%, from $1,647.7 million for the nine months ended September
30, 1998. The increase was primarily due to a $340.2 million increase in
premiums on single premium annuity contracts in the Guaranteed and Structured
Financial Products Segment, including the sale of one contract for $339.0
million, and a $40.9 million increase in the Protection Segment for premiums
on individual long-term care insurance products.
Universal life and investment-type product charges from ongoing businesses
were $509.4 million for the nine months ended September 30, 1999, an increase
of $68.1 million, or 15.4%, from $441.3 million for the nine months ended
September 30, 1998. These product charges consist primarily of cost of
insurance fees on our universal life insurance and variable life insurance
products and mortality and expense fees on our variable annuity products. The
increase was primarily due to higher cost of insurance fees resulting from
growth in the average amount of variable life insurance in force and higher
average variable annuity separate account liabilities. Investment-type product
charges in the Guaranteed and Structured Financial Products Segment also
increased as a result of higher sales of single premium annuity contracts and
separate account GICs.
Net investment income from ongoing businesses was $2,573.6 million for the
nine months ended September 30, 1999, an increase of $153.5 million, or 6.3%,
from $2,420.1 million for the nine months ended September 30, 1998. The
increase was primarily the result of higher average invested assets, which
increased $3,057.2 million, or 7.1%, to $46,001.4 million for the nine months
ended September 30, 1999, as compared to $42,944.2 million for the nine months
ended September 30, 1998. The net yield on average invested assets was 7.46%
and 7.65% for the nine months ended September 30, 1999 and 1998, respectively.
This decrease was primarily due to the general decline in market interest
rates and lower depreciation expense on real estate in 1998, which resulted
from suspending depreciation on real estate properties held for sale.
Net realized gains on investments from ongoing businesses were $200.0
million for the nine months ended September 30, 1999, an increase of $139.2
million, or 228.9%, from $60.8 million for the nine months ended September 30,
1998. The increase was primarily the result of increased gains on sales of
real estate relating to the program initiated in 1998 to sell more than 150 of
the properties in our real estate portfolio in order to take advantage of the
strong real estate market and reduce our general account investment in real
estate. Realized gains on sales of real estate increased $111.3 million to
$107.8 million for the nine months ended September 30, 1999 from realized
losses of $3.5 million for the nine months ended September 30, 1998.
Investment management revenues, commissions, and other fees from ongoing
businesses were $504.6 million for the nine months ended September 30, 1999,
an increase of $16.7 million, or 3.4%, from $487.9 million for the nine months
ended September 30, 1998. The increase was primarily the result of higher
underwriting and distribution fees which increased $15.2 million primarily
resulting from our acquisition of the Essex Corporation, a distributor of
annuities and mutual funds through banks, in January 1999. Institutional
investment advisory fees increased $5.9 million primarily due to growth in
average institutional assets under management. Average institutional assets
under management increased 14.0% to $40,881.4 million for the nine
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<PAGE>
months ended September 30, 1999. Partially offsetting these increases, mutual
fund advisory fees declined $6.6 million for the nine months ended September
30, 1999, primarily due to lower sales and higher redemptions along with a
decline in the average investment advisory fee rate, as fixed income assets,
which bear a lower advisory fee than equity assets, increased as a percentage
of total assets.
Other revenue from ongoing businesses increased $11.8 million to $14.4
million for the nine months ended September 30, 1999 from $2.6 million for the
nine months ended September 30, 1998, primarily due to proceeds received,
representing the reimbursement of benefits to policyholders previously paid,
from the liquidation of Confederation Life Insurance Company, an insolvent
Canadian insurer. The Maritime Life Assurance Company acquired the business
giving rise to these benefits in 1995.
Benefits to policyholders from ongoing businesses were $3,565.6 million for
the nine months ended September 30, 1999, an increase of $635.0 million, or
21.7%, from $2,930.6 million for the nine months ended September 30, 1998. The
increase was primarily due to a $381.8 million increase in benefits due to
higher sales of single premium annuity contracts, a $113.2 million increase in
benefits related to the settlement of a class action lawsuit involving
individual life insurance policies sold from 1979 through 1996, a
$53.0 million increase in benefits on traditional life insurance products due
to higher death benefits, including $24.0 million of benefits from previously
unreported deaths identified as a result of the policyholder demutualization
mailing, and a $45.2 million increase in benefits on individual long-term care
insurance products, resulting from higher sales.
Other operating costs and expenses from ongoing businesses were $982.7
million for the nine months ended September 30, 1999, an increase of $27.9
million, or 2.9%, from $954.8 million for the nine months ended September 30,
1998. The increase was primarily due to higher expenses of $27.0 million
related to the settlement of a class action lawsuit involving individual life
insurance policies sold from 1979 through 1996 and increased interest and
related expenses of $20.8 million in the Investment Management Segment
primarily resulting from the formation of a collateralized bond obligation
during the second quarter of 1998. These increases were partially offset by a
$18.5 million decrease in interest expense on prior year taxes.
Amortization of deferred policy acquisition costs from ongoing businesses
was $150.4 million for the nine months ended September 30, 1999, a decrease of
$50.0 million, or 25.0%, from $200.4 million for the nine months ended
September 30, 1998. The decrease was primarily due to lower amortization
expense on non-traditional life insurance products resulting from revised
projections of estimated gross profits and lower amortization expense on
traditional life insurance products due to lower profits.
Dividends to policyholders from ongoing businesses were $361.0 million for
the nine months ended September 30, 1999, an increase of $12.6 million, or
3.6%, from $348.4 million for the nine months ended September 30, 1998. The
increase primarily resulted from normal growth in dividends on traditional
life insurance products.
Income taxes from ongoing businesses were $276.7 million for the nine months
ended September 30, 1999, compared to $186.0 million for the nine months ended
September 30, 1998. Our effective tax rate from ongoing businesses before the
surplus tax, demutualization expenses and cumulative effect of accounting
change was 33.4% and 31.6% for the nine months ended September 30, 1999 and
1998, respectively. We have been subject to the surplus tax (add-on tax)
imposed on mutual life insurance companies which disallows a portion of a
mutual life insurance company's policyholder dividends as a deduction from
taxable income. As a stock company, we will no longer be subject to the
surplus tax.
Extraordinary expenses from ongoing businesses, net of tax, were $56.6
million and $4.8 million for the nine months ended September 30, 1999 and
1998, respectively. These expenses were comprised of direct non-recurring
costs specifically related to our reorganization. These costs primarily
consist of printing and mailing costs, fees of the regulators' advisors, and
our financial, legal, actuarial and accounting advisors.
62
<PAGE>
Cumulative effect of accounting change, net of tax, was $9.7 million for the
nine months ended September 30, 1999. During 1999, we adopted Statement of
Position 98-5, Reporting the Costs of Start-up Activities, which requires that
start-up costs capitalized prior to January 1, 1999 be written off and any
future start-up costs be expensed as incurred. We wrote off the unamortized
balance of capitalized start-up costs related to our closed-end mutual funds
in the nine months ended September 30, 1999.
Disposed Businesses. Revenues from disposed businesses decreased $42.7
million and benefits and expenses from disposed businesses increased $29.3
million for the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998 due to the previously described disposals.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated income before income taxes and extraordinary item of $644.1
million for the year ended December 31, 1998 increased by $54.4 million, or
9.2%, as compared to consolidated income before income taxes and extraordinary
item of $589.7 million for the year ended December 31, 1997. The increase was
primarily attributable to increases in income before income taxes and
extraordinary item of $43.6 million in the Asset Gathering Segment, $20.2
million in the Guaranteed and Structured Financial Products Segment, and $3.1
million in the Protection Segment. These increases were offset by decreases of
$8.5 million in the Corporate and Other Segment and $4.0 million in the
Investment Management Segment. The increase in the Asset Gathering Segment was
primarily attributable to growth in investment management revenues,
commissions, and other fees, investment-type product charges, and net
investment income, all due to growth in assets under management, primarily due
to net sales. The increase in the Guaranteed and Structured Financial Products
Segment was primarily due to improved interest margins on spread-based
products and growth in general account assets. The increase in the Protection
Segment was primarily due to higher fee income from cost of insurance and
separate account charges on variable life insurance products and lower
amortization of deferred policy acquisition costs, partially offset by higher
operating expenses. Corporate and Other Segment income declined due to the
disposal of businesses previously described. The decrease in the Investment
Management Segment was due primarily to reduced advisory fees on timber assets
and higher operating expenses due to growth in operations.
Ongoing Businesses. Premium revenue from ongoing businesses was $2,197.9
million for 1998, a decrease of $174.3 million, or 7.3%, from $2,372.2 million
in 1997. The decrease was primarily due to a decline in premiums of $107.6
million resulting from the termination of our participation in the Federal
Employers Group Life Insurance Program (the "FEGLI Program") in the Corporate
and Other Segment and a $79.6 million decrease in single premium annuity
contract premiums in the Guaranteed and Structured Financial Products Segment.
The decline in premiums due to the termination of our participation in the
FEGLI Program has little effect on earnings, as the decline in premiums is
completely offset by corresponding decreases in benefits to policyholders.
Traditional life insurance premiums in the Protection Segment decreased $38.0
million primarily due to term insurance premiums ceded under a reinsurance
contract entered into during 1998. These decreases were partially offset by
higher premiums of individual long-term care insurance of $43.3 million, an
increase of 24.7%.
Universal life and investment-type product charges from ongoing businesses
were $597.0 million for 1998, an increase of $85.0 million, or 16.6%, from
$512.0 million in 1997. The increase was primarily the result of growth in
account values of variable life insurance products due to additional deposits
and market appreciation. The average amount of variable life insurance in
force increased 12.7% to $49,364.1 million in 1998 from $43,791.7 million in
1997. Average variable annuity separate account liabilities increased 28.9% to
$5,736.0 million in 1998 compared to $4,450.0 million in 1997.
Net investment income from ongoing businesses was $3,300.8 million for 1998,
an increase of $147.5 million, or 4.7%, from $3,153.3 million in 1997. The
increase was primarily the result of an increase in average invested assets
related to ongoing businesses due to continued sales among all segments.
Average invested assets related to ongoing businesses increased $1,688.4
million, or 4.1%, to $43,310.3 million for 1998, as compared to $41,621.9
million in 1997. The net yield on average invested assets increased to 7.62%
in 1998 from 7.58% in 1997. The
63
<PAGE>
increase was primarily due to increased investments in leveraged leases and
lower depreciation expense on real estate, which resulted from suspending
depreciation on real estate properties held for sale during 1998.
Net realized gains on investments from ongoing businesses were $85.9 million
for 1998, a decrease of $27.1 million, or 24.0%, from $113.0 million in 1997.
The decrease was primarily due to additional provisions for losses of $142.0
million on mortgage loans, real estate, and other invested assets, partially
offset by higher gains on sales of common stock and real estate. During 1998
we initiated a program to sell more than 150 properties in our real estate
portfolio. Once we identify a property to be sold, it is held for sale and
valued at the lower of cost or fair value less costs to sell. Realized gains
on sales of common stock were $82.0 million in 1998, as compared to $6.2
million in 1997. Realized gains on sales of real estate were $48.5 million in
1998, as compared to $18.3 million in 1997.
Investment management revenues, commissions, and other fees from ongoing
businesses were $659.7 million, an increase of $105.0 million, or 18.9%, from
$554.7 million in 1997. This increase was primarily the result of higher
underwriting and distribution fees earned of $64.1 million, higher investment
advisory fees earned of $39.0 million, and higher shareholder service and
other fees earned of $6.7 million primarily in the Asset Gathering Segment.
The increases primarily reflect a higher level of average assets under
management, which increased 15.6% to $69,960.2 million in 1998 from $60,513.7
million in 1997.
Other revenue from ongoing businesses was $11.0 million in 1998, a decrease
of $11.2 million, or 50.5%, from $22.2 million reported in 1997. Of the
decrease, $4.4 million was due to lower conversion fee income resulting from
the termination of our participation in the FEGLI Program. Conversion fee
income is earned when an insured in the FEGLI Program purchases insurance
directly from us.
Benefits to policyholders from ongoing businesses were $4,140.8 million for
1998, a decrease of $29.6 million, or 0.7%, from $4,170.4 million in 1997.
This decrease primarily resulted from a $107.0 million decline in benefits
related to the termination of the FEGLI Program and a $83.6 million decline in
benefits primarily resulting from lower sales of single premium annuity
contracts. These decreases were partially offset by a $77.3 million increase
in benefits related to the settlement of a class action lawsuit involving
certain individual life insurance policies sold from 1979 through 1996 and
higher benefits on non-traditional life insurance and individual long-term
care insurance products due to increased sales.
Other operating costs and expenses from ongoing businesses were $1,383.0
million for 1998, an increase of $141.4 million, or 11.4%, from $1,241.6
million for 1997. The increase was primarily due to higher compensation and
related costs and administrative expenses of approximately $60.6 million
related to mutual fund and institutional investment management operations as a
result of continued growth in those businesses and additional expenses of
$47.2 million related to the operation, management, and enhancement of our
information systems. Commissions increased from 1997 as a result of higher
sales of mutual fund and non-traditional life insurance products. These
increases were partially offset by lower expenses of $19.6 million in 1998, as
compared to 1997, related to the settlement of a class action lawsuit
involving certain individual life insurance policies sold from 1979 through
1996.
Amortization of deferred policy acquisition costs from ongoing businesses
was $249.7 million for 1998, a decrease of $62.3 million, or 20.0%, from
$312.0 million for 1997. The decrease was primarily the result of higher
amortization expense in 1997 for non-traditional life insurance products
resulting from revised projections of estimated gross profits.
Dividends to policyholders from ongoing businesses were $473.2 million in
1998, an increase of $17.7 million, or 3.9%, from $455.5 million in 1997. The
increase primarily resulted from normal growth in dividends on traditional
life insurance products, partially offset by a reduction in participating
group annuity contract payments.
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<PAGE>
Income taxes from ongoing businesses were $176.4 million in 1998, compared
to $101.8 million for 1997. Our effective tax rate from ongoing businesses
before the surplus tax and demutualization expenses was 31.7% in 1998, as
compared to 25.0% in 1997. The increase in the effective tax rate was due
primarily to the development of tax planning strategies to use $51.0 million
of net loss carryforwards in 1997.
Extraordinary expenses of $11.7 million, net of tax, for 1998 were comprised
of direct non-recurring costs specifically related to our reorganization.
These costs primarily consist of fees of our financial, legal, actuarial, and
accounting advisors.
Disposed Businesses. Revenues from disposed businesses decreased $169.2
million and benefits and expenses from disposed businesses decreased $165.9
million from 1997 to 1998 due to the previously described disposals.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Consolidated income before income taxes was $589.7 million for the year
ended December 31, 1997, a decrease of $78.3 million, or 11.7%, as compared to
consolidated income before income taxes of $668.0 million for the year ended
December 31, 1996. The decrease was primarily attributable to decreases in
income before income taxes of $59.6 million in the Corporate and Other
Segment, $37.4 million in the Guaranteed and Structured Financial Products
Segment, $26.7 million in the Protection Segment, and $7.0 million in the
Investment Management Segment. These decreases were partially offset by an
increase of $52.4 million in the Asset Gathering Segment. The decrease in the
Corporate and Other Segment was primarily attributable to an increase of $34.6
million in benefits to policyholders and expenses incurred related to the
settlement of a class action lawsuit involving certain individual life
insurance policies sold from 1979 through 1996, as specified elsewhere in this
prospectus. The decrease in the Guaranteed and Structured Financial Products
Segment was primarily due to a decline in interest margins on spread-based
products. The decrease in the Protection Segment was primarily due to higher
amortization of deferred policy acquisition costs. Income before income taxes
in the Investment Management Segment declined primarily due to losses on
hedging transactions not qualifying for hedge accounting treatment resulting
from a decline in U.S. Treasury rates. The increase in income before income
taxes in the Asset Gathering Segment was due to growth in investment
management revenues, commissions, and other fees, investment-type product
charges, and net investment income, all due to growth in assets under
management.
Ongoing Businesses. Premium revenue from ongoing businesses was $2,372.2
million for 1997, a decrease of $13.5 million, or .6%, from $2,385.7 million
for 1996. The decrease was primarily due to a $158.6 million decrease in
premiums on conversion annuities and single premium annuity contracts in the
Guaranteed and Structured Financial Products Segment. A conversion annuity is
a participating group annuity contract that has been converted to a non-
participating annuity. Such a decline in sales has little effect on earnings,
as the decreased premiums are offset by corresponding decreases in benefits to
policyholders. The decrease was largely offset by higher premiums among most
products. Individual long-term care insurance premiums increased $51.0
million, or 41.0%; group life insurance premiums increased $36.3 million, or
19.4%; and single premium immediate annuities with life contingencies
increased $32.0 million, or 139.1%.
Universal life and investment-type product charges from ongoing businesses
were $512.0 million for 1997, an increase of $45.7 million, or 9.8%, from
$466.3 million in 1996. The increase was primarily due to a higher amount of
cost of insurance fees resulting from growth in the average amount of variable
life insurance in force, which increased 12.8% to $43,791.7 million in 1997
from $38,827.6 million in 1996. Average variable annuity separate account
liabilities increased 27.8% to $4,450.0 million in 1997 compared to $3,481.9
million in 1996.
Net investment income from ongoing businesses was $3,153.3 million for 1997,
an increase of $51.1 million, or 1.6%, from $3,102.2 million for 1996. The
increase was primarily the result of an increase in average invested assets
related to ongoing businesses of $1,648.4 million, or 4.1% to $41,621.9
million for 1997, as compared to $39,973.5 million for 1996. The net yield on
average invested assets decreased to 7.58% in 1997 from 7.76% in 1996. The
decrease was primarily due to the general decline in market interest rates.
65
<PAGE>
Net realized gains on investments from ongoing businesses were $113.0
million for 1997, an increase of $19.4 million, or 20.7%, from $93.6 million
in 1996. The increase was primarily due to higher gains on sales of mortgage
loans and real estate, partially offset by lower gains on sales of common and
preferred stock. Net realized gains on sales of mortgage loans were $8.4
million in 1997, as compared to a loss of $64.2 million in 1996. Realized
gains on sales of real estate were $18.3 million in 1997, as compared to a
loss of $20.1 million in 1996. Realized gains on sales of common and preferred
stock were $6.2 million and $10.5 million, in 1997, as compared to $77.1
million and $25.3 million in 1996, respectively.
Investment management revenues, commissions, and other fees from ongoing
businesses were $554.7 million, an increase of $104.4 million, or 23.2%, from
$450.3 million in 1996. This increase was primarily the result of higher
underwriting and distribution fees earned of $59.4 million and higher
investment advisory fees earned of $51.5 million. The increases primarily
reflect a higher level of average assets under management which increased
21.8% to $60,513.7 million in 1997 from $49,683.5 million in 1996.
Benefits to policyholders from ongoing businesses were $4,170.4 million for
1997, a decrease of $10.3 million, or .2%, from $4,180.7 million for 1996. The
decrease resulted from a $194.1 million decrease in benefits in the Guaranteed
and Structured Financial Products Segment primarily due to lower sales of
conversion annuities and single premium group annuity contracts, largely
offset by increases due to higher sales in almost all other product lines.
Other operating costs and expenses from ongoing businesses were $1,241.6
million for 1997, an increase of $161.6 million, or 15.0%, from $1,080.0
million for 1997. The increase was primarily due to higher compensation and
related costs and administrative expenses of approximately $67.3 million
related to our mutual funds and institutional investment management operations
as a result of continued growth and higher expenses of $15.8 million in 1997,
as compared to 1996, related to the settlement of a class action lawsuit
involving certain individual life insurance policies sold from 1979 through
1996. In addition, commissions increased primarily due to higher amortization
of deferred selling commissions on mutual fund products and increased sales in
almost all other product lines.
Amortization of deferred policy acquisition costs from ongoing businesses
was $312.0 million for 1997, an increase of $87.4 million, or 38.9%, from
$224.6 million for 1996. The increase was primarily the result of higher
amortization expense in 1997 for traditional life insurance products resulting
from revised projections of estimated gross margins based upon changes in
estimated future expense levels and higher amortization for non-traditional
life insurance products due to revised projections of estimated gross profits.
Dividends to policyholders from ongoing businesses were $455.5 million in
1997, an increase of $35.6 million, or 8.5%, from $419.9 million in 1996. The
increase primarily resulted from normal growth in dividends on traditional
life insurance products and an increase in participating group annuity
contract payments.
Income taxes from ongoing businesses were $101.8 million in 1997, compared
to $222.3 million for 1996. Our effective tax rate before the surplus tax was
25.0% in 1997, as compared to 33.5% in 1996. The decrease in the effective tax
rate was due primarily to the development of tax planning strategies to use
$51.0 million of net loss carryforwards in 1997.
Disposed Businesses. Revenues from disposed businesses were $218.9 million
for 1997, a decrease of $978.1 million, or 81.7%, from $1,197.0 million for
1996. Benefits and expenses from disposed businesses were $177.1 million for
1997, a decrease of $954.5 million, or 84.3%, from $1,131.6 million for 1996.
These decreases were due to the previously described disposals.
Results of Operations by Segment
We evaluate segment performance and base management's incentives on after-
tax operating income, which excludes the effect of net realized investment
gains and losses and unusual or non-recurring events and
66
<PAGE>
transactions. Segment after-tax operating income is determined by adjusting
GAAP net income for net realized investment gains and losses, including gains
and losses on disposals of businesses, extraordinary items, and certain other
items which we believe are not indicative of overall operating trends. While
these items may be significant components in understanding and assessing our
consolidated financial performance, we believe that the presentation of after-
tax operating income enhances the understanding of our results of operations
by highlighting net income attributable to the normal, recurring operations of
the business. However, after-tax operating income is not a substitute for net
income determined in accordance with GAAP.
A discussion of the adjustments to GAAP reported income, many of which
affect each operating segment, follows. A reconciliation of after-tax
operating income, as adjusted, to GAAP reported net income precedes each
segment discussion.
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
September 30, December 31,
-------------- ------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Segment after-tax operating income:
Protection Segment................. $137.3 $133.8 $ 172.3 $ 158.1 $197.3
Asset Gathering Segment............ 97.5 87.9 111.1 93.3 55.7
------ ------ ------- ------- ------
Total Retail..................... 234.8 221.7 283.4 251.4 253.0
Guaranteed and Structured Financial
Products Segment.................. 165.8 101.8 145.7 138.5 155.4
Investment Management Segment...... 27.6 6.4 15.4 17.2 21.6
------ ------ ------- ------- ------
Total Institutional.............. 193.4 108.2 161.1 155.7 177.0
Corporate and Other Segment........ 45.1 31.8 56.3 39.4 20.2
------ ------ ------- ------- ------
Total after-tax operating
income.......................... 473.3 361.7 500.8 446.5 450.2
After-tax adjustments:
Realized investment gains, net..... 118.0 75.1 93.9 104.9 80.6
Class action lawsuit............... (91.1) -- (150.0) (112.5) (90.0)
Restructuring charges.............. (7.5) -- -- -- --
Benefit from pension participating
contract modification............. -- -- -- 9.1 --
Surplus tax........................ (17.3) 11.6 15.5 35.3 (20.3)
------ ------ ------- ------- ------
Total after-tax adjustments...... 2.1 86.7 (40.6) 36.8 (29.7)
------ ------ ------- ------- ------
GAAP Reported:
Income before extraordinary item
and cumulative effect of
accounting change................. 475.4 448.4 460.2 483.3 420.5
Extraordinary item-demutualization
expenses, net of tax.............. (56.6) (4.8) (11.7) -- --
Cumulative effect of accounting
change............................ (9.7) -- -- -- --
------ ------ ------- ------- ------
Net income....................... $409.1 $443.6 $ 448.5 $ 483.3 $420.5
====== ====== ======= ======= ======
</TABLE>
Adjustments to GAAP Reported Net Income
Our GAAP reported net income was significantly affected by net realized
investment gains and losses and unusual or non-recurring events and
transactions presented above as after-tax adjustments. In all periods, net
realized investment gains and losses, including gains and losses on our
disposed businesses, and the surplus tax have been excluded from operating
income. We have been subject to the surplus tax imposed on mutual life
insurance companies which disallows a portion of mutual life insurance
company's policyholder dividends as a deduction from taxable income. As a
stock company, we will no longer be subject to surplus tax.
During 1997, we entered into a court approved settlement relating to a class
action lawsuit involving individual life insurance policies sold from 1979
through 1996, as specified elsewhere in this prospectus. In entering into the
settlement, we specifically denied any wrongdoing. The reserve held in
connection with the
67
<PAGE>
settlement to provide for relief to class members and for legal and
administrative costs associated with the settlement amounted to $522.5
million, $436.6 million and $308.8 million at September 30, 1999, December 31,
1998 and December 31, 1997, respectively. Given the uncertainties associated
with estimating the reserve, it is reasonably possible that the final cost of
the settlement could differ materially from the amount previously provided.
During the first nine months of 1999, we recorded $7.5 million in after-tax
restructuring charges in accordance with our plans to reduce the cost
structure of our mutual fund operations and career agency distribution system.
These charges primarily included accruals for severance and related benefits.
The restructuring liability at September 30, 1999 was $11.2 million and is
expected to be paid by March 2002.
During 1997, a participating pension reinsurance contractholder requested
the distribution of a portion of contract funds. At the time of the request,
the contract stated that these funds were to be paid out over a specified
number of years. However, we agreed to distribute a portion of the
contractholder's funds in exchange for the right to retain the tax credits
that resulted from the distribution. The contractual amendment resulted in the
recognition of a $9.1 million after-tax gain.
Segment Allocations
We allocate surplus to the segments in amounts sufficient to support the
associated liabilities of each segment and to maintain capital levels
consistent with the overall business segment and corporate strategies.
Allocations of net investment income are based on the amount of assets
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 allocation methodologies.
68
<PAGE>
Retail-Protection Segment
The following table presents certain summary financial data relating to the
Protection Segment for the periods indicated.
<TABLE>
<CAPTION>
For the Nine Months
Ended September For the Year Ended
30, December 31,
-------------------- ----------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues
Premiums................. $ 1,051.6 $ 1,002.2 $1,351.4 $1,343.0 $1,286.8
Universal life and
investment-type product
charges................. 273.9 238.1 333.3 288.8 268.8
Net investment income.... 802.7 788.9 1,063.9 983.4 947.1
Other revenue............ 5.8 3.9 10.6 16.6 14.9
--------- --------- -------- -------- --------
Total revenues......... 2,134.0 2,033.1 2,759.2 2,631.8 2,517.6
Benefits and expenses
Benefits to
policyholders........... 1,234.5 1,090.8 1,493.8 1,399.1 1,341.7
Other operating costs and
expenses................ 294.3 310.4 442.4 375.7 349.2
Amortization of deferred
policy acquisition
costs................... 80.0 117.2 153.9 224.7 160.7
Dividends to
policyholders........... 334.0 318.4 422.8 395.9 371.1
--------- --------- -------- -------- --------
Total benefits and
expenses.............. 1,942.8 1,836.8 2,512.9 2,395.4 2,222.7
--------- --------- -------- -------- --------
Pre-tax operating income... 191.2 196.3 246.3 236.4 294.9
Income taxes............... 53.9 62.5 74.0 78.3 97.6
--------- --------- -------- -------- --------
After-tax operating
income.................... 137.3 133.8 172.3 158.1 197.3
After-tax adjustments:
Realized investment
gains, net.............. 69.0 37.6 49.2 53.5 32.8
Restructuring charge..... (3.0) -- -- -- --
Surplus tax.............. (7.7) 8.8 11.7 16.9 (5.7)
--------- --------- -------- -------- --------
Total after-tax
adjustments........... 58.3 46.4 60.9 70.4 27.1
--------- --------- -------- -------- --------
GAAP Reported:
Income before
extraordinary item...... 195.6 180.2 233.2 228.5 224.4
Extraordinary item-
demutualization
expenses, net of tax.... (36.7) (3.3) (7.9) -- --
--------- --------- -------- -------- --------
Net income............. $ 158.9 $ 176.9 $ 225.3 $ 228.5 $ 224.4
========= ========= ======== ======== ========
Other Data:
After-tax operating income
(loss)
Non-traditional life
(variable life and uni-
versal life) $ 56.6 $ 54.3 $ 74.6 $ 38.6 $ 38.8
Traditional life......... 56.0 57.4 73.0 97.9 146.8
Individual long-term
care.................... 17.6 14.9 16.4 15.9 7.3
Group long-term care..... 9.0 5.9 7.8 8.4 5.3
Other.................... (1.9) 1.3 .5 (2.7) (.9)
Statutory premiums (1)
Variable life............ $ 603.0 $ 611.4 $ 810.8 $ 670.8 $ 583.4
Universal life (2)....... 86.0 414.5 436.8 141.8 302.7
Traditional life......... 757.1 785.6 1,051.3 1,071.7 1,068.5
Individual long-term
care.................... 186.7 145.4 199.8 156.6 94.7
Group long-term care..... 59.4 53.1 72.7 69.6 62.3
</TABLE>
69
<PAGE>
- --------
(1) Statutory data have been derived from the annual statements of John
Hancock Mutual Life Insurance Company, John Hancock Variable Life
Insurance Company, Investors Partner Life (formerly John Hancock Life
Insurance Company of America), and John Hancock Reassurance Company Ltd.
as filed with insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
(2) Includes bank owned life insurance premiums of $335.0 million for the nine
months ended September 30, 1998, and $340.0 million, $65.0 million, and
$255.0 million for the years ended 1998, 1997 and 1996, respectively.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
After-tax operating income was $137.3 million for the nine months ended
September 30, 1999, an increase of $3.5 million, or 2.6%, from $133.8 million
for the nine months ended September 30, 1998. Non-traditional life insurance
after-tax operating income increased $2.3 million, or 4.2%, primarily due to
an increase in universal life and investment-type product charges due to
growth in variable life insurance in-force. Traditional life insurance after-
tax operating income decreased $1.4 million, or 2.4%, primarily resulting from
higher death benefits, partially offset by lower amortization expense of
deferred policy acquisition costs, due to lower profits, and a decrease in
interest expense on prior year taxes. Individual long-term care insurance
after-tax operating income increased $2.7 million, or 18.1%, primarily due to
higher net investment income resulting from an increase in invested assets,
partially offset by unfavorable persistency. Group long-term care insurance
after-tax operating income increased by $3.1 million, or 52.5%, primarily due
to higher net investment income and favorable claims experience.
Total revenues were $2,134.0 million for the nine months ended September 30,
1999, an increase of $100.9 million, or 5.0%, from $2,033.1 million for the
nine months ended September 30, 1998. Premiums increased $49.4 million, or
4.9%, primarily due to an increase in individual long-term care insurance
premiums, which increased $40.9 million, or 25.7%. Universal life and
investment-type product charges consist primarily of cost of insurance fees
and separate account fees and were $273.9 million for the nine months ended
September 30, 1999, an increase of $35.8 million, or 15.0%, from $238.1
million for the nine months ended September 30, 1998. The increase was
primarily due to higher cost of insurance fees resulting from growth in the
average amount of variable life insurance in force, which increased 12.4% to
$55,230.2 million for the nine months ended September 30, 1999 from $49,155.9
million for the nine months ended September 30, 1998. Net investment income
increased $13.8 million, or 1.7%, primarily due to an increase in the
segment's average invested assets.
Total benefits and expenses were $1,942.8 million for the nine months ended
September 30, 1999, an increase of $106.0 million, or 5.8%, from $1,836.8
million for the nine months ended September 30, 1998. Benefits to
policyholders increased $143.7 million, or 13.2%, primarily due to a $53.0
million increase in benefits on traditional life insurance products due to
higher death benefits, including $24.0 million of benefits from previously
unreported deaths identified as a result of the policyholder demutualization
mailing, and a $45.2 million increase in benefits on individual long-term care
insurance products, due to higher sales. Other operating costs and expenses
decreased $16.1 million, or 5.2%, to $294.3 million for the nine months ended
September 30, 1999 from $310.4 million for the nine months ended September 30,
1998, primarily due to a $15.4 million decrease in interest expense on prior
year taxes. Amortization of deferred policy acquisition costs of $80.0 million
for the nine months ended September 30, 1999 decreased $37.2 million, or
31.7%, from $117.2 million for the nine months ended September 30, 1998. The
decrease was primarily due to lower amortization expense on non-traditional
life insurance products resulting from revised projections of estimated gross
profits based upon changes in estimated future interest margins and mortality
margins and lower amortization expense on traditional life insurance products
due to lower profits. Dividends to policyholders increased $15.6 million, or
4.9%, primarily due to normal growth of dividends on traditional life
insurance products. The segment's effective tax rate declined to 28.2% for the
nine months ended September 30, 1999 from 31.8% for the nine months ended
September 30, 1998, due to non-deductible losses in 1998.
70
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
After-tax operating income was $172.3 million in 1998, an increase of $14.2
million, or 9.0% from $158.1 million in 1997. Non-traditional life insurance
after-tax operating income increased $36.0 million, or 93.3%, to $74.6 million
in 1998 from $38.6 million in 1997. This increase was primarily due to higher
product charges on variable life insurance resulting from increased sales and
market appreciation. This increase also was due to lower amortization expense
of deferred policy acquisition costs in 1998 compared to 1997 that resulted
from revised projections of estimated gross profits. Traditional life
insurance after-tax operating income declined by $24.9 million, or 25.4%,
primarily due to higher operating expenses incurred for the operation,
management and enhancement of our information systems. Individual long-term
care insurance after-tax operating income increased $.5 million, or 3.1%, to
$16.4 million in 1998 from $15.9 million in 1997, primarily due to favorable
claims experience partially offset by unfavorable persistency. Group long-term
care insurance after-tax operating income declined by $.6 million, or 7.1%,
primarily due to unfavorable persistency.
Total revenues were $2,759.2 million in 1998, an increase of $127.4 million,
or 4.8%, from $2,631.8 million in 1997. Premiums increased $8.4 million, or
.6%, from 1997 primarily due to an increase in individual long-term care
insurance premiums of $43.3 million, or 24.7%, partially offset by a decrease
in traditional life insurance premiums of $38.0 million, or 3.5%. The decrease
in traditional life insurance premiums was primarily due to $34.5 million of
term insurance premiums, primarily related to policies issued from 1986 to
1995, which were ceded under a reinsurance contract entered into during 1998.
Universal life and investment-type product charges increased $44.5 million, or
15.4%, to $333.3 million in 1998 from $288.8 million in 1997. Cost of
insurance fees increased primarily due to growth in the average amount of
variable life insurance in force, which increased 12.7% to $49,364.1 million
in 1998 from $43,791.7 million in 1997. Fees earned on separate account
products increased as a result of the strong stock market returns experienced
during the year. Net investment income increased by $80.5 million, or 8.2%,
compared to 1997, primarily reflecting an increase in the segment's invested
assets. Other revenue decreased $6.0 million in 1998 primarily due to lower
conversion fee income of $4.4 million resulting from the termination of our
participation in the FEGLI Program.
Total benefits and expenses were $2,512.9 million in 1998, an increase of
$117.5 million, or 4.9%, from $2,395.4 million in 1997. This increase was
primarily due to a $85.6 million increase in benefits to policyholders on non-
traditional life insurance and individual long-term care insurance products.
Benefits on non-traditional life insurance products increased $51.8 million,
or 32.3%, primarily due to interest credited on the average total account
balance on universal life insurance, which increased 33.1% to $1,186.8 million
for 1998 from $891.5 million for 1997, due to sales of new contracts. Benefits
on individual long-term care insurance products increased $33.8 million, or
28.4%, due to sales of new contracts and higher than expected persistency of
insurance in force. These increases were partially offset by favorable
mortality and persistency on traditional life and non-traditional life
insurance products. Other operating costs and expenses increased $66.7
million, or 17.8%, to $442.4 million in 1998 from $375.7 million in 1997. The
increase was primarily due to higher expenses incurred for the operation,
management, and enhancement of our information systems and increased
commissions resulting from higher sales of non-traditional life insurance
products. Amortization of deferred policy acquisition costs of $153.9 million
for 1998 decreased $70.8 million, or 31.5%, from $224.7 million for 1997
primarily due to higher amortization expense recorded in 1997 that resulted
from revised projections of estimated gross profits based upon changes in
estimated future expense levels. Dividends to policyholders increased $26.9
million, or 6.8%, due primarily to normal growth of dividends on traditional
life insurance products. The segment's effective tax rate declined to 30.0% in
1998, from 33.1% in 1997 due to nondeductible losses arising in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
After-tax operating income was $158.1 million in 1997, a decrease of $39.2
million, or 19.9%, from $197.3 million in 1996. Non-traditional life insurance
after-tax operating income decreased $.2 million, or .5% to $38.6 million in
1997 from $38.8 million in 1996 primarily due to higher amortization expense
of deferred policy acquisition costs in 1997 that resulted from revised
projections of estimated gross profits. This decrease was
71
<PAGE>
partially offset by higher product charges on variable life insurance products
resulting from increased sales and market appreciation. Traditional life
insurance after-tax operating income declined $48.9 million primarily due to
higher amortization expense on deferred policy acquisition costs that resulted
from revised projections of estimated gross profits based on changes in
estimated future expense levels and higher dividends, partially offset by
favorable mortality experience. Individual long-term care insurance after-tax
operating income increased $8.6 million to $15.9 million in 1997 from $7.3
million in 1996 primarily due to higher sales. Group long-term care insurance
after-tax operating income increased by $3.1 million primarily due to
favorable persistency.
Total revenues increased $114.2 million, or 4.5%, to $2,631.8 million in
1997 from $2,517.6 million in 1996. This increase was due primarily to
individual long-term care premiums, which increased $51.0 million, or 41.0%,
to $175.2 million. Universal life and investment-type product charges
increased $20.0 million, or 7.4%, from 1996, primarily due to a higher amount
of cost of insurance fees resulting from growth in the average amount of
variable life insurance in force, which increased 12.8% to $43,791.7 million
in 1997 from $38,827.6 million in 1996. Net investment income increased by
$36.3 million, or 3.8%, compared to 1996, primarily due to an increase in the
segment's invested assets.
Total benefits and expenses were $2,395.4 million in 1997, an increase of
$172.7 million, or 7.8%, from $2,222.7 million in 1996. Benefits to
policyholders were $1,399.1 million in 1997, an increase of $57.4 million, or
4.3%, from $1,341.7 million in 1996. This increase was due primarily to a
$36.6 million increase in benefits to policyholders on individual long-term
care insurance products due to increased sales, and higher benefits on non-
traditional life insurance products which increased $13.7 million, or 9.4%.
Benefits on non-traditional life insurance products increased primarily due to
a higher average total account balance on universal life insurance, which
increased 28.0% to $891.5 million in 1997 from $696.3 million for 1996,
resulting in increased interest credited. These increases were partially
offset by favorable mortality in traditional life insurance products. Other
operating costs and expenses were $375.7 million in 1997, an increase of $26.5
million, or 7.6%, from $349.2 million in 1996. The increase was primarily due
to increased commissions on non-traditional life insurance and individual
long-term care insurance products, due to higher sales, partially offset by
higher expense allowances received under reinsurance agreements resulting from
higher sales of the reinsured term life insurance products. Amortization of
deferred policy acquisition costs of $224.7 million in 1997 increased $64.0
million, or 39.8%, from $160.7 million for 1996 primarily due to higher
amortization expense recorded in 1997 that resulted from revised projections
of estimated gross profits based upon changes in estimated future expense
levels. Dividends to policyholders increased $24.8 million, or 6.7%, due
primarily to normal growth in dividends on traditional life insurance
products. The segment's effective tax rate was 33.1% in 1997 and 1996.
72
<PAGE>
Retail-Asset Gathering Segment
The following table presents certain summary financial data relating to the
Asset Gathering Segment for the periods indicated.
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended September 30, December 31,
-------------------- ------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues
Premiums............... $ 10.2 $ 17.6 $ 19.8 $ 55.0 $ 23.0
Investment-type product
charges............... 89.8 76.8 99.9 82.7 67.3
Net investment income.. 283.4 283.6 378.0 353.3 320.0
Investment management
revenues, commissions,
and other fees........ 403.8 387.8 516.8 412.4 310.4
Other revenue
(expense)............. 1.3 0.3 0.8 1.5 (0.6)
--------- --------- --------- --------- ---------
Total revenues....... 788.5 766.1 1,015.3 904.9 720.1
Benefits and expenses
Benefits to
policyholders......... 206.2 217.7 296.3 314.5 259.9
Other operating costs
and expenses.......... 387.9 370.9 504.9 416.2 339.2
Amortization of
deferred policy
acquisition costs..... 47.8 44.2 46.8 38.9 33.6
Dividends to
policyholders......... 0.1 0.1 0.1 0.1 0.1
--------- --------- --------- --------- ---------
Total benefits and
expenses............ 642.0 632.9 848.1 769.7 632.8
--------- --------- --------- --------- ---------
Pre-tax operating
income.................. 146.5 133.2 167.2 135.2 87.3
Income taxes............. 49.0 45.3 56.1 41.9 31.6
--------- --------- --------- --------- ---------
After-tax operating
income.................. 97.5 87.9 111.1 93.3 55.7
After-tax adjustments:
Realized investment
gains, net............ 3.5 9.4 12.0 4.4 1.4
Restructuring charges.. (4.5) -- -- -- --
Surplus tax............ (0.7) 0.2 0.3 0.3 (1.0)
--------- --------- --------- --------- ---------
Total after-tax
adjustments......... (1.7) 9.6 12.3 4.7 0.4
--------- --------- --------- --------- ---------
GAAP Reported:
Income before
extraordinary item and
cumulative effect of
accounting change..... 95.8 97.5 123.4 98.0 56.1
Extraordinary item-
demutualization
expenses, net of tax.. (7.6) (0.7) (1.8) -- --
Cumulative effect of
accounting change..... (9.6) -- -- -- --
--------- --------- --------- --------- ---------
Net income........... $ 78.6 $ 96.8 $ 121.6 $ 98.0 $ 56.1
========= ========= ========= ========= =========
Other Data:
After-tax operating
income
Annuity................ $ 57.2 $ 43.2 $ 53.2 $ 45.7 $ 32.5
Mutual funds........... 39.6 44.0 57.0 46.8 22.2
Other.................. 0.7 0.7 0.9 0.8 1.0
Annuity premiums and
deposits (1)
Fixed.................. $ 445.5 $ 293.6 $ 360.6 $ 692.6 $ 652.2
Variable............... 610.2 710.1 882.7 745.9 629.3
Mutual fund assets under
management, end of
period.................. $31,169.0 $32,224.0 $34,945.2 $31,402.0 $23,298.6
</TABLE>
73
<PAGE>
- --------
(1) Statutory data have been derived from the annual statements of John
Hancock Mutual Life Insurance Company and John Hancock Variable Life
Insurance Company, as filed with insurance regulatory authorities and
prepared in accordance with statutory accounting practices.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
After-tax operating income was $97.5 million for the nine months ended
September 30, 1999, an increase of $9.6 million, or 10.9%, from $87.9 million
for the nine months ended September 30, 1998. Annuity after-tax operating
income increased $14.0 million, or 32.4%, primarily due to an increase in
variable annuity product charges, resulting from higher average account
balances, and higher investment spread on fixed annuity products, primarily
resulting from a decline in the average interest credited rate. Mutual fund
after-tax operating income decreased $4.4 million, or 10.0%, primarily due to
lower advisory fees as a result of lower assets under management, partially
offset by a decline in operating expenses.
Total revenues increased $22.4 million, or 2.9%, to $788.5 million for the
nine months ended September 30, 1999 from $766.1 million for the nine months
ended September 30, 1998. Premiums decreased $7.4 million, or 42.0%, due to
lower sales of immediate fixed annuities with life contingencies. Investment-
type product charges increased $13.0 million, or 16.9%, due to growth in
average variable annuity separate account liabilities, which increased 24.8%
to $6,568.1 million for the nine months ended September 30, 1999 from $5,261.9
million for the nine months ended September 30, 1998. Mortality and expense
fees as a percentage of average account balances were 1.49% and 1.52% for the
nine months ended September 30, 1999 and 1998, respectively. Net investment
income decreased $0.2 million, primarily due to a decrease in the average
investment yield on invested assets backing fixed annuity products. The
average investment yield on invested assets backing fixed annuity products was
7.66% and 7.91% for the nine months ended September 30, 1999 and 1998,
respectively, reflecting lower market interest rates on new fixed income
investments. The decrease in the average investment yield was partially offset
by a higher level of invested assets backing fixed annuity products.
Investment management revenues, commissions, and other fees increased $16.0
million, or 4.1%, to $403.8 million for the nine months ended September 30,
1999 from $387.8 million for the nine months ended September 30, 1998. Average
mutual fund assets under management decreased $625.7 million, or 1.8%, to
$33,819.6 million for the nine months ended September 30, 1999 from $34,445.3
million for the nine months ended September 30, 1998, primarily due to net
redemptions of $2,103.0 compared to net sales of $3,025.0 million for the nine
months ended September 30, 1999 and 1998, respectively. Investment advisory
fees decreased $6.6 million, or 4.2%, to $152.0 million for the nine months
ended September 30, 1999 and were .60% and .62% of average mutual fund assets
under management for the nine months ended September 30, 1999 and 1998,
respectively. The decline in the investment advisory fee rate occurred
primarily because fixed income assets, which bear a lower advisory fee than
equity assets, increased as a percentage of total assets. Underwriting and
distribution fees increased $15.2 million, or 7.6%, to $214.3 million for the
nine months ended September 30, 1999, primarily due to our acquisition of the
Essex Corporation, a distributor of annuities and mutual funds through banks,
in January 1999. Shareholder service and other fees were $37.5 million for the
nine months ended September 30, 1999 compared to $30.1 million for the nine
months ended September 30, 1998, primarily reflecting an increase in the
average number of customer accounts.
Total benefits and expenses increased $9.1 million, or 1.4%, to $642.0
million for the nine months ended September 30, 1999 from $632.9 million for
the nine months ended September 30, 1998. Benefits to policyholders decreased
$11.5 million, or 5.3%, primarily due to a decrease in interest credited on
fixed annuity account balances which was $199.6 million for the nine months
ended September 30, 1999 compared to $207.0 million for the nine months ended
September 30, 1998. The decrease was primarily due to a decline in the average
interest credited rate on fixed annuity account balances to 5.53% for the nine
months ended September 30, 1999 from 5.93% for the nine months ended September
30, 1998. The decrease in the average interest
74
<PAGE>
credited rate was partially offset by higher average fixed annuity account
balances of $4,859.6 million, as compared to $4,702.0 million, for the nine
months ended September 30, 1999 and 1998, respectively. The average interest
credited rate pattern is dependent upon the general trend of market interest
rates, frequency of credited rate resets and business mix. Deferred fixed
annuities' interest credited rates generally are reset annually on the policy
anniversary. Other operating costs and expenses increased $17.0 million, or
4.6%, to $387.9 million for the nine months ended September 30, 1999 from
$370.9 million for the nine months ended September 30, 1998. The increase was
primarily due to our acquisition of the Essex Corporation and higher
amortization of mutual fund deferred selling commissions, resulting from
higher redemptions. These increases were partially offset by a decrease in
operating expenses related to our mutual fund operations. Amortization of
deferred policy acquisition costs increased $3.6 million, or 8.1%, to $47.8
million for the nine months ended September 30, 1999 from $44.2 million for
the nine months ended September 30, 1998, primarily due to higher profits. The
segment's effective tax rate was 33.4% and 34.0% for the nine months ended
September 30, 1999 and 1998, respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
After-tax operating income was $111.1 million in 1998, an increase of $17.8
million, or 19.1% from $93.3 million in 1997. Annuity after-tax operating
income increased $7.5 million, or 16.4%, primarily due to higher variable
annuity product charges resulting from higher sales and market appreciation on
account balances. This increase also was due to higher investment spread in
1998 primarily due to an increase in average invested assets backing fixed
annuity products. Mutual fund after-tax operating income increased $10.2
million, or 21.8%, to $57.0 million in 1998 from $46.8 million in 1997
primarily due to an increase in advisory and distribution fees as a result of
growth in assets under management due to net sales.
Total revenues increased $110.4 million, or 12.2%, to $1,015.3 million in
1998 from $904.9 million in 1997. Premiums decreased $35.2 million, or 64.0%,
due to decreased sales of immediate fixed annuities with life contingencies.
Premiums in 1997 include $44.8 million of sales of immediate fixed annuities
with life contingencies. Investment-type product charges were $99.9 million,
an increase of $17.2 million, or 20.8%, as compared to $82.7 million in 1997.
The increase was due to growth in average variable annuity separate account
liabilities, which were $5,736.0 million in 1998 compared to $4,450.0 million
in 1997, an increase of 28.9%. Variable annuity deposits grew 18.3% to $882.7
million in 1998 from $745.9 million in 1997. Mortality and expense fees as a
percentage of average account balances were 1.37% and 1.38% in 1998 and 1997,
respectively. Net investment income increased by $24.7 million, or 7.0%, in
1998 compared to 1997 as a result of a higher level of invested assets backing
fixed annuity products partially offset by a decrease in the average
investment yield on invested assets backing fixed annuity products. The
average investment yield on invested assets backing fixed annuity products was
7.91% in 1998, compared to 7.98% in 1997. This decrease reflects lower market
interest rates on new investments.
Investment management revenues, commissions, and other fees increased $104.4
million, or 25.3%, in 1998. Average mutual fund assets under management
increased to $34,230.0 million in 1998 from $27,009.2 million in 1997 due to
net sales of approximately $3,107.2 million in 1998, and market appreciation.
Investment advisory fees were $208.4 million in 1998 compared to $173.7
million in 1997, reflecting a higher level of average mutual fund assets under
management. Investment advisory fees were .62% and .64% of average mutual fund
assets under management in 1998 and 1997, respectively. The decline in the
investment advisory fee rate reflected an increase in institutional assets
under management of $1,120.7 million, or 24.5%, to $5,696.5 million from
$4,575.8 million in 1997. Institutional assets under management generally have
a lower advisory fee rate than retail assets under management. Underwriting
and distribution fees increased $64.1 million, or 31.6%, to $266.7 million in
1998 from $202.6 million in 1997, primarily due to higher asset levels of
mutual funds. Shareholder service and other fees were $41.7 million in 1998
compared to $36.2 million in 1997, reflecting an increase in the average
number of customer accounts.
Total benefits and expenses increased $78.4 million, or 10.2%, to $848.1
million in 1998 from $769.7 million in 1997, reflecting the growth in annuity
and mutual fund assets under management. Benefits to policyholders decreased
$18.2 million in 1998, primarily resulting from a $35.2 million decrease in
premiums of
75
<PAGE>
immediate fixed annuities with life contingencies. This decrease was partially
offset by an increase in interest credited on fixed annuity account balances
which was $278.7 million in 1998 compared to $263.7 million in 1997. The
increase was due to an increase in the average interest credited rate on fixed
annuity account balances which was 5.96% in 1998, compared to 5.90% in 1997,
and higher average fixed annuity account balances during 1998 of $4,673.2
million, as compared to $4,468.9 million during 1997. Other operating costs
and expenses were $504.9 million in 1998, an increase of $88.7 million, or
21.3%, from $416.2 million in 1997. The increase was primarily due to an
increase in compensation and related costs and administrative expenses
incurred to support sales and marketing of mutual fund products and higher
amortization of deferred selling commissions on mutual fund products. The
increase was partially offset by lower commissions on fixed annuity products
due to a decline in sales. Amortization of deferred policy acquisition costs
of $46.8 million for 1998 increased $7.9 million from $38.9 million in 1997
primarily due to higher profits. The segment's effective tax rate increased to
33.6% in 1998 from 31.0% in 1997, primarily due to a state tax benefit
provided to Massachusetts domiciled investment management companies in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
After-tax operating income was $93.3 million in 1997, an increase of $37.6
million, or 67.5%, from $55.7 million in 1996. Annuity after-tax operating
income increased $13.2 million primarily due to variable annuity product
charges resulting from higher sales and market appreciation. In addition,
investment spread increased in 1997 from 1996 due primarily to an increase in
average invested assets backing fixed annuity products. Mutual fund after-tax
operating income increased $24.6 million, or 110.8%, to $46.8 million in 1997
from $22.2 million in 1996 primarily due to an increase in advisory and
distribution fees as a result of growth in assets under management due to net
sales and market appreciation.
Total revenues increased $184.8 million, or 25.7%, to $904.9 million in 1997
from $720.1 million in 1996, principally the result of an increase in annuity
and mutual fund assets under management. Premiums increased $32.0 million, or
139.1%, due to higher sales of immediate fixed annuities with life
contingencies. Investment-type product charges were $82.7 million, an increase
of $15.4 million, or 22.9%, as compared to $67.3 million in 1996 due primarily
to growth in 1997 in variable annuity separate account liabilities. Average
variable annuity separate account liabilities were $4,450.0 million in 1997
compared to $3,481.9 million in 1996, an increase of 27.8%. Variable annuity
deposits grew 18.5% during 1997 compared to 1996. Mortality and expense fees
as a percentage of average variable annuity account balances were 1.38% and
1.35% in 1997 and 1996, respectively, reflecting minimal changes in the levels
of fees charged. Net investment income increased by $33.3 million, or 10.4%,
in 1997 compared to 1996 primarily as a result of the higher level of average
invested assets due to sales of fixed annuity products, partially offset by a
lower average investment yield on these assets of 7.98% in 1997, compared to
8.14% in 1996. The decrease reflects lower market interest rates on new
investments.
Investment management revenues, commissions, and other fees increased $102.0
million, or 32.9%, in 1997. Average mutual fund assets under management
increased to $27,009.2 million in 1997 from $20,824.5 million in 1996 due to
net sales of approximately $3,134.8 million in 1997, as well as strong market
appreciation. Investment advisory fees were $173.7 million in 1997 compared to
$132.2 million in 1996. The $41.5 million increase primarily reflects a higher
level of average mutual fund assets under management. Investment advisory fees
were .64% of average assets under management in 1997 and 1996. Underwriting
and distribution fees were $202.6 million in 1997 compared to $143.2 million
in 1996. The increase of $59.4 million reflects the higher asset levels of
mutual funds and increased sales. Shareholder service and other fees were
$36.2 million in 1997 compared to $35.1 million in 1996.
Total benefits and expenses increased $136.9 million, or 21.6%, to $769.7
million in 1997 from $632.8 million in 1996. Benefits to policyholders
increased $54.6 million, or 21.0%, in 1997, primarily resulting from a $32.0
million increase in premiums of immediate fixed annuities with life
contingencies. Interest credited on fixed annuity account balances was $263.7
million in 1997, an increase of $25.2 million, or 10.6%, from $238.5 million
in 1996. The increase was due to an increase in average fixed annuity account
balances of $528.4 million during 1997, to $4,468.9 million as compared to
$3,940.5 million during 1996. The average interest credited rate
76
<PAGE>
was 5.90% in 1997 compared to 6.05% in 1996. The decrease in the average
interest credited rate was primarily due to the general decline of market
interest rates. Other operating costs and expenses were $416.2 million in
1997, an increase of $77.0 million, or 22.7%, from $339.2 million in 1996. The
increase was primarily due to an increase in compensation and related costs
and administrative expenses incurred to support sales and marketing of mutual
fund products and higher amortization of deferred selling commissions on
mutual fund products. Amortization of deferred policy acquisition costs
increased $5.3 million to $38.9 million in 1997 primarily due to higher
profits. The segment's effective tax rate decreased to 31.0% in 1997 as
compared to 36.2% in 1996, primarily due to a state tax benefit provided to
Massachusetts domiciled investment management companies in 1997.
Institutional-Guaranteed and Structured Financial Products Segment
The following table presents certain summary financial data relating to the
Guaranteed and Structured Financial Products Segment for the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended September 30, December 31,
-------------------- ----------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues
Premiums................. $ 434.6 $ 83.4 $ 121.4 $ 201.0 $ 359.6
Investment-type product
charges................. 63.1 53.5 71.4 68.7 68.5
Net investment income.... 1,272.0 1,157.5 1,576.3 1,545.2 1,608.5
Realized investment
losses, net............. (20.7) (35.8) (37.7) (0.6) --
Other revenue (expense).. 1.2 0.2 (0.2) 0.1 (0.9)
--------- --------- -------- -------- --------
Total revenues......... 1,750.2 1,258.8 1,731.2 1,814.4 2,035.7
Benefits and expenses
Benefits to
policyholders........... 1,429.9 1,048.1 1,411.5 1,495.1 1,675.3
Other operating costs and
expenses................ 62.7 75.5 92.6 81.0 88.5
Amortization of deferred
policy acquisition
costs................... 2.1 2.8 3.7 5.2 5.7
Dividends to
policyholders........... 15.0 11.2 20.8 41.4 31.2
--------- --------- -------- -------- --------
Total benefits and
expenses.............. 1,509.7 1,137.6 1,528.6 1,622.7 1,800.7
--------- --------- -------- -------- --------
Pre-tax operating income... 240.5 121.2 202.6 191.7 235.0
Income taxes............... 74.7 19.4 56.9 53.2 79.6
--------- --------- -------- -------- --------
After-tax operating
income.................... 165.8 101.8 145.7 138.5 155.4
After-tax adjustments:
Realized investment
gains, net.............. 55.7 16.0 17.2 4.8 9.9
Surplus tax.............. (3.8) 1.5 2.0 5.5 (2.3)
Benefit from pension
participating contract
modification............ -- -- -- 9.1 --
--------- --------- -------- -------- --------
Total after-tax
adjustments........... 51.9 17.5 19.2 19.4 7.6
--------- --------- -------- -------- --------
GAAP Reported:
Income before
extraordinary item...... 217.7 119.3 164.9 157.9 163.0
Extraordinary item-
demutualization
expenses, net of tax.... (10.0) (0.6) (1.5) -- --
--------- --------- -------- -------- --------
Net income............. $ 207.7 $ 118.7 $ 163.4 $ 157.9 $ 163.0
========= ========= ======== ======== ========
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months
Ended For the Year Ended
September 30, December 31,
------------------- --------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Other Data:
After-tax operating income
Spread-based products
GICs and funding
agreements................. $ 110.6 $ 42.8 $ 83.7 $ 78.9 $ 104.2
Single premium annuities.... 25.3 24.3 33.8 24.1 24.9
Fee-based products............ 29.9 34.7 28.2 35.5 26.3
Statutory premiums and deposits
(1)
Spread-based products
GICs and funding
agreements................. $ 4,159.9 $ 3,382.6 $4,995.0 $2,643.7 $2,767.3
Single premium annuities.... 422.5 75.1 111.8 193.7 247.2
Fee-based products
Participating contracts and
conversion annuity
contracts.................. 430.8 433.4 566.7 703.8 716.4
Separate account GICs....... 474.1 421.5 459.9 456.0 563.5
Other separate account
contracts.................. 174.2 127.1 145.6 195.0 213.7
</TABLE>
- --------
(1) Statutory data have been derived from the annual statement of John Hancock
Mutual Life Insurance Company, as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting
practices.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
After-tax operating income was $165.8 million for the nine months ended
September 30, 1999, an increase of $64.0 million, or 62.9%, from $101.8
million for the nine months ended September 30, 1998. Spread-based products'
after-tax operating income increased $68.8 million, or 102.5%, primarily due
to higher investment spread as a result of an increase in average invested
assets backing spread-based products and the receipt of $14.7 million of
interest on a defaulted fixed maturity investment. Fee-based products' after-
tax income decreased $4.8 million, or 13.8%, primarily due to lower taxes on
capital gains credited to contractholders in 1999.
Total revenues increased $491.4 million, or 39.0%, to $1,750.2 million for
the nine months ended September 30, 1999 from $1,258.8 million for the nine
months ended September 30, 1998, primarily due to a $340.2 million increase in
premiums of single premium annuity contracts. During the second quarter of
1999, we sold one single premium annuity contract for $339.0 million.
Investment-type product charges increased $9.6 million, or 17.9%, primarily
due to higher sales of single premium annuity contracts and higher product
charges from separate account GICs due to higher average account balances
resulting from sales. Investment-type product charges were .69% and .58% of
average fee-based policy reserves for the nine months ended September 30, 1999
and 1998, respectively. The increase primarily reflects higher expense charges
on participating contracts and the recognition of fee income upon the sale of
single premium annuity contracts and separate accounts GICs. Net investment
income increased $114.5 million, or 9.9%, to $1,272.0 million for the nine
months ended September 30, 1999 from $1,157.5 million for the nine months
ended September 30, 1998, primarily as a result of a higher level of average
invested assets backing spread-based products. Average invested assets backing
spread-based products increased $2,050.8 million, or 13.6%, to $17,185.4
million for the nine months ended September 30, 1999. The average investment
yield on these invested assets was 8.22% for the nine months ended September
30, 1999, compared to 8.01% for the nine months ended September 30, 1998. The
increase in the average investment yield primarily resulted from the receipt
of $14.7 million of interest on a defaulted fixed maturity investment and
higher returns on investments in partnerships. Realized investment losses
decreased $15.1 million, or 42.2%, primarily due to a narrowing of interest
rate spreads in 1999, as compared to 1998, on mortgage-backed securities and
corporate bonds relative to U.S. Treasury securities, resulting in higher
prices upon the sale of the securities.
78
<PAGE>
Total benefits and expenses increased $372.1 million, or 32.7%, to $1,509.7
million for the nine months ended September 30, 1999 from $1,137.6 million for
the nine months ended September 30, 1998, primarily due to a $381.8 million
increase in benefits to policyholders as a result of increased sales of single
premium annuity contracts. Benefits to policyholders also includes interest
credited on account balances for spread-based products, which was $831.2
million for the nine months ended September 30, 1999, an increase of $42.5
million, or 5.4%, from $788.7 million for the nine months ended September 30,
1998. The increase in interest credited was primarily due to an increase in
average account balances for spread-based products, which increased 15.8%,
partially offset by a decline in the average interest credited rate on account
balances for spread-based products, which was 6.79% for the nine months ended
September 30, 1999 compared to 7.28% for the nine months ended September 30,
1998. The decline in the average interest credited rate on account balances
for spread-based products was due to sales of GICs and funding agreements with
lower average interest crediting rates. Other operating costs and expenses
decreased $12.8 million, or 17.0%, primarily due to lower guaranty fund
assessments. Dividends increased $3.8 million, or 33.9%, reflecting higher
earnings on participating contractholders' accounts. The segment's effective
tax rate increased to 31.1% for the nine months ended September 30, 1999 from
16.1% for the nine months ended September 30, 1998, primarily due to lower
taxes on capital gains credited to contractholders in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
After-tax operating income was $145.7 million in 1998, an increase of $7.2
million, or 5.2% from $138.5 million in 1997. Spread-based products' after-tax
operating income increased $14.5 million, or 14.1%, primarily due to a decline
in the average interest credited rate partially offset by deposit growth from
sales of funding agreements. Fee-based products' after-tax operating income
decreased $7.3 million to $28.2 million in 1998 from $35.5 million in 1997
primarily due to an increase in operating expenses while average fee-based
assets under management remained nearly level.
Total revenues decreased $83.2 million, or 4.6%, to $1,731.2 million in 1998
from $1,814.4 million in 1997, due primarily to a $79.6 million decrease in
premiums primarily resulting from lower sales of single premium annuity
contracts. Investment-type product charges were $71.4 million for 1998, an
increase of $2.7 million, or 3.9%, primarily reflecting higher amortization of
deferred profits on single premium group annuity and terminal funding annuity
contracts, and were .59% and .58% of average fee-based policy reserves in 1998
and 1997, respectively. Net investment income increased $31.1 million, or
2.0%, in 1998 compared to 1997, primarily as a result of a higher level of
average invested assets backing spread-based products, partially offset by a
decline in average investment yield on these invested assets. Average invested
assets backing spread-based products increased $325.1 million, or 2.2% to
$15,151.8 million in 1998 from $14,826.7 million in 1997. The average
investment yield on these invested assets was 8.18% in 1998 compared to 8.37%
in 1997. The decrease in the average investment yield was primarily due to
lower market interest rates during 1998. Realized investment losses were $37.7
million for 1998, an increase of $37.1 million from realized investment losses
of $0.6 million for 1997. The increase primarily resulted from a widening of
interest rate spreads on mortgage-backed securities and corporate bonds
relative to U.S. Treasury securities, resulting in lower prices upon the sale
of the securities.
Total benefits and expenses decreased $94.1 million, or 5.8%, to $1,528.6
million in 1998 from $1,622.7 million in 1997. The decrease was due primarily
to an $83.6 million decrease in benefits to policyholders primarily resulting
from lower sales of single premium annuity contracts. Interest credited on
account balances for spread-based products was $1,049.1 million in 1998, a
decrease of $29.7 million, or 2.8%, from $1,078.8 million in 1997. The
decrease was due largely to a decline in the average interest credited rate on
account balances for spread-based products, which was 7.21% in 1998 compared
to 7.50% in 1997. The decrease in the average interest credited rate was
primarily due to the general decline of market interest rates, resulting in
new GIC and funding agreement liabilities which have a lower average interest
credited rate. Other operating costs and expenses were $92.6 million in 1998,
an increase of $11.6 million, or 14.3%, from $81.0 million in 1997. The
increase was primarily due to higher guaranty fund assessments and continuing
investments in technology for administrative systems. Dividends of $20.8
million in 1998, decreased $20.6 million, or 49.8%, from $41.4
79
<PAGE>
million for 1997. Dividends in 1997 included $25.9 million resulting from
contract modifications and conversions. Excluding dividends on contract
modifications and conversions, dividends were $20.2 million for 1998 and $15.5
million in 1997. The increase in recurring dividends primarily resulted from
appreciation of equity securities. The segment's effective tax rate was 28.1%
in 1998, as compared to 27.8% in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
After-tax operating income was $138.5 million in 1997, a decrease of $16.9
million, or 10.9% from $155.4 million in 1996. Spread-based products' after-
tax operating income decreased $26.1 million, or 20.2%, primarily due to lower
investment spread due to a decline in the average investment yield being
greater than the decline in the average interest credited rate. Fee-based
products' after-tax operating income increased $9.2 million to $35.5 million
in 1997 from $26.3 million in 1996 primarily due to a decrease in operating
expenses resulting from a reduction of interest payable on prior year taxes.
Total revenues decreased $221.3 million, or 10.9%, to $1,814.4 million in
1997 from $2,035.7 million in 1996. The decrease was due primarily to a $158.6
million decrease in premiums as a result of a $94.9 million decline in sales
of conversion annuities and a $49.4 million decline in sales of single premium
annuity and terminal funding contracts. A conversion annuity is a
participating group annuity contract that has been converted to a non-
participating annuity. Such a decline in sales has little effect on earnings,
as the decreased premiums are offset by corresponding decreases in benefits to
policyholders. Investment-type product charges were $68.7 million for 1997, an
increase of $.2 million, or .3%, from $68.5 million for 1996. Net investment
income decreased $63.3 million, or 3.9%, in 1997 compared to 1996, primarily
the result of a decrease in the average investment yield on invested assets
backing spread-based products. The average investment yield on these invested
assets was 8.37% in 1997, as compared to 8.93% in 1996, reflecting the
reinvestment of proceeds from higher yielding fixed maturities into relatively
lower yielding securities. Average invested assets backing spread-based
products increased $262.6 million, or 1.8%, to $14,826.7 million in 1997 from
$14,564.1 million in 1996.
Total benefits and expenses decreased $178.0 million, or 9.9%, to $1,622.7
million in 1997 from $1,800.7 million in 1996. The decrease was due primarily
to a $180.2 million decrease in benefits to policyholders as a result of lower
sales of conversion annuities and single premium annuity contracts. Interest
credited on account balances for spread-based products was $1,078.8 million in
1997, a decrease of $7.3 million, or .7% from $1,086.1 million in 1996. The
decrease was primarily due to a decline in the average interest credited rate
on account balances for spread-based products which was 7.50% in 1997 compared
to 7.64% in 1996, reflecting the maturity of GIC liabilities with a higher
average interest credited rate than new GIC and funding agreement liabilities
issued in 1997. Other operating costs decreased $7.5 million, or 8.5%, to
$81.0 million in 1997, from $88.5 million in 1996 primarily due to a reduction
of interest payable on prior year taxes. Dividends increased $10.2 million, or
32.7%, for 1997 primarily as a result of contract conversions and
modifications. Excluding dividends on contract conversions and modifications,
dividends to policyholders were $15.5 million for 1997, and $17.9 million for
1996, reflecting the lower level of average invested assets for participating
contracts. The segment's effective tax rate was 27.8% in 1997, as compared to
33.9% in 1996. The decline in the effective tax rate was primarily due to
higher affordable housing tax credits and higher foreign tax credits in 1997.
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Institutional-Investment Management Segment
The following table presents certain summary financial data relating to the
Investment Management Segment for the periods indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended For the Year Ended
September 30, December 31,
-------------------------- -------------------------------
1999 1998 1998 1997 1996
------------ ------------ --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues
Net investment
income............... $ 33.3 $ 13.5 $ 24.1 $ 4.0 $ 3.4
Realized investment
gains (losses), net.. 3.3 (13.4) (4.4) (4.0) --
Investment management
revenues,
commissions, and
other fees........... 104.9 84.5 123.8 118.3 109.4
Other revenue......... 0.2 0.7 0.4 0.2 0.6
------------ ------------ --------- --------- ---------
Total revenues...... 141.7 85.3 143.9 118.5 113.4
Benefits and expenses
Operating expenses.... 95.8 75.0 117.8 88.4 76.3
------------ ------------ --------- --------- ---------
Total benefits and
expenses........... 95.8 75.0 117.8 88.4 76.3
------------ ------------ --------- --------- ---------
Pre-tax operating
income................. 45.9 10.3 26.1 30.1 37.1
Income taxes............ 18.3 3.9 10.7 12.9 15.5
------------ ------------ --------- --------- ---------
After-tax operating
income................. 27.6 6.4 15.4 17.2 21.6
After-tax adjustments:
Realized investment
gains, net........... 0.1 -- 0.1 0.1 0.1
------------ ------------ --------- --------- ---------
GAAP Reported:
Income before
cumulative effect of
accounting change.... 27.7 6.4 15.5 17.3 21.7
Cumulative effect of
accounting change.... (0.1) -- -- -- --
------------ ------------ --------- --------- ---------
Net income.............. $ 27.6 $ 6.4 $ 15.5 $ 17.3 $ 21.7
============ ============ ========= ========= =========
Other Data:
Assets under management,
end of period (1)...... $ 39,706.6 $ 34,267.6 $39,637.7 $34,361.5 $32,884.5
</TABLE>
- --------
(1) Includes general account cash and invested assets of $180.3 million and
$67.5 million as of September 30, 1999 and 1998, respectively, and $88.1
million, $66.0 million, and $54.5 million as of December 31, 1998, 1997,
and 1996, respectively.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
After-tax operating income was $27.6 million for the nine months ended
September 30, 1999, an increase of $21.2 million, or 331.3%, from $6.4 million
for the nine months ended September 30, 1998. The increase was primarily due
to higher investment advisory fees resulting from an increase in average
assets under management and higher realized investment gains on sales of
mortgage loans.
Total revenues increased $56.4 million, or 66.1%, to $141.7 million for the
nine months ended September 30, 1999 from $85.3 million for the nine months
ended September 30, 1998. Net investment income increased $19.8 million, or
146.7%, resulting from a higher level of average invested assets due to the
formation of a collateralized bond obligation in 1998. Investment management
revenues, commissions, and other fees increased $20.4 million, or 24.1%, to
$104.9 million for the nine months ended September 30, 1999 from $84.5 million
for the nine months ended September 30, 1998, primarily due to an increase in
investment advisory fees, which
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<PAGE>
increased $21.1 million, or 26.9%, to $99.5 million. The increase in
investment advisory fees was primarily due to a higher level of average assets
under management, which increased $5,029.8 million, or 14.0%, to $40,881.4
million for the nine months ended September 30, 1999. Investment advisory fees
were .32% and .29% of average advisory assets under management for the nine
months ended September 30, 1999 and 1998, respectively. This increase
primarily reflects the receipt of a fee in connection with the termination of
a timber management contract. Mortgage origination and servicing fees were
$5.4 million and $6.1 million for the nine months ended September 30, 1999 and
1998, respectively. Realized investment gains increased $16.7 million, or
124.6%, to $3.3 million for the nine months ended September 30, 1999 primarily
due to a narrowing of interest rate spreads in 1999, as compared to 1998, on
mortgage loans held for sale.
Operating expenses were $95.8 million for the nine months ended September
30, 1999, an increase of $20.8 million, or 27.7%, from $75.0 million for the
nine months ended September 30, 1998. The increase was primarily due to an
increase in interest expense and other expenses in connection with the
collateralized bond obligation. Operating expenses were .22% of average
advisory assets under management for the nine months ended September 30, 1999
and 1998. The segment's effective tax rate increased to 39.9% for the nine
months ended September 30, 1999 from 37.9% for the nine months ended September
30, 1998, primarily due to non-deductible losses in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
After-tax operating income was $15.4 million in 1998, a decrease of $1.8
million, or 10.5%, from $17.2 million in 1997 primarily due to higher
investment advisory fees earned on timber assets under management in 1997
resulting from strong market appreciation, partially offset by higher
operating expenses resulting from the formation of a collateralized bond
obligation in 1998.
Total revenues increased $25.4 million, or 21.4%, to $143.9 million in 1998
from $118.5 million in 1997. Net investment income was $24.1 million in 1998,
an increase of $20.1 million from $4.0 million for 1997. The increase in net
investment income was due to an increase in the average loans held for sale
and a higher level of average invested assets due to the formation of a
collateralized bond obligation. Average loans held for sale in 1998 were
$106.2 million, compared to $20.7 million in 1997. Investment management
revenues, commissions, and other fees increased $5.5 million, or 4.6%, in
1998. Average advisory assets under management increased $2,225.7 million, or
6.6%, to $35,730.2 million in 1998 from $33,504.5 million in 1997, primarily
due to market appreciation in 1998. Investment advisory fees were $115.3
million in 1998 compared to $111.0 million in 1997 primarily due to a higher
level of average advisory assets under management. Investment advisory fees
were .32% and .33% of average advisory assets under management in 1998 and
1997, respectively. Mortgage origination and servicing fees were $8.5 million
in 1998 compared to $7.3 million in 1997. Realized investment losses were $4.4
million in 1998 compared to $4.0 million in 1997. The increase primarily
resulted from a widening of interest rate spreads on mortgage loans held for
sale, partially offset by gains on loan sales.
Operating expenses were $117.8 million in 1998, an increase of $29.4
million, or 33.3%, from $88.4 million in 1997. The increase was due primarily
to $13.9 million of interest and other expenses in connection with the
collateralized bond obligation. In addition, operating expenses increased $5.8
million due to financing an increased average balance of loans held for sale.
Operating expenses were .24% and .23% of average advisory assets under
management in 1998 and 1997, respectively. The segment's effective tax rate
declined to 41.0% in 1998 from 42.9% in 1997 primarily due to lower state tax
payments in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
After-tax operating income was $17.2 million in 1997, a decrease of $4.4
million from $21.6 million, or 20.4%, in 1996 primarily due to realized
investment losses of $4.0 million on short sale transactions resulting from a
decline in U.S. Treasury rates. Investment advisory fees increased as a result
of higher assets under management. The increase was partially offset by higher
operating expenses resulting from higher compensation and related costs due to
expanded operations.
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<PAGE>
Total revenues increased $5.1 million, or 4.5%, to $118.5 million in 1997
from $113.4 million in 1997. Net investment income was $4.0 million in 1997
compared to $3.4 million for 1996. Investment management revenues,
commissions, and other fees increased $8.9 million, or 8.1%, in 1997. Average
advisory assets under management increased $4,645.5 million, or 16.1%, to
$33,504.5 million in 1997 from $28,859.0 million in 1996 primarily due to
market appreciation in 1997. Investment advisory fees were $111.0 million in
1997 compared to $101.0 million in 1996, primarily reflecting a higher level
of average assets under management. Investment advisory fees were .33% and
.35% of average advisory assets under management in 1997 and 1996,
respectively. Mortgage origination and servicing fees were $7.3 million in
1997 compared to $8.4 million in 1996. Realized investment losses were $4.0
million in 1997, due to losses from a decline in U.S. Treasury rates.
Operating expenses were $88.4 million in 1997, an increase of $12.1 million,
or 15.8%, from $76.3 million in 1996. The increase was primarily due to
increased compensation and related costs which resulted from expanded
operations. The segment's effective tax rate increased to 42.9% in 1997 from
41.8% in 1996 primarily due to lower state tax payments in 1997.
Corporate and Other Segment
The following table presents certain summary financial data relating to the
Corporate and Other Segment for the periods indicated.
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
September 30, December 31,
-------------- ------------------------
1999 1998 1998 1997 1996
------- ----- ------- ------- ------
(in millions)
<S> <C> <C> <C> <C> <C>
Operating Results:
After-tax operating income (loss)
International insurance
operations........................ $ 17.8 $18.2 $ 25.3 $ 8.3 $ 8.8
Corporate operations............... 19.6 0.7 8.7 (32.0) (18.2)
Non-core businesses................ 7.7 12.9 22.3 63.1 29.6
------- ----- ------- ------- ------
Total............................ 45.1 31.8 56.3 39.4 20.2
After-tax adjustments:
Realized investment (losses) gains,
net............................... (10.3) 12.1 15.4 42.1 36.4
Class action lawsuit............... (91.1) -- (150.0) (112.5) (90.0)
Surplus tax........................ (5.1) 1.1 1.5 12.6 (11.3)
------- ----- ------- ------- ------
Total after-tax adjustments...... (106.5) 13.2 (133.1) (57.8) (64.9)
------- ----- ------- ------- ------
GAAP Reported:
(Loss) income before extraordinary
item.............................. (61.4) 45.0 (76.8) (18.4) (44.7)
Extraordinary item--demutualization
expenses, net of tax.............. (2.3) (0.2) (0.5) -- --
------- ----- ------- ------- ------
Net (loss) income.................... $ (63.7) $44.8 $ (77.3) $ (18.4) $(44.7)
======= ===== ======= ======= ======
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
After-tax operating income from international insurance operations was $17.8
million for the nine months ended September 30, 1999, a decrease of $0.4
million, or 2.2%, from $18.2 million for the nine months ended September 30,
1998. The decrease was primarily due to an increase in benefits to
policyholders in our Canadian operations resulting from unfavorable group
claims experience, partially offset by an increase in segregated fund product
charges, due to continued growth in our Canadian operations' assets under
management.
After-tax operating income from corporate operations was $19.6 million for
the nine months ended September 30, 1999, an increase of $18.9 million from
$0.7 million for the nine months ended September 30, 1998. The increase
primarily resulted from higher net investment income due to a higher level of
corporate purpose assets and an increase in group life insurance after-tax
operating income resulting from favorable mortality experience.
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<PAGE>
After-tax operating income from non-core businesses was $7.7 million for the
nine months ended September 30, 1999, a decrease of $5.2 million, or 40.3%,
from $12.9 million for the nine months ended September 30, 1998. The decrease
was primarily due to lower net investment income resulting from a decrease in
average invested assets due to the previously described disposals.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 and
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
After-tax operating income from international insurance operations was $25.3
million for 1998, an increase of $17.0 million from $8.3 million for 1997. The
increase in after-tax operating income primarily resulted from continued
growth in our Canadian operations' segregated assets, which resulted in higher
product charges, which increased $20.5 million, or 29.3%, from 1997. The
increase was primarily due to growth in segregated assets under management
which were $1,988.1 million in 1998, an increase of 30.4% from $1,524.9
million in 1997. After-tax operating income from international insurance
operations was $8.3 million for 1997, a decrease of $.5 million from $8.8
million for 1996.
After-tax operating income from corporate operations was $8.7 million in
1998, an increase of $40.7 million from after-tax operating loss of $32.0
million in 1997. The increase primarily resulted from higher net investment
income of $32.9 million on corporate assets. Unallocated corporate overhead
and expenses associated with the disposed businesses declined $8.0 million
during 1998. After-tax operating loss from corporate operations was $32.0
million in 1997 compared to $18.2 million in 1996. The increase in loss was
due to higher net investment income on intercompany assets backing
participating group annuity contracts. Because income associated with these
assets is eliminated within corporate operations during consolidation, higher
net investment income from these assets results in a higher recorded loss in
this segment.
After-tax operating income from non-core businesses was $22.3 million in
1998, a decrease of $40.8 million from $63.1 million in 1997. The decrease was
due primarily to the development of tax planning strategies to use $51.0
million of net loss carryforwards in 1997. After-tax operating income from
non-core businesses was $63.1 million in 1997, an increase of $33.5 million
from 1996. The increase was due to the previously described use of net loss
carryforwards and disposals.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. Historically, our
principal cash flow sources have been premiums, deposits and charges on
policies and contracts, investment income, maturing investments, and proceeds
from sales of investment assets. In addition to the need for cash flow to meet
operating expenses, our liquidity requirements relate principally to the
liabilities associated with our various life insurance, annuity, and
structured investment products, and to the funding of investments in new
products, processes, and technologies. Our product liabilities include the
payment of benefits under life insurance, annuity and structured investment
products and the payment of policy surrenders, withdrawals and policy loans.
After the effective date of the reorganization, John Hancock Financial
Services, Inc. will be an insurance holding company. The assets of John
Hancock Financial Services Inc. will initially consist of the outstanding
capital stock of John Hancock Life Insurance Company and a portion of the net
proceeds of the offering. We expect that the amount of net proceeds to be
retained by John Hancock Financial Services, Inc. will be $200.0 million.
However, provisions of our Plan of Reorganization may serve to reduce the
amount retained to an amount less than $200.0 million, unless specific
approval is received from the Massachusetts Commissioner of Insurance. Our
sources of cash will be dividends from our subsidiaries and investment returns
on the invested net proceeds of the offering retained by us. State insurance
laws generally restrict the ability of insurance companies to pay cash
dividends in excess of prescribed limitations without prior approval. The
ability of John Hancock Life Insurance Company, our primary operating
subsidiary, to pay shareholder dividends is and will continue to be subject to
restrictions set forth in the insurance laws and regulations of Massachusetts,
its
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<PAGE>
domiciliary state. The Massachusetts insurance law limits how and when John
Hancock Life Insurance Company can pay shareholder dividends. After giving
effect to the reorganization, John Hancock Life Insurance Company would be
able to pay approximately $607.1 million in dividends in 1999 based on 1998
statutory results without being subject to the restrictions on payment of
extraordinary dividends contained in the Massachusetts Insurance Law.
Following the reorganization, John Hancock Life Insurance Company may be
commercially domiciled in New York. If so, dividend payments may also be
subject to New York's insurance holding company act as well as Massachusetts
law. We currently do not expect such regulatory requirements to impair our
ability to meet our liquidity and capital needs. However, we can give no
assurance that we will declare or pay dividends. See "Stockholder Dividend
Policy."
We maintain investment programs generally intended to provide adequate funds
to pay benefits without forced sales of investments. Products having
liabilities with longer lives, such as life insurance and certain pension
products, are matched with assets having similar estimated lives such as
mortgage loans, long-term bonds, and private placement bonds. Shorter-term
liabilities are matched with investments such as short and medium-term fixed
maturities. In addition, highly liquid, high quality short-term U.S. Treasury
securities and other liquid investment grade fixed maturities are held to fund
normal operating expenses, surrenders, withdrawals and development and
maintenance expenses associated with new products and technologies.
As more fully discussed under "Business--General Account Investments," the
liquidity of our insurance operations is also related to the overall quality
of our investments. As of September 30, 1999, $26,551.8 million, or 87.2%, of
our fixed maturity securities were rated investment grade by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") or the
National Association of Insurance Commissioners (BBB or higher by S&P or 1 or
2 by the National Association of Insurance Commissioners). The remaining
$3,897.0 million of fixed maturity investments were rated non-investment
grade.
We employ an asset/liability management approach tailored to the specific
requirements of each of our product lines. Each product line has an investment
strategy based on the specific characteristics of the liabilities in the
product line. As part of this approach, we develop investment policies and
operating guidelines for each portfolio based upon the return objectives, risk
tolerance, liquidity, and tax and regulatory requirements of the underlying
products and business segments.
During 1999, we began to classify new purchases of fixed maturity securities
and equity securities that support our multi-manager funding agreement
product, a funding agreement with a variable rate that is periodically reset,
as trading securities. Changes in the fair value of these securities are
recognized in income. At September 30, 1999, our portfolio of trading
securities supporting our multi-manager product was $477.1 million.
Net cash provided by operating activities was $827.8 million and $750.3
million for the nine months ended September 30, 1999 and 1998, respectively.
Net cash provided by operating activities was $1,328.9 million, $1,438.3
million, and $1,892.7 million for the years ended December 31, 1998, 1997 and
1996, respectively. The increase in the nine months ended September 30, 1999
resulted primarily from a decrease in benefits paid to policyholders,
partially offset by an increase in purchases of trading securities. The
decrease in 1998 resulted primarily from an increase in benefits paid to
policyholders in 1998 as compared to 1997. The decrease in 1997 as compared to
1996 was due primarily to lower premiums collected, partially offset by lower
benefits paid to policyholders and lower operating expenses in 1997 as
compared to 1996.
Net cash used in investing activities was $2,710.0 million and $1,689.0
million for the nine months ended September 30, 1999 and 1998, respectively.
Net cash used in investing activities was $1,339.1 million, $1,295.3 million
and $1,183.3 million for the years ended December 31, 1998, 1997, and 1996,
respectively. The increase in net cash used in the nine months ended September
30, 1999 resulted primarily from a decrease in sales of fixed maturities,
partially offset by an increase in sales of real estate. In 1998 and 1997, the
increase in net cash used resulted primarily from an increase in purchases of
fixed maturities, partially offset by fixed maturity securities maturing or
being sold.
Net cash provided by financing activities was $1,071.7 million and $969.7
million for the nine months ended September 30, 1999 and 1998, respectively.
Net cash provided by (used in) financing activities was $850.0 million,
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<PAGE>
($792.4) million and $40.6 million, for the years ended December 31, 1998,
1997 and 1996, respectively. The increase in the nine months ended September
30, 1999 resulted primarily from cash received from deposits on universal life
insurance and investment-type contracts which exceeded cash payments made on
withdrawals of such contracts by $1,212.5 million, partially offset by a
decrease in commercial paper borrowings. The increase in 1998 resulted
primarily from cash received from deposits on universal life insurance and
investment-type contracts which exceeded cash payments made on withdrawals of
such contracts by $1,010.7 million. The decrease in 1997 primarily resulted
from cash payments made on withdrawals from investment-type contracts that
exceeded cash received from deposits on such contracts by $668.9 million.
Cash flow requirements also are supported by committed lines of credit
totaling $1,000.0 million, $500.0 million of which expires on July 29, 2000
and $500.0 million of which expires June 30, 2001. The lines of credit are
available for general liquidity needs, capital expansion, and acquisitions.
The lines of credit contain covenants that, among other provisions, require
maintenance of certain levels of policyholders' equity. To date, we have not
borrowed any amounts under the lines of credit.
As of September 30, 1999, we had $891.4 million of debt outstanding
consisting of $277.4 million of commercial paper borrowings, $447.0 million of
surplus notes, and $167.0 million of other notes payable.
A primary liquidity concern with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal. We
closely evaluate and manage this risk. The following table summarizes our
annuity policy reserves and deposit fund liabilities for the contractholder's
ability to withdraw funds for the indicated periods:
<TABLE>
<CAPTION>
As of
September 30, As of December 31,
--------------- --------------------------------
1999 1998 1997
--------------- --------------- ---------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Not subject to discretionary
withdrawal provisions...... $16,546.8 62.2% $15,383.4 62.4% $14,670.1 62.6%
Subject to discretionary
withdrawal adjustment:
With market value
adjustment............... 1,262.1 4.8 792.9 3.2 1,215.6 5.2
At contract value......... 4,025.1 15.1 4,010.7 16.3 3,693.6 15.8
Subject to discretionary
withdrawal at contract
value less surrender
charge..................... 4,759.9 17.9 4,462.8 18.1 3,851.7 16.4
--------- ----- --------- ----- --------- -----
Total annuity reserves and
deposit funds liability.... $26,593.9 100.0% $24,649.8 100.0% $23,431.0 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
Individual life insurance policies are less susceptible to withdrawal than
are annuity contracts because policyholders may incur surrender charges and
undergo a new underwriting process in order to obtain a new insurance policy.
As indicated in the table above, there is a substantial percentage of annuity
reserves and deposit fund liabilities that are not subject to withdrawal. As a
matter of policy, we seek to include provisions limiting withdrawal rights
from general account institutional structured investment products. These
include GICs and funding agreements sold to plan sponsors where the contract
prohibits the contractholder from making withdrawals other than on a scheduled
maturity date.
Individual life insurance policies (other than term life insurance policies)
increase in cash values over their lives. Policyholders have the right to
borrow from us an amount generally up to the cash value of their policy at any
time. As of September 30, 1999, we had approximately $16.5 billion in cash
values in which policyholders have rights to policy loans. The majority of
cash values eligible for policy loans are at variable interest rates which are
reset annually on the policy anniversary. Moreover, a portion of our fixed
interest rate policy loans have features that provide for reduced crediting
rates on the portion of cash values loaned. The amount of policy loans has
remained consistent over the past three years, at approximately $1.9 billion.
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<PAGE>
The risk-based capital standards for life insurance companies, as prescribed
by the National Association of Insurance Commissioners, establish a risk-based
capital ratio comparing adjusted surplus to required surplus for each of our
United States domiciled insurance subsidiaries. If the risk-based capital
ratio falls outside of acceptable ranges, regulatory action may be taken
ranging from increased information requirements to mandatory control by the
domiciliary insurance department. The risk-based capital ratios of all our
insurance subsidiaries as of December 31, 1998, were above the ranges that
would require regulatory action.
We maintain reinsurance programs designed to protect against large or
unusual losses. Based on our review of our reinsurers' financial statements
and reputations in the reinsurance marketplace, we believe that our reinsurers
are financially sound, and, therefore, that we have no significant exposure to
uncollectable reinsurance. See "Business--Protection Segment--Reinsurance" See
"Risk Factors--We face risks from assumed reinsurance business in respect of
personal accident insurance and the occupational accident component of workers
compensation insurance" for a discussion of potential exposures to
unrecoverable reinsurance.
Given the historical cash flow of our subsidiaries and current financial
results, management believes that the cash flow from the operating activities
over the next year will provide sufficient liquidity for our operations, as
well as to satisfy debt service obligations and to pay other operating
expenses. Although we anticipate that we will be able to meet our cash
requirements, we can give no assurances in this regard.
Year 2000
We have deployed and are executing a plan to address the impact of the Year
2000 issues that result from computer programs being written using two digits
to reflect the year rather than four to define the applicable year and
century. Historically, the first two digits were hardcoded to save memory.
Many of our computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in an information technology ("IT") system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions or send invoices, cause settlements of
trades to fail, lead to incomplete or inaccurate accounting, recording or
processing trades in securities, or engage in similar normal business
activities. In addition, non-IT systems including, but not limited to,
security alarms, elevators and telephones are subject to malfunction due to
their dependence on embedded technology such as microcontrollers for proper
operation. As described, the Year 2000 issue presents a number of challenges
for financial institutions since the correction of Year 2000 issues in IT and
non-IT systems will be complex and costly for the entire industry.
We began to address Year 2000 issues as early as 1994. Our plan to address
Year 2000 included an awareness campaign, an assessment period, a renovation
stage, validation work and an implementation of solutions.
The continuous awareness campaign serves several purposes: defining the
problem, gaining executive level support and sponsorship, establishing a team
and overall strategy, and assessing existing information system management
resources. Additionally, the awareness campaign establishes an education
process to ensure that all employees are aware of the Year 2000 issue and
knowledgeable of their role in securing solutions.
The assessment phase, which was completed for both IT and non-IT systems as
of April 1998, included the identification, inventory, analysis, and
prioritization of IT and non-IT systems and processes to determine their
conversion or replacement. Those systems which in the event of a Year 2000
failure would have the greatest impact on our operations were deemed to be
mission critical and prioritized accordingly. The systems which in the event
of a Year 2000 failure would cause minimal disruption to our operations were
classified as non-mission critical.
The renovation stage reflects the conversion, validation, replacement, or
elimination of selected platforms, applications, databases and utilities,
including the modification of applicable interfaces. Additionally, the
renovation stage includes performance, functionality, and regression testing
and implementation. The renovation phase for mission critical and non-mission
critical systems has been completed.
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<PAGE>
The validation phase consists of the compliance testing of renovated
systems. The validation phase for mission critical and non-mission critical
systems has been completed. We will use our testing facilities through the
remainder of 1999 to perform special functional testing. Special functional
testing includes testing, as required, with material third parties and
industry groups and performing reviews of "dry runs" of year-end activities.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities,
interfaces, and contingency planning. All mission critical systems and non-
mission critical systems have been implemented.
We face the risk that one or more of our business partners or customers with
whom we have a material relationship will not be able to interact with our
systems due to third party's failures to resolve its own Year 2000 issues,
including those associated with its own external relationships. We have
completed an inventory of third party relationships and prioritized each third
party relationship based upon the potential business impact, available
alternatives and cost of substitution. In the case of mission-critical
business partners such as banks, financial intermediaries such as stock
exchanges, mutual fund companies and recordkeepers, IT vendors,
telecommunications providers and other utilities, financial market data
providers, trading counterparties, depositories, clearing agencies and
clearing houses, we engaged in discussions with these third parties and have
obtained detailed information as to those parties' Year 2000 plans and state
of readiness. Scheduled testing of our material relationships with third
parties is completed. We will continue to test with other business partners
through the year-end, where appropriate. However, there is no guarantee that
the systems of other companies, upon which our systems rely, will be timely
converted or that a failure to convert by another company, or a conversion
that is incompatible with our systems, would not have a material adverse
effect on us.
The costs of the Year 2000 project consist of internal IT personnel and
external costs such as consultants, programmers, replacement software, and
hardware. The costs of the Year 2000 project are expensed as incurred. The
project is funded partially through a reallocation of resources from
discretionary projects. Through September 30, 1999, we have incurred and
expensed approximately $19.5 million in related payroll costs for internal IT
personnel on the project. The estimated range of remaining internal IT
personnel costs of the project is approximately $1.1 to $2.3 million. Through
September 30, 1999, we have incurred and expensed approximately $44.3 million
in external costs for the project. The estimated range of remaining external
costs of the project is approximately $4.0 to $6.1 million. The total costs of
the Year 2000 project, based on management's best estimates, include
approximately $21.8 million in internal IT personnel, $14.5 million in the
external modification of software, $19.7 million for external solution
providers, $9.3 million in replacement costs of non-compliant IT systems and
$6.9 million in oversight, test facilities and other expenses. Accordingly,
the estimated range of total costs of the Year 2000 project, internal and
external, is approximately $70 to $75 million. However, there can be no
guarantee that these estimates will be achieved and actual results could
materially differ from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, and similar uncertainties surrounding
the actual impact of the change to the year 2000. Our total Year 2000 project
costs include the estimated impact of external solution providers based on
presently available information.
It is documented in trade publications that the Year 2000 issue in foreign
countries is not being as actively addressed as in the United States.
Accordingly, it is expected that our facilities based outside the United
States face higher degrees of Year 2000 related risks. In addition, we have
thousands of individual and business customers that hold our insurance
policies, annuities and other financial products. Nearly all products sold by
us contain date sensitive data, examples of which are policy expiration dates,
birth dates and premium payment dates. Finally, the regulated nature of our
industry exposes us to potential supervisory or enforcement actions relating
to Year 2000 issues.
If our Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process claims, update customers' accounts, process financial transactions,
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bill customers, assess exposure to risks, determine liquidity requirements or
report accurate data to management, customers, regulators and others, as well
as business interruptions or shutdowns, including, in the case of third party
financial intermediaries such as stock exchanges and clearing agents, failed
trade settlements, inability to trade in certain markets and disruption of
funding flows; financial losses; reputational harm; increased scrutiny by
regulators; and litigation related to Year 2000 issues. We are attempting to
limit the potential impact of Year 2000 issues by monitoring the progress of
our own Year 2000 project and those of our material business partners and by
developing contingency plans. However, we cannot guarantee that we will be
able to resolve all of our Year 2000 issues. Any critical unresolved Year 2000
issues, however, could have a material adverse effect on our results of
operations, liquidity or financial condition.
Our contingency planning initiative related to the Year 2000 project is well
underway. The contingency plans address our readiness as well as that of
material business partners on whom we depend. Our contingency plans have been
designed to keep each business unit's operations functioning in the event of a
failure or delay due to the Year 2000 record format and date calculation
changes. Contingency plans were constructed based on the foundation of
extensive business resumption plans that we have maintained and updated
periodically, which outline responses to situations that may affect critical
business functions. These plans also provide emergency operations guidance,
which defines a documented order of actions to respond to problems. These
extensive business resumption plans have been enhanced to cover Year 2000
situations. Contingency planning also includes specific plans, staffing and
timelines to carry out proactive assessments and monitoring of equipment and
systems on the actual date rollover to the year 2000. Our millennium rollover
plans have been drafted and will continue to be updated through year-end.
Quantitative and Qualitative Information About Market Risk
Market Risk Exposures and Risk Management
Market risk is the risk that we will incur losses due to adverse changes in
market rates and prices. Our primary market risk exposures are to changes in
interest rates, although we have certain exposures to changes in equity prices
and foreign currency exchange rates.
The active management of market risk is integral to our operations. We may
use the following approaches to manage our exposure to market risk within
defined tolerance ranges: (1) rebalance our existing asset or liability
portfolios; (2) change the character of future investments purchased; or (3)
use derivative instruments to modify the market risk characteristics of
existing assets or liabilities or assets expected to be purchased.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. This risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets and
also have interest sensitive liabilities, primarily in our Protection, Asset
Gathering, and Guaranteed and Structured Financial Products Segments.
We seek to earn returns on investments that enhance our ability to offer
competitive rates and prices to customers while contributing to attractive and
stable profits and long-term capital growth. Accordingly, our investment
decisions and objectives are a function of the underlying risks and product
profiles of each primary business operation. In addition, we diversify our
product portfolio offerings to include products that contain features that
will protect us against fluctuations in interest rates. Those features include
adjustable crediting rates, policy surrender charges, and market value
adjustments on liquidations.
We manage the interest rate risk inherent in our assets relative to the
interest rate risk inherent in our liabilities. One of the measures we use to
quantify this exposure is duration. Duration measures the sensitivity of the
fair value of assets and liabilities to changes in interest rates. For
example, if interest rates increase by
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100 basis points, the fair value of an asset with a duration of 5 years is
expected to decrease in value by approximately 5%. As of September 30, 1999,
the difference between the pre-tax asset and liability durations on our
duration managed portfolio, was (0.2) years. This negative duration gap
indicates that the fair value of our assets is somewhat less sensitive to
interest rate movements than the fair value of our liabilities as of this
date. We manage this duration gap as closely as is possible to 0 years.
To calculate duration, we project asset and liability cash flows, and
discount them to a net present value basis using a risk-free market rate
adjusted for credit quality, liquidity, and other specific risks. Duration is
calculated by revaluing these cash flows at an alternative level of interest
rates, and determining the percentage change in fair value from the base case.
Based upon the information and assumptions we use in our duration
calculation and in effect as of September 30, 1999, we estimate that a 100
basis point immediate, parallel increase in interest rates ("rate shock")
would decrease the net fair value of our duration managed assets and
liabilities by approximately $16.3 million.
For other products, such as whole life insurance, term life insurance, and
single premium deferred annuities, the liability cash flow is less
predictable, and a duration-matching strategy is less reliable and manageable.
For these products, we manage interest rate risk based on a modeling process
which considers the target average life, maturities, crediting rates, and
assumptions of policyholder behavior. As of September 30, 1999, the fair value
of assets supporting liabilities managed under this modeling process was
$25,295.1 million. A rate shock (as defined above) would decrease the fair
value of these assets by $890.4 million.
The selection of a 100 basis point immediate, parallel increase or decrease
in interest rates is a hypothetical rate scenario used to demonstrate
potential risk. While a 100 basis point immediate, parallel increase or
decrease does not represent our view of future market changes, it is a near
term reasonably possible hypothetical change that illustrates the potential
impact of such events. While these fair value measurements provide a
representation of interest rate sensitivity, they are based on our portfolio
exposures at a point in time and may not be representative of future market
results. These exposures will change as a result of ongoing portfolio
transactions in response to new business, management's assessment of changing
market conditions and available investment opportunities.
We also utilize various derivative financial instruments to manage our
exposure to fluctuations in interest rates, including interest rate swaps,
interest rate futures, interest rate caps, interest rate floors, and interest
rate swaptions.
Interest rate swaps are used primarily to more closely match the interest
rate characteristics of assets and liabilities. We use a common variation of
interest rate swaps, constant maturity treasury ("CMT") swaps, to hedge our
exposure to floating rate, fixed maturity liability contracts. Interest rate
futures contracts are used to hedge changes in interest rates subsequent to
the issuance of an insurance liability (i.e., GIC) but prior to the purchase
of a supporting asset, or during periods of warehousing assets in anticipation
of near term liability sales. We also use interest rate futures to
periodically rebalance our duration-managed accounts. We use interest rate
caps to hedge embedded caps on floating-rate assets and to manage the risk
associated with a sudden rise in interest rates. Similar to interest rate
caps, we also use interest rate floors. These contracts are used to hedge a
sudden decline in interest rates during the premium contribution "window" on
our GICs or to hedge guaranteed minimum crediting rates in certain life and
annuity contracts. Interest rate swaptions are used to hedge premium
contribution risk and withdrawal risk associated with fixed liability
contracts.
We also seek to reduce call or prepayment risk arising from changes in
interest rates in individual investments. We limit our exposure to investments
that are not call protected, which means they are prepayable without penalty
prior to maturity at the option of the issuer, and we require incremental
yield on these
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investments to compensate for the risk that the option will be exercised. An
example of an investment we limit because of the option risk is residential
mortgage-backed securities. We assess option risk in all investments and, when
taken, price accordingly.
Our exposure to credit risk on derivative contracts is the risk of loss from
a counterparty failing to perform according to the terms of the contract. We
continually monitor our position and the credit ratings of the counterparties
to these derivative instruments. To limit exposure associated with
counterparty nonperformance on interest rate swap, cap, floor, and swaption
agreements, we enter into master netting agreements with our counterparties.
We believe the risk of incurring losses due to nonperformance by our
counterparties is remote and that such losses, if any, would not be material.
Futures contracts trade on organized exchanges and, therefore, effectively
have no credit risk.
The table below shows the interest rate sensitivity of our interest rate
derivatives measured in terms of fair value. These exposures will change as a
result of ongoing portfolio and risk management activities.
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------------------------------
Fair Value
----------------------------------
Weighted
Notional Average Term -100 Basis As of +100 Basis
Amount (Years) Point Change 9/30/99 Point Change
--------- ------------ ------------ ------- ------------
(in millions, except for Weighted Average Term)
<S> <C> <C> <C> <C> <C>
Interest rate swaps... $9,169.4 9.8 $(123.0) $(52.0) $ 31.3
CMT swaps............. 679.7 1.9 5.2 5.3 5.4
Futures Contracts..... 2,574.0 7.2 (163.7) (14.5) 127.4
Interest Rate Caps.... 359.4 6.0 1.5 4.1 8.7
Interest Rate Floors.. 125.0 4.3 0.3 0.2 0.1
Swaptions............. 30.0 25.7 (2.0) (2.9) (4.7)
--------- ------- ------ ------
Totals.............. $12,937.5 $(281.7) $(59.8) $168.2
========= ======= ====== ======
</TABLE>
As of September 30, 1999, the aggregate fair value of debt was $900.2
million. A 100 basis point, immediate, parallel decrease in interest rates
would increase the fair value of debt by approximately $56.0 million.
Equity Risk
Equity risk is the risk that we will incur economic losses due to adverse
changes in a particular common stock. In order to reduce our exposure to
market fluctuations on some equity securities, we use equity collar
agreements. These equity collar agreements limit the market value fluctuations
on equity securities. As of September 30, 1999, the fair value of our equity
securities was $1,114.2 million. The fair value of our equity collar
agreements as of September 30, 1999 was $41.7 million. A 15% decline in the
value of the equity securities including the equity collar agreements would
result in an unrealized loss of $154.4 million.
Foreign Currency Risk
Foreign currency risk is the risk that we will incur economic losses due to
adverse changes in foreign currency exchange rates. This risk arises from our
international operations and certain foreign currency-denominated funding
agreements issued to non-qualified institutional investors in the
international market. We also have fixed income securities that are
denominated in foreign currencies. However, we use derivatives to hedge the
foreign currency risk of these funding agreements and securities (both
interest payments and the final maturity payment). At September 30, 1999, the
fair value of our foreign currency denominated fixed maturity securities was
$244.0 million. We use currency swap agreements of the same currency to hedge
the foreign exchange risk related to these investments. The fair value of our
currency swap agreements associated with foreign-denominated bonds at
September 30, 1999 was ($15.6) million.
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We estimate that as of September 30, 1999, a 10% immediate unfavorable
change in each of the foreign currency exchange rates to which we are exposed
would result in no change to the net fair value of our foreign currency
denominated instruments identified above, including the currency swap
agreements. The selection of a 10% immediate unfavorable change in all
currency exchange rates should not be construed as a prediction by us of
future market events but rather as an illustration of the potential impact of
such an event. The largest individual currency exposure is to the Canadian
dollar/U.S. dollar.
Effects of Inflation
We do not believe that inflation has had a material effect on our
consolidated operations except insofar as inflation may affect interest rates.
See "Risk Factors--We face risks relating to our investment portfolio."
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BUSINESS
Founded in 1862, John Hancock today is one of the nation's leading financial
services companies, providing a broad array of insurance and investment
products and services to retail and institutional customers, primarily in
North America.
We operate our business in five segments. Two segments primarily serve
retail customers, and two segments serve institutional customers. Our fifth
segment is the Corporate and Other Segment.
Our retail segments are the Protection Segment and the Asset Gathering
Segment. The Protection Segment offers variable life, universal life, whole
life, term life, and individual and group long-term care insurance products.
The Asset Gathering Segment offers variable and fixed, deferred and immediate
annuities, and mutual funds. Our retail business also includes our retail
distribution and customer service operations.
In 1998, we were one of the ten largest writers of individual life insurance
in the U.S. (according to the 1999 A.M. Best's Sales Studies rankings for
Total Direct Premiums Written), and were the seventh largest writer of
individual variable universal life insurance (according to data published by
Tillinghast). We believe we are among the top five writers of individual long-
term care insurance, and, based on total in force premiums, the top provider
of group long-term care insurance, in the U.S. As of December 31, 1998, we
were the 29th largest individual annuity company, based on LIMRA sales data,
and our mutual fund subsidiary ranked 26th (28th as of September 30, 1999)
among U.S. asset managers in terms of total long-term, open end assets under
management (according to data published by Financial Research Corporation).
Our institutional segments are the Guaranteed and Structured Financial
Products Segment and the Investment Management Segment. The Guaranteed and
Structured Financial Products Segment offers a wide variety of spread-based
and fee-based investment products and services, most of which provide the
customer with some form of guaranteed return. The Investment Management
Segment consists of investment management services and products marketed to
institutions. This business is primarily fee-based and investment management
products generally do not offer guarantees.
Our expertise in both the Guaranteed and Structured Financial Products
Segment and the Investment Management Segment has its roots in our long
history of managing the assets in our general account. Our general account
assets are available to meet all general corporate obligations, including the
financial guarantees of our underlying insurance and investment products. Our
investment operations emphasize strong credit analysis and transaction
origination capabilities. For many years we have maintained, through our
general account as well as our separate account products, an expertise in
providing guaranteed products for U.S. pension plans, and in private domestic
fixed income investing. Over the past two decades we have also gained a
reputation as a manager of funds held in separate accounts for institutional
clients. Separate account assets are generally dedicated to and managed in
accordance with specific investment contracts and are generally not available
to satisfy general account obligations. Our specialties in this market include
fixed maturity securities, equities, natural resources, collateralized bond
obligations and mezzanine financings, mostly managed for U.S. pension plan
sponsors.
Our principal executive offices are located at John Hancock Place, Boston,
Massachusetts 02117.
Protection Segment
Overview
Through our Protection Segment, we offer a variety of non-traditional and
traditional life insurance products and individual and group long-term care
insurance products. Our non-traditional life insurance products include
variable life and universal life insurance. Our traditional life insurance
products include whole life insurance and term life insurance. Protection
products are distributed through multiple distribution channels, including our
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career agency system, which we are integrating into our newly formed
distribution subsidiary, Signator Financial Network ("Signator"), M Financial
Group, independent broker/dealers, a private label arrangement, banks and
directly to consumers.
The Protection Segment has traditionally been our largest business segment,
contributing 38.0% and 40.9% of consolidated operating revenues and 29.0% and
34.4% of consolidated after-tax operating income in the first nine months of
1999 and in the full year 1998, respectively. The Protection Segment has
achieved the following financial results for the periods indicated:
<TABLE>
<CAPTION>
As of or for
the Nine Months
Ended As of or for the Year Ended December 31,
September 30, -------------------------------------------
1999 1998 1997 1996
--------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Sales (new premiums and
deposits):
Non-traditional life--
excluding COLI and BOLI
(1)
Variable life......... $ 89.8 $ 103.9 $ 96.3 $ 82.7
Universal life........ 13.4 20.3 9.5 2.4
Traditional life--
excluding COLI (1)
Whole life............ 16.5 18.8 31.2 44.7
Term life............. 17.1 22.9 12.8 11.1
COLI and BOLI
Variable life--COLI... 18.6 53.5 18.9 13.5
Universal life--COLI.. 3.0 23.5 13.3 --
Whole life--COLI...... -- 1.2 2.2 7.7
Universal life--BOLI.. -- 12.4 3.0 3.0
Individual long-term
care................... 50.8 56.8 55.0 46.3
Group long-term care
(2).................... 4.8 3.8 5.9 6.3
--------- ------------- ------------- -------------
Total............... $ 214.0 $ 317.1 $ 248.1 $ 217.7
========= ============= ============= =============
Operating revenues: (3)
Non-traditional life.... $ 394.0 $ 488.1 $ 409.5 $ 374.9
Traditional life........ 1,420.9 1,921.2 1,930.0 1,918.4
Individual long-term
care................... 231.0 246.7 193.7 138.3
Group long-term care.... 81.4 94.2 87.5 74.9
Other................... 6.7 9.0 11.1 11.1
--------- ------------- ------------- -------------
Total............... $ 2,134.0 $ 2,759.2 $ 2,631.8 $ 2,517.6
========= ============= ============= =============
Segment after-tax
operating income: (3)
Non-traditional life.... $ 56.6 $ 74.6 $ 38.6 $ 38.8
Traditional life........ 56.0 73.0 97.9 146.8
Individual long-term
care................... 17.6 16.4 15.9 7.3
Group long-term care.... 9.0 7.8 8.4 5.3
Other................... (1.9) 0.5 (2.7) (0.9)
--------- ------------- ------------- -------------
Total............... $ 137.3 $ 172.3 $ 158.1 $ 197.3
========= ============= ============= =============
Assets:
Non-traditional life.... $ 9,177.6 $ 8,713.2 $ 7,091.6 $ 5,619.2
Traditional life........ 16,534.0 16,412.4 15,753.0 15,313.1
Individual long-term
care................... 927.5 754.8 582.0 388.2
Group long-term care.... 459.4 400.2 345.7 236.2
Other................... 30.9 23.2 21.1 8.1
Intra-segment
eliminations........... (867.4) (600.1) (619.5) (533.0)
--------- ------------- ------------- -------------
Total............... $26,262.0 $ 25,703.7 $ 23,173.9 $ 21,031.8
========= ============= ============= =============
</TABLE>
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- --------
(1) Individual life insurance sales exclude (a) excess premiums, which are
premiums that build cash value but do not purchase face amounts of
insurance on variable life and universal life insurance products and (b)
premiums on corporate owned life insurance ("COLI") and bank owned life
insurance ("BOLI") policies covering more than 200 lives. Sales include
10% of single premium payments on universal and whole life insurance
products.
(2) Group long-term care sales include only sales made to new employer groups
initially effective in the year. Re-enrollments on existing accounts,
sales constituting increased coverage to existing insureds, sales to non-
employer groups and sales to new employees added to a group are excluded.
(3) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 7 and Note
12 to our Unaudited Interim Consolidated Financial Statements and Audited
Consolidated Financial Statements, respectively, for a reconciliation of
amounts reported for operating segments to amounts reported in those
financial statements.
Products and Markets
We have built a broad life insurance product portfolio that covers nearly
all product categories. The following chart shows the product categories where
we are actively selling at least one, if not more, products.
<TABLE>
<CAPTION>
Separate
General Account Account
-----------------------------------------------------
Product Term Whole Universal Variable
Category Life Life Life Life
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Single life insurance X X X X
- -------------------------------------------------------------------------------
Joint or second-to-die life insurance X X X
- -------------------------------------------------------------------------------
Corporate and bank owned life insurance X X
</TABLE>
Individual Life Insurance. We believe there are two distinct groups of
consumers for our individual life insurance products: relationship-oriented
consumers and self-directed consumers. Relationship-oriented consumers are
generally those in the high and upper-middle income markets. They typically
have complex buying needs and are willing to pay a price premium to be served
personally by professional advisors. Self-directed consumers typically have
simpler product needs, are more price sensitive and are more likely to
initiate their own insurance purchases as protection needs arise. We market
our variable, universal and whole life insurance products to relationship-
oriented consumers. We market our term life insurance products to
relationship-oriented consumers, as well as to self-directed consumers.
In the past several years, our life insurance sales growth has come
principally from sales of variable and universal life insurance, while sales
of whole life insurance have declined. By diversifying from traditional life
insurance products to the investment-oriented savings products demanded by
today's consumer, we have generated strong business and earnings growth.
. Variable Life Insurance. Our primary variable life insurance product is
variable universal life insurance. This product provides life insurance
coverage and an investment return linked to an underlying portfolio of
investments chosen by the policyholder. Our sales of variable life
insurance have grown at a compound annual rate of 28% from 1996 through
1998. For the first nine months of 1999, our sales of variable life
insurance increased 8% over the same period in 1998. Our variable life
insurance product portfolio includes joint (second-to-die) and corporate
owned life insurance products, as well as single life policies. Second-
to-die products are typically used for estate planning purposes and
insure two lives rather than one, with the policy proceeds paid after
the death of both insured individuals. Corporate owned life insurance
products are sold to corporations to fund special deferred compensation
plans and benefit programs for key employees. We were among the first
insurance companies to offer variable life insurance products, beginning
in 1980, and we believe the
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length of our experience in this market is a competitive strength.
Variable life insurance policies represented 68% of our individual life
insurance sales in the first nine months of 1999, compared to an average
of 61% over the past three full years.
Our current variable life insurance products offer the policyholder a
broad array of choices with respect to both investment options and also
fund managers through our Variable Series Trust (VST). As of September
30, 1999, the VST included 24 fund options and 16 fund managers,
offering a broad range of domestic equity, fixed income and
international investment styles from retail and institutional managers.
Offerings include both John Hancock and non-John Hancock funds.
. Universal Life Insurance. Our universal life insurance products provide
life insurance coverage and a cash value that increases based on a
credited interest rate which is periodically reset. These policies
generally permit policyholders to use any increase in cash value to vary
the amount of insurance coverage and the timing and amount of premium
payments. Our universal life insurance product portfolio also includes
corporate owned life insurance and bank owned life insurance products
which are sold to banks to fund post-retirement employee benefit plan
liabilities. We participate in the bank owned life insurance market
selectively, as special sales opportunities arise. For the first nine
months of 1999, sales of universal life insurance policies declined 67%
compared to the same period of 1998. This decline is primarily
attributable to the significant sales of bank and corporate owned life
insurance that occurred in 1998. From 1996 through 1998, our sales of
universal life insurance products grew at a compound annual rate of
223%. Universal life insurance policies represented 10% of our
individual life insurance sales in the first nine months of 1999,
compared to an average of 14% over the past three full years.
. Traditional Life Insurance Products. Our traditional life insurance
products include single life and joint life (second-to-die) whole life
insurance, and term life insurance. Participating whole life insurance
combines a death benefit with a cash value that generally increases
gradually in amount over a period of years, and typically pays a policy
dividend. Term life insurance provides only a death benefit, does not
build up cash value, and does not pay a dividend. Whole life insurance
products represented 8%, and term life insurance products represented
9%, of our individual life insurance sales in 1998. For the first nine
months of 1999, our whole life insurance sales increased by 19% as
compared to the same period of 1998. From 1996 through 1998, our whole
life insurance sales declined at a 38% compound annual rate, as demand
shifted to our variable and universal life insurance products. For the
first nine months of 1999, our term life insurance sales increased by 6%
over the same period of 1998. From 1996 through 1998, sales of our term
life insurance products grew at a compound annual rate of 44%.
Traditional life insurance policies represented 25% of our average
individual life insurance sales over the past three full years.
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The following table illustrates, for the periods indicated, total statutory
premiums and deposits, which is the premium we report on the annual statements
we file with insurance regulators, life insurance in force and GAAP reserves
for our individual life insurance products. In addition to premium from sales
of new policies, which we refer to as "sales," statutory premiums and deposits
includes revenues from renewals of policies, 10% of single premium payments,
and premiums from reinsurance assumed by us. We deduct from this measure the
premiums that we cede to our reinsurers. Statutory premiums and deposits
differ from GAAP premiums because GAAP requires that premiums on variable and
universal life insurance products be accounted for using deposit accounting.
Deposit accounting excludes from revenue the premiums received on these
products and generally shows the fees earned from the products as revenues.
Individual Life Insurance Selected Financial Data
<TABLE>
<CAPTION>
As of or for
the Nine As of or for the Year Ended
Months Ended December 31,
September --------------------------------
30, 1999 1998 1997 1996
------------ ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Total statutory premiums and
deposits:
Variable life................... $ 603.0 $ 810.8 $ 670.8 $ 583.4
Universal life (1).............. 86.0 436.8 141.8 302.7
Traditional life................ 757.1 1,051.3 1,071.7 1,068.5
---------- ---------- ---------- ----------
Total......................... $ 1,446.1 $ 2,298.9 $ 1,884.3 $ 1,954.6
========== ========== ========== ==========
Life insurance in force:
Variable life................... $ 55,230.2 $ 52,552.9 $ 46,175.3 $ 41,408.1
Universal life.................. 8,882.9 8,511.0 6,967.2 6,491.8
Traditional life................ 55,776.0 52,122.6 61,772.3 65,704.8
---------- ---------- ---------- ----------
Total......................... $119,889.1 $113,186.5 $114,914.8 $113,604.7
========== ========== ========== ==========
GAAP Reserves:
Variable life................... $ 5,771.2 $ 5,407.5 $ 4,122.2 $ 3,227.0
Universal life.................. 2,030.8 1,930.3 1,470.7 1,359.1
Traditional life................ 9,652.7 9,386.0 9,046.4 8,717.3
---------- ---------- ---------- ----------
Total......................... $ 17,454.7 $ 16,723.8 $ 14,639.3 $ 13,303.4
========== ========== ========== ==========
</TABLE>
- --------
(1) Includes bank owned life insurance premiums of $340.0 million, $65.0
million and $255.0 million for the years ended December 31, 1998, 1997 and
1996, respectively. There were no bank owned life insurance premiums for
the first nine months of 1999.
Long-Term Care Insurance. We are one of the few insurance companies that
offers both individual and group long-term care insurance. We entered the
individual long-term care insurance market in 1987 and the group long-term
care insurance market in 1988. In 1998, we believe that we were the market
leader for group long-term care insurance, with a 26% share of total premiums
according to data reported by LIMRA. In 1998, we were among the top five
writers of individual long-term care insurance according to data published by
LifePlans, Inc.
Our long-term care insurance products provide protection against the large
and escalating costs of home health care, assisted living, and nursing home
care. With the aging population, the expected inability of government
entitlement programs to meet retirement needs, and a growing public awareness
of long-term care insurance, we believe there is excellent growth potential
for the long-term care insurance market. In addition to our core distribution
channels, which include our Signator/career agent channel, broker/dealers and
banks, we expect to derive sales growth from alternative distribution methods,
such as private label arrangements where our products are sold through other
insurers' sales forces.
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<PAGE>
Our long-term care insurance products are reimbursement products, which
provide benefits only for documented nursing home or health care expenses.
These products are sold on a guaranteed renewable basis, meaning that we are
required to renew the policies each year as long as the premium is paid.
However, this also gives us the ability to reset the price of the product
prospectively, if needed. Our claims history on these products has been
favorable.
. Individual Long-Term Care Insurance. Our individual long-term care
insurance products are sold to pre-retirement and retired customers. For
the first nine months of 1999, our sales of individual long-term care
insurance products were $50.8 million, an increase of 23% over the same
period in 1998. From 1996 through 1998, our sales of individual long-
term care insurance products increased at a compound annual rate of 11%.
In the third quarter of 1999, we began an innovative Telephone Interview
Program that permits eligible long-term care clients to be interviewed
over the telephone by trained nurses. This program dramatically shortens
the new business underwriting process by eliminating the need to obtain
a potential client's medical records from his or her physician. The
following table illustrates for the periods indicated first year
premium, total premium and reserves for our individual long-term care
insurance products. First year premium represents total premiums earned
during the first year of the policy for all new individual long-term
care insurance business.
Individual Long-Term Care Insurance Selected Financial Data
<TABLE>
<CAPTION>
As of or for the As of or for the
Nine Months Year Ended
Ended December 31,
September 30, --------------------
1999 1998 1997 1996
---------------- ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
First year premium..................... $ 54.3 $ 57.2 $ 56.0 $ 44.6
Total premium.......................... 200.1 218.5 175.2 124.2
Reserves............................... 602.1 473.4 340.9 237.3
</TABLE>
. Group Long-Term Care Insurance. Our group long-term care insurance
products are sold through employer-sponsored plans to employees and
retirees, and their eligible relatives. The insured, not the employer,
generally pays the premium for this insurance. Following selection of
one of our plans by an employer, we market our products directly to the
employee base. The principal market for our group long-term care
insurance products is companies with over 7,500 employees and retirees.
We also pursue smaller employers with 500 or more employees and retirees
in selected industries.
Our sales of group long-term care insurance for the first nine months
of 1999 were $4.8 million, an increase of 137% over the same period in
1998. From 1996 through 1998, although we remained the market leader
based on in force premium, our sales of group long-term care insurance
products declined at a compound annual rate of 23%.
The following table illustrates for the periods indicated first year
premium, total premium and reserves for our group long-term care
insurance products. First year premium represents total premiums earned
during the first year of the policy for all new group long-term care
insurance business, including employer and non-employer groups, and new
employees added to a group.
Group Long-Term Care Insurance Selected Financial Data
<TABLE>
<CAPTION>
As of or for the As of or for the
Nine Months Year Ended
Ended December 31,
September 30, --------------------
1999 1998 1997 1996
---------------- ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
First year premium..................... $ 7.1 $ 5.5 $ 7.1 $ 9.3
Total premium.......................... 59.4 72.7 69.6 62.3
Reserves............................... 319.9 275.2 219.9 170.7
</TABLE>
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<PAGE>
Distribution
We employ multiple distribution channels, both owned and non-owned, to sell
our protection products. Typically we employ separate sales efforts for each
product. However, we also attempt to optimize our distributor relationships by
selling complementary products where the needs of the consumer call for them.
The Protection Segment's distribution channels include the following:
Signator. We are making fundamental changes in our career agency system to
improve productivity, reduce fixed costs and enhance service. To enable our
agents to provide more sophisticated financial planning services as well as a
broader range of financial products, we are making a significant investment in
agent education and training, expanding licensing requirements and enhancing
our service and product support capability. A key component of this strategy
was the creation in early 1999 of Signator, a separate distribution
subsidiary. Signator will provide highly tailored financial planning tools and
market support and will further enable our agents to sell products of multiple
companies. This new subsidiary is structured to enable us to recruit, develop
and retain top producers. The major producers within Signator include 43
managerial agencies owned by us and 100 independent general agencies, as well
as insurance brokers. The managerial agencies are in the process of
transitioning to independent general agencies. In addition to brokerage
business sold through the managerial agencies and independent general
agencies, Signator has established a direct brokerage outlet serving consumers
in the high-end markets. Combined, the Signator system includes approximately
3,000 associated sales personnel. We believe that over time Signator will
enable us to continue growing revenues, while reducing unit expenses.
M Financial Group. M Financial Group is a national producer group founded in
1978 of approximately 100 life insurance producing firms with over 400
individual producers operating exclusively in the upper end of the wealth
transfer and executive benefit markets. We believe John Hancock has been
either the first or second largest provider of life insurance products to the
M Financial Group in each of the past three years, although the member firms
also sell the products of other prominent U.S. life insurance companies.
We have jointly developed a proprietary life insurance product line with M
Financial Group to meet the distinct requirements of its producers. We also
offer four proprietary investment options of M Fund, Inc. on all variable life
insurance products sold by M Financial Group members, in addition to the
investment options supported by the VST. In addition to these proprietary
products, we provide a number of exclusive services to M Financial Group
members, including a deferred compensation plan, dedicated sales, underwriting
and service teams and participation in special marketing events, as well as M
Financial Group sponsored systems and technology initiatives. In addition, M
Life Insurance Company shares the insurance risk, through reinsurance, on 50%
of most of our policies that its members sell. These products and services and
this reinsurance arrangement serve to align M Financial Group producers'
incentives with ours.
The business generated by M Financial Group producers has experienced lower
termination or non-renewal (referred to in the industry as "lapse") and
mortality rates than the industry average. Over the nine months ended
September 30, 1999 and the past three full years, sales originated through the
M Financial Group relationship have accounted for approximately 36% of our
average annual life insurance sales. In 1998, these sales included $39.4
million of large corporate owned life insurance policies.
Independent Broker/Dealers. We have selling agreements for individual long-
term care insurance products with over 20 independent broker/dealer
organizations. In 1998, we launched Investors Partner Life Insurance Company,
a wholly-owned subsidiary, to work with independent broker/dealers in offering
tailored life insurance products to high income clients. In addition, our
sales through Signator include some life insurance sold by broker/dealers.
Direct distribution. We have developed a direct distribution unit, operating
under the "MarketPlace by John Hancock" brand, to complement our traditional
sales efforts. Through this unit, we sell term life insurance and variable
annuities over the telephone, through direct mail and over the Internet,
directly to consumers. We currently sell fully underwritten and simplified
issue term insurance products and a simplified, no load, no surrender charge
variable annuity. Term insurance products are marketed via direct response
television, targeted direct mail and over the Internet. Consumers can call a
toll-free number or go directly to our web site to get
99
<PAGE>
information, obtain a quote or start an application. We have built a call
center and a streamlined application, payment and issue process to support
this distribution channel.
Our e-commerce initiatives include the launch of a John Hancock Internet web
site that allows consumers to collect information on John Hancock and our
products, get a quote, and begin an insurance application process directly on-
line. Consumers can also access our term life insurance products through the
on-line services offered by Quotesmith Corporation, InsWeb Corporation, and
Intuit's QuickenInsurance site. We have also entered into a strategic
relationship with Microsoft Corporation involving the presentation of our
interactive banner advertisements throughout the MSN network of Internet
services providing direct electronic links to our web site.
Banks. We offer a full line of life and individual long-term care insurance
products through banks that have established an insurance sales force.
Group sales force. Group long-term care insurance products are marketed by a
dedicated sales force located in major cities around the country. The sales
force works closely with consultants, brokers, and other intermediaries to
generate sales and grow existing accounts.
Private label arrangements. We have launched, during the second quarter of
1999, an individual long-term care product which is being sold through another
insurer under a private label arrangement. We anticipate entering into more of
these private label arrangements with respect to various products.
Signator, the M Financial Group, our independent broker/dealer channel and
the bank channel are aimed at relationship-oriented consumers. The direct
distribution channel targets self-directed consumers.
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<PAGE>
The table below shows Protection Segment sales by distribution channel for
the periods indicated. Individual life insurance sales exclude excess
premiums, which are premiums that build cash value but do not purchase any
additional face amount of insurance, on variable life and universal life
insurance products and premiums on corporate owned life insurance and bank
owned life insurance policies covering more than 200 lives. Sales include 10%
of single premium payments on universal life and whole life insurance
policies. Group long-term care sales include only sales made to new employer
groups initially effective in the year. Re-enrollments on existing accounts,
sales constituting increased coverage to existing insureds, and sales to non-
employer groups and new employees added to a group are excluded. COLI is sold
only by Signator and M Financial Group. BOLI is sold only by Signator.
Protection Segment Sales by Distribution Channel
<TABLE>
<CAPTION>
Nine Months For the
Ended Year Ended December 31,
September 30, -----------------------
1999 1998 1997 1996
------------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C>
Signator: (1)
Individual life--excluding COLI and
BOLI.................................. $ 89.6 $ 111.4 $ 108.7 $ 125.3
Individual life--COLI.................. 6.9 9.1 6.2 .8
Individual life--BOLI.................. -- 12.4 3.0 3.0
Individual long-term care.............. 44.9 50.7 49.1 41.8
M Financial Group:
Individual life--excluding COLI........ 40.3 48.7 40.3 15.6
Individual life--COLI.................. 14.7 69.1 28.2 20.4
Individual long-term care.............. .1 .1 -- --
Independent Broker/Dealers:
Individual long-term care.............. 4.7 5.7 5.8 4.5
Direct Distribution:
Individual life........................ 5.5 4.8 .7 --
Banks:
Individual life........................ 1.1 .5 -- --
Individual long-term care.............. .4 .2 .1 --
Dedicated Sales Force:
Group long-term care................... 4.8 3.8 5.9 6.3
Other:
Individual life........................ .3 .5 .1 --
Individual long-term care.............. .7 .1 -- --
Total:
Individual life--excluding COLI and
BOLI.................................. 136.8 165.9 149.8 140.9
Individual life--COLI and BOLI......... 21.6 90.6 37.4 24.2
Individual long-term care.............. 50.8 56.8 55.0 46.3
Group long-term care................... 4.8 3.8 5.9 6.3
</TABLE>
- --------
(1) Sales originated through independent broker/dealers and reported within
the Signator channel were 22% of total Signator individual life insurance
sales, before deduction of excess premiums but after exclusion of cases
with over 200 lives, for the nine months ended September 30, 1999 and 25%,
19% and 8% for 1998, 1997 and 1996, respectively. For individual long-term
care insurance for each of these four periods, less than 2% of total
Signator sales were originated through independent broker/dealers. Also
reported in the Signator channel are sales originated through independent
insurance brokers, which accounted for 30% of total Signator individual
life insurance sales, before deduction of excess premiums but after
exclusion of cases with over 200 lives, for the nine months ended
September 30, 1999, and 23%, 17% and 23% for 1998, 1997 and 1996,
respectively. For individual long-term care insurance, 21% of total
Signator channel sales for the nine months ended September 30, 1999 were
originated through independent insurance brokers, and 18%, 17% and 18%
were originated through these brokers for 1998, 1997 and 1996,
respectively.
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<PAGE>
Underwriting
Insurance underwriting involves a determination of the type and amount of
risk that an insurer is willing to accept. Underwriting also determines the
amount and type of reinsurance levels appropriate for a particular type of
risk. By utilizing reinsurance, we can limit our risk and improve product
pricing.
Our underwriting standards for life insurance are intended to result in the
issuance of policies that produce mortality experience consistent with the
assumptions used in product pricing. For individual long-term care products,
we use separate but similar underwriting criteria appropriate to the morbidity
risks insured. Our overall profitability depends to a large extent on the
degree to which our mortality and/or morbidity experience matches our pricing
assumptions. In addition, a key focus of our life insurance and long-term care
underwriting is the streamlining of the process we use in issuing new
business. An example of an innovation in this area is the Telephone Interview
Program for long-term care products, described above.
For life insurance, our underwriting is based on our historical mortality
experience, as well as the experience of the insurance industry and of the
general population. We continually compare our underwriting standards against
the industry to mitigate our exposure to higher risk business and to stay
abreast of industry trends.
Our life and long-term care insurance underwriters evaluate policy
applications on the basis of the information provided by the applicant and
others. We use a variety of methods to evaluate certain policy applications,
such as those where the size of the policy is large, or the applicant is an
older individual or has a known medical impairment or is engaged in a
hazardous occupation or hobby.
Group long-term care underwriting is conducted on both the employer group
level and the individual level. Our group long-term care corporate customers
generally offer their employees the opportunity to purchase coverage on a
"guaranteed-issue" basis, meaning that all employees are eligible for
insurance coverage, and offer individually underwritten coverage to family
members. We rely on our experience in underwriting large groups in order to
set prices that take into account the underwriting arrangements, the general
health conditions of the corporate customers' employees, the specifics of the
negotiated plan design, and other demographic and morbidity trends. Group
products are written on a guaranteed renewable basis, which permits repricing
if necessary.
Our corporate owned and bank owned life insurance policies covering multiple
lives are issued on a guaranteed issue basis, where the amount of insurance
issued per life on a guaranteed basis is related to the total number of lives
being covered and the particular need that the product is being purchased for.
Guaranteed issue underwriting applies to employees actively at work, and
product pricing reflects the additional guaranteed issue underwriting risk.
Reserves
We establish and report liabilities for future policy benefits on our
balance sheet to meet the obligations under our insurance policies and
contracts. Our liability for variable life insurance and universal life
insurance policies and contracts is equal to the cumulative account balances.
Cumulative account balances include deposits plus credited interest less
expense and mortality charges and withdrawals. Future policy benefits for our
traditional life, individual long-term care and group long-term care insurance
policies are calculated based on a set of actuarial assumptions that we
establish and maintain throughout the lives of the policies. Our assumptions
include investment yields, mortality, morbidity and expenses.
Competition
We face significant competition in all our retail protection businesses. Our
competitors include other large and highly rated insurance carriers. Some
competitors have penetrated more markets and have greater resources than us.
Many competitors offer similar products and use similar distribution channels.
In the e-commerce arena, we also face competition from internet start-up
companies and traditional competitors that have established internet
platforms. We believe that we distinguish ourselves from our competitors
through the combination of:
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. our strong financial ratings;
. our strong and reputable brand;
. our broad range of competitive and innovative products and our ability
to create unique product combinations;
. our ability to develop customized/proprietary products for various
distribution channels;
. the variety of our distribution channels;
. the depth of our experience as one of the first companies to offer
variable life insurance, individual long-term care insurance and group
long-term care insurance;
. the quality of the support we provide to the distributors of our
products including sophisticated tax, estate and business planning
support; and
. our dedication to customer service.
Competition also exists for agents and other distributors of insurance
products. Much of this competition is based on the pricing of products and the
agent or distributor compensation structure. We believe that our competitive
strengths coupled with the advantages of our new Signator network will enable
us to compete successfully to attract and retain top quality agents and
distributors. We continuously provide technology upgrades and enhanced agent
training, and strive to improve service.
Reinsurance
We reinsure portions of the risks we assume for our protection products. The
maximum amount of individual ordinary life insurance retained by us on any
life is $10 million under an individual policy and $20 million under a second-
to-die policy. We are in the process of negotiating with several reinsurers to
establish an additional reinsurance program which would limit our exposure to
fluctuations in claims under policies where the net amount at risk is $2
million or more. Although there is no assurance that the terms of this program
will be acceptable to us, we believe that we will be able to enter into such a
program before the end of 1999, to be effective at the beginning of 2000. By
entering into reinsurance agreements with a diverse group of highly rated
reinsurers, we seek to control our exposure to losses. Our reinsurance,
however, does not discharge our legal obligations to pay policy claims on the
policies reinsured. As a result, we enter into reinsurance agreements only
with highly rated reinsurers. Nevertheless, there can be no assurance that all
our reinsurers will pay the claims we make against them. As discussed below,
one of our principal reinsurers, RGA Reinsurance Company ("RGA"), has recently
been downgraded by several rating agencies. Failure of a reinsurer to pay a
claim could adversely affect our business, financial condition or results of
operations.
We have several major life reinsurance arrangements, including agreements
with four reinsurers (The Lincoln National Life Insurance Company,
Transamerica Occidental Life Insurance Company, RGA and Life Reassurance
Corporation of America) that transfers a total of 80% of the risk arising from
our indeterminate premium term life insurance policies. We also have a
reinsurance agreement with M Life Insurance Company, an affiliate of the M
Financial Group, under which M Life Insurance Company reinsures 50% of most of
our policies that its members sell. Under the terms of this agreement, we
continue to hold the assets backing the reserves on the risks reinsured. M
Life Insurance Company is assigned an NR-1 classification by A.M. Best, a
rating which is primarily assigned to small companies for which A.M. Best does
not have sufficient financial information required to assign rating opinions.
To review the claims-paying ability and financial strength of M Life Insurance
Company, we review semi-annual financial information provided to us by M Life
Insurance Company, and hold semi-annual meetings with its management to review
operations, marketing, reinsurance and financial issues. We also review the
annual audited financial reports of the parent company of M Life Insurance
Company. For amounts in excess of $400,000 per policy that would otherwise be
reinsured by M Life Insurance Company, we have entered into reinsurance
agreements with The Lincoln National Life Insurance Company and RGA.
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The total amount of reinsurance premiums paid in 1998 by the individual life
insurance line of business to reinsurers amounted to $244.3 million. At
December 31, 1998 we had reinsured $33,517.7 million in face amount of
insurance, representing 23% of our total face amount of $146,704.3 million.
Our five principal unaffiliated life reinsurers are listed below, along with
the reinsurance recoverable, on a statutory basis, the face amount of life
insurance in force reinsured as of December 31, 1998, and their respective
A.M. Best ratings as of November 12, 1999:
<TABLE>
<CAPTION>
Face Amount
of Life A.M.
Reinsurance Insurance Best
Reinsurer Recoverable In-Force Rating
--------- ----------- ----------- ------
(in millions)
<S> <C> <C> <C>
RGA Reinsurance
Company................ $25.1 $6,297.0 B++
The Lincoln National
Life Insurance
Company................ 22.1 5,990.7 A
Life Reassurance
Corporation of
America................ 21.3 5,692.4 A+
Transamerica Occidental
Life Insurance
Company................ 16.9 4,532.4 A+
M Life Insurance
Company................ 3.8 5,682.5 NR-1
</TABLE>
On August 11, 1999 A.M. Best announced that it had downgraded its rating of
RGA to B++ from A+ and placed the rating under review with negative
implications. A.M. Best reported that the action followed a request filed by
RGA's majority shareholder and one of their largest reinsurance clients,
General American Life Insurance Company ("General American"), with the
Missouri Department of Insurance that General American be placed under
voluntary administrative supervision. According to A.M. Best, such supervision
would enable General American to not face immediate contractual obligations
related to its block of funding agreements. While A.M. Best downgraded its
rating of RGA, it stated that it assigned a higher rating to RGA than it did
to General American because RGA is not in default and because A.M. Best
believes that demands on the liquidity of RGA are likely to be less onerous
while General American remains under regulatory protection. Other rating
agencies have similarly downgraded their ratings of RGA. Moody's announced on
August 9, 1999 that it had downgraded RGA's insurance financial strength
rating from A3 to Ba1 and on August 12, 1999, from Ba1 to Ba3. On August 10,
1999, S&P announced that it had lowered its financial strength rating of RGA
from AA to BB and placed RGA on credit watch with negative implications. On
August 26, 1999 S&P continued to keep RGA on credit watch but with positive
implications. Despite these developments, we have not experienced any failure
to receive payment from RGA under the terms of our reinsurance agreements.
There can be no assurance that RGA will continue to pay in full and in a
timely manner the claims that we make against them in accordance with terms of
these agreements. However, even if RGA failed to pay our claims in full, we do
not believe that our exposure to RGA would be material. On August 26, 1999,
Metropolitan Life Insurance Company and GenAmerica Corporation, the parent
company of General American Life Insurance Company and its subsidiaries,
including RGA, announced a definitive agreement whereby Metropolitan Life
Insurance Company (rated A+ by A.M. Best) has agreed to acquire GenAmerica
Corporation for $1.2 billion in cash. The acquisition is expected to close in
early 2000. On October 1, 1999 RGA announced that General American Life
Insurance Company recaptured 100% of the funding agreements which had
precipitated the ratings downgrades.
Our individual long-term care business unit has entered into a coinsurance
agreement with London Life International Reinsurance Company of Barbados. The
amount of reinsurance premium paid by us in the first nine months of 1999 and
for the full year 1998 under these agreements was $13.4 million and $18.7
million, respectively. As of December 31, 1998, there was, on a statutory
basis, $51.1 million of total reinsurance recoverable under this agreement.
Asset Gathering Segment
Overview
Through our Asset Gathering Segment, we offer individual annuities, mutual
fund products and investment management services. Individual annuities include
variable and fixed annuities, both immediate and deferred. Mutual fund
products primarily consist of open-end mutual funds and closed-end funds.
Open-end mutual funds are subject to redemption at any time by investors.
After their initial public offering, the shares of closed-end funds are not
subject to redemption, and accordingly represent a more stable base of assets
than open-end funds.
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As of September 30, 1999, 73% of our mutual fund assets under management were
invested in open-end mutual funds. Our investment management services include
retirement services, offered principally to 401(k) plans, and the management
of institutional pools of capital. We distribute these products and services
through Signator, independent broker/dealers, banks, directly to state lottery
commissions and, both directly and through pension consultants, to retirement
plan sponsors. In this segment, we also include the results of Signator, of
John Hancock Signature Services, our servicing subsidiary, of First Signature
Bank & Trust Company, our limited-service banking subsidiary, and of Essex
Corporation, one of the nation's largest intermediaries between banks and
product manufacturers for annuities.
The Asset Gathering Segment contributed 14.0% and 15.0% of consolidated
operating revenues and 20.6% and 22.2% of consolidated after-tax operating
income in the first nine months of 1999 and in the full year 1998,
respectively. The Asset Gathering Segment has achieved the following financial
results for the periods indicated:
<TABLE>
<CAPTION>
As of or for the As of or for the Year Ended
Nine Months December 31,
Ended September 30, -------------------------------
1999 1998 1997 1996
------------------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Sales:
Variable annuities (1)... $ 610.2 $ 882.7 $ 745.9 $ 629.3
Fixed annuities (1)...... 457.3 377.8 714.0 672.1
John Hancock Funds (2)... 2,798.6 6,797.7 7,442.3 5,150.3
--------- --------- --------- ---------
Total.................. $ 3,866.1 $ 8,058.2 $ 8,902.2 $ 6,451.7
========= ========= ========= =========
Operating revenues: (3)
Variable annuities....... $ 86.1 $ 94.1 $ 76.3 $ 69.3
Fixed annuities.......... 287.0 390.1 400.5 328.9
John Hancock Funds (4)... 342.5 467.2 377.9 276.5
Signator Investors
(formerly John Hancock
Distributors, Inc.)..... 140.3 169.0 112.2 41.9
John Hancock Signature
Services................ 74.4 102.2 101.7 27.7
Other.................... 23.8 10.8 10.8 10.3
Eliminations............. (165.6) (218.1) (174.5) (34.5)
--------- --------- --------- ---------
Total.................. $ 788.5 $ 1,015.3 $ 904.9 $ 720.1
========= ========= ========= =========
Segment after-tax
operating income: (3)
Variable annuities....... $ 25.0 $ 18.3 $ 8.3 $ 3.6
Fixed annuities.......... 32.2 34.9 37.4 28.9
John Hancock Funds....... 41.2 54.8 45.6 27.8
Signator Investors
(formerly John Hancock
Distributors, Inc.)..... 0.6 1.5 1.2 1.3
John Hancock Signature
Services................ (2.2) 0.7 0.0 (6.9)
Other.................... 0.7 0.9 0.8 1.0
--------- --------- --------- ---------
Total.................. $ 97.5 $ 111.1 $ 93.3 $ 55.7
========= ========= ========= =========
Assets:
Variable annuities....... $ 7,070.4 $ 6,820.5 $ 5,360.0 $ 4,194.3
Fixed annuities.......... 5,516.1 5,140.4 5,042.5 4,505.9
John Hancock Funds....... 465.6 502.1 467.3 372.2
Signator Investors
(formerly John Hancock
Distributors, Inc.)..... 15.2 13.2 12.4 11.4
John Hancock Signature
Services................ 25.1 26.7 22.3 16.3
Other.................... 174.7 212.8 165.8 172.1
--------- --------- --------- ---------
Total.................. $13,267.1 $12,715.7 $11,070.3 $ 9,272.2
========= ========= ========= =========
Assets Under Management:
Variable annuities....... $ 6,782.5 $ 6,569.6 $ 5,125.6 $ 3,983.8
Fixed annuities.......... 5,089.7 4,867.4 4,777.8 4,252.6
John Hancock Funds (5)... 31,169.0 34,945.2 31,402.0 23,298.6
</TABLE>
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<PAGE>
- --------
(1) Represents statutory annual statement values. Statutory revenues include
premiums and deposits on variable and fixed annuities. Statutory premiums
and deposits differ from GAAP premiums because GAAP requires that variable
and certain fixed annuity products be accounted for using deposit
accounting. Deposit accounting excludes from revenue the premiums and
deposits received on these products.
(2) Mutual fund and institutional asset sales are defined as new inflows of
funds from investors into our investment products. Sales of retail money
market products are not included. Sales of mutual fund products are
recorded on the trade date. Sales of institutional investment products are
recorded on the date a firm commitment is established.
(3) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 7 and Note
12 to our Unaudited Interim Consolidated Financial Statements and Audited
Consolidated Financial Statements, respectively, for a reconciliation of
amounts reported for operating segments to amounts reported in those
financial statements.
(4) Includes $5.0 million, $5.8 million, $7.7 million and $6.9 million of
revenue from management of our general account assets for the nine months
ended September 30, 1999 and for the years 1998, 1997 and 1996,
respectively.
(5) Includes $2.3 billion, $2.6 billion, $2.3 billion, and $2.1 billion of our
general account assets as of September 30, 1999 and December 31, 1998,
1997 and 1996, respectively.
Products and Markets
Annuities
We offer variable and fixed, immediate and deferred, annuities to a broad
range of consumers through multiple distribution channels. Variable annuities
are separate account products, where the contractholder bears the investment
risk and has the right to allocate his or her funds among various separate
investment subaccounts. Our major source of revenues from variable annuities
is mortality and expense fees charged to the contractholder, generally
determined as a percentage of the market value of the underlying assets under
management. Fixed annuities are general account products, where we bear the
investment risk as funds are invested in our general account and a stated
interest rate is credited to the contractholders' accounts. Our major source
of income from fixed annuities is the spread between the investment income
earned on the underlying general account assets and the interest credited to
contractholders' accounts. Annuities may be deferred, where assets accumulate
until the contract is surrendered, the contractholder dies, or the
contractholder begins receiving benefits under an annuity payout option; or
immediate, where payments begin within one year of issue and continue for a
fixed period of time or for life with or without a period certain.
Annuities offer a tax-deferred means of accumulating savings for retirement
needs, and provide a tax-efficient source of income in the payout period. We
sell our annuity products primarily to members of two groups: forty to sixty
year-olds seeking to accumulate assets for retirement, and people over sixty
years old seeking to protect against outliving assets during retirement.
Members of both groups typically have annual incomes of less than $100,000.
Investment management skills are critical to the growth and profitability of
our annuity business. In addition to variable annuity products that offer the
same fund choices as our variable life insurance products, we also offer
variable annuities that offer funds managed by our subsidiaries. As of
September 30, 1999 86% of our variable annuity assets were managed by John
Hancock Funds, our mutual fund subsidiary, and by Independence Investment
Associates, Inc., our internal institutional equity manager. Our fixed annuity
assets are also managed internally.
The relative proportion of our total annuity sales represented by fixed and
variable annuities is generally driven by the relative performance of the
equity and fixed income markets. Fixed annuity deposits represented 52% of
total annuity deposits in 1996, and, as interest rates declined, represented
only 30% of total annuity deposits in 1998. However, as a result of strong
equity markets, deposits of variable annuities grew from 48% of
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<PAGE>
total annuity deposits in 1996 to 70% of total annuity deposits in 1998. From
1996 through 1998, variable annuity deposits grew at a compound annual rate of
18% while fixed annuity deposits fell at a compound annual rate of 25%, as
interest rates generally declined and the equity markets have generally been
strong. Through September 30, 1999, as interest rates have generally risen,
fixed annuity deposits have increased as a proportion of total annuity sales.
In order to enhance our competitiveness in the variable annuity marketplace,
we introduced a new variable annuity product line, the Revolution suite of
variable annuities, in September of 1999. These products include features that
are responsive to the demand in all of our distribution channels, and will be
sold through Signator, independent brokers, financial planners, broker/dealers
and banks. Innovative optional features of these products, which can be added
by consumers by way of riders to their original contracts, include a number of
long-term care protection options. We believe that these new variable annuity
products will present an attractive offering in the evolving variable annuity
marketplace.
The following tables present certain information regarding our annuity
reserve activity for the periods indicated:
Annuity Reserve Activity
<TABLE>
<CAPTION>
For the
Nine Months As of or for the Year
Ended Ended December 31,
September 30, -----------------------------
1999 1998 1997 1996
------------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Variable Annuities:
Reserves, beginning of period..... $ 6,660.4 $ 5,245.0 $4,092.3 $3,309.0
Deposits........................ 610.2 882.7 745.9 629.3
Interest credited and investment
performance.................... 188.7 1,090.9 816.6 452.1
Surrenders and benefits......... (472.4) (467.4) (337.1) (238.8)
Product charges................. (84.0) (90.8) (72.7) (59.3)
--------- --------- -------- --------
Reserves, end of period........... $ 6,902.9 $ 6,660.4 $5,245.0 $4,092.3
========= ========= ======== ========
Fixed Annuities:
Reserves, beginning of period..... $ 4,591.3 $ 4,501.8 $4,083.0 $3,591.8
Premiums and deposits........... 445.5 360.6 692.6 652.2
Interest credited............... 193.0 245.0 228.1 208.0
Surrenders and benefits......... (375.1) (507.1) (492.0) (361.0)
Product charges................. (5.8) (9.0) (9.9) (8.0)
--------- --------- -------- --------
Reserves, end of period........... $ 4,848.9 $ 4,591.3 $4,501.8 $4,083.0
========= ========= ======== ========
Total Annuities:
Reserves, beginning of period..... $11,251.7 $ 9,746.8 $8,175.3 $6,900.8
Premiums and deposits........... 1,055.7 1,243.3 1,438.5 1,281.5
Interest credited and investment
performance.................... 381.7 1,335.9 1,044.7 660.1
Surrenders and benefits......... (847.5) (974.5) (829.1) (599.8)
Product charges................. (89.8) (99.8) (82.6) (67.3)
--------- --------- -------- --------
Reserves, end of period........... $11,751.8 $11,251.7 $9,746.8 $8,175.3
========= ========= ======== ========
</TABLE>
John Hancock Funds
John Hancock Funds, our mutual fund subsidiary, had $31.2 billion in total
assets under management as of September 30, 1999. We employ a team style in
the management of our funds. These teams manage portfolios in accordance with
a variety of specified strategies, which we believe gives us a competitive
advantage over competitors, many of whom deploy only one style across a family
of funds. As of September 30, 1999, our fixed income and equity research
staffs included over 60 portfolio managers and analysts with an average of 15
years
107
<PAGE>
of experience. We are recruiting additional investment professionals to
enhance our capabilities across both fundamental and quantitative analysis and
investment styles. This ongoing commitment to investment research further
enables us to develop new products intended to strengthen our fund offerings,
across a broad array of investment styles.
Through John Hancock Funds, we offer a variety of mutual fund products and
related investment management services:
. Mutual Funds. John Hancock Funds offers a broad array of open-end mutual
funds and closed-end funds to a broad base of consumers across varying
income levels. We also offer our mutual funds as investment options in
variable annuities and variable life insurance products. Our product
offerings cover both domestic and international equity and fixed-income
markets. As of September 30, 1999, 64% of assets under management were
invested in equity funds with the balance in fixed-income and money
market funds. As of the same date, 26% of assets under management were
invested in financial services sector funds.
We have three principal sources of income from our mutual fund
business: investment advisory fees; commission income; and Rule 12b-1
fees. We receive investment advisory fees for providing investment
advisory and management services to the funds. Any changes in these
fees must be approved by fund shareholders. Rule 12b-1 fee income
consists of fees charged to cover the costs of distributing fund
shares. We also receive a monthly management fee for shareholder and
accounting services. Mutual fund investment advisory contracts,
including the level of fees charged, are subject to the approval of the
independent board members of the individual funds.
Commission income consists of sales charges, also referred to as
"loads," on our open-end funds. We offer three commission structures.
Class A shares have a front-end load, in which sales charges are
incurred as deposits are received. John Hancock Funds retains a portion
of the front-end loads it receives but pays most of the amount to the
broker/dealer firms that sell the funds' shares. Class B shares have a
back-end or contingent load, in which sales charges are incurred only
if redemptions are made within a time frame specified at the time of
deposit. These charges decline to zero over time, typically a six year
period. Class C shares do not have an upfront sales charge but they do
have a back-end load for redemptions made within one year and ongoing
annual expenses tend to be higher. Class B shares have been our highest
selling class of mutual fund since 1996, representing 49% of deposits
in the first nine months of 1999. Class C shares have been offered on
our funds since 1998.
. Retirement Services. We offer mutual funds and services to 401(k) plan
sponsors, primarily small- and mid-size companies, on either a full-
service or on an unbundled basis. A third option is available to clients
who want to choose John Hancock Funds on an investment-only basis.
We also offer traditional IRA programs and a complete line of
retirement products, including: SIMPLE IRA and SIMPLE 401(k) plans for
companies with no more than 100 eligible employees and no other
qualified plan; Simplified Employee Pensions for companies of any size,
including self-employed persons, partnerships and corporations; and
Roth IRA plans for individuals.
Capturing retirement plan assets is an important focus of John Hancock
Funds, as plan participants' contributions are typically long-term in
nature and therefore represent a stable source of investment advisory
fee income. As of September 30, 1999, our retirement plan assets under
management, including 401(k) and IRA assets under management, were
approximately $5.9 billion. The retirement services we provide help us
to attract and retain assets under management.
. Institutional Pools of Capital. Through institutional funds and private
accounts, John Hancock Funds manages assets for public pension plans,
high net-worth individuals, corporate pension plans, pooled separate
accounts, union pension plans, foundations and endowments. As of
September 30, 1999, assets under management included $2.3 billion of our
general account assets.
108
<PAGE>
The following tables present certain information regarding the assets under
management by John Hancock Funds for the periods indicated:
Asset Flow Summary
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended December
September 31,
30, -------------------------------
1999 1998 1997 1996
------------ --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Retail Mutual Funds:
Assets under management,
beginning of period (1)........ $29,248.7 $26,826.2 $19,244.5 $15,443.8
Deposits and reinvestments.... 2,990.0 6,242.8 6,178.3 5,013.1
Redemptions and withdrawals... (4,358.0) (4,412.8) (3,282.1) (2,375.0)
Market (depreciation)
appreciation................. (1,332.4) 1,044.0 5,048.9 1,422.0
Fees.......................... (326.0) (451.5) (363.4) (259.4)
--------- --------- --------- ---------
Assets under management, end of
period......................... $26,222.3 $29,248.7 $26,826.2 $19,244.5
========= ========= ========= =========
Institutional Investment
Management:
Assets under management,
beginning of period............ $ 5,696.5 $ 4,575.8 $ 4,054.1 $ 3,379.2
Deposits and reinvestments.... 381.0 2,184.4 811.9 758.6
Redemptions and withdrawals... (1,116.0) (907.2) (573.3) (464.3)
Market (depreciation)
appreciation................. (2.5) (132.4) 307.3 402.8
Fees.......................... (12.3) (24.1) (24.2) (22.2)
--------- --------- --------- ---------
Assets under management, end of
period......................... $ 4,946.7 $ 5,696.5 $ 4,575.8 $ 4,054.1
========= ========= ========= =========
Total:
Assets under management,
beginning of period............ $34,945.2 $31,402.0 $23,298.6 $18,823.0
Deposits and reinvestments.... 3,371.0 8,427.2 6,990.2 5,771.7
Redemptions and withdrawals... (5,474.0) (5,320.0) (3,855.4) (2,839.3)
Market (depreciation)
appreciation................. (1,334.9) 911.6 5,356.2 1,824.8
Fees.......................... (338.3) (475.6) (387.6) (281.6)
--------- --------- --------- ---------
Assets under management, end of
period......................... $31,169.0 $34,945.2 $31,402.0 $23,298.6
========= ========= ========= =========
</TABLE>
- --------
(1) Retail mutual fund assets under management includes $5.9 billion, $5.0
billion, $4.4 billion, and $3.5 billion in retirement plan assets for the
nine months ended September 30, 1999 and the years ended December 31,
1998, 1997 and 1996, respectively.
For the first nine months of 1999, John Hancock Funds experienced net
redemptions of $2.1 billion, primarily due to higher redemptions and sharply
declining sales of its regional bank and financial services industries funds.
Performance of these sector funds declined as did the underlying stocks in
these industry categories. Further, industry-wide data indicates a general
slowdown in the mutual fund industry. According to information published by
Financial Research Corporation, net flows of new money into long-term open end
mutual funds, including new sales (but not reinvestment of dividends), less
redemptions outside the fund's family plus net exchanges within the fund's
family, have declined by nearly 38% in 1999, from $196.6 billion for the nine
months ended September 30, 1998 to $122.3 billion for the nine months ended
September 30, 1999. To increase our mutual fund assets under management, we
have taken steps to boost sales, including the development of several new fund
offerings and refocusing the sales organization on regional broker/dealers and
financial planners. Operating expenses have also been cut to protect profit
margins.
109
<PAGE>
The following table sets forth the performance of our 10 largest retail open
end mutual funds, as measured by net assets as of September 30, 1999. All of
these mutual funds are managed by our affiliates. The historical performance
of these funds is not an indicator of future performance. The table also sets
forth the net assets of all other retail open end funds as a group, our
variable annuity funds, our institutional funds, our closed end funds and our
private accounts and other funds, which include $2.3 billion of our own
general account assets.
Summary of Fund Performance
As of September 30, 1999
<TABLE>
<CAPTION>
One-Year Three-Year Five-Year Overall
Class Type of Net Assets Annual Total Average Annual Average Annual Morningstar
Fund (1) Fund (in millions) Return Total Return Total Return Rating (Stars) (2)
---- ----- ------- ------------- ------------ -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10 Largest Open End
Funds
Regional Bank A Equity $ 1,102.6 2.00% 15.47% 19.19% 3
B 3,341.9 1.36 14.70 18.39 4
C 5.3 N/A N/A N/A N/A
Financial Industries A Equity 599.1 5.23 12.94 N/A 2
B 1,992.2 4.47 N/A N/A N/A
C 4.2 N/A N/A N/A N/A
Sovereign Investors A Equity 1,746.4 14.30 15.53 17.54 4
B 792.0 13.54 14.67 16.67 3
C 8.6 13.50 N/A N/A N/A
Bond Fund A Income 1,235.0 (1.17) 6.26 7.77 4
B 234.4 (1.85) 5.54 7.05 3
C 23.4 N/A N/A N/A N/A
Strategic Income A Income 522.0 3.35 7.69 9.84 3
B 616.1 2.61 6.96 9.08 4
C 27.3 2.60 N/A N/A N/A
High Yield Bond A Income 266.9 10.90 5.44 8.01 1
B 814.7 10.08 4.72 7.25 2
C 30.7 10.08 N/A N/A N/A
Large Cap Value A Equity 445.6 22.28 21.28 21.85 4
B 588.8 21.45 20.40 20.96 4
C 8.5 21.40 N/A N/A N/A
Core Equity A Equity 362.0 26.11 21.87 22.87 4
B 618.2 25.24 21.03 N/A 4
C 23.6 25.24 N/A N/A N/A
Global Technology A Equity 462.5 107.08 34.68 31.43 4
B 461.7 105.69 33.74 30.50 5
C 9.4 N/A N/A N/A N/A
Large Cap Growth A Equity 465.0 28.51 15.40 19.05 2
B 300.5 27.63 14.61 18.20 3
C 1.3 27.58 N/A N/A N/A
Other Retail Open-End Funds 5,570.1
---------
Total Retail Open-End Funds 22,680.0
Variable Annuity Funds 314.9
Institutional Funds 774.8
Closed-End Funds 2,324.1
Private Accounts and Other 5,075.2 (3)
---------
Total $31,169.0 (3)
=========
</TABLE>
- -------
(1) Represents different classes of shares within each fund, based upon fee
and expense computations.
(2) Morningstar is an independent provider of financial information concerning
mutual fund performance. According to Morningstar, a fund's 10 year return
accounts for 50% of its overall rating score, its five year return
accounts
110
<PAGE>
for 30% and its three year return accounts for 20%. If only five years of
history are available, the five year period is weighted 60% and the three
year period is weighted 40%. If only three years of data are available, the
three years are used alone. Funds scoring in the top 10% of their
investment category receive 5 stars; funds scoring in the next 22.5%
receive 4 stars; the next 35% receive 3 stars; those in the next 22.5%
receive 2 stars and the bottom 10% receive 1 star.
(3) Includes $2.3 billion of our general account assets.
The following table presents certain information regarding our investment
management revenues, commissions and other fees earned by John Hancock Funds
in the periods indicated.
Investment Management Revenues, Commissions and Other Fees
<TABLE>
<CAPTION>
For the Nine
Months For the Year Ended
Ended December 31,
September 30, --------------------
1999 1998 1997 1996
------------- ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Investment advisory fee income............. $153.3 $210.9 $173.7 $132.7
Commission income.......................... 60.5 84.8 71.6 56.6
Rule 12b-1 fee income...................... 118.4 163.7 125.3 79.0
Shareholder and accounting service fee
income.................................... 7.5 4.2 3.9 6.8
------ ------ ------ ------
Total.................................... $339.7 $463.6 $374.5 $275.1
====== ====== ====== ======
</TABLE>
Distribution
We sell our asset gathering products and services through multiple
distribution channels, both owned and non-owned, including many of the
channels described within the Protection Segment.
Signator. Signator, through its broker/dealer and insurance agency
subsidiaries, is the primary distribution channel for our variable annuities.
We also sell fixed annuities, mutual funds, 401(k) programs and other
retirement programs through these entities.
Broker/Dealers. Broker/dealers, which include regional and national
brokerage firms and financial planners, are the primary distribution channel
for our mutual funds. Broker/dealers also sell our fixed and variable
annuities. We support this distribution channel with an internal network of
wholesalers. These wholesalers meet directly with broker/dealers and financial
planners and are supported by an extensive home office sales staff.
Our recent distribution initiatives in this channel have included
participation in alternative distribution programs, including: (1) wrap
programs which package products under a single asset-based fee; (2) fund
supermarkets, which distribute a menu of funds to consumers through a single
brokerage account; and (3) subadvisory arrangements where we are hired to
provide investment management services by other organizations involved in the
packaging and distribution of mutual fund products.
We also sell our 401(k) programs and other retirement programs through the
broker/dealer channel. We employ a dedicated team of retirement plan
wholesalers to sell products and services to this channel and are seeking to
leverage these wholesalers to sell more retirement business directly to the
small to mid-size 401(k) plan marketplace typically served by intermediaries.
We have recently expanded our internal and external wholesaling capabilities
and have expanded our telemarketing capabilities to better serve this channel.
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<PAGE>
Pension Consultants. We market investment management services to pension
consultants nationwide who provide advisory services to plan sponsors.
Marketing efforts are supported by dedicated client relationship officers who
keep clients updated on portfolio performance information.
Banks. Starting with sales of fixed annuities, we have expanded our
offerings through banks to include mutual funds and variable annuities.
Starting in 1998, we added additional products to our bank offerings. We
believe we are well positioned to take advantage of the growth opportunity we
see for multiple product offerings, coupled with added value marketing
programs and customized service support for banks.
Essex Corporation. In January 1999, we purchased Essex Corporation, one of
the nation's largest intermediaries between banks and product manufacturers
for annuities. Essex Corporation also serves as an intermediary in the
distribution of mutual funds. Essex Corporation's primary source of income is
commissions on sales of these products.
Direct Distribution. We are currently offering a variable annuity through
the direct distribution channel where customers may call a toll-free number
and obtain an application to purchase the product.
The table below shows Asset Gathering Segment sales by distribution channel
for the periods indicated:
Asset Gathering Segment Sales by Distribution Channel
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------
For the Nine
Months
Ended
September 30,
1999 1998 1997 1996
------------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Broker/Dealers:
Variable annuities................... $ 79.1 $ 155.8 $ 62.8 $ 0.4
Fixed annuities...................... 21.5 29.3 50.8 27.9
Mutual funds......................... 1,836.5 4,826.3 4,987.9 3,839.8
Signator:
Variable annuities................... 509.5 709.7 678.4 628.9
Fixed annuities...................... 53.1 75.8 120.1 118.4
Mutual funds......................... 628.9 902.5 753.9 776.9
Pension consultants:
Mutual funds......................... 231.8 885.9 1,562.5 456.1
Banks:
Variable annuities................... 13.1 14.2 3.3 --
Fixed annuities...................... 22.9 255.1 490.7 475.8
Mutual funds......................... 97.2 183.0 138.0 77.5
Essex (included with bank channel
prior to 1999):
Variable annuities................... 5.0 -- -- --
Fixed annuities...................... 331.7 -- -- --
Mutual funds......................... 4.2 -- -- --
Direct distribution.................. 3.5 3.0 1.4 --
Other (1)............................ 28.1 17.6 52.4 50.0
-------- -------- -------- --------
Total.............................. $3,866.1 $8,058.2 $8,902.2 $6,451.7
======== ======== ======== ========
</TABLE>
- --------
(1) Other includes single premium immediate annuities, including lottery-
related payout contracts, and supplemental contracts involving life
contingencies.
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<PAGE>
Reserves
We establish and report liabilities for future policy benefits on our
balance sheet to meet the obligations under our annuity contracts. Our
liability for variable annuity contracts and deferred fixed annuity contracts
is equal to the cumulative account balances. Cumulative account balances
include deposits plus credited interest or investment earnings less expense
and mortality charges, as applicable, and withdrawals. Future policy benefits
on our immediate fixed annuity contracts are calculated based on a set of
actuarial assumptions that we establish and maintain throughout the lives of
the contracts.
Competition
We face substantial competition in all aspects of our asset gathering
business. The annuity business is highly competitive. We compete with a large
number of insurance companies, investment management firms, mutual fund
companies, banks and others in the sale of annuities. We compete for mutual
fund business with hundreds of fund companies. Many of our competitors in the
mutual fund industry are larger, have been established for a longer period of
time, offer less expensive products, have deeper penetration in key
distribution channels and have more resources than us.
Competition in the asset gathering business is based on several factors.
These include investment performance and the ability to successfully penetrate
distribution channels, to offer effective service to intermediaries and
consumers, to develop products to meet the changing needs of various consumer
segments, to charge competitive fees and to control expenses.
We believe the Asset Gathering Segment is well positioned to increase assets
under management in the face of this competition. Our competitive strengths
include our ability to:
. deliver strong investment performance, and enhance this performance by
expanding the depth and breadth of fundamental research, portfolio
management teams, and investment professionals;
. develop new products and expand into new markets; and
. provide excellent service to investors and distributors.
Distribution and Service Organizations
Within the Asset Gathering Segment, we also include our distribution
company, Signator, and our servicing subsidiary, John Hancock Signature
Services.
Signator is the holding company for Signator Investors, Inc. and several
insurance agencies. Signator Investors, Inc. representatives are able to offer
securities and financial advisory products and services including general
securities trading, wrap account products and other financial instruments to
their clients, including not only John Hancock mutual funds and variable
products, but also the products and services of other companies.
John Hancock Signature Services combines and coordinates customer service
functions for life insurance, annuity and mutual fund customers. The services
provided by John Hancock Signature Services, Inc. include new business
processing, contract change services, claims processing, premium collection
and processing, billing, and preparation of annual or quarterly statements.
Through this subsidiary, we seek to provide an integrated and comprehensive
customer service function on a cost effective basis. This system permits a
customer to have a single point of contact for most servicing needs.
Banking Products and Services
First Signature Bank & Trust Company is a limited-service bank, which
accepts demand deposits but does not make commercial loans. It provides
consumer banking products and services to our customers. First Signature Bank
& Trust Company had $158.1 million in assets as of September 30, 1999.
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<PAGE>
Guaranteed and Structured Financial Products Segment
Overview
Through our Guaranteed and Structured Financial Products Segment, we offer a
variety of products to qualified defined benefit and defined contribution
retirement plans, as well as to other institutional buyers. A "defined benefit
plan" is a retirement plan in which benefit payment obligations are specified
by the plan document and where the contribution levels must adjust as
necessary to fund these benefit obligations. In contrast to this, a "defined
contribution plan" is a retirement plan in which the rules for making
contributions to the plan are determined pursuant to a plan document and where
the ultimate benefit levels will adjust to reflect actual contributions and
the investment earnings thereon.
Our products include non-guaranteed, partially guaranteed and fully
guaranteed general account and separate account investment options. We
distribute these products through home office and regional sales
representatives either directly to institutional buyers or indirectly through
financial intermediaries, consultants and brokers.
The Guaranteed and Structured Financial Products Segment contributed 31.1%
and 25.6% of consolidated operating revenues and 35.0% and 29.1% of
consolidated after-tax operating income in the nine months ended September 30,
1999 and in the full year 1998, respectively. The segment has achieved the
following financial results for the periods indicated.
<TABLE>
<CAPTION>
As of or for the
Nine Months
Ended As of or for the Year Ended December 31,
September 30, -----------------------------------------
1999 1998 1997 1996
---------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Operating Revenues: (1)
Spread-based products... $ 1,467.7 $ 1,353.7 $ 1,433.6 $ 1,547.0
Fee-based products...... 282.5 377.5 380.8 488.7
--------- ------------- ------------- -------------
Total................. $ 1,750.2 $ 1,731.2 $ 1,814.4 $ 2,035.7
========= ============= ============= =============
Segment After-Tax
Operating Income: (1)
Spread-based products... $ 135.9 $ 117.5 $ 103.0 $ 129.1
Fee-based products...... 29.9 28.2 35.5 26.3
--------- ------------- ------------- -------------
Total................. $ 165.8 $ 145.7 $ 138.5 $ 155.4
========= ============= ============= =============
Assets:
Spread-based products... $19,352.8 $ 17,311.6 $ 16,100.4 $ 16,288.8
Fee-based products...... 12,288.6 12,003.6 12,009.6 11,772.4
--------- ------------- ------------- -------------
Total................. $31,641.4 $ 29,315.2 $ 28,110.0 $ 28,061.2
========= ============= ============= =============
Assets Under Management:
Spread-based products... $18,744.9 $ 16,808.6 $ 15,653.5 $ 15,827.4
Fee-based products...... 11,935.5 11,738.0 11,759.6 11,540.7
--------- ------------- ------------- -------------
Total................. $30,680.4 $ 28,546.6 $ 27,413.1 $ 27,368.1
========= ============= ============= =============
</TABLE>
- --------
(1) Excluded from the operating segment financial results are net realized
investment gains and losses, except those incurred for investments
supporting our multi-manager funding agreements, and non-recurring or
unusual items. See Note 7 and Note 12 to our Unaudited Interim
Consolidated Financial Statements and Audited Consolidated Financial
Statements, respectively, for a reconciliation of amounts reported for
operating segments to amounts reported in those financial statements.
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<PAGE>
Products and Markets
The Guaranteed and Structured Financial Products Segment offers spread-based
products and fee-based products.
Spread-Based Products. Our spread-based products provide a guaranteed rate
of return to the customer. We derive earnings on these products primarily from
the difference between the investment returns on the supporting assets and the
guaranteed returns provided to customers. We refer to this difference as the
"spread." Our spread-based products include both fund-type products and single
premium annuities:
. Fund-type products. Our fund-type products consist of the following:
General account GICs. GICs are guaranteed annuity contracts that pay a
specified rate of return. GICs are primarily marketed to sponsors of
tax-qualified retirement plans such as 401(k) plans. The rate of return
on GICs can be a fixed rate or a floating rate based on an external
market index.
Funding agreements. Funding agreements are also guaranteed contracts
that pay a specified rate of return. However, funding agreements
generally are issued to corporations, mutual funds and other
institutional investors and, unlike GICs, are not typically used to
fund retirement plans. The rate of return on funding agreements can be
a fixed rate or a floating rate based on an external market index.
. Single premium annuities. Our primary spread-based group annuity product
is the single premium annuity. Single premium annuities are immediate or
deferred annuities which commence payment at a specified time, typically
retirement. The two most common types of annuities are the straight life
annuity, which makes payments for the life of a retired annuitant, and
the joint and survivor annuity, which continues to make payments to a
spouse after the death of the annuitant.
The following table illustrates for the periods indicated, statutory
premiums and deposits, future policy benefits/account balances and assets
under management for our spread-based products. Statutory premiums and
deposits differ from GAAP premiums because GAAP requires that contributions to
general account GICs and funding agreements be accounted for using deposit
accounting. Deposit accounting excludes from revenue the contributions and
deposits received on these products.
Spread-Based Products Selected Financial Data
<TABLE>
<CAPTION>
As of or for the
Nine Months Ended As of or for the Year Ended December 31,
September 30, -----------------------------------------
1999 1998 1997 1996
----------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Statutory Premiums and
Deposits:
Fund-type products......
General account GICs.. $ 1,749.7 $ 2,578.9 $ 2,332.7 $ 2,564.8
Funding agreements.... 2,410.2 2,416.1 311.0 202.5
Single premium
annuities.............. 422.5 111.8 193.7 247.2
--------- ------------- ------------- -------------
Total................. $ 4,582.4 $ 5,106.8 $ 2,837.4 $ 3,014.5
========= ============= ============= =============
Future Policy
Benefits/Account
Balances:
Fund-type products......
General account GICs.. $ 9,019.6 $ 9,743.3 $ 10,976.4 $ 11,707.7
Funding agreements.... 5,044.6 2,929.5 531.7 222.2
Single premium
annuities.............. 3,530.5 3,182.3 3,131.0 2,994.7
--------- ------------- ------------- -------------
Total................. $17,594.7 $ 15,855.1 $ 14,639.1 $ 14,924.6
========= ============= ============= =============
Assets Under Management:
Fund-type products......
General account GICs.. $ 9,609.2 $ 10,329.2 $ 11,736.9 $ 12,416.0
Funding agreements.... 5,374.4 3,105.7 568.6 235.6
Single premium
annuities.............. 3,761.3 3,373.7 3,348.0 3,175.8
--------- ------------- ------------- -------------
Total................. $18,744.9 $ 16,808.6 $ 15,653.5 $ 15,827.4
========= ============= ============= =============
Segment After-Tax
Operating Income:
Fund-type products...... $ 110.6 $ 83.7 $ 78.9 $ 104.2
Single premium
annuities.............. 25.3 33.8 24.1 24.9
--------- ------------- ------------- -------------
Total................. $ 135.9 $ 117.5 $ 103.0 $ 129.1
========= ============= ============= =============
</TABLE>
115
<PAGE>
Fee-Based Products. Our fee-based products generally pass the investment
results of invested assets through to the contractholder with no, or minimal,
guarantees. We derive earnings on these products primarily from expense, risk
and profit charges which are generally assessed on the basis of assets under
management. Fee-based businesses provide relatively stable revenues and have
lower capital requirements than do our spread-based businesses. Our fee-based
products include:
. General account participating pension fund-type products and conversion
annuity contracts. These products are group annuities which pass
investment results through to the contractholder, after expense, risk
and profit charges. Annuity guarantees of these products are supported
by asset requirements under which assets must be maintained at levels at
least 5% above the annuity reserve. If the level of assets held under
the contract falls below this threshold we may withdraw an amount equal
to the annuity reserve and apply the assets to purchase a fully
guaranteed annuity.
. Separate account GICs. These products pass the investment results of a
separate account through to the contractholder and contain only minimal
guarantees. Contractholders may select from among flexible investment
options provided by our various investment managers. Investment options
may include a guaranteed tranche of a collateralized bond obligation
offering originated by our Investment Management Segment. The separate
account GIC business leverages the strong marketing relationships
developed in our general account GIC business.
. Guaranteed separate account annuities. These products are group
annuities which offer customers an insured pension-funding program with
a broad range of investment options, including both equity and fixed-
income investment classes. The risk associated with providing these
fully guaranteed annuities is mitigated by excess collateral maintenance
requirements, which vary depending on the investment option selected.
. Separate investment accounts. These are non-guaranteed group annuity
contracts under which assets are held in a separate account. We
typically use affiliated investment advisors to manage these assets. We
may also use non-affiliated investment managers if the customer so
requires. Because these products do not provide guarantees, new sales of
separate investment accounts are reported in the Investment Management
Segment. Existing agreements, however, continue to be reported in the
Guaranteed and Structured Financial Products Segment because of customer
relationships.
116
<PAGE>
The following table illustrates, for the periods indicated, statutory
premiums and deposits, future policy benefits/balances and assets under
management for our fee-based products. Statutory premiums and deposits differ
from GAAP premiums because GAAP requires that premiums on general account
participating pension products, separate account GICs, separate account
annuities and separate investment accounts be accounted for using deposit
accounting. Deposit accounting excludes from revenue the contributions and
deposits received on these products and generally shows the fees earned from
the products as revenues.
Fee-Based Products Selected Financial Data
<TABLE>
<CAPTION>
As of or for the
Nine Months
Ended As of or for the Year Ended December 31,
September 30, -------------------------------------------
1999 1998 1997 1996
---------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Statutory Premiums and
Deposits:
General account
participating pension
fund-type products and
conversion annuity
contracts.............. $ 430.8 $ 566.7 $ 703.8 $ 716.4
Separate account GICs... 474.1 459.9 456.0 563.5
Guaranteed separate
account annuities...... (46.3) (27.9) (70.4) 47.1
Separate investment
accounts............... 220.5 173.5 265.4 166.6
--------- ------------- ------------- -------------
Total................. $ 1,079.1 $ 1,172.2 $ 1,354.8 $ 1,493.6
========= ============= ============= =============
Future Policy
Benefits/Account
Balances:
General account
participating pension
fund-type products and
conversion annuity
contracts.............. $ 3,088.4 $ 3,167.9 $ 3,338.2 $ 3,501.5
Separate account GICs... 3,631.5 3,333.6 3,305.0 3,192.0
Guaranteed separate
account annuities...... 1,967.3 2,118.9 1,944.2 1,867.9
Separate investment
accounts............... 2,367.8 2,463.1 2,285.1 2,383.5
--------- ------------- ------------- -------------
Total................. $11,055.0 $ 11,083.5 $ 10,872.5 $ 10,944.9
========= ============= ============= =============
Assets Under Management:
General account
participating pension
fund-type products and
conversion annuity
contracts.............. $ 3,417.7 $ 3,466.6 $ 3,651.8 $ 3,762.8
Separate account GICs... 4,104.7 3,644.5 3,799.7 3,491.8
Guaranteed separate
account annuities...... 1,973.8 2,113.4 1,968.6 1,882.6
Separate investment
accounts............... 2,439.3 2,513.5 2,339.5 2,403.5
--------- ------------- ------------- -------------
Total................. $11,935.5 $ 11,738.0 $ 11,759.6 $ 11,540.7
========= ============= ============= =============
</TABLE>
117
<PAGE>
Markets. We offer our spread-based products and our fee-based products in a
variety of markets. We emphasize a comprehensive understanding of each market
in which we participate, and strive to create and maintain strong,
consultative relationships with key buyers and intermediaries. By working
closely with our customers to develop customized investment programs, we have
been able to build a leading market share in several important markets,
including general account GICs, funding agreements and separate account GICs.
The following table provides a summary of our products and the markets in
which they are sold.
<TABLE>
<CAPTION>
Markets
-----------------------------------------------------
Qualified Defined Qualified and Non-
Contribution Qualified Defined Non-Qualified
Products Plans Benefit Plans Institutional Market
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Spread-based
- -------------------------------------------------------------------------------
General account
GICs X
- -------------------------------------------------------------------------------
Single premium
annuities X X
- -------------------------------------------------------------------------------
Funding agreements X
- -------------------------------------------------------------------------------
Fee-based
- -------------------------------------------------------------------------------
Separate account
GICs X
- -------------------------------------------------------------------------------
Guaranteed
separate account
annuities X
- -------------------------------------------------------------------------------
General account
participating
pension fund-type
products and
conversion
annuity products X
- -------------------------------------------------------------------------------
Separate
investment
accounts X
- -------------------------------------------------------------------------------
</TABLE>
Industry sales of single premium annuities are driven primarily by pension
plan terminations, which have been flat or have declined in recent years. Our
sales of single premium annuities will generally follow this trend in the
absence of a disproportionately large sale. In addition, due to declining
demand for general account GICs in the 401(k) plan market, deposits on our
general account GICs have remained relatively constant over the past three
full years and during the nine months ended September 30, 1999. In response to
these trends, we have created new products for the non-qualified institutional
marketplace.
We intend to continue to capitalize on our risk-management and investment
skills to attract funds with new products from new markets, while continuing
to pursue opportunities in those parts of the U.S. pension market that are
still expanding. In particular, beginning in 1998 we significantly expanded
our marketing and product development efforts for funding agreements. We are
now selling our products and services to defined contribution plans, banks,
insurance companies, mutual funds, and other investors in the U.S. and have
recently entered the European and Asian markets.
. Qualified Defined Contribution Plans. We offer spread-based as well as
fee-based products to sponsors or investment managers of qualified
defined contribution plans. Our marketing efforts principally are
directed toward mid- to large-sized plans with an average contract size
of $7 million to $10 million.
The general account GIC has been the predominant product issued in this
market, primarily for use as the asset underlying the fixed income
investment option of 401(k) plans. Both general account and separate
account GICs sold in this market provide a feature which permits
individual plan participants to redeem or transfer funds in their
account at book value during the term of the contract. In the case of
separate account GICs, gains and losses arising out of these book value
redemptions are absorbed by the plan by means of prospective changes in
the crediting rate, which is the rate at which the GIC fund balances
increase in value under the terms of the GIC.
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<PAGE>
. Qualified and Non-Qualified Defined Benefit Plans. New sales to this
market are primarily limited to single premium annuities and separate
account annuities. Although traditionally a significant portion of this
market, currently there is little demand for new general account
participating pension products, as demand for these arrangements has
largely been replaced by demand for unbundled services, such as non-
insured arrangements. However, because the significant majority of our
existing general account participating pension products business does
not contain provisions allowing for termination of the agreement by the
customer prior to the termination date specified in the agreement, this
business provides a slowly decreasing but predictable source of
earnings.
The primary drivers of the single premium annuity market are plan
terminations and plan spin-offs. In such instances, the plan sponsor
transfers all its obligations under the plan to an insurer by paying a
lump sum premium amount. Another type of single premium annuity,
referred to as a terminal funding annuity, is sold to plan sponsors who
wish to transfer the payment obligations with respect to individual
retirees to an insurer. Because the Department of Labor has mandated
that annuities be purchased only from the "safest available" insurer,
plan sponsors restrict their purchases of single premium and terminal
funding annuities almost exclusively to insurance companies with
superior or excellent financial quality ratings. We believe that our
strong financial ratings position us well to compete in this market.
Separate account annuities are purchased by plan sponsors who wish to
provide guaranteed retirement benefits for their retirees and control
their asset allocation mix. The advantage of an insurer's guarantee for
a plan sponsor is that the obligation to the retiree is removed from
the employer's balance sheet, and the employer is no longer required to
pay Pension Benefit Guaranty Corporation premiums in respect of such
retiree.
. Non-Qualified Institutional Market. We issue funding agreements to non-
qualified institutional investors both in the domestic and the
international marketplace. We have broadened our marketing and product
development efforts in this market in response to declining demand for
traditional general account GICs in the 401(k) plan market.
Domestic purchasers of funding agreements include money market mutual
funds, bank short-term investment funds, municipalities, bond funds and
securities lending funds. Funding agreements sold in the United States
tend to have guarantees that are based upon floating interest rate
market indices. According to government and industry sources, as of
December 31, 1998, the potential domestic non-qualified institutional
market included over $500 billion in taxable, non-government only money
market funds, over $175 billion in bank short-term funds and over $400
billion in securities lending accounts.
International purchasers of funding agreements include pension funds,
banks, mutual funds, and insurance companies located in Europe and
Asia. For international funding agreements, interest rate guarantees
are generally fixed and the liabilities are denominated predominantly
in foreign currencies. These funding agreements (accompanied by a
currency swap where appropriate) typically are issued to a non-
affiliated conduit which issues publicly-traded medium-term notes.
According to Capital NET Limited's MTNWare, there were nearly $550
billion of medium term notes issued in Europe in 1998. In general,
medium-term note funding agreements do not give the contractholder the
right to terminate prior to contractually stated maturity dates.
Through September 30, 1999, we had issued approximately $5.2 billion of
funding agreements, including approximately $2.0 billion in the
domestic market and $3.2 billion internationally. Of our $1.7 billion
of total domestic funding agreement liabilities at September 30, 1999
approximately $704 million contained a 90-day termination provision,
and approximately $457 million contained a 30-day termination
provision. The balance contained no early termination provisions of
less than one year, and we are currently not selling any funding
agreements with less than one year termination provisions. Further, in
the fourth quarter of 1999, we plan to exercise our termination rights
on all funding agreements containing 30 or 90 day termination
provisions. We estimate that the cost of exercising our
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<PAGE>
right to terminate under these agreements will result in an after-tax
charge to operations of $10 million to $15 million in the fourth
quarter of 1999. We believe that expansion into the domestic and
international funding agreement markets presents good prospects for
future growth. Moreover, diversification into these markets permits us
to seek out the lowest cost of funds among diverse markets.
Distribution
We distribute our guaranteed and structured financial products through a
variety of channels. General and separate account GICs are sold through our
regional representatives to plan sponsors, or to GIC managers who represent
plan sponsors. Funding agreements marketed in the United States are sold
either directly or through brokers, and in the international market they are
sold through investment banks in the form of medium-term notes. Annuities are
sold through pension consultants who represent defined benefit plan sponsors
or through brokers who receive a commission for sales of our products.
We maintain an experienced sales staff that develops and maintains
relationships with target customers, consultants, and other financial
intermediaries. We believe that our consistent market presence over the past
two decades has strengthened our relationships with a large segment of the
customer base.
Spread-Based Products Risk Management
Because of the significant guarantees provided as part of our spread-based
products, risk management is particularly important in this line of business.
To facilitate risk management, we segregate and manage the assets supporting
our spread-based products separately from the rest of our general account. Our
risk management strategy is based on:
. Managing interest rate exposure by closely matching the relative
sensitivity of asset and liability values to interest rate changes, i.e.
controlling the "duration mismatch" of assets and liabilities. We
believe that our target duration mismatch of .05 years is considerably
narrower than the standard in the industry.
. Using sophisticated systems and processes to project cash flows for each
asset and each liability and to measure with precision the sensitivity
of assets and liabilities to interest rate changes. This measurement
process provides risk managers with a more complete picture of our
liability structure, the appropriateness of pricing and the overall
soundness of the management of the account than do conventional
accounting techniques alone.
. Writing contracts that typically have a predictable maturity structure
and do not have premature surrender or redemption provisions. This
predictability allows us to invest a significant proportion of our
assets in relatively illiquid asset classes, primarily private placement
bonds and commercial mortgages, which have traditionally provided
relatively attractive yields.
. Monitoring all contribution and withdrawal activity in each contract to
anticipate deviations from expected cash flows. Any such deviations form
the basis for new cash flow projections and may trigger a change in
portfolio hedging requirements.
. Establishing working groups to facilitate interaction among our various
business units, including portfolio management, sales management, risk
management, financial management and the pricing staff. We believe
frequent interaction and effective communication across the various
business units have been key components of our successful risk
management strategy.
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<PAGE>
Underwriting
Spread-based products, particularly general account GICs and single premium
annuities, are the products in this segment for which underwriting is most
significant.
General Account GICs. In developing pricing proposals for new contracts, our
underwriters estimate both base-line cash flows and also likely variance from
the base line due to plan participants reallocating assets from the "stable
value" option of their defined contribution plan. Our underwriters utilize
customized pricing models that generate plan-specific risk charges for each
customer's book value payment provision. If these pricing models project the
risk of losses exceeding customary thresholds, instead of rejecting the
business, our underwriters can modify the proposal by suggesting the use of
risk reduction techniques designed to shift some of the risk of redemptions
back to the plan or to a third party.
Single Premium Annuities. We underwrite immediate annuities using recent
mortality experience and an assumption of continued improvement in annuitant
longevity. We underwrite deferred annuities by analyzing not only mortality
risk but also the expected time to retirement.
Reserves
We establish and report liabilities for contractholders' funds and future
policy benefits to meet the obligations on our policies and contracts. Our
liability for general account GICs, funding agreements, and fee-based products
is equal to the cumulative account balances for these products. Cumulative
account balances include deposits plus credited interest or investment
earnings less expense charges and withdrawals. Future policy benefits for our
single premium annuity contracts are calculated based on a set of actuarial
assumptions that we establish and maintain throughout the lives of the
contracts. Our assumptions include investment yields, mortality and the
expected time to retirement.
Competition
Our Guaranteed and Structured Financial Products Segment operates in a
variety of highly competitive institutional markets. Although a large number
of companies offer these products, the market is concentrated. Five insurers,
including John Hancock, issued approximately 40% of total GICs and funding
agreements issued by U.S. insurance companies reporting to LIMRA in 1998; and
five insurers, including John Hancock, issued more than 80% of total single
premium annuities in 1998. Our competitors include a variety of well-
recognized insurance companies, domestic and foreign banks and other
institutional investment advisors, many of whom are larger and have greater
resources than us. The recent entry of several new competitors, particularly
foreign banks, has placed pressure on the pricing of some products, such as
separate account GICs. We have, as a result, pursued a strategy of
concentrating on higher value-added products and positioning our offerings
over a wider variety of institutional markets.
We believe that we are able to compete successfully in our markets as a
result of our strong financial ratings, investment management expertise,
national distribution, flexible product design and competitive pricing.
Competition in this market is restricted almost exclusively to insurance
companies with superior or excellent financial ratings. The requirement for
strong financial ratings reduces pressure on margins by limiting the number of
potential competitors and by lowering our cost of funds.
Investment Management Segment
Overview
Through our Investment Management Segment, we provide investment management
services to domestic and international institutions. While this segment
includes primarily assets managed for third-party institutional clients, the
investment professionals providing these services also manage assets
underlying our general account
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<PAGE>
and separate account products, as well as variable life and annuity and mutual
fund products. The Investment Management Segment attracts funds from corporate
and public pension plan sponsors, banks, insurance companies, mutual funds,
and other domestic and international institutions.
Our total assets under management as of September 30, 1999 and December 31,
1998 were $123.4 billion and $124.4 billion, respectively, of which the
Investment Management Segment represented 32.2% and 31.9%, respectively. The
Investment Management Segment contributed $141.7 million of consolidated
operating revenues and $27.6 million of consolidated after-tax operating
income in the nine months ended September 30, 1999. The Investment Management
Segment has achieved the following financial results for the periods
indicated:
<TABLE>
<CAPTION>
As of or for the
Nine Months
Ended As of or for the Year Ended December 31,
September 30, -----------------------------------------
1999 1998 1997 1996
---------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Operating revenues (1).. $ 141.7 $ 143.9 $ 118.5 $ 113.4
Segment after-tax
operating income (1)... $ 27.6 $ 15.4 $ 17.2 $ 21.6
Assets.................. $ 3,263.4 $ 3,439.6 $ 3,286.8 $ 2,465.2
Assets under management
(2).................... $39,706.6 $ 39,637.7 $ 34,361.5 $ 32,884.5
</TABLE>
- --------
(1) Excluded from the operating segment financial results are net realized
investment gains and losses, except for gains or losses from mortgage
securitization, and non-recurring or unusual items. See Note 7 and Note 12
to our Unaudited Interim Consolidated Financial Statements and Audited
Consolidated Financial Statements, respectively, for a reconciliation of
amounts reported for operating segments to amounts reported in those
financial statements.
(2) Includes $180.3 million, $88.1 million, $66.0 million and $54.5 million of
general account cash and invested assets as of September 30, 1999 and as
of December 31, 1998, 1997 and 1996, respectively.
Products and Markets
The Investment Management Segment is primarily a fee-based investment
advisory business in which we do not offer guarantees to our customers. We
provide a variety of investment structures, such as investment advisory client
portfolios, individually managed and pooled separate accounts, securitized
portfolios, and registered investment company funds. We have recently added
bond and mortgage securitizations, and mutual fund management capabilities.
Our investment management expertise covers a wide range of private and
publicly-traded asset classes and is based on fundamental research and
disciplined, quantitatively-based analysis and asset-liability management. Our
private fixed income, equity, real estate and alternative asset operations
have strong credit analysis capabilities and deal origination expertise. These
operations enjoy broad networks of relationships with intermediaries giving
them early access to new investment opportunities.
The capabilities of the Investment Management Segment include:
Public Fixed Income and Equity Investments. Through our Independence
Investment Associates subsidiaries we provide active stock and bond management
to pension funds, endowments, and other institutions. We provide core, value,
growth, medium-cap, balanced and market neutral investment strategies. We also
offer international stock and bond management.
In addition, we offer active, quantitative investment management services in
the high quality fixed income markets, with a special emphasis on structuring
and managing portfolios of mortgage-backed securities and Treasury securities
combined, when appropriate, with various derivative strategies.
Private Fixed Income, Equity and Alternative Asset Class Investments. We
manage funds for external institutional clients investing in private fixed-
income and equity securities and alternative asset classes. Our
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<PAGE>
strength is in private placement corporate securities, structured and
innovative transactions and niche investment opportunities. Our recently
completed offerings include a mezzanine fund investing primarily in
subordinated debt with equity participation features and a collateralized bond
obligation fund, which have been marketed domestically and overseas to banks,
insurance companies, brokers and other clients outside of the pension market.
We are the leading manager of equity timberland for large tax-exempt
institutional investors, and are among the largest managers of equity farmland
investments. In addition, we sponsor affordable housing investments that
qualify for Federal tax credits. We have recently entered the business of
commercial mortgage securitization. We now originate all mortgages in a
standardized form so that they can be allocated to our own accounts, third
parties or securitized as demand dictates. We also invest in independent power
and renewable energy project investments on behalf of institutional clients.
The following tables present certain information regarding the assets under
management by the Investment Management Segment for the periods indicated:
Total Assets Under Management By Asset Class
<TABLE>
<CAPTION>
As of As of December 31,
September 30, -----------------------------
1999 1998 1997 1996
------------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Assets Under Management: (1) (2)
Domestic equity and balanced...... $26,720.0 $25,699.0 $21,993.9 $21,423.0
International equity and
balanced......................... 2,781.0 2,340.0 1,927.1 1,885.0
Domestic fixed income............. 5,923.4 7,265.5 6,760.1 6,489.6
International fixed income........ 367.6 286.6 166.9 130.4
Independent power generation...... 430.5 375.5 375.5 347.0
Timber............................ 2,952.6 3,255.0 2,819.0 2,326.0
Farmland.......................... 351.2 328.0 253.0 229.0
--------- --------- --------- ---------
Total........................... $39,526.3 $39,549.6 $34,295.5 $32,830.0
========= ========= ========= =========
</TABLE>
Asset Flow Summary
<TABLE>
<CAPTION>
For the
Nine Months For the Year Ended
Ended December 31,
September 30, -------------------------------
1999 1998 1997 1996
------------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Assets Under Management:
Assets under management,
beginning of period (1) (3)... $39,549.6 $34,295.5 $32,830.0 $27,006.0
Sales and reinvestments........ 3,832.1 3,738.9 1,309.0 4,892.0
Redemptions and withdrawals.... (3,985.6) (4,916.8) (6,218.0) (3,447.0)
Market appreciation............ 130.2 6,432.0 6,374.5 4,379.0
--------- --------- --------- ---------
Assets under management, end of
period (1) (2)................ $39,526.3 $39,549.6 $34,295.5 $32,830.0
========= ========= ========= =========
</TABLE>
- --------
(1) Includes $1,227.8 million, $1,563.0 million, $1,411.2 million and $1,301.5
million of assets managed by subsidiaries for our general account in the
nine months ended September 30, 1999 and the year ended 1998, 1997 and
1996, respectively.
(2) Does not include $180.3 million, $88.1 million, $66.0 million, and $54.5
million of general account cash and invested assets as of September 30,
1999 and December 31, 1998, 1997, and 1996, respectively.
(3) Does not include $88.1 million, $66.0 million, $54.5 million and $45.1
million of general account cash and invested assets as of January 1, 1999,
1998, 1997 and 1996, respectively.
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<PAGE>
Distribution
We sell our investment management products and services through multiple
distribution channels. Marketing to pension funds, endowments, foundations and
other institutional clients is conducted primarily by our experienced sales
professionals and dedicated marketing and client relationship staff. Products
are also offered through independent marketing specialists, consulting firms,
and investment banking firms.
Competition
The institutional asset management industry is highly competitive, with over
23,000 registered investment advisers. Consolidation activity over the past
three years has increased the concentration of competitors within certain
asset classes, particularly in the timber and independent power generation
asset classes. We compete with other investment management firms, insurance
companies, banks and mutual fund companies, many of whom are larger and have
greater resources than us.
We believe the key bases for competition are investment performance and
customer service. Our competitive strategy focuses on attracting assets
through superior performance. Consistent with this strategy, we continually
evaluate opportunities to develop internally, acquire, or divest investment
management units and strive to improve our investment management products and
services. In addition, we believe our leading role in non-traditional asset
classes helps to create a distinct and competitively advantageous profile in
the institutional asset management marketplace.
Corporate and Other Segment
Overview
Our Corporate and Other Segment consists primarily of our international
insurance operations, corporate operations, and non-core businesses that are
either in the process of winding down (i.e., are in "run-off") or have been
divested. This segment contributed approximately 14.4% of consolidated
operating revenues and 9.5% of consolidated after-tax operating income in the
nine months ended September 30, 1999.
The Corporate and Other Segment has achieved the following financial results
for the periods indicated:
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
September December 31,
30, -------------------------------
1999 1998 1997 1996
------------ --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Operating revenues: (1)
International insurance
operations..................... $ 577.8 $ 744.9 $ 728.3 $ 711.9
Corporate operations............ 191.1 292.5 264.1 176.2
Non-core businesses............. 39.3 74.2 330.8 1,327.7
--------- --------- --------- ---------
Total......................... $ 808.2 $ 1,111.6 $1,323.2 $ 2,215.8
========= ========= ========= =========
Segment after-tax operating
income: (1)
International insurance
operations..................... $ 17.8 $ 25.3 $ 8.3 $ 8.8
Corporate operations............ 19.6 8.7 (32.0) (18.2)
Non-core businesses............. 7.7 22.3 63.1 29.6
--------- --------- --------- ---------
Total......................... $ 45.1 $ 56.3 $ 39.4 $ 20.2
========= ========= ========= =========
Assets:
International insurance
operations..................... $ 5,831.8 $ 5,222.0 $ 4,828.1 $ 4,317.9
Corporate operations............ 3,299.5 3,494.0 3,745.7 3,173.5
Non-core businesses............. 1,213.0 1,894.8 2,013.4 2,406.4
Intra-segment eliminations...... (4,572.1) (4,818.3) (4,810.7) (4,225.5)
--------- --------- --------- ---------
Total......................... $ 5,772.2 $ 5,792.5 $ 5,776.5 $ 5,672.3
========= ========= ========= =========
</TABLE>
124
<PAGE>
- --------
(1) Excluded from the segment financial results are net realized investment
gains and losses and non-recurring or unusual items. See Note 7 and Note
12 to our Unaudited Interim Consolidated Financial Statements and Audited
Consolidated Financial Statements, respectively, for a reconciliation of
amounts reported for operating segments to amounts reported in those
financial statements.
International Insurance Operations
Our international insurance operations include The Maritime Life Assurance
Company, the ninth largest Canadian life insurance company based on total
assets under management at year-end 1998. This company distributes a full
range of individual life insurance and investment products and group life and
health products through independent agencies, investment brokerage firms, and
employee benefit brokers and consultants. On October 1, 1999, we completed the
purchase of Aetna Canada Limited, which will be integrated into the operations
of The Maritime Life Assurance Company. The purchase price was approximately
$300 million. External financing for the acquisition will be provided through
a CDN $100 million offering of preferred stock by The Maritime Life Assurance
Company. The acquisition essentially doubles our Canadian business in terms of
revenues and customers, making our Canadian insurance operations the eighth
largest Canadian life insurer based on combined assets under management. We
also offer individual life and group insurance and pension products through
local affiliates doing business in five Southeast Asian countries. Working
with an international network of over 40 insurers, we also coordinate and
reinsure group life, health, disability and pension coverage for foreign and
globally mobile employees of multinational companies in more than 45
countries.
In 1999, we were invited to apply for a license to enter into a joint
venture and begin doing business in China, providing us an early foothold in
this emerging economy with its vast population. The license will be restricted
initially to the city of Shanghai. We anticipate commencing operations in
China early in 2001.
Corporate Operations
Corporate operations consist principally of (1) investment and treasury
activities, and assets, investment income, interest expense and other expenses
not specifically allocated to segments and (2) group life insurance
operations. Our group life insurance business generated $176.4 million in
premium in the nine months ended September 30, 1999, and $234.5 million of
premium in the full year 1998.
Non-Core Businesses
We have certain non-core businesses that have been divested or put in run-
off, reflecting a strategic decision to focus on our retail and institutional
businesses. Non-core businesses consist primarily of run-off property and
casualty insurance companies that were sold in 1999, a portion of our group
life and accident and health business and related subsidiaries that were sold
in 1997, regional stock brokerage companies that were sold in 1996 and other
small subsidiaries in various stages of running-off their operations.
In 1992, we sold our individual disability income insurance block of
business to Provident Life and Accident Insurance Company through a
reinsurance arrangement. The reinsurance recoverable from Provident Life and
Accident Insurance Company reported on our GAAP financial statements was
$220.6 million as of December 31, 1998.
General Account Investments
General Account and Separate Accounts
Our investments include assets held in our general account and assets held
in numerous separate accounts. We manage our general account assets in
investment segments that support specific classes of product liabilities.
These investment segments permit us to implement investment policies that both
support the financial characteristics of the underlying liabilities, and also
provide returns on our invested capital. The investment segments also enable
us to gauge the performance and profitability of our various businesses.
125
<PAGE>
Separate account assets are managed in accordance with specific investment
contracts. We generally do not bear any investment risk on assets held in
separate accounts, but rather receive investment management fees based on
levels of assets under management, measured at fair value, as well as
mortality charges, policy administration fees and surrender charges.
Generally, assets held in separate accounts are not available to satisfy
general account obligations.
Asset/Liability Risk Management
Our primary investment objective is to maximize after-tax returns within
acceptable risk parameters. We are exposed to two primary types of investment
risk:
. Credit risk, meaning uncertainties associated with the continued ability
of an obligor to make timely payments of principal and interest; and
. Interest rate risk, meaning changes in the market value of fixed
maturity securities as interest rates change over time.
Management of credit risk is central to our business and we devote
considerable resources to the credit analysis underlying each investment
acquisition. Our corporate bond management group employs a staff of highly
specialized, experienced, and well-trained credit analysts. We rely on these
analysts' ability to analyze complex private financing transactions and to
acquire the investments needed to profitably fund our liability guarantees. In
addition, when investing in private fixed maturity securities, we rely upon
broad access to management information, negotiated protective covenants, call
protection features and collateral protection.
Our bond portfolio is reviewed on a continuous basis to assess the integrity
of current quality ratings. As circumstances warrant, specific investments are
"re-rated" with the adjusted quality ratings reflected in our investment
system. All bonds are evaluated regularly against the following criteria:
. material declines in the issuer's revenues or margins;
. significant management or organizational changes;
. significant uncertainty regarding the issuer's industry;
. debt service coverage or cash flow ratios that fall below industry-
specific thresholds;
. violation of financial covenants; and
. other business factors that relate to the issuer.
Our records dating back to 1970 show that, on average, the default
assumptions built into our investment and liability pricing models have been
consistent with actual investment performance.
We also apply a variety of strategies to minimize credit risk in our
commercial mortgage loan portfolio. When considering the origination of new
commercial mortgage loans, we review the cash flow fundamentals of the
property, a physical assessment of the underlying security, a comprehensive
market analysis, and industry lending practices. Upon completion of our due
diligence investigation, we score each mortgage loan application against a
number of qualitative and quantitative factors that we have developed and
tested over many years of mortgage lending. We emphasize the acquisition of
commercial mortgage loans on properties that are at, or near, full lease.
Guidelines for new mortgage loans typically require a loan-to-value ratio of
75% or less at the time of origination. A portfolio management team is
responsible for centralized monitoring of the portfolio, including receiving
and analyzing current rent rolls and financial statements on a property-by-
property basis.
To assist in the risk management of our commercial mortgage portfolio,
beginning in 1991 we undertook the development of an analytic database, the
"Mortgage Investment Risk Analysis" system. This system is designed to screen
our mortgage portfolio for likely default candidates.
126
<PAGE>
We use a variety of techniques to control interest rate risk in our
portfolio of assets and liabilities. In general, our risk management
philosophy is to limit the net impact of interest rate changes on our assets
and liabilities. Each investment segment holds bonds, mortgages, and other
asset types that will satisfy the projected cash needs of its underlying
liabilities. Where policyholder withdrawal options make it difficult to
accurately forecast liability cash flows, and thus difficult to implement
conventional asset/liability matching techniques based on interest rate
sensitivity, we project asset and liability cash flows under a wide variety of
possible economic scenarios. We use those cash flow projections to assess and
control interest rate risk.
Another important aspect of our asset-liability management efforts is the
use of interest rate derivatives. We selectively apply derivative instruments,
such as interest rate swaps and futures, to reduce the interest rate risk
inherent in our portfolios.
Overall Composition of the General Account
The investment assets in our general account as of September 30, 1999 were
generally of high quality and broadly diversified across asset classes and
individual credits. As shown in the following table, the major categories of
investment assets are fixed maturity securities, including bonds, redeemable
preferred stock, asset- and mortgage-backed securities, and commercial and
agricultural mortgage loans. The remainder of the general account is invested
in cash and short-term investments, real estate, equity securities, and
"other" invested assets. "Other" invested assets primarily include fixed
income leases, private equity investments and independent power generation
projects in joint venture and limited partnership form. In addition, policy
loans are included in our general account.
In the following discussion, we include the investment portfolio of our
Canadian subsidiary, The Maritime Life Assurance Company. As of September 30,
1999, approximately 29% of The Maritime Life Assurance Company's invested
assets consisted of government-insured mortgage loans and obligations of the
Canadian federal government and provincial governments.
General Account Invested Assets
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
As of
September 30, 1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity
securities (1)......... $31,087.5 65.5% $28,200.4 61.9% $27,174.9 62.4% $25,733.6 60.2%
Mortgage loans (2)...... 10,233.6 21.6 9,616.1 21.1 9,296.3 21.4 9,473.6 22.1
Real estate............. 572.8 1.2 1,483.2 3.2 2,035.6 4.7 2,160.6 5.1
Policy loans............ 1,905.7 4.0 1,879.7 4.1 1,855.6 4.3 1,846.5 4.3
Equity securities....... 1,114.2 2.3 1,063.7 2.3 953.6 2.2 828.1 1.9
Other invested assets... 1,303.5 2.7 1,254.6 2.7 831.6 1.9 887.8 2.1
Short-term investments.. 249.1 0.5 279.8 0.6 294.1 0.7 167.4 0.4
Cash and cash
equivalents............ 1,065.9 2.2 1,876.4 4.1 1,036.6 2.4 1,686.0 3.9
--------- ----- --------- ----- --------- ----- --------- -----
Total invested
assets............... $47,532.3 100.0% $45,653.9 100.0% $43,478.3 100.0% $42,783.6 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- --------
(1) In addition to bonds, the fixed maturity security portfolio contains
redeemable preferred stock with a carrying value of $638.7 million, $639.2
million, $546.2 million, and $300.9 million as of September 30, 1999 and
December 31, 1998, 1997, and 1996, respectively. Carrying value is
composed of investments categorized as "held-to-maturity," which are
carried at amortized cost, and investments categorized as "available-for-
sale," which are carried at fair value. The total fair value of our fixed
maturity security portfolio was $31,153.4 million, $29,143.9 million,
$28,028.6 million, and $26,335.2 million at September 30, 1999 and
December 31, 1998, 1997, and 1996, respectively.
(2) The fair value for our mortgage loan portfolio was $10,377.0 million,
$10,204.4 million, $9,873.0 million, and $10,151.9 million as of September
30, 1999 and 1998, 1997, and 1996, respectively.
127
<PAGE>
Consistent with the nature of our product liabilities, our assets are
heavily oriented toward fixed maturity securities. We determine the allocation
of our assets primarily on the basis of cash flow and return requirements of
our products and secondarily by the level of investment risk.
Description of Investment Assets
The following table provides gross investment yields by asset categories for
the periods indicated. Our general account portfolio yield has declined
somewhat in recent years, primarily due to lower interest rates on our fixed
maturity securities and mortgage loan portfolios. The lower yields on fixed
maturity securities and mortgage loans are primarily a function of our
investing in a declining interest rate environment. Indicative of this
decline, during the three year period beginning January 1, 1996, the yield on
the 10-year U.S. Treasury Note dropped from 5.57% to 4.65%. However, as of
September 30, 1999, the same 10-year U.S. Treasury Note yield has rebounded to
5.88%. This general increase in U.S. Treasury rates is reflected in the 20
basis point increase in fixed maturity securities yield between December 31,
1998 and September 30, 1999.
General Account Yields by Asset Type
<TABLE>
<CAPTION>
As of December 31,
As of September 30, --------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
Yield Amount Yield Amount Yield Amount Yield Amount
----- ------------- ----- ------------- ----- ------------- ----- -------------
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity
securities
Gross income (1)........ 8.18% $ 1,818.6 7.98% $ 2,210.2 7.93% $ 2,097.3 8.26% $ 2,081.8
Ending assets........... 31,087.5 28,200.4 27,174.9 25,733.6
Equity securities
Gross income (1)........ 2.78 22.7 1.85 18.7 3.12 27.8 2.83 22.1
Ending assets........... 1,114.2 1,063.7 953.6 828.1
Mortgage loans
Gross income (1)........ 8.21 611.5 8.26 781.2 8.62 808.6 8.95 880.1
Ending assets........... 10,233.6 9,616.1 9,296.3 9,473.6
Real estate
Gross income (1)........ 15.15 116.8 23.63 415.7 20.54 430.9 19.01 395.9
Ending assets........... 572.8 1,483.2 2,035.6 2,160.6
Policy loans
Gross income (1)........ 5.84 82.9 5.99 111.9 5.82 107.7 5.89 109.2
Ending assets........... 1,905.7 1,879.7 1,855.6 1,846.5
Short-term investments
and cash and cash
equivalents
Gross income (1)........ 4.74 61.7 2.60 45.3 4.50 71.7 4.53 65.1
Ending assets........... 1,315.0 2,156.2 1,330.7 1,853.4
Other invested assets
Gross income (1)........ 14.34 137.5 17.38 181.3 16.81 144.5 19.28 158.7
Ending assets........... 1,303.5 1,254.6 831.6 887.8
Total gross income
(1)................... 8.16 2,851.7 8.45 3,764.3 8.55 3,688.5 8.84 3,712.9
Less: investment
expenses............... (270.7) (433.6) (497.8) (489.8)
--------- --------- --------- ---------
Net investment income.. 7.39% $ 2,581.0 7.47% $ 3,330.7 7.40% $ 3,190.7 7.67% $ 3,223.1
========= ========= ========= =========
</TABLE>
- --------
(1) Gross income before investment expenses.
Fixed Maturity Securities. Our fixed maturity securities portfolio is
predominantly comprised of low risk, investment grade, publicly and privately
traded corporate bonds and senior tranches of asset-backed securities ("ABS")
and mortgage-backed securities ("MBS"), with the balance invested in
government bonds. Our fixed maturity securities portfolio also includes
redeemable preferred stock. As of September 30, 1999, fixed maturity
securities represented 65.5% of general account investment assets with a
carrying value of $31.1 billion, roughly comprised of 52% public securities
and 48% private securities. Each year we direct the majority of our net cash
inflows into investment grade fixed maturity securities. We typically invest
between 10% and 15% of funds
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<PAGE>
allocated to fixed maturity securities in below-investment-grade bonds, some
of which include equity participations, such as warrants. Allocations are
based on our assessment of relative value and the likelihood of enhancing
risk-adjusted portfolio returns. While the general account has profited from
the below-investment-grade asset class in the past, care is taken to manage
its growth strategically by limiting its size relative to our net worth.
The following table shows the composition by issuer of our fixed maturity
securities portfolio.
Fixed Maturity Securities -- By Issuer
<TABLE>
<CAPTION>
As of December 31,
As of September 30, ----------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Corporate securities.... $23,535.9 75.7% $21,479.6 76.1% $20,313.6 74.8%
ABS/MBS................. 6,239.7 20.1 5,830.1 20.7 5,431.0 20.0
U.S. Treasury securities
and obligations of
U.S. government
agencies............... 402.7 1.3 334.7 1.2 797.2 2.9
Debt securities issued
by foreign
governments............ 586.0 1.9 450.3 1.6 450.2 1.7
Obligations of states
and political
subdivisions........... 323.2 1.0 105.7 0.4 172.0 0.6
Other debt securities... 0.0 0.0 0.0 0.0 10.9 N/M
--------- ----- --------- ----- --------- -----
Total................. $31,087.5 100.0% $28,200.4 100.0% $27,174.9 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
Our MBS and ABS holdings, in keeping with our investment philosophy of
tightly managing interest rate risk, are heavily concentrated in commercial
MBS where the underlying loans are largely call protected, which means they
are not prepayable without penalty prior to maturity at the option of the
issuer, rather than in residential MBS where the underlying loans have no call
protection. By investing in MBS and ABS securities with relatively predictable
repayments, we add high quality, liquid assets to our portfolios without
incurring the risk of excessive cash flow in periods of low interest rates or
a cash flow deficit in periods of high interest rates. We believe the portion
of our MBS/ABS portfolio subject to prepayment risk as of December 31, 1998
was limited to 6.8% of our total MBS/ABS portfolio and 1.4% of our total fixed
maturity securities holdings.
The following table provides the scheduled maturities of our general account
fixed maturity securities as of the dates indicated. The portfolio's maturity
distributions are primarily a function of our liability composition, but also
reflect where our investment managers see relative value.
Fixed Maturity Securities -- By Scheduled Maturities
<TABLE>
<CAPTION>
As of December 31,
As of September 30, ----------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturity
Securities:
Due in one year or
less................. $ 1,862.3 6.0% $ 1,776.2 6.3% $ 1,646.5 6.1%
Due after one year
through five years... 7,171.6 23.1 6,604.6 23.4 7,034.2 25.9
Due after five years
through ten years.... 7,852.9 25.3 6,258.1 22.2 6,299.3 23.2
Due after ten years... 7,961.0 25.5 7,731.4 27.4 6,763.9 24.8
--------- ----- --------- ----- --------- -----
Subtotal............ 24,847.8 79.9 22,370.3 79.3 21,743.9 80.0
Asset & Mortgaged-
backed securities.... 6,239.7 20.1 5,830.1 20.7 5,431.0 20.0
--------- ----- --------- ----- --------- -----
Total Fixed Maturity
Securities......... $31,087.5 100.0% $28,200.4 100.0% $27,174.9 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
129
<PAGE>
The securities valuation office ("SVO") of the National Association of
Insurance Commissioners evaluates all public and private bonds purchased as
investments by insurance companies. The SVO assigns one of six investment
categories to each security it reviews. Category 1 is the highest quality
rating, and Category 6 is the lowest. Categories 1 and 2 are the equivalent of
investment grade debt as defined by rating agencies such as S&P and Moody's
(i.e., BBB-/Baa3 or higher), while Categories 3-6 are the equivalent of below-
investment grade securities. SVO ratings are reviewed and may be revised at
least once a year.
The following table sets forth the SVO ratings for our bond portfolio along
with an equivalent S&P rating agency designation. The majority of our bonds
are investment grade, with 87.2% invested in Category 1 and 2 securities as of
September 30, 1999. As a percent of total invested assets, our below
investment grade bonds, at 8.2% as of September 30, 1999, are higher than the
American Council of Life Insurance ("ACLI") industry average of 4.8% as of
December 31, 1998. This allocation reflects our strategy of avoiding the
unpredictability of interest rate risk in favor of relying on our bond
analysts' ability to better predict credit or default risk. Our bond analysts
operate in an industry-based, team-oriented structure that permits the
evaluation of a wide range of below investment grade offerings in a variety of
industries. We believe this results in substantive input from all analysts and
a well-diversified high yield portfolio. Category 6 bonds represent securities
that were originally acquired as long-term investments, but subsequently
became distressed. The fair value of our category 6 bonds was $116.3 million
as of September 30, 1999 and $181.2 million and $152.4 million as of December
31, 1998 and 1997, respectively. For the years ended December 31, 1998 and
1997, $31.2 million and $28.7 million of scheduled interest payments were not
received on problem fixed maturity securities.
Fixed Maturity Securities -- By Credit Quality
<TABLE>
<CAPTION>
As of December 31,
As of September 30, -------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total
---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA/AA/A............... $14,834.1 48.7% $14,157.7 51.3% $14,018.8 52.7% $13,157.0 51.7%
2 BBB.................... 11,717.7 38.5 9,636.6 35.0 9,008.2 33.8 9,284.7 36.5
3 BB..................... 2,704.6 8.9 2,688.5 9.8 2,369.5 8.9 1,863.3 7.3
4 B...................... 837.3 2.7 669.1 2.4 828.5 3.1 884.0 3.5
5 CCC and lower.......... 238.8 0.8 228.1 0.8 251.3 0.9 146.6 0.6
6 In or near default..... 116.3 0.4 181.2 0.7 152.4 0.6 97.1 0.4
--------- ----- --------- ----- --------- ----- --------- -----
Total.................. $30,448.8 100.0% $27,561.2 100.0% $26,628.7 100.0% $25,432.7 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- --------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of
$638.7 million, $639.2 million, $546.2 million, and $300.9 million as of
September 30, 1999 and December 31, 1998, 1997, and 1996, respectively.
130
<PAGE>
The following table sets forth the credit quality of our public fixed
maturity securities portfolio. As the public market has grown to include new
asset classes such as securities issued in the Rule 144A market, which we
classify as "public" securities, and ABS/MBS, our public fixed maturity
securities portfolio has grown in both absolute and relative terms, from 45.7%
of our fixed maturity securities portfolio, as of December 31, 1996, to 53.1%,
as of September 30, 1999.
Public Fixed Maturity Securities -- By Credit Quality
<TABLE>
<CAPTION>
As of December 31,
As of -------------------------------------------------------------
September 30, 1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total
---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA/AA/A............... $ 9,455.5 58.5% $ 8,687.8 62.5% $ 8,665.9 67.0% $ 7,856.3 67.5%
2 BBB.................... 4,995.3 30.9 3,565.1 25.6 2,941.7 22.7 2,959.8 25.5
3 BB..................... 1,429.7 8.9 1,425.3 10.2 1,086.5 8.4 630.1 5.4
4 B...................... 227.0 1.4 169.8 1.2 191.8 1.5 146.2 1.3
5 CCC and lower.......... 36.3 0.2 60.1 0.4 36.8 0.3 21.7 0.2
6 In or near default..... 10.2 0.1 16.4 0.1 11.0 0.1 5.8 0.1
--------- ----- --------- ----- --------- ----- --------- -----
Total.................. $16,154.0 100.0% $13,924.5 100.0% $12,933.7 100.0% $11,619.9 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- --------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of
$130.8 million, $225.2 million, $161.6 million, and $62.4 million as of
September 30, 1999 and December 31, 1998, 1997, and 1996, respectively.
The following table sets forth the credit quality of our private fixed
maturity securities portfolio. We invest in privately placed bonds to enhance
the returns of our overall portfolio and to increase issuer diversification.
We believe there are significantly higher risk-adjusted spreads to be obtained
in the private placement market than in the public market. Over time the
relative percentage of asset qualities has remained stable, with minor
repositioning year-to-year reflecting our perception of relative value in the
private placement market.
Private Fixed Maturity Securities -- By Credit Quality
<TABLE>
<CAPTION>
As of December 31,
As of September 30, -------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
SVO S&P Equivalent Carrying % of Carrying % of Carrying % of Carrying % of
Rating (1) Designation (2) Value (3) Total Value (3) Total Value (3) Total Value (3) Total
---------- ----------------------- ------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA/AA/A............... $ 5,378.6 37.7% $ 5,469.9 40.1% $ 5,352.9 39.1% $ 5,300.7 38.4%
2 BBB.................... 6,722.4 47.0 6,071.5 44.5 6,066.5 44.3 6,324.9 45.8
3 BB..................... 1,274.9 8.9 1,263.2 9.3 1,283.0 9.4 1,233.2 8.9
4 B...................... 610.3 4.3 499.3 3.7 636.7 4.6 737.8 5.3
5 CCC and lower.......... 202.5 1.4 168.0 1.2 214.5 1.6 124.9 0.9
6 In or near default..... 106.1 0.7 164.8 1.2 141.4 1.0 91.3 0.7
--------- ----- --------- ----- --------- ----- --------- -----
Total.................. $14,294.8 100.0% $13,636.7 100.0% $13,695.0 100.0% $13,812.8 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- --------
(1) With respect to securities that are awaiting an SVO rating, we have
assigned a rating based on an analysis that we believe is equivalent to
that used by the SVO.
(2) Comparisons between SVO and S&P ratings are published by the National
Association of Insurance Commissioners.
(3) Does not include redeemable preferred stock with a carrying value of
$507.9 million, $414.0 million, $384.5 million, and $238.5 million as of
September 30, 1999 and December 31, 1998, 1997, and 1996, respectively.
131
<PAGE>
The following tables detail the different industry classes that were
represented in our bond portfolio as of the dates indicated. Our bond
portfolio's industry diversification reflects our preference for corporate
issuers and for issuers that rely on the private placement and Rule 144A
markets. Our diversification tends to be fairly stable. Relative to insurance
industry averages, we invest significantly less in MBS due to our aversion to
prepayment and extension risk.
Fixed Maturity Securities -- By Industry Diversification
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Manufacturing........... $ 1,267.4 7.8% $ 3,071.6 20.8% $ 4,339.0 13.9%
Utilities............... 1,322.7 8.1 2,902.8 19.6 4,225.5 13.5
MBS..................... 3,656.2 22.4 5.2 0.0 3,661.4 11.8
ABS..................... 2,386.3 14.7 192.0 1.3 2,578.3 8.3
Bank & Finance.......... 1,831.5 11.2 1,668.6 11.3 3,500.1 11.3
Transportation.......... 982.4 6.0 1,174.8 7.9 2,157.2 6.9
Oil & Gas............... 1,752.1 10.8 1,129.5 7.6 2,881.6 9.3
Agri/Forestry/Mining.... 383.5 2.4 1,614.9 10.9 1,998.4 6.4
Government.............. 1,248.4 7.7 758.6 5.1 2,007.0 6.5
Services................ 485.9 3.0 981.5 6.6 1,467.4 4.7
Communications.......... 636.8 3.9 466.9 3.2 1,103.7 3.6
Trade................... 251.3 1.5 680.3 4.6 931.6 3.0
Other................... 80.3 0.5 156.0 1.1 236.3 0.8
--------- ----- --------- ----- --------- -----
Total Fixed Maturity
Securities........... $16,284.8 100.0% $14,802.7 100.0% $31,087.5 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Manufacturing........... $ 1,158.3 8.2% $ 2,897.1 20.5% $ 4,055.4 14.4%
Utilities............... 1,381.3 9.8 2,743.0 19.5 4,124.3 14.6
MBS..................... 3,408.4 24.1 2.6 0.0 3,411.0 12.1
ABS..................... 2,126.5 15.0 292.6 2.1 2,419.1 8.6
Bank & Finance.......... 1,305.9 9.2 1,556.1 11.1 2,862.0 10.1
Transportation.......... 1,194.6 8.4 1,193.4 8.5 2,388.0 8.5
Oil & Gas............... 856.8 6.1 1,063.5 7.6 1,920.3 6.8
Agri/Forestry/Mining.... 377.3 2.7 1,435.3 10.2 1,812.6 6.4
Government.............. 1,027.4 7.3 687.1 4.9 1,714.5 6.1
Services................ 295.7 2.1 909.1 6.5 1,204.8 4.3
Communications.......... 519.4 3.7 478.7 3.4 998.1 3.5
Trade................... 280.7 2.0 598.2 4.3 878.9 3.1
Other................... 217.4 1.4 194.0 1.4 411.4 1.5
--------- ----- --------- ----- --------- -----
Total Fixed Maturity
Securities........... $14,149.7 100.0% $14,050.7 100.0% $28,200.4 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Industry Class Value Total Value Total Value Total
- -------------- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Manufacturing........... $ 868.9 6.6% $ 3,275.3 23.3% $ 4,144.2 15.3%
Utilities............... 1,224.6 9.4 2,524.9 17.9 3,749.5 13.8
MBS..................... 3,035.6 23.2 4.3 0.0 3,039.9 11.2
ABS..................... 2,310.5 17.6 80.5 0.6 2,391.0 8.8
Bank & Finance.......... 1,100.2 8.4 1,580.6 11.2 2,680.8 9.9
Transportation.......... 1,028.0 7.9 1,180.1 8.4 2,208.1 8.1
Oil & Gas............... 552.1 4.2 1,131.7 8.0 1,683.8 6.2
Agri/Forestry/Mining.... 292.6 2.2 1,291.7 9.2 1,584.3 5.8
Government.............. 1,262.5 9.6 651.2 4.6 1,913.7 7.0
Services................ 239.1 1.8 940.7 6.7 1,179.8 4.3
Communications.......... 558.7 4.3 620.6 4.4 1,179.3 4.3
Trade................... 246.6 1.9 585.3 4.2 831.9 3.1
Other................... 375.9 2.9 212.7 1.5 588.6 2.2
--------- ----- --------- ----- --------- -----
Total Fixed Maturity
Securities........... $13,095.3 100.0% $14,079.6 100.0% $27,174.9 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
The following tables provide additional detail on the composition of our MBS
and ABS portfolios. As the securitized asset market has continued to expand in
recent years, we have made use of this asset class selectively to add
attractive risk-adjusted returns and furnish additional liquidity to our fixed
maturity securities portfolios. For asset-liability management purposes we
favor relatively stable cash flow structures such as those funded with
commercial mortgages, auto loans and credit card receivables.
Mortgage Backed Securities -- By Type
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial mortgage-
backed securities...... $2,180.1 59.7% $5.2 100.0% $2,185.3 59.7%
Residential
collateralized mortgage
obligations............ 451.5 12.3 -- 0.0 451.5 12.3
Residential pass-through
securities............. 1,024.6 28.0 -- 0.0 1,024.6 28.0
-------- ----- ---- ----- -------- -----
Total................. $3,656.2 100.0% $5.2 100.0% $3,661.4 100.0%
======== ===== ==== ===== ======== =====
<CAPTION>
As of December 31, 1998
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial mortgage-
backed securities...... $2,048.5 60.1% $2.6 100.0% $2,051.1 60.1%
Residential
collateralized mortgage
obligations............ 307.1 9.0 -- 0.0 307.1 9.0
Residential pass-through
securities............. 1,052.8 30.9 -- 0.0 1,052.8 30.9
-------- ----- ---- ----- -------- -----
Total................. $3,408.4 100.0% $2.6 100.0% $3,411.0 100.0%
======== ===== ==== ===== ======== =====
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Commercial mortgage-
backed securities...... $1,596.7 52.6% $ 4.3 100.0% $1,601.0 52.7%
Residential
collateralized mortgage
obligations............ 228.5 7.5 -- 0.0 228.5 7.5
Residential pass-through
securities............. 1,210.4 39.9 -- 0.0 1,210.4 39.8
-------- ----- ------ ----- -------- -----
Total................. $3,035.6 100.0% $ 4.3 100.0% $3,039.9 100.0%
======== ===== ====== ===== ======== =====
Asset Backed Securities -- By Type
<CAPTION>
As of September 30, 1999
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Credit card
receivables............ $ 125.6 5.3% $ -- 0.0% $ 125.6 4.9%
Auto loans.............. 784.0 32.9 -- 0.0 784.0 30.4
Manufactured housing.... 91.1 3.8 -- 0.0 91.1 3.5
Home equity loans....... 108.8 4.6 -- 0.0 108.8 4.2
Collateralized bond
obligations............ 362.9 15.2 32.3 16.8 395.2 15.3
Other................... 913.9 38.2 159.7 83.2 1,073.6 41.7
-------- ----- ------ ----- -------- -----
Total................. $2,386.3 100.0% $192.0 100.0% $2,578.3 100.0%
======== ===== ====== ===== ======== =====
<CAPTION>
As of December 31, 1998
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Credit card
receivables............ $ 257.6 12.1% -- 0.0% $ 257.6 10.6%
Auto loans.............. 839.7 39.5 $ 4.6 1.6 844.3 34.9
Manufactured housing.... 113.6 5.3 -- 0.0 113.6 4.7
Home equity loans....... 74.0 3.5 -- 0.0 74.0 3.1
Collateralized bond
obligations............ 471.2 22.2 198.8 67.9 670.0 27.7
Other................... 370.4 17.4 89.2 30.5 459.6 19.0
-------- ----- ------ ----- -------- -----
Total................. $2,126.5 100.0% $292.6 100.0% $2,419.1 100.0%
======== ===== ====== ===== ======== =====
<CAPTION>
As of December 31, 1997
-------------------------------------------------------------
Publicly Traded Privately Traded Total
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C>
Credit card
receivables............ $ 490.6 21.2% -- 0.0% $ 490.6 20.5%
Auto loans.............. 937.1 40.6 $ 15.2 18.9 952.3 39.8
Manufactured housing.... 152.4 6.6 -- 0.0 152.4 6.4
Home equity loans....... 53.5 2.3 -- 0.0 53.5 2.2
Collateralized bond
obligations............ 331.7 14.4 18.0 22.4 349.7 14.6
Other................... 345.2 14.9 47.3 58.7 392.5 16.5
-------- ----- ------ ----- -------- -----
Total................. $2,310.5 100.0% $ 80.5 100.0% $2,391.0 100.0%
======== ===== ====== ===== ======== =====
</TABLE>
134
<PAGE>
Mortgage Loans. As of September 30, 1999, we held mortgage loans with a
carrying value of $10.2 billion, including $1.5 billion of agricultural loans
and $0.9 billion of commercial loans managed by our Canadian subsidiary, The
Maritime Life Assurance Company.
The following table shows the distribution of our mortgage loan portfolio by
property type as of the dates indicated. Our commercial mortgage loan
portfolio consists primarily of non-recourse fixed-rate mortgages on fully, or
nearly fully, leased commercial properties.
<TABLE>
<CAPTION>
As of September 30, As of December 31,
---------------------------- -------------------------------------------------------------
1999 1998 1997 1996
---------------------------- ------------------- ------------------- -------------------
Number Carrying % of Carrying % of Carrying % of Carrying % of
of Loans Value Total Value Total Value Total Value Total
-------- ------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment............... 635 $ 2,438.5 23.8% $2,362.3 24.6% $2,476.7 26.7% $2,580.7 27.3%
Office Buildings........ 276 2,565.3 25.1 2,260.5 23.5 1,889.2 20.3 1,995.7 21.1
Retail.................. 263 1,722.8 16.8 1,730.4 18.0 1,748.8 18.8 1,760.1 18.6
Agricultural............ 340 1,539.8 15.1 1,356.7 14.1 1,455.9 15.7 1,623.4 17.1
Industrial.............. 244 1,033.5 10.1 1,069.9 11.1 1,017.4 10.9 1,048.4 11.1
Hotels.................. 27 400.7 3.9 301.2 3.1 198.3 2.1 156.1 1.6
Multi-Family............ 404 80.3 0.8 104.9 1.1 84.9 0.9 20.5 0.2
Mixed Use............... 20 136.7 1.3 93.2 1.0 83.3 0.9 0.0 0.0
Other................... 68 316.0 3.1 337.0 3.5 341.8 3.7 288.7 3.0
----- --------- ----- -------- ----- -------- ----- -------- -----
Total................. 2,277 $10,233.6 100.0% $9,616.1 100.0% $9,296.3 100.0% $9,473.6 100.0%
===== ========= ===== ======== ===== ======== ===== ======== =====
The following table shows the distribution of our mortgage loan portfolio by
geographical region.
Mortgage Loans -- By ACLI Region
<CAPTION>
As of September 30, As of December 31,
---------------------------- -------------------------------------------------------------
1999 1998 1997 1996
---------------------------- ------------------- ------------------- -------------------
Number Carrying % of Carrying % of Carrying % of Carrying % of
of Loans Value Total Value Total Value Total Value Total
-------- ------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
East North Central...... 177 $ 1,172.5 11.5% $1,106.9 11.5% $ 803.2 8.6% $ 731.6 7.7%
East South Central...... 34 160.0 1.6 157.4 1.6 157.5 1.7 123.2 1.3
Middle Atlantic......... 147 1,640.3 16.0 1,500.2 15.6 1,491.2 16.0 1,535.4 16.2
Mountain................ 118 365.5 3.6 381.2 4.0 410.2 4.4 419.8 4.4
New England............. 148 904.3 8.8 854.8 8.9 900.8 9.7 913.2 9.6
Pacific................. 323 2,053.2 20.1 1,885.0 19.6 1,817.3 19.5 2,017.2 21.4
South Atlantic.......... 222 1,838.6 18.0 1,648.3 17.1 1,557.8 16.8 1,504.0 15.9
West North Central...... 78 386.2 3.8 333.1 3.5 260.4 2.8 262.1 2.8
West South Central...... 175 688.9 6.7 645.6 6.7 653.9 7.0 590.5 6.2
Canada.................. 855 1,024.1 9.9 1,103.6 11.5 1,244.0 13.5 1,376.6 14.5
----- --------- ----- -------- ----- -------- ----- -------- -----
Total................. 2,277 $10,233.6 100.0% $9,616.1 100.0% $9,296.3 100.0% $9,473.6 100.0%
===== ========= ===== ======== ===== ======== ===== ======== =====
</TABLE>
135
<PAGE>
The following table shows our commercial mortgage loan portfolio by loan
size. Our commercial mortgage loan portfolio is highly diversified by
borrower. As of September 30, 1999, 49% of the portfolio was comprised of
mortgage loans with principal balances of less than $10 million. Consistent
with our diverse base of business, our mortgage loans are originated through
affiliated field offices across the country and through a national network of
mortgage correspondents.
Commercial Mortgage Loan Portfolio -- By Loan Size
<TABLE>
<CAPTION>
As of December 31,
As of September 30, ----------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Number Number Number
of Principal % of of Principal % of of Principal % of
Loans Balance Total Loans Balance Total Loans Balance Total
------ --------- ----- ------ --------- ----- ------ --------- -----
(in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Under $5 million........ 1,381 $1,997.3 22.7% 1,779 $2,048.9 24.6% 1,555 $2,021.1 25.4%
$5 million but less
than $10 million....... 348 2,315.9 26.3 355 2,295.2 27.5 369 2,381.2 30.0
$10 million but less
than $20 million....... 142 1,814.9 20.7 142 1,781.6 21.4 131 1,736.6 21.9
$20 million but less
than $30 million....... 39 966.5 11.0 34 859.6 10.3 30 737.4 9.3
$30 million and over.... 27 1,696.3 19.3 24 1,351.0 16.2 20 1,060.3 13.4
----- -------- ----- ----- -------- ----- ----- -------- -----
Total................. 1,937 $8,790.9 100.0% 2,334 $8,336.3 100.0% 2,105 $7,936.6 100.0%
===== ======== ===== ===== ======== ===== ===== ======== =====
</TABLE>
The following table shows the distribution of maturities of our commercial
mortgage loan portfolio. To accommodate our liability needs, we seek a
reasonably diversified maturity structure for this portfolio. The table
illustrates the trend toward longer maturity mortgages. This lengthening of
the portfolio primarily reflects commercial borrowers taking advantage of
declining interest rates by locking-in long-term financing.
Commercial Mortgage Loan Maturities
<TABLE>
<CAPTION>
As of December 31,
As of September 30, -------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
Principal Principal Principal Principal
Balance % of Balance % of Balance % of Balance % of
Maturing Total Maturing Total Maturing Total Maturing Total
------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997.................... N/A N/A N/A N/A N/A N/A $ 840.2 10.6%
1998.................... N/A N/A N/A N/A $ 797.5 10.1% 827.1 10.4
1999.................... $ 140.1 1.6% $ 609.0 7.3% 673.5 8.5 690.0 8.7
2000.................... 739.3 8.4 736.2 8.8 859.2 10.8 878.5 11.0
2001.................... 658.8 7.5 691.8 8.3 834.2 10.5 902.4 11.3
2002.................... 690.4 7.9 767.8 9.2 844.2 10.6 588.6 7.4
2003.................... 795.1 9.0 859.5 10.3 598.3 7.6 602.3 7.6
2004.................... 608.5 6.9 443.0 5.3 509.1 6.4 447.6 5.6
2005.................... 695.0 7.9 698.3 8.4 637.3 8.0 612.4 7.7
2006.................... 646.8 7.4 429.0 5.2 420.5 5.3 456.7 5.7
2007.................... 512.1 5.8 507.7 6.1 517.3 6.5 159.0 2.0
After 2007.............. 3,304.8 37.6 2,594.0 31.1 1,245.5 15.7 952.9 12.0
-------- ----- -------- ----- -------- ----- -------- -----
Total................. $8,790.9 100.0% $8,336.3 100.0% $7,936.6 100.0% $7,957.7 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
136
<PAGE>
The following table shows the percentages of our commercial loan portfolio
that are delinquent but not in foreclosure, delinquent and in foreclosure,
restructured and foreclosed. Commercial mortgage loans are classified as
delinquent when they are 60 days or more past due as to the payment of
interest or principal. Commercial mortgage loans are classified as
restructured when they are in good standing, but the basic terms, such as
interest rate or maturity date, have been modified as a result of a prior
actual delinquency or an imminent delinquency. Although we have recorded
higher levels of delinquencies and foreclosures than ACLI averages in most of
the periods shown, we believe our commercial mortgage portfolio has performed
comparably to ACLI industry averages for delinquencies, restructurings and
foreclosures in process. While our total delinquency rate as of June 30, 1999
was 0.60%, as shown in the table below, as of September 30, 1999, it has
improved to 0.45% and we expect it will be reduced by an additional 0.17% by
December 31, 1999 due to the foreclosure of a $13 million loan which was
completed in October. At each of December 31, 1998, 1997 and 1996,
restructured mortgage loans constituted a lower percentage of our mortgage
loan portfolio than was the industry average. In addition, one $70 million
loan accounted for 30.4% of our total restructured mortgage loans as of June
30, 1999. This loan is scheduled to be sold by year-end and the sale should
reduce the percentage of our mortgage loans that are restructured to
approximately 2.00%. All foreclosure decisions are based on a thorough
assessment of the property's quality and location and market conditions. The
decision may also reflect a plan to invest additional capital in a property to
make tenant improvements or renovations to secure a higher resale value at a
later date. Following foreclosure, we rely on our real estate investment
group's ability to manage foreclosed real estate for eventual return to
investment real estate status or outright sale.
Commercial Mortgage Loan Comparisons
<TABLE>
<CAPTION>
As of December 31,
As of June 30, --------------------------------------------------------------
1999 (1) 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
John John John John
Hancock (2) ACLI (3) Hancock (2) ACLI (3) Hancock (2) ACLI (3) Hancock (2) ACLI (3)
----------- -------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquent,
not in foreclosure..... 0.12% 0.13% 0.33% 0.17% 0.50% 0.32% 0.24% 0.69%
Delinquent,
in foreclosure......... 0.48 0.17 0.30 0.31 0.67 0.58 1.14 1.10
Restructured............ 2.90 2.59 2.88 3.02 4.20 4.61 5.77 6.81
---- ---- ---- ---- ---- ---- ----- ----
Subtotal.............. 3.50 2.89 3.51 3.50 5.37 5.51 7.15 8.60
Loans foreclosed during
period................. 0.24 0.22 0.64 0.44 1.58 0.84 3.03 1.01
---- ---- ---- ---- ---- ---- ----- ----
Total................. 3.74% 3.11% 4.15% 3.94% 6.95% 6.35% 10.18% 9.61%
==== ==== ==== ==== ==== ==== ===== ====
</TABLE>
- --------
(1) Most recent reporting period available.
(2) Excludes data from The Maritime Life Assurance Company.
(3) Source: ACLI Investment Bulletins entitled "Mortgage Loan Portfolio
Profile" Numbers 1445, 1429, 1399, and 1367, dated August 23, 1999, March
4, 1999, March 9, 1998, and March 6, 1997, respectively.
We use our internally developed Mortgage Investment Risk Analysis system to
monitor the aggregate risk of our commercial mortgage loan portfolio. When a
loan becomes more than 30 days delinquent, an assessment is made as to what
course of action should be taken with the investment. In most instances, the
loan is referred for foreclosure; however, in some circumstances we may decide
that it is advantageous to restructure the loan. We will only restructure when
we believe we will recapture lost income as markets improve.
Delinquent and restructured loans are reviewed on a quarterly basis after
consultation with the controller's department. Loan officers present an
analysis of the problem loans, including a 10 year discounted cash flow
analysis, that establishes a value for the property. A reserve is established
based on the difference between the book value of the property and the agreed-
upon market value.
137
<PAGE>
The following table shows our agricultural mortgage loan portfolio by its
three major sectors: agribusiness, timber and production agriculture.
Agribusiness is our largest agricultural sector and is a relatively stable
segment of the food industry that includes suppliers, warehousers, processors,
distributors, wholesalers, and retailers. Our expertise in this area provides
us with a specialized niche in the largest sector of manufactured goods in the
United States. Our largest concentrations of agricultural mortgage loans are
located in California and Maine, with the two states comprising 44% of our
agricultural mortgage loan portfolio's holdings as of September 30, 1999. We
are one of the largest lenders in the timber market and, in addition to
managing timber investments for third parties, we have a small amount of
timber loans in our general account. In 1998, we sold 70% of our production
agriculture portfolio and are not actively pursuing new investments in this
market sector.
Agricultural Mortgage Loans -- By Sector
<TABLE>
<CAPTION>
As of September 30, As of December 31,
------------------- -------------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
------------- ----- ------------- ----- ------------- ----- ------------- -----
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agribusiness............ $1,047.5 68.0% $ 958.7 70.7% $ 717.5 49.3% $ 695.6 42.8%
Timber.................. 428.0 27.8 319.2 23.5 402.4 27.6 461.4 28.4
Production Agriculture.. 64.3 4.2 78.8 5.8 336.0 23.1 466.4 28.8
-------- ----- -------- ----- -------- ----- -------- -----
Total.................. $1,539.8 100.0% $1,356.7 100.0% $1,455.9 100.0% $1,623.4 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Real Estate. We are currently nearing the completion of a comprehensive
strategic sales initiative intended to liquidate approximately 90% of our
current commercial real estate portfolio. This sales initiative is expected to
be complete by year-end 1999. Upon completion of the sales program, it is
expected that our headquarters in Boston, Massachusetts will be our
predominant investment real estate holding.
Our equity real estate holdings include properties originally acquired as
investment real estate, foreclosed properties subsequently transferred to
investment status, and recently foreclosed properties. As of September 30,
1999, our total real estate portfolio, with a carrying value of $572.8
million, represented 1.2% of invested assets.
The following table shows investment valuation allowances for our mortgage
loan and real estate portfolios for the periods indicated:
Investment Valuation Allowances
<TABLE>
<CAPTION>
Real
Mortgages Estate Total
--------- ------ -------
(in millions)
<S> <C> <C> <C>
Year Ended December 31,
1996
Beginning Balance.................................. $204.2 $ 72.1 $ 276.3
Provision......................................... 26.7 5.7 32.4
Write-offs........................................ (88.9) (23.3) (112.2)
------ ------ -------
Ending balance.................................... $142.0 $ 54.5 $ 196.5
Valuation allowance as % of carrying value before
reserves......................................... 1.5% 2.5% 1.7%
1997
Provision......................................... $ 19.5 $ 1.5 $ 21.0
Write-offs........................................ (34.2) (30.5) (64.7)
------ ------ -------
Ending balance.................................... $127.3 $ 25.5 $ 152.8
Valuation allowance as % of carrying value before
reserves......................................... 1.4% 1.3% 1.3%
1998
Provision (1)..................................... $ 15.9 $ 97.0 $ 112.9
Write-offs........................................ (32.2) (10.5) (42.7)
------ ------ -------
Ending balance.................................... $111.0 $112.0 $ 223.0
Valuation allowance as % of carrying value before
reserves......................................... 1.2% 7.0% 2.0%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Real
Mortgages Estate Total
--------- ------ ------
(in millions)
<S> <C> <C> <C>
Nine Months Ended September 30, 1999
Provision........................................... $ 32.5 $ 24.7 $ 57.2
Write-offs.......................................... (35.0) (76.4) (111.4)
------ ------ ------
Ending balance...................................... $108.5 $ 60.3 $168.8
Valuation allowance as % of carrying value before
reserves........................................... 1.0% 9.5% 1.5%
</TABLE>
- --------
(1) The increased amount in 1998 is primarily attributable to our commercial
real estate disposition initiative, which resulted in a shortening of the
expected holding period for the majority of all properties in our
commercial real estate portfolio.
The allowance for losses on mortgage loans on real estate and foreclosed
real estate is maintained at a level that we believe to be adequate to absorb
estimated probable credit losses. Our periodic evaluation of the adequacy of
the allowance for losses is based on past experience, known and inherent
risks, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of the
underlying security, the general composition of the portfolio, current
economic conditions and other factors. This evaluation is inherently
subjective and is susceptible to significant changes and no assurance can be
given that the allowances taken will in fact be adequate to cover all future
losses or that additional valuation allowances or asset write-downs will not
be required in the future.
Policy Loans. As of September 30, 1999, our investment assets included
$1,905.7 million in policy loans, nearly unchanged in absolute terms from
outstanding levels as of December 31, 1998 and 1997. Policy loans are extended
to our life insurance policyholders and are collateralized by the cash value
of their insurance policies. The interest rates charged to policyholders on
these loans are set forth in their policies and are approved by state
insurance commissioners. These interest rates usually range from 5% to 8% for
older policies, which typically have fixed interest rate provisions. For newer
policies, which typically have variable interest rate provisions, interest
rates are expressly based on external market indices. Interest rates charged
on policy loans have generally exceeded the guaranteed interest rates credited
on the underlying policies. Our gross investment income from policy loans
amounted to $82.9 million, $111.9 million and $107.7 million in the first nine
months of 1999 and for the years ended December 31, 1998 and 1997,
respectively.
Equity Securities. As of September 30, 1999, we held $1,114.2 million of
equity securities, including $845.2 million of common equity that was largely
acquired through the equity participation features of below-investment-grade
bonds or through recoveries on defaulted bonds.
Other Invested Assets. Other invested assets totaled $1,303.5 million as of
September 30, 1999, compared to $1,254.6 million as of December 31, 1998 and
$831.6 million as of December 31, 1997. Total gross investment income from
other invested assets totaled $137.5 million for the nine months ended
September 30, 1999, $181.3 million in 1998 and $144.5 million in 1997. Other
invested assets primarily include leases, private equity, and independent
power projects. Most of these investments are structured as joint ventures or
partnership interests and are composed of a variety of underlying investment
pools or assets such as real estate leases. Joint venture and partnership
interests are generally accounted for under the equity method. The equity
method requires increasing the asset's carrying value to recognize
undistributed earnings, or reducing the asset's carrying value to recognize
distributed earnings and return of principal, in the underlying entities. The
carrying value of this asset class, as well as the investment income it
generates, is highly contingent upon the economic performance of the
underlying entities or assets. Also included in this category are derivatives
and other miscellaneous assets.
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The following table shows other invested assets carrying value and income by
type. Our real estate joint ventures were disposed of in 1999 as part of our
comprehensive real estate sale previously discussed.
<TABLE>
<CAPTION>
As of September 30, As of December 31,
------------------- -------------------------------
1999 1998 1997
------------------- --------------- ---------------
Carrying Carrying Carrying
Value Income Value Income Value Income
---------- -------- -------- ------ -------- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Real estate joint
ventures................ $ 0.0 $ (0.4) $ 173.8 $ 5.8 $123.7 $ 13.5
Equity participations.... 40.3 1.5 72.3 11.5 35.4 8.5
Fixed Income/leases...... 71.9 0.9 213.4 30.5 200.2 23.5
Equity or fund type
limited partnerships.... 164.6 19.5 151.4 31.7 151.7 51.7
Oil & gas, power, etc.... 123.2 24.1 153.2 44.3 209.1 39.0
All other................ 903.5 91.9 490.5 57.5 111.5 8.3
---------- -------- -------- ------ ------ ------
Total.................. $ 1,303.5 $ 137.5 $1,254.6 $181.3 $831.6 $144.5
========== ======== ======== ====== ====== ======
</TABLE>
Cash and Short-Term Investments. As of September 30, 1999, our short-term
investments (including cash and cash-equivalents) totaled $1,315.0 million.
Volatility in our annual short-term investment income reflects swings in our
cash balances, as well as changes in short-term interest rates. As a general
policy, we aim to minimize the opportunity cost of holding excess cash and
short-term investments, while balancing our need to meet obligations to our
policyholders and creditors, as well as to settle investment transactions. We
invest short-term funds in commercial paper, certificates of deposit and other
short-term instruments, subject to investment guidelines regarding issuer
concentration, quality and maturity. We also have an active securities-lending
program.
Ratings
Insurance companies are rated by rating agencies based upon factors relevant
to policyholders. Ratings provide both industry participants and insurance
consumers meaningful information on specific insurance companies. Higher
ratings generally indicate financial stability and a strong ability to pay
claims. John Hancock Mutual Life Insurance Company is rated A++ (Superior) by
A.M. Best, AAA (Highest) by Duff and Phelps, AA+ (second highest rating) by
S&P, and Aa2 (third highest rating) by Moody's. On November 12, 1999, Moody's
reaffirmed our Aa2 rating but revised our ratings outlook to negative. Moody's
stated that the revision in ratings outlook was based on Moody's concerns
about our exposure to potential underwriting losses arising from workers'
compensation reinsurance programs arranged by Unicover Managers, Inc.,
business changes that could result from the demutualization and our sizable
guaranteed and structured products business. The revision in ratings outlook
does not constitute a ratings "downgrade," nor has Moody's placed us on their
"Watchlist" for possible downgrade.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F," and some companies are not rated. A.M. Best publications indicate that
"A++" and "A+" ratings are assigned to those companies that in A.M. Best's
opinion have achieved superior overall performance when compared to the norms
of the life insurance industry and generally have demonstrated a strong
ability to meet their policyholder and other contractual obligations.
Moody's rating for insurance companies currently range from "Aaa" to "C."
S&P ratings for insurance companies range from "AAA" to "CC." In evaluating a
company's financial and operating performance, Moody's and S&P review its
profitability, leverage and liquidity as well as its book of business, the
adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its policy reserves and the experience
and competency of its management.
We believe that our strong ratings are an important factor in marketing our
products to our distributors and customers, since ratings information is
broadly disseminated and generally used throughout the industry. Our
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ratings reflect each rating agency's opinion of our financial strength,
operating performance and ability to meet our obligations to policyholders,
and are not evaluations directed toward the protection of investors. Such
ratings are neither a rating of securities nor a recommendation to buy, hold
or sell any security, including our common stock.
Properties
Our home office consists of our 60-story landmark office tower and five
other buildings located in Boston, Massachusetts. We own this facility and
occupy approximately 50% of the 3.8 million gross square feet of space in
these buildings. In addition, we lease office space throughout the United
States as needed for our operations, including for our sales force. We believe
that our current facilities are adequate for our current and expected needs.
Since 1987, we have entered into a series of lease agreements with a non-
affiliated organization for the rental of furniture and equipment. The leases
have a non-cancelable term of twelve months and an expected term of
approximately nine years. Annual aggregate payments under these leases are
approximately $8 million.
Legal Proceedings
We are regularly involved in litigation, both as a defendant and as a
plaintiff. The litigation naming us as a defendant ordinarily involves our
activities as a provider of insurance protection products, as well as an
investment adviser, employer and taxpayer. In addition, state regulatory
bodies, the Securities and Exchange Commission, the National Association of
Securities Dealers, Inc. and other regulatory bodies regularly make inquiries
and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws
governing the activities of broker/dealers. We do not believe that this
litigation or any of these other matters that are currently pending, either
individually or in the aggregate, will have a material adverse effect on our
business, financial condition or results of operations.
Sales Practice Class Action Settlement
Over the past several years, companies engaged in the life insurance
business have faced extensive claims, including class-action lawsuits,
alleging improper marketing and sales of individual life insurance policies or
annuities.
On December 31, 1997, the United States District Court for the District of
Massachusetts approved a settlement of a nationwide class action lawsuit
regarding sales practices against John Hancock Mutual Life Insurance Company,
John Hancock Variable Life Insurance Company and John Hancock Distributors,
Inc., Duhaime, et al. v. John Hancock Mutual Life Insurance Company, John
Hancock Variable Life Insurance Company and John Hancock Distributors, Inc.
With certain limited exceptions, the class that is bound by the terms of the
settlement includes persons and entities who at any time during the class
period (January 1, 1979 through December 31, 1996) had an ownership interest
in one or more of our whole life, universal life or variable life insurance
policies (and certain annuities and mutual funds) issued during the class
period.
The lawsuit alleged various misrepresentations, including (1)
misrepresentations that a limited number of out-of-pocket premium payments
would keep a policy in force without further out-of-pocket premium payments,
(2) misrepresentations concerning replacement of an existing insurance policy
by surrendering (or borrowing or withdrawing cash surrender value from) an
existing insurance policy in order to purchase a new policy, and (3)
misrepresentations concerning the sale of life insurance solely or
predominately as an investment, retirement or savings vehicle.
We denied the allegations but agreed to settle the lawsuit because we
believe the settlement to be fair, reasonable and in the best interest of our
present and past policyholders. The settlement provides substantial benefits
to the class, and allows us to continue to serve our customers' needs
undistracted by disruptions caused by litigation.
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The settlement provides two main types of benefits to those persons and
entities who decided not to opt out of the class, whom we refer to as "Class
Members": General Policy Relief and Alternative Dispute Resolution. The forms
of General Policy Relief available include contributions to in force policies,
premium loans at favorable rates, and enhancements to life insurance policies,
annuities and mutual funds. Certain of these forms of General Policy Relief
are yet to be fully implemented and final amounts to be paid over time will
change. Class Members who believe that they were misled when they purchased
their policy or that there was other wrongdoing in connection with the policy
could submit a claim to the Alternative Dispute Resolution process. Successful
Alternative Dispute Resolution claimants are awarded relief in accordance with
the nature and strength of their claims and based upon a formula approved by
the court. This relief will be administered in a demutualization neutral
manner, such that the timing associated with processing claims for relief will
not cause Class Members to lose the value of demutualization compensation they
would otherwise be eligible to receive under the Plan of Reorganization. The
Alternative Dispute Resolution process is ongoing, and no guarantees can be
made with regard to the total amount of relief which will be awarded to class
members through this process.
A third type of relief called Monthly Deduction Relief in the total,
aggregate amount of $4 million has already been paid to class members with an
ownership interest in eligible flexible variable and universal life insurance
policies.
Since the court has approved the settlement, all claims that have been
asserted or could have been asserted in this lawsuit have been dismissed on
the merits and with prejudice. None of these claims may hereafter be asserted
by Class Members in any other lawsuit or proceeding.
Harris Trust Litigation
Since 1983, we have been involved in complex litigation known as Harris
Trust and Savings Bank, as Trustee of Sperry Master Retirement Trust No. 2 v.
John Hancock Mutual Life Insurance Company (S.D.N.Y. Civ. 83-5491), which
raised the question of whether insurance company general account assets could
be assets of a contractholder's plan under ERISA. The case was tried in 1997,
but as of yet there is no final decision in the matter.
Relying on the language of ERISA and Department of Labor interpretations,
the insurance industry had believed that general account assets were not ERISA
plan assets and had structured its business accordingly. In a 1993 ruling in
our case, however, the Supreme Court decided against us and determined that
certain funds held by us in connection with the general account group annuity
contract issued to the Trustee of the Sperry Master Retirement Trust No. 2
were plan assets for ERISA purposes. Accordingly, the Supreme Court concluded
that we were subject to ERISA's fiduciary rules in connection with those
assets.
Because the Supreme Court found that the funds associated with this group
annuity contract were ERISA plan assets, the case was remanded to the district
court for a determination of whether our handling of those assets violated
ERISA. The plaintiff in this suit, the Trustee of Sperry Master Retirement
Trust No. 2, claimed that John Hancock, as defendant, had violated ERISA's
fiduciary rules in administering this group annuity contract. The plaintiff
claimed the Sperry Master Retirement Trust No. 2 had been damaged by these
alleged violations; however, the plaintiff did not specify the dollar amount
of its damages. We deny that our actions have violated ERISA in any way. This
case was tried before a judge, and we await his decision.
The Supreme Court decision raised the possibility that common industry
practices developed in reliance on the Department of Labor's position could
give rise to significant retroactive liability under ERISA's fiduciary rules.
Legislation enacted in 1996, however, addresses the difficulties created by
the retroactive application of the Supreme Court's decision in the Harris
Trust case and provides a grace period to permit insurance companies to bring
their general account operations into compliance with ERISA and Department of
Labor regulations. We expect that the Department of Labor's regulations will
provide sufficient direction to enable us to eliminate the potential for
Harris Trust liability in the future.
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However, the Harris Trust litigation itself is not affected by the new
regulations, since the implementing legislation does not apply to litigation
commenced before November 7, 1995. If we have an unfavorable ruling in the
Harris Trust lawsuit, it would be limited to this group annuity contract, and
it might require that John Hancock pay money damages to the Trustee of the
Sperry Master Retirement Trust No. 2.
Employees
As of September 30, 1999, we employed approximately 8,800 people. We believe
our relations with our employees are satisfactory.
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MANAGEMENT
Directors and Executive Officers
The following table lists our directors and executive officers, their ages
and their positions as of December 10, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stephen L. Brown........ 62 Chairman of the Board, Chief Executive Officer and Director
Foster L. Aborn......... 65 Vice Chairman of the Board, Chief Investment Officer and Director
David F. D'Alessandro... 48 President and Chief Operations Officer and Director
Samuel W. Bodman........ 61 Director
Joan T. Bok............. 69 Director
I. MacAllister Booth.... 68 Director
Wayne A. Budd........... 58 Director
John M. Connors, Jr. ... 57 Director
Robert E. Fast, Esq..... 64 Director
Dr. Kathleen Foley
Feldstein.............. 58 Director
Nelson S. Gifford....... 69 Director
Michael C. Hawley....... 61 Director
Edward H. Linde......... 58 Director
Judith A. McHale........ 52 Director
Richard F. Syron........ 56 Director
Robert J. Tarr, Jr. .... 56 Director
Diane M. Capstaff....... 55 Executive Vice President
Kathleen M. Graveline... 47 Executive Vice President
Thomas E. Moloney....... 56 Chief Financial Officer
Richard S. Scipione..... 62 General Counsel
</TABLE>
The following is biographical information for our directors and executive
officers:
Stephen L. Brown has been Chairman and Chief Executive Officer of John
Hancock Mutual Life Insurance Company since 1992 and a John Hancock Mutual
Life Insurance Company director since 1982. Effective June 1, 2000, Mr. Brown
will be Chairman of the Board and a director of John Hancock Financial
Services, Inc., but will no longer serve as Chief Executive Officer. He is a
Fellow, Society of Actuaries, Enrolled Actuary under ERISA, member of American
Academy of Actuaries and Chartered Life Underwriter, American College of
Chartered Life Underwriters. He is a former director of the Federal Reserve
Bank of Boston. On December 7, 1999 Mr. Brown became chairman of The Berkeley
Financial Group where he previously served as a director. He chairs the Policy
Committee of John Hancock Mutual Life Insurance Company.
Foster L. Aborn has been Vice Chairman of the Board and Chief Investment
Officer of John Hancock Mutual Life Insurance Company since 1992 and a John
Hancock Mutual Life Insurance Company director since 1987. He is a director of
John Hancock Subsidiaries, Inc., Independence Investment Associates, Inc., and
The Berkeley Financial Group and Chairman of the Committee of Finance of the
board of directors of John Hancock Mutual Life Insurance Company.
David F. D'Alessandro has been President and Chief Operations Officer of
John Hancock Mutual Life Insurance Company since 1998 and a John Hancock
Mutual Life Insurance Company director since 1990. Effective June 1, 2000 Mr.
D'Alessandro will also become Chief Executive Officer of John Hancock
Financial Services, Inc. From 1988 to 1997 he was Senior Executive Vice
President. He is Vice Chairman of the Executive Committee of the board of
directors, Chairman of John Hancock Variable Life Insurance Company and a
director of John Hancock Subsidiaries, Inc. and The Berkeley Financial Group.
He is a director of Partners Healthcare Systems, Inc., an integrated
healthcare delivery system.
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Samuel W. Bodman has been a John Hancock Mutual Life Insurance Company
director since 1992. Mr. Bodman has been Chairman and Chief Executive Officer
of Cabot Corporation, a manufacturer of specialty chemicals and materials,
since 1987. He is a director of Cabot Oil & Gas Corporation, an oil and gas
exploration company, Security Capital Group Incorporated, a global real estate
management company, Thermo Electron Corporation, a manufacturer of a broad
range of biomedical and other products, and Westvaco Corporation, a paper and
paperboard producer. He is Chairman of the Compensation Committee and a member
of the Nominating and Corporate Governance Committee and Executive Committee
of the board of directors of John Hancock Mutual Life Insurance Company.
Joan T. Bok has been a John Hancock Mutual Life Insurance Company director
since 1989. Ms. Bok has been Chairman of the Board of New England Electric
System since 1984 and was elected Chairman Emeritus in 1998. She is a director
of Avery Dennison Corporation, New England Electric System and Solutia Inc., a
manufacturer of chemical-based materials. She is a member of the Committee of
Finance and the Nominating and Corporate Governance Committee of the board of
directors of John Hancock Mutual Life Insurance Company.
I. MacAllister Booth has been a John Hancock Mutual Life Insurance Company
director since 1992. Mr. Booth is the retired Chairman, President, Chief
Executive Officer and a retired director of Polaroid Corporation. He is a
director of State Street Bank and Western Digital Corporation, a manufacturer
of disk drives. He is Chairman of the Committee on Ethics and Business
Practices and a member of the Nominating and Corporate Governance Committee of
the board of directors of John Hancock Mutual Life Insurance Company.
Wayne A. Budd has been a John Hancock Mutual Life Insurance Company director
since 1998. Mr. Budd has been the Group President, Bell Atlantic-New England,
Bell Atlantic Corporation, since 1996. He is a director of BankBoston
Corporation and Tosco Corporation, an independent marketer of petroleum
products. Prior to 1996, he was a Senior Partner in the law firm of Goodwin,
Proctor & Hoar. He is a member of the Audit Committee and Compensation
Committee of the board of directors of John Hancock Mutual Life Insurance
Company.
John M. Connors, Jr. has been a John Hancock Mutual Life Insurance Company
director since 1991. Mr. Connors has been the Chairman and Chief Executive
Officer of Hill, Holliday, Connors, Cosmopulos, Inc., a full-service
advertising agency, since 1968. He is a director of Geerlings & Wade, Inc., a
direct marketer of premium wines, Lycos, Inc., an Internet company, and
Saucony, Inc., a manufacturer of performance-oriented athletic shoes. Mr.
Connors is also the Chairman of the board of directors for Partners Healthcare
Systems, Inc., an integrated healthcare delivery system, and a trustee of
Boston College. He is a member of the Committee on Ethics and Business
Practices and Executive Committee of the board of directors of John Hancock
Mutual Life Insurance Company.
Robert E. Fast has been a John Hancock Mutual Life Insurance Company
director since 1989. Mr. Fast is a Senior Partner in the law firm of Hale and
Dorr, where he has been an attorney since 1962. He is a member of the Audit
Committee and Committee on Ethics and Business Practices of the board of
directors of John Hancock Mutual Life Insurance Company.
Dr. Kathleen Foley Feldstein has been a John Hancock Mutual Life Insurance
Company director since 1993. Dr. Feldstein has been the President of Economics
Studies, Inc., a private economic consulting firm, since 1987. She is a
director of Bank of America Corporation, BellSouth Corporation, a
telecommunications company, Ionics Corporation, a water purification company,
and Knight-Ridder Corporation, a newspaper publishing company. She is a member
of the Compensation Committee of the board of directors of John Hancock Mutual
Life Insurance Company.
Nelson S. Gifford has been a John Hancock Mutual Life Insurance Company
director since 1976. Mr. Gifford has been the Principal of Fleetwing Capital,
a venture capital investment firm, since 1991. Prior to 1991, he was
President, Chief Executive Officer and a director of Dennison Manufacturing
Company, a stationery products, systems and packaging company. He is a trustee
of NSTAR, a holding company for Massachusetts'
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utility companies, including Boston Edison Company. He is the Chairman of the
Audit Committee and a member of the Committee of Finance and Executive
Committee of the board of directors of John Hancock Mutual Life Insurance
Company.
Michael C. Hawley has been a John Hancock Mutual Life Insurance Company
director since 1995. Mr. Hawley was elected Chairman and Chief Executive
Officer of The Gillette Company in April, 1999. Prior to this election, he had
been President and Chief Operating Officer. He is a director of The Gillette
Company and Texaco, Inc. He is a member of the Audit Committee and
Compensation Committee of the board of directors of John Hancock Mutual Life
Insurance Company.
Edward H. Linde has been a John Hancock Mutual Life Insurance Company
director since 1999. Mr. Linde has been President and Chief Executive Officer
of Boston Properties, Inc., an owner and developer of office properties, since
1970. He is a member of the Committee of Finance of the board of directors of
John Hancock Mutual Life Insurance Company.
Judith A. McHale has been President and Chief Operating Officer of Discovery
Communications, Inc., parent company of cable television's Discovery Channel,
since 1995. From 1989 to 1995, she served as Executive Vice President and
General Counsel for Discovery Communications, Inc. She is a director of the
Potomac Electric Power Company.
Richard F. Syron has been a John Hancock Mutual Life Insurance Company
director since 1985. Mr. Syron is the President and Chief Executive Officer of
Thermo Electron Corporation, a manufacturer of a broad range of biomedical and
other products. Mr. Syron has served as a director of Thermo Electron
Corporation since 1997. Mr. Syron is the former Chairman and Chief Executive
Officer of the American Stock Exchange. From 1989 to 1994, he was the
President and Chief Executive Officer of the Federal Reserve Bank of Boston.
He is a member of the Compensation Committee and Executive Committee of the
board of directors of John Hancock Mutual Life Insurance Company.
Robert A. Tarr, Jr. has been a John Hancock Mutual Life Insurance Company
director since 1996. Mr. Tarr is the former President, Chief Executive Officer
and Chief Operating Officer of Harcourt General, Inc. (formerly General Cinema
Corporation) and the Neiman Marcus Group, Inc. He is a director of Barney's
New York, Inc., a retailer of men's and women's apparel and accessories,
Hannaford Bros. Co., a multi-regional food retailer, Houghton Mifflin Company
and Wesco International, Inc., a distributor of electrical products. He is a
member of the Committee of Finance and a member of the Audit Committee of the
board of directors of John Hancock Mutual Life Insurance Company.
Diane M. Capstaff has been Executive Vice President of John Hancock Mutual
Life Insurance Company since 1991.
Kathleen M. Graveline has been Executive Vice President of John Hancock
Mutual Life Insurance Company since 1999. From 1996 through 1999, she was
Senior Vice President, Retail Sector, of John Hancock Mutual Life Insurance
Company.
Thomas E. Moloney has been Chief Financial Officer of John Hancock Mutual
Life Insurance Company and John Hancock Subsidiaries, Inc. since 1992. He is
the Chairman and a director of John Hancock Management Company, John Hancock
Reassurance Co., Ltd. and John Hancock Signature Services. He is a director of
The Berkeley Financial Group, John Hancock Realty Services Corp., John Hancock
Subsidiaries, Inc., The Maritime Life Assurance Company and John Hancock
Canadian Holdings Limited.
Richard S. Scipione has been General Counsel of John Hancock Mutual Life
Insurance Company since 1987. He is a director of Signator Investors, Inc. and
The Berkeley Financial Group.
Composition of Board and Committees
The business of John Hancock Financial Services, Inc. will be managed under
the direction of its board of directors. The board of directors currently
consists of 16 directors, 13 of whom are independent directors. John Hancock
Financial Services, Inc. has established the following standing committees:
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Compensation Committee
The Compensation Committee of John Hancock Financial Services, Inc. will be
chosen by the board of directors from those members who are not officers of
John Hancock Financial Services, Inc. The Compensation Committee will make
recommendations to the board of directors regarding salaries and any
supplemental employee compensation of the executive officers and act upon
management's recommendations for salary and supplemental employee compensation
for all other employees. The Compensation Committee will also act upon
management's recommendations which require director action with respect to all
employee pension and welfare benefit plans.
The Audit Committee
The Audit Committee of John Hancock Financial Services, Inc. will be chosen
by the board of directors from those members who are not officers of John
Hancock Financial Services, Inc. The Audit Committee will recommend to the
board of directors the firm of independent certified public accountants to
annually audit the books and records. The Audit Committee will review and
report on the activities of the independent certified public accountants to
the board of directors and review and advise the board of directors as to the
adequacy of John Hancock Financial Services, Inc.'s system of internal
accounting controls.
Other Committees
The board of directors may form such other committees of the board of
directors as it deems appropriate.
Compensation of Directors
The compensation for our directors who are not officers or employees of John
Hancock Mutual Life Insurance company consists of a $40,000 annual retainer
plus a $1,500 attendance fee for each regular or special board meeting
attended. These directors are also compensated for participation on
committees. We anticipate that, following the reorganization, the directors of
John Hancock Life Insurance Company will be, for the most part, identical to
the directors of John Hancock Financial Services, Inc. However, at least one
director of John Hancock Life Insurance Company will be an individual who is
not a director or officer of John Hancock Financial Services, Inc. We do not
currently plan to pay additional compensation to directors for also
participating on the board of directors of John Hancock Financial Services,
Inc.
Compensation of Named Executive Officers
The following table describes the compensation paid to our Chief Executive
Officer and the four other most highly compensated executive officers for
services rendered during the fiscal year ended December 31, 1998 (the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------- ------------
Long-Term All Other
Incentive Compensation
Name and Position Year Salary Bonus (1) Plan (2) (3)
- -------------------------- ---- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
S.L. Brown................ 1998 $1,000,000 $1,000,000 $899,941 $10,000
Chairman of the Board and
Chief Executive Officer
D.F. D'Alessandro......... 1998 600,000 420,000 554,605 10,000
President and Chief
Operations Officer
F.L. Aborn................ 1998 518,000 310,800 503,946 10,000
Vice Chairman of the
Board and Chief
Investment Officer
T.E. Moloney.............. 1998 412,000 206,000 358,807 10,000
Chief Financial Officer
R.S. Scipione............. 1998 355,000 177,500 311,627 10,000
General Counsel
</TABLE>
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- --------
(1) The amount in this column represents the annual incentive paid in 1999 for
the prior performance year of 1998.
(2) This column reports long-term incentive awards received or deferred in
1998 for prior performance cycles.
(3) The amounts in this column include employer contributions under the
Investment Incentive Plan. This payment makes up the company match on base
salary over the ERISA limitations as well as the match on deferred base
salary. In 1998, there was a 4% company match on base salary over the 1998
ERISA limitations of $160,000 as well as the 4% match on deferred base
salary. Total company match contributions for 1998 are capped at $10,000.
Annual Incentive Compensation Plan
Under the Incentive Compensation Plan for Employees ("ICP"), cash awards
will be payable to eligible employees upon the achievement of corporate
performance objectives established by the Compensation Committee of the board
of directors. Such cash awards will be stated as a percentage of the base
salary payable to the eligible employee, with the range of targets for
executive officers being from 55% to 100% of the officer's base salary. Actual
amounts payable will be adjusted up or down for performance at or above
targeted levels of performance. Amounts, if any, payable under the ICP are
paid during the first quarter of the fiscal year immediately following the
performance year. Generally, an eligible employee must be employed on the last
day of the fiscal year in order to receive a payment under the ICP in respect
of such fiscal year. However, in the event of an executive's death, disability
or retirement, a pro-rated amount may be payable in accordance with
administrative guidelines established by the Compensation Committee.
Long Term Incentive Plan
The executive officers, each senior vice president or vice president and
such other senior officers of John Hancock Mutual Life Insurance Company, and
officers of a subsidiary as may be selected by the committee responsible for
administering the plan, are participants of the Long-Term Incentive Plan for
Senior Executives (the "LTIP"). The LTIP operates during successive three-year
periods (the "Performance Cycle"). At the beginning of the Performance Cycle
each participant is awarded a number of Equity Rights determined by dividing
his or her Target Award by 100. The Target Award is a percentage of salary
established for each participant, with the range of Target Awards for
executive officers ranging from 70% to 350%. Under the LTIP, the Compensation
Committee of the board of directors establishes corporate performance
objectives. If these objectives are achieved at target levels, each of the
equity rights is worth $100, but such amount may be adjusted up (to a maximum
of $300 per equity right) or down depending on whether the goals have been
exceeded or have not been met. For Messrs. Brown, Aborn, D'Alessandro and
Moloney, beginning with the 1999 Performance Cycle, equity rights vest in one
installment after five years. For most other participants, the equity rights
vest in three installments, one-third at the end of the Performance Cycle and
one-third on January 1 of each of the following two years. As equity rights
vest, cash payments equal to the value of the equity rights will be made to
participants unless a participant irrevocably elects to defer the payment
until retirement or more than five years from the date of election.
In the event of a participant's death, all equity rights for completed
Performance Cycles which have not previously vested will vest and a pro rata
share of the equity rights will vest based on the elapsed portion of any
Performance Cycle in progress. In the event of a participant's retirement or
disability, all equity rights for completed Performance Cycles which have not
previously vested will vest under the normal vesting schedule and a pro rata
share of the equity rights will vest based on the elapsed portion of any
current Performance Cycle. For Messrs. Brown and Aborn, beginning with the
1999 Performance Cycle, in the event of normal retirement, all equity rights
for completed Performance Cycles which have not previously vested shall vest
under the normal vesting schedule and a full share of the equity rights for
the current Performance Cycle will vest in one installment after five years.
Additionally, participants may be entitled to hardship distributions if, in
the opinion of the Compensation Committee, the participant has incurred a
financial hardship. Participants who terminate employment, other than by
retirement, disability or death, shall forfeit all non-vested equity rights.
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The table immediately below presents the number of equity rights granted to
each Named Executive Officer during 1998 and their potential value contingent
upon performance over the 1998-2000 performance period. For purposes of
section 162(m) of the Internal Revenue Code, the subsequent table presents the
number of equity rights granted to each Named Executive Officer during 1999
and their potential value contingent upon performance over the 1999-2001
performance period.
Long-Term Incentive Plan Table (Cycle 1998)
<TABLE>
<CAPTION>
Estimated Future Payouts
Number of Performance -------------------------
Name Equity Rights Period Target Maximum
- ------------------------------------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
S.L. Brown................................. 10,000 98-99-00 $ 1,000,000 $ 3,000,000
D.F. D'Alessandro.......................... 6,000 98-99-00 600,000 1,800,000
F.L. Aborn................................. 4,403 98-99-00 440,300 1,320,900
T.E. Moloney............................... 2,884 98-99-00 288,400 865,200
R.S. Scipione.............................. 2,485 98-99-00 248,500 745,500
Long-Term Incentive Plan Table (Cycle 1999-2001)
<CAPTION>
Estimated Future Payouts
Number of Performance -------------------------
Name Equity Rights Period Target Maximum
- ------------------------------------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
S.L. Brown................................. 33,000 99-00-01 $ 3,300,000 $ 9,900,000
D.F. D'Alessandro.......................... 20,000 99-00-01 2,000,000 6,000,000
F.L. Aborn................................. 10,360 99-00-01 1,036,000 3,108,000
T.E. Moloney............................... 8,240 99-00-01 824,000 2,472,000
R.S. Scipione.............................. 2,485 99-00-01 248,500 745,500
</TABLE>
1999 Long-Term Stock Incentive Plan
Under the 1999 Long Term Stock Incentive Plan, a committee responsible for
administering the 1999 Long Term Stock Incentive Plan (the "Committee"), may
from time to time grant eligible employees qualified or nonqualified stock
options to purchase shares of common stock having an exercise price at least
equal to the fair market value of a share of common stock on the effective
date of the grant of such stock option. The Committee may also award employees
the right to receive shares, a cash equivalent payment, or a combination of
both which may be subject to forfeitability contingencies based on continued
employment with us or on meeting performance criteria or both (the "Stock
Awards"). The 1999 Long Term Stock Incentive Plan further provides that the
Committee must consist of two or more members each of whom must be a "non-
employee director" within the meaning of Rule 16b-3, as promulgated pursuant
to the Exchange Act, and Section 162(m) of the Internal Revenue Code.
The maximum number of shares of common stock that may be issued under the
1999 Long Term Stock Incentive Plan is 5.0% of the total number of shares of
common stock that are outstanding following this offering. The shares of
common stock underlying any awards which are forfeited, canceled, reacquired
by us, satisfied without the issuance of common stock or otherwise terminated
(other than by exercise) shall be added back to the shares of common stock
available for issuance under the 1999 Long Term Stock Incentive Plan. The
maximum number of shares that may be granted as Stock Awards shall be 1.0% of
total shares outstanding and the maximum number of shares available for use as
incentive stock options shall be 4.0% of total shares outstanding.
Additionally, the maximum number of shares that may be awarded to any
participant shall be 1% of total shares outstanding. If there is a stock
split, stock dividend, recapitalization or other relevant change affecting the
outstanding shares of common stock, appropriate adjustments will be made in
the number and kind of shares available for award under the 1999 Long Term
Stock Incentive Plan in the future and the number and kind of shares as to
which outstanding shares shall be exercisable.
The Committee may amend the 1999 Long Term Stock Incentive Plan, except that
no amendment without the approval of our stockholders shall be made which
would increase the number of shares available for issuance
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under the 1999 Long Term Stock Incentive Plan or cause the Long Term 1999
Stock Incentive Plan not to comply with Rule 16b-3 of the Exchange Act or
Section 162(m) of the Code. The 1999 Long Term Stock Incentive Plan shall be
effective as of the date approved by the board. No awards may be made under
the 1999 Long Term Stock Incentive Plan after ten years from the date of
approval or earlier termination of the 1999 Long Term Stock Incentive Plan by
the board.
In the event of a change in control, the Committee may provide for the
acceleration of any time period relating to the exercise or realization of the
award, provide for the purchase of the award upon the participant's request
for an amount of cash or other property that could have been received upon the
exercise or realization of the award had the award been currently exercisable
or payable, adjust the terms of the award, cause the award to be assumed, or
new rights substituted therefor, by another entity, or make such other
provisions as the Committee may consider to be equitable and in our best
interests. Under the Plan of Reorganization until one year after completion of
the offering, we may not award any stock options or stock grants to any of our
executive officers or directors.
Federal Income Tax Aspects
The following is a brief summary of the Federal income tax consequences of
awards under the 1999 Long Term Stock Incentive Plan based on the Federal
income tax laws in effect on the date hereof. This summary is not intended to
be exhaustive and does not describe state or local tax consequences.
No taxable income is realized by the grantee upon the grant or exercise of
an Incentive Stock Option (an "ISO"). If a grantee does not sell the stock
received upon the exercise of an ISO ("ISO Shares") for at least two years
from the date of grant and one year from the date of exercise, when the ISO
Shares are sold any gain or loss realized will be treated as long-term capital
gain or loss. In such circumstances, no deduction will be allowed to the
grantee's employer for Federal income tax purposes.
If ISO Shares are disposed of prior to the expiration of the holding periods
described above, the grantee generally will realize ordinary income at that
time equal to the lesser of the excess of the fair market value of the shares
at exercise over the price paid for such ISO Shares or the actual gain on the
disposition. We will generally be entitled to deduct any such recognized
amount. Any further gain or loss realized by the grantee will be taxed as
short-term or long-term capital gain or loss. Subject to certain exceptions
for disability or death, if an ISO is exercised more than three months
following the termination of the grantee's employment, the ISO will generally
be taxed as a nonqualified stock option.
No income is realized by the grantee at the time a nonqualified stock option
is granted. Generally upon exercise of a nonqualified stock option, the
grantee will realize ordinary income in an amount equal to the difference
between the price paid for the shares and the fair market value of the shares
on the date of exercise. We will generally be entitled to a tax deduction in
the same amount and at the time as the grantee recognizes ordinary income. Any
appreciation or depreciation after the date of exercise will be treated as
either short-term or long-term capital gain or loss, depending upon the length
of time that the grantee has held the shares.
Employment Continuation Agreements and Retention Arrangement
Employment Continuation Agreements. We have entered into agreements with
certain of our executive officers, including Messrs. Brown, Aborn,
D'Alessandro, and Moloney, that provide for each executive's continued
employment with us for a period of three years following the occurrence of a
change of control. A change of control generally means a merger or other
change in corporate structure after which the majority of our board members is
no longer on our board or a majority of our shareholders are no longer
shareholders. Under these agreements, each eligible executive's terms and
conditions of employment, including his rate of base salary, annual bonus
opportunity and his title, position, duties and responsibilities, are not to
be modified in a manner adverse to the executive following the change of
control. If an eligible executive's employment is terminated by us within
three years of a change of control without cause, or is terminated by the
executive for good reason, we will provide the executive with certain
benefits, including severance in an amount equal to three times the sum of the
executive's annual base salary and target annual bonus amount. Cause is
generally defined as the
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occurrence of one or more acts of intentional and willful misconduct that has
an adverse effect on us. Good reason generally means the occurrence of one or
more events that have an adverse effect on the executive's terms and
conditions of employment, including a reduction in the executive's base salary
or annual bonus opportunity, a material adverse change in the executive's
duties and responsibilities, and the relocation of the executive's principal
place of employment to a location more than 50 miles away from his prior place
of employment. Additionally, if such a termination of employment occurs prior
to the fourth calendar year beginning after the first grant of stock options,
performance shares or any similar stock based awards made to the executive
following an underwritten public offering, the severance amount will also
include three times the long term incentive award granted to the executive
with respect to most recent performance period commencing prior to the change
of control. The severance amounts will also be payable if an executive's
employment is terminated after the occurrence of certain enumerated events
that are a prelude to a change of control, e.g., the commencement of a tender
offer or a proxy contest or the signing of a merger agreement, and a change of
control occurs within two years thereafter.
The agreements also ensure that an executive who receives severance benefits
will also receive various benefits and payments otherwise earned by or owing
to the executive for his prior service. Such an executive will receive a pro-
rated target bonus for the then current year, and pro-rated long term
incentive amounts in respect of performance periods then in effect. Except as
noted below, each such executive's retirement benefits will be calculated
based on the service (but not the age) the executive would have attained or
completed had the executive continued in our employ until the earlier of (1)
the date the executive attains age 65 or (2) the third anniversary of his
termination. In the event he becomes entitled to receive severance benefits
under his agreement or if his employment terminates more than three years
after a change of control, but under circumstances under which he would have
been entitled to severance were the agreement then still in effect, Mr.
D'Alessandro will be deemed to have worked until the earliest age at which he
could retire and immediately commence receipt of his retirement benefits
without actuarial reduction for early commencement. We will also make
additional payments to any eligible executive who incurs any excise taxes in
respect of the benefits and other payments provided to him under the agreement
or otherwise on account of the change of control. The payments will be in an
amount such that, after taking into account all applicable Federal, state and
local taxes, the executive is able to retain an amount equal to the excise
taxes that are imposed without regard to these additional payments.
Retention Arrangement. In 1998, we established a special retention program
for Mr. D'Alessandro to induce him to remain in our employ for the five
calendar years ending December 31, 2002. The retention award was initially
valued at two million dollars, or $400,000 per year of service during the
retention period. This initial amount was treated as invested in surplus
units. The value of these surplus units will be payable to Mr. D'Alessandro if
he is still employed at the end of this five-year period. The value of the
surplus units will also be paid if Mr. D'Alessandro's employment terminates
prior to December 31, 2002 due to his death or disability or in certain
circumstances following a change of control.
Retirement Plan
The following table shows the estimated annual pension benefits payable to a
covered participant at normal retirement age based on the final pay formula
contained in our Pension Plan, a qualified defined-benefit plan. The benefits
also include any pension amounts provided under our Non-Qualified Pension Plan
due to benefit limitations imposed by ERISA.
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Pension Plan Table
<TABLE>
<CAPTION>
Final Average Years of Plan Participation
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pay 15 20 25 30 35 40
- -------------------------------------------------------------------------------
$ 300,000 $ 79,171 $105,562 $ 131,953 $ 158,343 $ 166,260 $ 174,178
- -------------------------------------------------------------------------------
$ 350,000 $ 92,671 $123,562 $ 154,453 $ 185,343 $ 194,610 $ 204,878
- -------------------------------------------------------------------------------
$ 400,000 $106,171 $141,562 $ 176,953 $ 212,343 $ 222,960 $ 233,578
- -------------------------------------------------------------------------------
$ 450,000 $119,671 $159,562 $ 199,453 $ 239,343 $ 251,310 $ 263,278
- -------------------------------------------------------------------------------
$ 500,000 $133,171 $177,562 $ 221,953 $ 266,343 $ 279,660 $ 292,978
- -------------------------------------------------------------------------------
$ 550,000 $146,671 $195,562 $ 244,453 $ 293,343 $ 308,010 $ 322,678
- -------------------------------------------------------------------------------
$ 600,000 $160,171 $213,562 $ 266,953 $ 320,343 $ 336,360 $ 352,378
- -------------------------------------------------------------------------------
$ 650,000 $173,671 $231,562 $ 289,453 $ 347,343 $ 364,710 $ 382,078
- -------------------------------------------------------------------------------
$ 700,000 $187,171 $249,562 $ 311,953 $ 374,343 $ 393,060 $ 411,778
- -------------------------------------------------------------------------------
$ 750,000 $200,671 $267,562 $ 334,453 $ 401,343 $ 421,410 $ 441,478
- -------------------------------------------------------------------------------
$ 800,000 $214,171 $285,562 $ 356,953 $ 438,343 $ 449,760 $ 471,178
- -------------------------------------------------------------------------------
$ 900,000 $241,171 $321,562 $ 401,953 $ 482,343 $ 506,460 $ 530,578
- -------------------------------------------------------------------------------
$1,000,000 $268,171 $357,562 $ 446,953 $ 536,343 $ 563,160 $ 589,978
- -------------------------------------------------------------------------------
$1,100,000 $295,171 $393,562 $ 491,953 $ 590,343 $ 619,860 $ 649,378
- -------------------------------------------------------------------------------
$1,200,000 $322,171 $429,562 $ 536,953 $ 644,343 $ 676,560 $ 708,778
- -------------------------------------------------------------------------------
$1,300,000 $349,171 $465,562 $ 581,953 $ 698,343 $ 733,260 $ 768,178
- -------------------------------------------------------------------------------
$1,400,000 $376,171 $501,562 $ 626,953 $ 752,343 $ 789,960 $ 827,578
- -------------------------------------------------------------------------------
$1,500,000 $403,171 $537,562 $ 671,953 $ 806,343 $ 846,660 $ 886,978
- -------------------------------------------------------------------------------
$1,600,000 $430,171 $573,562 $ 716,953 $ 860,343 $ 903,360 $ 946,378
- -------------------------------------------------------------------------------
$1,700,000 $457,171 $609,562 $ 761,953 $ 914,343 $ 960,060 $1,005,778
- -------------------------------------------------------------------------------
$1,900,000 $511,171 $681,562 $ 851,953 $1,022,343 $1,073,460 $1,124,578
- -------------------------------------------------------------------------------
$2,100,000 $565,171 $753,562 $ 941,953 $1,130,343 $1,186,860 $1,247,378
- -------------------------------------------------------------------------------
$2,300,000 $619,171 $825,562 $1,031,953 $1,238,343 $1,300,260 $1,370,178
</TABLE>
The benefits shown in the above table are payable in the form of a straight
life annuity. Benefits payable under the Pension Plan are not subject to
offset for Social Security benefits. Compensation taken into account under the
Pension Plan is the average monthly compensation paid to a participant during
the consecutive 60-month period over the most recent 120-month period that
produces the highest average compensation. For this purpose, compensation
includes the total of base salary and bonus.
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REGULATION
General
Our business is subject to extensive regulation at both the state and
Federal level, including regulation under state insurance and Federal and
state securities laws.
State Insurance Regulation
Our insurance subsidiaries are subject to supervision and regulation by the
insurance authorities in each jurisdiction in which they transact business.
Currently, we are licensed to transact business in all fifty states, the
District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern
Mariana Islands, and 13 Canadian provinces and territories, and therefore are
subject to regulation in all these jurisdictions. Most states have laws and
regulations governing such issues as: what lines of business a company may
engage in; underwriting practices, including a company's ability to request
results of applicants' genetic tests; what premium rates may be charged in
various lines of business; what products a company may sell; mandating certain
insurance benefits and policy forms; minimum rates for accumulation of cash
values and maximum rates for policy loans; licensing of insurance companies
and agents; advertising and marketing practices; statutory accounting and
reporting requirements; reserve requirements and solvency standards; admitted
statutory assets; the appropriate mix of investments; dividend payments;
transactions with affiliates; and acquisitions of control. State insurance
departments periodically review the business and operations of an insurance
company by examining its financial condition and how its agents sell its
products. Our insurance subsidiaries are also required to file various reports
relating to their financial condition, including detailed annual financial
statements. This is required in each jurisdiction where an insurance
subsidiary is licensed.
State insurance regulatory authorities and other state law enforcement
agencies and attorneys general from time to time make inquiries concerning
whether our insurance subsidiaries are in compliance with the regulations
covering their businesses. We try to respond to such inquiries in an
appropriate way and to take corrective action if warranted.
The Massachusetts Division of Insurance is in the process of conducting a
routine regulatory examination of John Hancock Mutual Life Insurance Company's
financial statements for the years 1993 through 1997. In addition, the Arizona
and New Jersey insurance departments have ongoing market conduct examinations
involving John Hancock Mutual Life Insurance Company. We do not believe that
the potential findings of these examinations will have a material impact on
our business, financial condition or results of operations.
State insurance regulators and the National Association of Insurance
Commissioners are continually re-examining existing laws and regulations.
Among other things, these laws and regulations may focus on insurance company
investments and solvency issues, risk-adjusted capital guidelines,
interpretations of existing laws, the development of new laws, the
implementation of non-statutory guidelines and the circumstances under which
dividends may be paid. For example, the National Association of Insurance
Commissioners has recently promulgated proposed changes to statutory
accounting standards. See "Risk Factors--The National Association of Insurance
Commissioners' codification of statutory accounting practices may adversely
affect the statutory surplus of John Hancock Life Insurance Company." These
initiatives may be adopted by the various states in which we are licensed, but
the ultimate content and timing of any statutes and regulations adopted by the
states cannot be determined at this time. It is impossible to predict the
future impact of changing state and federal regulations on our business, and
there can be no assurance that existing or future insurance-related laws and
regulations will not become more restrictive.
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Regulation Governing Potential Acquisitions of Control
After the reorganization, we will continue to be subject to regulation under
the insurance holding company statutes of the states in which our insurance
subsidiaries are organized, principally Massachusetts, which will be the state
of domicile of John Hancock Life Insurance Company. The Massachusetts
insurance law contains provisions which, in general, provide that the
acquisition or change of "control" of a domestic insurer or of any person that
controls a domestic insurer cannot be consummated without the prior approval
of the Massachusetts Commissioner of Insurance. In general, a presumption of
"control" arises from the ownership, control, possession with the power to
vote or possession of proxies with respect to, 10% or more of the voting
securities of an insurer or of a person that controls an insurer. A person
seeking to acquire control, directly or indirectly, of a Massachusetts
insurance company or of any person controlling a Massachusetts insurance
company must file an application for approval of the acquisition of control
with the Massachusetts Commissioner of Insurance and obtain the approval of
the Massachusetts Commissioner of Insurance before consummating the
acquisition.
In addition, we anticipate that following the reorganization we may be
subject to New York insurance law governing the activities of insurance
holding companies. Other state holding company laws, specifically those of
California and Delaware, and similar Canadian laws, apply to us as well
because we have insurance subsidiaries organized in those jurisdictions.
Accordingly, the direct or indirect acquisition of control of John Hancock
Life Insurance Company will be subject to the prior approval of the California
and Delaware Commissioners of Insurance and the Office of the Superintendent
of Financial Institutions in Canada and may also be subject to the prior
approval of the New York Superintendent of Insurance.
In addition to the restrictions under applicable insurance holding company
statutes, each of the Plan of Reorganization governing our reorganization and
our restated certificate of incorporation prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more of
the outstanding shares of our common stock until two years after the
effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire beneficial
ownership of 10% or more of the outstanding shares of our common stock
during the one year period following the two-year period described in
the preceding paragraph.
Under the Plan of Reorganization, the same restrictions apply to the common
stock of John Hancock Life Insurance Company.
There is an exception to the foregoing prohibitions for acquisitions by a
person that becomes a beneficial owner of 10% or more of our common stock as a
result of our issuance of such common stock to such person as consideration in
an acquisition of another entity that was initiated by us by authority of our
board of directors. Any such acquisition initiated by us by authority of our
board of directors would require the approval of the Massachusetts
Commissioner of Insurance and the Commissioners of Insurance of California and
Delaware, the Office of the Superintendent of Financial Institutions in Canada
and, potentially, the New York Superintendent of Insurance. If any person
acquires or offers to acquire 10% or more of the outstanding shares of our
common stock in violation of our Plan of Reorganization, we and the
Massachusetts Commissioner of Insurance would be entitled to injunctive
relief. By virtue of these provisions of the Plan of Reorganization and our
restated certificate of incorporation, John Hancock Financial Services, Inc.
may not be subject to an acquisition by another company during the two years
following the effective date of the reorganization and may only be subject to
acquisition in the third year following the effective date of the
reorganization with the approval of our board of directors and the
Massachusetts Commissioner of Insurance.
All the restrictions described above may deter, delay or prevent a future
acquisition of control, including transactions that could be perceived as
advantageous to our stockholders. See "Risk Factors--There are a number of
provisions of our Plan of Reorganization, our restated certificate of
incorporation and by-laws, laws applicable to us, agreements that we have
entered into with our senior management and our stockholder rights plan that
will prevent or discourage takeovers and business combinations that our
stockholders might otherwise consider to be in their best interest."
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Regulation of Dividends and Other Payments from Insurance Subsidiaries
John Hancock Financial Services, Inc. is a holding company and, after the
reorganization, its assets will consist initially of the outstanding capital
stock of John Hancock Life Insurance Company and a portion of the net proceeds
of the offering. As an insurance holding company, we will depend primarily on
dividends from John Hancock Life Insurance Company to pay dividends to our
stockholders (other than dividends during the first year following the
effective date of the reorganization) and pay operating expenses. Any
inability of John Hancock Life Insurance Company to pay dividends to us in the
future in an amount sufficient for us to pay dividends to our stockholders and
meet our cash obligations may materially adversely affect the market price of
our common stock and our business, financial condition or results of
operations.
The Massachusetts insurance law limits how and when John Hancock Life
Insurance Company can pay dividends to us. There are a number of provisions of
the Massachusetts insurance law that govern payment of shareholder dividends
and other distributions by stock issuance companies. Under the Massachusetts
insurance law, no insurer may pay any shareholder dividend from any source
other than statutory unassigned funds without the prior approval of the
Massachusetts Commission of Insurance. The Massachusetts insurance holding
company act requires that a report be given to the Massachusetts Commissioner
of Insurance no later than five days following declaration, and at least ten
days' prior to payment, of any dividend or distribution by a Massachusetts
insurance company. Further, this act provides that no extraordinary dividend
may be paid without thirty days' prior written notice to the Massachusetts
Commissioner of Insurance, and only if the Massachusetts Commissioner of
Insurance has not disapproved, or has approved, the payment within the thirty
day notice period. An extraordinary dividend is any dividend or distribution
of cash or other property whose fair market value, together with other
dividends or distributions made within the preceding twelve months, exceeds
the greater of (1) 10% of an insurance company's surplus as regards
policyholders as of the preceding December 31, and (2) a life insurance
company's statutory net gain from operations for the twelve months ending on
the preceding December 31. John Hancock Mutual Life Insurance Company's
statutory net gain from operations for the year ended December 31, 1998 was
$607.1 million and as of December 31, 1998 its statutory surplus was $3,388.7
million. Following the reorganization, John Hancock Life Insurance Company may
be commercially domiciled in New York and, if so, dividend payments may also
be subject to New York's insurance holding company act as well as
Massachusetts law.
Surplus and Capital Requirements
Insurance regulators have the discretionary authority, in connection with
the ongoing licensing of our insurance subsidiaries, to limit or prohibit the
ability to issue new policies if, in the regulators' judgment, the insurer is
not maintaining a minimum amount of surplus or is in hazardous financial
condition. Limits may also be established on the ability to issue new life
insurance policies and annuity contracts above an amount based upon the face
amount and premiums of policies of a similar type issued in the prior year.
Risk-Based Capital
The National Association of Insurance Commissioners has established risk-
based capital standards for life insurance companies as well as a model act to
apply such standards at the state level. The model act provides that life
insurance companies must submit an annual risk-based capital report to state
regulators reporting their risk-based capital based on four categories of
risk: asset risk, insurance risk, interest rate risk and business risk. The
formula is intended to be used by insurance regulators as an early warning
tool to identify possible weakly capitalized companies for purposes of
initiating further regulatory action.
If an insurer's risk-based capital falls below specified levels, the insurer
would be subject to different degrees of regulatory action depending upon the
level. These actions range from requiring the insurer to propose actions to
correct the risk-based capital deficiency to placing the insurer under
regulatory control. John Hancock Mutual Life Insurance Company exceeded the
level of risk-based capital that would require it to propose actions to
correct a deficiency by 156% as of December 31, 1998.
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Guaranty Funds
All fifty states of the United States, the District of Columbia and Puerto
Rico have insurance laws requiring companies licensed to do life or health
insurance business within those jurisdictions to participate as members of the
state's life and health insurance guaranty associations. These associations
are organized to pay contractual obligations under life and health insurance
policies and annuity contracts issued by impaired or insolvent insurance
companies. To meet these obligations, these associations levy assessments on
all member insurers based on the proportionate share of the premiums written
by each member in the lines of business in which the impaired or insolvent
insurer is engaged. Some states permit member insurers to recover assessments
paid through full or partial premium tax offsets, usually over a period of
years. For the nine months ended September 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, we paid (received funds of) $(.2) million,
$6.9 million, $7.4 million, and $9.3 million, respectively, in assessments
pursuant to state guaranty association laws. We are also subject to
assessments pursuant to similar types of arrangements in Canada. While the
amount of future assessments cannot be accurately predicted, we believe that
assessments with respect to other pending insurance company impairments and
insolvencies will not be material to our business, financial condition or
results of operations.
Statutory Investment Valuation Reserves
Life insurance companies are required to establish an asset valuation
reserve ("AVR") consisting of two components: (i) a "default component," which
provides for future credit-related losses on fixed maturity investments, and
(ii) an "equity component," which provides for losses on all types of equity
investments, including equity securities and real estate. Insurers also are
required to establish an interest maintenance reserve ("IMR") for net realized
capital gains and losses on fixed maturity securities, net of tax, related to
changes in interest rates. The IMR is required to be amortized into statutory
earnings on a basis reflecting the remaining period to maturity of the fixed
maturity securities sold. These reserves are required by state insurance
regulatory authorities to be established as a liability on a life insurer's
statutory financial statements, but do not affect our financial statements
prepared in accordance with GAAP. Although future additions to AVR will reduce
the future statutory capital and surplus of John Hancock Life Insurance
Company, we do not believe that the impact under current regulations of such
reserve requirements will materially affect the ability of John Hancock Life
Insurance Company to increase its statutory capital and surplus and pay future
dividends to John Hancock Financial Services, Inc.
IRIS Ratios
The National Association of Insurance Commissioners has developed a set of
financial tests known as the Insurance Regulatory Information System ("IRIS")
for early identification of companies which may require special attention by
insurance regulators. Insurance companies submit data on an annual basis to
the National Association of Insurance Commissioners. This data is used to
calculate ratios covering various categories of financial data, with defined
"usual ranges" for each category. IRIS consists of 12 key financial ratios for
life insurance companies. An insurance company may fall out of the usual range
with respect to one or more ratios because of specific transactions that are
in themselves immaterial or eliminated at the consolidated level. Departure
from the usual range on four or more of the ratios may lead to inquiries from
individual states' insurance departments. During the five-year period ended
December 31, 1998, John Hancock Mutual Life Insurance Company was outside one
usual IRIS ratio range (real estate mortgage loans to total investment assets)
on two occasions and has not been outside the usual IRIS ratio range with
respect to any ratio during the past three years.
Regulation of Investments
Our insurance subsidiaries are subject to state laws and regulations that
require diversification of their investment portfolios. Some of these laws and
regulations also limit the amount of investments in specified investment
categories, such as below investment grade fixed maturity securities, equity
real estate, other equity investments and derivatives. Failure to comply with
these laws and regulations would cause investments
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exceeding regulatory limitations to be treated as nonadmitted assets for
purposes of measuring statutory surplus, in some instances, requiring
divestiture. State regulatory authorities from the domiciliary states of our
insurance subsidiaries have not indicated any non-compliance with any such
regulations.
Valuation of Life Insurance Policies Model Regulation
The National Association of Insurance Commissioners has adopted a revision
to the Valuation of Life Insurance Policies Model Regulation (known as Revised
XXX). This model regulation would establish new minimum statutory reserve
requirements for certain individual life insurance policies written in the
future. Before the new reserve standards can become effective, individual
states must adopt the model regulation. If these reserve standards were
adopted in their current form, companies selling certain individual life
insurance products such as term life insurance with guaranteed premium periods
and universal life insurance products with no-lapse guarantees would be
required to redesign their products or hold increased reserves to be
consistent with the new minimum standards with respect to policies issued
after the effective date of the regulation. We cannot predict whether this
model regulation will be adopted in Massachusetts or any other state and, if
adopted, when it will become effective. However, it is likely that the
industry will encourage the states to adopt the regulation with an effective
date of January 1, 2000. New York State adopted a regulation similar to the
model regulation in 1994, and is considering amending its regulation to be
consistent with Revised XXX.
Federal Insurance Initiatives and Litigation
Although the Federal government generally does not directly regulate the
insurance business, federal initiatives often have an impact on our business.
Current and proposed measures that may significantly affect the insurance
business generally include limitations on anti-trust immunity, minimum
solvency requirements and health care reform.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act of 1999, implementing fundamental changes in the regulation of the
financial services industry in the United States. The act permits the
transformation of the already converging banking, insurance and securities
industries by permitting mergers that combine commercial banks, insurers and
securities firms under one holding company. Under the act, national banks
retain their existing ability to sell insurance products in some
circumstances. In addition, bank holding companies that qualify and elect to
be treated as "financial holding companies" may engage in activities, and
acquire companies engaged in activities, that are "financial" in nature or
"incidental" or "complementary" to such financial activities, including acting
as principal, agent or broker in selling life, property and casualty and other
forms of insurance, including annuities. A financial holding company can own
any kind of insurance company or insurance broker or agent, but its bank
subsidiary cannot own the insurance company. Under state law, the financial
holding company would need to apply to the insurance commissioner in the
insurer's state of domicile for prior approval of the acquisition of the
insurer, and the act provides that the commissioner, in considering the
application, may not discriminate against the financial holding company
because it is affiliated with a bank. Under the act, no state may prevent or
interfere with affiliations between banks and insurers, insurance agents or
brokers, or the licensing of a bank or affiliate as an insurer or agent or
broker.
Until passage of the Gramm-Leach-Bliley Act, the Glass-Steagall Act of 1933,
as amended, had limited the ability of banks to engage in securities-related
businesses, and the Bank Holding Company Act of 1956, as amended, had
restricted banks from being affiliated with insurance companies. With the
passage of the Gramm-Leach-Bliley Act, bank holding companies may acquire
insurers, and insurance holding companies may acquire banks. The ability of
banks to affiliate with insurance companies may materially adversely affect
all of our product lines by substantially increasing the number, size and
financial strength of potential competitors.
Moreover, the United States Supreme Court held in 1995 in NationsBank of
North Carolina v. Variable Annuity Life Insurance Company that annuities are
not insurance for purposes of the National Bank Act. Although the effect of
these recent developments on us and our competitors is uncertain, both the
persistency of our existing products and our ability to sell new products may
be materially impacted by these developments in the future.
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Tax Legislation
Currently, under the Internal Revenue Code, holders of many life insurance
and annuity products, including both traditional and variable products, are
entitled to tax-favored treatment on these products. For example, income tax
payable by policyholders on investment earnings under traditional and variable
life insurance and annuity products which are owned by natural persons is
deferred during the product's accumulation period and is payable, if at all,
only when the insurance or annuity benefits are actually paid or to be paid.
Also, for example, interest on loans up to $50,000 secured by the cash value
of life insurance policies owned by businesses on key employees is eligible
for deduction even though investment earnings during the accumulation period
are tax-deferred.
In the past, legislation has been proposed that would have curtailed the
tax-favored treatment of some of our life insurance and annuity products. For
example, in 1992, the Bush Administration proposed legislation that, had it
been enacted, would have limited otherwise deductible interest payments for
businesses that own life insurance policies on the lives of their employees.
Similarly, in 1998, the Clinton Administration proposed legislation that, had
it been enacted, would have caused transfers between separate accounts
underlying tax-deferred annuity products to be taxable. The proposed
legislation also contained other provisions unfavorable to our tax favored
annuity products. None of these proposals was enacted, and no such proposals
or similar proposals are currently under active consideration by Congress. The
Clinton Administration has proposed tax law changes that would, if enacted,
adversely affect our corporate owned and bank owned life insurance product
offerings. If these or similar proposals directed at limiting the tax-favored
treatment of life insurance policies or annuity contracts were enacted, market
demand for such products would be adversely affected. In addition, there are a
number of proposals currently being considered by Congress which would either
eliminate or significantly reduce Federal estate taxes. Many insurance
products are designed and sold to help policyholders reduce the effect of
Federal estate taxation on their estates. Thus, the enactment of any
legislation that eliminates or significantly reduces Federal estate taxation
would likely result in a significant reduction in sales of our currently tax-
favored products.
Securities Laws
Certain of our investment advisory activities are subject to federal and
state securities laws and regulations. Our mutual funds are registered under
the Securities Act of 1933, as amended (the "Securities Act"), and the
Investment Company Act. All of our separate investment accounts that fund
retail variable annuity contracts and retail variable life insurance products
issued by us, other than those which fund private placement investment options
that are exempt from registration or support fixed rate investment options
that are also exempt from registration, are registered both under the
Securities Act and the Investment Company Act. Institutional products such as
group annuity contracts, guaranteed investment contracts and funding
agreements are sold to tax qualified pension plans or are sold to other
sophisticated investors as "private placements," and are exempt from
registration under both acts. Some of our subsidiaries are registered as
broker/dealers under the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), and with the National Association of Securities
Dealers, Inc., and a number are registered as investment advisers under the
Investment Advisers Act of 1940. One subsidiary is registered as a commodity
pool operator under the Commodity Exchange Act. Our insurance companies or
other subsidiaries also own or manage other investment vehicles that are
exempt from registration under the Securities Act and the Investment Company
Act but may be subject to other requirements of those laws, such as antifraud
provisions and the terms of applicable exemptions. We are also subject to
similar laws and regulations in the states and foreign countries in which we
provide investment advisory services, offer the products described above or
non-variable life and annuity products or conduct other securities and
investment related activities.
Environmental Considerations
As owners and operators of real property, we are subject to extensive
federal, state and local environmental laws and regulations. Inherent in such
ownership and operation is the risk that there may be potential environmental
liabilities and costs in connection with any required remediation of such
properties. When deemed appropriate, we
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routinely conduct environmental assessments for real estate being acquired for
investment and before taking title to property acquired through foreclosure or
deed in lieu of foreclosure. Based on these environmental assessments and
compliance with our internal environmental procedures, we believe that any
costs associated with compliance with environmental laws and regulations or
any remediation of such properties would not be material to our consolidated
financial position. Furthermore, although we hold equity positions in
subsidiaries and investments that could potentially be subject to
environmental liabilities, we believe, based on our assessment of the business
and properties of these companies and our level of involvement in the
operation and management of such companies, that we would not be subject to
any environmental liabilities with respect to these investments which would
have a material adverse effect on our business, financial position or results
of operations.
ERISA Considerations
Certain of our lines of business, including our management of employee
benefit plan assets in our advisory capacity in separate accounts, are subject
to the requirements of ERISA. In addition, the Small Business Job Protection
Act, which we refer to as the SBJPA, offered insurers protection from
potential litigation exposure prompted by the 1993 U.S. Supreme Court decision
in John Hancock Mutual Life Insurance Company v. Harris Trust & Savings Bank,
which we refer to as the Harris Trust Decision, in which the Court held that,
with respect to a portion of the funds held under certain general account
group annuity contracts, an insurer is subject to the fiduciary requirements
of ERISA. The pertinent SBJPA provisions provide that insurers are protected
from liability for breaches of fiduciary duties under ERISA for past actions
with respect to their general account contracts. However, insurers remain
subject to federal criminal law and liable for actions brought by the U.S.
Secretary of Labor alleging breaches of fiduciary duties that also constitute
a violation of federal or state criminal law. The SBJPA also provides that
contracts issued from an insurer's general account on or before December 31,
1998, that are not guaranteed benefit policies, will not be subject to ERISA's
fiduciary requirements if they meet the requirements of regulations to be
issued by the United States Department of Labor. The SBJPA further provides
that contracts issued from an insurer's general account after December 31,
1998, that are not guaranteed benefit policies will be subject to ERISA. In
December 1997, the Department of Labor published proposed regulations pursuant
to the SBJPA that provide, among other things, that if an employee benefit
plan acquired an insurance policy (other than a guaranteed benefit policy)
issued on or before December 31, 1998 that is supported by the assets of the
insurer's general account, the plan's assets for purposes of ERISA will not be
deemed to include any of the assets of the insurer's general account, provided
that the requirements of the regulation are met. Accordingly, if those
requirements are met, the insurer would not be subject to the fiduciary
obligations of ERISA in connection with issuing such an insurance policy.
These requirements include detailed disclosures to be made to the employee
benefit plan and the requirement that the insurer must permit the policyholder
to terminate the policy on 90 days' notice and receive without penalty, at the
policyholder's option, either (1) the accumulated fund balance (which may be
subject to market value adjustment) or (2) a book value payment of such amount
in annual installments with interest. John Hancock Life Insurance Company
cannot predict whether these regulations will be adopted in the form proposed.
In the event the regulations are adopted in the form proposed and John Hancock
Life Insurance Company elects to comply with the requirements set forth
therein to secure the exemption provided by the regulations from the fiduciary
obligations of ERISA, John Hancock Life Insurance Company's exposure to
disintermediation risk could increase due to the termination options that it
would be required to provide to policyholders. Since the regulations are only
in proposed form and since there has been no final ruling in the Harris Trust
litigation regarding whether John Hancock Mutual Life Insurance Company has
violated ERISA, we are unable at this time to determine the effects of the
decision. In the absence of relief pursuant to the regulations, the Harris
Trust Decision could substantially increase administrative costs, may require
the segregation of assets associated with non-guaranteed benefit policies
allocated to the general account, result in potential liability arising from
the application of ERISA's fiduciary rules to ERISA plan contracts, or
adversely affect future business.
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With respect to employee welfare benefit plans subject to ERISA, the
Congress periodically has considered amendments to the law's Federal
preemption provision, which would expose John Hancock Life Insurance Company,
and the insurance industry generally, to state law causes of action, and
accompanying extra-contractual (e.g., punitive) damages in lawsuits involving,
for example, group life and group disability claims. To date, all such
amendments to ERISA have been defeated.
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OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of the effective date of the reorganization
by:
(1) each of our directors and Named Executive Officers (as defined in
"Management") and
(2) all of our directors and executive officers as a group.
The number of shares of our common stock beneficially owned by each director
and executive officer and all directors and executive officers as a group is
based upon the number of shares that we estimate each director and executive
officer, and persons and entities affiliated with each director and executive
officer, will receive in their capacity as eligible policyholders under the
Plan of Reorganization. Except as otherwise indicated below, each of the
persons named in the table will have sole voting and investment power with
respect to the shares beneficially owned by such person as set forth opposite
such person's name.
<TABLE>
<CAPTION>
Number of Shares to Be
Name Beneficially Owned(1)
---- ----------------------
<S> <C>
Stephen L. Brown....................................... *
Foster L. Aborn........................................ *
David F. D'Alessandro.................................. *
Samuel W. Bodman....................................... *
Joan T. Bok............................................ *
I. MacAllister Booth................................... *
Wayne A. Budd.......................................... *
John M. Connors, Jr.................................... *
Robert E. Fast, Esq.................................... *
Dr. Kathleen Foley Feldstein........................... *
Nelson S. Gifford...................................... *
Michael C. Hawley...................................... *
Edward H. Linde........................................ *
Judith A. McHale....................................... *
Richard F. Syron....................................... *
Robert J. Tarr, Jr..................................... *
Diane M. Capstaff...................................... *
Kathleen M. Graveline.................................. *
Thomas E. Moloney...................................... *
Richard S. Scipione.................................... *
All directors and executive officers as a group (20
persons).............................................. *
</TABLE>
- --------
* Less than 1% of the number of shares of our common stock expected to be
outstanding on the effective date of the reorganization.
(1) Based on an estimated allocation of shares based upon policy ownership
records as of November 22, 1999.
We believe no persons will beneficially own more than 5% of our outstanding
shares of common stock as of the effective date of the reorganization.
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DESCRIPTION OF CAPITAL STOCK AND CHANGE-OF-CONTROL
RELATED PROVISIONS OF OUR PLAN OF REORGANIZATION,
RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS,
INSURANCE HOLDING COMPANY LAWS, AND OUR STOCKHOLDER RIGHTS PLAN
The authorized capital stock of John Hancock Financial Services, Inc.
consists of 2 billion shares of common stock and 500 million shares of
preferred stock.
Common Stock
Holders of common stock are entitled to receive such dividends as may from
time to time be declared by our board of directors out of funds legally
available therefor. See "Stockholder Dividend Policy." Holders of common stock
are entitled to one vote per share on all matters on which the holders of
common stock are entitled to vote and do not have any cumulative voting
rights. Holders of common stock have no preemptive, conversion, redemption or
sinking fund rights. In the event of a liquidation, dissolution or winding up
of John Hancock Financial Services, Inc., holders of common stock are entitled
to share equally and ratably in the assets of John Hancock Financial Services,
Inc., if any, remaining after the payment of all liabilities of John Hancock
Financial Services, Inc. and the liquidation preference of any outstanding
class or series of preferred stock. The outstanding shares of common stock
are, and the shares of common stock offered by John Hancock Financial
Services, Inc. hereby, when issued, will be, fully paid and nonassessable. The
rights and privileges of holders of common stock are subject to any series of
preferred stock that John Hancock Financial Services, Inc. may issue in the
future, as described below.
Preferred Stock
The board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and
the voting rights, designations, preferences and qualifications, limitations
and restrictions of the shares constituting any series, without any further
vote or action by our stockholders. The issuance of preferred stock by the
board of directors could adversely affect the rights of holders of common
stock.
We have authorized . shares of Series A Junior Participating Preferred
Stock for issuance in connection with the stockholder rights plan. See "--
Stockholder Rights Plan."
Change-of-Control Related Provisions in Our Plan of Reorganization, Restated
Certificate of Incorporation and By-Laws, and Delaware Law
Plan of Reorganization and Restated Certificate of Incorporation. The Plan
of Reorganization and our restated certificate of incorporation each
prohibits:
. any person, or persons acting in concert, from directly or indirectly
acquiring or offering to acquire beneficial ownership of 10% or more of
the outstanding shares of our common stock until two years after the
effective date of the reorganization; and
. without prior approval of our board of directors and the Massachusetts
Commissioner of Insurance, any person, or persons acting in concert,
from directly or indirectly acquiring or offering to acquire beneficial
ownership of 10% or more of the outstanding shares of our common stock
during the one year period following the two-year period described
above.
Under the Plan of Reorganization, the same restrictions apply to the stock
of John Hancock Life Insurance Company.
There is an exception to the foregoing prohibitions for acquisitions by a
person that becomes a beneficial owner of 10% or more of our common stock as a
result of our issuance of such common stock to such person as consideration in
an acquisition of another entity that was initiated by us by authority of our
board of directors. Any such acquisition initiated by us by authority of our
board of directors would require the approval of the
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Massachusetts Commissioner of Insurance and the Commissioners of Insurance of
California and Delaware, the Office of the Superintendent of Financial
Institutions in Canada and, potentially, the New York Superintendent of
Insurance. If any person acquires or offers to acquire 10% or more of the
outstanding shares of our common stock in violation of our Plan of
Reorganization, we and the Massachusetts Commissioner of Insurance would be
entitled to injunctive relief. By virtue of these provisions of the Plan of
Reorganization and our restated certificate of incorporation, John Hancock
Financial Services, Inc. may not be subject to an acquisition by another
company during the two years following the effective date of the
reorganization and may only be subject to acquisition in the third year
following the effective date of the reorganization with the approval of our
board of directors and the Massachusetts Commissioner of Insurance.
Restated Certificate of Incorporation and By-Laws. A number of provisions
of our restated certificate of incorporation and by-laws deal with matters of
corporate governance and rights of stockholders. The following discussion is a
general summary of selected provisions of our restated certificate of
incorporation and by-laws and regulatory provisions that might be deemed to
have a potential anti-takeover effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by our board of
directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the incumbent board of
directors or management more difficult. Some provisions of the Delaware
General Corporation Law and the Massachusetts Insurance Law may also have an
anti-takeover effect. The following description of selected provisions of our
restated certificate of incorporation and by-laws and selected provisions of
the Delaware General Corporation Law and the Massachusetts Insurance Law are
necessarily general and reference should be made in each case to our restated
certificate of incorporation and by-laws, which are filed as exhibits to our
registration statement, and to the provisions of those laws. See "Additional
Information" for information on where to obtain a copy of our restated
certificate of incorporation and by-laws.
Unissued Shares of Capital Stock
Common Stock. Based upon the assumptions described under "Unaudited Pro
Forma Consolidated Financial Information," we currently plan to issue an
estimated 333.2 million shares of our authorized common stock in the offering
and the demutualization. The remaining shares of authorized and unissued
common stock will be available for future issuance without additional
stockholder approval. While the additional shares are not designed to deter or
prevent a change of control, under some circumstances we could use the
additional shares to create voting impediments or to frustrate persons seeking
to effect a takeover or otherwise gain control by, for example, issuing those
shares in private placements to purchasers who might side with our board of
directors in opposing a hostile takeover bid.
Preferred Stock. Our board of directors has the authority to issue preferred
stock in one or more series and to fix the number of shares constituting any
such series and the preferences, limitations and relative rights, including
dividend rights, dividend rate, voting rights, terms of redemption, redemption
price or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by our
stockholders. The existence of authorized but unissued preferred stock could
reduce our attractiveness as a target for an unsolicited takeover bid since we
could, for example, issue shares of preferred stock to parties who might
oppose such a takeover bid or shares that contain terms the potential acquiror
may find unattractive. This may have the effect of delaying or preventing a
change in control, may discourage bids for the common stock at a premium over
the market price of the common stock, and may adversely affect the market
price of, and the voting and other rights of the holders of, common stock.
Classified Board of Directors and Removal of Directors. Our restated
certificate of incorporation provides that the directors shall be divided into
three classes, as nearly equal in number as possible, with the term of office
of each class to be three years. The classes serve staggered terms, such that
the term of one class of directors expires each year. Any effort to obtain
control of our board of directors by causing the election of a majority of the
board of directors may require more time than would be required without a
staggered election structure. Our
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restated certificate of incorporation also provides that directors may be
removed only for cause at a meeting of stockholders by a vote of a majority of
the shares then entitled to vote. This provision may have the effect of
slowing or impeding a change in membership of our board of directors that
would effect a change of control.
Restriction on Maximum Number of Directors and Filling of Vacancies on our
Board of Directors. Our by-laws provide that the number of directors shall be
fixed and increased or decreased from time to time by resolution of the board
of directors, but the board of directors shall at no time consist of fewer
than three directors. Stockholders can only remove a director for cause by a
vote of a majority of the shares entitled to vote, in which case the vacancy
caused by such removal may be filled at such meeting by the stockholders
entitled to vote for the election of the director so removed. Any vacancy on
the board of directors, including a vacancy resulting from an increase in the
number of directors or resulting from a removal for cause where the
stockholders have not filled the vacancy, may be filled by a majority of the
directors then in office, although less than a quorum. If the vacancy is not
so filled, it shall be filled by the stockholders at the next annual meeting
of stockholders. The stockholders are not permitted to fill vacancies between
annual meetings except where the vacancy resulted from a removal for cause.
These provisions give incumbent directors significant authority that may have
the effect of limiting the ability of stockholders to effect a change in
management.
Advance Notice Requirements for Nomination of Directors and Presentation of
New Business at Meetings of Stockholders; Action by Written Consent. Our by-
laws provide for advance notice requirements for stockholder proposals and
nominations for director. In addition, pursuant to the provisions of both our
restated certificate of incorporation and by-laws, action may not be taken by
written consent of stockholders; rather, any action taken by the stockholders
must be effected at a duly called meeting. The chief executive officer, or,
under some circumstances, the president or any vice president, and the board
of directors may call a special meeting, and the chief executive officer shall
call a special meeting upon the request of stockholders whose holdings are
one-fourth or more of our outstanding common stock. These provisions make it
more procedurally difficult for a stockholder to place a proposal or
nomination on the meeting agenda or to take action without a meeting, and
therefore may reduce the likelihood that a stockholder will seek to take
independent action to replace directors or seek a stockholder vote with
respect to other matters that are not supported by management.
Limitations on Director Liability
Our restated certificate of incorporation contains a provision that is
designed to limit our directors' liability. Specifically, directors will not
be held liable to John Hancock Financial Services, Inc. for monetary damages
for breach of their fiduciary duty as a director, except to the extent that
this limitation on or exemption from liability is not permitted by the
Delaware General Corporation Law and any amendments to that law.
The principal effect of the limitation on liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of John Hancock Financial Services, Inc. unless the stockholder can
demonstrate a basis for liability for which indemnification is not available
under the Delaware General Corporation Law. This provision, however, does not
eliminate or limit director liability arising in connection with causes of
action brought under the Federal securities laws. Our restated certificate of
incorporation does not eliminate our directors' duty of care. The inclusion of
this provision in the Restated Certificate of Incorporation may, however,
discourage or deter stockholders or management from bringing a lawsuit against
directors for a breach of their fiduciary duties, even though such an action,
if successful, might otherwise have benefited John Hancock Financial Services,
Inc. and our stockholders. This provision should not affect the availability
of equitable remedies such as injunction or rescission based upon a director's
breach of the duty of care.
Our by-laws also provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law. We are required to indemnify
our directors and officers for all judgments, fines, settlements, legal fees
and other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with John Hancock
Financial Services, Inc. or another entity that the director or officer serves
at our request, subject to certain conditions, and to advance funds to our
directors and officers to enable them to defend against such proceedings. To
receive indemnification, the director or officer must have been successful in
the legal proceeding or have acted in good faith and in what was reasonably
believed to be a lawful manner in the best interest of John Hancock Financial
Services, Inc.
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Supermajority Voting Requirement for Amendment of Certain Provisions of our
Restated Certificate of Incorporation and By-Laws. The provisions of our
restated certificate of incorporation governing the number of directors and
the filling of vacancies and restricting the removal of directors without
cause may not be amended, altered, changed or repealed unless the amendment is
approved by the vote of holders of two-thirds of the shares then entitled to
vote at an election of directors. This requirement exceeds the majority vote
of the outstanding stock that would otherwise be required by the Delaware
General Corporation Law for the repeal or amendment of such provisions of the
restated certificate of incorporation. Our by-laws may be amended by the board
of directors or by the vote of holders of two-thirds of the shares then
entitled to vote. These provisions make it more difficult for any person to
remove or amend any provisions that have an antitakeover effect.
Business Combination Statute. In addition, as a Delaware corporation, we
are subject to Section 203 of the Delaware General Corporation Law, unless we
elect in our restated certificate of incorporation not to be governed by the
provisions of Section 203. We have not made that election. Section 203 can
affect the ability of an "interested stockholder" of John Hancock Financial
Services, Inc. to engage in certain business combinations, including mergers,
consolidations or acquisitions of additional shares of John Hancock Financial
Services, Inc., for a period of three years following the time that the
stockholder becomes an "interested stockholder." An "interested stockholder"
is defined to include persons owning directly or indirectly 15% or more of the
outstanding voting stock of a corporation. The provisions of Section 203 are
not applicable in some circumstances, including those in which (a) the
business combination or transaction which results in the stockholder becoming
an "interested stockholder" is approved by the corporation's board of
directors prior to the time the stockholder becomes an "interested
stockholder" or (b) the "interested stockholder," upon consummation of such
transaction, owns at least 85% of the voting stock of the corporation
outstanding prior to such transaction.
Restrictions on Acquisitions of Securities
The insurance holding company and other insurance laws of many states also
regulate changes of control (generally presumed upon acquisitions of 10% or
more of voting securities) of insurance holding companies, such as John
Hancock Financial Services, Inc. The Massachusetts, California and Delaware
insurance holding company laws and similar laws in Canada, which we expect to
be applicable to us following the reorganization, require filings in
connection with proposed acquisitions of control of domestic insurance
companies. Following the reorganization, John Hancock Life Insurance Company
may be commercially domiciled in New York, and, if so, acquisition of control
may also be subject to New York's holding company act. The insurance holding
company laws prohibit a person from acquiring direct or indirect control of an
insurer incorporated or, in the case of New York, commercially domiciled in
the relevant jurisdiction without prior insurance regulatory approval.
Stockholder Rights Plan
Our board of directors intends to adopt a stockholder rights plan under
which each outstanding share of common stock issued between the effective date
of the reorganization and the distribution date (as described below) will be
coupled with a stockholder right. Initially, the stockholder rights will be
attached to the certificates representing outstanding shares of common stock,
and no separate rights certificates will be distributed. Each right will
entitle the holder to purchase one one-thousandth of a share of our Series A
Junior Participating Preferred Stock. Each one one-thousandth of a share of
Series A Junior Participating Preferred Stock would have economic and voting
terms equivalent to one share of common stock. Until the right is exercised,
the holder of a stockholder right, as such, will not have any rights as a
stockholder, including the right to receive dividends or to vote at
stockholder meetings.
Stockholder rights are not exercisable until the "distribution date," and
will expire at the close of business on [ ], 2010 unless earlier redeemed
or exchanged by us. Unless an acquisition or offer has been previously
approved by our board of directors, a distribution date would occur upon the
earlier of:
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. the tenth day (referred to as the "stock acquisition time") after the
first public announcement a person or group of affiliated or associated
persons has acquired beneficial ownership of 10% or more of our
outstanding common stock (referred to as an "acquiring person"); or
. the tenth business day after the commencement or announcement of a
tender offer or exchange offer that would result in a person or group
becoming an acquiring person.
If any person becomes an acquiring person, each holder of a stockholder
right will be entitled to exercise the right and receive, instead of Series A
Junior Participating Preferred Stock, common stock (or, in certain
circumstances, cash, property or other securities of John Hancock Financial
Services, Inc.) having a value equal to two times the exercise price of the
stockholder right. All stockholder rights that are beneficially owned by an
acquiring person or its transferee will become null and void.
If at any time following a stock acquisition time (1) we are acquired in a
merger or other business combination, or (2) 50% or more of our assets, cash
flow or earning power is sold or transferred, each holder of a stockholder
right (except rights which previously have been voided as set forth above)
shall have the right to receive, upon exercise, common stock of the acquiring
company having a value equal to two times the exercise price of the right.
The purchase price payable, the number of one one-thousandth of a share of
Series A Junior Participating Preferred Share or other securities or property
issuable upon exercise of rights and the number of rights outstanding, are
subject to adjustment from time to time to prevent dilution. With certain
exceptions, no adjustment in the purchase price or the number of shares of
Series A Junior Participating Preferred Stock issuable upon exercise of a
stockholder right will be required until the cumulative adjustment would
require an increase or decrease of at least 1 percent in the purchase price or
number of shares for which a right is exercisable.
At any time until the earlier of (1) 10 days (or longer if extended pursuant
to the terms of the Rights Agreement) after a person becomes an acquiring
person and (2) the termination of the Rights Agreement, we may redeem the
stockholder rights at a price of $0.001 per right. At any time after a public
announcement that a person has become an acquiring person, we may exchange the
stockholder rights at an exchange ratio of one share of common stock, or one
one-thousandth of a share of Series A Junior Participating Preferred Stock (or
of a share of a class or series of John Hancock Financial Services, Inc.
preferred stock having equivalent rights, preferences and privileges), per
right.
The stockholder rights plan is designed to protect stockholders of John
Hancock Financial Services, Inc. in the event of unsolicited offers to acquire
John Hancock Financial Services, Inc. and other coercive takeover tactics
which, in the opinion of our board of directors, could impair its ability to
represent stockholder interests. The provisions of the stockholder rights plan
may render an unsolicited takeover of John Hancock Financial Services, Inc.
more difficult or less likely to occur or might prevent such a takeover, even
though such takeover may offer our shareholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by the
majority of our stockholders.
Potential Effects of the Stockholder Rights Plan. The stockholder rights
plan is designed to protect stockholders in the event of unsolicited offers to
acquire John Hancock Financial Services, Inc. and other coercive takeover
tactics which, in the opinion of our board of directors, could impair its
ability to represent stockholder interests. The provisions of the stockholder
rights plan may render an unsolicited takeover more difficult or less likely
to occur or might prevent such a takeover, even though such takeover may offer
our stockholders the opportunity to sell their stock at a price above the
prevailing market rate and may be favored by a majority of the stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock and our Series A
Junior Participating Preferred Stock is EquiServe Trust Company, N.A.
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COMMON STOCK ELIGIBLE FOR FUTURE SALE
Substantially all of the estimated 231.2 million shares of our common stock
distributed to eligible policy-holders in the reorganization (estimated to be
approximately 69.4% of our outstanding common stock after the offering) will
be eligible for immediate resale in the public market without restriction. See
"The Reorganization." We have been advised by counsel that the distribution of
shares to policyholders in the reorganization will be exempt from registration
under the Securities Act by virtue of the exemption provided by Section
3(a)(10) of the Securities Act, and those eligible policyholders who are not
our "affiliates" within the meaning of Rule 144 under the Securities Act will
be able to resell their shares immediately in the public market without
registration or compliance with the time, volume, manner of sale and other
limitations set forth in Rule 144.
In addition, in accordance with the Plan of Reorganization, we will, for a
90-day period commencing no earlier than the first business day after the six-
month anniversary, and no later than the first business day after the twelve-
month anniversary, of the effective date of the reorganization, provide for
the public sale, at prevailing market prices and without brokerage commissions
or similar fees to shareholders, of all shares of our common stock held by
shareholders who own 99 shares or fewer of our common stock received pursuant
to the Plan of Reorganization or otherwise. The commission-free sales program
may be extended by us with the approval of the Massachusetts Commissioner of
Insurance. We will also, simultaneously and in conjunction with the
commission-free sales program, offer to each such stockholder entitled to
participate in the commission-free sales program the opportunity to purchase
that number of shares of our common stock necessary to increase such
stockholder's holdings to 100 shares without paying brokerage commissions or
other similar expenses.
No prediction can be made as to the effect, if any, such future sales of
shares, or the availability of shares for such future sales, will have on the
market price of our common stock prevailing from time to time. The sale of
substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could harm prevailing market prices
for our common stock. See "Risk Factors--The market price of our common stock
may decline if persons receiving common stock as compensation in the
reorganization sell their stock in the public market."
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UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock
by non-U.S. holders. As used herein, "non-U.S. holder" means any person or
entity that holds our common stock, other than (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in the United States or under the laws of the United States or of
any state of the United States, (iii) an estate whose income is includable in
gross income for U.S. federal income tax purposes regardless of its source or
(iv) a trust if (x) a court within the United States is able to exercise
primary supervision over the administration of the trust and (y) at least one
U.S. person has authority to control all substantial decisions of the trust.
Recently enacted legislation authorizes the issuance of Treasury Regulations
that, under some circumstances, could reclassify as a non-U.S. partnership a
partnership that would otherwise be treated as a U.S. partnership, or could
reclassify as a U.S. partnership a partnership that would otherwise be treated
as a non-U.S. partnership. Such regulations would apply only to partnerships
created or organized after the date that proposed Treasury Regulations are
filed with the Federal Register (or, if earlier, the date of issuance of a
notice substantially describing the expected contents of the regulations).
This summary is based on provisions of the Internal Revenue Code, existing
and proposed Treasury regulations promulgated thereunder (the "Treasury
Regulations") and administrative and judicial interpretations thereof, all as
of the date hereof and all of which are subject to change, possibly on a
retroactive basis.
This summary is for general information only. The tax treatment of a
particular non-U.S. holder may vary depending on the holder's particular
situation. In addition, this summary does not include any description of the
tax laws of any state, local or non-U.S. government that may be applicable to
a particular non-U.S. holder.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, AS WELL AS THE TAX
CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX LAWS AND
THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
Income Tax
Dividends. Generally, dividends paid on our common stock to a non-U.S.
holder will be subject to U.S. federal income tax. Except for dividends that
are effectively connected with a non-U.S. holder's conduct of a trade or
business within the United States, this tax is imposed and collected by
withholding at the rate of 30% of the amount of the dividend, unless reduced
by an applicable income tax treaty. Currently, dividends paid to an address in
a country other than the United States are presumed to be paid to a resident
of such country in determining the applicability of a treaty for such
purposes.
However, under recently finalized Treasury Regulations relating to
withholding of tax on non-U.S. persons, which by their terms apply to dividend
and other payments made after December 31, 2000 (the "Final Withholding
Regulations"), a non-U.S. holder who is the beneficial owner (within the
meaning of the Final Withholding Regulations) of dividends paid on our common
stock and who wishes to claim the benefit of an applicable treaty is generally
required to satisfy specified certification and documentation requirements.
Special rules apply to claims for treaty benefits made by non-U.S. persons
that are entities rather than individuals and to beneficial owners (within the
meaning of the Final Withholding Regulations) of dividends paid to entities in
which such beneficial owners are interest holders.
Except as may be otherwise provided in an applicable income tax treaty,
dividends paid on our common stock to a non-U.S. holder that are effectively
connected with the holder's conduct of a trade or business within the United
States are subject to tax at ordinary U.S. federal income tax rates, which tax
is not collected by
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withholding (except as described below under "Backup Withholding and
Information Reporting"). All or part of any effectively connected dividends
received by a non-U.S. corporation may also, under some circumstances, be
subject to an additional "branch profits" tax at a 30% rate, or such lower
rate as may be specified by an applicable income tax treaty. A non-U.S. holder
who wishes to claim an exemption from withholding for effectively connected
dividends is generally required to satisfy specified certification and
documentation requirements.
A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the I.R.S.
Disposition of Common Stock. Generally, non-U.S. holders will not be subject
to U.S. federal income tax (or withholding thereof) in respect of gain
recognized on a disposition of our common stock unless (i) the gain is
effectively connected with the holder's conduct of a trade or business within
the United States (in which case the "branch profits" tax described above may
also apply if the holder is a non-U.S. corporation); (ii) in the case of a
holder who is a nonresident alien individual and holds our common stock as a
capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale and certain other conditions are met;
(iii) we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes (which we do not believe we have been or
are currently) and the holder has held directly or constructively more than 5%
of our outstanding common stock within the five-year period ending on the date
of the disposition; or (iv) the holder is an individual who lost U.S.
citizenship within the 10-year period immediately preceding the close of the
taxable year of such disposition, unless such loss of citizenship did not have
a U.S. tax avoidance purpose.
Estate Tax
If an individual non-U.S. holder owns, or is treated as owning, our common
stock at the time of his or her death, such stock would be subject to U.S.
federal estate tax imposed on the estates of nonresident aliens, in the
absence of a contrary provision contained in an applicable tax treaty.
Backup Withholding and Information Reporting
Dividends. Under current law, dividends paid on our common stock to a non-
U.S. holder at an address outside the United States are generally exempt from
backup withholding tax and U.S. information reporting requirements (but not
from regular withholding tax, as discussed above). Under the Final Withholding
Regulations, for dividends paid after December 31, 2000, a non-U.S. person
must generally provide proper documentation indicating non-U.S. status to a
withholding agent in order to avoid backup withholding tax; however, dividends
paid to certain exempt recipients (not including individuals) will not be
subject to backup withholding even if such documentation is not provided if
the withholding agent is allowed to rely on certain regulatory presumptions
concerning the recipient's non-U.S. status (including payment to an address
outside the United States).
Broker Sales. Payments of proceeds from the sale of our common stock by a
non-U.S. holder made to or through a U.S. office of a broker are generally
subject to both information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes entitlement to an exemption. Payments of proceeds from
the sale of our common stock by a non-U.S. holder made to or through a non-
U.S. office of a broker generally will not be subject to information reporting
or backup withholding. However, payments made to or through certain non-U.S.
offices, including the non-U.S. offices of a U.S. broker, are generally
subject to information reporting (but not backup withholding) unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes entitlement to an exemption.
A non-U.S. holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing an appropriate claim for refund with
the I.R.S.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated is acting as U.S. representative,
and the international underwriters named below, for whom Morgan Stanley & Co.
International Limited is acting as international representative, have severally
agreed to purchase, and we have agreed to sell to them, severally, the
respective number of shares of our common stock set forth opposite the names of
the underwriters below:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated........................... .
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Salomon Smith Barney Inc....................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities
Corporation...........................................
Goldman, Sachs & Co.........................................
Fox-Pitt, Kelton Inc.
Subtotal.................................................. .
---
International Underwriters:
Morgan Stanley & Co. International Limited..................
Merrill Lynch International.................................
Salomon Brothers International Limited......................
Credit Suisse First Boston (Europe) Limited.................
Donaldson, Lufkin & Jenrette International .................
Goldman Sachs International Ltd.............................
Fox-Pitt, Kelton Inc........................................
Subtotal.................................................. .
---
Total..................................................... .
===
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representative and the international representative, are collectively referred
to as the "underwriters" and the "representatives", respectively. The
underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of our common stock offered hereby are
subject to the approval of legal matters by their counsel and to other
customary conditions. The underwriters are obligated to take and pay for all of
the shares of our common stock offered hereby if any such shares are taken.
However, the underwriters are not required to take or pay for the shares
covered by the U.S. underwriters' over-allotment option described below.
In the agreement between U.S. and international underwriters, each U.S.
underwriter has represented and agreed that, with specific exceptions:
. it is not purchasing any shares for the account of anyone other than a
U.S. or Canadian person, and
. it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares outside the United States or Canada or to anyone other than a
U.S. or Canadian person.
In the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that, with specific
exceptions:
. it is not purchasing any shares for the account of any U.S. or Canadian
person, and
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. it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any U.S. or Canadian person.
For any underwriter that is both a U.S. underwriter and an international
underwriter, these representations and agreements made by it in its capacity
as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter
and those made by it in its capacity as an international underwriter apply
only to it in its capacity as an international underwriter. The limitations
described above do not apply to stabilization transactions or to other
transactions specified in the agreement between U.S. and international
underwriters. As used in this prospectus, U.S. or Canadian person means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the
laws of the United States or Canada or of any political subdivision thereof,
other than a branch located outside the United States and Canada of any U.S.
or Canadian person. U.S. or Canadian person includes any U.S. or Canadian
branch of a person who is otherwise not a U.S. or Canadian person. All shares
of common stock to be purchased by the underwriters under the underwriting
agreement are referred to as shares.
In the agreement between U.S. and international underwriters, sales of
shares may be made between the U.S. underwriters and international
underwriters. The price of any shares so sold will be the public offering
price set forth on the cover page of this prospectus, in U.S. dollars, less an
amount not greater than the per share amount of the concessions to dealers set
forth below.
In the agreement between U.S. and international underwriters, each U.S.
underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares in any province or territory of Canada or to,
or for the benefit of, any resident of any province or territory of Canada in
contravention of the securities laws of Canada. Each U.S. underwriter has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which the offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing the shares,
the dealer agrees that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which the offer or sale is made. Each
dealer will deliver to any other dealer to whom it sells any of the shares a
notice containing substantially the same Canadian selling restrictions.
In the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:
. it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international
underwriters, will not offer to sell, any shares to persons in the
United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments for the
purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986; and
. it has and will distribute any document relating to the shares in the
United Kingdom only to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 (as amended) or is a person to whom such
document may otherwise lawfully be distributed.
In the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell in Japan or to or for the account of
any resident of Japan, any of the shares. This limitation does not apply to
Japanese international underwriters or dealers and offers or sales pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each international
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underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating that, by purchasing the shares, the dealer
agrees that any offer or sale of the shares in Japan will be made only to
Japanese international underwriters or dealers or under an exemption from the
registration requirements of the Securities and Exchange Law and otherwise in
compliance with applicable provisions of Japanese law. Each dealer will send
to any other dealer to whom it sells any of the shares a notice containing
substantially the same Japanese selling restrictions.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus, and part to securities dealers at a price that
represents a concession not in excess of $ . per share under the public
offering price. Any underwriter may allow, and dealers may reallow, a
concession not in excess of $ . per share to other underwriters or to
securities dealers. After the initial offering of the shares, the offering
price and other selling terms may from time to time be varied by the
representatives.
We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of .
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
The U.S. underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares offered by this prospectus. To the extent this option is exercised,
each U.S. underwriter will become obligated, subject to specified conditions,
to purchase about the same percentage of additional shares as the number
listed next to the U.S. underwriter's name in the preceding table bears to the
total number of shares set forth next to the names of all U.S. underwriters in
the preceding table. If the U.S. underwriters' option is exercised in full,
the total price to the public for this offering would be $ . , the total
underwriters' discounts and commissions would be $ . and total proceeds to
John Hancock would be $ . .
[The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares
offered by them.]
We intend to apply for the listing of our common stock on the New York Stock
Exchange under the symbol "JHF." The underwriters intend to sell shares to a
minimum of . beneficial owners in lots of . or more so as to meet the
distribution requirements of this listing.
We and all of our directors and executive officers have agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of
the underwriters, we or they, as the case may be, will not, during the period
ending . days after the date of this prospectus: [to come]
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of our common stock. Specifically, the underwriters may agree to sell
or allot more shares than the . shares of our common stock we have agreed to
sell to them. This over-allotment would create a short position in our common
stock for the underwriters' account. To cover any over-allotments or to
stabilize the price of our common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in the offering, if the syndicate
repurchases previously distributed common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. The
underwriters have reserved the right to reclaim selling concessions in order
to encourage underwriters and dealers to distribute the common stock for
investment, rather than for short-term profit taking. Increasing the
proportion of the offering held for investment may reduce the supply of common
stock available for short-term trading. Any of these activities may stabilize
or maintain the market price of our common stock above independent market
levels. The underwriters are not required to engage in these activities and
may end any of these activities at any time.
From time to time, Morgan Stanley & Co. Incorporated has provided, and may
continue to provide, investment banking services to us.
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We and the underwriters have agreed to indemnify each other against a
variety of liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
among us and the U.S. representative. Among the factors to be considered in
determining the initial public offering price will be our future prospects and
our industry in general, our sales, earnings and other financial and operating
information in recent periods, and the price-earnings ratios, price-book value
ratios, market prices of securities and financial and operating information of
companies engaged in activities similar to ours. The estimated initial public
offering price range set forth on the cover page of this preliminary
prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for John Hancock Financial Services, Inc. by Debevoise & Plimpton, New
York, New York. The Underwriters have been represented by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Godfrey Perrott, a consulting actuary associated with Milliman & Robertson,
Inc. has rendered an opinion, dated August 31, 1999, to our board of directors
that states (in reliance upon the matters described in such opinion) that the
allocation of policyholder consideration under the Plan of Reorganization is
based on a fair and reasonable formula, that the arrangement for establishment
and operation of the closed block set forth in the Plan of Reorganization
allocates assets to the closed block which are reasonably sufficient to enable
the closed block to provide for the guaranteed benefits, certain expenses and
taxes associated with closed block policies, and the continuation of the 1999
dividend scale if the experience underlying that scale continues, and that the
arrangement also provides for appropriate adjustment of the dividend scales if
the underlying experience changes from that underlying the 1999 dividend
scale, and that the appropriate policies are included in the closed block.
Such opinion is included herein in reliance upon the authority of such actuary
as an expert in actuarial matters generally and in the application of
actuarial concepts to insurance matters.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement on Form S-1 (Registration No. 333-87271) under
the Securities Act with respect to the common stock offered hereby. This
prospectus which forms a part of the registration statement does not contain
all the information set forth in the registration statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information with respect to
John Hancock Financial Services, Inc. and the common stock offered hereby,
reference is made to the registration statement. Statements made in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. The registration statement may be inspected
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and copied at the Securities and Exchange Commission's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an internet site, http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Securities and Exchange
Commission.
As a result of the offering we will become subject to the information
requirements of the Securities Exchange Act. We will fulfill our obligations
with respect to such requirements by filing periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Such
reports, proxy statements and information may be inspected and copied at the
public reference facilities maintained by the Securities and Exchange
Commission referenced above. We intend to furnish holders of our common stock
with annual reports that include audited annual consolidated financial
statements by an independent certified public accounting firm and quarterly
reports for the first three quarters of each Fiscal Year containing unaudited
interim financial information.
We intend to list our common stock on the New York Stock Exchange. Upon such
listing, copies of the registration statement, including all exhibits thereto,
and periodic reports, proxy statements and other information will be available
for inspection at the offices of the New York Stock Exchange, Inc. located at
20 Broad Street, New York, New York 10005.
174
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-2
Audited Consolidated Financial Statements--December 31, 1998
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Changes in Policyholders' Equity.............. F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Interim Consolidated Financial Statements--September 30, 1999
Unaudited Interim Consolidated Balance Sheet............................. F-39
Unaudited Interim Consolidated Statements of Income...................... F-40
Unaudited Interim Consolidated Statement of Changes in Policyholders'
Equity.................................................................. F-41
Unaudited Interim Consolidated Statements of Cash Flows.................. F-42
Notes to Unaudited Interim Consolidated Financial Statements............. F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
John Hancock Mutual Life Insurance Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of John Hancock
Mutual Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
policyholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of John Hancock
Mutual Life Insurance Company and subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
April 26, 1999
F-2
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
--------- ---------
(in millions)
<S> <C> <C>
Assets
Investments--Note 3
Fixed maturities:
Held-to-maturity--at amortized
cost (fair value: 1998--$13,921.7; 1997--$13,566.1)....... $12,978.2 $12,712.4
Available-for-sale--at fair value
(cost: 1998--$14,491.5; 1997--$13,576.9).................. 15,222.2 14,462.5
Equity securities:
Available-for-sale--at fair value
(cost: 1998--$756.8; 1997--$521.8)........................ 995.8 881.5
Trading securities--at fair value
(cost: 1998--$53.0; 1997--$50.6).......................... 67.9 72.1
Mortgage loans on real estate............................... 9,616.1 9,296.3
Real estate................................................. 1,483.2 2,035.6
Policy loans................................................ 1,879.7 1,855.6
Short-term investments...................................... 279.8 294.1
Other invested assets....................................... 1,254.6 831.6
--------- ---------
Total Investments....................................... 43,777.5 42,441.7
Cash and cash equivalents................................... 1,876.4 1,036.6
Accrued investment income................................... 537.9 559.2
Premiums and accounts receivable............................ 227.5 358.8
Deferred policy acquisition costs........................... 2,758.7 2,563.0
Reinsurance recoverable..................................... 1,634.3 1,736.0
Other assets................................................ 1,187.8 1,211.1
Separate accounts assets.................................... 24,966.6 21,511.1
--------- ---------
Total Assets............................................ $76,966.7 $71,417.5
========= =========
Liabilities and Policyholders' Equity
Liabilities
Future policy benefits...................................... $27,070.5 $25,832.7
Policyholders' funds........................................ 14,671.7 13,637.5
Unearned revenue............................................ 373.8 340.5
Unpaid claims and claim expense reserves.................... 886.3 957.9
Dividends payable to policyholders.......................... 432.8 399.4
Short-term debt--Note 6..................................... 427.8 647.9
Long-term debt--Note 6...................................... 602.7 543.3
Income taxes--Note 5........................................ 385.1 439.7
Other liabilities........................................... 2,168.9 2,412.1
Separate accounts liabilities............................... 24,966.6 21,511.1
--------- ---------
Total Liabilities....................................... 71,986.2 66,722.1
Commitments and contingencies--Note 9
Policyholders' equity--Note 11
Surplus..................................................... 4,697.1 4,248.6
Accumulated other comprehensive income...................... 283.4 446.8
--------- ---------
Total Policyholders' Equity............................. 4,980.5 4,695.4
--------- ---------
Total Liabilities and Policyholders' Equity............. $76,966.7 $71,417.5
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Revenues
Premiums......................................... $2,197.9 $2,473.6 $2,922.5
Universal life and investment-type product
charges......................................... 597.0 512.0 466.3
Net investment income--Note 3.................... 3,330.7 3,190.7 3,223.1
Realized investment gains, net--Note 3........... 97.9 115.8 110.7
Investment management revenues, commissions and
other fees...................................... 659.7 554.7 751.3
Other revenue.................................... 18.8 99.5 230.9
-------- -------- --------
Total revenues................................. 6,902.0 6,946.3 7,704.8
Benefits and expenses
Benefits to policyholders........................ 4,152.0 4,303.1 4,676.7
Other operating costs and expenses............... 1,383.0 1,283.7 1,694.1
Amortization of deferred policy acquisition
costs........................................... 249.7 312.0 230.9
Dividends to policyholders....................... 473.2 457.8 435.1
-------- -------- --------
Total benefits and expenses.................... 6,257.9 6,356.6 7,036.8
-------- -------- --------
Income before income taxes and extraordinary item.. 644.1 589.7 668.0
Income taxes--Note 5............................... 183.9 106.4 247.5
-------- -------- --------
Income before extraordinary item................... 460.2 483.3 420.5
Extraordinary item--demutualization expenses, net
of tax............................................ 11.7 -- --
-------- -------- --------
Net income......................................... $ 448.5 $ 483.3 $ 420.5
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN POLICYHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Surplus Income Total
-------- ------------- ---------
(in millions)
<S> <C> <C> <C>
Balance at January 1, 1996.................... $3,344.8 $ 436.0 $ 3,780.8
---------
Comprehensive income:
Net income.................................. 420.5 420.5
Other comprehensive income, net of tax:
Net unrealized gains (losses)............. (78.7) (78.7)
Foreign currency translation adjustment... (5.7) (5.7)
Minimum pension liability................. 0.8 0.8
---------
Comprehensive income.......................... 336.9
-------- ------- ---------
Balance at December 31, 1996.................. 3,765.3 352.4 4,117.7
---------
Comprehensive income:
Net income.................................. 483.3 483.3
Other comprehensive income, net of tax:
Net unrealized gains (losses)............. 131.0 131.0
Foreign currency translation adjustment... (28.4) (28.4)
Minimum pension liability................. (8.2) (8.2)
---------
Comprehensive income.......................... 577.7
-------- ------- ---------
Balance at December 31, 1997.................. 4,248.6 446.8 4,695.4
---------
Comprehensive income:
Net Income.................................. 448.5 448.5
Other comprehensive income, net of tax:
Net unrealized gains (losses)............. (148.6) (148.6)
Foreign currency translation adjustment... (6.0) (6.0)
Minimum pension liability................. (8.8) (8.8)
---------
Comprehensive income.......................... 285.1
-------- ------- ---------
Balance at December 31, 1998.................. $4,697.1 $ 283.4 $ 4,980.5
======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1998 1997 1996
---------- ---------- ---------
(in millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 448.5 $ 483.3 $ 420.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discount--fixed
maturities................................ (55.6) (33.9) (8.5)
Realized investment gains, net............. (97.9) (115.8) (110.7)
Change in deferred policy acquisition
costs..................................... (206.9) (154.9) (195.9)
Depreciation and amortization.............. 91.9 124.8 155.7
Net cash flows from trading securities..... 4.2 (11.6) 288.1
Decrease in accrued investment income...... 21.3 59.8 46.0
Decrease (increase) in premiums and
accounts receivable....................... 131.3 (112.4) 711.3
Increase in other assets and other
liabilities, net.......................... (373.0) (454.8) (605.7)
Increase in policy liabilities and
accruals, net............................. 1,347.4 1,763.8 1,270.5
Increase (decrease) in income taxes........ 17.7 (110.0) (78.6)
---------- ---------- ---------
Net cash provided by operating
activities.............................. 1,328.9 1,438.3 1,892.7
Cash flows from investing activities:
Sales of:
Fixed maturities held-to-maturity.......... 8.5 35.0 69.1
Fixed maturities available-for-sale........ 21,079.2 13,635.2 2,989.4
Equity securities available-for-sale....... 249.2 661.2 347.8
Real estate................................ 640.3 449.0 405.2
Short-term investments and other invested
assets.................................... 926.3 109.6 185.1
Maturities, prepayments and scheduled
redemptions of:
Fixed maturities held-to-maturity.......... 2,166.9 2,035.9 2,352.7
Fixed maturities available-for-sale........ 2,162.3 2,571.1 1,496.9
Short-term investments and other invested
assets.................................... 79.4 167.4 81.8
Mortgage loans on real estate.............. 1,849.8 1,426.5 2,385.2
Purchases of:
Fixed maturities held-to-maturity.......... (2,428.5) (1,886.7) (3,152.2)
Fixed maturities available-for-sale........ (24,154.7) (17,455.6) (5,247.6)
Equity securities available-for-sale....... (384.5) (663.8) (352.0)
Real estate................................ (152.0) (232.7) (692.6)
Short-term investments and other invested
assets.................................... (1,103.0) (466.3) (382.2)
Mortgage loans on real estate issued....... (2,265.3) (1,406.8) (1,696.2)
Other, net................................. (13.0) (274.3) 26.3
---------- ---------- ---------
Net cash used in investing activities.... (1,339.1) (1,295.3) (1,183.3)
Cash flows from financing activities:
Universal life and investment-type contract
deposits.................................. 8,214.8 5,778.7 6,000.8
Universal life and investment-type contract
maturities and withdrawals................ (7,204.1) (6,447.6) (5,977.2)
Issuance of long-term debt................. 77.0 55.4 379.8
Repayment of long-term debt................ (298.1) (251.9) (277.2)
Net increase (decrease) in commercial
paper..................................... 60.4 73.0 (85.6)
---------- ---------- ---------
Net cash provided by (used in) financing
activities.............................. 850.0 (792.4) 40.6
---------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 839.8 (649.4) 750.0
Cash and cash equivalents at beginning of
year....................................... 1,036.6 1,686.0 936.0
---------- ---------- ---------
Cash and cash equivalents at end of
year.................................... $ 1,876.4 $ 1,036.6 $ 1,686.0
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
John Hancock Mutual Life Insurance Company (John Hancock) and its
subsidiaries (collectively, the Company) is a diversified financial services
organization that provides a broad range of insurance and investment products
and investment management and advisory services. John Hancock is presently
organized as a mutual life insurance company but expects to convert to a stock
life insurance company pursuant to a Plan of Reorganization.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
John Hancock and its majority-owned and controlled domestic and foreign
subsidiaries. Less than majority-owned entities in which the Company has at
least a 20% interest are accounted for using the equity method. All
significant intercompany transactions and balances have been eliminated.
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Management determines the appropriate classification of fixed maturity
investments at the time of purchase. Fixed maturity investments include bonds,
mortgage-backed securities, and redeemable preferred stock and are classified
as held-to-maturity or available-for-sale. Bonds and mortgage-backed
securities, which the Company has the positive intent and ability to hold to
maturity, are classified as held-to-maturity and carried at amortized cost.
Fixed maturity investments not classified as held-to-maturity are classified
as available-for-sale and are carried at fair value. Unrealized gains and
losses related to available-for-sale securities are reflected in
policyholders' equity, after adjustment for deferred policy acquisition costs,
participating group annuity contracts and applicable taxes. The amortized cost
of fixed maturity investments is adjusted for impairments in value deemed to
be other than temporary.
For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments to
date, and anticipated future payments and any resulting adjustment is included
in net investment income.
Equity securities include common stock and non-redeemable preferred stock.
Equity securities that have readily determinable fair values are carried at
fair value. For equity securities which the Company has classified as
available-for-sale, unrealized gains and losses are reflected in
policyholders' equity as described above. Gains and losses, both realized and
unrealized, on equity securities classified as trading are included in net
investment income.
Mortgage loans on real estate are carried at unpaid principal balances
adjusted for amortization of premium or discount, less allowance for possible
losses. When it is probable that the Company will be unable to collect all
amounts of principal and interest due according to the contractual terms of
the mortgage loan agreement, the loan is deemed to be impaired and a valuation
allowance for probable losses is established. The valuation allowance is based
on the present value of the expected future cash flows, discounted at the
loan's original effective interest rate, or on the collateral value of the
loan if the loan is collateral dependent. Any change to the valuation
allowance for mortgage loans on real estate is reported as a component of
realized investment gains
F-7
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
(losses). Interest received on impaired mortgage loans on real estate is
included in interest income in the period received. If foreclosure becomes
probable, the measurement method used is collateral value. Foreclosed real
estate is then recorded at the collateral's fair value at the date of
foreclosure, which establishes a new cost basis.
Investment real estate, which the Company has the intent to hold for the
production of income, is carried at depreciated cost, using the straight-line
method of depreciation, less adjustments for impairments in value. In those
cases where it is determined that the carrying amount of investment real
estate is not recoverable, an impairment loss is recognized based on the
difference between the depreciated cost and fair value of the asset. The
Company reports impairment losses as part of realized investment gains
(losses).
Real estate to be disposed of is carried at the lower of cost or fair value
less costs to sell. Any change to the valuation allowance for real estate to
be disposed of is reported as a component of realized investment gains
(losses). The Company does not depreciate real estate to be disposed of.
During 1998, the Company made a strategic decision to sell the majority of its
commercial real estate portfolio. Properties with a carrying value of $535.2
million were sold in 1998, and real estate with a carrying value of $1.0
billion is expected to be sold in 1999.
Policy loans are carried at unpaid principal balances.
Short-term investments are carried at amortized cost.
Partnership and joint venture interests in which the Company does not have
control or a majority ownership interest are recorded using the equity method
of accounting and included in other invested assets.
Realized investment gains and losses are determined on the basis of specific
identification.
Derivative Financial Instruments
The Company uses futures contracts, interest rate swap, cap and floor
agreements, swaptions, and currency rate swap agreements for other than
trading purposes to hedge and manage its exposure to changes in interest rate
levels, foreign exchange rate fluctuations and to manage duration mismatch of
assets and liabilities. The Company also uses equity collar agreements to
reduce its exposure to market fluctuations in certain equity securities.
The Company uses futures contracts principally to hedge risks associated
with interest rate fluctuations on sales of guaranteed investment contracts.
Futures contracts represent commitments to either purchase or sell securities
at a specified future date and at a specified price or yield.
The Company uses interest rate swap, cap and floor agreements and swaptions
for the purpose of converting the interest rate characteristics (fixed or
variable) of certain investments to more closely match its liabilities.
Interest rate swap agreements are contracts with a counterparty to exchange
interest rate payments of a differing character (e.g., fixed-rate payments
exchanged for variable-rate payments) based on an underlying principal balance
(notional principal) to hedge against interest rate changes. Interest rate cap
and floor agreements are contracts with a counterparty which require the
payment of a premium for the right to receive payments for the difference
between the cap or floor interest rate and a market interest rate on specified
future dates based on an underlying principal balance (notional principal) to
hedge against rising and falling interest rates. Swaptions entitle the Company
to receive settlement payments from other parties on specified expiration
dates, contingent on future interest rates. The amount of such settlement
payments, if any, is determined by the present value of the difference between
the fixed rate on a market rate swap and the strike rate multiplied by the
notional amount.
F-8
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
Currency rate swap agreements are used to manage the Company's exposure to
foreign exchange rate fluctuations. Currency rate swap agreements are
contracts to exchange the currencies of two different countries at the same
rate of exchange at specified future dates.
The Company invests in common stock that is subject to fluctuations from
market value changes in stock prices. The Company sometimes seeks to reduce
its market exposure to such holdings by entering into equity collar
agreements. A collar consists of a call option that limits the Company's
potential for gain from appreciation in the stock price as well as a put
option that limits the Company's potential for loss from a decline in the
stock price.
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability.
The net differential to be paid or received on interest rate swap agreements
and currency rate swap agreements is accrued and recognized as a component of
net investment income. The related amounts due to or from counterparties are
included in accrued investment income receivable or payable.
Premiums paid for interest rate cap and floor agreements and swaptions are
deferred and amortized to net investment income on a straight-line basis over
the term of the agreements. The unamortized premium is included in other
assets. Amounts earned on interest rate cap and floor agreements and swaptions
are recorded as an adjustment to net investment income. Settlements received
on swaptions are deferred and amortized over the life of the hedged assets as
an adjustment to yield.
Interest rate swap, cap and floor agreements, swaptions and currency rate
swap agreements which hedge instruments designated as available-for-sale are
adjusted to fair value with the resulting unrealized gains and losses, net of
related taxes, included in policyholders' equity. The net unrealized losses on
derivatives hedging available-for-sale instruments included in policyholders'
equity were ($128.1) million, ($59.7) million and ($28.3) million, at December
31, 1998, 1997 and 1996, respectively. The change in net unrealized losses for
derivatives recorded as part of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996 was ($68.4) million, ($31.4) million and
($20.4) million, respectively. The fair value of these derivatives used to
hedge items other than available-for-sale instruments is not recognized in the
financial statements.
Equity collar agreements are carried at fair value and are included in other
invested assets, with the resulting unrealized gains and losses included in
realized investment gains (losses).
Hedge accounting is applied after the Company determines that the items to
be hedged expose it to interest or price risk, designates these financial
instruments as hedges and assesses whether the instruments reduce the hedged
risks through the measurement of changes in the value of the instruments and
the items being hedged at both inception and throughout the hedge period.
From time to time, futures contracts, interest rate swap, cap and floor
agreements, swaptions and currency rate swap agreements are terminated. If the
terminated position was accounted for as a hedge, realized gains or losses are
deferred and amortized over the remaining lives of the hedged assets or
liabilities. Realized and unrealized changes in fair value of derivatives
designated with items that no longer exist or are no longer probable of
occurring are recorded as a component of the gain or loss arising from the
disposition of the designated item or included in income when it is determined
that the item is no longer probable of occurring. Changes in the fair value of
derivatives no longer effective as hedges are recognized in income from the
date the derivative becomes ineffective until their expiration.
F-9
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
Revenue Recognition
Premiums from participating and non-participating traditional life insurance
and annuity policies with life contingencies are recognized as income when
due.
Premiums from universal life and investment-type contracts are reported as
deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period against policyholders' account
balances for mortality charges, policy administration charges and surrender
charges.
Premiums for contracts with a single premium or a limited number of premium
payments, due over a significantly shorter period than the total period over
which benefits are provided, are recorded in income when due. The portion of
such premium that is not required to provide for all benefits and expenses is
deferred and recognized in income in a constant relationship to insurance in
force or, for annuities, the amount of expected future benefit payments.
Premiums from long-term care insurance contracts are recognized as income
when due. Premiums from group life and health insurance contracts are
recognized as income over the period to which the premiums relate in
proportion to the amount of insurance protection provided.
Property and casualty insurance premiums are recognized as earned over the
terms of the contracts.
Investment advisory, transfer agent, distribution and service fees are
recognized as revenues when services are performed. Commissions related to
security transactions are recognized as income on the trade date. Contingent
deferred selling charge commissions are recognized as income in the year
received. Selling commissions paid to the selling broker/dealer for sales of
mutual funds that do not have a front-end sales charge are deferred and
amortized on a straight-line basis over periods not exceeding six years. This
is the approximate period of time expected to be benefited and during which
fees earned pursuant to Rule 12b-1 distribution plans are received from the
funds and contingent deferred sales charges are received from shareholders of
the funds.
Future Policy Benefits and Policyholders' Funds
Future policy benefits for participating traditional life insurance policies
are based on the net level premium method. This net level premium reserve is
calculated using the guaranteed mortality and dividend fund interest rates,
which range from 2.5% to 9.5%. The liability for annual dividends represents
the accrual of annual dividends earned. Settlement dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefits are estimated using a net level premium method on the basis of
actuarial assumptions as to mortality, persistency, interest and expenses
established at policy issue. Assumptions established at policy issue as to
mortality and persistency are based on the Company's experience, which,
together with interest and expense assumptions, include a margin for adverse
deviation. Benefit liabilities for annuities during the accumulation period
are equal to accumulated contractholders' fund balances and after
annuitization are equal to the present value of expected future payments.
Interest rates used in establishing such liabilities range from 2.5% to 9.5%
for life insurance liabilities, from 2.0% to 14.2% for individual annuity
liabilities and from 2.0% to 14.7% for group annuity liabilities.
Policyholders' funds for universal life and investment-type products,
including guaranteed investment contracts and funding agreements, are equal to
the policyholder account values before surrender charges. As of December 31,
1998, the Company had approximately $2.9 billion of funding agreements, of
which $457.1 million contained a 30 day termination provision, $527.0 million
contained a 90 day termination provision, $433.4 million contained no early
termination provisions of less than 1 year and $1,512.0 million contained no
F-10
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
early termination provisions. Policy benefits that are charged to expense
include benefit claims incurred in the period in excess of related policy
account balances and interest credited to policyholders' account balances.
Interest crediting rates range from 3.0% to 9.0% for universal life products
and from 2.0% to 16.0% for investment-type products.
Future policy benefits for long-term care insurance policies are based on
the net level premium method. Assumptions established at policy issue as to
mortality, morbidity, persistency, interest and expenses which include a
margin for adverse deviation, are based on estimates developed by management.
Interest rates used in establishing such liabilities range from 6.0% to 8.5%.
Liabilities for unpaid claims and claim expenses include estimates of
payments to be made on reported individual and group life, long-term care, and
group accident and health insurance claims and estimates of incurred but not
reported claims based on historical claims development patterns.
Estimates of future policy benefit reserves, claim reserves and expenses are
reviewed continually and adjusted as necessary; such adjustments are reflected
in current earnings. Although considerable variability is inherent in such
estimates, management believes that future policy benefit reserves and unpaid
claims and claims expense reserves are adequate.
Property and casualty reserves include loss reserve estimates based on
claims reported and unreported and estimates of future expenses to be incurred
in settlement of the claims provided for in the loss reserve estimates. These
liabilities include estimates of future trends in claim severity and frequency
and other factors that could vary as the losses are ultimately settled.
Certain property and casualty reserves are recorded on a discounted basis,
using interest rates from 4.0% to 7.0%; the resulting discounted reserves were
$38.8 million and $47.7 million at December 31, 1998 and 1997, respectively,
less than the projected ultimate values.
Participating Insurance
Participating business represents approximately 87.7%, 86.8% and 92.1% of
the Company's life insurance in force, 98.4%, 98.5% and 98.6% of the number of
life insurance policies in force, and 97.3%, 96.8% and 96.8% of life insurance
premiums in 1998, 1997 and 1996, respectively.
The portion of earnings allocated to participating group annuity
policyholders that cannot be expected to inure to the Company is excluded from
net income and policyholders' equity.
The amount of policyholders' dividends to be paid is approved annually by
the Company's Board of Directors. The aggregate amount of policyholders'
dividends is related to actual interest, mortality, morbidity and expense
experience for the year and judgment as to the appropriate level of statutory
surplus to be retained by John Hancock.
Deferred Policy Acquisition Costs
Costs that vary with, and are related primarily to, the production of new
business have been deferred to the extent that they are deemed recoverable.
Such costs include commissions, certain costs of policy issue and
underwriting, and certain agency expenses. For participating traditional life
insurance policies, such costs are being amortized over the life of the
contracts at a constant rate based on the present value of the estimated gross
margin amounts expected to be realized over the lives of the contracts.
Estimated gross margin amounts include anticipated premiums and investment
results less claims and administrative expenses, changes in the net level
premium reserve and expected annual policyholder dividends. For universal life
insurance contracts and investment-type products, such costs are being
amortized generally in proportion to the present value of expected gross
profits arising principally from surrender charges and investment results, and
mortality and expense
F-11
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
margins. The effects on the amortization of deferred policy acquisition costs
of revisions to estimated gross margins and profits are reflected in earnings
in the period such estimated gross margins and profits are revised. For non-
participating term life and long-term care life insurance products, such costs
are being amortized over the premium-paying period of the related policies
using assumptions consistent with those used in computing policy benefit
reserves. For property and casualty policies, such costs are being amortized
over the contract period. Amortization expense was $290.9 million, $343.2
million and $248.5 million in 1998, 1997 and 1996, respectively.
The effect on the deferred policy acquisition cost asset that would result
from the realization of unrealized gains (losses) on assets backing
participating traditional life insurance and universal life and investment-
type contracts is recognized net of tax with an offset to unrealized gains
(losses) in policyholders' equity as of the balance sheet date.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid investments
with a maturity of three months or less when purchased.
Separate Accounts
Separate accounts assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are administered and invested
by the Company to meet specific investment objectives of the contractholders.
Investment income and investment gains and losses generally accrue directly to
such contractholders who bear the investment risk, subject in some cases to
minimum guaranteed rates. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company. Separate account assets are reported at fair value. Deposits, net
investment income and realized investment gains and losses of separate
accounts are not included in the revenues of the Company. Fees charged to
contractholders, principally mortality, policy administration and surrender
charges, are included in universal life and investment-type product charges.
Reinsurance
The Company utilizes reinsurance agreements to provide for greater
diversification of business, allow management to control exposure to potential
losses arising from large risks and provide additional capacity for growth.
Assets and liabilities related to reinsurance ceded contracts are reported
on a gross basis. The accompanying statements of income reflect premiums,
benefits and settlement expenses net of reinsurance ceded. Reinsurance
premiums, commissions, expense reimbursements, benefits and reserves related
to reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts.
Federal Income Taxes
The provision for federal income taxes includes amounts currently payable or
recoverable and deferred income taxes, computed under the liability method,
resulting from temporary differences between the tax basis and book basis of
assets and liabilities. A valuation allowance is established for deferred tax
assets when it is more likely than not that an amount will not be realized.
Foreign subsidiaries and U.S. subsidiaries operating outside of the United
States are taxed under applicable foreign statutory rates.
F-12
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
Foreign Currency Translation
The assets and liabilities of operations in foreign currencies are
translated into United States dollars at current exchange rates. Revenues and
expenses are translated at average rates during the year. The resulting net
translation adjustments for each year are accumulated and included in
policyholders' equity. Gains or losses on foreign currency transactions are
reflected in earnings.
Extraordinary Item
The accompanying consolidated statements of income reflect extraordinary
expenses of $11.7 million (net of tax of $6.3 million) for the year ended
December 31, 1998 relating to costs associated with the planned
demutualization.
Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which was adopted by the
Company in the fourth quarter of 1997 on a retroactive basis. Under SFAS No.
131, business segments are defined on the same basis that the Company is
managed versus the product or market approach. Data shown for all periods have
been presented to conform to the requirements of SFAS No. 131.
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, was
adopted by the Company during the fourth quarter of 1997 on a retroactive
basis as permitted by SFAS No. 130. SFAS No. 130 requires that selected
changes in policyholders' equity be added to net income and reported as
comprehensive income. The Company reported this information within the
consolidated statements of changes in policyholders' equity and the footnotes
to the consolidated financial statements.
SFAS No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits," was adopted by the Company during the fourth quarter
of 1998. SFAS No. 132 does not change the recognition or measurement of
pension or postretirement benefit plans, but standardizes disclosure
requirements for pensions and other postretirement benefits. Data shown for
all periods has been presented to conform to the requirements of SFAS No. 132.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivatives to be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in the fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
recognized immediately in earnings. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company is evaluating the effect that the
implementation of SFAS No. 133 will have on its results of operations and
financial position and is unable to quantify the impact at this time.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance for determining whether
F-13
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Summary of Significant Accounting Policies--(Continued)
computer software is for internal use and when costs incurred for internal use
software are to be capitalized. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to
have a material impact on the Company's consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities." The SOP is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs be expensed as incurred. Restatement of previously
issued financial statements is not required. SOP 98-5 is not expected to have
a material impact on the Company's consolidated financial statements.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance for assessments related to insurance activities and requirements for
disclosure of certain information. SOP 97-3 is effective for financial
statements issued for periods beginning after December 31, 1998. Restatement
of previously issued financial statements is not required. SOP 97-3 is not
expected to have a material impact on the Company's consolidated financial
statements.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," provides guidance on how to
account for insurance and reinsurance contracts that do not transfer insurance
risk under a method referred to as deposit accounting. SOP 98-7 is effective
for fiscal years beginning after June 15, 1999. SOP 98-7 is not expected to
have a material impact on the Company's consolidated financial statements.
Note 2--Reorganization
On November 9, 1998, John Hancock Mutual Life Insurance Company submitted to
the staff of the Massachusetts Division of Insurance (the Division) a draft
Plan of Reorganization (the Plan) whereby John Hancock would convert, pursuant
to Massachusetts insurance law, from a Massachusetts mutual life insurance
company to a Massachusetts stock life insurance company and become a wholly-
owned subsidiary of John Hancock Financial Services. It is anticipated a final
plan of Reorganization will be adopted by the Company's Board of Directors
later in 1999 following completion of the informal review of the draft Plan by
the staff of the Division.
Under the Plan, the eligible policyholders of John Hancock will receive
shares of Common Stock of John Hancock Financial Services, policy credits or
cash in exchange for their policyholders' membership interest in John Hancock.
Under the Plan, John Hancock will establish and operate a closed block of
participating business for the benefit of the policies included therein (the
Closed Block). Such business (the Closed Block Business) will contain certain
classes of individual or joint traditional whole life insurance participating
policies and individual term life insurance policies which are in force on the
effective date. The Closed Block will continue in effect until no more
policies included therein are in force or until the Commissioner consents to
the termination of the Closed Block.
John Hancock will allocate to the Closed Block an amount of assets expected
to produce cash flows which, together with anticipated revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payments of claims, certain expenses and
taxes, and for continuation of 1999 dividend scales if experience underlying
such scales continues. Future changes in actual reinvestment rates over the
long term from assumed reinvestment rates, similar to changes in other
assumptions made in funding the Closed Block, may cause dividend scales to
change.
F-14
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Reorganization--(Continued)
To the extent that over time cash flows from the assets allocated to the
Closed Block and other experience related to the Closed Block Business are, in
the aggregate, more favorable than assumed in establishing the Closed Block,
total dividends paid to Closed Block policyholders in future years will be
greater than the total dividends that would have been paid to such
policyholders if the dividend scales payable in 1999 had been continued.
Conversely, to the extent that over time such cash flows and other experience
are, in the aggregate, less favorable than assumed in setting up the Closed
Block, total dividends paid to Closed Block policyholders in future years will
be less than the total dividends that would have been paid to such
policyholders if the dividend scales payable in 1999 had been continued. In
addition, if the assets allocated to the Closed Block, the cash flows
therefrom and the revenues from the Closed Block Business prove to be
insufficient to pay the benefits guaranteed under the policies and contracts
included in the Closed Block, John Hancock Life Insurance Company will be
required to make such payments from its general funds and will reflect the
charge to earnings at the time it is determined that any such funding is
required. Since the Closed Block will be funded to provide for payment of
guaranteed benefits on such policies and contracts, and in addition, for
continuation of dividends paid under 1999 dividend scales (assuming the
experience underlying such scales continues), it will not be necessary to use
general funds to pay guaranteed benefits unless the Closed Block Business
experiences substantial adverse deviations in investment, mortality,
persistency or other experience factors.
Note 3--Investments
The following information summarizes the components of net investment income
and realized investment gains, net:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Net Investment Income
Fixed maturities........................... $2,210.2 $2,097.3 $2,081.8
Equity securities.......................... 18.7 27.8 22.1
Mortgage loans on real estate.............. 781.2 808.6 880.1
Real estate................................ 415.7 430.9 395.9
Policy loans............................... 111.9 107.7 109.2
Short-term investments..................... 45.3 71.7 65.1
Other...................................... 181.3 144.5 158.7
-------- -------- --------
Gross investment income.................. 3,764.3 3,688.5 3,712.9
Less investment expenses................... 433.6 497.8 489.8
-------- -------- --------
Net investment income.................... $3,330.7 $3,190.7 $3,223.1
======== ======== ========
Realized Investment Gains (Losses), Net
Fixed maturities........................... $ 110.6 $ 101.3 $ 43.1
Equity securities.......................... 115.2 23.6 140.3
Mortgage loans on real estate and real
estate.................................... (15.6) 64.2 (22.4)
Other...................................... (71.1) (42.1) (32.7)
Amortization adjustment for deferred policy
acquisition costs......................... (41.2) (31.2) (17.6)
-------- -------- --------
Realized investment gains, net........... $ 97.9 $ 115.8 $ 110.7
======== ======== ========
</TABLE>
Gross gains of $268.1 million in 1998, $143.8 million in 1997 and $159.1
million in 1996 and gross losses of $92.9 million in 1998, $35.4 million in
1997 and $30.6 million in 1996 were realized on the sale of available-for-sale
securities.
F-15
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
The Company's investments in held-to-maturity securities and available-for-
sale securities are summarized below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions)
<S> <C> <C> <C> <C>
December 31, 1998
Held-to-Maturity:
Corporate securities............... $11,617.0 $1,041.2 $150.3 $12,507.9
Mortgage-backed securities......... 1,318.1 43.2 0.5 1,360.8
Obligations of states and political
subdivisions...................... 29.4 3.4 -- 32.8
Debt securities issued by foreign
governments....................... 6.0 6.5 -- 12.5
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... 7.7 -- -- 7.7
--------- -------- ------ ---------
Total............................ $12,978.2 $1,094.3 $150.8 $13,921.7
========= ======== ====== =========
Available-for-Sale:
Corporate securities............... $ 9,358.3 $ 734.6 $230.3 $ 9,862.6
Mortgage-backed securities......... 4,361.2 156.2 5.4 4,512.0
Obligations of states and political
subdivisions...................... 69.3 7.0 -- 76.3
Debt securities issued by foreign
governments....................... 387.2 62.4 5.3 444.3
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... 315.5 11.6 0.1 327.0
--------- -------- ------ ---------
Total fixed maturities............. 14,491.5 971.8 241.1 15,222.2
Equity securities.................. 756.8 321.5 82.5 995.8
--------- -------- ------ ---------
Total............................ $15,248.3 $1,293.3 $323.6 $16,218.0
========= ======== ====== =========
</TABLE>
F-16
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions)
<S> <C> <C> <C> <C>
December 31, 1997
Held-to-Maturity:
Corporate securities............... $11,192.6 $ 896.4 $ 68.4 $12,020.6
Mortgage-backed securities......... 1,406.6 28.0 21.7 1,412.9
Obligations of states and political
subdivisions...................... 91.0 13.2 -- 104.2
Debt securities issued by foreign
governments....................... 12.8 6.2 -- 19.0
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... 7.7 -- -- 7.7
Other debt securities.............. 1.7 -- -- 1.7
--------- -------- ------ ---------
Total............................ $12,712.4 $ 943.8 $ 90.1 $13,566.1
========= ======== ====== =========
Available-for-Sale:
Corporate securities............... $ 8,423.3 $ 784.4 $ 86.7 $ 9,121.0
Mortgage-backed securities......... 3,935.0 95.7 6.3 4,024.4
Obligations of states and political
subdivisions...................... 76.5 4.5 -- 81.0
Debt securities issued by foreign
governments....................... 355.1 82.5 0.2 437.4
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... 778.4 11.4 0.3 789.5
Other debt securities.............. 8.6 0.6 -- 9.2
--------- -------- ------ ---------
Total fixed maturities............. 13,576.9 979.1 93.5 14,462.5
Equity securities.................. 521.8 398.7 39.0 881.5
--------- -------- ------ ---------
Total............................ $14,098.7 $1,377.8 $132.5 $15,344.0
========= ======== ====== =========
</TABLE>
F-17
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
The amortized cost and fair value of fixed maturities at December 31, 1998,
by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
(in millions)
<S> <C> <C>
Held-to-Maturity:
Due in one year or less.................................. $ 1,103.0 $ 1,141.6
Due after one year through five years.................... 3,663.7 3,893.2
Due after five years through ten years................... 3,116.5 3,357.3
Due after ten years...................................... 3,776.9 4,168.8
--------- ---------
11,660.1 12,560.9
Mortgage-backed securities............................... 1,318.1 1,360.8
--------- ---------
Total.................................................. $12,978.2 $13,921.7
========= =========
Available-for-Sale:
Due in one year or less.................................. $ 656.9 $ 673.2
Due after one year through five years.................... 2,797.4 2,940.9
Due after five years through ten years................... 3,038.0 3,141.6
Due after ten years...................................... 3,638.0 3,954.5
--------- ---------
10,130.3 10,710.2
Mortgage-backed securities............................... 4,361.2 4,512.0
--------- ---------
Total.................................................. $14,491.5 $15,222.2
========= =========
</TABLE>
Expected maturities may differ from contractual maturities because eligible
borrowers may exercise their right to call or prepay obligations with or
without call or prepayment penalties.
The sale of fixed maturities held-to-maturity relate to certain securities,
with amortized cost of $8.5 million, $98.1 million and $75.4 million, for the
years ended December 31, 1998, 1997 and 1996, respectively, which were sold
specifically due to a significant decline in the issuers' credit quality. The
related realized gains (losses), net on the sales, were $0.0 million, $(63.1)
million and $(6.3) million in 1998, 1997 and 1996, respectively.
The change in net unrealized gains (losses) on trading securities that has
been included in earnings during 1998, 1997 and 1996 amounted to $(6.6)
million, $5.0 million, and $8.7 million, respectively.
The Company participates in a securities lending program for the purpose of
enhancing income on securities held. At December 31, 1998 and 1997, $421.5
million and $217.0 million, respectively, of the Company's bonds and stocks,
at market value, were on loan to various brokers/dealers, but were fully
collateralized by cash and U.S. government securities in an account held in
trust for the Company. The market value of the loaned securities is monitored
on a daily basis, and the Company obtains additional collateral when deemed
appropriate.
For 1998, 1997 and 1996, investment results passed through to participating
group annuity contracts as interest credited to policyholders' account
balances amounted to $178.1 million, $168.8 million and $182.4 million,
respectively.
Mortgage loans on real estate are evaluated periodically as part of the
Company's loan review procedures and are considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. The allowance
F-18
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
for losses is maintained at a level believed adequate by management to absorb
estimated probable credit losses that exist at the balance sheet date.
Management's periodic evaluation of the adequacy of the allowance for losses
is based on the Company's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently
subjective as it requires estimating the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
Changes in the allowance for probable losses on mortgage loans on real
estate and real estate to be disposed of were as follows:
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End
of Year Additions Deductions of Year
---------- --------- ---------- -------
(in millions)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Mortgage loans on real estate......... $127.3 $ 15.9 $ 32.2 $111.0
Real estate to be disposed of......... 25.5 97.0 10.5 112.0
------ ------ ------ ------
Total............................... $152.8 $112.9 $ 42.7 $223.0
====== ====== ====== ======
Year ended December 31, 1997
Mortgage loans on real estate......... $142.0 $ 19.5 $ 34.2 $127.3
Real estate to be disposed of......... 54.5 1.5 30.5 25.5
------ ------ ------ ------
Total............................... $196.5 $ 21.0 $ 64.7 $152.8
====== ====== ====== ======
Year ended December 31, 1996
Mortgage loans on real estate......... $204.2 $ 26.7 $ 88.9 $142.0
Real estate to be disposed of......... 72.1 5.7 23.3 54.5
------ ------ ------ ------
Total............................... $276.3 $ 32.4 $112.2 $196.5
====== ====== ====== ======
</TABLE>
At December 31, 1998 and 1997, the total recorded investment in mortgage
loans that are considered to be impaired under SFAS No. 114, along with the
related provision for losses, were as follows:
<TABLE>
<CAPTION>
December 31
--------------
1998 1997
------ ------
(in millions)
<S> <C> <C>
Impaired mortgage loans on real estate with provision
for losses............................................ $210.6 $312.5
Provision for losses................................... (38.8) (62.8)
------ ------
Net impaired mortgage loans on real estate............. $171.8 $249.7
====== ======
</TABLE>
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
<TABLE>
<CAPTION>
Year Ended December
31
--------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Average recorded investment in impaired loans...... $193.2 $363.1 $453.3
Interest income recognized on impaired loans....... 2.7 18.4 17.2
</TABLE>
F-19
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
The payment terms of mortgage loans on real estate may be restructured or
modified from time to time. Generally, the terms of the restructured mortgage
loans call for the Company to receive some form or combination of an equity
participation in the underlying collateral, excess cash flows or an effective
yield at the maturity of the loans sufficient to meet the original terms of
the loans.
Restructured commercial mortgage loans aggregated $241.8 million and $329.2
million as of December 31, 1998 and 1997, respectively. The expected gross
interest income that would have been recorded had the loans been current in
accordance with the original loan agreements and the actual interest income
recorded were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(in millions)
<S> <C> <C> <C>
Expected.......................................... $23.7 $35.3 $51.3
Actual............................................ 12.6 26.0 33.3
</TABLE>
At December 31, 1998, the mortgage portfolio was diversified by geographic
region and specific collateral property type as displayed below:
<TABLE>
<CAPTION>
Carrying Geographic Carrying
Property Type Amount Concentration Amount
- ------------- ------------ ------------- ------------
(in millions) (in millions)
<S> <C> <C> <C>
Apartments............. $2,377.9 East North Central.... $1,122.1
Hotels................. 303.3 East South Central.... 159.3
Industrial............. 1,075.6 Middle Atlantic....... 1,513.6
Office buildings....... 2,308.4 Mountain.............. 386.7
Retail................. 1,742.8 New England........... 864.3
1-4 Family............. 105.8 Pacific............... 1,909.6
Mixed Use.............. 93.8 South Atlantic........ 1,662.8
Agricultural........... 1,380.2 West North Central.... 337.0
Other.................. 339.3 West South Central.... 652.0
Allowance for losses... (111.0) Canada/Other.......... 1,119.7
-------- Allowance for losses.. (111.0)
Total.................. $9,616.1 --------
======== Total................. $9,616.1
========
</TABLE>
Mortgage loans with outstanding principal balances of $107.0 million, bonds
with amortized cost of $107.1 million and real estate with a carrying value of
$22.3 million were non-income producing for the year ended December 31, 1998.
Depreciation expense on investment real estate was $41.7 million, $73.1
million and $68.9 million in 1998, 1997 and 1996, respectively. Accumulated
depreciation was $189.4 million and $289.6 million at December 31, 1998 and
1997, respectively.
Investments in unconsolidated joint ventures and partnerships accounted for
by using the equity method of accounting totaled $286.0 million and $297.7
million at December 31, 1998 and 1997, respectively. Total combined assets of
these joint ventures and partnerships were $1,819.9 million and $1,874.2
million (consisting primarily of investments), and total combined liabilities
were $425.3 million and $800.4 million (including $349.2 million and $135.9
million of nonrecourse notes payable to banks) at December 31, 1998 and 1997,
F-20
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
respectively. Total combined revenues and expenses of such joint ventures and
partnerships were $1,435.6 million and $1,128.0 million, respectively,
resulting in $312.6 million of total combined income from operations before
income taxes in 1998. Total combined revenues of such joint ventures and
partnerships were $1,524.1 million and $1,388.3 million, and total combined
expenses were $1,275.5 million and $1,209.1 million, respectively, resulting
in $248.6 million and $179.2 million of total combined income from operations
before income taxes in 1997 and 1996, respectively. Net investment income on
investments accounted for on the equity method totaled $70.0 million, $54.6
million and $51.2 million in 1998, 1997 and 1996, respectively.
Note 4--Derivatives
The notional amounts, carrying values and estimated fair values of the
Company's derivative instruments by type of hedge are as follows:
<TABLE>
<CAPTION>
Number of Assets (Liabilities)
Contracts/ -----------------------------------
Notional Amounts 1998 1997
------------------ ----------------- ----------------
Carrying Fair Carrying Fair
1998 1997 Value Value Value Value
-------- -------- -------- ------- -------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Asset Hedges:
Futures contracts to
sell securities...... 12,477 4,100 $ (3.7) $ (3.7) $ 2.9 $ 2.9
Interest rate swap
agreements
Notional............ $5,485.0 $4,477.3 (127.4) (411.0) (60.2) (208.2)
Average Fixed Rate--
Paid............... 6.74% 6.95% -- -- -- --
Average Float Rate--
Received........... 5.07% 5.83% -- -- -- --
Interest rate cap
agreements........... 80 80 0.4 0.4 0.5 0.5
Interest rate swaption
agreements........... 30.0 64.2 (1.9) (1.9) (1.7) (1.7)
Currency rate swap
agreements........... 439.5 400.1 (19.5) (19.5) (18.2) (18.2)
Equity collar
agreements........... -- -- 28.6 28.6 (14.1) (14.1)
Liability Hedges:
Futures contracts to
acquire securities... 1,470 1,559 (0.3) (0.3) (1.2) (1.2)
Interest rate swap
agreements
Notional............ 2,483.3 2,790.0 -- 235.9 -- 156.0
Average Fixed Rate--
Received........... 6.42% 6.71% -- -- -- --
Average Float Rate--
Paid............... 5.07% 5.83% -- -- -- --
Interest Rate Swaps
(receive CMT rate)... 609.7 450.6 -- (0.2) -- 3.2
Interest rate cap
agreements........... 129.4 129.4 3.2 3.2 1.6 1.6
Interest rate floor
agreements........... 125.0 125.0 0.7 0.7 0.4 0.4
Currency rate swap
agreements........... 2,597.4 -- -- 21.8 -- --
</TABLE>
Financial futures contracts are used principally to hedge risks associated
with interest rate fluctuations on sales of guaranteed investment contracts.
The Company is subject to the risks associated with changes in the value of
the underlying securities; however, such changes in value generally are offset
by opposite changes in the value of the hedged items. The contracts or
notional amounts of the contracts represent the extent of the Company's
involvement but not the future cash requirements, as the Company intends to
close the open positions prior to settlement. The futures contracts expire in
1999.
The interest rate swap agreements expire in 1999 to 2028. The interest rate
cap and floor agreements expire in 2000 to 2007. Interest rate swaption
agreements expire in 2025. The currency rate swap agreements expire in 1999 to
2036. The equity collar agreements expire in 2003.
Fair values for futures contracts are based on quoted market prices. Fair
values for interest rate swap, cap and floor agreements, swaptions, and
currency swap agreements and equity collar agreements are based on
F-21
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Derivatives--(Continued)
current settlement values. The current settlement values are based on quoted
market prices, which utilize pricing models or formulas using current
assumptions.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform to the terms of the contract. The Company
continually monitors its position and the credit ratings of the counterparties
to these derivative instruments. To limit exposure associated with
counterparty nonperformance on interest rate and currency swap agreements, the
Company enters into master netting agreements with its counterparties. The
Company believes the risk of incurring losses due to nonperformance by its
counterparties is remote and that such losses, if any, would be immaterial.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk.
Note 5--Income Taxes
Two of the Company's domestic life insurance companies (John Hancock Mutual
Life Insurance Company and John Hancock Variable Life Insurance Company) file
consolidated federal income tax returns with John Hancock's non-life insurance
company subsidiaries (John Hancock Subsidiaries, Inc. and John Hancock
International Holdings, Inc.). The Company's other domestic life insurance
company, Investors Partner Life Insurance Company, previously filed a separate
tax return and is now eligible for inclusion in the 1998 consolidated federal
income tax return.
In addition to taxes on operations, mutual life insurance companies are
charged an equity base tax. The equity base tax is determined by applying an
industry based earnings rate to John Hancock's average equity base, as defined
by the Internal Revenue Code. The industry earnings rate is determined by the
Internal Revenue Service (IRS) and is not finalized until subsequent years.
John Hancock estimates income taxes based on estimated industry earnings rates
and revises these estimates up or down when the earnings rates are finalized
and published by the IRS.
Income before income taxes and extraordinary item includes the following:
<TABLE>
<CAPTION>
Year Ended December
31
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Domestic......................................... $611.9 $566.8 $652.7
Foreign.......................................... 32.2 22.9 15.3
------ ------ ------
Income before income taxes and extraordinary
item............................................. $644.1 $589.7 $668.0
====== ====== ======
The components of income taxes were as follows:
<CAPTION>
Year Ended December
31
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Current taxes:
Federal........................................ $234.9 $144.2 $293.2
Foreign........................................ 1.9 9.5 10.7
State.......................................... 6.3 7.3 8.6
------ ------ ------
243.1 161.0 312.5
Deferred taxes:
Federal........................................ (66.0) (45.6) (63.4)
Foreign........................................ 7.7 (1.9) (5.5)
State.......................................... (0.9) (7.1) 3.9
------ ------ ------
(59.2) (54.6) (65.0)
------ ------ ------
Total income taxes........................... $183.9 $106.4 $247.5
====== ====== ======
</TABLE>
F-22
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Income Taxes--(Continued)
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
<TABLE>
<CAPTION>
Year Ended December
31
----------------------
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Tax at 35%.............................................. $225.4 $206.4 $233.8
Add (deduct):
Equity base tax....................................... (19.9) (25.3) 15.4
Prior year taxes...................................... 5.8 9.0 12.1
Tax credits........................................... (13.0) (20.0) (8.9)
Foreign taxes......................................... 2.5 4.5 4.7
Tax exempt investment income.......................... (24.4) (18.5) (18.0)
Non-taxable gain on sale of subsidiary................ -- -- (8.8)
Use of loss carryforwards............................. -- (51.0) --
Other................................................. 7.5 1.3 17.2
------ ------ ------
Total income taxes.................................. $183.9 $106.4 $247.5
====== ====== ======
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Deferred tax assets:
Policy reserve adjustments................................ $ 673.7 $ 630.6
Other postretirement benefits............................. 151.2 159.6
Investment valuation reserves............................. 175.8 116.7
Dividends payable to policyholders........................ 132.9 125.0
Unearned premium.......................................... 49.1 43.7
Loss on sale of foreign subsidiary........................ 68.0 68.0
Interest.................................................. 37.8 29.3
Other..................................................... 79.8 70.5
-------- --------
Total deferred tax assets............................... 1,368.3 1,243.4
Valuation allowance....................................... (17.0) (17.0)
-------- --------
Net deferred tax assets................................. 1,351.3 1,226.4
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs......................... 684.6 649.5
Depreciation.............................................. 268.4 282.4
Basis in partnerships..................................... 142.0 124.3
Market discount on bonds.................................. 48.7 49.9
Pension plan expense...................................... 60.6 45.9
Capitalized charges related to mutual funds............... 98.4 88.7
Unrealized gains.......................................... 204.2 275.7
-------- --------
Total deferred tax liabilities.......................... 1,506.9 1,516.4
-------- --------
Net deferred tax liabilities............................ $ 155.6 $ 290.0
======== ========
</TABLE>
The Company made income tax payments of $163.3 million in 1998, $223.1
million in 1997 and $345.9 million in 1996.
F-23
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Debt and Line of Credit
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Short-term debt:
Commercial paper......................................... $ 411.1 $ 350.7
Current maturities of long-term debt..................... 16.7 297.2
-------- --------
Total short-term debt.................................. 427.8 647.9
-------- --------
Long-term debt:
Surplus notes, 7.38% maturing in 2024.................... 446.9 446.9
REMIC Trust class A2 notes, interest at LIBOR plus 0.27%,
due monthly to June 25, 1998 (average monthly
rate:1998--5.80%; 1997--5.93%).......................... -- 42.8
REMIC Trust class A2 notes, interest at LIBOR plus 0.19%,
due monthly to December 28, 1998 (average monthly rate:
1998--5.72%; 1997--5.85%)............................... -- 160.8
Notes payable, interest ranging from 5.4% to 9.6%, due in
varying amounts to 2007................................. 172.5 190.0
-------- --------
Total long-term debt....................................... 619.4 840.5
Less current maturities.................................... (16.7) (297.2)
-------- --------
Long-term debt............................................. 602.7 543.3
-------- --------
Total debt............................................. $1,030.5 $1,191.2
======== ========
</TABLE>
The Company issues commercial paper primarily to take advantage of current
investment opportunities, balance operating cash flows and existing
commitments and meet working capital needs. The weighted average interest rate
for outstanding commercial paper at December 31, 1998 and 1997 was 5.22% and
5.6%, respectively. The weighted average life for outstanding commercial paper
at December 31, 1998 and 1997 was approximately 14 days and 8 days,
respectively. Commercial paper borrowing arrangements are supported by a
syndicated line of credit.
The issuance of surplus notes was approved by the Commonwealth of
Massachusetts Division of Insurance, and any payments of interest or principal
on the surplus notes requires the prior approval of the Commissioner of the
Commonwealth of Massachusetts Division of Insurance.
In 1995, the Company issued $213.1 million of debt through a Real Estate
Mortgage Investment Conduit (REMIC) and in 1996, the Company issued $292.0
million of additional debt through a REMIC (REMIC II). As collateral to the
debt, the Company pledged $2.5 billion of commercial mortgages to the REMIC
trusts. In addition, the Company has guaranteed the timely payment of
principal and interest on the debt. The interest rates on the two notes are
calculated on a floating basis based on the monthly LIBOR rate. The LIBOR
rates were 5.06% and 5.72%, respectively, at December 31, 1998 and 1997.
At December 31, 1998, the Company had a $500.0 million syndicated line of
credit with a group of banks. The banks will commit, when requested, to loan
funds at prevailing interest rates as determined in accordance with the line
of credit agreement, which terminates on June 30, 2001. 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 December 31,
1998. At December 31, 1998, the Company had no outstanding borrowings under
this agreement.
F-24
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Debt and Line of Credit--(Continued)
Aggregate maturities of long-term debt are as follows: 1999--$16.7 million;
2000--$73.3 million; 2001--$23.0 million; 2002--$38.1 million; 2003--$23.0
million and thereafter--$445.3 million.
Interest expense on debt, included in operating expenses, was $76.7 million,
$76.9 million and $86.8 million in 1998, 1997 and 1996, respectively. Interest
paid amounted to $76.7 million in 1998, $76.9 million in 1997 and $86.8
million in 1996.
Note 7--Reinsurance
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Premiums Premiums Premiums
------------------ ------------------ ------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Life, Health and
Annuity:
Direct................ $2,830.4 $2,828.4 $2,931.6 $2,929.8 $2,887.0 $2,885.8
Assumed............... 351.9 351.9 417.1 417.1 391.0 391.0
Ceded................. (982.5) (982.4) (874.0) (874.0) (395.5) (395.5)
-------- -------- -------- -------- -------- --------
Net life, health and
annuity premiums... 2,199.8 2,197.9 2,474.7 2,472.9 2,882.5 2,881.3
-------- -------- -------- -------- -------- --------
Property and Casualty:
Direct................ 0.4 7.1 37.5 65.0 77.9 88.7
Assumed............... -- 1.9 6.2 6.2 14.3 14.1
Ceded................. ( 0.4) (9.0) (43.0) (70.5) (86.3) (61.6)
-------- -------- -------- -------- -------- --------
Net property and
casualty premiums.. -- -- 0.7 0.7 5.9 41.2
-------- -------- -------- -------- -------- --------
Net premiums........ $2,199.8 $2,197.9 $2,475.4 $2,473.6 $2,888.4 $2,922.5
======== ======== ======== ======== ======== ========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, benefits to
policyholders under life, health and annuity ceded reinsurance contracts were
$810.8 million, $800.4 million and $260.8 million, respectively.
On February 28, 1997, the Company sold a major portion of its group
insurance business to UNICARE Life & Health Insurance Company (UNICARE), a
wholly-owned subsidiary of WellPoint Health Networks Inc. The business sold
includes the Company's group accident and health business and related group
life business and Cost Care, Inc., Hancock Association Services Group and Tri-
State, Inc., all indirect wholly-owned subsidiaries of the Company. The
Company retained its group long-term care operations. Assets equal to
liabilities of approximately $686.7 million at February 28, 1997, subject to
agreement on asset and liability values, were transferred to UNICARE in
connection with the sale. Income from operations in both periods was not
significant. The insurance business sold was transferred to UNICARE through a
100% coinsurance agreement. The Company remains liable to the policyholders to
the extent that UNICARE does not meet its contractual obligations under the
coinsurance agreement. A pre-tax gain of $59.6 million was realized on the
sale, comprised of a $33.9 million gain on the sale of the underlying business
and a $25.7 million gain related to the curtailment of the Company's pension
and other postretirement benefit plans. The business sold primarily consisted
of short duration contracts, and $15.5 million and $8.5 million of the gain
was recognized in 1997 and 1998, respectively, as the underlying claims were
settled. The remaining gain realized on the sale of the underlying business of
$9.9 million is being recognized over the remaining lives of the contracts in
accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts." The $25.7 million curtailment
gain was recognized in 1997.
F-25
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Reinsurance--(Continued)
The Company has secured a $397.0 million letter of credit facility with a
group of banks. The banks have agreed to issue a letter of credit to the
Company pursuant to which the Company may draw up to $397.0 million for any
claims not satisfied by UNICARE under the coinsurance agreement after the
Company has incurred the first $113.0 million of losses from such claims. The
amount available pursuant to the letter of credit agreement and any letter of
credit issued thereunder will be automatically reduced on a scheduled basis
consistent with the anticipated runoff of liabilities related to the business
reinsured under the coinsurance agreement. The letter of credit and any letter
of credit issued thereunder are scheduled to expire on March 1, 2002.
Reinsurance ceded contracts do not relieve the Company from its obligations
to policyholders. The Company remains liable to its policyholders for the
portion reinsured to the extent that any reinsurer does not meet its
obligations for reinsurance ceded to it under the reinsurance agreements.
Failure of the reinsurers to honor their obligations could result in losses to
the Company; consequently, estimates are established for amounts deemed or
estimated to be uncollectible. To minimize its exposure to significant losses
from reinsurance insolvencies, the Company evaluates the financial condition
of its reinsurers and monitors concentration of credit risk arising from
similar characteristics of the reinsurers.
Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans
The Company provides pension benefits to substantially all employees and
general agency personnel. These benefits are provided through both qualified
defined benefit and defined contribution pension plans. In addition, through
nonqualified plans, the Company provides supplemental pension benefits to
employees with salaries and/or pension benefits in excess of the qualified
plan limits imposed by federal tax law. Pension benefits under the defined
benefit plans are based on years of service and average compensation generally
during the five years prior to retirement. Benefits related to the Company's
defined benefit pension plans paid to employees and retirees covered by
annuity contracts issued by the Company amounted to $92.6 million in 1998,
$89.7 million in 1997 and $84.4 million in 1996. Plan assets consist
principally of listed equity securities, corporate obligations and U.S.
government securities. The Company's funding policy for qualified defined
benefit plans is to contribute annually an amount in excess of the minimum
annual contribution required under the Employee Retirement Income Security Act
(ERISA). This amount is limited by the maximum amount that can be deducted for
federal income tax purposes. Because the qualified defined benefit plans are
overfunded, no amounts were contributed to these plans in 1998 or 1997. The
funding policy for nonqualified defined benefit plans is to contribute the
amount of the benefit payments made during the year. The projected benefit
obligation and accumulated benefit obligation for the non-qualified defined
benefit pension plans, which are underfunded, for which accumulated benefit
obligations are in excess of plan assets were $221.3 million, and $194.8
million, respectively at December 31, 1998, and $202.4 million and $175.5
million, respectively at December 31, 1997. Non-qualified plan assets, at fair
value, were $1.2 million and $0.3 million at December 31, 1998 and 1997,
respectively.
Defined contribution plans include The Investment Incentive Plan and the
Savings and Investment Plan. The expense for defined contribution plans was
$8.1 million, $6.2 million, and $21.4 million in 1998, 1997 and 1996,
respectively.
In addition to the Company's defined benefit pension plans, the Company has
employee welfare plans for medical, dental, and life insurance covering most
of its retired employees and general agency personnel. Substantially all
employees may become eligible for these benefits if they reach retirement age
while employed by the Company. The postretirement health care and dental
coverages are contributory based on service for post January 1, 1992 non-union
retirees. A small portion of pre-January 1, 1992 non-union retirees also
contribute. The applicable contributions are based on service.
F-26
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans--
(Continued)
The Company's policy is to fund postretirement benefits in amounts at or
below the annual tax qualified limits. As of December 31, 1998 and 1997, plan
assets related to non-union employees were comprised of an irrevocable health
insurance contract to provide future health benefits to retirees. Plan assets
related to union employees were comprised of approximately 70% equity
securities and 30% fixed income investments.
The changes in benefit obligation and plan assets related to the Company's
qualified and nonqualified benefit plans are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
Other Postretirement
Pension Benefits Benefits
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning
of year......................... $1,734.5 $1,611.5 $ 452.7 $ 492.7
Service cost..................... 34.6 32.6 7.1 7.6
Interest cost.................... 117.5 111.3 29.1 31.1
Amendments....................... -- -- -- (4.8)
Actuarial (gain) loss............ 55.5 77.5 (19.2) (42.5)
Transition gain.................. (2.1) (1.3) -- --
Benefits paid.................... (100.2) (97.1) (28.6) (31.4)
-------- -------- ---------- ----------
Benefit obligation at end of
year............................ 1,839.8 1,734.5 441.1 452.7
-------- -------- ---------- ----------
Change in plan assets:
Fair value of plan assets at
beginning of year............... 2,044.6 1,829.9 172.7 132.4
Actual return on plan assets..... 298.5 304.0 39.9 31.0
Employer contribution............ 11.5 9.8 2.6 9.3
Transition loss.................. (3.3) (2.0) -- --
Benefits paid.................... (100.2) (97.1) -- --
-------- -------- ---------- ----------
Fair value of plan assets at end
of year......................... 2,251.1 2,044.6 215.2 172.7
-------- -------- ---------- ----------
Funded status.................... 411.3 310.1 (225.9) (280.0)
Unrecognized actuarial gain...... (301.6) (232.1) (187.2) (150.5)
Unrecognized prior service cost.. 23.1 29.6 (1.8) (2.1)
Unrecognized net transition
asset........................... (23.9) (35.6) -- --
-------- -------- ---------- ----------
Prepaid (accrued) benefit cost,
net........................... $ 108.9 $ 72.0 $ (414.9) $ (432.6)
======== ======== ========== ==========
Amounts recognized in balance sheet
consist of:
Prepaid benefit cost............. $ 229.6 $ 189.6
Accrued benefit liability........ (193.6) (175.2)
Intangible asset................. 8.3 10.6
Accumulated other comprehensive
income.......................... 64.6 47.0
-------- --------
Prepaid benefit cost, net...... $ 108.9 $ 72.0
======== ========
</TABLE>
F-27
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Pension Benefit Plans and Other Postretirement Benefit Plans--
(Continued)
The assumptions used in accounting for the Company's qualified and
nonqualified benefit plans were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
Other Postretirement
Pension Benefits Benefits
----------------- ---------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C>
Discount rate..................... 6.8% 7.0% 6.8% 7.0%
Expected return on plan assets.... 8.5% 8.5% 8.5% 8.5%
Rate of compensation increase..... 4.6% 4.8% 4.6% 4.8%
</TABLE>
For measurement purposes, a 5.8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.0% in 2001 and remain at that level
thereafter.
The net periodic benefit cost (credit) related to the Company's qualified
and nonqualified benefit plans includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
Other Postretirement
Pension Benefits Benefits
------------------------- ----------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost................ $ 34.6 $ 32.6 $ 34.2 $ 7.1 $ 7.6 $ 9.4
Interest cost............... 117.5 111.3 109.2 29.1 31.1 34.4
Expected return on plan
assets..................... (168.5) (150.7) (138.1) (14.7) (11.3) (15.9)
Amortization of transition
asset...................... (11.7) (11.7) (11.7) -- -- --
Amortization of prior
service cost............... 6.5 6.6 6.7 (0.3) (0.2) (0.1)
Recognized actuarial loss
(gain)..................... (2.6) (1.0) 0.1 (7.8) (5.4) (2.8)
Other....................... (1.2) (20.2) 0.2 -- (5.2) 7.2
------- ------- ------- ------ ------ ------
Net periodic benefit cost
(credit)................. $ (25.4) $ (33.1) $ 0.6 $ 13.4 $ 16.6 $ 32.2
======= ======= ======= ====== ====== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the healthcare plans. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(in millions)
<S> <C> <C>
Effect on total of service and interest
costs in 1998.............................. $ 4.4 $ (3.2)
Effect on postretirement benefit obligations
as of
December 31, 1998.......................... 37.6 (33.6)
</TABLE>
Note 9--Commitments and Contingencies
The Company has extended commitments to purchase fixed maturity investments,
preferred and common stock, and other invested assets and issue mortgage loans
on real estate totaling $377.4 million, $72.0 million, $214.1 million and
$509.9 million, respectively, at December 31, 1998. If funded, loans related
to real estate mortgages would be fully collateralized by related properties.
The Company monitors the creditworthiness of borrowers under long-term bond
commitments and requires collateral as deemed necessary. The estimated fair
values of the commitments described above aggregate $1.2 billion at December
31, 1998. The majority of these commitments expire in 1999.
F-28
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Commitments and Contingencies--(Continued)
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal National Mortgage Association (FNMA). Under the
agreement, the Company sold $532.8 million of commercial mortgage loans and
acquired an equivalent amount of FNMA securities. The Company completed
similar transactions with FNMA in 1991 for $1.04 billion and in 1993 for $71.9
million. FNMA is guaranteeing the full face value of the bonds of the three
transactions to the bondholders. However, the Company has agreed to absorb the
first 12.25% of original principal and interest losses (less buy-backs) for
the pool of loans involved in the three transactions, based on the total
outstanding principal balance of $1.04 billion at July 1, 1996, but is not
required to commit collateral to support this loss contingency. Historically,
the Company has experienced losses of less than one percent on its multi-
family mortgage portfolio. At December 31, 1998, the aggregate outstanding
principal balance of all the remaining pools of loans from 1991, 1993 and 1996
is approximately $602.8 million.
During 1996, the Company entered into a credit support and collateral pledge
agreement with the Federal Home Loan Mortgage Corporation (FHLMC). Under the
agreement, the Company sold $535.3 million of multi-family loans and acquired
an equivalent amount of FHLMC securities. FHLMC is guaranteeing the full face
value of the bonds to the bondholders. However, the Company has agreed to
absorb the first 10.5% of original principal and interest losses (less buy-
backs) for the pool of loans involved but is not required to commit collateral
to support this loss contingency. Historically, the Company has experienced
total losses of less than one percent on its multi-family loan portfolio. At
December 31, 1998, the aggregate outstanding principal balance of the pools of
loans was $445.8 million. There were no mortgage buy-backs in 1998, 1997 or
1996.
The Company is subject to insurance guaranty fund laws in the states in
which it does business. These laws assess insurance companies amounts to be
used to pay benefits to policyholders and claimants of insolvent insurance
companies. Many states allow these assessments to be credited against future
premium taxes. The Company believes such assessments in excess of amounts
accrued would not materially affect its financial position or results of
operations.
In the normal course of its business operations, the Company is involved
with litigation from time to time with claimants, beneficiaries and others,
and a number of litigation matters were pending as of December 31, 1998. It is
the opinion of management, after consultation with counsel, that the ultimate
liability with respect to these claims, if any, will not materially affect the
financial position or results of operations of the Company.
During 1997, the Company entered into a court approved settlement relating
to a class action lawsuit involving certain individual life insurance policies
sold from 1979 through 1996. In entering into the settlement, the Company
specifically denied any wrongdoing. The reserve held in connection with the
settlement to provide for relief to class members and for legal and
administrative costs associated with the settlement amounted to $436.6 million
and $308.8 million at December 31, 1998 and 1997, respectively. Costs incurred
related to the settlement were $230.8 million, $173.1 million, and $138.5
million in 1998, 1997 and 1996, respectively. The estimated reserve is based
on a number of factors, including the estimated number of claims, the expected
type of relief to be sought by class members (general relief or alternative
dispute resolution), the estimated cost per claim and the estimated costs to
administer the claims.
During 1996, management determined that it was probable that a settlement
would occur and that a minimum loss amount could be reasonably estimated.
Accordingly, the Company recorded its best estimate based on the information
available at that time. The terms of the settlement agreement were negotiated
throughout 1997 and approved by the court on December 31, 1997. In accordance
with the terms of the settlement agreement, the Company contacted class
members during 1998 to determine the actual type of relief to be sought by
class members. The majority of the responses from class members were received
by the fourth quarter of 1998 and the type of relief sought by class members
differed from the Company's previous estimates.
F-29
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Commitments and Contingencies--(Continued)
Given the uncertainties associated with estimating the reserve, it is
reasonably possible that the final cost of the settlement could differ
materially from the amounts presently provided for by the Company. The Company
will continue to update its estimate of the final cost of the settlement as
the claims are processed and more specific information is developed,
particularly as the actual cost of the claims subject to alternative dispute
resolution becomes available. However, based on information available at this
time, and the uncertainties associated with the final claim processing and
alternative dispute resolution, the range of any additional costs related to
the settlement cannot be reasonably estimated.
Note 10--Statutory Financial Information
John Hancock Mutual Life Insurance Company and its domestic insurance
subsidiaries prepare their statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the state of domicile.
Prescribed statutory accounting practices include state laws, regulations and
administrative rules, as well as guidance published by the NAIC. Permitted
accounting practices encompass all accounting practices that are not
prescribed by the sources noted above. Since 1988, the Commonwealth of
Massachusetts Division of Insurance has provided the Company with approval to
recognize the pension plan prepaid expense in accordance with the requirements
of SFAS No. 87, "Employers' Accounting for Pensions." The Company furnishes
the Massachusetts Division of Insurance with an actuarial certification of the
prepaid expense computation on an annual basis.
In addition, during 1998, the Company received permission from the
Commonwealth of Massachusetts Division of Insurance to record its Asset
Valuation Reserve in excess of the prescribed maximum reserve level by $111.3
million. There are no other material permitted practices. Statutory net income
and surplus include the accounts of John Hancock Mutual Life Insurance Company
and its variable life insurance subsidiary, John Hancock Variable Life
Insurance Company, including its wholly-owned subsidiary, Investors Partners
Life Insurance Company, and Investors Guaranty Life Insurance Company.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Statutory net income........................... $ 627.3 $ 414.0 $ 313.8
Statutory surplus.............................. 3,388.7 3,157.8 2,856.1
</TABLE>
Massachusetts has enacted laws governing the payment of dividends by
insurers. Massachusetts statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its
statutory policyholders' surplus as of the preceding December 31 or (ii) the
individual company's statutory net gain from operations for the preceding
calendar year, if such insurer is a life company.
F-30
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Policyholders' Equity
The components of accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
Foreign Accumulated
Currency Minimum Other
Net Unrealized Translation Pension Comprehensive
Gains (Losses) Adjustment Liability Income
-------------- ----------- --------- -------------
(in millions)
<S> <C> <C> <C> <C>
Balance at January 1,
1996...................... $ 468.1 $(10.0) $(22.1) $ 436.0
------- ------ ------ -------
Gross unrealized gains
(losses) (net of deferred
income tax expense of $4.5
million).................. (2.8) -- -- (2.8)
Less reclassification
adjustment for (gains)
losses, realized in net
income (net of tax expense
of $45.0 million)......... (83.5) -- -- (83.5)
Participating group annuity
contracts (net of deferred
income tax benefit of $6.6
million).................. (12.1) -- -- (12.1)
Adjustment to deferred
policy acquisition costs
and present value of
future profits (net of
deferred income tax
expense of $10.6
million).................. 19.7 -- -- 19.7
------- ------ ------ -------
Net unrealized gains
(losses).................. (78.7) -- -- (78.7)
Foreign currency
translation adjustment.... -- (5.7) -- (5.7)
Minimum pension liability
(net of deferred income
tax expense of $0.6
million).................. -- -- 0.8 0.8
------- ------ ------ -------
Balance at December 31,
1996...................... $ 389.4 $(15.7) $(21.3) $ 352.4
======= ====== ====== =======
Gross unrealized gains
(losses) (net of deferred
income tax expense of
$145.8 million)........... 274.5 -- -- 274.5
Less reclassification
adjustment for (gains)
losses, realized in net
income (net of tax expense
of $37.9 million)......... (70.5) -- -- (70.5)
Participating group annuity
contracts (net of deferred
income tax benefit of
$22.5 million)............ (41.9) -- -- (41.9)
Adjustment to deferred
policy acquisition costs
and present value of
future profits (net of
deferred income tax
benefit of $16.7
million).................. (31.1) -- -- (31.1)
------- ------ ------ -------
Net unrealized gains
(losses).................. 131.0 -- -- 131.0
Foreign currency
translation adjustment.... -- (28.4) -- (28.4)
Minimum pension liability
(net of deferred income
tax benefit of $4.4
million).................. -- -- (8.2) (8.2)
------- ------ ------ -------
Balance at December 31,
1997...................... 520.4 (44.1) (29.5) 446.8
------- ------ ------ -------
Gross unrealized gains
(losses) (net of deferred
income tax benefit of
$56.7 million)............ (121.3) -- -- (121.3)
Less reclassification
adjustment for (gains)
losses, realized in net
income (net of tax expense
of $61.4 million)......... (113.9) -- -- (113.9)
Participating group annuity
contracts (net of deferred
income tax expense of
$31.1 million)............ 57.7 -- -- 57.7
Adjustment to deferred
policy acquisition costs
and present value of
future profits (net of
deferred income tax
expense of $15.5
million).................. 28.9 -- -- 28.9
------- ------ ------ -------
Net unrealized gains
(losses).................. (148.6) -- -- (148.6)
Foreign currency
translation adjustment.... -- (6.0) -- (6.0)
Minimum pension liability
(net of deferred income
tax benefit of $6.2
million).................. -- -- (8.8) (8.8)
------- ------ ------ -------
Balance at December 31,
1998...................... $ 371.8 $(50.1) $(38.3) $ 283.4
======= ====== ====== =======
</TABLE>
F-31
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Policyholders' Equity--(Continued)
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of policyholders' equity are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(in millions)
<S> <C> <C> <C>
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................. $ 730.7 $ 885.6 $ 629.1
Equity investments........................... 239.0 359.7 267.5
Derivatives and other........................ (111.5) (33.8) 3.0
------- -------- -------
Total.......................................... 858.2 1,211.5 899.6
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts........ (138.7) (227.5) (163.1)
Deferred policy acquisition cost and present
value of future profits..................... (143.5) (187.9) (140.1)
Deferred federal income taxes................ (204.2) (275.7) (207.0)
------- -------- -------
Total.......................................... (486.4) (691.1) (510.2)
------- -------- -------
Net unrealized investment gains................ $ 371.8 $ 520.4 $ 389.4
======= ======== =======
</TABLE>
Note 12--Segment Information
The Company offers financial products and services in two major businesses:
(i) its retail business, which offers protection and asset gathering products
and services primarily to retail consumers; and (ii) the institutional
business, which offers guaranteed and structured financial products and
investment management products and services primarily to institutional
customers. In addition, there is a Corporate and Other segment. The Company's
reportable segments are strategic business units offering different products
and services. The reportable segments are managed separately, as they focus on
different products, markets or distribution channels.
In the Retail-Protection segment, the Company offers a variety of individual
life insurance and individual and group long-term care insurance products,
including participating whole life, term life, universal life, variable life,
and retail and group long-term care insurance. Products are distributed
through multiple distribution channels, including insurance agents and brokers
and alternative distribution channels that include banks, financial planners,
direct marketing and the Internet.
In the Retail-Asset Gathering segment, the Company offers individual
annuities and mutual fund products and services. Individual annuities consist
of fixed deferred annuities, fixed immediate annuities, single premium
immediate annuities, and variable annuities. Mutual fund products and services
primarily consist of open-end mutual funds, closed-end funds, and 401(k)
services. This segment distributes its products through distribution channels
including insurance agents and brokers affiliated with the Company, securities
brokerage firms, financial planners, and banks.
In the Institutional-Guaranteed and Structured Financial Products (G&SFP)
segment, the Company offers a variety of retirement products to qualified
defined benefit plans, defined contribution plans and non-qualified buyers.
The Company's products include guaranteed investment contracts, funding
agreements, single premium annuities, and general account participating
annuities and fund type products. These contracts provide non-guaranteed,
partially guaranteed, and fully guaranteed investment options through general
and separate account products. The segment distributes its products through a
combination of dedicated regional representatives, pension consultants and
investment professionals.
F-32
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Segment Information--(Continued)
The Institutional-Investment Management segment offers a wide range of
investment management products and services to institutional investors
covering a variety of private and publicly-traded asset classes including
fixed income, equity, mortgage loans, and real estate. The Investment
Management segment distributes its products through a combination of dedicated
sales and marketing professionals, independent marketing specialists, and
investment professionals.
The Corporate and Other segment primarily consists of the Company's
international insurance operations, certain corporate operations, and
businesses that are either disposed of or in run-off. Corporate operations
primarily include certain financing activities, income on capital not
specifically allocated to the reporting segments and certain non-recurring
expenses not allocated to the segments. The disposed businesses primarily
consist of group health insurance and related group life insurance, property
and casualty insurance, and selected broker/dealer operations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Allocations of net investment
income are based on the amount of assets allocated to each segment. Other
costs and operating expenses are allocated to each segment based on a review
of the nature of such costs, cost allocations utilizing time studies, and
other relevant allocation methodologies.
Management of the Company evaluates performance and bases incentives on
after-tax operating income which excludes the effect of net realized
investment gains and losses and unusual or non-recurring events and
transactions. Segment after-tax operating income is determined by adjusting
GAAP net income for net realized investment gains and losses, including gains
and losses on disposals of businesses, extraordinary items, and certain other
items which management believes are not indicative of overall operating
trends. While these items may be significant components in understanding and
assessing the Company's financial performance, management believes that the
presentation of after-tax operating income enhances its understanding of the
Company's results of operations by highlighting net income attributable to the
normal, recurring operations of the business.
Amounts reported as segment adjustments in the tables below primarily relate
to: (i) benefits to policyholders and expenses incurred and recorded during
the fourth quarter relating to the settlement of a class action lawsuit
against the Company involving certain individual life insurance policies sold
from 1979 through 1996; (ii) certain realized investment gains (losses), net
of related amortization adjustment for deferred policy acquisition costs;
(iii) the surplus tax on mutual life insurance companies which as a stock
company will no longer be applicable to the Company; and (iv) benefits
obtained in 1997 in connection with a pension participating group annuity
contract modification.
F-33
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Segment Information--(Continued)
The following table summarizes selected financial information by segment for
the year ended or as of December 31 and reconciles segment revenues and
segment after-tax operating income to amounts reported in the consolidated
statements of income (in millions):
<TABLE>
<CAPTION>
Retail-- Institutional--
Retail-- Asset Institutional- Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------- --------- -------------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues:
Segment revenues...... $ 2,759.2 $ 1,015.3 $ 1,731.2 $ 143.9 $ 1,103.9 $ 6,753.5
Realized investment
gains, net........... 75.6 18.3 30.7 .2 23.7 148.5
--------- --------- --------- -------- --------- ---------
Revenues.............. $ 2,834.8 $ 1,033.6 $ 1,761.9 $ 144.1 $ 1,127.6 $ 6,902.0
========= ========= ========= ======== ========= =========
Net investment
income............... $ 1,063.9 $ 378.0 $ 1,576.3 $ 24.1 $ 288.4 $ 3,330.7
Net income:
Segment after-tax
operating income..... $ 172.3 $ 111.1 $ 145.7 $ 15.4 $ 56.3 $ 500.8
Class action lawsuit.. -- -- -- -- (150.0) (150.0)
Realized investment
gains, net........... 49.2 12.0 17.2 .1 15.4 93.9
Surplus tax........... 11.7 .3 2.0 -- 1.5 15.5
Extraordinary item.... ( 7.9) (1.8) (1.5) -- ( .5) ( 11.7)
--------- --------- --------- -------- --------- ---------
Net income............ $ 225.3 $ 121.6 $ 163.4 $ 15.5 $ (77.3) $ 448.5
========= ========= ========= ======== ========= =========
Supplemental
information:
Inter-segment
revenues............. $ -- $ -- $ -- $ 34.3 $ (34.3) $ --
Equity in net income
of investees
accounted for by the
equity method........ 54.9 -- 12.7 .9 1.5 70.0
Amortization of
deferred policy
acquisition costs.... 153.9 46.8 3.7 -- 45.3 249.7
Interest expense...... .3 8.5 -- 7.0 60.9 76.7
Income tax expense.... 88.6 62.2 68.4 10.7 (46.0) 183.9
Segment assets........ 25,703.7 12,715.7 29,315.2 3,439.6 5,792.5 76,966.7
</TABLE>
F-34
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Segment Information--(Continued)
<TABLE>
<CAPTION>
Retail- Institutional-
Retail- Asset Institutional- Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------- --------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997
Revenues:
Segment revenues...... $ 2,631.8 $ 904.9 $ 1,814.4 $ 118.5 $ 1,315.1 $ 6,784.7
Realized investment
gains, net........... 82.3 6.8 7.6 .1 64.8 161.6
--------- -------- --------- -------- --------- ---------
Revenues.............. $ 2,714.1 $ 911.7 $ 1,822.0 $ 118.6 $ 1,379.9 $ 6,946.3
========= ======== ========= ======== ========= =========
Net investment
income............... $ 983.4 $ 353.3 $ 1,545.2 $ 4.0 $ 304.8 $ 3,190.7
Net income:
Segment after-tax
operating income..... $ 158.1 $ 93.3 $ 138.5 $ 17.2 $ 39.4 $ 446.5
Class action lawsuit.. -- -- -- -- (112.5) (112.5)
Realized investment
gains, net........... 53.5 4.4 4.8 .1 42.1 104.9
Surplus tax........... 16.9 .3 5.5 -- 12.6 35.3
Benefit from pension
participating
contract
modification......... -- -- 9.1 -- -- 9.1
--------- -------- --------- -------- --------- ---------
Net income............ $ 228.5 $ 98.0 $ 157.9 $ 17.3 $ (18.4) $ 483.3
========= ======== ========= ======== ========= =========
Supplemental
information:
Inter-segment
revenues............. $ -- $ -- $ -- $ 31.0 $ (31.0) $ --
Equity in net income
of investees
accounted for by the
equity method........ 42.3 -- 8.8 .8 2.7 54.6
Amortization of
deferred policy
acquisition costs.... 224.7 38.9 5.2 -- 43.2 312.0
Interest expense...... .3 9.2 -- 1.3 66.1 76.9
Income tax expense.... 90.2 43.9 55.2 13.0 (95.9) 106.4
Segment assets........ 23,173.9 11,070.3 28,110.0 3,286.8 5,776.5 71,417.5
1996
Revenues:
Segment revenues...... $ 2,517.6 $ 720.1 $ 2,035.7 $ 113.4 $ 2,207.3 $ 7,594.1
Realized investment
gains, net........... 50.5 2.2 15.5 .1 42.4 110.7
--------- -------- --------- -------- --------- ---------
Revenues.............. $ 2,568.1 $ 722.3 $ 2,051.2 $ 113.5 $ 2,249.7 $ 7,704.8
========= ======== ========= ======== ========= =========
Net investment
income............... $ 947.1 $ 320.0 $ 1,608.5 $ 3.4 $ 344.1 $ 3,223.1
Net income:
Segment after-tax
operating income..... $ 197.3 $ 55.7 $ 155.4 $ 21.6 $ 20.2 $ 450.2
Class action lawsuit.. -- -- -- -- (90.0) (90.0)
Realized investment
gains, net........... 32.8 1.4 9.9 .1 36.4 80.6
Surplus tax........... (5.7) (1.0) (2.3) -- (11.3) (20.3)
--------- -------- --------- -------- --------- ---------
Net income............ $ 224.4 $ 56.1 $ 163.0 $ 21.7 $ (44.7) $ 420.5
========= ======== ========= ======== ========= =========
Supplemental
information:
Inter-segment
revenues............. $ -- $ -- $ -- $ 21.1 $ (21.1) $ --
Equity in net income
of investees
accounted for by the
equity method........ 40.5 -- 8.6 .3 1.8 51.2
Amortization of
deferred policy
acquisition costs.... 160.7 33.6 5.7 -- 30.9 230.9
Interest expense...... .1 12.9 -- .4 73.4 86.8
Income tax expense.... 121.0 33.4 87.5 15.6 (10.0) 247.5
Segment assets........ 21,031.8 9,272.2 28,061.2 2,465.2 5,672.3 66,502.7
</TABLE>
F-35
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Segment Information--(Continued)
The Company operates primarily in the United States, Canada and the Pacific
Rim (Malaysia, Singapore, Thailand, Indonesia, and the Philippines). The
following table summarizes selected financial information by geographic
location for the year ended or at December 31:
<TABLE>
<CAPTION>
Income Before
Income Taxes
and
Long-Lived Extraordinary
Location Revenues Assets Assets Item
- -------- -------- ---------- --------- -------------
(in millions)
<S> <C> <C> <C> <C>
1998
United States....................... $6,161.4 $442.5 $71,744.6 $611.9
Canada.............................. 512.0 24.9 4,941.6 30.2
Foreign--other...................... 228.6 2.1 280.5 2.0
-------- ------ --------- ------
$6,902.0 $469.5 $76,966.7 $644.1
======== ====== ========= ======
1997
United States....................... $6,207.5 $445.8 $66,589.4 $566.8
Canada.............................. 535.0 29.1 4,588.5 31.5
Foreign--other...................... 203.8 2.0 239.6 (8.6)
-------- ------ --------- ------
$6,946.3 $476.9 $71,417.5 $589.7
======== ====== ========= ======
1996
United States....................... $6,990.9 $460.2 $62,184.8 $652.7
Canada.............................. 528.2 31.1 4,077.9 19.0
Foreign--other...................... 185.7 2.3 240.0 (3.7)
-------- ------ --------- ------
$7,704.8 $493.6 $66,502.7 $668.0
======== ====== ========= ======
</TABLE>
The Company has no reportable major customers and revenues are attributed to
countries based on the location of customers.
Note 13--Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the fair value of the Company's financial instruments. The aggregate
fair value amounts presented herein do not represent the underlying value of
the Company and, accordingly, care should be exercised in drawing conclusions
about the Company's business or financial condition based on the fair value
information presented herein.
The following methods and assumptions were used by the Company to determine
the fair values of financial instruments:
Fair values for publicly traded fixed maturities (including redeemable
preferred stocks) are obtained from an independent pricing service. Fair
values for private placement securities and fixed maturities not provided
by the independent pricing service are estimated by the Company by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments.
The fair value for equity securities is based on quoted market prices.
The fair value for mortgage loans on real estate is estimated using
discounted cash flow analyses using interest rates adjusted to reflect the
credit characteristics of the loans. Mortgage loans with similar
characteristics and credit risks are aggregated into qualitative categories
for purposes of the fair value calculations. Fair values for impaired
mortgage loans are measured based either on the present value of expected
future cash flows discounted at the loan's effective interest rate or the
fair value of the underlying collateral for loans that are collateral
dependent.
F-36
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Fair Value of Financial Instruments--(Continued)
The carrying amount in the balance sheet for policy loans, short-term
investments and cash and cash equivalents approximates their respective
fair values.
The fair value of the Company's long-term debt is estimated using
discounted cash flows based on the Company's incremental borrowing rates
for similar types of borrowing arrangements. Carrying amounts for
commercial paper and short-term borrowings approximate fair value.
Fair values for the Company's guaranteed investment contracts are
estimated using discounted cash flow calculations based on interest rates
currently being offered for similar contracts with maturities consistent
with those remaining for the contracts being valued. The fair value for
fixed-rate deferred annuities is the cash surrender value, which represents
the account value less applicable surrender charges. Fair values for
immediate annuities without life contingencies and supplementary contracts
without life contingencies are estimated based on discounted cash flow
calculations using current market rates.
The Company's derivatives include futures contracts, interest rate swap,
cap and floor agreements, swaptions, currency rate swap agreements and
equity collar agreements. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the financial futures contracts and brokerage quotes that utilize
pricing models or formulas using current assumptions for all swaps and
other agreements.
The fair value for commitments approximates the amount of the initial
commitment.
The following table presents the carrying amounts and fair values of the
Company's financial instruments:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1998 1997
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
(in millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturities:
Held-to-maturity............... $12,978.2 $13,921.7 $12,712.4 $13,566.1
Available-for-sale............. 15,222.2 15,222.2 14,462.5 14,462.5
Equity securities:
Available-for-sale............. 995.8 995.8 881.5 881.5
Trading securities............. 67.9 67.9 72.1 72.1
Mortgage loans on real estate.... 9,616.1 10,204.4 9,296.3 9,873.0
Policy loans..................... 1,879.7 1,879.7 1,855.6 1,855.6
Short-term Investments........... 279.8 279.8 294.1 294.1
Cash and cash equivalents........ 1,876.4 1,876.4 1,036.6 1,036.6
Liabilities:
Debt............................. 1,030.5 1,082.2 1,191.2 1,212.7
Guaranteed investment contracts.. 12,796.2 12,729.0 12,546.2 12,605.0
Fixed rate deferred and immediate
annuities....................... 4,501.7 4,412.2 4,441.5 4,465.4
Supplementary contracts without
life contingencies.............. 43.3 44.7 59.8 63.1
Derivatives assets/(liabilities)
relating to:
Futures contracts, net........... (4.0) (4.0) 1.7 1.7
Interest rate swap agreements.... (127.4) (175.3) (60.2) (49.0)
Interest rate cap agreements..... 3.6 3.6 2.1 2.1
Interest rate floor agreements... 0.7 0.7 0.4 0.4
Interest rate swaption
agreements...................... (1.9) (1.9) (1.7) (1.7)
Currency rate swap agreements.... (19.5) 2.3 (18.2) (18.2)
Equity collar agreements......... 28.6 28.6 (14.1) (14.1)
Commitments........................ -- (1,202.5) -- (1,602.5)
</TABLE>
F-37
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
1998 and 1997:
<TABLE>
<CAPTION>
1998
------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in millions)
<S> <C> <C> <C> <C>
Premiums........................... $ 559.6 $ 525.1 $ 563.0 $ 550.2
Net investment income.............. 801.7 831.3 808.4 889.3
Realized investment gains (losses),
net............................... 27.1 86.3 (48.5) 33.0
Investment management revenues,
commissions and other fees........ 156.5 170.7 160.7 171.8
Total revenues..................... 1,686.8 1,765.2 1,633.8 1,816.2
Benefits and expenses.............. 1,486.4 1,476.6 1,485.6 1,809.3
Income before income taxes and
extraordinary item................ 200.4 288.6 148.2 6.9
Extraordinary item--demutualization
expenses, net..................... -- 1.7 3.1 6.9
Net income......................... 143.1 192.2 108.3 4.9
<CAPTION>
1997
------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in millions)
<S> <C> <C> <C> <C>
Premiums........................... $ 676.6 $ 610.4 $ 566.3 $ 620.3
Net investment income.............. 780.2 798.4 819.1 793.0
Realized investment gains (losses),
net............................... 43.8 8.9 13.5 49.6
Investment management revenues,
commissions and other fees........ 129.9 126.0 145.8 153.0
Total revenues..................... 1,833.8 1,672.1 1,682.5 1,757.9
Benefits and expenses.............. 1,630.7 1,492.3 1,498.1 1,735.5
Income before income taxes and
extraordinary item................ 203.1 179.8 184.4 22.4
Net income......................... 145.1 125.0 132.4 80.8
</TABLE>
F-38
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET
September 30, 1999
(in millions)
<TABLE>
<S> <C>
Assets
Investments
Fixed maturities:
Held-to-maturity--at amortized cost (fair value: $13,589.7)........ $13,523.8
Available-for-sale--at fair value (cost: $17,024.6)................ 17,086.6
Trading securities--at fair value (cost $484.4).................... 477.1
Equity securities:
Available-for-sale--at fair value (cost: $894.9)................... 1,043.3
Trading securities--at fair value (cost: $55.3).................... 70.9
Mortgage loans on real estate........................................ 10,233.6
Real estate.......................................................... 572.8
Policy loans......................................................... 1,905.7
Short-term investments............................................... 249.1
Other invested assets................................................ 1,303.5
---------
Total Investments................................................ 46,466.4
Cash and cash equivalents............................................ 1,065.9
Accrued investment income............................................ 698.5
Premiums and accounts receivable..................................... 257.8
Deferred policy acquisition costs.................................... 3,000.3
Reinsurance recoverable.............................................. 1,368.5
Other assets......................................................... 1,300.2
Separate accounts assets............................................. 26,048.5
---------
Total Assets..................................................... $80,206.1
=========
Liabilities and Policyholders' Equity
Liabilities
Future policy benefits............................................... $28,201.7
Policyholders' funds................................................. 16,194.9
Unearned revenue..................................................... 384.5
Unpaid claims and claim expense reserves............................. 458.6
Dividends payable to policyholders................................... 423.2
Short-term debt...................................................... 354.6
Long-term debt....................................................... 536.8
Income taxes......................................................... 294.8
Other liabilities.................................................... 2,148.2
Separate accounts liabilities........................................ 26,048.5
---------
Total Liabilities................................................ 75,045.8
Commitments and contingencies--Note 6
Policyholders' equity--Note 8
Surplus.............................................................. 5,106.2
Accumulated other comprehensive income............................... 54.1
---------
Total Policyholders' Equity...................................... 5,160.3
---------
Total Liabilities and Policyholders' Equity...................... $80,206.1
=========
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-39
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months
Ended September 30
--------------------
1999 1998
--------- ---------
(in millions)
<S> <C> <C>
Revenues
Premiums.............................................. $ 2,033.3 $ 1,647.7
Universal life and investment-type product charges.... 509.4 441.3
Net investment income................................. 2,581.0 2,441.5
Realized investment gains, net........................ 177.4 64.9
Investment management revenues, commissions and other
fees................................................. 504.6 487.9
Other revenue......................................... 12.4 2.6
--------- ---------
Total revenues...................................... 5,818.1 5,085.9
Benefits and expenses
Benefits to policyholders............................. 3,600.4 2,944.1
Other operating costs and expenses.................... 991.7 955.8
Amortization of deferred policy acquisition costs..... 150.4 200.4
Dividends to policyholders............................ 361.0 348.4
--------- ---------
Total benefits and expenses......................... 5,103.5 4,448.7
--------- ---------
Income before income taxes, extraordinary item and
cumulative effect
of accounting change................................... 714.6 637.2
Income taxes............................................ 239.2 188.8
--------- ---------
Income before extraordinary item and cumulative effect
of accounting change................................... 475.4 448.4
Extraordinary item--demutualization expenses, net of
tax.................................................... (56.6) (4.8)
Cumulative effect of accounting change--Note 4.......... (9.7)
--------- ---------
Net income.............................................. $ 409.1 $ 443.6
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-40
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN POLICYHOLDERS' EQUITY
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Surplus Income Total
--------- ------------- ---------
(in millions)
<S> <C> <C> <C>
Balance at January 1, 1999................... $ 4,697.1 $ 283.4 $ 4,980.5
---------
Comprehensive income:
Net income.................................. 409.1 409.1
Other comprehensive income, net of tax:
Net unrealized losses...................... (245.2) (245.2)
Foreign currency translation adjustment.... 15.9 15.9
---------
Comprehensive income--Note 8................. 179.8
--------- ------- ---------
Balance at September 30, 1999................ $ 5,106.2 $ 54.1 $ 5,160.3
========= ======= =========
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-41
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
--------- ----------
(in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 409.1 $ 443.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount--fixed maturities.......... (45.2) (47.0)
Realized investment gains, net...................... (177.4) (64.9)
Change in deferred policy acquisition costs......... (187.6) (146.5)
Depreciation and amortization....................... 55.3 76.3
Net cash flows from trading securities.............. (487.4) 14.3
Increase in accrued investment income............... (162.0) (126.5)
Increase in premiums and accounts receivable........ (30.3) (56.2)
Decrease in other assets and other liabilities,
net................................................ 120.1 257.9
Increase in policy liabilities and accruals, net.... 1,223.2 275.1
Loss on sales of subsidiaries....................... 21.3 --
Increase in income taxes............................ 88.7 124.2
--------- ----------
Net cash provided by operating activities......... 827.8 750.3
Cash flows from investing activities:
Sales of:
Fixed maturities held-to-maturity..................... 57.6 5.2
Fixed maturities available-for-sale................... 8,094.5 14,295.2
Equity securities available-for-sale.................. 127.8 161.1
Real estate........................................... 1,191.8 110.1
Short-term investments and other invested assets...... 763.5 320.9
Maturities, prepayments and scheduled redemptions of:
Fixed maturities held-to-maturity..................... 1,339.8 1,669.9
Fixed maturities available-for-sale................... 1,486.3 1,561.2
Short-term investments and other invested assets...... 232.1 63.5
Mortgage loans on real estate......................... 966.3 1,299.8
Purchases of:
Fixed maturities held-to-maturity..................... (1,935.3) (1,603.5)
Fixed maturities available-for-sale................... (12,124.2) (17,761.4)
Equity securities available-for-sale.................. (243.8) (271.9)
Real estate........................................... (160.1) (84.5)
Short-term investments and other invested assets...... (685.7) (351.9)
Mortgage loans on real estate issued.................. (1,581.7) (1,112.6)
Net cash paid for sale of subsidiaries................ (206.5) --
Other, net............................................ (32.4) 9.9
--------- ----------
Net cash used in investing activities............. (2,710.0) (1,689.0)
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-42
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
--------------------
1999 1998
-------- ----------
(in millions)
<S> <C> <C>
Cash flows from financing activities:
Universal life and investment-type contract deposits... $6,510.5 $ 5,642.8
Universal life and investment-type contract maturities
and withdrawals....................................... (5,298.0) (4,930.2)
Issuance of long-term debt............................. 6.0 71.3
Repayment of long-term debt............................ (12.0) (247.3)
Net (decrease) increase in commercial paper............ (134.8) 433.1
-------- ----------
Net cash provided by financing activities............ 1,071.7 969.7
-------- ----------
Net (decrease) increase in cash and cash
equivalents......................................... (810.5) 31.0
Cash and cash equivalents at beginning of period......... 1,876.4 1,036.6
-------- ----------
Cash and cash equivalents at end of period........... $1,065.9 $ 1,067.6
======== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-43
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization and Description of Business
John Hancock Mutual Life Insurance Company (John Hancock) and its
subsidiaries (collectively, the Company) is a diversified financial services
organization that provides a broad range of insurance and investment products
and investment management and advisory services. John Hancock is presently
organized as a mutual life insurance company but expects to convert to a stock
life insurance company pursuant to a Plan of Reorganization.
Note 2--Basis of Presentation
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine months
ended September 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. The accompanying
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and related notes for the year ended
December 31, 1998.
Note 3--Reorganization
On November 9, 1998, John Hancock Mutual Life Insurance Company submitted to
the staff of the Massachusetts Division of Insurance (the Division) a draft
Plan of Reorganization (the Plan) whereby John Hancock would convert, pursuant
to Massachusetts insurance law, from a Massachusetts mutual life insurance
company to a Massachusetts stock life insurance company and become a wholly-
owned subsidiary of John Hancock Financial Services, Inc. A Plan of
Reorganization was adopted by the Company's Board of Directors on August 31,
1999.
Under the Plan, the eligible policyholders of John Hancock will receive
shares of Common Stock of John Hancock Financial Services, policy credits or
cash in exchange for their policyholders' membership interest in John Hancock.
Under the Plan, John Hancock will establish and operate a closed block of
participating business for the benefit of the policies included therein (the
Closed Block). Such business (the Closed Block Business) will contain certain
classes of individual or joint traditional whole life insurance participating
policies and individual term life insurance policies which are in force on the
effective date. The Closed Block will continue in effect until no more
policies included therein are in force or until the Commissioner consents to
the termination of the Closed Block.
John Hancock will allocate to the Closed Block an amount of assets expected
to produce cash flows which, together with anticipated revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payments of claims, certain expenses and
taxes, and for continuation of 1999 dividend scales if experience underlying
such scales continues. Future changes in actual reinvestment rates over the
long term from assumed reinvestment rates, similar to changes in other
assumptions made in funding the Closed Block, may cause dividend scales to
change.
To the extent that over time cash flows from the assets allocated to the
Closed Block and other experience related to the Closed Block Business are, in
the aggregate, more favorable than assumed in establishing the Closed Block,
total dividends paid to Closed Block policyholders in future years will be
greater than the total dividends that would have been paid to such
policyholders if the dividend scales payable in 1999 had been continued.
Conversely, to the extent that over time such cash flows and other experience
are, in the aggregate,
F-44
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Reorganization--(continued)
less favorable than assumed in setting up the Closed Block, total dividends
paid to Closed Block policyholders in future years will be less than the total
dividends that would have been paid to such policyholders if the dividend
scales payable in 1999 had been continued. In addition, if the assets
allocated to the Closed Block, the cash flows therefrom and the revenues from
the Closed Block Business prove to be insufficient to pay the benefits
guaranteed under the policies and contracts included in the Closed Block, John
Hancock Life Insurance Company will be required to make such payments from its
general funds and will reflect the charge to earnings at the time it is
determined that any such funding is required. Since the Closed Block will be
funded to provide for payment of guaranteed benefits on such policies and
contracts, and in addition, for continuation of dividends paid under 1999
dividend scales (assuming the experience underlying such scales continues), it
will not be necessary to use general funds to pay guaranteed benefits unless
the Closed Block Business experiences substantial adverse deviations in
investment, mortality, persistency or other experience factors.
Note 4--Cumulative Effect of Change in Accounting Principle
On January 1, 1999 the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
that start-up costs capitalized prior to January 1, 1999 be written-off and
any future start-up costs be expensed as incurred. The adoption of SOP 98-5
resulted in a charge to operations of $9.7 million (net of taxes) and was
accounted for as a cumulative effect of a change in accounting principle.
Note 5--Recent Accounting Pronouncement
The Financial Accounting Standards Board (FASB) deferred the effective date
of Statement of Financial Accounting Standards (SFAS) No. 133 until 2001. The
Company plans to adopt SFAS No. 133 effective January 1, 2001 and is currently
evaluating the effect that the implementation of SFAS No. 133 will have on its
results of operations and financial position. The impact is not known at this
time.
Note 6--Commitments and Contingencies
In the normal course of its business operations, the Company is involved
with litigation from time to time with claimants, beneficiaries and others,
and a number of litigation matters were pending as of September 30, 1999. It
is the opinion of management, after consultation with counsel, that the
ultimate liability with respect to these claims, if any, will not materially
affect the financial position or results of operations of the Company.
During 1997, the Company entered into a court approved settlement relating
to a class action lawsuit involving certain individual life insurance policies
sold from 1979 through 1996. In entering into the settlement, the Company
specifically denied any wrongdoing. The reserve held in connection with the
settlement to provide for relief to class members and for legal and
administrative costs associated with the settlement amounted to $522.5 million
at September 30, 1999. Costs incurred related to the settlement were $140.2
million and $0 million for the nine months ended September 30, 1999 and 1998,
respectively. The estimated reserve is based on a number of factors, including
the estimated number of claims, the expected type of relief to be sought by
class members (general relief or alternative dispute resolution), the
estimated cost per claim and the estimated costs to administer the claims.
During 1996, management determined that it was probable that a settlement
would occur and that a minimum loss amount could be reasonably estimated.
Accordingly, the Company recorded its best estimate based on the information
available at that time. The terms of the settlement agreement were negotiated
throughout 1997 and approved by the court on December 31, 1997. In accordance
with the terms of the settlement agreement, the Company contacted class
members during 1998 to determine the actual type of relief to be sought by
class members. The majority of the responses from class members were received
by the fourth quarter of 1998. The
F-45
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Commitments and Contingencies--(continued)
type of relief sought by class members differed from the Company's previous
estimates, primarily due to additional outreach activities by regulatory
authorities during 1998 encouraging class members to consider alternative
dispute resolution relief. In 1999, the Company updated its estimate of the
cost of claims subject to alternative dispute resolution relief and revised
its reserve estimate accordingly.
Given the uncertainties associated with estimating the reserve, it is
reasonably possible that the final cost of the settlement could differ
materially from the amounts presently provided for by the Company. The Company
will continue to update its estimate of the final cost of the settlement as
the claims are processed and more specific information is developed,
particularly as the actual cost of the claims subject to alternative dispute
resolution becomes available. However, based on information available at this
time, and the uncertainties associated with the final claim processing and
alternative dispute resolution, the range of any additional costs related to
the settlement cannot be reasonably estimated.
Note 7--Segment Information
The following tables summarize selected financial information by segment as
of or for the nine months ended September 30, 1999 and 1998, and reconcile
segment revenues and segment after-tax operating income to amounts reported in
the unaudited interim condensed consolidated statements of income. Amounts
reported as segment adjustments in the tables below primarily relate to: (i)
certain realized investment gains (losses), net of related amortization
adjustment for deferred policy acquisition costs; (ii) benefits to
policyholders and expenses incurred relating to the settlement of a class
action lawsuit against the Company involving certain individual life insurance
policies sold from 1979 through 1996; (iii) restructuring costs related to our
distribution systems and mutual fund operations; (iv) the surplus tax on
mutual life insurance companies which as a stock company will no longer be
applicable to the Company; and (v) extraordinary item and cumulative effect of
accounting change.
<TABLE>
<CAPTION>
Retail- Institutional-
Retail- Asset Institutional- Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------- --------- -------------- -------------- --------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
As of or for the nine
months ended
September 30, 1999:
Revenues:
Segment revenues........ $2,134.0 $788.5 $1,750.2 $141.7 $808.2 $5,622.6
Realized investment
gains (losses), net.... 109.2 5.6 88.1 0.2 (7.6) 195.5
-------- ------ -------- ------ ------ --------
Revenues................ $2,243.2 $794.1 $1,838.3 $141.9 $800.6 $5,818.1
======== ====== ======== ====== ====== ========
Net investment income... $ 802.7 $283.4 $1,272.0 $ 33.3 $189.6 $2,581.0
Net income:
Segment after-tax
operating income....... $ 137.3 $ 97.5 $ 165.8 $ 27.6 $ 45.1 $ 473.3
Realized investment
gains (losses), net.... 69.0 3.5 55.7 0.1 (10.3) 118.0
Class action lawsuit.... -- -- -- -- (91.1) (91.1)
Restructuring charges... (3.0) (4.5) -- -- -- (7.5)
Surplus tax............. (7.7) (0.7) (3.8) -- (5.1) (17.3)
Extraordinary item...... (36.7) (7.6) (10.0) -- (2.3) (56.6)
Cumulative effect of
accounting change...... -- (9.6) -- (0.1) -- (9.7)
-------- ------ -------- ------ ------ --------
Net income (loss)....... $ 158.9 $ 78.6 $ 207.7 $ 27.6 $(63.7) $ 409.1
======== ====== ======== ====== ====== ========
</TABLE>
F-46
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Segment Information--(continued)
<TABLE>
<CAPTION>
Retail- Institutional-
Retail- Asset Institutional- Investment Corporate
Protection Gathering G&SFP Management and Other Consolidated
---------- --------- -------------- -------------- --------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
information:
Inter-segment revenues.. $ -- $ -- $ -- $ 40.5 $ (40.5) $ --
Equity in net income of
investees accounted for
by the equity method... 25.4 5.7 7.8 1.8 0.8 41.5
Amortization of deferred
policy acquisition
costs.................. 80.0 47.8 2.1 -- 20.5 150.4
Interest expense........ 0.5 8.5 -- -- 43.3 52.3
Income tax expense...... 100.1 49.4 110.9 18.4 (39.6) 239.2
Segment assets.......... 26,262.0 13,267.1 31,641.4 3,263.4 5,772.2 80,206.1
As of or for the nine
months ended
September 30, 1998:
Revenues:
Segment revenues........ $ 2,033.1 $ 766.1 $ 1,258.8 $ 85.3 $ 828.6 $ 4,971.9
Realized investment
gains, net............. 57.9 14.5 29.3 -- 12.3 114.0
--------- --------- --------- -------- -------- ---------
Revenues................ $ 2,091.0 $ 780.6 $ 1,288.1 $ 85.3 $ 840.9 $ 5,085.9
========= ========= ========= ======== ======== =========
Net investment income... $ 788.9 $ 283.6 $ 1,157.5 $ 13.5 $ 198.0 $ 2,441.5
Net income:
Segment after-tax
operating income....... $ 133.8 $ 87.9 $ 101.8 $ 6.4 $ 31.8 $ 361.7
Realized investment
gains, net............. 37.6 9.4 16.0 -- 12.1 75.1
Surplus tax............. 8.8 0.2 1.5 -- 1.1 11.6
Extraordinary item...... (3.3) (0.7) (0.6) -- (0.2) (4.8)
--------- --------- --------- -------- -------- ---------
Net income.............. $ 176.9 $ 96.8 $ 118.7 $ 6.4 $ 44.8 $ 443.6
========= ========= ========= ======== ======== =========
Supplemental
information:
Inter-segment revenues.. $ -- $ -- $ -- $ 25.6 $ (25.6) $ --
Equity in net income of
investees accounted for
by the equity method... 29.4 -- 6.9 0.5 1.3 38.1
Amortization of deferred
policy acquisition
costs.................. 117.2 44.2 2.8 -- 36.2 200.4
Interest expense........ 0.2 16.7 -- 45.0 61.9
Income tax expense...... 73.9 50.2 31.3 4.0 29.4 188.8
Segment assets.......... 24,559.8 11,579.2 29,085.7 3,457.6 6,019.7 74,702.0
</TABLE>
F-47
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Segment Information--(continued)
The Company operates primarily in the United States, Canada and the Pacific
Rim (Malaysia, Singapore, Thailand, Indonesia, and the Philippines). The
following table summarizes selected financial information by geographic
location:
<TABLE>
<CAPTION>
Income Before Income
Taxes, Extraordinary
Item and Cumulative
Long-Lived Effect of Accounting
Location Revenues Assets Assets Change
- -------- -------- ---------- --------- --------------------
(in millions)
<S> <C> <C> <C> <C>
As of or for the nine
months ended
September 30, 1999:
United States.............. $5,238.6 $435.1 $74,374.3 $685.0
Canada..................... 413.7 24.4 5,487.6 24.9
Foreign--other............. 165.8 2.2 344.2 4.7
-------- ------ --------- ------
$5,818.1 $461.7 $80,206.1 $714.6
======== ====== ========= ======
As of or for the nine
months ended
September 30, 1998:
United States.............. $4,525.2 $431.6 $69,893.8 $610.1
Canada..................... 375.1 25.7 4,545.4 27.8
Foreign--other............. 185.6 1.9 262.8 (0.7)
-------- ------ --------- ------
$5,085.9 $459.2 $74,702.0 $637.2
======== ====== ========= ======
</TABLE>
The Company has no reportable major customers and revenues are attributed to
countries based on the location of customers.
Note 8--Comprehensive Income
Total comprehensive income was $179.8 million and $250.4 million for the
nine month periods ended September 30, 1999 and 1998, respectively.
F-48
<PAGE>
ANNEX A
[LETTERHEAD OF MILLIMAN & ROBERTSON, INC.]
August 31, 1999
The Board of Directors
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, MA 02111
Re: Plan of Reorganization of John Hancock Mutual Life Insurance Company,
dated August 31, 1999
STATEMENT OF ACTUARIAL OPINIONS
Qualifications
I, Godfrey Perrott, am associated with the firm of Milliman & Robertson,
Inc. (M&R) and am a Member of the American Academy of Actuaries, qualified under
the Academy's Qualification Standards to render the opinions set forth herein.
John Hancock Mutual Life Insurance Company's ("JHMLICO") Plan of Reorganization
is carried out under the demutualization statute, Section 19E of Chapter 175 of
the General Laws of the Commonwealth of Massachusetts ("(S)19E"). The opinions
set forth herein are not legal opinions concerning the Plan, but rather reflect
the application of actuarial concepts and standards of practice to the
requirements set forth in (S)19E.
Reliance
In forming the opinion set forth in this memorandum, I have received from
JHMLICO extensive information concerning JHMLICO's past and present practices
and financial results. I, and other M&R staff acting under my direction, met
with JHMLICO personnel and defined the information we required; in all cases, we
were provided with the information we required. We have made no independent
verification of this information, although we have reviewed it where practicable
for general reasonableness and internal consistency. I have relied on this
information, which--except for certain investment information discussed below
- --was provided under the
A-1
<PAGE>
The Board of Directors
August 31, 1999
Page 2
general direction of Senior Vice President and Corporate Actuary, Barry Shemin,
F.S.A., M.A.A.A. My opinions depend on the substantial accuracy of this
information.
Certain information concerning the expected future cash flows arising from
certain assets held by JHMLICO as of December 31, 1998, was provided under the
general direction of Vice President Robert Reitano. I have relied on Mr.
Reitano's confirmation that these cash flows represent, on the average,
JHMLICO's estimates of the most likely cash flows to be derived from these
assets. Certain information concerning the statement value, tax basis, and
expected market value of certain assets held by JHMLICO as of December 31,
1998, was provided under the general direction of Earl Baucom, Richard Brown,
Deborah McAneny, and Gregory Winn (all of whom are officers of JHMLICO). I have
relied on their confirmation that these values are correct, or (in the case of
expected market value) reasonable. My opinions depend on the substantial
accuracy of this information.
Process
In all cases I, and other M&R staff acting under my direction, either
derived the results on which my opinions rest or reviewed derivations carried
out by JHMLICO personnel.
Opinion #1
In my opinion, the plan for allocation of policyholder consideration set
forth in Article VII of the Plan of Reorganization ("the Plan") is based on a
fair and reasonable formula as required by (S)19E.
Discussion
The Policyholder Consideration is allocated on two bases: Variable and
Fixed. The Variable Component is allocated among participating policies in
proportion to actuarial contributions and represents about 80% of the total
consideration. The Fixed component is allocated per policy and represents about
20% of the total consideration.
The distribution described in Article VII of the Plan takes into account
the ratio of any reasonably determined positive total past contributions to
surplus and expected future contributions to surplus for each participating
policy or contract ("actuarial contribution") to the sum of all such positive
actuarial contributions.
MILLIMAN & ROBERTSON, INC.
A-2
<PAGE>
The Board of Directors
August 31, 1999
Page 3
Most of the consideration to be distributed to policyholders is allocated
based on the ratios described above. Under (S)19E, there is no specific guidance
given for the allocation of consideration in a reorganization other than that it
be based on "a fair and reasonable formula." However, the contribution
method, taking into account both past and expected future contributions to
surplus, is recognized in the actuarial literature as an appropriate method. It
is specifically endorsed by the Exposure Draft of the Actuarial Standard of
Practice ("ASOP") "Allocation of Policyholder Consideration in Mutual Life
Insurance Company Demutualizations" dated May 1999. I therefore find that the
use of "actuarial contribution" as the principal basis underlying the allocation
of consideration is fair and reasonable. I further find that the actuarial
contribution method has been implemented in a reasonable manner.
The distribution also takes into account the fact that policyholders have
intangible membership rights that are independent of their actuarial
contributions. Under the Plan, each Eligible Policy is allocated a fixed number
of shares of common stock without regard to the actuarial contribution of that
policy. This element of the allocation is consistent with overall concepts of
equity and therefore is fair and reasonable.
Opinion #2
In my opinion, the arrangement for establishment and operation of the
Closed Block set forth in Article VIII of the Plan allocates assets to the
Closed Block which are reasonably sufficient to enable the Closed Block to
provide for the guaranteed benefits, certain expenses and taxes associated with
Closed Block policies, and to provide for the continuation of the 1999 dividend
scale if the experience underlying that scale continues. In my opinion, the
arrangement also provides for the appropriate adjustment of the dividend scales
if the underlying experience changes from that underlying the 1999 dividend
scale.
Discussion
The above opinion rests in part on a projection that extends over the
future life of all policies assigned to the Closed Block (the majority of these
are individual and joint life insurance policies that are covered by JFMLICO's
1999 dividend scale, plus other such policies that will be issued prior to the
Effective Date). That projection is based on the experience underlying the 1999
dividend scale and on the cash flows expected from assets already allocated to
the Closed Block. The above opinion also rests in part on the adjustments that
will be made shortly after the Effective Date to the assets already allocated to
the Closed Block. The projection and adjustments, as set forth in the Closed
Block Memorandum, indicate that the assets are sufficient to provide for the
continuation of the 1999 dividend scale if the experience is unchanged.
MILLIMAN & ROBERTSON, INC.
A-3
<PAGE>
The Board of Directors
August 31, 1999
Page 4
The criteria set forth in Article VIII for modifying the dividend scales if
the experience changes are such that, if followed, the Closed Block
policyholders will be treated equitably in a manner consistent with the
contribution principle for dividend determination. Although (S)19E sets forth no
requirements that there be a Closed Block, the funding and operation of the
Closed Block as set forth in Article VIII are consistent with actuarial
practice, in particular ASOP 15 "Dividend Determination for Participating
Individual Life Insurance Policies and Annuity Contracts", and ASOP 33
"Actuarial Responsibilities with Respect to Closed Blocks in Mutual Life
Insurance Company Conversions".
Opinion #3
In my opinion the appropriate policies are included in the Closed Block.
Almost all individual policies which are currently receiving dividends, or are
expected to receive dividends, are included in the Closed Block. Term
nonparticipating policies (which are substantially reinsured) are included in
the Closed Block for administrative reasons. Their inclusion should not affect
the participating policies in the Closed Block adversely because the reinsurance
already in place on the nonpar term policies transfers most of the mortality
risk to the reinsurer.
Discussion
The Closed Block includes individual and joint life policies covered by
JHMLICO's 1999 dividend scale, plus other such policies that will be issued
prior to the Effective Date. It also includes individual nonparticipating term
policies. It excludes supplementary contracts. It also excludes small amounts of
variable life insurance which receive a dividend covering only mortality and
expense gains. (These policies were originally issued by John Hancock Variable
Life Insurance Company ("JHVLICO") and were assumed by JHMLICO when JHVLICO
surrendered its license to issue insurance in New York.) These dividends are
small in aggregate amount.
Most individual disability income and individual medical policies, while
technically participating, have not received dividends for years (similar to the
rest of the industry), and there is no expectation that they will receive
dividends in the future. A few individual disability income and individual
medical policies have received dividends. In addition, a small number of
individual retirement annuity policies receive dividends. There are sound
administrative reasons to exclude these policies from the Closed Block. The
aggregate amount of dividends paid on these policies is small.
There are some group policies issued to Hancock sponsored trusts as the
policyholder. These include coverages such as optional term life, accidental
death and dismemberment, and long term care insurance sold through a sponsoring
organization (such as an employer or an
MILLIMAN & ROBERTSON, INC
A-4
<PAGE>
The Board of Directors
August 31, 1999
Page 5
association). Sponsored trust arrangements were also used for annuities sold to
individuals through sponsoring banks. Each of these group policies was
considered for inclusion in the Closed Block since each could be considered
insurance that is individual in substance while group in form. None of these
blocks pay individual dividends, and so it is not appropriate to include them in
the Closed Block.
Thus, the Closed Block encompasses almost all individual and joint policies
that pay dividends, and this is the appropriate content for the Closed Block to
protect the dividend expectations of JHMLICO's policyholders. This is also
consistent with actuarial practice as set forth in ASOP 33.
Very truly yours,
/s/ Godfrey Perrott
Godfrey Perrott, F.S.A., M.A.A.A.
Consulting Actuary
MILLMAN & ROBERTSON, INC.
A-5
<PAGE>
[Alternate cover page for international prospectus]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
102,000,000 Shares
[LOGO OF JOHN HANCOCK APPEARS HERE]
John Hancock Financial Services, Inc.
COMMON STOCK
-----------
This is an initial public offering of 102,000,000 shares of common stock of
John Hancock Financial Services, Inc. The offering is being made in connection
with the reorganization of John Hancock Mutual Life Insurance Company from a
mutual life insurance company to a stock life insurance company in a process
called a demutualization.
In addition to these shares, an estimated 231,200,000 shares of our common
stock will be issued to eligible policyholders of John Hancock Mutual Life
Insurance Company in the reorganization.
-----------
Prior to this offering there has been no public market for our common stock. We
anticipate that the initial public offering price per share will be between
$15.00 and $25.00 per share.
-----------
We will apply to list our common stock on the New York Stock Exchange under the
symbol "JHF."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 13.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total........................................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
John Hancock Financial Services, Inc. has granted the underwriters the right to
purchase up to an additional 15,300,000 shares to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
2000.
-----------
<TABLE>
<S> <C>
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH INTERNATIONAL SALOMON SMITH BARNEY INTERNATIONAL
(Co-Lead Manager) (Co-Lead Manager)
CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE
GOLDMAN SACHS INTERNATIONAL FOX-PITT, KELTON
</TABLE>
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the New York Stock Exchange listing fee and the
NASD filing fee, are estimates:
<TABLE>
<CAPTION>
Description Amount
----------- --------
<S> <C>
Securities and Exchange Commission registration fee............. $567,120
New York Stock Exchange listing fee and expenses................ *
NASD filing fee................................................. 30,500
Blue Sky fees and expenses (including legal fees)............... *
Printing and engraving expenses................................. *
Legal fees and expenses (other than Blue Sky)................... *
Accounting fees and expenses.................................... *
Transfer Agent and Registrar's fee.............................. *
Miscellaneous................................................... *
--------
TOTAL......................................................... $*
========
</TABLE>
- --------
* To be furnished by amendment
Item 14. Indemnification of Directors and Officers.
Our directors and officers may be indemnified against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually
and reasonably incurred by them as provided in the Delaware General
Corporation Law and our Restated Certificate of Incorporation and By-Laws. We,
by a majority vote of our disinterested directors or a committee thereof or,
under certain circumstances, independent counsel appointed by the board of
directors, or our stockholders, must determine that the director or officer
seeking indemnification acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. In addition, the Delaware General
Corporation Law and our Restated Certificate of Incorporation may under
certain circumstances limit the liability of directors and officers to us or
our stockholders.
If the person involved is not a director or officer of John Hancock
Financial Services, Inc., the board of directors may cause John Hancock
Financial Services, Inc. to indemnify, to the same extent allowed for our
directors and officers, such person who was or is a party to a proceeding by
reason of the fact that he or she is or was, or had agreed to become, our
employee or agent, or is or was serving, or had agreed to serve, at our
request as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
We have in force and effect a policy insuring our directors and officers
against losses which they or any of them shall become legally obligated to pay
for by reason of any actual or alleged error or misstatement or misleading
statement or act or omission or neglect or breach of duty by the directors and
officers in the discharge of their duties, individually or collectively, or
any matter claimed against them solely by reason of their being directors or
officers. Such coverage is limited by the specific terms and provisions of the
insurance policy.
Item 15. Recent Sales of Unregistered Securities.
[None.]
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Exhibit Index following the signature pages to this
registration statement.
(b) Financial Statement Schedules.
II-2
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
Schedule I Summary of Investments--Other Than Investments in Related Parties
as of December 31, 1998
Schedule III Supplementary Insurance Information as of December 31, 1998, 1997
and 1996 and for each of the years then ended
Schedule IV Reinsurance as of December 31, 1998, 1997 and 1996 and for each
of the years then ended
</TABLE>
II-3
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1998
(in millions of dollars)
<TABLE>
<CAPTION>
Amount at Which
Shown in the
Consolidated
Type of Investment Cost (2) Value Balance Sheet
------------------------------------------ --------- -------- ---------------
<S> <C> <C> <C>
Fixed maturity securities available-for-
sale
Bonds:
United States Government and government
agencies and authorities................. $ 4,676.7 $4,839.0 $ 4,839.0
States, municipalities and political
subdivisions............................. 69.3 76.3 76.3
Foreign governments....................... 387.2 444.3 444.3
Public utilities.......................... 932.5 970.6 970.6
Convertibles and bonds with warrants
attached................................. 207.4 241.7 241.7
All other corporate bonds................. 7,604.0 8,011.1 8,011.1
Certificates of deposits.................. -- -- --
Redeemable preferred stock................ 614.4 639.2 639.2
--------- -------- ---------
Total fixed maturity securities
available-for-sale..................... 14,491.5 15,222.2 15,222.2
--------- -------- ---------
Equity securities, available-for-sale:
Common stocks:
Public utilities.......................... 9.7 10.8 10.8
Banks, trust and insurance companies...... 28.8 30.6 30.6
Industrial, miscellaneous and all other... 441.3 677.4 677.4
Non-redeemable preferred stock............ 277.0 277.0 277.0
--------- -------- ---------
Total equity securities available-for-
sale................................... 756.8 995.8 995.8
--------- -------- ---------
Fixed maturity securities held-to-
maturity:
Bonds:
United States Government and government
agencies and authorities................. 1,325.8 1,368.5 1,325.8
States, municipalities and political
subdivisions............................. 29.4 32.8 29.4
Foreign governments....................... 6.0 12.5 6.0
Public utilities.......................... 1,133.7 1,186.5 1,133.7
Convertibles and bonds with warrants
attached................................. 6.1 6.0 6.1
All other corporate bonds................. 10,477.2 11,315.4 10,477.2
Certificates of deposits.................. -- -- --
Redeemable preferred stock................ -- -- --
--------- -------- ---------
Total fixed maturity securities held-to-
maturity............................... 12,978.2 13,921.7 12,978.2
--------- -------- ---------
Equity securities, trading:
Common stocks:
Public utilities.......................... -- -- --
Banks, trust and insurance companies...... -- -- --
Industrial, miscellaneous and all other... 53.0 67.9 67.9
Non-redeemable preferred stock............ -- -- --
--------- -------- ---------
Total equity securities trading......... 53.0 67.9 67.9
--------- -------- ---------
Mortgage loans on real estate (1)......... 9,727.1 XXXX 9,616.1
Real estate, net:
Investment properties (1)................. 1,256.4 XXXX 1,204.9
Acquired in satisfaction of debt (1)...... 338.8 XXXX 278.3
Policy loans.............................. 1,879.7 XXXX 1,879.7
Other long-term investments............... 1,254.6 XXXX 1,254.6
Short-term investments.................... 279.8 XXXX 279.8
--------- -------- ---------
Total investments........................ $43,015.9 XXXX $43,777.5
========= ======== =========
</TABLE>
- --------
(1) Difference is due to valuation allowances on mortgage loans on real estate
and real estate. See note 3 to the consolidated financial statements.
(2) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
II-4
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
As of December 31, 1998, 1997 and 1996 and for each of the years then ended
(in millions of dollars)
<TABLE>
<CAPTION>
Other Policy
Deferred Policy Future Policy Claims and
Acquisition Benefits, Losses, Unearned Benefits Premium
Segment Costs and Expenses Revenue Payable Revenue
- ------------------------ --------------- ----------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
1998:
Protection.............. $2,073.8 $14,093.6 $219.5 $ 85.5 $1,351.4
Asset Gathering......... 425.2 4,850.0 -- 0.2 19.8
Guaranteed & Structured
Financial Products..... 8.7 19,366.4 48.4 0.3 121.4
Investment Management... -- -- -- -- --
Corporate & Other....... 251.0 3,865.0 105.9 800.3 705.3
-------- --------- ------ -------- --------
Total.................. 2,758.7 42,175.0 373.8 886.3 2,197.9
-------- --------- ------ -------- --------
1997:
Protection.............. 1,957.6 13,001.7 200.5 82.0 1,343.0
Asset Gathering......... 376.7 4,765.1 -- 0.1 55.0
Guaranteed & Structured
Financial Products..... 10.0 18,306.9 46.9 0.3 201.0
Investment Management... -- -- -- -- --
Corporate & Other....... 218.7 3,795.9 93.1 875.5 874.6
-------- --------- ------ -------- --------
Total.................. 2,563.0 39,869.6 340.5 957.9 2,473.6
-------- --------- ------ -------- --------
1996:
Protection.............. 1,958.9 12,330.2 181.4 88.1 1,286.8
Asset Gathering......... 340.1 4,302.5 -- 0.1 23.0
Guaranteed & Structured
Financial Products..... 12.0 18,644.9 44.0 0.2 359.6
Investment Management... -- -- -- -- --
Corporate & Other....... 187.1 3,793.3 79.2 897.8 1,253.1
-------- --------- ------ -------- --------
Total.................. $2,498.1 $39,070.9 $304.6 $ 986.2 $2,922.5
-------- --------- ------ -------- --------
<CAPTION>
Amortization
Benefits, Claims, of Deferred
Losses, and Policy Other
Net Investment Settlement Acquisition Operating
Segment Income Expenses Costs Expenses
- ------------------------ --------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
1998:
Protection.............. $1,063.9 $ 1,493.8 $153.9 $ 442.4
Asset Gathering......... 378.0 296.3 46.8 504.9
Guaranteed & Structured
Financial Products..... 1,576.3 1,411.5 3.7 92.6
Investment Management... 24.1 -- -- 117.8
Corporate & Other....... 288.4 950.4 45.3 225.3
-------- --------- ------ --------
Total.................. 3,330.7 4,152.0 249.7 1,383.0
-------- --------- ------ --------
1997:
Protection.............. 983.4 1,399.1 224.7 375.7
Asset Gathering......... 353.3 314.5 38.9 416.2
Guaranteed & Structured
Financial Products..... 1,545.2 1,481.1 5.2 81.0
Investment Management... 4.0 -- -- 88.4
Corporate & Other....... 304.8 1,108.4 43.2 322.4
-------- --------- ------ --------
Total.................. 3,190.7 4,303.1 312.0 1,283.7
-------- --------- ------ --------
1996:
Protection.............. 947.1 1,341.7 160.7 349.2
Asset Gathering......... 320.0 260.0 33.6 339.2
Guaranteed & Structured
Financial Products..... 1,608.5 1,675.3 5.7 88.5
Investment Management... 3.4 -- -- 76.3
Corporate & Other....... 344.1 1,399.7 30.9 840.9
-------- --------- ------ --------
Total.................. $3,223.1 $ 4,676.7 $230.9 $1,694.1
-------- --------- ------ --------
</TABLE>
II-5
<PAGE>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY and SUBSIDIARIES
SCHEDULE IV--REINSURANCE
As of December 31, 1998, 1997 and 1996 and for each of the years then ended:
(in millions of dollars)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of Amount
Gross Other Other Assumed to
Amount Companies Companies Net Amount Net
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
Life insurance in force.. $353,807.8 $88,662.6 $29,210.1 $294,355.3 9.9%
========== ========= ========= ========== =====
Premiums:
Life insurance........... $ 1,871.9 $ 327.6 $ 221.0 $ 1,765.3 12.5%
Accident and health
insurance............... 956.5 654.8 130.9 432.6 30.3%
P&C...................... 7.1 9.0 1.9 -- 0.0%
---------- --------- --------- ---------- -----
Total................... $ 2,835.5 $ 991.4 $ 353.8 $ 2,197.9 16.1%
========== ========= ========= ========== =====
1997
Life insurance in force.. $371,627.9 $82,752.3 $ 1,411.6 $290,287.2 0.5%
========== ========= ========= ========== =====
Premiums:
Life insurance........... $ 2,177.7 $ 452.7 $ 287.2 $ 2,012.2 14.3%
Accident and health
insurance............... 752.1 421.3 129.9 460.7 28.2%
P&C...................... 65.0 70.5 6.2 0.7 885.7%
---------- --------- --------- ---------- -----
Total................... $ 2,994.8 $ 944.5 $ 423.3 $ 2,473.6 17.1%
========== ========= ========= ========== =====
1996
Life insurance in force.. $377,230.6 $24,409.1 $23,335.7 $376,157.2 6.2%
========== ========= ========= ========== =====
Premiums:
Life insurance........... 2,273.3 235.9 323.8 2,361.2 13.7%
Accident and health
insurance............... 612.5 159.6 67.2 520.1 12.9%
P&C...................... 88.7 61.6 14.1 41.2 34.2%
---------- --------- --------- ---------- -----
Total................... $ 2,974.5 $ 457.1 $ 405.1 $ 2,922.5 13.9%
========== ========= ========= ========== =====
</TABLE>
II-6
<PAGE>
All schedules, other than those listed above, are omitted because the
information is not required or because the information is included in our
Consolidated Financial Statements or Notes thereto.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(a) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 ("Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions described under
Item 14 above, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(c) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time
it was declared effective.
(d) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Boston, Massachusetts on December
10, 1999.
John Hancock Financial Services, Inc.
/s/ Thomas E. Moloney
----------------------
By: Thomas E. Moloney
Title: Chief Financial Officer
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
* Chairman of the Board,
____________________________________ Chief Executive Officer and
Stephen L. Brown Director
* Vice Chairman of the Board,
____________________________________ Chief Investment Officer and
Foster L. Aborn Director
* President and Chief
____________________________________ Operations Officer and
David F. D'Alessandro Director
* Director
____________________________________
Samuel W. Bodman
* Director
____________________________________
Joan T. Bok
* Director
____________________________________
I. MacAllister Booth
* Director
____________________________________
Wayne A. Budd
* Director
____________________________________
John M. Connors, Jr.
* Director
____________________________________
Robert E. Fast, Esq.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
* Director
____________________________________
Dr. Kathleen Foley Feldstein
* Director
____________________________________
Nelson S. Gifford
* Director
____________________________________
Michael C. Hawley
* Director
____________________________________
Edward H. Linde
* Director
____________________________________
Judith A. McHale
* Director
____________________________________
Richard F. Syron
* Director
____________________________________
Robert J. Tarr, Jr.
*By: /s/ Thomas E. Moloney December 10, 1999
____________________________________
Attorney-in-fact
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<C> <S> <C>
1.1 Form of Underwriting Agreement***
2.1 Plan of Reorganization**
3.1 Restated Certificate of Incorporation of John Hancock
Financial Services, Inc.***
3.2 By-laws of John Hancock Financial Services, Inc.**
4.1 Form of certificate for the common stock, par value $0.01 per
share, of John Hancock Financial Services, Inc.**
5.1 Opinion of Debevoise & Plimpton***
10.1 Credit Agreement, dated as of July 30, 1999, among John
Hancock Mutual Life Insurance Company, John Hancock Capital
Corporation, The Banks Listed therein, BankBoston, N.A., as
Administrative Agent, Citicorp USA, Inc., as Syndication
Agent, The First National Bank of Chicago, as Documentation
Agent, and Comerica Bank, The Bank of Nova Scotia, Fleet
National Bank, Royal Bank of Canada and Wachovia Bank, as Co-
Agents**
10.2 Amended and Restated Credit Agreement, dated as of July 19,
1996 by and among John Hancock Mutual Life Insurance Company
and John Hancock Capital Corporation, Banks named therein and
Morgan Guaranty Trust Company of New York, as Agent**
10.3 Fiscal Agency Agreement, dated as of February 25, 1994 by and
between John Hancock Mutual Life Insurance Company, as
Issuer, and First National Bank of Boston, as Fiscal Agent**
10.4 Reinsurance Agreement, dated as of July 30, 1992 by and
between John Hancock Mutual Life Insurance Company and
Provident Life and Accident Insurance Company**
10.5 Reinsurance Agreement, dated as of July 30, 1992 by and
between John Hancock Mutual Life Insurance Company and
Provident Life and Accident Insurance Company**
10.6 Coinsurance Agreement, dated as of March 1, 1997 by and
between John Hancock Mutual Life Insurance Company and
UNICARE Life & Health Insurance Company**
10.7 Letter of Credit Agreement, dated as of January 2, 1997 by
and among John Hancock Mutual Life Insurance Company, Banks
named therein and Morgan Guaranty Trust Company of New York,
as Issuing Bank and Agent**
10.8 Long-Term Incentive Compensation Plan**
10.9 Form of Employment Continuation Agreement**
10.10 Form of Stockholder Rights Agreement***
10.11 1999 Long-Term Stock Incentive Plan**
10.12 Incentive Compensation Plan**
21.1 Subsidiaries of the Registrant**
23.1 Consent of Ernst & Young LLP**
23.2 Consent of Debevoise & Plimpton (included in Exhibit 5.1)***
23.3 Consent of Godfrey Perrott, F.S.A., M.A.A.A.**
24.1 Powers of Attorney**
24.2 Power of Attorney of Judith A. McHale**
27.1 Financial Data Schedule**
</TABLE>
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* Filed herewith
** Previously filed
*** To be filed by amendment.
