<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
---------------------
Securities and Exchange Commission File No. 812-06037
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
22-2265014
(I.R.S. Employer Identification No.)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of principal executive offices)
(617) 266-6008
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None
---------------------
Indicated by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
No shares of voting stock are held by nonaffiliates of the Registrant.
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's sole class of common stock, as
of March 1, 1998 was 2,600.
<PAGE> 2
PART I
ITEM 1 - BUSINESS
The Manufacturers Life Insurance Company of North America (the "Registrant" also
referred to as the "Company"), formerly North American Security Life Insurance
Company, is a stock life insurance company organized under the laws of Delaware
in 1979. The Company's principal office is located at 116 Huntington Avenue,
Boston, Massachusetts 02116. The ultimate parent of the Company is The
Manufacturers Life Insurance Company ("Manulife"), a Canadian mutual life
insurance company based in Toronto, Canada. Prior to January 1, 1996, the
Company was a wholly owned subsidiary of North American Life Assurance Company
("NAL"), a Canadian mutual life insurance company. On January 1, 1996 NAL and
Manulife merged with the combined company retaining the Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and Manulife,
the Company experienced a corporate restructuring which resulted in the
formation of a newly organized holding corporation, Manulife-Wood Logan Holding
Co., Inc., formerly, NAWL Holding Co., Inc. ("MWL"). MWL holds all of the
outstanding shares of the Company and Wood Logan Associates, Inc. ("WLA"). MWL
is 62.5% owned by The Manufacturers Life Insurance Company (U.S.A.), 22.5% owned
by MRL Holding, LLC and approximately 15% owned by the principals of WLA.
On June 19, 1992, the Company formed The Manufacturers Life Insurance Company of
New York, formerly, First North American Life Assurance Company ("Manulife New
York"). Subsequently, on July 22, 1992, Manulife New York was granted a license
by the New York State Insurance Department. Manulife New York issues variable
annuity contracts and individual life insurance contracts in the State of New
York.
NASL Financial Services, Inc. ("NASL Financial"), a wholly-owned subsidiary of
the Company, acted as investment adviser to Manufacturers Investment Trust,
formerly NASL Series Trust ("MIT"), a no-load, open-end management investment
company organized as a Massachusetts business trust and the North American Funds
("NAF"), a no-load, open-end management investment company organized as a
Massachusetts business trust. NASL Financial also acted as principal underwriter
of the annuity and life insurance contracts issued by the Company. NASL
Financial had an agreement with Wood Logan to act as the promotional agent for
the sale of the variable annuity and variable life insurance products issued by
the Company and Manulife New York.
Effective October 1, 1997, Manufacturers Securities Services, LLC ("MSS")
replaced NASL Financial as the investment advisor to MIT and as the principal
underwriter of the annuity and life insurance contracts. MSS has entered into a
marketing agreement with WLA to act as the non-exclusive agent for the sale of
the Company's insurance contracts.
The Company issues fixed and variable annuities and variable life insurance
contracts within its annuity and life insurance segment. Amounts invested in the
fixed portion of the Company's insurance contracts are allocated to the general
account of the Company, or in the case of the market value adjusted annuity, to
a non-unitized separate account of the Company. Amounts invested in the variable
portion of the contracts are allocated to separate accounts of the Company. The
separate account assets (other than the non-unitized separate account) are
invested in shares of MIT and other underlying mutual funds sponsored by Merrill
Lynch Asset Management.
On October 1, 1997, the Company disposed of its retail mutual fund segment
through the sale of NAF to an unrelated party. NAF was advised by NASL Financial
and consisted of thirteen mutual funds.
As of December 31, 1997, the Company was licensed to sell fixed and variable
annuities and variable life insurance in all states except New Hampshire and New
York. The Company's subsidiary, Manulife New York, was licensed to sell fixed
and variable annuities and individual life insurance in the state of New York.
On January 20, 1998, the Board of Directors of Manulife asked the management of
Manulife to prepare a plan for conversion of Manulife from a mutual life
insurance company to an investor-owned, publicly-traded stock company. Any
demutualization plan for Manulife is subject to the approval of the Manulife
Board of Directors and policyholders as well as regulatory approval.
2
<PAGE> 3
REGULATION
The Company is subject to the laws of the state of Delaware governing insurance
companies and to the regulation of the Delaware Insurance Department (Manulife
New York is subject to the laws and regulation of the State of New York). In
addition, the Company is subject to regulation under the insurance laws of other
jurisdictions in which the Company operates. Regulation by each insurance
department includes periodic examination to determine the Company's contract
liabilities and reserves so that each insurance department may verify that these
items are correct. Regulation by supervisory agencies includes licensing to
transact business, overseeing trade practices, licensing agents, approving
policy forms, establishing reserve requirements, fixing maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values, prescribing the form and content of required financial statements and
regulation of the type and amounts of investments permitted. The Company's books
and accounts are subject to review by each insurance department and other
supervisory agencies at all times, and the Company files annual statements with
these agencies. A full examination of the Company's operations is conducted
periodically by the Delaware insurance department.
In addition, several states, including Delaware and Michigan, regulate
affiliated groups of insurers, such as the Company, under insurance holding
company legislation. Manulife's state of entry for insurance regulatory purposes
is Michigan. In addition, several of its insurance subsidiaries are domiciled
there. Consequently, Michigan's Insurance Bureau has jurisdiction in applying
such legislation to transactions between Manulife and its U.S. insurance company
affiliates. Under such laws, intercompany transactions, transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies. Transactions between the Company and
WLA are primarily regulated by Delaware, but may also be regulated by Michigan
if the transaction involves Manulife or any of its insurance subsidiaries
domiciled in Michigan.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments on the
Company under these laws cannot be reasonably estimated. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal legislation that removed barriers preventing banks
from engaging in the insurance business or that changed the Federal income tax
treatment of insurance companies, insurance company products, or employee
benefit plans could significantly affect the insurance business.
PRODUCTS
The focus of the Company is to provide retirement-oriented insurance products.
The primary product distributed is a variable annuity which provides returns
based upon the return of the underlying mutual funds. The variable annuity
returns will fluctuate with the returns of the underlying mutual funds and are
not guaranteed. The Company also offers fixed annuities, which guarantee a
return for the stated guaranteed investment duration, and variable life
insurance products which offer both variable and fixed investment options.
Annuities: Annuities provide insurance protection against the risk of outliving
an individual's income during his or her lifetime. Annuities also provide
tax-deferred savings during the accumulation savings phase and tax-favored
retirement income during the income phase. The majority of the Company's
variable annuity sales occur via its Venture annuity series: Venture, Venture
Vision and Venture Vantage. All three variable annuities offer 35 variable
investment options and one or more fixed investment options as well as minimum
death benefit guarantees (see Sales and Asset Retention). The Venture annuity
deposits for 1997 were $1.7 billion representing 80% of total deposits and an
average initial deposit of over $43,000. Venture currently offers an additional
3 variable investment options for certain sales and up to 5 fixed investment
options depending upon the state of issuance. The fixed investment options
guarantee the interest rate return for the stated guaranteed duration. However,
premature withdrawals or transfers prior to the end of the guaranteed duration
may subject the policyholder to a market value charge. One of the fixed account
investment options is a one year DCA fixed account investment option. Venture
imposes a 1.40% annual asset based fee on amounts held in variable investment
options and a six or seven year graded contingent deferred sales charge. Venture
Vision also offers a one year fixed account investment option. Venture Vision
offers a one-year guaranteed fixed account which is not subject to a market
value charge. Venture Vision deposits for 1997 were $268 million representing
13% of total deposits with an average deposit of over $70,000. The Venture
Vision annuity imposes a 1.65% annual asset based fee on amounts held in
variable investment options and has no contingent deferred sales charges.
Effective August 1, 1997, the Company introduced the Venture Vantage annuity.
Venture Vantage offers a one-year fixed investment option which is not subject
to a market value charge and a unique Payment Enhancement feature which credits
an additional 3-5% of the initial deposit to the contract; the
3
<PAGE> 4
percentage varies with the size of the deposit. Venture Vantage also offers a
one year DCA fixed account investment option. Venture Vantage deposits for 1997
were $87 million representing 4% of sales, with an average initial deposit of
over $68,000. The annual asset based fee applicable under this contract to
amounts held in variable investment options is 1.55%; Venture Vantage also
includes a 9 year graded contingent deferred sales charge. In February 1997, the
Company also introduced the Venture Market Value Annuity which offers only fixed
investment options and imposes a market value adjustment upon surrender. Sales
of the Venture Market Value Annuity were negligible during 1997. At December 31,
1997, the variable annuity policyholder balances before reinsurance ceded were
$9.5 billion of variable investment options and $0.6 billion of fixed income
options.
Effective June 30, 1995, the Company entered into a reinsurance agreement with
Peoples Security Life Insurance Company ("Peoples") pursuant to which Peoples
reinsures certain amounts (currently 100%) with respect to the fixed investment
options of the above noted products. Under this reinsurance agreement, the
Company remains liable for the contractual obligations of the contracts' fixed
account and Peoples agrees to reimburse the Company for certain amounts and
obligations in connection with the fixed account. Peoples contractual liability
runs solely to the Company, and no policyholder shall have any right of action
against Peoples.
The Company has a very small block of flexible premium deferred fixed annuities
which provide either a 1 year or 5 year guaranteed interest rate option. As of
December 31, 1997 the fixed interest obligations under these annuities totaled
$23 million.
Variable Life: The Company issues a modified single premium variable life
insurance product named Venture Life. Generally, Venture Life is issued as a
modified endowment contract ("MEC") which provides similar tax treatment as an
annuity with additional tax-efficient death proceeds. Venture Life offers 29
variable investment options and a 1 year guaranteed fixed interest rate option.
The contract may be issued on a simplified underwriting basis dependent upon the
initial premium amount. Insurance coverage varies by issue age, smoking status
and single or joint last survivor coverage options. The 1997 deposits totaled
$38 million representing 2% of total deposits with an average deposits of over
$57,000. The Venture Life contract imposes annual asset based fees of 1.95%
(1.30% after the tenth contract year) on amounts held in variable investment
options, includes a graded nine year contingent deferred sales charge, and
charges Cost of Insurance premiums on a current rate basis, subject to
contractual maximums.
Under current law, returns credited on annuities and life insurance policies
during the accumulation phase (the period during which interest is credited and
annuity payments have not yet begun) are not subject to federal or state income
tax. Proceeds payable on death from a life insurance policy are also free from
such taxes. At maturity or payment date of an annuity policy, the policyholder
is entitled to receive the original deposit plus accumulated returns. The
policyholder may elect to take this amount in either a lump sum or receive a
series of payments over a stated period of time. The return component of such
payments is taxed at the time of receipt as ordinary income.
FINANCIAL PRODUCT SUMMARY
The following table sets forth certain information regarding the Company's
annuity and life insurance business, including the business issued by its
subsidiary Manulife New York.
<TABLE>
<CAPTION>
For the year ended December 31,
(dollars in thousands, except policy data)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed Annuities in Force:
Aggregate amount $ 22,512 $ 23,951 $ 26,338
Average policy amount $ 41,922 $ 39,200 $ 36,530
Number of policies 537 611 721
Variable Annuities in Force:
Aggregate amount $9,550,343 $6,878,746 $5,210,689
Average policy amount $ 60,696 $ 51,742 $ 46,108
Number of policies 157,346 132,943 113,010
Variable Life Insurance in Force:
Aggregate amount $ 151,259 $ 45,597 $ 245
Average policy amount $ 153,562 $ 141,605 $ 122,500
Number of policies 985 322 2
</TABLE>
4
<PAGE> 5
SALES AND ASSET RETENTION
Variable annuity sales are primarily driven by the U.S. domestic and
international equity markets, distribution capabilities, attractive policy
features and client servicing capabilities. The variable options tend to be more
attractive in low interest rate environments as they provide potential for high
returns through equity investments. For this potential higher return the
policyholder assumes directly the investment risk of the underlying mutual fund.
Higher interest rate environments tend to favor the fixed investment options as
the policyholder may lock in guaranteed interest rates without assuming the
investment risk associated with variable investment options.
The Venture annuity series and Venture Life products offer a variety of
investment options, death benefit options, administrative features and customer
services that enhance both sales and asset retention. The variable investment
options offered by the Company employ a multi-manager approach through the
hiring of subadvisers to the underlying mutual funds. Currently 15 investment
management firms provide investment management expertise to the 30 individual
variable investment options. Recently the Company introduced five Lifestyle
portfolios which are "funds of funds". These variable investment options
strategically allocate deposits over various investment disciplines with the
goal of matching return to the risk profile of the policyholder. The ability to
provide superior investment returns under the variable options is essential to
the retention of assets.
Policyholders are permitted to withdraw all or part of their account value at
any time subject to possible contingent deferred sales charges and/or market
value charges. Such premature terminations result in a loss of the Company's
anticipated future earnings related to the annuity deposit and accelerated
recognition of expenses related to policy acquisition, principally commissions
(which are otherwise deferred and amortized over the life of the policy).
Contingent deferred sales charges, generally starting at 6% and declining over a
7 or 9 year period (dependent upon the policy) are designed to compensate the
Company for the accelerated recognition of policy acquisition costs. The
contingent deferred sales charge acts as a deterrent against policyholders
surrendering their policy prematurely. Market value charges are imposed to
offset the cost of selling depressed asset values in increasing interest rate
environments. Generally, contingent deferred sales charges do not apply to
withdrawals up to the higher of 10% of payments or accumulated earnings.
The Venture, Venture Vision and Venture Vantage annuities provide innovative
minimum death benefits to policyholders. For issue ages 80 and younger Venture
guarantees the greater of deposits or a locking of any investment gains on a
yearly basis, so-called yearly ratchet, up to attained age 85. Venture Vision
provides a minimum death benefit equal to deposits indexed at 5% per annum up to
a maximum of twice the original deposit for issues up to age 80. Venture Vantage
provides a minimum death benefit equal to the larger of deposits or the contract
value on the ninth contract anniversary. The minimum death benefits are designed
to act as a deterrent to policyholders moving their policy after the contingent
deferred sales charge has expired.
The Company, along with its ultimate parent company, Manulife, enjoys strong
financial ratings that enhance its ability to attract new sales and retain
assets. Distributors and consumers of variable and fixed annuity products have
begun to utilize the relative financial strength ratings as a criteria in
choosing an annuity carrier. The Company is rated A++ (Superior) by A.M. Best,
AA+ (Excellent) by Standards and Poor's ("S&P"), AAA (Highest) by Duff & Phelps
and Aa3 (Excellent) by Moody's Investor Services. These ratings reflect the
opinion of the rating organization as to the relative financial strength of the
Company and the Company's ability to meet its contractual obligations to its
policyholders.
The ability to service policyholders in an effective, efficient and courteous
manner is a driving goal for the Company. It is the Company's belief that sales
and asset retention can only be achieved by providing excellent service. Through
recent independent surveys the Company has received high service ratings. To
maintain this level of service the Company has and will continue to make
significant investment in its infrastructure. The Company's administrative unit
operates in a paper-less environment employing optical imaging systems and
electronic communication with both policyholders and distributors. It is this
commitment to infrastructure that will allow the Company to maintain and enhance
its current service standards.
GENERAL ACCOUNT INVESTMENTS
Investment policy is established and reviewed by the Board of Directors of the
Company. The Company and Manulife New York had appointed Elliott & Page, an
indirectly owned subsidiary of Manulife, to manage their general account assets
supporting both non-reinsured business and surplus in accordance with the
policies established by the Board. All general account assets supporting the
Company's fixed investment option business are managed by its reinsurer
(Peoples). Effective October 1, 1997, Manulife New York's general account assets
are being managed by Manulife. Assets in MIT supporting
5
<PAGE> 6
the Company's variable annuity and life contracts are managed in accordance with
subadvisory agreements with the fifteen investment management firms.
The Company participates in setting credited rates with Peoples and employs a
new money approach in establishing both initial and renewal interest rates. The
relationship between the rates for the various guarantee periods will typically
follow the slope of the Treasury yield curve, with the Company's rates typically
about .95% (.70% for the Venture Market Value Annuity) below the corresponding
Treasury rate. The minimum declared rate required by the Company's general
account contracts depending on the policy form is either 3% or 4%. On the
Company's fixed investment option products currently being sold, the renewal
rate is always equal to the initial new money rate. For the old 5 year product,
the Company's current policy is to credit .25% more on renewal than the new
money rate. For money deposited into the one year fixed account during the first
quarter of 1995, the Company credited a rate of 8%. This was successful in
raising approximately $140 million of deposits while providing awareness of our
distribution and product during a period of economic uncertainty. During 1996
the majority of these funds transferred to Separate Account options, given the
relatively low interest rate guarantees relative to the stock market
performance.
At December 31, 1997 the Company's fixed maturity portfolio had an overall
average S&P rating of A and 100% of the general account portfolio consisted of
investment grade securities. There were no mortgage loans or real estate held at
December 31, 1997.
MARKETING AND DISTRIBUTION
The variable annuity market in the United States is relatively young and has
realized significant growth in the past few years. According to the Value Survey
conducted by Tillinghast, sales grew 16.2% in 1997 over 1996 with total 1997
sales of $86 billion. The Company, including its subsidiary Manulife New York,
with 1997 total sales of $2.1 billion captured market share of 2.44%, ranking it
16th for variable annuity products issued in the United States. All sales and
marketing activities are conducted through Wood Logan Associates which employs a
team of wholesalers soliciting broker-dealer firms across the United States.
Percentage Sale of Annuities by Channel
For the years ended December 31
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Wirehouse 21.9% 22.7% 27.7%
Regional Brokerage 19.6 24.4 23.8
Financial Planner 46.7 42.2 39.9
Banks 11.8 10.7 8.6
---- ----- -----
100% 100.0% 100.0%
==== ===== =====
</TABLE>
ITEM 2 - PROPERTIES
The Registrant owns no property.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An action by unanimous consent of the sole stockholder of the Company, with
regard to elect and appoint John D. DesPrez III, Peter S. Hutchinson and John D.
Richardson as the Board of Directors of the Company and to ratify the
appointment of Ernst & Young, LLP as auditors, was approved on May 30, 1997.
6
<PAGE> 7
Part II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MWL is the sole record holder of the Registrant's shares. Therefore, there is no
public trading market for Registrant's common stock. The Registrant has declared
no cash dividends on its common stock at any time during the two most recent
fiscal years.
The Company currently sells Venture Group Annuity, a flexible premium payment
deferred variable unallocated group annuity, to retirement plans that qualify
for special tax treatment under Section 401(a) of the Internal Revenue Code.
Sales of these securities are not required to be registered under the Securities
Act of 1933 (Section 3(a)(2) of this Act). MSS, a majority owned subsidiary of
the Company is the principal underwriter of the contracts and Wood Logan
Associates, Inc., an affiliate of the Company, is the promotional agent. There
are no maximum or minimum purchase payments required to establish a contract.
The value of a contract will vary according to the investment performance,
charges and expenses of the subaccounts in which the contract is vested. As of
December 31, 1997, the total variable assets in the Venture Group Annuity was
$87,031,525.
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
-------------------------------------------------------------
1997 1996 1995 1994* 1993*
---- ---- ---- ----- -----
(in thousands)
<S> <C> <C> <C>
Under Generally Accepted Accounting Principles:
Total Revenues $ 202,751 $ 147,772 $ 143,896
Income from Continuing Operations 27,420 16,545 12,494
Net Income 33,233 15,735 11,032
Total Separate Account Assets 9,529,160 6,820,599 5,131,536
Total Assets 10,633,763 7,811,370 6,244,352
Separate Account Liabilities 9,529,160 6,820,599 5,131,536
Payable to Affiliates 183,955 158,201 129,867
Total Liabilities 10,425,037 7,684,299 6,149,096
Shareholder's Equity 208,726 127,071 95,256
</TABLE>
* Selected financial data under generally accepted accounting principles is not
available for the 1994 and 1993 fiscal year. See Management's Discussion and
Analysis and Notes to the Consolidated Financial Statements for additional
information.
7
<PAGE> 8
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
On Statutory Basis **:
Total Revenues $1,733,920 $1,045,188 $ 997,817 $1,176,476 $1,259,976
Net Income (Loss) 22,259 3,067 (7,288) (30,454) (10,678)
Total Separate Account Assets 8,931,967 6,459,290 4,914,728 3,661,278 2,937,436
Total Assets 9,055,820 6,517,773 4,962,504 4,240,250 3,415,584
Capital and Surplus 139,171 69,554 50,158 59,408 51,723
</TABLE>
** Statutory accounting practices differ in certain respects from generally
accepted accounting principles. The significant differences relate to
consolidation accounting, investments, deferred acquisition costs, deferred
income taxes, non-admitted asset balances and reserve calculation assumptions.
All information presented elsewhere in this document is presented under
generally accepted accounting principles.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements.
Overview
Prior to 1997 the Company was comprised of two different segments, annuity and
life insurance products and retail mutual funds. The Company discontinued its
retail mutual fund operations, North American Funds, on October 1, 1997 through
a sale to an unrelated third party. This sale has been treated as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.
Within the annuity and life insurance segment, the Company issues fixed and
variable annuity contracts and variable life insurance through major wirehouses,
regional broker dealers, financial planners and banks. Amounts invested in
variable contracts are allocated to Separate Accounts of the Company. The assets
of the Separate Accounts are invested in shares of MIT or other underlying
mutual funds sponsored by Merrill Lynch Asset Management (Merrill Lynch).
Amounts invested in the fixed portion of the contracts, excluding the Company's
wholly owned subsidiary Manulife New York, are subject to an indemnity
coinsurance agreement entered into between the Company and Peoples Security Life
Insurance Company ("Peoples") effective June 30, 1995. Manulife New York's fixed
portion of the contracts are invested in Manulife New York's general account and
are backed by investment grade fixed income maturities.
The Company's primary source of earnings from the annuity and life insurance
product segment is generated from Separate Account fees assessed against
policyholder account balances: mortality and expense risk charges, surrender
charges and an annual administrative charge. In addition, the segment earns
advisory fees from the Separate Account assets invested in MIT and in Merrill
Lynch. A key factor in the Company's profitability is sustained growth in the
underlying assets through market performance coupled with the ability to acquire
and retain annuity and variable life deposits.
The Company's primary source of earnings from the retail mutual fund segment was
from the advisory fees earned on the NAF assets maintained in the underlying
portfolios and distribution and servicing fees and sales loads associated with
the sales of the Class A, Class B and Class C shares.
Basis of Presentation
During 1996, the Company adopted generally accepted accounting principles
("GAAP") in conformity with the requirements of the Financial Accounting
Standards Board. Prior to 1996, the Company prepared its financial statements
8
<PAGE> 9
in conformity with statutory accounting practices prescribed or permitted by the
Insurance Department of the State of Delaware which practices were considered
GAAP for mutual life insurance companies and their direct and indirect
subsidiaries. As discussed in Note 2 to the consolidated financial statements,
the effect of the adoption of GAAP has been reflected retroactively and the
previously issued 1995 consolidated financial statements have been restated for
the change. A description of accounting policies under GAAP can be found in Note
2 to the consolidated financial statements.
Review of consolidated operating results
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Financial Summary (In `000's) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees from separate accounts and policyholder funds $ 126,637 $ 95,323 $ 77,572
Advisory fees and other distribution revenues 67,678 46,233 27,912
Net investment income 7,905 5,452 28,701
Net realized investment gains 531 764 9,711
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 202,751 147,772 143,896
- --------------------------------------------------------------------------------------------------------------
Benefits to policyholders 4,986 4,242 27,129
Amortization of deferred policy acquisition costs 40,649 30,830 43,287
Other insurance expenses 100,385 71,255 58,745
Financing costs 14,268 15,821 9,282
- --------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 160,288 122,148 138,443
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision
for income tax (benefit) 42,463 25,624 5,453
Provision for income tax (benefit) 15,043 9,079 (7,041)
Income from continuing operations 27,420 16,545 12,494
Discontinued operations - (loss) from operations, net of tax (141) (810) (1,462)
Discontinued operations - gain on disposal, net of tax 5,954
Net income $ 33,233 $ 15,735 $ 11,032
- --------------------------------------------------------------------------------------------------------------
General Account Assets 1,104,603 990,771 1,112,816
Separate Account Assets 9,529,160 6,820,599 5,131,536
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,633,763 $7,811,370 $6,244,352
- --------------------------------------------------------------------------------------------------------------
General Account Liabilities $ 895,877 $ 863,700 $1,017,560
Separate Account Liabilities 9,529,160 6,820,599 5,131,536
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY $208,726 $127,071 $95,256
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Compared to 1996
The Company recorded net income of $33.2 million in 1997 versus net income of
$15.7 million in 1996, an increase of $17.5 million or 112%. A portion of the
increase, $6.6 million, is attributable to the gain on the disposal of the
Company's mutual fund segment and the decreased loss from its operations in
1997. The increase in net income from continuing operations was primarily a
result of fee income earned on additional Separate Account assets. Separate
Account assets grew by 40% while total assets increased by 36% during 1997. This
growth is attributable to deposits of $2.1 billion for 1997 compared to 1996
deposits of $1.4 billion, strong equity market performance during 1997 and
favorable contract persistency. The increase in deposits for 1997 was
attributable to the Company's implementation of the Efficient Frontier
Investment model in early 1997 and the addition of competitively performing
funds, including additional investment options. The latter includes five
Lifestyle funds which offer the buyer the opportunity to invest in a
pre-determined "fund of funds." In addition the Company also modified its
product features and pricing to directly compete in a profitable manner with its
key competitors. Total fees, including advisory fees, generated by Separate
Accounts and policyholder funds increased by $52.7 million or 37% in 1997. Net
investment income grew by $2.5 million or 45% due to higher fixed account sales
and a $47.7 million capital infusion received in the fourth quarter of 1997 to
support expanded operations in Manulife New York.
9
<PAGE> 10
The Company incurred total benefits and expenses in 1997 of $160.3 million, an
increase of $38.1 million, or 31% compared to 1996. The additional expenses are
associated with higher subadvisory fees generated from higher asset levels in
MIT and Merrill Lynch, an increase in non-capitalized acquisition expenses and
other costs associated with growth in the Company's business, and additional
operating expenses associated with expanding the Company's operations in New
York.
The mutual fund segment net loss from operations improved by $0.7 million
between 1997 and 1996. The decrease in the loss is primarily attributable to
higher advisory fees and other revenues through the nine month period ended
September 30, 1997 (date of disposal). Total revenues for this segment were
$10.5 million (nine month period) in 1997 compared to $12.4 million (twelve
month period) for 1996.
1996 Compared to 1995
The Company recorded net income of $15.7 million in 1996 versus net income of
$11.0 million in 1995, an increase of $4.7 million or 43%. The increase was
primarily a result of fee income earned on additional Separate Account assets.
Separate Account assets grew by 33% during 1996, while total assets grew by 25%.
This growth was due to strong equity market performance and favorable contract
persistency. Transfers of approximately $200 million from the fixed account also
contributed to the increased asset levels. Deposits for 1996 were $1.4 billion
compared to $1.2 billion for 1995. The Company's relatively flat deposits and
reduced market share during 1996 were primarily a result of relatively poor
investment performance in the underlying funds within MIT along with more
competitive product features and pricing offered by the competition. Total fees,
including advisory fees, generated by Separate Accounts and policyholder funds
increased by $36.1 million or 34% in 1996. As a result of the transfer of
general account assets to Peoples in accordance with the coinsurance agreement
established in 1995, net investment income and net realized investment gains
decreased between 1996 and 1995 by $23.2 million and $8.9 million, respectively.
Benefits and expenses were $122.1 million in 1996 and $138.4 million in 1995.
The decrease is primarily attributed to the transfer of the general account
liabilities to Peoples in accordance with the coinsurance agreement established
in 1995. The decrease in overall expenses was partially offset by higher
subadvisory fees generated from higher asset levels in MIT, an increase in
non-capitalizable acquisition expenses and other operating expenses. Higher
financing costs, associated with the People's coinsurance agreement, were
incurred during 1996 as the Company experience increased transfers from the
fixed account to the Separate Account.
Net income for 1995 included the reversal of a $12.0 million deferred tax
allowance established at December 31, 1994.
The mutual fund segment net loss from operations improved by $0.7 million
between 1996 and 1995. The decrease in the loss is attributed to higher advisory
fees, and other revenues. During 1996 and 1995 the Company recorded total
revenues of $12.4 million and $10.3 million, respectively, for its mutual fund
segment.
Financial Position
<TABLE>
<CAPTION>
Assets
- ---------------------------------------------------------------------------------------
(In `000's) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Invested assets $ 161,575 $ 104,632
Deferred policy acquisition costs 364,984 290,610
Due from reinsurers 553,834 573,419
Separate account assets 9,529,160 6,820,599
Other assets 24,210 22,110
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $10,633,763 $7,811,370
=======================================================================================
- ---------------------------------------------------------------------------------------
Fixed maturities by Investment Grade
(In `000's) 1997 1996
- ---------------------------------------------------------------------------------------
AAA $ 30,145 21.0% $17,589 18.1%
AA 12,545 8.8% 7,099 7.3%
A 85,130 59.4% 63,899 65.5%
BBB 15,487 10.8% 8,844 9.1%
- ---------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $143,307 $97,431
- ---------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Total assets increased from $7.8 billion at December 31, 1996 to $10.6 billion
at December 31, 1997, an increase of $2.8 billion or 56%. Separate Account
assets increased by 40% in 1997 compared to 1996 and represent 90% of total
assets as the Company continues to focus on its variable option insurance
products. Fixed maturity and short-term investments, included in invested
assets, increased by 56% during 1997. This increase is a result of a $47.7
million capital infusion in the fourth quarter of 1997 to support expansion of
Manulife New York's operations to include individual life insurance and pension
products in the state of New York. The Company continues to own high quality
investment grade fixed maturity investments, with an average rating of A, to
support its general account. The Company's deferred policy acquisition costs
(DPAC) asset grew by 26% as the Company experienced strong sales volumes during
1997 and deferred the related costs, net of current amortization, associated
with the sales. Due from reinsurers decreased $19.6 million as a result of lower
fixed deferred account values associated with the policies reinsured under the
Peoples coinsurance agreement.
<TABLE>
<CAPTION>
Liabilities
- ------------------------------------------------------------------------------
(In `000's) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Amount payable to reinsurers $ 571,882 $ 593,910
Notes payable to affiliates 183,955 158,201
Separate account liabilities 9,529,160 6,820,599
Other liabilities 140,040 111,589
- ------------------------------------------------------------------------------
TOTAL LIABILITIES $10,425,037 $7,684,299
- ------------------------------------------------------------------------------
</TABLE>
Total liabilities have increased proportionately with the growth in the related
assets during 1997, primarily in the Company's Separate Accounts. During 1997,
the Company borrowed an additional $25.0 million from Manulife to support the
record sales volumes and related acquisition expenses. Amount payable to
reinsurers decreased $22.0 million primarily as a result of lower fixed deferred
account values associated with the policies reinsured under the Peoples
coinsurance agreement.
Shareholder's Equity
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In `000's) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Common stock $ 2,600 $ 2,600
Additional paid-in capital 179,053 131,322
Unrealized appreciation on securities 1,200 509
available-for sale
Retained earnings (deficit) 25,873 (7,360)
- ------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY $ 208,726 $ 127,071
- ------------------------------------------------------------------------------
</TABLE>
The Company received $47.7 million of additional capital to support expansion of
its New York operations. The growth in retained earnings is due to net income
from continuing operations and discontinued operations of $27.4 million and $5.8
million, respectively, during 1997.
Asset/liability Management
The Company has established a target portfolio mix which takes into account the
risk attributes of the liabilities supported by the assets, expectations of
market performance, and a generally conservative investment philosophy.
Preservation of capital and maintenance of income flows are key objectives.
Liquidity and Capital Resources
The substantial increase in the Company's sales since 1993 has resulted in the
Company requiring cash financing to support this growth. The Company must invest
all of its variable option deposits in the Separate Accounts while paying
11
<PAGE> 12
commissions and acquisition expenses related to these deposits and other sales
from its general account. Prior to 1995, the Company used capital and general
account assets to fund these costs. Since 1995, The Company's fixed account
acquisition expenses are largely funded by the Peoples fixed account reinsurance
agreement. Substantially all variable account acquisition costs are financed
through borrowings from Manulife and internally generated cashflows.
The Company obtained external financing in 1994 by entering into a $150 million
revolving credit and term loan agreement (the "Loan") with the Canadian Imperial
Bank of Commerce and Deutsche Bank AG ("CIBC"). The Loan was collateralized by
the mortality and expense risk charges and surrender charges related to the
Company's business. As a result of the merger with Manulife, the Company became
party to a restructured lending facility that provides sufficient cash flow
needs at more favorable interest rate margins. Consequently, in April 1996, the
Company extinguished its debt with CIBC through a restructured financing
arrangement directly with Manulife.
Aside from the financing required to partially fund acquisition costs, the
Company's cash flows are adequate to meet the general obligations on all annuity
contracts.
Capital Requirements and Solvency Protection
In order to enhance the regulation of insurer solvency, the National Association
of Insurance Commissioners enforces minimum Risk Based Capital (RBC)
requirements. The requirements are designed to monitor capital adequacy and to
raise the level of protection that statutory surplus provides for policyholders.
The RBC model law requires that life insurance companies report on a
formula-based RBC standard which is calculated by applying factors to various
asset, premium and reserve items. The formula takes into account risk
characteristics of the life insurer, including asset risk, insurance risk,
interest risk and business risk. If an insurer's ratio falls below certain
thresholds, regulators will be authorized, and in some circumstance required, to
take regulatory action.
The Company's policy is to maintain capital and surplus balances well in excess
of the minimums required under government regulations in all jurisdictions in
which the Company does business. This was the case for each of the years ended
December 31, 1997, 1996 and 1995.
Impact of year 2000
Like other business organizations and individuals, the Company would be
adversely affected if its computer systems and those of its service providers do
not properly process and calculate date-related information and data from and
after January 1, 2000. The Company is completing an assessment of the Year 2000
impact on its systems and business processes. Management believes that the
Company will complete its Year 2000 project for all critical systems and
processes by September 30, 1998, prior to any anticipated impact on the critical
systems and processes.
The date on which the Company believes it will complete the Year 2000 project is
based on management's best estimates, which were derived utilizing numerous
assumptions of future events. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer code, and
other similar uncertainties.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Auditors and the Company's consolidated financial
statements attached hereto are incorporated herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the years ended December 31, 1997 and 1996, the Company has engaged Ernst &
Young LLP, who are also the independent auditors of Manulife, as the Company's
independent auditors. The appointment of Ernst & Young as auditors was approved
by the Board of Trustees of the Company and by the sole shareholder of the
Company, Manulife-Wood Logan Holding Co., Inc., formerly, NAWL Holding Company,
Inc. on May 31, 1997. For the year ended December 31, 1995, the Company had
engaged Coopers & Lybrand L.L.P. ("Coopers") as the Company's independent
accountants.
12
<PAGE> 13
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (ALSO REFERRED TO
AS THE "COMPANY")
Officers and Directors of the Company
The directors and executive officers of the Company, together with their
principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
Name Position with the Company Principal Occupation
<S> <C> <C>
John D. DesPrez III Director* and President Senior Vice President, U.S. Annuities,
Age: 41 Manulife, September 1996 to present; Director
and President of the Company, September
1996 to present; Vice President, Mutual
Funds, Manulife, January, 1995 to
September 1996, President and Chief
Executive Officer, North American Funds,
March 1993 to September 1996; Vice
President and General Counsel of the
Company, January 1991 to June 1994.
Peter S. Hutchison Director* Senior Vice President, Corporate Taxation,
Age: 48 Manulife, January 1996 to present; Director
of the Company January 1991 to present;
Executive Vice President and Chief
Financial Officer, North American Life,
September 1994 to December 31, 1995;
Senior Vice President and Chief Actuary,
North American Life, April 1992 to
August 1994.
John D. Richardson Director* and Chairman Senior Vice President and General Manager,
Age: 60 of the Board U.S. Operations, Manulife, January 1995 to
present; Director and Chairman of the Board
of the Company, March 1997 to present; Senior
Vice President and General Manager, Canadian
Operations, Manulife, June 1992 to January
1995.
Robert Boyda Vice President, Investment Vice President, Investment Management
Age: 41 Management Services Services of the Company, January 1997 to
present; Assistant Vice President,
Management Service, Manulife, August
1994 to January 1997; General Manager,
Retail Banking, CIBC, January 1987 to
April 1994.
James R. Boyle Vice President, Administration Vice President, Administration Accumulation
Age: 38 Products, Manulife September 1996 to
present; Vice President, Administration
of the Company, September 1996 to
present; Vice President, Treasurer and
Chief Administrative Officer, North
American Funds, June 1994 to September
1996; Corporate Controller of the
Company, July 1993 to June 1994; Mutual
Fund Accounting Executive of the
Company, June 1992 to July 1993.
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Name Position with the Company Principal Occupation
<S> <C> <C>
James D. Gallagher Vice President, Secretary and Vice President, Legal Services U.S.
Age: 43 General Counsel Operations, Manulife, January 1996 to
present; Vice President, Secretary and
General Counsel of the Company, June
1994 to present; Vice President and
Associate General Counsel, The
Prudential Insurance Company of America,
1990-1994.
Richard C. Hirtle Vice President, Strategic Vice President, Strategic Development,
Age: 42 Development & Accumulation Life Annuities, Manulife, December 1997 to
Products present; Vice President, Strategic
Development & Accumulation Life Products
of the Company December 1997 to present;
Vice President, Treasurer, Chief
Financial Officer of the Company
November 1988 to December 1997.
Hugh C. McHaffie Vice President, U.S. Annuities Vice President, Product and Development,
Age: 39 Product and Development Annuities, Manulife, January 1996 to present;
Vice President U.S. Annuities Product and
Development of the Company August 1994 to
present; Product Development Executive of the
Company, August 1990 to August 1994.
David W. Libbey Vice President, Treasurer, and Vice President and Chief Financial Officer,
Age: 50 Chief Financial Officer Annuities, Manulife, December 1997 to
present; Vice President, Treasurer and
Chief Financial Officer of the Company
December 1997 to present; Vice
President, Finance of the Company June
1997 to December 1997; Vice President &
Actuary, Paul Revere Insurance Group
June 1970 to March 1997.
Janet Sweeney Vice President, Corporate Services Vice President, Human Resources, U.S.
Age: 47 Operations, Manulife, January 1996 to
present; Vice President, Corporate
Services of the Company, January 1995 to
present; Executive, Corporate Services
of the Company, July 1989 to December
1994.
John G. Vrysen Vice President and Chief Actuary Vice President and Chief Financial Officer,
Age: 42 U.S. Operations, Manulife, January 1996 to
present; Vice President and Chief Actuary of
the Company, January 1986 to present.
</TABLE>
ITEM 11 - EXECUTIVE COMPENSATION OF THE REGISTRANT
The Company's executive officers may also serve as officers of one or more of
Manulife's affiliates. Allocations have been made as to such officers' time
devoted to duties as executive officers of the Company. The following table
shows the allocated compensation paid or awarded to or earned by the Company's
Chief Executive Officer for services provided to the Company. No other executive
officer had allocated cash compensation in excess of $100,000.
14
<PAGE> 15
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus(1) Other Restricted Securities LTIP All Other
Position Annual Stock Under-lying Payout Compen-
Compen- Award(s) Options/SARs sation(3)
sation(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John D. DesPrez, 1997 $99,959 $39,292 N/A N/A N/A N/A $3,612
President
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Bonus for 1996 performance paid in 1997.
(2) Does not include group health insurance since the plans are the same for all
salaried employees. Other Annual Compensation disclosed only if the aggregate
value of the perquisite exceeded the lesser of $50,000 or 10% of salary and
bonus.
(3) Other Compensation includes the value of term life insurance premiums paid
by Manulife for the benefit of the executive officer and Company paid 401(k)
plan contributions. In prior years, this column included company paid pension
plan contributions but this year there were no company paid contributions since
the plan is overfunded.
The Management Resources and Compensation Committee (the "Committee") of the
Board of Directors for Manulife approves the compensation programs for all
officers as well as the annual review of Manulife's Annual Incentive Plan awards
and Long-Term Incentive Plan grants. Executive officers participate in certain
plans sponsored by Manulife.
Manulife's executive compensation policies are designed to recognize and reward
individual performance as well as provide a total compensation package which is
competitive with the median of Manulife's comparator group.
Manulife's officer compensation program is comprised of three key components;
base salary, annual incentive and long-term incentive.
Salary
The Committee approves the salary ranges and salary increase levels for all Vice
Presidents and above based on competitive industry data for all markets in which
Manulife operates. Salary increases to Manulife's officers and executive
officers have been consistent with the salary increase programs approved for all
employees.
In establishing Manulife's competitive position and developing annual salary
increase programs, Manulife uses several annual surveys as prepared by
independent compensation consulting firms with reference to publicly disclosed
information.
The compensation of executive officers is determined by the individual to whom
the officer reports and is approved by Manulife.
Annual Incentive Plan
Manulife's Annual Incentive Plan ("AIP") provides the opportunity to earn
incentive bonuses based on the achievement of pre-established corporate and
divisional earnings objectives and divisional and individual performance
objectives. The AIP uses earnings and performance measures to determine awards
with predetermined thresholds for each component as approved by the Committee
annually. Incentive award levels are established for each participant based on
organizational level. When corporate and divisional performance objectives are
significantly exceeded, a participant can receive up to a maximum of 150% to
200% of the established incentive award which would result in incentive award
levels ranging from 22.5% to 100% of base salary. For named executive officers,
incentive award levels range from 20-35% of base salary assuming achievement of
targeted performance objectives. If corporate and divisional performance
objectives are above or below targeted pay the incentive award is adjusted
according to plan guidelines.
15
<PAGE> 16
Long Term Incentive Plan
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Name Securities Units Performance or Estimated Future Payouts Under
of Other Rights Other Period Until Non-Securities-Price-Based Plans (US$)(3)
(#)(1) Maturation or
Payout(2)
--------------------------------------------
Threshold Target(4) Maximum
($ or #) ($ or #) ($ or #)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John D. DesPrez, 2,942 Jan. 1, 2001 0 $16,940 N/A
President
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Each grant has two components: Cash Appreciation Rights and Retirement
Appreciation Rights.
(2) The appreciation in the value of Cash Appreciation Rights are redeemed four
years following the grant date. Retirement Appreciation Rights are only redeemed
upon retirement or cessation of employment with the Company.
(3) Canadian Dollars converted to US dollars using a book rate of 1.36.
(4) The target is calculated assuming Cash Appreciation Rights are exercised in
the fourth year. At that time 50% of the target is redeemed in cash and the
balance continues to appreciate until redeemed upon retirement or cessation of
employment.
All employees at the Vice President level and above are eligible to participate
in the Manulife Long-Term Incentive Plan.
The purpose of the Long Term Incentive Plan is to encourage senior officers to
act in the long term interests of Manulife and to provide an opportunity to
share in value creation as measured by the changes in Manulife's statutory
surplus. The Plan is an appreciation rights plan which requires that substantial
portion of any accumulated gain remain invested with Manulife during the
participant's career with Manulife.
The Committee reviews the Plan on an annual basis with respect to Manulife's
performance, targeted growth and competitive position. Based on management's
recommendations, the Committee approves certain officers for participation in
Plan, when grants will be awarded, and the size and terms of grant.
Grants are determined as a percentage of the participant's base salary or
Canadian job grade midpoint depending on organization level of the participant.
Each grant has two components: cash appreciation rights and retirement
appreciation rights which are granted in tandem on a one-for-one basis. Grants
appreciate proportionally to the statutory surplus of Manulife. Cash
appreciation rights are exercised on the fourth anniversary of the grant whereas
retirement appreciation rights may only be exercised upon retirement. The net
present value of the payout opportunity after four years varies between 20% to
100% of base salary depending on the organization level of the participant.
Perquisites
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, dental, pension, basic and dependent life
insurance, defined contribution plan and long and short-term disability
coverage.
US domiciled officers at the Vice President levels and above are provided with
an automobile and parking benefit, cellular telephone and computer. The
automobile benefit covers insurance and maintenance. There are no other benefit
packages which currently enhance overall compensation by more than 10%.
US Retirement Plans
The United States domiciled executive officers of The Manufacturers Life
Insurance Company (U.S.A.) ("ManUSA") and the Company continue to earn Pension
Benefits pursuant to their plan membership prior to the merger of Manulife and
NAL. In addition they are also eligible for benefits under the Supplemental
Pension Plan for United States Salaried
16
<PAGE> 17
Employees of Manulife. Their participation also continues in their respective
401(k) Savings Plans (Manulife Financial 401(k) Savings Plan and North American
Security Life 401(k) Savings Plan).
North American Life Staff Pension Fund 1948 For United States Members:
Under the North American Life Staff Pension Fund 1948 For United States Members,
income is payable for the life of the executive officer, with a guarantee of a
minimum of 120 monthly payments. The defined benefit pension plan vests with
five years of service. The normal retirement benefit is a monthly pension
benefit in an amount equal to the Employer Pension Credit. Employer Pension
units are equal to the average of 1.1% of compensation plus 0.4% of compensation
in excess of the Social Security Taxable Wage Base during the employee's last
five years of employment, multiplied by the years of benefit service earned
after December 31, 1966 (Maximum 35 years). Normal retirement age is 65. Early
retirement is age 55 with 5 years of service.
Combined pension benefits at age 65 under this arrangement are as follows:
<TABLE>
<CAPTION>
==========================================================================
Years of Service
------------------------------------------------------
Remuneration ($) 15 20 25 30 35
=========================================================================
$ $ $ $ $
- -------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$125,000 21,881 29,175 36,468 43,762 51,056
- -------------------------------------------------------------------------
150,000 26,995 35,994 44,992 53,990 62,989
- -------------------------------------------------------------------------
175,000 30,239 40,318 50,398 60,478 70,557
- -------------------------------------------------------------------------
200,000 30,510 40,680 50,850 61,020 71,190
- -------------------------------------------------------------------------
225,000 30,510 40,680 50,850 61,020 71,190
- -------------------------------------------------------------------------
250,000 30,510 40,680 50,850 61,020 71,190
- -------------------------------------------------------------------------
300,000 30,510 40,680 50,850 61,020 71,190
- -------------------------------------------------------------------------
400,000 30,510 40,680 50,850 61,020 71,190
=========================================================================
</TABLE>
Mr. DesPrez has 6.9 years of credited service.
Supplemental Pension Plan for United States Salaried Employees of Manulife
Financial:
In addition to their respective pension plans, executives officers are eligible
for benefits under the Supplemental Pension Plan for United States Salaried
Employees of Manulife Financial. This is a non-contributory, non-qualified plan
intended to provide additional pension income. The pension earned under the
Supplemental Pension Plan for United States Salaried Employees of Manulife is
60% of the first $200,000 of Final Average Earnings, plus 30% of the next
$300,000, plus 10% of amount over $500,000, less 15.75% of their Social Security
Offset Base, multiplied by the number of years of service (maximum 35). This
benefit is offset by pension benefit payable from the executive officer's
respective Qualified Plan.
Combined pension benefits at age 65 under this arrangement were as follows:
<TABLE>
<CAPTION>
================================================================================
Years of Service
- --------------------------------------------------------------------------------
Remuneration ($) 15 20 25 30 35
================================================================================
$ $ $ $ $
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$150,000 0 0 0 0 0
- --------------------------------------------------------------------------------
175,000 2,138 2,850 3,563 4,275 4,988
- --------------------------------------------------------------------------------
200,000 7,673 10,230 12,788 15,345 17,903
- --------------------------------------------------------------------------------
225,000 12,930 17,240 21,550 25,860 30,170
- --------------------------------------------------------------------------------
250,000 15,853 21,137 26,421 31,705 36,989
- --------------------------------------------------------------------------------
300,000 21,697 28,930 36,162 43,395 50,627
- --------------------------------------------------------------------------------
400,000 33,387 44,516 55,645 66,774 77,903
- --------------------------------------------------------------------------------
500,000 45,077 60,102 75,128 90,153 105,179
================================================================================
</TABLE>
17
<PAGE> 18
North American Security Life 401(k) Savings Plan:
The Company offers a 401(k) savings plan. This plan allows employees of the
Company to contribute 6% of their annual earnings up to the yearly compensation
limits of $160,000 for 1997. The yearly maximum an employee can contribute is
$9,500 for 1997. The Company matches 50% of employees contributions as well as
contributes a floor amount of 2% of base pay. Employees become 100% vested in
the employer matching contributions if he or she retires on or after age 65,
becomes disabled or dies. Otherwise employees become vested in the employer
contribution through the following vesting schedule:
<TABLE>
<CAPTION>
Years of Service Vested Percentage
<S> <C>
less than 3 0%
at least 3 33 1/3 %
at least 4 66 2/3%
5 or more 100%
</TABLE>
Employment Contract
Mr. DesPrez's previous compensation package with the Company (the "Previous
Agreement") included a termination provision which was subsequently incorporated
into his employment agreement with ManUSA. The Previous Agreement was due to
expire 3 years from the date (January 1, 1996) NAL merges with Manulife. The
provision provides that if a termination occurs without just and proper cause
prior to January 1, 1999, Mr. DesPrez shall be entitled to receive the following
severance allowances and benefits in equal semi-monthly installments on the date
of termination for a period of 18 months: one twelfth the sum of his annual base
salary and the average of his last two years bonus payments multiplied by the
number of months in the severance period. He would also receive a lump sum
payment equal to the monthly average of his annual bonus payments for the last
two years multiplied by the number of full months in which he provided
employment services to the Company during the calendar year in which he is
terminated. The Employer will continue to pay for premiums for the benefit of
Mr. DesPrez under the Employer's group life, medical, dental and vision
insurance plans. Any unvested pension benefits shall vest at date of
termination. The employer will pay for outplacement counseling services up to a
maximum of $25,000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock MWL 2,600 shares 100%
</TABLE>
(b) Nothing to report
(c) Nothing to report
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Item 7 - Liquidity and Capital Resources
18
<PAGE> 19
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
(1) The following consolidated financial statements of the Registrant are filed
as part of this report:
a. Report of Independent Auditors of Ernst & Young, LLP dated February 26,
1998.
b. Report of Independent Accountants of Coopers & Lybrand L.L.P. dated May 29,
1997, except for Note 14, as to which the date is February 26, 1998.
c. Consolidated Balance Sheets at December 31, 1997 and 1996.
d. Consolidated Statement of Income for the Years ended December 31, 1997,
1996 and 1995.
e. Consolidated Statements of Changes in Shareholder's Equity for the Years
ended December 1997, 1996 and 1995.
f. Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
g. Notes to Financial Statements - December 31, 1997
(2) Financial Statement Schedules:
a. Schedule I - Summary of Investments - Other than Investments in Related
Parties.
b. Schedule III - Supplemental Insurance Information
c. Schedule IV - Reinsurance
(3) Exhibits (the Registrant is also referred to as the "Company")
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
1(a) Underwriting Agreement between the Company and
Manufacturers Securities Services, LLC, formerly
NASL Financial Services, Inc. (Underwriter)1/
1(b)i Promotional Agent Agreement between Manufacturers
Securities Services, LLC, formerly NASL Financial
Services, Inc. (Underwriter), the Company and Wood
Logan Associates, Inc. (Promotional Agent) 2/
1(b)ii Amendment to Promotional Agent Agreement 1/
2 Not Applicable
3(i)(a) Certificate of Incorporation of the Company 3/
3(i)(b) Certificate of Amendment of Certificate of
Incorporation of the Company, Name Change, July
1984 3/
19
<PAGE> 20
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
3(i)(c) Certificate of Amendment of Certificate of
Incorporation of the Company, Authorization of
Capital, December 1994 3/
3(i)(d) Certificate of Amendment of Certificate of
Incorporation of the Company, Name Change, March
1997 4/
3(i)(e) Certificate of Amendment of Certificate of
Incorporation of the Company, Registered Agent,
July 1997 3/
3(ii) Amended and Restated By-Laws of the Company 3/
4(i) Form of Individual Single Payment Deferred Fixed
Annuity Non-Participating Contract - 10/
4(ii) Form of Group Single Payment Deferred Fixed Annuity
Non-Participating Contract - 10/
4(iii) Individual Retirement Annuity Endorsement - 10/
4(iv) ERISA Tax-Sheltered Annuity Endorsement - 10/
4(v) Tax-Sheltered Annuity Endorsement - 10/
4(vi) Section 401 Plans Endorsement - 10/
5 Opinion and Consent of James D. Gallagher, Esq.- 11/
6 Not Applicable
7 Not Applicable
8 Not Applicable
9 Not Applicable
10(i) - Form of broker-dealer agreement between the
Company, Manufacturers Securities Services,
LLC, formerly NASL Financial Services, Inc.
(underwriter), Wood Logan Associates, Inc.
(Promotional Agent) and broker-dealers 5/
(10)(ii)
- Reinsurance and Guaranteed Death Benefits
Agreement between the Company and Connecticut
General Life Insurance Company 8/
(10)(iii)
- Reinsurance Agreement between the Company and
PaineWebber Life Insurance Company 9/
(10)(iv)
- Coinsurance Agreement between the Company and
Peoples Security Life Insurance Company - 12/
(10)(v) - Reinsurance and Accounts Receivable Agreements
between the Company and ITT Lyndon Life - 12/
20
<PAGE> 21
(10)(vi) - Automatic Modified -Coinsurance Reinsurance
Agreement between the Company and Transamerica
Occidental Life Insurance Company - 12/
(10)(vii) - Automatic Yearly Renewable Term Reinsurance
Agreement between the Company and Transamerica
Occidental Life Insurance Company - 12/
(10)(viii) - Amendment No. 1 to the Variable Annuity
Guaranteed Death Benefit Reinsurance Agreement
between the Company and Connecticut General
Life Insurance Company - 12/
11 Not Applicable
12 Not Applicable
13 Not Applicable
14 Not Applicable
15 Not Applicable
16 Not Applicable
17 Not Applicable
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 The Company has the following wholly owned
subsidiaries: Manufacturers Securities Services,
LLC and The Manufacturers Life Insurance Company of
New York
22 Not Applicable
23(i) Not Applicable
23(ii) Not Applicable
24 (i) Power of Attorney - John D. Richardson, Director
and Chairman of the Company
24(ii) Power of Attorney - David W. Libbey, Principal
Financial Officer of the Company 3/
21
<PAGE> 22
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
24(iii) Power of Attorney - Peter Hutchison, Director of
the Company 1/
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule - 13/
28 Not Applicable
1/ Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement on Form N-4, file number 33-76162, filed February 25, 1988 on
behalf of The Manufacturers Life Insurance Company of North America
Separate Account A.
2/ Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4, file number 33-76162, filed April 29, 1997 on behalf
of The Manufacturers Life Insurance Company of North America Separate
Account A.
3/ Incorporated by reference to Form 10Q, file number 812-06037, filed
November 14, 1997 on behalf of The Manufacturers Life Insurance Company of
North America.
4/ Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1, file number 333-6011, filed October 9, 1997 on
behalf of The Manufacturers Life Insurance Company of North America.
5/ Incorporated by reference to Exhibit (b)(3)(iii) to pre-effective amendment
no. 1 to Form N-4, file number 33-9960, filed February 2, 1987 on behalf of
the NASL Variable Account of the Company, now known as The Manufacturers
Life Insurance Company of North America Separate Account A
6/ not applicable
7/ not applicable
8/ Incorporated by reference to Exhibit (b)(7)(i) to Registration Statement on
Form N-4, file number 33-76162, filed March 1, 1996
9/ Incorporated by reference to Exhibit (b)(7)(iii) to Registration Statement
on Form N-4, file number 33-76162, filed March 1, 1996
10/ Incorporated by reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
11/ Incorporated by reference to Exhibit 5 to Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, file number 33-6011, filed January
29, 1997
12/ Incorporated by reference to Exhibits (10)(iv) through (10)(viii) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1,
file number 33-6011, filed January 29, 1997
13/ Filed herewith
22
<PAGE> 23
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No Annual Report covering the Registrant's last fiscal year or proxy material
has been or will be sent to Registrant's security holders.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
(Registrant)
By: /s/ John D. Desprez III
-------------------------------------------------
John D. DesPrez III, Principal Executive Officer
By: /s/ David W. Libbey
-------------------------------------------------
David W. Libbey, Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: March 31, 1998
24
<PAGE> 25
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons in the capacities with the
Registrant and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John D. DesPrez III March 31, 1998
- ------------------------------- ------------------
John D. DesPrez III Director and President (Principal Date
Executive Officer)
- ------------------------------- ------------------
*Peter S. Hutchison Director Date
- ------------------------------- ------------------
*John D. Richardson Director and Chairman of the Board Date
/s/ David W. Libbey March 31, 1998
- ------------------------------- ------------------
David W. Libbey Vice President, Treasurer and Chief Date
Financial Officer (Principal and
Accounting Officer)
/s/ James D. Gallagher March 31, 1997
- ------------------------------- ------------------
*By James D. Gallagher Date
Attorney-in-Fact Pursuant to
Powers of Attorney
</TABLE>
25
<PAGE> 26
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE
INSURANCE COMPANY OF NORTH
AMERICA (FORMERLY NORTH
AMERICAN SECURITY LIFE
INSURANCE COMPANY)
Years ended December 31, 1997, 1996
and 1995
26
<PAGE> 27
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Audited Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors............................................... 28
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................................. 30
Consolidated Statements of Income............................................ 31
Consolidated Statements of Changes in Shareholder's Equity................... 32
Consolidated Statements of Cash Flows........................................ 33
Notes to Consolidated Financial Statements................................... 34
27
<PAGE> 28
Report of Independent Auditors
The Board of Directors and Shareholder
The Manufacturers Life Insurance Company of North America
We have audited the accompanying consolidated balance sheets of The
Manufacturers Life Insurance Company of North America (formerly North American
Security Life Insurance Company and hereinafter referred to as the Company) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for the years then
ended. Our audit also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 1997 and 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Manufacturers Life Insurance Company of North America at December 31, 1997 and
1996, and the consolidated results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respect the information set forth therein.
/s/ Ernst & Young LLP
- ---------------------
Boston, Massachusetts
February 26, 1998
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Shareholder of The Manufacturers Life Insurance
Company of North America:
We have audited the accompanying statements of income, changes in stockholder's
equity and cash flows of The Manufacturers Life Insurance Company of North
America (formerly North American Security Life Insurance Company) for the year
ended December 31, 1995. 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 audit.
We conducted our audit 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 made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of The
Manufacturers Life Insurance Company of North America for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 40 (FIN 40) and
Statement of Financial Accounting Standards No. 120 (SFAS 120), which required
implementation of several accounting pronouncements not previously adopted.
The effects of adopting FIN 40 and SFAS 120 were retroactively applied to the
Company's previously issued financial statements, consistent with the
implementation guidance of those standards.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Boston, Massachusetts
May 29, 1997, except for Note 14,
as to which the date is February 26, 1998
29
<PAGE> 30
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale, at fair value $ 143,307,365 $ 97,431,343
Marketable equity securities available-for-sale,
at fair value 1,177
Short-term investments 14,991,793 4,294,370
Foreclosed real estate -- 2,268,120
Policy loans 3,275,654 637,096
--------------------------------------
161,574,812 104,632,106
Cash and cash equivalents 7,338,690 12,073,302
Accrued investment income 2,640,707 1,806,106
Deferred policy acquisition costs 364,983,732 290,610,274
Receivable from affiliates 4,605,036
Other assets 9,625,844 8,229,825
Due from reinsurers 553,833,869 573,418,610
Separate account assets 9,529,160,219 6,820,599,385
--------------------------------------
Total assets $10,633,762,909 $7,811,369,608
======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policyholder funds $ 92,750,188 $ 82,619,372
Payable to affiliates 1,462,021
Amounts on deposit from reinsurer 3,000,000 6,000,000
Amount payable to reinsurers 571,881,943 593,909,628
Notes payable to affiliates 183,955,075 158,200,680
Deferred tax liability 16,428,278 288,800
Other liabilities 27,861,648 21,219,254
Separate account liabilities 9,529,160,219 6,820,599,385
--------------------------------------
Total liabilities 10,425,037,351 7,684,299,140
Shareholder's equity:
Common stock (par value $1,000 per share--authorized, 3,000
shares; issued and outstanding, 2,600 shares) 2,600,000 2,600,000
Additional paid-in capital 179,052,696 131,322,072
Unrealized appreciation on securities available-for-sale 1,199,890 508,601
Retained earnings (deficit) 25,872,972 (7,360,205)
--------------------------------------
Total shareholder's equity 208,725,558 127,070,468
--------------------------------------
Total liabilities and shareholder's equity $10,633,762,909 $7,811,369,608
======================================
</TABLE>
See accompanying notes.
30
<PAGE> 31
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Revenues:
Fees from separate accounts and policyholder funds $126,636,872 $ 95,323,185 $ 77,572,040
Advisory fees and other distribution revenues 67,677,977 46,232,682 27,911,710
Net investment income 7,905,545 5,452,083 28,701,102
Net realized investment gains 530,886 764,139 9,711,168
-------------------------------------------------
202,751,280 147,772,089 143,896,020
Benefits and expenses:
Benefits to policyholders 4,986,244 4,241,628 27,128,685
Amortization of deferred policy acquisition costs 40,648,703 30,830,214 43,287,070
Other insurance expenses 100,385,240 71,255,354 58,745,087
Financing costs 14,267,785 15,820,730 9,282,164
-------------------------------------------------
160,287,972 122,147,926 138,443,006
-------------------------------------------------
Income from continuing operations before provision
for income tax (benefit) 42,463,308 25,624,163 5,453,014
Provision for income tax (benefit):
Current (723,741) 1,464,291 2,022,624
Deferred 15,767,246 7,614,476 (9,063,710)
-------------------------------------------------
15,043,505 9,078,767 (7,041,086)
-------------------------------------------------
Income from continuing operations 27,419,803 16,545,396 12,494,100
Discontinued operations
Loss from operations, net of tax (141,134) (809,948) (1,461,888)
Gain on disposal, net of tax 5,954,508
-------------------------------------------------
Net income $ 33,233,177 $ 15,735,448 $ 11,032,212
=================================================
</TABLE>
See accompanying notes.
31
<PAGE> 32
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Changes in Shareholder's Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION ON RETAINED TOTAL
ADDITIONAL SECURITIES EARNINGS SHAREHOLDER'S
COMMON STOCK PAID-IN CAPITAL AVAILABLE-FOR-SALE (DEFICIT) EQUITY
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 as
previously reported $2,600,000 $110,633,000 $(53,824,868) $ 59,408,132
Cumulative effect on prior years
of applying the new basis of
accounting 1,830,140 $ (8,664,619) 19,697,003 12,862,524
------------------------------------------------------------------------------------
Balance at January 1, 1995 2,600,000 112,463,140 (8,664,619) (34,127,865) 72,270,656
Net income 11,032,212 11,032,212
Reversal of deferred tax
valuation allowance 858,932 858,932
Change in unrealized
appreciation on securities
available-for-sale, net of tax 11,094,515 11,094,515
------------------------------------------------------------------------------------
Balance at December 31, 1995 2,600,000 113,322,072 2,429,896 (23,095,653) 95,256,315
Capital contribution 18,000,000 18,000,000
Net income 15,735,448 15,735,448
Change in unrealized
appreciation on securities
available-for-sale, net of
tax and DPAC adjustments (1,921,295) (1,921,295)
------------------------------------------------------------------------------------
Balance at December 31, 1996 2,600,000 131,322,072 508,601 (7,360,205) 127,070,468
Capital contribution 47,730,624 47,730,624
Net income 33,233,177 33,233,177
Change in unrealized
appreciation on securities
available-for-sale, net of
tax and DPAC adjustments 691,289 691,289
------------------------------------------------------------------------------------
Balance at December 31, 1997 $2,600,000 $179,052,696 $ 1,199,890 $ 25,872,972 $208,725,558
====================================================================================
</TABLE>
See accompanying notes.
32
<PAGE> 33
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,233,177 $ 15,735,448 $ 11,032,212
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Write-down of foreclosed real estate 342,025 1,235,620
Amortization of bond discount and premium 400,488 196,315 56,458
Benefits to policyholders 4,986,244 4,241,628 27,128,685
Gain on interest rate swap (1,632,000) (475,407)
Provision for deferred income tax (benefit) 15,767,246 7,944,703 (7,929,766)
Net realized investment gains (530,886) (764,139) (9,711,168)
Amortization of deferred policy acquisition costs 40,648,703 30,830,214 43,287,070
Amortization of deferred policy acquisition costs
included in discontinued operations 1,706,547 2,213,505 1,035,069
Policy acquisition costs deferred (123,964,814) (89,535,239) (61,103,093)
Gain on disposal of discontinued operations (9,393,984)
Changes in assets and liabilities:
Accrued investment income (834,601) 146,322 5,575,157
Other assets (1,396,019) 2,061,204 (2,456,292)
Receivable from affiliates (4,605,036)
Payable to affiliates (1,462,021) (4,203,687) (4,233,252)
Other liabilities 6,642,395 (1,788,725) 12,081,461
------------------------------------------------------
Net cash (used in) provided by operating activities (38,802,561) (34,212,426) 15,522,754
INVESTING ACTIVITIES
Purchase of fixed maturities (118,765,270) (48,300,025) (506,524,031)
Purchase of marketable equity securities (250,000) (6,033,533) (10,137,860)
Mortgage loans issued (136,101)
Proceeds from fixed maturities sold, matured or repaid 74,625,632 41,269,218 781,840,143
Proceeds from marketable equity securities sold 1,239 12,737,787 5,080,010
Proceeds from sales of foreclosed real estate 2,268,120 1,602,064 860,375
Proceeds from disposal of discontinued operations 16,337,562
Proceeds from sales of mortgage loans 110,791,046
Net change in short-term investments (10,697,423) (3,984,370)
Net change in policy loans (2,638,558) (569,773) 2,511,985
------------------------------------------------------
Net cash (used in) provided by investing activities (39,118,698) (3,278,632) 384,285,567
FINANCING ACTIVITIES
Net reinsurance (consideration) proceeds (2,442,944) (1,116,114) 4,785,845
Repayment of amounts on deposit from reinsurers (3,000,000) (3,000,000) (3,000,000)
Receipts credited to policyholder funds 20,606,428 20,923,239 302,496,632
Return of policyholder funds (15,461,856) (24,657,906) (69,404,163)
Transfer of policyholder funds to reinsurer (745,950,764)
Increase in notes payable to affiliates 25,754,395 138,200,680
Increase in notes payable 29,843,003
Notes payable repaid (109,866,565) (20,000,000)
Capital contribution 47,730,624 18,000,000
------------------------------------------------------
Net cash provided by (used in) financing activities 73,186,647 38,483,334 (501,229,447)
------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,734,612) 992,276 (101,421,126)
Cash and cash equivalents at beginning of year 12,073,302 11,081,026 112,502,152
------------------------------------------------------
Cash and cash equivalents at end of year $ 7,338,690 $ 12,073,302 $ 11,081,026
======================================================
Non-cash transactions:
Mortgage loans transferred to foreclosed real estate $2,405,052
======================================================
</TABLE>
See accompanying notes.
33
<PAGE> 34
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION
The Manufacturers Life Insurance Company of North America (formerly North
American Security Life Insurance Company and hereinafter referred to as MNA or
the Company) is a stock life insurance company domiciled in the State of
Delaware. The Company is a wholly-owned subsidiary of Manulife Wood Logan
Holding Company, Inc. (formerly NAWL Holding Company, Inc. and hereinafter
referred to as MWL or the Parent). On January 1, 1996, North American Life
Assurance Company of North York, Canada (NAL), the former parent of the Company,
merged with The Manufacturers Life Insurance Company. The surviving company
conducts business under the name The Manufacturers Life Insurance Company (MLI).
Concurrent with the merger, the Company's Parent went through a corporate
restructuring which resulted in the formation of a newly organized holding
corporation, MWL. At that time, all of the assets and liabilities of MNA and its
subsidiaries, The Manufacturers Life Insurance Company of New York (formerly
First North American Life Assurance Company and hereinafter referred to as MNY)
and NASL Financial Services, Inc. (NASL Financial), were transferred from MLI to
MWL. In addition, MLI's 20.2% ownership interest in Wood Logan Associates, Inc.
and its majority-owned subsidiary, Wood Logan Distributors, Inc., (collectively
Wood Logan) was transferred to MWL. In exchange, MLI received all Class A shares
of MWL common stock representing an 85% ownership interest. On January 1, 1997,
MLI contributed 62.5% of its 85% ownership interest to its indirect wholly-owned
subsidiary, The Manufacturers Life Insurance Company (U.S.A.) (MANUSA).
Effective December 18, 1997, MLI transferred its remaining 22.5% interest in MWL
to MRL Holding, LLC, (MRL) a newly formed Delaware limited liability company.
Also effective January 1, 1996, as part of the restructuring, the remaining
79.8% of Wood Logan was purchased by MWL. In exchange for the remaining shares
of Wood Logan, certain employees and former owners of Wood Logan received the
Class B voting shares of MWL representing a 15% ownership interest. Wood Logan
provides marketing services for the sale of the annuity products of MNA and MNY.
34
<PAGE> 35
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION (CONTINUED)
The Company issues individual life, variable life and annuity insurance
contracts (the contracts) in forty-eight states, including New York. Amounts
invested in the fixed portion of the contracts are allocated to the general
account of the Company. Amounts invested in the variable portion of the
contracts are allocated to the separate accounts of the Company. The separate
account assets are invested in shares of the Manufacturers Investment Trust
(formerly NASL Series Trust and hereinafter referred to as MIT), a no-load,
open-end management investment company organized as a Massachusetts business
trust.
NASL Financial acted as investment adviser to MIT and the North American Funds
(NAF), a no-load, open-end management investment company organized as a
Massachusetts business trust. NASL Financial also acted as principal underwriter
of the annuity and life insurance contracts issued by the Company. NASL
Financial had an agreement with Wood Logan to act as the promotional agent for
the sale of the variable annuity and variable life insurance products issued by
MNA and MNY.
Effective October 1, 1997, Manufacturers Securities Services, LLC (MSS),
replaced NASL Financial as the investment advisor to MIT and as the principal
underwriter of the annuity contracts. Wood Logan provides marketing services for
the sale of annuity contracts under an Administrative Services Agreement dated
October 7, 1997, between the Company and MLI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company and its
majority and wholly-owned subsidiaries have been prepared in conformity with
generally accepted accounting principles (GAAP).
35
<PAGE> 36
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Prior to 1996, the Company prepared its financial statements in conformity with
accounting practices prescribed or permitted by the Delaware Insurance
Department which practices were considered GAAP for mutual life insurance
companies. FASB Interpretation 40, Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and other Enterprises (FIN 40),
as amended, which is effective for 1996 annual financial statements, no longer
permits statutory-basis financial statements to be described as being prepared
in conformity with GAAP. Accordingly, the Company has adopted various accounting
pronouncements, principally Statement of Financial Accounting Standards No. 120,
Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts (SFAS No. 120),
which addresses the accounting for long-duration insurance contracts.
Pursuant to the requirements of the above pronouncements, the effect of the
changes in accounting have been applied retroactively and the previously issued
1995 financial statements have been restated for the change. The effect of the
change applicable to years prior to January 1, 1995 has been presented as a
restatement of shareholder's equity as of this date.
The adoption had the effect of increasing net income for 1995 by approximately
$18,300,000.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and the
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts and
operations, after intercompany eliminations, of the Company and its majority and
wholly-owned subsidiaries, MNY and MSS (NASL Financial through October 1, 1997).
36
<PAGE> 37
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS AND INVESTMENT INCOME
The Company accounts for its fixed maturities and marketable equity securities
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that fixed maturities and marketable equity securities be
designated as either held-to-maturity, available-for-sale or trading at the time
of purchase. Held-to-maturity fixed maturities are reported at amortized cost
and the remainder of fixed maturities and marketable equity securities are
reported at fair value with unrealized holding gains and losses reported in
income for those designated as trading and as a separate component of
shareholder's equity for those designated as available-for-sale.
The Company has classified all of its fixed maturities and marketable equity
securities as available-for-sale. As a result, these securities are reported in
the accompanying financial statements at fair value. Changes in fair values,
after adjustment for deferred policy acquisition costs (DPAC) and deferred
income taxes, are reported as unrealized appreciation or depreciation directly
in shareholder's equity, and accordingly, have no effect on net income. The DPAC
offset to the unrealized appreciation or depreciation represents valuation
adjustments or reinstatements of DPAC that would have been required as a charge
or credit to operations had such unrealized amounts been realized.
The amortized cost of fixed maturities is adjusted for the amortization of
premiums and accretion of discounts using the interest method. This amortization
or accretion is included in net investment income.
For the mortgage-backed bond portion of the fixed maturities portfolio, the
Company recognizes amortization 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. The net investment in the security is adjusted to
the amount that would have existed had the new effective yield been applied
since the acquisition of the security. That adjustment is included in net
investment income.
Short-term investments generally consist of instruments which have a maturity of
less than one year at the time of acquisition. Short-term investments are
reported at cost, which approximates fair value.
37
<PAGE> 38
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
Real estate acquired in satisfaction of debt is stated at the lower of the
appraised fair value or the outstanding principal loan balance plus accrued
interest and foreclosure costs.
Policy loans are reported at unpaid balances, not in excess of the underlying
cash value of the policies.
Realized gains or losses on investments sold and declines in value judged to be
other-than-temporary are determined on the specific identification basis.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest, which approximates fair
value.
DEFERRED POLICY ACQUISITION COSTS
Commissions, net of commission allowances for reinsurance ceded, and other costs
of acquiring new business that vary with and are primarily related to the
production of new business have been deferred. These acquisition costs are being
amortized generally in proportion to the present value of expected gross profits
from surrender charges and investment, mortality and expense margins. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of products are revised.
The Company, through the date of the NAF sale, deferred NAF commissions and
promotional agent fees (NAF commission) up to the amount recoverable from
contingent deferred sales charges (CDSC). Deferred NAF commissions were
recognized on a straight-line basis over the period in which the CDSC's were in
effect.
38
<PAGE> 39
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate account assets and liabilities that are reported in the accompanying
consolidated balance sheet represent investments in MIT, which are mutual funds
that are separately administered for the exclusive benefit of the variable life
and annuity policyholders and are reported at fair value. Such policyholders,
rather than the Company, bear the investment risk. The operations of the
separate accounts are not included in the accompanying consolidated financial
statements. Fees charged on separate account policyholder funds are included in
revenues.
POLICYHOLDER FUNDS AND BENEFITS TO POLICYHOLDERS
Policyholder funds for the fixed portion of variable life and annuity contracts
are computed under a retrospective deposit method and represent account balances
before applicable surrender charges. Benefits to policyholders include interest
credited to policyholders and other benefits that are charged to expense
including benefit claims incurred in the period in excess of the related
policyholder account balances. Interest crediting rates for the fixed portion of
variable life and annuity contracts ranged from 4.10% to 6.15% in 1997; 4.00% to
6.15% in 1996 and 4.20% to 7.15% in 1995.
RECOGNITION OF REVENUES
Fees from separate accounts and policyholder funds represent fees assessed
against policyholder account balances, and include mortality and expense risk
charges, surrender charges and an annual administrative charge.
MSS, and formerly NASL Financial (collectively the Advisor), are responsible for
managing the corporate and business affairs of MIT and act as investment advisor
to MIT. As compensation for its investment advisory services, the Advisor
receives advisory fees based on the daily average net assets of the portfolios.
The Advisor, as part of its advisory services, is responsible for selecting and
compensating subadvisors to manage the investment and reinvestment of the assets
of each portfolio, subject to the supervision of the Board of Trustees of MIT.
The Company's discontinued operations include the compensation of NASL Financial
for investment advisory fees and subadvisor compensation from NAF through
October 1, 1997 the date the Company sold NAF. Subadvisor compensation, for MIT,
is included in other insurance expenses.
39
<PAGE> 40
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCING AGREEMENTS
The Company has entered into various financing agreements with reinsurers. All
assets and liabilities related to these contracts are reported on a gross basis.
Due to the nature of the Company's products, these agreements are accounted for
under the deposit method whereby the net premiums paid to the reinsurer are
recorded as deposits.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that likely will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced by a valuation allowance if, based
upon the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
RECLASSIFICATIONS
Certain 1995 balances have been reclassified to permit comparison with the 1997
and 1996 presentations.
40
<PAGE> 41
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Fixed maturities $7,250,366 $ 5,197,363 $21,980,896
Marketable equity securities 34,993 137,862
Mortgage loans 5,620,613
Short-term investments 1,126,181 1,187,368 3,133,008
Foreclosed real estate 432,648 (164,540)
----------------------------------------------
8,376,547 6,852,372 30,707,839
Less: investment expenses (471,002) (1,400,289) (2,006,737)
----------------------------------------------
Net investment income $7,905,545 $ 5,452,083 $28,701,102
==============================================
</TABLE>
The proceeds from sales of available-for-sale fixed maturities for the year
ended December 31, 1997, 1996 and 1995 were $53,325,435, $15,151,764 and
$755,538,955, respectively.
The gross realized gains and losses on the sales of investments for the year
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEAR DECEMBER 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Gross realized gains $ 787,645 $ 429,786 $10,913,975
Gross realized losses (6,759) (3,814) (2,042,666)
Marketable equity securities:
Gross realized gains 988,022 80,010
Gross realized losses (250,000) (15,308)
Mortgage loans:
Gross realized gains 967,301
Foreclosed real estate:
Gross realized gains 12,063
Gross realized losses (634,547) (219,515)
--------------------------------------------
Net realized gain $ 530,886 $ 764,139 $ 9,711,168
============================================
</TABLE>
41
<PAGE> 42
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The gross unrealized gains and losses for fixed maturities available-for-sale
and marketable equity securities held at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 14,333 $ 566 $ 13 $ 14,886
Corporate securities 110,191 1,905 23 112,073
Mortgage-backed securities 10,455 74 3 10,526
States, territories and possessions 5,594 228 5,822
---------------------------------------------------
Total $140,573 $2,773 $ 39 $143,307
===================================================
DECEMBER 31, 1996
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
agencies $ 10,160 $ 337 $ 27 $ 10,470
Corporate securities 79,375 1,084 208 80,251
Mortgage-backed securities 1,940 19 9 1,950
States, territories and possessions 4,578 182 4,760
---------------------------------------------------
Total fixed-maturity securities 96,053 1,622 244 97,431
Marketable equity securities 1 1
---------------------------------------------------
Total $ 96,054 $1,622 $244 $ 97,432
===================================================
</TABLE>
42
<PAGE> 43
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities available-for-sale at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers or lenders may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------------------------
(In Thousands)
<S> <C> <C>
FIXED MATURITIES AVAILABLE-FOR-SALE
Due in one year or less $ 13,870 $ 13,870
Due after one year through five years 61,741 63,235
Due after five years through ten years 32,936 33,350
Due after ten years through twenty years 2,050 2,127
Due after twenty years 19,521 20,199
Mortgage-backed securities 10,455 10,526
----------------------------
Total fixed maturities available-for-sale $140,573 $143,307
============================
</TABLE>
Investments with a fair value of $6,283,750 and $5,820,150 at December 31, 1997
and 1996 respectively were on deposit with, or in custody accounts on behalf of,
state insurance departments to satisfy regulatory requirements.
4. FEDERAL INCOME TAXES
Beginning in 1996, the Company participated as a member of the MWL affiliated
group consolidated federal income tax return. In 1995, the Company filed a group
consolidated federal income tax return with MNY and NASL Financial. The Company
files separate state income tax returns. The method of allocation between
companies is subject to a written tax sharing agreement. The tax liability is
allocated to each member on a pro rata basis based on the relationship that the
member's tax liability computed on a separate return basis bears to the tax
liability of the consolidated group. The tax charge to the Company shall not be
more than the Company would have paid on a separate return basis.
43
<PAGE> 44
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Statutory federal income rate applied to income
before federal income taxes 35% 35% 35%
Add (deduct):
Non-deductible meals and entertainment 1 1 2
Nondeductible consulting fees 4
Change in prior year income taxes (1) (1)
Reversal of deferred asset valuation allowance (285)
---------------------------------
Effective income tax rate 35% 35% (244)%
=================================
</TABLE>
The Company maintained a valuation allowance of approximately $11,982,000 at
December 31, 1994 as the Company had current and cumulative net losses. During
1997, 1996 and 1995, no valuation allowance has been established as the Company
believes that it is more likely than not that its deferred tax assets will be
realized from the generation of future taxable income.
44
<PAGE> 45
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
4. FEDERAL INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,313,135
Financing arrangements $ 2,699,371 4,222,611
Interest on notes payable 1,282,776 677,823
Guaranty fund assessment liabilities 315,000 490,000
Alternative minimum tax credit 313,839
Real estate 607,920 241,266
Other 116,862 500,524
--------------------------------
Total deferred tax assets 5,021,929 16,759,198
--------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs (18,429,529) (15,336,265)
Unrealized appreciation on securities
available-for-sale (646,094) (273,863)
Other (2,374,584) (1,437,870)
--------------------------------
Total deferred tax liabilities (21,450,207) (17,047,998)
--------------------------------
Net deferred tax liability $(16,428,278) $ (288,800)
================================
</TABLE>
The Company made estimated tax payments of $530,666, $0 and $164,260 in 1997,
1996 and 1995, respectively.
45
<PAGE> 46
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS
All financing agreements entered into with reinsurance companies relate solely
to the products sold by the Company and not its subsidiaries. The Company's
reinsured products are considered investment products under generally accepted
accounting principles and, as such, the reinsurance agreements are considered
financing arrangements and are accounted for under the deposit method. Under
this method, net premiums received by the reinsurer are recorded as deposits.
Financing transactions have been entered into primarily to improve cash flow and
statutory capital. All financing agreements discussed below were in effect for
the full year in 1997, 1996 and 1995 unless otherwise indicated.
On June 30, 1995, the Company entered into an indemnity coinsurance agreement
with Peoples Security Life Insurance Company (Peoples), a AA+ rated subsidiary
of the Aegon Corporation, to reinsure 100% of the fixed portion of the variable
annuity business written by the Company. In 1997, the treaty was amended to
cover the Company's Market Value Adjusted fixed annuity product.
The indemnity aspects of the agreement provide that the Company remains liable
for the contractual obligations whereas Peoples agrees to indemnify the Company
for any contractual claims incurred. The coinsurance aspects of the agreement
require the Company to transfer to Peoples all receipts of the fixed portion of
premiums and transfers from variable to the fixed portion of the variable
annuity contracts. Once transferred, the assets belong to Peoples. In exchange,
Peoples reimburses the Company for all claims and provides expense allowances to
cover commissions and other costs associated with the acquisition of the fixed
portion of the variable annuity business. Under this agreement, the Company will
continue to administer the fixed portion of the annuity business for which it
will earn an expense allowance.
Peoples is responsible for investing the premiums received for the fixed portion
of the contracts and is at risk for any potential investment gains and losses.
There is no recourse to the Company if investment losses are incurred. As of
October, 1997, the assets are maintained at Bankers Trust under a trust
agreement owned by Peoples. The Company is the beneficiary of the trust.
46
<PAGE> 47
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS (CONTINUED)
Effective July 1, 1995 and August 1, 1995, the Company entered into treaties
with the Connecticut General Life Insurance Company (CIGNA) and Swiss Re Life
Insurance Company, respectively, to reinsure the minimum death benefit guarantee
risks of the Company. Each company has assumed 50% of the risk. In addition, the
Company reinsured 50% of its risk related to the waiving of surrender charges at
death with CIGNA. The Company is paying the reinsurers an asset-based premium,
the level of which varies with both the amount of exposure to this risk and the
realized experience.
Effective November 1, 1995, the Company entered into a modified coinsurance
treaty with Transamerica Occidental Life Insurance Company (Transamerica).
Transamerica reinsures a 50% quota share of the variable portion of the
Company's variable life insurance contracts. At inception, Transamerica
reinsured 80% of this product's net amount at risk in excess of the Company's
retention limit on a yearly renewable term basis. At December 31, 1997, this
contract was amended to increase this percentage to 100%.
The Company entered into a modified coinsurance agreement with RGA/Swiss,
formerly ITT Lyndon Life, to cede 64% of certain variable annuity contracts
(policy form 203-VA) and 95% of certain other variable annuity contracts
(VISION.001). At the time of the transaction, the Company received $25 million
in cash representing withheld premiums of $15 million and $10 million of ceding
commissions. The withheld premiums are being repaid with interest over five
years. The ceding commission is payable out of future profits generated by the
business reinsured. Effective December 31, 1994, the agreement was amended to
increase the percentage of ceded business on policy form 203-VA to 95%. In
return, the Company received additional ceding commissions of $5,200,000 which
is reflected as a due to reinsurers and is expected to be paid back over a five
year period. Policies issued under the applicable policy forms after December
31, 1996, in accordance with a 1997 amendment, are not reinsured under this
agreement.
47
<PAGE> 48
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
5. FINANCING AGREEMENTS (CONTINUED)
The Company entered into an indemnity quota share reinsurance agreement with
PaineWebber Life to reinsure a portion of its policy forms 207-VA, VFA,
VENTURE.001, and VENTURE.003. The quota share percentage for business written
prior to January 1, 1997 varies between 15% and 35% depending on the policy
form. Effective January 1, 1997, the agreement was amended to change the quota
share to 20% for policies written thereafter. The form of reinsurance is
modified coinsurance and only covers the variable portion of contracts written
by PaineWebber brokers. All elements of risk (including persistency, investment
performance, and mortality) have been transferred.
During 1997, the Company entered into a modified coinsurance agreement with
Merrill Lynch Life to cede 50% of the variable portion of its Merrill Lynch
policies. The agreement only covers the variable portion of contracts sold by
Merrill Lynch brokers. All elements of risk (including persistency, investment
performance, and mortality) have been transferred.
In the event of insolvency of a reinsurer, the Company remains primarily liable
to its policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company and accordingly, the Company periodically
monitors the financial condition of its reinsurers.
6. SHAREHOLDER'S EQUITY
Generally, the net assets of the Company and its insurance subsidiary available
for the Parent as dividends are limited to and cannot be made except from earned
statutory basis profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Insurance Commissioners
of the States of Delaware and New York is subject to restrictions relating to
statutory surplus and net gain from operations on a statutory basis.
48
<PAGE> 49
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
6. SHAREHOLDER'S EQUITY (CONTINUED)
Net income (loss) and capital and surplus, as determined in accordance with
statutory accounting principles, for the Company and its insurance subsidiary,
MNY, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
MNA:
Net income (loss) $ 22,259,385 $ 3,066,908 $(7,287,985)
Net capital and surplus 139,170,756 69,553,706 50,157,994
MNY:
Net (loss) income (1,562,544) 231,315 (578,899)
Net capital and surplus 68,336,238 22,265,070 8,821,782
</TABLE>
The Company's broker dealer subsidiaries, MSS and formerly NASL Financial
(through October 1, 1997), are subject to the Securities and Exchange
Commission's (SEC) "Net Capital Rule" as defined under rule 15c3-1. At December
31, 1997 and 1996, the net capital of each of the broker dealers exceeded the
SEC's minimum capital requirements.
The components of the balance sheet caption "Unrealized appreciation on
securities available-for-sale" in shareholder's equity are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------
(In Thousands)
<S> <C> <C>
Fair value of securities $143,307 $97,432
Amortized cost of securities 140,573 96,054
------------------------
Unrealized appreciation 2,734 1,378
Adjustment to deferred policy
acquisition costs (888) (595)
Deferred income taxes (646) (274)
------------------------
Unrealized appreciation on securities
available-for-sale $ 1,200 $ 509
========================
</TABLE>
49
<PAGE> 50
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
7. RELATED-PARTY TRANSACTIONS
In connection with the indemnity coinsurance agreement (see Note 5) of the fixed
portion of annuities, the Company pooled its mortgage portfolio (book value of
approximately $106 million) and transferred a senior participation interest to
an affiliate of Peoples. The senior interest was transferred for a purchase
price of approximately $72 million and entitles an affiliate of Peoples to 100%
of the cash flows produced by the portfolio until it recovers in full the
purchase price with interest at a rate of 7.52%. The remaining residual interest
was transferred to First North American Realty, Inc., which at the time of the
transaction was a wholly-owned subsidiary of NAL, the former Parent, for a
purchase price of $33 million. As a result of the sale of the senior and
residual interests in the Company's mortgages, the Company has no further
economic interest in any mortgages.
The Company utilizes various services administered by MLI in 1997 and 1996 and
NAL in 1995, such as legal, personnel, investment accounting and other corporate
services. The charges for these services were approximately $8,229,000,
$6,053,000 and $295,000 in 1997, 1996 and 1995, respectively. During 1996, MLI
changed the allocation method of expenses subsequent to the merger with NAL. At
December 31, 1997 and 1996, the Company had a net liability to MLI for these
services and interest accrued on notes payable of $3,646,308 and $3,172,259,
respectively. At December 31, 1997, the payable is offset by a receivable from
MIT and MLI for expenses paid on their behalf of $8,251,344. At December 31,
1996, payable to affiliates was offset by a receivable from MIT and NAF of
$1,710,238 for expenses paid on behalf of those entities.
The financial statements have been prepared from the records maintained by the
Company and may not necessarily be indicative of the financial conditions or
results of operations that would have occurred if the Company had been operated
as an unaffiliated corporation (see also Notes 1, 4, 6, 8, 10, 11 and 13 for
additional related-party transactions).
50
<PAGE> 51
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT
The Company has a promissory note dated March 27, 1997, from MANUSA for
$138,500,000. Interest on the loan is calculated at a fluctuating rate equal to
LIBOR plus 32.5 basis points and is payable in quarterly installments starting
June 15, 1997. Principal and accrued interest are payable within 45 days of
demand. On June 15, 1997, the Company borrowed an additional $25,000,000
increasing the principal outstanding to $163,500,000.
During 1996 and through March 26, 1997 the Company had a revolving credit line
with Manufacturers Investment Corporation (MIC), an affiliated company. The
original term of the agreement was seven years. Each additional borrowing under
the agreement had a seven year term from the date of that additional borrowing.
Principal and interest was payable in quarterly installments. The interest rate
was LIBOR plus 32.5 basis points. This revolving credit line was replaced by the
demand promissory note. The balance outstanding for the borrowings at December
31, 1997 and 1996 is $163,500,000 and $137,864,052, respectively. Accrued
interest payable at December 31, 1997 and 1996 is $455,075 and $336,628,
respectively.
During 1995, the Company had a $150 million revolving credit and term loan
agreement with the Canadian Imperial Bank of Commerce and Deutsche Bank AG. The
amount outstanding at December 31, 1995 was in the form of a term loan of $107
million. In April of 1996, this loan was paid in full and the credit line with
MIC described above was established.
The Company received $20,000,000 from its former Parent, NAL, in the form of a
surplus note agreement with interest at 8%. This note agreement was assumed by
MLI upon the merger described in Note 1. The note and accrued interest are
subordinated to payments due to policyholders and other claimants. Principal and
interest payments can be made only upon prior approval of the Insurance
Department of the State of Delaware. Interest accrued at December 31, 1997 and
1996 was $3,191,231 and $1,591,232, respectively.
The Company and its insurance subsidiaries have unsecured lines of credit with
State Street Bank and Trust totaling $15,000,000, bearing interest at the bank's
money market rate plus 50 basis points. There were no outstanding advancements
under the line of credit at December 31, 1997 and 1996.
51
<PAGE> 52
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT (CONTINUED)
Interest expense and interest paid in 1997 were $11,072,791 and $9,354,343,
respectively. Interest expense and interest paid in 1996 were $8,774,643 and
$11,727,002, respectively. Interest expense and interest paid in 1995 were
$8,981,532 and $8,980,132.
9. OTHER INSURANCE EXPENSES
Other insurance expenses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Selling and administrative expenses $ 42,580,888 $29,207,640 $28,058,234
Subadvisory fees 26,364,212 15,882,860 12,007,940
General operating expenses 31,440,140 26,164,854 18,678,913
-------------------------------------------------
$100,385,240 $71,255,354 $58,745,087
=================================================
</TABLE>
10. RETIREMENT PLANS
MLI, and formerly NAL prior to the merger, sponsors a defined benefit pension
plan (the Plan) covering substantially all of the Company's employees. The
benefits are based on years of service and the employee's compensation during
the last five years of employment. MLI's funding policy is to contribute
annually the normal cost up to the maximum amount that can be deducted for
federal income tax purposes and to charge each subsidiary for its allocable
share of such contributions based on a percentage of payroll. No pension costs
were allocated to the Company in 1997, 1996 or 1995, as the Plan was subject to
the full funding limitation under the Internal Revenue Code.
The Company sponsors a defined contribution retirement plan pursuant to
regulation 401(k) of the Internal Revenue Code. All employees who are 21 years
old are eligible after one year of service. The Company contributes two percent
of base pay plus fifty percent of the employee savings contribution. The
employee savings contribution is limited to six percent of base pay. The Company
contributed $352,867, $306,989 and $209,423 in 1997, 1996 and 1995,
respectively.
52
<PAGE> 53
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
11. LEASES
The Company leases its office space and various office equipment under operating
lease agreements. For the years ended December 31, 1997, 1996 and 1995, the
Company incurred rent expense of $1,315,567, $1,224,352 and $1,461,475,
respectively. The Company negotiated a ten-year lease for new office space which
commenced in March 1992. In connection with the lease, the Company was required
to deposit $1,500,000 in an escrow account as security toward fulfilling the
future lease commitment. The balance of the escrow at December 31, 1997 and 1996
is $750,000 and $900,000, respectively. The lease for the offices of MNY expires
in 1999 and is subject to a renewal option at market rates prevailing at the
time of renewal.
The minimum lease payments associated with the office space and various office
equipment under operating lease agreements are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
PAYMENTS
-------------
<S> <C>
Year ended:
1998 $1,285,808
1999 1,261,159
2000 1,197,368
2001 1,197,368
2002 197,651
----------
Total $5,139,354
==========
</TABLE>
12. INTEREST RATE SWAP
The Company entered into a variable-for-fixed interest rate swap in 1995 with
Canadian Imperial Bank of Commerce and Deutsche AG for the purpose of minimizing
exposure to fluctuations in interest rates on a portion of the variable-rate
outstanding debt held by the Company. This interest rate swap was prematurely
terminated in 1996 concurrent with the restructuring of the Company's revolving
line of credit resulting in a gain of $1,632,000 recorded as an offset to
interest expense.
53
<PAGE> 54
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
13. GUARANTEE AGREEMENT
Pursuant to a guarantee agreement, MLI unconditionally guarantees that it will,
on demand, make funds available to the Company for the timely payment of
contractual claims made under the fixed portion of the variable annuity
contracts issued by its subsidiaries. The guarantee covers the outstanding fixed
portion of variable annuity contracts, including those issued prior to the date
of the guarantee agreement.
14. DISCONTINUED OPERATIONS
On May 6, 1997, the Company signed a letter of intent to sell their mutual fund
operations. This disposal has been accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which among other
provisions, requires the plan of disposal to be carried out within one year. On
October 1, 1997, the Company sold its advisory operations for NAF and the
pre-existing deferred commission assets related to the mutual fund operations.
The Company realized a gain of $9,160,782, before applicable taxes of
$3,206,274. Included in the gain is a provision of $9,758, before applicable
taxes of $3,415, for the loss from continuing operations during the phase-out
period. Expenses of $223,444 were incurred on the sale and netted against the
realized gain.
The operating results related to discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Advisory fees, commissions
and distribution revenues $4,605,110 $12,444,560 $10,336,334
==============================================
Loss from operations before provision for
income (tax) benefit $ (217,129) $(1,246,074) $(2,249,058)
Provision for income (tax) benefit:
Current 75,995 766,353 1,921,114
Deferred (330,227) (1,133,944)
----------------------------------------------
75,995 436,126 787,170
Loss from operations, net of tax $ (141,134) $ (809,948) $(1,461,888)
==============================================
</TABLE>
54
<PAGE> 55
The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company)
Notes to Consolidated Financial Statements (continued)
14. DISCONTINUED OPERATIONS (CONTINUED)
The sale agreement contains a contingent payment option where the Company could
earn an additional $1,000,000, before income taxes, if certain conditions are
met. This amount, if earned, would be reflected in discontinued operations
during 1998.
15. FINANCIAL INSTRUMENTS
Due from reinsurers: The fair value of the amount due from reinsurers is
equal to deposits made under the contract and approximates the carrying
value.
Policyholder funds: Fair values of the Company's liabilities under
contracts not involving significant mortality risk (deferred annuities) are
estimated to be the cash surrender value, or the cost the Company would
incur to extinguish the liability.
Amounts on deposit from and payable to reinsurers: Amounts on deposit from
and payable to reinsurers reflects the net reinsured cash flow related to
financing agreements which is primarily a current liability. As such, fair
value approximates carrying value.
Notes payable to affiliates: Fair value is considered to approximate
carrying value as the majority of notes payable are at variable interest
rates that fluctuate with market interest rate levels.
The carrying values and estimated fair values of the Company financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Fixed maturities $143,307,365 $143,307,365 $97,431,343 $97,431,343
Marketable equity securities 1,177 1,177
Short-term investments 14,991,793 14,991,793 4,294,370 4,294,370
Policy loans 3,275,654 3,275,654 637,096 637,096
Cash and cash equivalents 7,338,690 7,338,690 12,073,302 12,073,302
Due from reinsurers 553,833,869 553,833,869 573,418,610 573,418,610
Liabilities:
Policyholder funds 92,750,188 87,375,237 82,619,372 81,123,255
Amounts on deposit from and
payable to reinsurers 574,881,943 574,881,943 599,909,628 599,909,628
Notes payable to affiliates 183,955,075 183,955,075 158,200,680 158,200,680
</TABLE>
55
<PAGE> 56
THE MANUFACTURES LIFE INSURANCE COMPANY OF NORTH AMERICA
SCHEDULE I -- CONSOLIDATED SUMMARY OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Type of Investment Cost Value Amount at which
Shown in the
Consolidated Balance
Sheet
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
United States Government $ 14,333,194 $ 14,886,442 $ 14,886,442
Corporate debt securities 110,190,631 112,073,350 112,073,350
Mortgage-backed securities 10,454,824 10,525,524 10,525,524
States, Territories and Possessions 5,594,331 5,822,049 5,822,049
------------ ------------ ------------
Total fixed maturities 140,572,980 $143,307,365 143,307,365
Policy loans 3,275,654 XXX 3,275,654
Short-term investments 14,991,793 XXX 14,991,793
------------ ------------
Total investments $158,840,427 $XXX $161,574,812
============ ==== ============
</TABLE>
56
<PAGE> 57
THE MANUFACTURES LIFE INSURANCE COMPANY OF NORTH AMERICA
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ THOUSANDS)
<TABLE>
<CAPTION>
Future Policy
Deferred Policy Benefits Other Policy
Acquisition Losses, Claims and Unearned Claims and Premium Net Investment
Segment Costs Loss Expenses Premiums Benefits Payable Revenue Income
<S> <C> <C> <C> <C> <C> <C>
1997 life insurance
and maturities 364,984 92,750 -- -- -- 7,905
Mutual fund -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total 364,984 92,750 -- -- -- 7,905
================================================================================================================================
1996 life insurance
and maturities 283,420 82,619 -- -- -- 5,452
Mutual fund 7,190 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total 290,610 82,619 -- -- -- 5,452
================================================================================================================================
1995 life insurance
and annuities -- -- -- -- -- 28,701
Mutual fundS -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total -- -- -- -- -- 28,701
================================================================================================================================
<CAPTION>
Benefits, Amortization
Claims of Deferred
Losses and Policy
Settlement Acquisition
Segment Expenses Cost* Expenses*
<S> <C> <C> <C>
1997 life insurance
and maturities 4,986 40,649 100,385
Mutual fund -- 1,706 8,836
- ------------------------------------------------------------------------------------
Total 4,986 42,355 109,221
====================================================================================
1996 life insurance
and maturities 4,242 30,830
Mutual fund -- 2,214 71,255
- ------------------------------------------------------------------------------------
Total 4,242 33,044 82,175
====================================================================================
1995 life insurance
and annuities 27,129 43,287 58,745
Mutual funds -- 1,035 11,550
- ------------------------------------------------------------------------------------
Total 27,129 44,322 70,295
====================================================================================
* Mutual fund segment related items are included in discontinued operations:
loss from operations, net of tax and gain on disposal, net of tax in the
consolidated statements of income
</TABLE>
57
<PAGE> 58
THE MANUFACTURES LIFE INSURANCE COMPANY OF NORTH AMERICA
SCHEDULE IV -- REINSURANCE
($ THOUSANDS)
<TABLE>
<CAPTION>
Assumed Percentage of
Ceded to From Amount
Gross Other Other Net Assumed
Segment Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Life insurance inforce 151,259 84,130 -- 67,129 0%
Premiums-Life Insurance -- -- -- -- 0%
----------------------------------------------------------------------
Total -- -- -- -- 0%
======================================================================
Year ended December 31, 1996
Life insurance inforce 45,597 23,931 -- 21,666 0%
Premiums-Life Insurance -- -- -- -- 0%
----------------------------------------------------------------------
Total -- -- -- -- 0%
======================================================================
Year ended December 31, 1995
Life insurance inforce 245 123 -- 122 0%
Premiums-Life Insurance -- -- -- -- 0%
----------------------------------------------------------------------
Total -- -- -- -- 0%
======================================================================
----------------------------------------------------------------------
</TABLE>
58
<PAGE> 59
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
59
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF FINANCIAL POSITION STATEMENTS OR OPERATIONS AND UNASSIGNED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 143,307,365
<DEBT-CARRYING-VALUE> 143,307,365
<DEBT-MARKET-VALUE> 143,307,365
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 161,574,812
<CASH> 7,338,690
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 10,633,762,909
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,580,826
<NOTES-PAYABLE> 183,955,075
0
0
<COMMON> 2,600,000
<OTHER-SE> 206,125,558
<TOTAL-LIABILITY-AND-EQUITY> 10,633,762,909
0
<INVESTMENT-INCOME> 7,905,545
<INVESTMENT-GAINS> 530,886
<OTHER-INCOME> 194,314,849
<BENEFITS> 4,986,244
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 42,463,308
<INCOME-TAX> 15,043,505
<INCOME-CONTINUING> 27,419,803
<DISCONTINUED> 5,813,374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,233,177
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
