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As Filed with the Securities and Exchange Commission on April 2, 1999
Registration No. 333-6011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 3
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA, FORMERLY
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
(Exact Name of Registrant)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
116 Huntington Avenue, Boston, Massachusetts 02116
(617) 266-6008
(Address of Registrant's Principal Executive Offices and Telephone Number)
(I.R.S. Employer Number) (Primary Standard Industrial
Classification Code Number)
22-2265014 6312
James D. Gallagher
Vice President, Secretary and
General Counsel
The Manufacturers Life Insurance Company of
North America
73 Tremont Street
Boston, Massachusetts 02108
(617) 266-6004
(Name and Address of Agent for Service)
Copy to:
J. Sumner Jones, Esq.
Jones & Blouch L.L.P.
1025 Thomas Jefferson Street N.W.
Washington DC 20007
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THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CROSS REFERENCE TO ITEMS REQUIRED BY FORM S-1
<TABLE>
<CAPTION>
Form S-1 Item No. and Caption Prospectus Heading
- ----------------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus Cover Pages
2. Inside Front and Outside Back Cover Pages Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio Summary
of Earnings to Fixed Charges
4. Use of Proceeds The Manufacturers Life Insurance
Company of North America
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution The Manufacturers Life Insurance
Company of North America -
Distribution of the Contract
9. Description of Securities to be Registered Description of the Contract,
Reinsurance and Guarantees, The
Manufacturers Life Insurance
Company of North America
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant The Manufacturers Life Insurance
Company of North America
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
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PART I
INFORMATION REQUIRED IN A PROSPECTUS
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Annuity Service Office: Mailing Address:
116 Huntington Avenue Post Office Box 9230
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6004 02205-9230
(800) 344-1029
- --------------------------------------------------------------------------------
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
VENTURE MVA
DEFERRED FIXED ANNUITY CONTRACT
NON-PARTICIPATING
This prospectus describes Venture Market Value Adjusted Annuity
("Venture MVA"), a single payment deferred fixed annuity contract. Venture MVA
is offered by The Manufacturers Life Insurance Company of North America ("we",
"us" or "the Company").
The prospectus describes both an individual deferred annuity contract
and a participating interest in a group deferred annuity contract. Both are
designed to provide retirement income pursuant to either non-qualified
retirement plans or plans qualifying for special income tax treatment under the
Internal Revenue Code of 1986, as amended (the "Code"). As used herein, "you"
refers to the owner of a contract.
- You make a single purchase payment for the contract.
-- The minimum purchase payment is $5,000.
-- The maximum purchase payment (without our
prior approval) is $500,000.
- You may not make additional purchase payments for a contract
but may purchase additional contracts at the then prevailing
rates and terms.
- You designate the guarantee period to which we allocate your
purchase payment.
- You select one or more annuity options or an alternate form
of settlement acceptable to us.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW
BEFORE INVESTING.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE CONTRACT
OWNER BEARS THE INVESTMENT RISK THAT THE GUARANTEED INTEREST RATES OFFERED BY US
AT THE TIME OF WITHDRAWAL, TRANSFER OR THE START OF ANNUITY PAYMENTS MAY BE
HIGHER THAN THE GUARANTEED INTEREST RATE APPLIED TO THE CONTRACT WITH THE RESULT
THAT THE AMOUNT YOU RECEIVE UPON WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY BE
REDUCED BY THE MARKET VALUE ADJUSTMENT AND MAY BE LESS THAN YOUR ORIGINAL
INVESTMENT IN THE CONTRACT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, (THE "SEC"). NEITHER THE SEC NOR ANY STATE HAS DETERMINED
WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY.
The date of this prospectus is May 1, 1999.
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TABLE OF CONTENTS
SPECIAL TERMS................................................................
SUMMARY......................................................................
GENERAL INFORMATION ABOUT THE COMPANY........................................
AVAILABLE INFORMATION........................................................
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT..............................
ACCUMULATION PROVISIONS.................................................
Purchase Payment....................................................
Guarantee Periods...................................................
Transfers Among Guarantee Periods...................................
Telephone Transactions..............................................
Renewals............................................................
Withdrawals.........................................................
Death Benefit Before Maturity Date..................................
ANNUITY PROVISIONS......................................................
General.............................................................
Annuity Options.....................................................
Death Benefit on or After Maturity Date.............................
OTHER CONTRACT PROVISIONS...............................................
Ten Day Right to Review.............................................
Ownership...........................................................
Beneficiary.........................................................
Annuitant...........................................................
Modification........................................................
Our Approval........................................................
Discontinuance of New Owners........................................
MARKET VALUE ADJUSTMENT.................................................
CHARGES AND DEDUCTIONS..................................................
Withdrawal Charge...................................................
Reduction or Elimination of Withdrawal Charge.......................
Taxes...............................................................
Administration Fee..................................................
REINSURANCE..................................................................
ADDITIONAL INFORMATION ABOUT MANULIFE NORTH AMERICA..........................
Description of Business.............................................
Management Discussion & Analysis....................................
Selected Financial Data.............................................
Our Officers and Directors..........................................
Executive Compensation..............................................
The Manufacturers Life Insurance Company of
North America Separate Account D...................................
Distribution of the Contract........................................
Confirmation Statements.............................................
Legal Proceedings...................................................
Legal Matters.......................................................
Independent Auditors................................................
Notices and Reports to Contract Owners..............................
Contract Owner Inquiries............................................
FEDERAL TAX MATTERS..........................................................
Introduction........................................................
Our Tax Status......................................................
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Taxation of Annuities in General....................................
Qualified Retirement Plans..........................................
Federal Income Tax Withholding......................................
GENERAL MATTERS..............................................................
Restrictions Under the Texas Optional Retirement Program............
APPENDIX A - EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE....................
APPENDIX B - MARKET VALUE ADJUSTMENT EXAMPLES................................
APPENDIX C - STATE PREMIUM TAXES.............................................
OUR FINANCIAL STATEMENTS.....................................................
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SPECIAL TERMS
Annuitant Any individual person or persons to whom
annuity payments are made and whose life is
used to determine the duration of annuity
payments involving life contingencies. The
annuitant is as designated on the contract or
certificate specifications page or in the
application, unless changed.
Annuity Option One of several alternative methods by which
payment of the proceeds may be made.
Beneficiary The individual person, persons, or entity to
whom we pay the death benefit proceeds
following the death of the owner, or in
certain circumstances, an annuitant.
Certificate For a group contract, the documents we issued
to each owner which summarize the owner's
rights and benefits under the contract.
Contingent The individual person, persons or entity who
Beneficiary becomes the beneficiary if the beneficiary is
not alive.
Contract For an individual contract, the individual
annuity contract. For a group contract, the
certificate evidencing a participating
interest in the group annuity contract. Any
reference in this prospectus to "contract"
includes the underlying group annuity
contract.
Contract For an individual contract, the anniversary of
Anniversary the contract date. For a group contract, the
anniversary of the date we issue a certificate
under the contract.
Contract Date In the case of an individual annuity contract,
the date we issue the contract as designated
on the contract specifications page. In the
case of a group annuity contract, the
effective date of participation under the
group annuity contract as designated in the
certificate specifications page.
Contract Value The sum of the net purchase payment for the
contract and accrued interest, less the sum of
any withdrawals and any administration fee,
adjusted for any transfer market value
adjustment.
Contract Year The period of twelve consecutive months
beginning on the contract date, certificate
date in the case of a group contract, or any
anniversary thereafter.
Code The Internal Revenue Code of 1986, as amended.
Due Proof of Death We require due proof of death upon the death
of the owner or annuitant, as applicable. We
must receive one of the following at our
Annuity Service Office:
(a) a certified copy of a death
certificate;
(b) a certified copy of a decree of a
court of competent jurisdiction as
to the finding of death; or
(c) any other proof satisfactory to us.
We will pay death benefits within seven days
after we receive due proof of death and all
required claim forms at our Annuity Service
Office.
Fixed Account The Manufacturers Life Insurance Company of
North America Separate Account D, which is one
of our separate accounts.
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Fixed Annuity An annuity option with payments which are
predetermined and guaranteed as to dollar
amount.
General Account All of our assets other than assets in our
separate accounts.
Group Holder In the case of a group annuity contract, the
person, persons or entity to whom we issue the
contract.
Gross Withdrawal Value The portion of the contract value specified by
the owner for a full or partial withdrawal.
Such amount is determined prior to the
application of any withdrawal charge, annual
administration fee and market value
adjustment.
Initial Guarantee Period The period of time during which the initial
guaranteed interest rate is in effect.
Initial Guaranteed Interest Rate The compound annual rate used to determine the
interest earned on the net purchase payment
during the initial guarantee period.
Market Value Adjustment An adjustment we make to amounts that are
withdrawn, transferred or annuitized prior to
the end of the guarantee period. It may
increase or decrease the amount available for
transfer, withdrawal or annuitization.
Maturity Date The date on which annuity benefits commence.
It is the date specified on the contract
specifications page, unless changed.
Net Purchase Payment The purchase payment less the amount of
premium tax, if any, deducted from the
payment.
Non-Qualified Certificates Certificates issued under non-qualified
contracts.
Non-Qualified Contracts Contracts which are not issued under qualified
plans.
Owner or In the case of an individual contract, the
Contract Owner individual person, persons or entity entitled
to the ownership rights under the contract. In
the case of a group annuity contract, the
individual person, persons or entity named in
a certificate and entitled to all of the
ownership rights under the contract not
expressly reserved to the group holder. The
owner is as designated on the contract or
certificate specifications page or in the
application, unless changed.
Payment or An amount paid by a contract owner to us as
Purchase Payment consideration for the benefits provided by the
contract.
Qualified Certificates Certificates issued under qualified contracts.
Qualified Contracts Contracts issued under qualified plans.
Qualified Plans Retirement plans which receive favorable tax
treatment under Section 401, 403, 408, 408A or
457 of the Code.
Renewal Amount The contract value at the end of the initial
guarantee period or at the end of a renewal
guarantee period.
Renewal Guarantee Period The period of time during which a renewal
guaranteed interest rate is in effect.
Renewal Guaranteed Interest Rate The compound annual rate used to determine the
interest earned on a renewal amount during a
renewal guarantee period. In no event shall
this rate be less than 3%.
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Separate Account A segregated account of our's that is not
commingled with our general assets and
obligations.
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SUMMARY
DESCRIPTION OF THE CONTRACT
The Contract. The contract is a single purchase payment deferred fixed
annuity contract. It provides for the accumulation of the contract value and the
payment of annuity benefits on a fixed basis. This prospectus describes
participating interests in both group deferred annuity contracts and individual
deferred annuity contracts. For information on eligible groups for the group
deferred annuity contracts, see "ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT."
- Participation in a group contract will be separately
accounted for by the issuance of a certificate evidencing the
owner's interest under the contract.
- Ownership of an individual contract will be evidenced by the
issuance of an individual annuity contract.
The certificate and individual annuity contract are both hereafter
referred to as the "contract."
Retirement Plans. We may issue the contract pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Code. Qualified plans include individual retirement accounts
and annuities (including Roth IRAs), pension and profit-sharing plans for
corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh"
plans), tax-sheltered annuities, and state and local government deferred
compensation plans (see "QUALIFIED RETIREMENT PLANS"). If you are considering
purchasing a contract for use in connection with a qualified plan, you should
consider, in evaluating the suitability of the contract, that it allows only a
single premium purchase payment in an amount of at least $5,000.
Purchase Payments. You make your purchase payment to us at our Annuity
Service Office. We allocate your purchase payment to the guarantee period which
you designate.
- The minimum purchase payment for a contract is $5,000.
- The maximum purchase payment which you may make without our
prior approval is $500,000.
While we will not accept additional purchase payments for a contract,
you may purchase additional contracts at the then prevailing rates and terms.
Prior to the maturity date and at our option, we may cancel a contract
after the second contract anniversary if both (i) the total purchase payment
made, less any withdrawals, is less than $2,000; and (ii) the higher of the
contract value or the amount available upon total withdrawal is less than
$2,000. This cancellation privilege may vary in certain states to comply with
the requirements of their insurance laws and regulations (see "PURCHASE
PAYMENTS").
Guarantee Periods. We currently offer ten guarantee periods under the
contract: one year through ten years. We may offer additional guarantee periods
for any yearly period from one to twenty years (see "INVESTMENT OPTIONS").
Transfers Among Guarantee Periods. Before the maturity date, you may
transfer the entire contract value to a different guarantee period at any time
by giving us written notice or by telephone if you have authorized us in writing
to accept telephone transfer requests.
- You may transfer amounts only once per contract year.
- You must transfer the entire amount of the account.
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Amounts transferred will be subject to a transfer market value
adjustment (see "TRANSFERS AMONG INVESTMENT OPTIONS").
Telephone Transactions. You may request transfers or withdrawals by
telephone (see "TELEPHONE TRANSACTIONS").
Renewals. At the end of a guarantee period, you may choose a renewal
guarantee period from any of the then existing guarantee period options, at the
then current interest rates (see "RENEWALS").
Withdrawals. Before the earlier of the maturity date or the death of
the contract owner, you may withdraw all or a portion of the contract value.
- You must withdraw at least $300 or, if less, the entire
contract value.
- If a partial withdrawal (plus any applicable withdrawal
charge and after giving effect to any market value
adjustment) reduces the contract value to less than $300, we
will treat the partial withdrawal as a total withdrawal.
We may impose a withdrawal charge and market value adjustment (see
"WITHDRAWALS"). A withdrawal may be subject to income tax and a 10% penalty tax
(see "FEDERAL TAX MATTERS").
Confirmation Statements. We will send you confirmation statements for
certain transactions in your account. You should carefully review these
statements to verify their accuracy and should report any mistake immediately to
our Annuity Service Office. If you fail to report any mistake to Annuity Service
Office within 60 days of the mailing of the confirmation statement, you will be
deemed to have ratified the transaction.
Death Benefits. We will pay the death benefit to the beneficiary if any
contract owner dies before the maturity date. The death benefit equals the
contract value. If there is a surviving contract owner, that contract owner will
be deemed to be the beneficiary. No death benefit is payable on the death of any
annuitant, except that if any contract owner is not a natural person, we will
treat the death of any annuitant as the death of an owner.
We will determine the death benefit as of the date we receive written
notice and proof of death and all required claim forms at our Annuity Service
Office.
Annuity Payments. We offer a variety of fixed annuity options. Periodic
annuity payments will begin on the maturity date. You select the maturity date,
frequency of payment and annuity option (see "ANNUITY PROVISIONS").
Ten Day Review. Within 10 days of your receipt of a contract, you may
cancel the contract by returning it to us or our agent (see "TEN DAY RIGHT TO
REVIEW").
Market Value Adjustment. We will adjust any amount withdrawn,
transferred or annuitized prior to the end of either the initial guarantee
period or a renewal guarantee period by the market value adjustment factor
described under "MARKET VALUE ADJUSTMENT. "
Withdrawal Charge. If you make a withdrawal from the contract before
the maturity date and during the first seven contract years, we may assess a
withdrawal charge (contingent deferred sales charge) against amounts withdrawn.
There is never a withdrawal charge after seven complete contract years or with
respect to certain free withdrawal amounts described below. The amount of the
withdrawal charge and when it is assessed are discussed under "CHARGES AND
DEDUCTIONS - WITHDRAWAL CHARGE. "
Tax Deferral. The status of the contract as an annuity generally allows
all earnings on the underlying investments to be tax-deferred until withdrawn or
until annuity payments begin (see "FEDERAL TAX
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MATTERS"). This tax deferred treatment may be beneficial to you in building
assets in a long-term investment program.
GENERAL INFORMATION ABOUT THE COMPANY
The Company (formerly North American Security Life Insurance Company)
is a stock life insurance company organized under the laws of Delaware in 1979.
Our principal office is located at 116 Huntington Avenue, Boston, Massachusetts
02116. Our ultimate parent entity is The Manufacturers Life Insurance Company
("Manulife"), a Canadian mutual life insurance company based in Toronto, Canada.
Prior to January 1, 1996, we were 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; the combined company retained the
Manulife name.
Effective January 1, 1996, immediately following the merger of NAL and
Manulife, we experienced a corporate restructuring resulting 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 our outstanding
shares and all of the outstanding shares of 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.
Our majority owned subsidiary, Manufacturers Securities Services, LLC
(the successor to NASL Financial Services, Inc.) ("MSS"), acts as principal
underwriter of the contracts which we issue. MSS has entered into a promotional
agent agreement with WLA to act as the non-exclusive agent for the promotion of
our insurance contract sales.
We also have an insurance subsidiary, The Manufacturers Life Insurance
Company of New York (MNY") which is licensed to conduct business in the State of
New York.
On January 20, 1998, the Board of Directors of Manulife asked its
management to prepare a plan for converting Manulife from a mutual life
insurance company to an investor-owned, publicly-traded stock company. Any
demutualization plan for Manulife is subject to approval by the Manulife Board
of Directors and policyholders as well as regulatory approval.
Our financial ratings are as follows:
A++ A.M. Best
Superior in financial strength; 1st category of 15
AAA Duff & Phelps
Highest in claims paying ability; 1st category of 18
AA+ Standard & Poor's
Very strong in financial strength; 2nd category of 21
Aa2 Moody's
Excellent in financial strength; 3rd category of 21
These ratings, which are current as of the date of this prospectus and are
subject to change, are assigned as a measure of our ability to honor the death
benefit and life annuitization guarantees but not specifically to our products,
the performance (return) of these products, the value of any investment in these
products upon withdrawal or to individual securities held in any portfolio.
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AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 as amended, (the "1934 Act"). Accordingly, we file reports
and other information with the SEC. You may read and copy (at prescribed rates)
such reports and other information at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 75 Park Place, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The SEC maintains
a Web site at http://www.sec.gov. that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
We have filed a registration statement with the SEC under the
Securities Act of 1933, as amended, (the "1933 Act") relating to the contracts
offered by this prospectus. This prospectus has been filed as part of the
registration statement but does not contain all the information included in the
registration statement and its exhibits. Additionally, statements in this
prospectus about the content of the contracts and other legal instruments are
only summaries. For a complete statement of the terms of these documents, you
should refer to the registration statement and its exhibits. You may inspect and
copy the registration statement and its exhibits at the offices of the SEC as
described in the preceding paragraph.
DETAILED DESCRIPTION OF THE CONTRACT
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT
We may issue the group deferred annuity contract to fund plans
qualifying for special income tax treatment under the Code. Qualified plans
include individual retirement accounts and annuities, pension and profit-sharing
plans for corporations and sole proprietorships/partnerships ("H.R. 10" and
"Keogh" plans), tax-sheltered annuities, and state and local government deferred
compensation plans. If you are considering purchasing a contract for use in
connection with a Qualified plan, you should consider, in evaluating the
suitability of the contract, that it allows only a single premium purchase
payment in an amount of at least $5,000 (see "QUALIFIED RETIREMENT PLANS"). The
group deferred annuity contract is also designed for use with non-qualified
retirement plans, such as payroll savings plans and such other groups (trusteed
or non-trusteed) as may be eligible under applicable law. Group deferred annuity
contracts have been issued to the Security Life Trust, a trust established with
United Missouri Bank, N.A., Kansas City, Missouri, as group holder for groups
comprised of persons who have brokerage accounts with brokers having selling
agreements with MSS, the principal underwriter of the contracts.
An eligible member of a group to which a contract has been issued may
become an owner under the contract by submitting a completed application, if
required by us, and a minimum purchase payment. We will issue a certificate
summarizing the rights and benefits of the owner under the contract to an
applicant acceptable to us. We reserve the right to decline to issue a
certificate to any person in our sole discretion.
All rights and privileges under the contract may be exercised by each
owner as to such owner's interest unless expressly reserved to the group holder.
However, provisions of any plan in connection with which we issue the contract
may restrict an owner's ability to exercise such rights and privileges.
ACCUMULATION PROVISIONS
PURCHASE PAYMENT
You make your purchase payment to us at our Annuity Service Office. The
minimum purchase payment for a contract is $5,000. The maximum purchase payment
which you may make without our prior approval is $500,000. We allocate the
entire purchase payment to the guarantee period which you select. We will not
accept additional purchase payments for a contract. You may, however, purchase
additional contracts at the then prevailing rates and terms.
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Prior to the maturity date and following the second contract
anniversary, we may, at our option, cancel a contract. We may cancel a contract
if both:
- the total purchase payment made, less any withdrawals, is
less than $2,000; and
- the higher of the contract value or the amount available upon
total withdrawal is less than $2,000.
This cancellation privilege may vary in certain states in order to
comply with the requirements of insurance laws and regulations in such states.
If we cancel a contract, we will pay you the higher of the contract value and
any annual administration fee or the amount available upon total withdrawal. The
amount paid will be treated as a withdrawal for federal tax purposes and thus
may be subject to income tax and to a 10% penalty tax. (See "FEDERAL TAX
MATTERS")
GUARANTEE PERIODS
Currently, we offer ten guarantee periods: one year through ten years.
We may offer additional guarantee periods for any yearly period from one to
twenty years. The contract provides for the accumulation of interest on the
purchase payment at guaranteed rates for the duration of the guarantee period.
From time to time, we may offer customers of certain broker-dealers special
initial guaranteed interest rates which are higher than the initial guaranteed
interest rate offered to the general public. In consideration of these higher
interest rates, commissions to these broker-dealers may be reduced. We determine
from time-to-time in accordance with market conditions the renewal guaranteed
interest rate on a renewal amount allocated or transferred to a renewal
guarantee period. Under certain circumstances, we may offer a rate in excess of
the renewal guaranteed rate for the first year only of a renewal guarantee
period. The renewal guaranteed interest rate will in no event be less than 3%.
We guarantee the interest rate for the duration of the guarantee period and may
not change it.
TRANSFERS AMONG GUARANTEE PERIODS
Before the maturity date and subject to the following conditions, you
may transfer the entire contract value to a different guarantee period at any
time by giving us written notice or by telephone if you have authorized us in
writing to accept telephone transfer requests:
- you may transfer amounts only once per contract year; and
- you must transfer the entire contract.
Amounts transferred will be subject to a transfer market value
adjustment. The amount which you request to transfer will be multiplied by the
market value adjustment factor to determine the transferred amount (see "MARKET
VALUE ADJUSTMENT"). We may modify or terminate the transfer privilege at any
time in accordance with applicable law.
TELEPHONE TRANSACTIONS
You may request transfers or withdrawals by telephone if you elect that
option on an appropriate authorization form provided by us. We will not be
liable for following telephone instructions that we reasonably believe to be
genuine. We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; such procedures include asking you, upon
telephoning a request, to provide certain identifying information. We may be
liable for any losses due to unauthorized or fraudulent instructions only where
we fail to employ our procedures properly. For your and our protection, we will
tape record all such conversations. All telephone transactions will be followed
by a confirmation statement of the transaction.
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RENEWALS
At the end of a guarantee period, you may choose a renewal guarantee
period from any of the then existing guarantee periods at the then current
interest rate, all without the imposition of any charge. You may not select a
guarantee period that would extend beyond the maturity date. For a renewal
within one year of the maturity date, the only option available to you is to
have interest accrued up to the maturity date at the then current interest rate
for one-year guarantee periods.
If you do not specify the renewal guarantee period you desire, we will
select the same guarantee period that has just expired, provided that such
period does not extend beyond the maturity date. If a renewal would extend
beyond the maturity date, we will select the longest period that will not extend
beyond such date. For a renewal within one year of the maturity date, we will
credit interest up to the maturity date at the then current interest rate for
one-year guarantee periods.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the contract
owner, you may withdraw all or a portion of the contract value by written
request, complete with all necessary information, to our Annuity Service Office.
For certain qualified contracts, the Code and regulations promulgated by the
Treasury Department may require the consent of a Qualified plan participant's
spouse to an exercise of the withdrawal right.
If you request a total withdrawal of the contract value, we will, as of
the date we receive the request at our Annuity Service Office, cancel the
contract and pay the following amount:
C + [ (A - B - C) x D], where:
A = the gross withdrawal value reduced by any
applicable annual administration fee;
B = the withdrawal charge;
C = the free withdrawal amount; and
D = the market value adjustment factor.
(See "CHARGES AND DEDUCTIONS" and "MARKET VALUE ADJUSTMENT")
If you request a partial withdrawal, we will use the above formula and
the gross withdrawal value to determine the amount payable. Partial withdrawals
will be subject to market value adjustments and possible withdrawal charges. We
will deduct the gross withdrawal value from the contract value. The gross
withdrawal value may not exceed the contract value.
We may defer the payment of a full or partial withdrawal for not more
than six months (or the period permitted by applicable state law if shorter)
from the date we receive the withdrawal request. If we defer payments for 30
days or more, we will credit the amount deferred with interest at a rate not
less than 3% per year or as determined by applicable state law. We will not,
however, defer payment for more than 30 days for any withdrawal effective at the
end of any guarantee period.
There is no limit on the frequency of partial withdrawals. However, the
amount withdrawn must be at least $300 or, if less, the entire contract value.
If a partial withdrawal plus any applicable withdrawal charge, after giving
effect to any market value adjustment, would reduce the contract value to less
than $300, we will treat the partial withdrawal as a total withdrawal of the
contract value.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) Qualified plans only under limited circumstances (see "FEDERAL
TAX MATTERS").
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<PAGE> 17
Telephone Redemptions. You may request the option to withdraw a portion
of the contract value by telephone by completing the application described under
"Telephone Transactions" above. We reserve the right to impose maximum
withdrawal amounts and procedural requirements regarding this privilege.
DEATH BENEFIT BEFORE MATURITY DATE
In General. The following discussion applies principally to contracts
that are not issued in connection with Qualified plans, i.e., a "non-qualified
contract." The requirements of the tax law applicable to Qualified plans, and
the tax treatment of amounts held and distributed under such plans, are quite
complex. Accordingly, if you are considering using the contract in connection
with a Qualified plan, you should seek competent legal and tax advice regarding
the suitability of the contract for the particular situation and the
requirements governing the distribution of benefits, including death benefits,
from a contract used in the plan.
Determination of Death Benefit. We will determine the death benefit on
the date we receive written notice and proof of death, as well as all required
claims forms, at our Annuity Service Office. No person is entitled to the death
benefit until this time.
Amount and Payment of Death Benefit. We will pay a death benefit equal
to the contract value to the beneficiary if any contract owner dies before the
maturity date. If there is a surviving contract owner, that contract owner will
be deemed to be the beneficiary. No death benefit is payable on the death of any
annuitant, except that if any contract owner is not a natural person, the death
of any annuitant will be treated as the death of an owner. On the death of the
last surviving annuitant, the contract owner, if a natural person, will become
the annuitant unless the contract owner designates another person as the
annuitant.
The death benefit may be taken immediately in the form of a lump sum.
If the death benefit is not taken immediately, the contract will continue
subject to the following:
(1) the beneficiary will become the contract owner;
(2) if the beneficiary is not the deceased owner's spouse, we
will distribute the contract owner's entire interest in the
contract within five years of the owner's death or,
alternatively, as an annuity (under one of the annuity
options described below) beginning within one year of the
owner's death and payable over the life of the beneficiary or
over a period not extending beyond the life expectancy of the
beneficiary.
If the beneficiary dies before distributions described in "(2)" above
are completed, we will distribute the entire remaining contract value in a lump
sum immediately. If the owner's spouse is the beneficiary, the spouse continues
the contract as the new owner. In such a case, the distribution rules described
in "(2)" which apply when a contract owner dies will apply when the spouse, as
the owner, dies.
If any annuitant is changed and any contract owner is not a natural
person, we will distribute the entire interest in the contract to the contract
owner within five years.
We will pay death benefits within seven days of the date we determine
the amount of the death benefit, as described above. We may postpone such
payment under the same circumstances that we may postpone the payment of
withdrawals (see "WITHDRAWALS").
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<PAGE> 18
ANNUITY PROVISIONS
GENERAL
You may apply the proceeds of the contract payable on death, withdrawal
or the contract maturity date to the annuity options described below, subject to
the distribution of death benefit provisions (see "DEATH BENEFIT BEFORE MATURITY
DATE").
Generally, annuity benefits under the contract will begin on the
maturity date. The maturity date is the date specified on the contract
specifications page, unless changed. If no date is specified, the maturity date
is the maximum maturity date. The maximum maturity date is the first day of the
month following the later of the 85th birthday of the annuitant or the tenth
contract anniversary. You may specify a different maturity date at any time by
written request at least one month before both the previously specified and the
new maturity date. Without our consent, the new maturity date may not be later
than the maximum maturity date. The occurrence or scheduled occurrence of
maturity dates when the annuitant is at an advanced age, e.g., past age 85, may
in some circumstances have adverse income tax consequences (see "FEDERAL TAX
MATTERS"). Distributions from qualified contracts may be required before the
maturity date.
You may select the frequency of annuity payments. However, if the
contract value at the maturity date is such that a monthly payment would be less
than $20, we may pay the higher of contract value and any annual administration
fee or the amount available upon total withdrawal in one lump sum to the
annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed basis.
When you purchase a contract, and on or before the maturity date, you may select
one or more of the annuity options described below or choose an alternate form
of settlement acceptable to us. If you do not select an annuity option, we will
provide as a default option that annuity payments be made for a period certain
of ten years and continue thereafter during the lifetime of the annuitant.
Treasury Department regulations may preclude the availability of certain annuity
options in connection with certain qualified contracts.
We guarantee the following annuity options in the contract.
- Option 1(a): Non-Refund Life Annuity. We will make annuity
payments during the lifetime of the annuitant. No payments
are due after the death of the annuitant. Since we do not
guarantee that any minimum number of payments will be made,
an annuitant may receive only one payment if the annuitant
dies prior to the date the second payment is due.
- Option 1(b): Life Annuity with Payments Guaranteed for 10
Years. We will make annuity payments for at least 10 years
and continuing thereafter during the lifetime of the
annuitant. Since we guarantee payments for 10 years, we will
make annuity payments to the end of such period even if the
annuitant dies prior to the end of the tenth year.
- Option 2(a): Joint & Survivor Non-Refund Life Annuity. We
will make annuity payments during the lifetimes of the
annuitant and a designated co-annuitant. No payments are due
after the death of the last survivor of the annuitant and
co-annuitant. Since we do not guarantee that any minimum
number of payments will be made, an annuitant or co-annuitant
may receive only one payment if the annuitant and
co-annuitant die prior to the date the second payment is due.
- Option 2(b): Joint & Survivor Life Annuity with Payments
Guaranteed for 10 Years. We will make annuity payments for at
least 10 years and continuing thereafter during the lifetimes
of the annuitant and a designated co-annuitant. Since we
guarantee payments for 10 years, we will make
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<PAGE> 19
annuity payments to the end of such period even if both the
annuitant and the co-annuitant die prior to the end of the
tenth year.
In addition to the foregoing annuity options which we are contractually
obligated to offer at all times, we currently offer the following annuity
options. We may cease offering the following annuity options at any time and may
offer other annuity options in the future.
- Option 3: Life annuity with Payments Guaranteed for 5, 15 or
20 Years. We will make annuity payments guaranteed for 5, 15
or 20 years and continuing thereafter during the lifetime of
the annuitant. Since we guarantee payments for the specific
number of years, we will make annuity payments to the end of
the last year of the 5, 15 or 20 year period.
- Option 4: Joint & Two-Thirds Survivor Non-Refund Life
Annuity. We will make full annuity payments during the joint
lifetime of the annuitant and a designated co-annuitant and
two-thirds payments during the lifetime of the survivor.
Since we do not guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only
one payment if the annuitant and co-annuitant die prior to
the date the second payment is due.
- Option 5: Period Certain Only Annuity for 5, 10, 15 or 20
years. We will make annuity payments for a 5, 10, 15 or 20
year period and no payments thereafter.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If you have selected an annuity option providing for payments for a
guaranteed period, and the annuitant dies on or after the maturity date, we will
make the remaining guaranteed payments to the beneficiary. We will make any
remaining payments as rapidly as under the method of distribution being used as
of the date of the annuitant's death. If no beneficiary is living, we will
commute any unpaid guaranteed payments to a single sum (on the basis of the
interest rate used in determining the payments) and pay that single sum to the
estate of the last to die of the annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
You may cancel the contract by returning it to our Annuity Service
Office or agent within ten days after receipt of the contract. Within seven days
after we receive the returned contract, we will refund the payment made for the
contract.
We do not impose any withdrawal charge upon return of the contract
within the ten day right to review period. The ten day right to review may vary
in certain states in order to comply with the requirements of insurance laws and
regulations in such states. When we issue the contract as an individual
retirement annuity under Section 408 or 408A of the Code, during the first seven
days of the ten day period we will return the contract value if this is greater
than the amount otherwise payable.
OWNERSHIP
In the case of an individual annuity contract, the contract owner is
the person entitled to exercise all rights under the contract. In the case of a
group annuity contract, the contract is owned by the group holder; however, all
contract rights and privileges not expressly reserved to the group holder may be
exercised by each owner as to such owner's interest as specified in his or her
certificate. Prior to the maturity date, the contract owner is the person
designated in the contract specifications page or as subsequently named. On and
after the maturity date, the annuitant is the contract owner. If amounts become
payable to any beneficiary under the contract, the beneficiary is the contract
owner.
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<PAGE> 20
In the case of non-qualified contracts, you may change the ownership of
or collaterally assign the contract at any time prior to the maturity date,
subject to the rights of any irrevocable beneficiary. Assigning a contract, or
changing the ownership of a contract, may be treated as a distribution of the
contract value for Federal tax purposes (see "FEDERAL TAX MATTERS").
You must make any request for a change of ownership or assignment in
writing, and we must approve your request If approved by us, any assignment and
any change will be effective as of the date we receive your request at our
Annuity Service Office. We assume no liability for any payments made or actions
taken before we approve a change or accept an assignment and no responsibility
for the validity or sufficiency of any assignment. If you make an absolute
assignment, it will revoke the interest of any revocable beneficiary.
In the case of qualified contracts, ownership of the contract generally
may be transferred only by the trustee of an exempt employees' trust which is
part of a retirement plan qualified under Section 401 of the Code or as
otherwise permitted by applicable Internal Revenue Service ("IRS") regulations.
Subject to the foregoing, a qualified contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than us.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the
contract specifications page or as subsequently named. However, if there is a
surviving contract owner, that person will be treated as the beneficiary. You
may change the beneficiary subject to the rights of any irrevocable beneficiary.
You must make any request for a change in writing. We must approve such a
request and, if approved by us, the change will be effective as of the date on
which we receive your request. We assume no liability for any payments made or
actions taken before we approve the change. If no beneficiary is living, the
contingent beneficiary will be the beneficiary. The interest of any beneficiary
is subject to that of any assignee. If no beneficiary or contingent beneficiary
is living, the beneficiary is the estate of the deceased contract owner. In the
case of certain qualified contracts, Treasury Department regulations prescribe
certain limitations on the designation of a beneficiary.
ANNUITANT
The annuitant is any natural person or persons to whom we will make
annuity payments and whose life is used to determine the duration of annuity
payments involving life contingencies. If you name more than one person as an
"annuitant," the second person named will be referred to as "co-annuitant." The
annuitant is as designated on the contract specifications page or in the
application, unless changed.
On the death of the annuitant, the co-annuitant, if living, becomes the
annuitant. If there is no living co-annuitant, the owner becomes the annuitant.
In the case of certain qualified contracts, there are limitations on the ability
to designate and change the annuitant and the co-annuitant.
MODIFICATION
We will not change or modify the contract without the consent of the
owner or group holder, as applicable, except to the extent necessary to conform
to any applicable law or regulation or any ruling issued by a government agency.
However, on 60 days notice to the group holder, we may change the withdrawal
charges, administration fees, free withdrawal percentage, annuity purchase rate
and the market value adjustment as to any certificates issued after the
effective date of the modification. We will interpret the provisions of the
contract so as to comply with the requirements of Section 72(s) of the Code.
OUR APPROVAL
We may accept or reject a contract application in our sole discretion.
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<PAGE> 21
DISCONTINUANCE OF NEW OWNERS
In the case of a group annuity contract, we may, on 30 days notice to
the group holder, limit or discontinue acceptance of new applications and the
issuance of new certificates under a contract.
MARKET VALUE ADJUSTMENT
If you withdraw, transfer or annuitize any amount prior to the end of
either the initial guarantee period or a renewal guarantee period, we will
adjust such amount by the market value adjustment factor described below.
The market value adjustment factor is determined by the following
n/12
formula: ((1+i)/(1+j)) where:
i - the initial guaranteed interest rate or renewal guaranteed
interest rate currently being earned on the contract.
j - the guaranteed interest rate available, on the date we process
the request, for a guarantee period with the same length as the
period remaining in the initial guarantee period or renewal
guarantee period. If the guarantee period of this length is not
available, we will choose our guarantee period with the next
highest duration.
n - the number of complete months remaining to the end of the
initial guarantee period or renewal guarantee period.
We will make no market value adjustment in the following situations:
- the death of the contract owner;
- the withdrawal of amounts within one month before the end of
the guarantee period; and
- the withdrawal of amounts in any contract year that do not
exceed 10% of total purchase payments less any prior partial
withdrawals in that year.
The market value adjustment reflects the relationship between the
initial guaranteed interest rate or the renewal guaranteed interest rate
applicable to the contract and the then current available guaranteed interest
rate. Generally, if the initial guaranteed interest rate or the renewal
guaranteed interest rate is lower than the then current available guaranteed
interest rate, then the effect of the market value adjustment will be to reduce
the amount withdrawn, transferred or annuitized. Similarly, if the initial
guaranteed interest rate or the renewal guaranteed interest rate is higher than
the then current available guaranteed interest rate, then the effect of the
market value adjustment will be to increase the amount withdrawn, transferred or
annuitized. The greater the difference in these interest rates the greater the
effect of the market value adjustment.
The market value adjustment is also affected by the amount of time
remaining in the guarantee period. Generally, the longer the time remaining in
the guarantee period, the greater the effect of the market value adjustment on
the amount withdrawn, transferred or annuitized. This is because the longer the
time remaining in the guarantee period, the higher the compounding factor 'n' in
the market value adjustment factor.
The cumulative effect of the market value adjustment and withdrawal
charges could result in your receiving total withdrawal proceeds of less than
your purchase payment.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, YOU
BEAR THE INVESTMENT RISK THAT THE CURRENT AVAILABLE GUARANTEED INTEREST RATE
OFFERED BY US AT THE TIME OF WITHDRAWAL, TRANSFER OR ANNUITIZATION
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<PAGE> 22
MAY BE HIGHER THAN THE INITIAL OR RENEWAL GUARANTEE INTEREST RATE APPLICABLE TO
THE CONTRACT WITH THE RESULT THAT THE AMOUNT YOU RECEIVE UPON A WITHDRAWAL,
TRANSFER OR ANNUITIZATION MAY BE SUBSTANTIALLY REDUCED.
For more information on the market value adjustment, including examples
of its calculation, see Appendix B.
CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE
If you make a withdrawal from the contract before the maturity date, we
may assess a withdrawal charge (contingent deferred sales charge) against
amounts withdrawn during the first seven contract years. There is never a
withdrawal charge after seven complete contract years or with respect to certain
free withdrawal amounts described below. The amount of the withdrawal charge and
when it is assessed are discussed below:
(1) In any contract year, the free withdrawal amount for that
year is the excess of (i) over (ii), where (i) is 10% of the
purchase payment and (ii) is all prior partial withdrawals in
that contract year. You may withdraw free withdrawal amounts
without the imposition of a withdrawal charge.
(2) If you make a withdrawal at the end of the initial guarantee
period, we will not apply a withdrawal charge provided such
withdrawal occurs on or after the end of the third contract
year. If you make a withdrawal at the end of any other
guarantee period, we will not apply a withdrawal charge
provided such withdrawal occurs on or after the end of the
fifth contract year. We must receive your written request for
withdrawal at the end of a guarantee period during the 30 day
period preceding the end of that guarantee period.
(3) We calculate the amount of the withdrawal charge by
multiplying the gross withdrawal value, less any
administration fee and free withdrawal amount, by the
applicable withdrawal charge percentage obtained from the
table below.
<TABLE>
<CAPTION>
NUMBER OF COMPLETED WITHDRAWAL CHARGE
CONTRACT YEARS PERCENTAGE
-------------------------------------------------
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
</TABLE>
(4) We generally do not assess any withdrawal charge on
distributions made as a result of the death of the contract
owner or, if applicable, the annuitant, (see "Death Benefit
Before Maturity Date - Amount and Payment of Death Benefit").
We will use the amount collected from the withdrawal charge to
reimburse us for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
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<PAGE> 23
For examples of calculation of the withdrawal charge, see Appendix A.
We may subject withdrawals to a market value adjustment in addition to the
withdrawal charge described above (see "MARKET VALUE ADJUSTMENT").
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGE
We may from time to time reduce or eliminate the amount of the
withdrawal charge on a contract or the period to which it applies when contracts
are sold to certain individuals or groups of individuals in a manner that
results in savings of sales expenses. When considering whether to reduce or
eliminate the sales charge or the period to which it applies, we will consider
such factors as:
- the size and type of group,
- the amount of the single premium, and/or
- other transactions where sales expenses are reduced.
Withdrawals may be subject to income tax to the extent of earnings
under the contract and, if made prior to age 59-1/2, generally will be subject
to a 10% IRS penalty tax (see "FEDERAL TAX MATTERS Taxation of Partial and Full
Withdrawals").
TAXES
We reserve the right to charge or provide for certain taxes against
purchase payments, contract values, death benefits or annuity payments. Such
taxes may include premium taxes or other taxes levied by any government entity
which we determine to have resulted from the:
- establishment or maintenance of the Fixed Account,
- receipt by us of purchase payments,
- issuance of the contracts,
- commencement or continuance of annuity payments under the
contracts, or
- death of the owner or annuitant.
In addition, we will withhold taxes to the extent required by
applicable law.
Except for residents of those states which apply premium taxes upon
receipt of purchase payments, we will deduct premium taxes from the contract
value used to provide for annuity payments. For residents of those states which
apply premium taxes upon receipt of purchase payments, we will deduct premium
taxes upon payment of any withdrawal or death benefits or upon any
annuitization. The amount deducted will depend on the premium tax assessed in
the applicable state. State premium taxes currently range from 0% to 3.5%
depending on the jurisdiction and the tax status of the contract and are subject
to change by the legislature or other authority (see "APPENDIX C: STATE PREMIUM
TAXES").
ADMINISTRATION FEE
To compensate us for assuming certain administrative expenses, we
reserve the right to charge an annual administration fee. Prior to the maturity
date, we will deduct the administration fee on the last day of each contract
year. If you surrender the contract for its contract value on any date other
than the last day of any contract year, we will deduct the full amount of the
administration fee from the amount paid. We are not currently assessing an
administration fee.
REINSURANCE
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We have entered into an indemnity coinsurance agreement with Peoples
Security Life Insurance Company ("Peoples") to reinsure fixed annuity business
written by us prior to January 1, 1999 for the product described in this
prospectus.
The indemnity aspects of the agreement provide that we remain liable
for the contractual obligations whereas Peoples agrees to indemnify us for any
contractual claims incurred. The coinsurance aspects of the agreement require
that we transfer to Peoples an agreed upon percentage (currently, 100%) of
assets backing the fixed annuity premiums received by us for fixed annuity
contracts. Peoples reimburses us for a percentage of claims and provides expense
allowances to cover commission and other costs associated with this fixed
annuity business. Peoples' contractual liability runs solely to us, and no
contract owner has any right of action against Peoples.
Peoples is responsible for investing the fixed annuity premiums
received and is at risk for any potential investment gains and losses. Under
this agreement, we will continue to administer the fixed annuity business for
which we will earn an expense allowance. We have set up a reserve to recognize
that expense allowances received from Peoples under this indemnity coinsurance
agreement do not fully reimburse us for overhead expenses allocated to this
fixed annuity line of business.
For fixed annuity business written by us on or after to January 1,
1999, The Manufacturers Life Insurance Company (U.S.A.) reinsures certain
amounts with respect to the contract described in this prospectus under a
reinsurance agreement with substantial similar terms to the Peoples Reinsurance
Agreement.
ADDITIONAL INFORMATION ABOUT MANULIFE NORTH AMERICA
DESCRIPTION OF BUSINESS
Product Lines
We issue fixed and variable annuity contracts. We allocate amounts
invested in the fixed portion of the contracts either to our general account or,
in the case of the contract described in this prospectus, to a non-unitized
separate account. Amounts invested in the variable portion of the contracts are
allocated to our separate accounts (excluding the Fixed Account). We invest
separate account assets (other than the separate account described in this
prospectus) in shares of Manufacturers Investment Trust (formerly NASL Series
Trust) ("MIT"), a no-load, open end management investment company organized as a
Massachusetts business trust.
As of December 31, 1998, we were licensed to sell fixed and variable
and variable life insurance in all states except New Hampshire and New York. Our
wholly owned subsidiary, MNY, which we established in 1992, is licensed to sell
fixed and variable annuity contracts in New York.
Property and Office Location
Our offices are located at 116 Huntington Avenue and 73 Tremont Street,
Boston, Massachusetts where we lease office space. We do not own any real
property which we use for business purposes.
MANAGEMENT DISCUSSION & ANALYSIS
You should read the following analysis of our results from operations
and our financial condition in conjunction with our Financial Statements and the
related Notes to Financial Statements. In this "Management Discussion &
Analysis" section we refer to ourselves as the Company.
OVERVIEW
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<PAGE> 25
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.
Prior to 1998, the Company reported two segments, Annuities and Mutual
Funds. The Mutual Fund segment consisted solely of the North American Funds, a
group of thirteen mutual funds. During 1997, the Company disposed of its Mutual
Fund segment to an unrelated party. In 1998 and 1997, pursuant to a revised plan
of operations for MNY, the Company entered the Savings and Retirement Services
and the Life Insurance businesses in New York. The Company now reports three
segments: Annuities, Savings and Retirement Services, and Life Insurance.
Because two of the Company's segments, Savings and Retirement Services and Life
Insurance, were recently introduced, the assets, revenues and operations of
those segments are not material to the Company's 1998 financial position or
results of operations.
The remainder of this discussion will be limited to the Annuities
segment except as noted.
The Company's primary source of earnings from the Annuities segment are
fees assessed against policyholder account balances held in the Company's
separate accounts including: mortality and expense risk charges, surrender
charges and an annual administrative charge. In addition, the segment earns a
spread between the advisory fees charged to manage the separate account assets
invested in MIT and the subadvisory fees paid to external managers of those
assets. 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 variable annuity and life deposits.
BASIS OF PRESENTATION
During 1996, the Company adopted generally accepted accounting
principles ("GAAP") in conformity with the requirements of the Financial
Accounting Standards Board. A description of accounting policies can be found in
Note 2 to the consolidated financial statements.
REVIEW OF CONSOLIDATED OPERATING RESULTS
1998 Compared to 1997
The Company recorded net income from continuing operations of $43.8
million in 1998 versus net income of $27.4 million in 1997, an increase of $16.4
million or 60%. The increase was primarily a result of fee income earned on
additional separate account assets. Separate account assets grew by 28% while
total assets increased by 27% during 1998. This growth is attributed to record
sales of $2.4 billion for 1998 compared to 1997 sales of $2.2 billion, strong
equity market performance during 1998 and favorable contract persistency. Total
fees, including advisory fees, generated by separate accounts and policyholder
funds increased by $67.0 million or 34% in 1998. Net investment income grew by
$4.3 million or 54% due to additional fixed account sales. In addition, the
Company recognized additional net investment income for the full year of 1998
associated with the $47.7 million capital infusion received in the fourth
quarter of 1997 to support expanded operations in New York.
The Company incurred total benefits and expenses in 1998 of $206.5
million, an increase of $46.2 million, or 29% compared to 1997. The additional
expenses are associated with higher subadvisory fees generated from higher asset
levels in MIT, an increase in non-capitalized acquisition expenses and other
costs associated with growth in the Company's business, and additional start-up
expenses associated with expanding the Company's operations in New York.
The discontinued Mutual Fund segment, under the terms of the sale
agreement concluded in 1997, received a contingent payment of $1.0 million
payment on October 1, 1998. After taxes and an adjustment to the final sales
price, this segment recorded an additional $0.6 million gain on sale in 1998
compared to net income of $5.8 million, including a $5.9 million gain on sale,
in 1997.
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<PAGE> 26
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 attributed 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 56% during 1997. This
growth is attributed to record sales of $2.2 billion for 1997 compared to 1996
sales of $1.4 billion, strong equity market performance during 1997 and
favorable contract persistency. The record sales for 1997 were 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 $2.4 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 MNY.
The Company incurred total benefits and expenses in 1997 of $160.3
million, an increase of $38.2 million, or 31% compared to 1996. The additional
expenses are associated with higher subadvisory fees generated from higher asset
levels in MIT, 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 $0.6
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 $12.5 million
(twelve month period) for 1996.
FINANCIAL POSITION
1998 Compared to 1997
Total assets increased from $10.6 billion at December 31, 1997 to $13.5
billion at December 31, 1998, an increase of $2.9 billion or 27%. Separate
account assets increased by 28% in 1998 compared to 1997 and represent 90% of
total assets as the Company continues to focus on its variable option insurance
products. The Company continues to own high quality investment grade fixed
maturity investments to support its general account liabilities and
shareholder's equity. The Company's deferred acquisition costs (DAC) asset grew
by 23% as the Company experienced record sales volumes during 1998 and deferred
the related costs, net of current amortization, associated with those sales. Due
from reinsurers increased $88.0 million as a result of higher fixed deferred
account values related to 1998 dollar cost averaging promotions offered to
policyholders in 1998.
Total liabilities increased proportionately with the growth in the
related assets during 1998, primarily in the Company's separate accounts. During
1998, the Company borrowed an additional $57.5 million from Manulife to support
its record sales volumes and related acquisition expenses. Amount payable to
reinsurers increased by $81.0 million primarily as a result of higher fixed
annuity deposits and increased account values associated with the policies
reinsured under the fixed annuity coinsurance agreement.
The growth in retained earnings is due to net income from continuing
operations and discontinued operations of $43.8 million and $0.6 million,
respectively, during 1998. In addition, shareholders equity increased $0.9
million due to higher market values associated with invested assets at December
31, 1998.
1997 Compared to 1996
22
<PAGE> 27
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 36%. Separate
account assets increased by 40% in 1997 compared to 1996 and represented 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 36% during 1997. This increase is a result of a $47.7
million capital infusion in the fourth quarter of 1997 to support expansion of
MNY'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 to support its general account. The Company's
DAC asset grew by 25% as the Company experienced record 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
Company's coinsurance agreement.
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 Company's
coinsurance agreement.
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. In addition, shareholders
equity increased $0.7 million due to higher market values associated with
invested assets at December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes the ability of a company to generate sufficient
cash flows to meet the cash requirements of business operations. Historically,
the Company's principal cash flow sources have been deposits and charges on
contracts, investment income, maturing investments, and proceeds from sales of
investment assets. In addition to the need for cash flow to meet operating
expenses, the liquidity requirements of the Company relate principally to its
annuity liabilities and to the funding of investments in new products,
processes, and technologies. The liabilities mentioned above include the payment
of benefits under its annuity contracts along with contract withdrawals and
policy loans.
The general account liabilities consist of policyholder funds whose
liquidity requirements do not fluctuate significantly from one year to the next.
Policyholder transactions related to separate accounts do not materially impact
the cash flow of the Company.
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
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 through a fixed account reinsurance
agreement. Substantially all variable account acquisition costs are financed
through borrowing from Manulife, starting in 1996, and internally generated cash
flows.
The Company maintains a prudent amount invested in cash and short term
investments. At the end of 1998, this amounted to $44.4 million or 21% of total
investments compared to $ 22.3 million in 1997 or 13%. In addition, the
Company's liquidity is managed by maintaining an easily marketable portfolio of
fixed maturity securities. Because of the excess expense over income which
arises from the cost of new policy issues, the continued success in generating
sales will not only result in losses in the results from operations, but will
create a cash flow strain as well. As a result, the Company on an annual basis
forecasts its capital and financing requirements to support its
23
<PAGE> 28
operations. The Company looks to Manulife for the necessary capital or financing
to support the Company's growth.
The Company's net cash flows from operating activities were ($18.7)
million, ($38.8) million and ($34.2) million for the years ended December 31,
1998, 1997 and 1996, respectively. The negative cash flows from operations are
primarily related to increased commissions and acquisition expenses associated
with increasing sales volumes. Offsetting these items each year are increases in
total fees, including net advisory fees, generated by separate accounts and
policyholder funds.
The Company's net cash flows from investing activities were ($33.3)
million, ($39.1) million and ($3.3) million for the years ended December 31,
1998, 1997 and 1996, respectively. The decrease in cash flows for 1998 resulted
primarily from fixed maturity securities maturing or sold offset by an increase
in purchases of fixed maturity securities to meet the Company's cash flow needs.
The negative cash flows in 1997 were primarily attributable to the purchases of
fixed maturity securities associated with the capital infusion of $47.7 million
and were partially offset by the disposal of the Mutual Fund segment in 1997 and
the disposal of foreclosed real estate. The negative cash flows in 1996 were
primarily attributable to the purchases of fixed maturity securities associated
with the capital infusion of $18.0 million and were offset by the liquidation of
"seed money" invested in the underlying MIT and NAF funds and the disposal of
foreclosed real estate.
The Company's net cash flows from financing activities were $55.1
million, $73.2 million, and $38.5 million, for the years ended December 31,
1998, 1997 and 1996, respectively. The increase in net cash flows for all three
years is primarily related to additional borrowings from Manulife to support the
Company's growth. Net deposits to policyholder funds for 1998 and 1997 and
capital contributions in 1997 and 1996 also contributed additional cash to the
Company. Offsetting the cash flows for all three years are reinsurance costs
and, in 1996, the Company incurred net redemptions from policyholder funds.
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 NAIC has
established 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 various factors to 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. At December 31, 1998 the
Company's capital and surplus balances exceeded all such required minimums.
IMPACT OF YEAR 2000
The Company makes extensive use of information systems in the
operations of its various businesses, including for the exchange of financial
data and other information with customers, suppliers and other counterparties.
The Company also uses software and information systems provided by third parties
in its accounting, business and investment systems.
The Year 2000 risk, as it is commonly known, is the result of computer
programs being written using two digits, rather than four, to define the
applicable year. Any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in systems failures or miscalculations causing
disruptions of operations, including among other things, a temporary
24
<PAGE> 29
inability to process transactions, send premium billing notices, make claims
payments or engage in other normal business activities.
The systems used by the Company have been assessed as part of a
comprehensive written plan conducted by The Manufacturers Life Insurance Company
(collectively with its subsidiaries "Manulife"), to ensure that computer systems
and processes of Manulife and its subsidiaries and affiliates, including the
Company, will continue to perform through the end of this century and in the
next.
In 1996, in order to make Manulife's systems Year 2000 compliant, a
program was instituted to modify or replace both Manulife's information
technology systems ("IT systems") and embedded technology systems ("Non-IT
systems"). The phases of this program include (i) an inventory and assessment of
all systems to determine which are critical, (ii) planning and designing the
required modifications and replacements, (iii) making these modifications and
replacements, (iv) testing modified or replaced systems, (v) redeploying
modified or replaced systems and (vi) final management review and certification.
For most IT and non-IT systems identified as critical, certification has been
completed for the Company. Of those systems classified as critical, management
believes that over 99% were Year 2000 compliant at the end of 1998. Management
continues to focus attention on the remaining 1% of critical systems. Those that
affect the Company are expected to be compliant by the end of the second quarter
in 1999. Management believes that the Company's non-critical systems will be
Year 2000 compliant by the end of the second quarter 1999.
In addition to efforts directed at Manulife's own systems, Manulife is
presently consulting vendors, customers, and other third parties with which it
deals in an effort to ensure that no material aspect of Manulife's operations
will be hindered by Year 2000 problems of these third parties. This process
includes providing third parties with questionnaires regarding the state of
their Year 2000 readiness and, where possible or where appropriate, conducting
further due diligence activities.
Manulife recognizes the importance of preparing for the change to the
Year 2000 and, in January 1999, commenced preparation of contingency plans, in
the event that Manulife's Year 2000 program has not fully resolved its Year 2000
issues. The Year 2000 Project Management Office for Manulife's U.S. Division is
coordinating the preparation of the Year 2000 contingency plan on behalf of U.S.
Division affiliates and subsidiaries. Contingency planning is targeted for
completion by mid-1999.
Management currently believes that, with modifications to existing
software and conversions to new software, the Year 2000 risk will not pose
significant operational problems for Manulife's computer systems. As part of the
Year 2000 program, critical systems were "time-shift" tested in the Year 2000
and beyond to confirm that they will continue to function properly before,
during and after the change to the Year 2000. However, there can be no assurance
that Manulife's Year 2000 program, including consulting third parties and its
contingency planning, will avoid any material adverse effect on Manulife's
operations, customer relations or financial condition. Manulife estimates the
total cost of its Year 2000 program will be approximately $59 million, of which
$49.5 million has been incurred through December 31, 1998; however, there can be
no assurance that the actual cost incurred will not be materially higher than
such estimate. Most costs will be expensed as incurred; however, those costs
attributed to the purchase of new software and hardware will generally be
capitalized. The total cost of the Year 2000 program is not expected to have a
material effect on Manulife's net operating income.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. The primary market risk exposure for
the Company is the impact of lower than expected equity market performance on
its asset-related fee revenue. The Company also has certain exposures to changes
in interest rates.
Equity Risk
25
<PAGE> 30
The Company earns asset based fees based on the asset levels invested
in the separate accounts. As a result, the Company is subject to equity risk and
the effect changes in equity market levels will have on the amounts invested in
the separate accounts. The Company estimates that the effect of a 10% decline in
equity fair values in force at December 31, 1998, if the decline existed
throughout 1999, would adversely affect the Company's asset based fees for 1999
by $28.6 million.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur economic
losses due to adverse changes in interest rates. This risk arises from the
issuance of certain interest sensitive annuity products and the investing of
those proceeds in fixed rate investments. The Company manages its interest rate
risk through an asset/liability management program. 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 of this program. In addition, the
Company has diversified its product portfolio offerings to include products that
contain features that will protect it against fluctuations in interest rates.
Those features include adjustable crediting rates, policy surrender charges, and
market value adjustments on liquidations.
Based upon the Company's investment strategy, asset-liability
management process, and the calculated durations of its assets and liabilities
at December 31, 1998, management estimates that a 100 basis point immediate,
parallel increase in interest rates for the entire year of 1999 would decrease
the fair value of its duration managed assets by approximately $1.2 million.
There would be no effect on the fair value of the Company's liabilities because
of the features inherent in the Company's products.
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.
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 of the Company's financial position and
operations, including contract liabilities and reserves. 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 permitted investments. 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.
Several insurers affiliated with the Company, are domiciled in Michigan
and therefore are subject to Michigan regulation. Consequently, the Michigan
Insurance Bureau has jurisdiction in applying its laws and regulations to
transactions which may occur between the Company and any of Manulife's United
States subsidiaries. Under Michigan holding company laws and other laws and
regulations, intercompany transactions, transfers of assets and dividend
payments may be subject to prior notification or approval depending upon the
size of such transfers and payments in relation to the financial positions of
the companies. Transactions between the Company and Manulife or any if its
subsidiaries are primarily regulated by Delaware but may also be subject to
Michigan regulation.
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
26
<PAGE> 31
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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994*
---- ---- ---- ---- -----
(in thousands)
<S> <C> <C> <C> <C>
Under Generally Accepted Accounting Principles:
Total Revenues $ 274,216 $ 202,751 $ 147,772 $ 143,896
Net Income 44,420 33,233 15,735 11,032
Total Separate Account Assets 12,188,420 9,529,160 6,820,599 5,131,536
Total Assets 13,496,414 10,633,763 7,811,370 6,244,352
Shareholder's Equity 254,030 208,726 127,070 95,256
</TABLE>
* Selected financial data under generally accepted accounting principles is not
available for 1994. 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 was effective for 1996 annual financial statements, no longer
permitted 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.
27
<PAGE> 32
<TABLE>
<CAPTION>
For the Years Ended December 31
----------------------------------------------- --------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
On Statutory Basis **:
Total Revenues $ 2,210,418 $ 1,944,058 $ 1,128,313 $ 1,058,882 $ 1,226,602
Net Income (Loss) 28,067 22,259 3,067 (7,288) (30,454)
Total Separate Account Assets 11,354,727 8,931,967 6,459,290 4,914,728 3,661,278
Total Assets 11,494,727 9,055,820 6,517,773 4,962,504 4,240,248
Capital and Surplus 157,940 139,171 69,554 50,158 59,408
</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.
Charges for investment management, administration and contract guarantees have
been reclassified from net transfers to total revenues for 1994-1997 to conform
to the current year statutory presentation.
All information presented elsewhere in this document is presented under
generally accepted accounting principles.
OUR OFFICERS AND DIRECTORS
The following table presents certain information regarding our
Directors and executive officers, including their age and principal occupations,
which, unless specific dates are shown, are of more than five years duration.
<TABLE>
<CAPTION>
Name Position with The Company Principal Occupation
- ---- ------------------------- --------------------
<S> <C> <C>
John D. DesPrez III Chairman of the Board of Executive Vice President, U.S. Operations, Manulife, January 1,
Age: 42 Directors* 1999 to present; Senior Vice President, U.S. Annuities,
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.
Theodore F. Director and President President, The Company and Senior Vice President, U.S.
Kilkuskie, Jr. Annuities, Manulife, January 1, 1999 to present, Senior Vice
Age: 43 President, U.S. Insurance, Manulife, February 1998 to December
1998, Vice President U.S. Insurance, June 1995 to February
1998, Executive Vice President Mutual Fund Sales & Marketing,
Metropolitan Life Insurance Company, March 1994 to June 1995.
John D. Richardson Director* Senior Executive Vice President and General Manager, U.S.
Age: 61 Operations, Manulife, January 1995 to present; Director of The
Company, March 1997 to present; Senior Vice President and
General Manager, Canadian Operations, Manulife, June 1992 to
</TABLE>
28
<PAGE> 33
<TABLE>
<S> <C> <C>
January 1995.
Robert Boyda Vice President, Investment Vice President, Investment Management Services of The Company,
Age: 42 Management Services 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 D. Gallagher Vice President, Secretary Vice President, Legal Services U.S. Operations, Manulife,
Age: 44 and General Counsel 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.
Hugh C. McHaffie Vice President, U.S. Vice President, Product Development, Annuities, Manulife,
Age: 40 Annuities and Product January 1996 to present; Vice President U.S. Annuities and
Development Product 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, Vice President and Chief Financial Officer, Annuities,
Age: 51 and Chief Financial Officer 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 Vice President, Human Resources, U.S. Operations, Manulife,
Age: 48 Services 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 Vice President and Chief Financial Officer, U.S. Operations,
Age: 43 Actuary Manulife, January 1996 to present; Vice President and Chief
Actuary of The Company, January 1986 to present.
William Hayward Vice President, Vice President, Administration, The Company, June 1998 to
Age: 43 Administration present; Vice President, Administration, Allmerica Financial
Services, August, 1994 to May, 1998; Executive, Administration, The
Company, May 1991 to August 1994.
Cindy Granata Vice President, Information Vice President, Information Systems, The Company, 1998 to
Age: 47 Systems present; Director, Information Systems, Allmerica Financial,
1996-1998; Assistant Vice President, Strategic Planning,
Massachusetts Casualty Insurance Company, 1991-1996.
</TABLE>
*Each Director is elected to serve until the next annual meeting of shareholders
or until his or her successor is elected and qualified.
EXECUTIVE COMPENSATION
We refer to ourselves as the "Company" in the "Executive Compensation"
section.
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
29
<PAGE> 34
Officer for services provided to The Company and any other executive officer who
had allocated cash compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Bonus(1) Other Restricted Securities LTIP All Other
Position Annual Stock Underlying Payout Compensa-
Compensa- Award(s) Options/SARs tion(3)
tion(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John D. DesPrez III, 1998 $118,250 $70,735 $4,274 N/A N/A N/A $3,557
President
David W. Libbey, 1998 $111,998 $41,000 $10,679 N/A N/A N/A $1,858
Vice President
Treasurer
John D. Richardson, 1998 $74,167 $57,333 $9,000 N/A N/A $11,698 $ 104
Chairman
</TABLE>
(1) Bonus for 1997 performance paid in 1998.
(2) Does not include group health insurance since the plans are the same for all
salaried employees.
(3) Other Compensation includes the value of term life insurance premiums paid
by Manulife for the benefit of the executive officer and for US domiciled
officers it includes Company paid 401(k) plan contributions. In prior years,
this column included company paid pension plan contributions for US domiciled
officers 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 is comprised of six external directors. The
Committee's principal mandate is to approve the appointment, succession and
remuneration of Manulife's Executive Vice Presidents and Senior Vice Presidents,
including the Named Executive Officers. For the President and Chief Executive
Officer of Manulife, the Committee makes compensation recommendations that are
then approved by the entire Board. The Committee also approves the compensation
programs for all other officers as well as the annual review of the Annual
Incentive Plan awards and Long-Term Incentive Plan grants for all officers of
Manulife and it's subsidiaries.
In addition to the annual reviews, the Committee approves any major
changes to all policies which are designed to attract, retain, develop and
motivate employees and all pension plans of Manulife and it's subsidiaries.
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,
which is comprised of Schedule I banks and major life insurance companies.
Further, Manulife ensures that its compensation levels are competitive within
local markets outside of Canada.
Manulife's executive compensation program is comprised of three key
components; base salary, annual incentives and long-term incentives. Officers of
The Company participate in the following Manulife compensation programs.
Salary
30
<PAGE> 35
The Committee approves the salary ranges and salary increase levels for
all of Manulife's Executive and Senior Vice Presidents individually, and all
Vice Presidents as a group, based on competitive industry data for all markets
in which Manulife operates. Salary increases for Manulife's 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.
Annual Incentive Plan
Manulife's Annual Incentive Plan ("AIP") provides executive officers of
Manulife with 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 Committee and management periodically review the design of the
incentive plan to ensure that it:
(i) is competitive with Manulife's comparator groups;
(ii) supports, and aligns, with Manulife's strategic objectives; and
(iii) recognizes and rewards individual contributions and value creation.
In conducting these reviews, Manulife obtains advice from independent,
external consultants.
The AIP uses earnings and performance measures to determine awards with
predetermined thresholds for each component as approved by the Committee
annually. Incentive awards are established for each participant based on
organizational level. Incentive award levels range from 12% to 60% of base
salary assuming achievement of targeted performance objectives. When corporate
and divisional performance objectives are significantly exceeded, a participant
can receive incentive awards ranging from 30% to 150% of base salary. If
corporate and divisional performance objectives are below targeted performance,
the incentive awards are adjusted downward according to plan guidelines. The
Named Executive Officers participate in the AIP on the same basis as all other
officers.
Long Term Incentive Plan
<TABLE>
<CAPTION>
Estimated Future Payouts Under
Non-Securities-Price-Based Plans (US $)(3)
-----------------------------------------
Name Securities Performance or Threshold Target Maximum
Units or Other Other Period ($ or #) ($ or #)(4) ($ or #)
Rights (#)(1) Until
Maturation or
Payout(2)
<S> <C> <C> <C> <C> <C>
John D. DesPrez III 5,245 Jan. 1, 2002 N/A $35,787 N/A
David W. Libbey 4,338 Jan. 1, 2002 N/A $29,599 N/A
John D. Richardson 7,831 Jan. 1, 2002 N/A $6,412 N/A
</TABLE>
Notes:
(1) Each grant has two components: Cash Appreciation Rights and Retirement
Appreciation Rights.
31
<PAGE> 36
(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 Manulife.
(3) Canadian dollars converted to US dollars using a book rate of 1.50.
(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.
Manulife's Board of Directors approved the implementation of a
Long-Term Incentive Plan ("LTIP") effective April 1, 1994. All employees at the
Vice President level and above are eligible to participate in the LTIP.
The purpose of the LTIP is to encourage executive officers to act in
the long-term interests of Manulife and to provide an opportunity to share in
value creation as measured by changes in Manulife's statutory surplus. The LTIP
is an appreciation rights plan which requires that a substantial portion of any
accumulated gain remain invested with Manulife during the participant's career
with Manulife.
The Committee reviews the LTIP on an annual basis having regard to
Manulife's performance, targeted growth and competitive position. The Committee
approves grants on a prospective basis considering management's recommendations
for participation, size and terms of grant.
Grants of appreciation rights are generally made to participants in the
LTIP each year. The number of appreciation rights granted to participants is
determined based on the net present value of the potential payout represented by
the appreciation rights, assuming that Manulife's surplus grows at a targeted
rate. Appreciation rights are granted such that this net present value
represents between 20% and 115% of the participant's salary level on the date of
grant.
Perquisites
In addition to cash compensation, all officers are entitled to a
standard benefit package including medical, dental, basic and dependent life
insurance, long and short-term disability coverage and defined contribution or
defined benefit plan.
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%.
Canadian domiciled officers at the Vice President levels and above are
eligible to receive the Executive Flexible Spending Account. The objective of
the program is to assist and encourage the executive officers to represent the
interests and high standards of Manulife, both from a business and a personal
perspective. The program's flexibility allows use of the allowance for benefit
choices from a comprehensive list of options, including: car, mortgage subsidy
and club memberships.
U.S. Retirement Plans
With the integration of the Manulife and North American Life
operations, a review of the retirement programs for the employees in the United
States was conducted in 1998. As a result of this review, effective July 1,
1998, (i) the two defined benefit pension plans (The Manulife United States
Salaried Employees Pension Plan and the North American Life Staff Pension Fund
1948 for United States Members) were merged and converted to a Cash Balance
Plan, entitled "The Manulife U.S. Cash Balance Plan"; (ii) the Supplemental
Pension Plan for United States Salaried Employees of Manufacturers Life
Insurance Company was converted into a Cash Balance Supplemental Plan, entitled
"The Manulife U.S. Supplemental Cash Balance Plan"; and, (iii) the two 401(k)
plans
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<PAGE> 37
(The Manulife 401(k) Savings Plan and the North American Security Life 401(k)
Savings Plans) were merged and restated into The Manulife U.S. 401(k) Savings
Plan.
The executives of The Company are eligible to participate in the three
restated retirement plans as sponsored by The Manufacturer's Life Insurance
Company (U.S.A.).
The Manulife Cash Balance Plan
To implement the conversion to the Cash Balance Plan, participants in
the two former defined benefit plans were provided with opening account balances
equal to the value of their accrued benefit under their respective prior plan
participation as at June 30, 1998, using interest rate assumption equal to the
Pension Benefit Guaranty Corporation (PBGC) rate for 1998.
Under this plan, which is a defined benefit plan, a separate account is
established for each participant. The account receives company contribution
credits based on vesting service and earnings as outlined in the table below.
The account earns semi-annual interest credits based on the yield of one-year
Treasury bills plus half a percentage point, subject to a minimum interest
credit of 5.25%. The yearly maximum amount of eligible pay allowed under the
qualified plan is $160,000 for 1998. Employees are vested after 3 years of
vesting service. Normal retirement age is 65. Pension benefits are provided to
those who terminate after three years of vesting service, and the normal
retirement benefit is actuarially equivalent to the cash balance account at
normal retirement date. Early benefits are actuarially equivalent to the normal
retirement benefits but are subsidized for participants who were age 45 and 5 or
more years of vesting service on July 1, 1998 and who terminate employment after
attaining age 50 and completing 10 years of service. For these grandfathered
participants, the prior early retirement factors under the Manulife Plan apply.
The normal form of payment under the Cash Balance Plan is a life annuity, with
various optional forms available, including a lump sum equal to the cash balance
account.
Company Contribution Credits
Years of Vesting Service Percentage of Eligible Pay
Less than 6 4%
6, but less than 11 5%
11, but less than 16 7%
16, but less than 21 9%
21 or more 11%
Projected Cash Balance Plan pension benefits at age 65 payable as an annual life
annuity.
Years of Service
<TABLE>
<CAPTION>
Renumeration ($) 15 20 25 30 35
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
$150,000 16,960 30,178 49,664 76,018 111,659
175,000 18,090 32,190 52,975 81,086 119,103
200,000 18,090 32,190 52,975 81,086 119,103
225,000 18,090 32,190 52,975 81,086 119,103
250,000 18,090 32,190 52,975 81,086 119,103
300,000 18,090 32,190 52,975 81,086 119,103
400,000 18,090 32,190 52,975 81,086 119,103
500,000 18,090 32,190 52,975 81,086 119,103
</TABLE>
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<PAGE> 38
The Manulife U.S. Supplemental Cash Balance Plan
In addition to their pension plan benefits, executives are eligible for
benefits under The Manulife U.S. Supplemental Cash Balance Plan. This is a
non-contributory, non-qualified plan, the purpose of which is to provide the
executives with the same level of retirement benefits they would have been
entitled to but for the limitations prescribed for qualified plans under the
Internal Revenue Code. Opening account balances were established using the same
method as The Manulife U.S. Cash Balance Plan. During the period of an
executive's active participation in the plan, annual company contributions are
made with respect to the portion of the executives earnings which is in excess
of $160,000 for 1998 as outlined below with interest credited under this plan at
the same rate as provided under the Cash Balance Plan. In addition, a one time
contribution may be made for a participant if it is determined at the time of
their termination of employment, that the participant's pension benefit under
the Cash Balance Plan is limited by Internal Revenue Code Section 415. Together,
these contributions serve to restore to the participant the benefit that they
would have been entitled to under the Cash Balance Plan's benefit formula but
for the limitations, in Internal Revenue Code Sections 401(a)(17) and 415.
Benefits are provided to those who terminate after three years. The default form
of payment under the plan is a lump sum, although participants may elect to
receive payment in the form of an annuity provided that such election is made
within the time period prescribed in the plan.
<TABLE>
<CAPTION>
Complete Years of Cash
Balance Service Credits as of Percentage of Eligible Pay Percentage of Eligible Pay
December 31st up to $200,000 over $200,000
<S> <C> <C>
Less than 6 4% 4%
6, but less than 11 5% 5%
11, but less than 16 7% 5%
16, but less than 21 9% 5%
21 or more 11% 5%
</TABLE>
Projected Supplemental pension benefits at age 65 payable as an annual life
annuity.
Years of Service
<TABLE>
<CAPTION>
Renumeration ($) 15 20 25 30 35
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
$150,000 0 0 0 0 0
175,000 1,696 3,018 4,966 7,602 11,166
200,000 4,523 8,048 13,244 20,271 29,776
225,000 7,081 12,178 19,501 29,404 42,797
250,000 9,639 16,309 25,757 38,536 55,818
300,000 14,756 24,570 38,271 56,801 81,861
400,000 24,990 41,092 63,298 93,330 133,946
500,000 35,224 57,615 88,325 129,859 186,031
</TABLE>
Projected Cash Balance and Supplemental pension benefits at age 65 payable as an
annual annuity.
Years of Service
<TABLE>
<CAPTION>
Renumeration ($) 15 20 25 30 35
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
$150,000 16,960 30,178 49,664 76,018 111,659
175,000 19,786 35,208 57,941 88,688 130,269
200,000 22,613 40,238 66,219 101,357 148,879
225,000 25,171 44,368 72,476 110,490 161,900
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C>
250,000 27,729 48,499 78,732 119,622 174,921
300,000 32,846 56,760 91,246 137,887 200,964
400,000 43,080 73,282 116,273 174,416 253,049
500,000 53,314 89,805 141,300 210,945 305,134
</TABLE>
The Manulife U.S. 401(k) Savings Plan
In addition to the above plans a 401(k) Savings Plan is also offered.
The plan allows employees of The Company to contribute on a pre-tax basis 1% to
15% of their earnings up to the yearly limit of $160,000 for 1998. The yearly
maximum an employee can contribute is $10,000 for 1998. The company matches 50%
of the first 6% of contributions. Employees become 100% vested in the employer
matching contributions as outlined in the vesting schedule below. Additionally
they become 100% vested if they retire on or after age 65, become disabled or
die.
Years of Vesting Service Vested Percentage
Less than 2 years 0%
2 years but less than 3 50%
3 years and thereafter 100%
Messrs DesPrez and Libbey have 8.0 and 1.6 years of credited service,
respectively as at December 31, 1998.
Canadian Retirement Plans
Executive officers domiciled in Canada, and certain executive officers
formerly domiciled in Canada, are eligible to participate in Manulife's Canadian
Staff Pension Plan and to receive supplemental pension benefits under Manulife's
supplemental retirement income program. Under these plans, income is payable for
the life of the executive officer, with a guarantee of a minimum of 120 monthly
payments. If the executive officer is married, the income is actuarially
adjusted to a joint and survivor pension which pays a set amount during the life
of the executive officer. Upon the death of the executive officer, this amount
is reduced by one-third and is payable for the life of the spouse (provided that
in no event is this amount reduced prior to 60 months from the date of
retirement).
Pensionable earnings for this purpose are calculated as the highest
average of the base earnings and bonuses earned over any 36 consecutive months.
The pension benefit is determined by years of service multiplied by the sum of
1.3% of pensionable earnings up to the average of the last three years maximum
pensionable earnings ("YMPE") plus 2.0% of the excess of pensionable earnings
over the average YMPE, without regard to the maximum pension limit for
registered pension plans imposed by Revenue Canada.
Employees hired after the age of 40 who become executive officers at
the vice president level and above within one year of hire may also receive
additional service credits equal to their actual period of service, to a maximum
of 10 years.
The following table sets forth the aggregate standard annual benefits
payable to executive officers under Manulife's Canadian Staff Pension Plan and
supplemental retirement income program.
Years of Service
<TABLE>
<CAPTION>
Remuneration 15 20 25 30 35
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C>
125,000 34,978 46,637 58,296 69,955 81,615
150,000 42,478 56,637 70,796 84,955 99,115
175,000 49,978 66,637 83,296 99,955 116,615
200,000 57,478 76,637 95,796 114,955 134,115
</TABLE>
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<PAGE> 40
<TABLE>
<S> <C> <C> <C> <C> <C>
225,000 64,978 86,637 108,296 129,955 151,615
250,000 72,478 96,637 120,796 144,955 169,115
300,000 87,478 116,637 145,796 174,955 204,115
400,000 117,478 156,637 195,796 234,955 274,115
450,000 132,478 176,637 220,796 264,955 309,115
500,000 147,478 196,637 245,796 294,955 344,115
600,000 177,478 236,637 295,796 354,955 414,115
700,000 207,478 276,637 345,796 414,955 484,115
800,000 237,478 316,637 395,796 474,955 554,115
900,000 267,478 356,637 445,796 534,955 624,115
1,000,000 297,478 396,637 495,796 594,955 694,115
</TABLE>
Mr. Richardson has 13.9 years of credited service, as at December 31, 1998. His
entitlement includes additional service credits under the terms of the
additional service credit program described above.
Employment Contracts
Mr. DesPrez's previous compensation package with North American
Security Life Insurance Company (the "Previous Agreement") included a
termination provision which was subsequently incorporated into his employment
agreement with The Manufacturers Life Insurance Company (U.S.A.). The Previous
Agreement was due to expire 3 years from the date (January 1, 1996) North
American Life Assurance Company 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 Employer 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.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA SEPARATE ACCOUNT D
We established The Manufacturers Life Insurance Company of North
America Separate Account D (formerly NASL Fixed Account) (the "Fixed Account")
in 1996 as a separate account under Delaware law. It is not a registered
investment company. The Fixed Account holds assets that are segregated from all
of our other assets. The Fixed Account is currently used only to support the
obligations under the contracts offered by this prospectus. These obligations
are based on interest rates credited to the contracts and do not depend on the
investment performance of the Fixed Account. Any gain or loss in the Fixed
Account accrues solely to us and we assume any risk associated with the
possibility that the value of the assets in the Fixed Account might fall below
the reserves and other liabilities that must be maintained. Should the value of
the assets in the Fixed Account fall below reserve and other liabilities, we
will transfer assets from our general account to the Fixed Account to make up
the shortfall. We reserve the right to transfer to our general account any
assets of the Fixed Account in excess of such reserves and other liabilities and
to maintain assets in the Fixed Account which support any number of annuities
which we offer or may offer. The assets of the Fixed Account are not insulated
from the claims of our creditors and may be charged with liabilities which arise
from other business which we conduct. Thus we may, at our discretion if
permitted by applicable state law, transfer existing Fixed Account assets to, or
place future Fixed Account allocations in, the general account for purposes of
administration.
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<PAGE> 41
We will invest the assets of the Fixed Account in those assets which we
select and which are permitted by applicable state laws for separate account
investment. As noted above under "REINSURANCE," two reinsurers are responsible
for investing an agreed upon percentage (currently, 100%) of the assets in the
Fixed Account.
DISTRIBUTION OF THE CONTRACT
Our majority-owned subsidiary, MSS, a Delaware limited liability
company with offices at 73 Tremont Street, Boston, Massachusetts 02108, is the
principal underwriter of the contracts. It also provides advisory services to
MIT. MSS is a broker-dealer registered under the 1934 Act and a member of the
National Association of Securities Dealers, Inc. ("NASD"). MSS has entered into
a non-exclusive promotional agent agreement with WLA. WLA is a broker-dealer
registered under the 1934 Act and a member of the NASD. WLA is a wholly owned
subsidiary of MWL, the holding company that 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.
The contracts will be sold by registered representatives of
broker-dealers authorized by MSS to sell them. Such registered representatives
will also be our licensed insurance agents. Under the promotional agent
agreement, WLA will recruit and provide sales training and licensing assistance
to such registered representatives and will prepare sales and promotional
materials for our approval. MSS will pay distribution compensation to selling
brokers in varying amounts which under normal circumstances are not expected to
exceed 5% of purchase payments. MSS may from time to time pay additional
compensation pursuant to promotional contests. Additionally, in some
circumstances, MSS will provide reimbursement of certain sales and marketing
expenses. MSS will pay the promotional agent for providing marketing support for
the distribution of the contracts.
CONFIRMATION STATEMENTS
We will send you confirmation statements for certain transactions in
your account. You should carefully review these statements to verify their
accuracy and should immediately report any mistake to our Annuity Service
Office. If you fail to notify our Annuity Service Office of any mistake within
60 days of the mailing of the confirmation statement, you will be deemed to have
ratified the transaction.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation, to which we or any of our subsidiaries is a party or to
which any of our or their property is subject. To the best of our knowledge, no
such proceedings are contemplated by any governmental authority.
LEGAL MATTERS
James D. Gallagher, Esq., our Vice President, Secretary and General
Counsel, has passed upon all matters of applicable state law pertaining to the
contract, including our right to issue the contract.
INDEPENDENT AUDITORS
The consolidated financial statements at December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998 appearing
in this Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
NOTICES AND REPORTS TO CONTRACT OWNERS
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<PAGE> 42
At least once each contract year, we will send you a statement showing
the contract value of the contract as of the date of the statement. The
statement will also show premium payments and any other information required by
any applicable law or regulation.
CONTRACT OWNER INQUIRIES
You should direct all inquiries to our Annuity Service Office at P.O.
Box 9230, Boston, Massachusetts 02205-9230.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the contracts is
unclear in certain circumstances, and you should consult a qualified tax adviser
with regard to the application of law to individual circumstances. This
discussion is based on the Code, Treasury Department regulations, and
interpretations existing on the date of this prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions. This discussion does not address state or local tax
consequences associated with the purchase of the contracts.
WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT, FEDERAL, STATE OR
LOCAL, OF ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
OUR TAX STATUS
We are taxed as a life insurance company under the Code. The assets in
the separate accounts are owned by us, and the income derived from such assets
is includible as income for federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral During Accumulation Period
Under existing provisions of the Code, except as described below, any
increase in contract value is generally not taxable to you as the contract owner
or to the annuitant until received, either in the form of annuity payments as
contemplated by the contracts, or in some other form of distribution. However,
this rule applies only if the contract owner is an individual.
As a general rule, deferred annuity contracts held by "non-natural
persons," such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal income tax
purposes. The income on such contracts (as defined in the tax law) is taxed as
ordinary income that is received or accrued by the owner during the taxable
year. There are several exceptions to this general rule for non-natural contract
owners. First, annuity contracts will generally be treated as held by a natural
person if the nominal owner is a trust or other entity which holds the contract
as an agent for a natural person. However, this exception will not apply in the
case of any employer which is the nominal owner of an annuity contract under a
non-qualified deferred compensation arrangement for its employees.
Other exceptions to the general rule for non-natural contract owners
will apply with respect to:
- annuity contracts acquired by an estate of a decedent
by reason of the death of the decedent,
- annuity contracts issued in connection with certain
qualified retirement plans,
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<PAGE> 43
- annuity contracts purchased by employers upon the
termination of certain qualified retirement plans,
- certain annuity contracts used in connection with
structured settlement agreements, and
- annuity contracts purchased with a single premium
when the annuity starting date is no later than a
year from purchase of the annuity and substantially
equal periodic payments are made, not less frequently
than annually, during the annuity period.
In addition to the foregoing, if the contract's maturity date occurs,
or is scheduled to occur, at a time when the annuitant is at an advanced age,
such as over age 85, it is possible that the owner will be taxable currently on
the annual increase in the contract value.
The remainder of this discussion assumes that the contract will
constitute an annuity for federal tax purposes.
Taxation of Partial and Total Withdrawals
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the owner's contract value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
total withdrawal, amounts received are includible in income to the extent they
exceed the "investment in the contract." For these purposes the "investment in
the contract" at any time equals the total of the purchase payments made under
the contract to that time (to the extent such payments were neither deductible
when made nor excludable from income as, for example, in the case of certain
employer contributions to qualified contracts) less any amounts previously
received from the contract which were not included in income.
Other than in the case of qualified contracts (which generally cannot
be assigned or pledged), any assignment or pledge (or agreement to assign or
pledge) any portion of the contract value is treated as a withdrawal of such
amount or portion. The investment in the contract is increased by the amount
includible in income with respect to such assignment or pledge, though it is not
affected by any other aspect of the assignment or pledge (including its
release). If you transfer your interest in a contract without adequate
consideration to a person other than your spouse (or a former spouse incident to
divorce), you will be taxed on the difference between your contract value and
the investment in the contract at the time of transfer. In such case, the
transferee's investment in the contract will be increased to reflect the
increase in the transferor's income.
There is some uncertainty regarding the treatment of the market value
adjustment for purposes of determining the amount includible in income as a
result of any partial withdrawal or transfer without adequate consideration.
Congress has given the Internal Revenue Service ("IRS") regulatory authority to
address this uncertainty. However, as of the date of this prospectus, the IRS
has not issued any regulations addressing these determinations.
Taxation of Annuity Payments
Normally, the portion of each annuity payment taxable as ordinary
income is equal to the excess of the payment over the exclusion amount. The
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract, adjusted for any period certain or
refund feature, to the total expected value of annuity payments for the term of
the contract (determined under Treasury Department regulations). A simplified
method of determining the taxable portion of annuity payments applies to
contracts issued in connection with certain qualified plans other than IRAs.
Once the total amount of the investment in the contract is excluded
using this ratio, annuity payments will be fully taxable. If annuity payments
cease because of the death of the annuitant and before the total amount of the
39
<PAGE> 44
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his or her last taxable year.
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person or are not married. You should
consult a tax adviser in those situations.
Taxation of Death Benefit Proceeds
Amounts may be distributed from a contract because of the death of an
owner or the annuitant. Prior to the maturity date, such death benefit proceeds
are includible in income as follows:
- if distributed in a lump sum, they are taxed in the
same manner as a full withdrawal, as described above,
or
- if distributed under an annuity option, they are
taxed in the same manner as annuity payments, as
described above.
After the maturity date, where a guaranteed period exists under an
annuity option and the annuitant dies before the end of that period, payments
made to the beneficiary for the remainder of that period are includible in
income as follows:
- if received in a lump sum, they are includible in
income to the extent that they exceed the unrecovered
investment in the contract at that time, or
- if distributed in accordance with the existing
annuity option selected, they are fully excludable
from income until the remaining investment in the
contract is deemed to be recovered, and all annuity
payments thereafter are fully includible in income.
Penalty Tax on Premature Distributions
Where a contract has not been issued in connection with a qualified
plan, there generally is a 10% penalty tax on the taxable amount of any payment
from the contract. This penalty is not applicable if the payment is:
- received on or after the owner reaches age 59-1/2;
- attributable to the owner becoming disabled (as
defined in the tax law);
- made on or after the death of the owner or, if the
owner is not an individual, on or after the death of
the primary annuitant (as defined in the tax law);
- made as a series of substantially equal periodic
payments (not less frequently than annually) for the
life (or life expectancy) of the owner or the joint
lives (or joint life expectancies) of the owner and a
"designated beneficiary" (as defined in the tax law),
or
- made under a contract purchased with a single premium
when the maturity date is no later than a year from
purchase of the contract and substantially equal
periodic payments are made, not less frequently than
annually, during the annuity period.
Aggregation of Contracts
In certain circumstances, the IRS may determine the amount of an
annuity payment or a withdrawal from a contract that is includible in income by
combining some or all of the annuity contracts owned by an individual which are
not issued in connection with a qualified plan. For example, if you purchases a
contract offered by this
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<PAGE> 45
prospectus and also purchases at approximately the same time an immediate
annuity, the IRS may treat the two contracts as one contract.
In addition, if you purchases two or more deferred annuity contracts
from the same insurance company (or its affiliates) during any calendar year,
all such contracts will be treated as one contract for purposes of determining
whether any payment not received as an annuity (including withdrawals prior to
the maturity date) is includible in income. Thus, if during a calendar year you
buy two or more of the contracts offered by this prospectus (which might be
done, for example, in order to invest amounts in different guarantee periods),
all of such contracts would be treated as one contract in determining whether
withdrawals from any of such contracts are includible in income.
The effects of such aggregation are not clear and depend on the
circumstances. However, aggregation could affect the amount of a withdrawal that
is taxable and the amount that might be subject to the 10% penalty tax described
above.
Loss of Interest Deduction Where Contracts are Held by or for the
Benefit of Certain Non-Natural Persons
In the case of contracts issued after June 8, 1997 to a non-natural
taxpayer (such as a corporation or a trust), or held for the benefit of such an
entity, recent changes in the tax law may result in a portion of otherwise
deductible interest no longer being deductible by the entity, regardless of
whether the interest relates to debt used to purchase or carry the contract.
However, this interest deduction disallowance does not affect contracts where
the income on such contracts is treated as ordinary income that is received or
accrued by the owner during the taxable year. Entities that are considering
purchasing the contract, or entities that will be beneficiaries under a
contract, should consult a tax adviser.
QUALIFIED RETIREMENT PLANS
In General
The contracts are also designed for use in connection with certain
types of qualified retirement plans which receive favorable treatment under the
Code. Numerous special tax rules apply to participants in such qualified plans
and to contracts used in connection with such qualified plans. In this
prospectus we provide only general information about the use of the contract
with the various types of qualified plans. Persons intending to use the contract
in connection with a qualified plan should seek competent advice.
The tax rules applicable to qualified plans vary according to the type
of plan and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain qualified contracts, there may be
no "investment in the contract" and the total amount received may be taxable.
Also, loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loan must be repaid. (You
should always consult your tax adviser and retirement plan fiduciary prior to
exercising loan privileges.) Both the amount of the contribution that may be
made, and the tax deduction or exclusion that the owner may claim for such
contribution, are limited under qualified plans. If you are considering
purchasing a contract for use in connection with a qualified retirement plan,
you should consider, in evaluating the suitability of the contract, that the
contract allows only a single premium purchase payment in an amount of at least
$5,000. If this contract is used in connection with a qualified plan, the owner
and annuitant must be the same individual. If a co-annuitant is named, all
distributions made while the annuitant is alive must be made to the annuitant.
Also, if a co-annuitant is named who is not the annuitant's spouse, the annuity
options which are available may be limited, depending on the difference in ages
between the annuitant and co-annuitant. Furthermore, the length of any guarantee
period may be limited in some circumstances to satisfy certain minimum
distribution requirements under the Code.
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<PAGE> 46
Additionally, for contracts issued in connection with qualified plans
subject to the Employee Retirement Income Security Act, the spouse or ex-spouse
of the owner will have rights in the contract. In such a case, the owner may
need the consent of the spouse or ex-spouse to a change annuity options or make
a withdrawal from the contract.
In addition, special rules apply to the time at which distributions
must commence and the form in which the distributions must be paid. For example,
failure to comply with minimum distribution requirements applicable to qualified
plans will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the qualified plan. In the case of Individual
Retirement Accounts ("IRAs") (other than Roth IRAs), distributions of minimum
amounts (as specified in the tax law) must generally commence by April 1 of the
calendar year following the calendar year in which the owner attains age 70-1/2.
In the case of certain other qualified plans, distributions of such minimum
amounts generally must commence by the later of this date or April 1 of the
calendar year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment
from certain qualified contracts. (The amount of the penalty tax is 25% of the
taxable amount of any payment received from a "SIMPLE retirement account" during
the 2-year period beginning on the date the individual first participated in any
qualified salary reduction agreement (as defined in the tax law) maintained by
the individual's employer.) There are exceptions to this penalty tax which vary
depending on the type of qualified plan. In the case of an IRA, including a
"SIMPLE IRA," exceptions provide that the penalty tax does not apply to a
payment (a) received on or after the owner reaches age 59-1/2, (b) received on
or after the owner's death or because of the owner's disability (as defined in
the tax law), or (c) made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life expectancy) of the
owner or for the joint lives (or joint life expectancies) of the owner and
designated beneficiary (as defined in the tax law). These exceptions, as well as
certain others not described herein, generally apply to taxable distributions
from other qualified plans (although, in the case of plans qualified under
sections 401 and 403, exception "c" above for substantially equal periodic
payments applies only if the owner has separated from service). In addition, the
penalty tax does not apply to certain distributions from IRAs taken after
December 31, 1997 which are used for qualified first time home purchases or for
higher education expenses. Special conditions must be met to qualify for these
two exceptions to the penalty tax. If you wish to take a distribution from an
IRA for these purposes, you should consult your tax adviser.
When issued in connection with a qualified plan, a contract will be
amended as generally necessary to conform to the requirements of the plan.
However, owners, annuitants, and beneficiaries are cautioned that the rights of
any person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the contract. In addition, we will not be bound by terms and conditions of
qualified plans to the extent such terms and conditions contradict the contract,
unless we consent.
Qualified Plan Types
Following are brief descriptions of various types of qualified plans in
connection with which we may issue a contract.
Individual Retirement Annuities. Section 408 of the Code permits
eligible individuals to contribute to an individual retirement program known as
an IRA. IRAs are subject to limits on the amounts that may be contributed and
deducted, the persons who may be eligible and on the time when distributions may
commence. Also, distributions from certain qualified plans may be "rolled over"
on a tax-deferred basis into an IRA. The contract may not be used in connection
with an "Education IRA" under Section 530 of the Code.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code
allows employers to establish simplified employee pension plans for their
employees, using the employees' IRAs for such purposes, if certain criteria are
met. Under these plans the employer may, within specified limits, make
deductible contributions on
42
<PAGE> 47
behalf of the employees to IRAs. Employers intending to use the contract in
connection with such plans should seek competent advice.
SIMPLE IRAs. Section 408(p) of the Code permits certain small employers
to establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence.
Roth IRAs. Section 408A of the Code permits eligible individual to
contribute to a type of IRA known as a "Roth IRA." Roth IRAs are generally
subject to the same rules as non-Roth IRAs, but differ in certain respects.
Among the difference are that contributions to a Roth IRA are not
deductible and "qualified distributions" from a Roth IRA are excluded from
income. A qualified distribution is a distribution that satisfies two
requirements. First, the distribution must be made in a taxable year that is at
least five years after the first taxable year for which a contribution to any
Roth IRA established for the owner was made. Second, the distribution must be:
- made after the owner attains age 59 1/2;
- made after the owner's death;
- attributable to the owner being disable; or
- a qualified first-time homebuyer distribution within the
meaning of Section 72(t)(2)(F) of the Code.
In addition, distributions from Roth IRAs need not commence when the
owner attains age 70 1/2. A Roth IRA may accept a "qualified rollover
contribution" from a non-Roth IRA but a Roth IRA may not accept rollover
contributions from other qualified plans.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and
Profit-Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
contract in order to provide benefits under the plans.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the contracts.
Section 403(b) policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings in such years on amounts held as of the last year beginning before
January 1, 1989. These amounts can be paid only if the employee has reached age
59-1/2, separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship are
limited to actual contributions; earnings thereon cannot be distributed on
account of hardship. Amounts subject to the withdrawal restrictions applicable
to Section 403(b)(7) custodial accounts may be subject to more stringent
restrictions. (These limitations on withdrawals do not apply to the extent we
are directed to transfer some or all of the contract value to the issuer of
another tax-sheltered annuity or into a Section 403(b)(7) custodial account.)
Direct Rollover Rules
43
<PAGE> 48
In the case of contracts used in connection with a pension,
profit-sharing, or annuity plan qualified under Sections 401(a) or 403(a) of the
Code, or in the case of a Section 403(b) tax sheltered annuity, any "eligible
rollover distribution" from the contract will be subject to direct rollover and
mandatory withholding requirements. An eligible rollover distribution generally
is any taxable distribution from a qualified pension plan under Section 401(a)
of the Code, qualified annuity plan under Section 403(a) of the Code, or Section
403(b) tax sheltered annuity or custodial account, excluding certain amounts
(such as minimum distributions required under Section 401(a)(9) of the Code,
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more, and hardship
distributions).
Under these requirements, withholding at a rate of 20% will be imposed
on any eligible rollover distribution. In addition, the participant in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the participant elects
to have amounts directly transferred to certain qualified retirement plans (such
as to an IRA). Prior to receiving an eligible rollover distribution, a notice
will be provided explaining generally the direct rollover and mandatory
withholding requirements and how to avoid the 20% withholding by electing a
direct rollover.
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the U.S. government a part of the taxable
portion of each distribution made under a contract unless the distributee
notifies us at or before the time of the distribution that he or she elects not
to have any amounts withheld. In certain circumstances, we may be required to
withhold tax. The withholding rates applicable to the taxable portion of
periodic annuity payments are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the maturity
date and rollovers from non-Roth IRAs to Roth IRAs) is 10%. As described above,
the withholding rate applicable to eligible rollover distributions is 20%.
GENERAL MATTERS
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in
the Texas Optional Retirement Program ("ORP") to withdraw their interest in a
deferred annuity contract issued under the ORP only upon:
(1) termination of employment in the Texas public institutions of
higher education,
(2) retirement,
(3) death, or
(4) the participant's attainment of age 70 1/2.
Accordingly, before we may distribute any amounts may from the
contract, a participant in the ORP must furnish us proof that one of the four
events has occurred. The foregoing restrictions on withdrawal do not apply if a
participant in the ORP transfers his or her contract value to another contract
or another qualified custodian during the period of participation in the ORP.
44
<PAGE> 49
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
EXAMPLE 1 - Assume you make a single payment of $50,000 into the contract, there
are no transfers or partial withdrawals and your withdrawal is not made at the
end of a guarantee period. The table below illustrates three examples of the
withdrawal charges that we would impose if the contract were completely
withdrawn during the contract year shown, based on hypothetical contract values
and assuming no market value adjustment.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE AMOUNT SUBJECT
CONTRACT CONTRACT WITHDRAWAL TO WITHDRAWAL WITHDRAWAL
YEAR VALUE AMOUNT CHARGE CHARGE
---------------------
PERCENT AMOUNT
<S> <C> <C> <C> <C> <C>
2 55,000 5,000(a) 50,000 6% 3,000
6 60,000 5,000(b) 55,000 2% 1,100
8 70,000 5,000 0(c) 0% 0
</TABLE>
(a) During any contract year the free withdrawal amount is 10% of the
single payment made under the contract less any prior partial
withdrawals in that contract year. Ten percent of payments less prior
withdrawals equals $5,000 ($5,000-0). Consequently, on total
withdrawal, you withdraw $5,000 without imposition of the withdrawal
charge, and we assess the withdrawal charge against the remaining
balance of $50,000 (contract value less free withdrawal amount).
(b) The free withdrawal amount is again equal to $5,000, and we apply the
withdrawal charge to the remaining balance of $55,000 (contract value
less free withdrawal amount).
(c) There is no withdrawal charge after seven contract years.
EXAMPLE 2 - Assume you make a single payment of $50,000 into the contract and
that no transfers are made. The table below illustrates two partial withdrawals
of $2,000 and $7,000 made during the third contract year and assumes no market
value adjustment applies.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE AMOUNT SUBJECT
CONTRACT WITHDRAWAL WITHDRAWAL TO WITHDRAWAL WITHDRAWAL
VALUE REQUESTED AMOUNT CHARGE CHARGE
----------------------
PERCENTAGE AMOUNT
<S> <C> <C> <C> <C> <C>
65,000 2,000 2,000(a) 0 5% 0
63,000 7,000 3,000(b) 4,000 5% 200
</TABLE>
(a) The free withdrawal amount during any contract year is 10% of the
single payment made under the contract less any prior withdrawals in
that contract year. Ten percent of the payment less prior withdrawals
equals $5,000 ($5,000-0). The amount requested ($2,000) is less than
the free withdrawal amount; therefore, no withdrawal charge applies.
(b) Since $2,000 has already been withdrawn in the current contract year,
the remaining free withdrawal amount during the third contract year is
$3,000. The $7,000 partial withdrawal will consist of $3,000 free of
withdrawal charge, and the remaining $4,000 will be subject to a
withdrawal charge.
We may subject withdrawals to a market value adjustment in addition to
the withdrawal charge described above (see "MARKET VALUE ADJUSTMENT."
45
<PAGE> 50
APPENDIX B
MARKET VALUE ADJUSTMENT EXAMPLES
We determine the market value adjustment factor by the following
formula: n/12
((1+I)/(1+J)) where:
i - The initial guaranteed interest rate or renewal guaranteed
interest rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the
request is processed by the Company, for a guarantee period
with the same length as the period remaining in the initial
renewal guarantee period or RENEWAL guarantee period. If the
guarantee period of this length is not available, the
guarantee period with the next highest duration which is
maintained by the Company will be chosen.
n - The number of complete months remaining to the end of the
initial guarantee period or renewal guarantee period.
Example 1
<TABLE>
<S> <C>
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest
rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 6.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of 2.5
contract year 3 =$100,000 X 1.05 =$112,972.63
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment n/12
factor =((1+i)/(1+j))
i = .05
j = .06
n = 30
30/12
=(1.05/1.06)
=0.9765817
Amount transferred to a
different guarantee period =$112,972.63 x 0.9765817
=$110,327.00
</TABLE>
46
<PAGE> 51
Example 2
<TABLE>
<S> <C>
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest
rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 4.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of 2.5
contract year 3 =$100,000 x 1.05 =$112,972.63
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment n/12
factor =((1+i)/(1+j))
i = .05
j = .04
n = 30
30/12
=(1.05/1.04)
=1.0242121
Amount transferred to a
different guarantee period =$112,972.63 x 1.0242121
=$115,707.93
</TABLE>
47
<PAGE> 52
APPENDIX C
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
<TABLE>
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- ----- --------- ---------
<S> <C> <C>
CALIFORNIA........................................... .50% 2.35%
DISTRICT OF COLUMBIA................................. 2.25% 2.25%
KENTUCKY ............................................ 2.00% 2.00%
MAINE ............................................ .00% 2.00%
NEVADA ............................................ 00% 3.50%
PUERTO RICO.......................................... 1.00% 1.00%
SOUTH DAKOTA*........................................ .00% 1.25%
WEST VIRGINIA........................................ 1.00% 1.00%
WYOMING ............................................ 00% 1.00%
</TABLE>
* Premium tax paid upon receipt of premium (no tax at annuitization if tax paid
on premium at issue).
48
<PAGE> 53
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF NORTH AMERICA
Years ended December 31, 1998, 1997 and 1996
<PAGE> 54
The Manufacturers Life Insurance Company of North America
Audited Consolidated
Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
Report of Independent Auditors............................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets...............................................2
Consolidated Statements of Income.........................................3
Consolidated Statements of Changes in Shareholder's Equity................4
Consolidated Statements of Cash Flows.....................................5
Notes to Consolidated Financial Statements................................6
<PAGE> 55
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, 1998 and 1997, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated 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, 1998 and
1997, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
February 22, 1999
Ernst & Young LLP
<PAGE> 56
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31
ASSETS ($ thousands) 1998 1997
------------- ------------
<S> <C> <C>
INVESTMENTS
Fixed maturity securities available-for-sale, at fair value (note 3) $ 157,743 $ 143,307
(amortized cost: 1998 $152,969; 1997 $140,573)
Short-term investments 34,074 14,992
Policy loans 5,175 3,276
------------- ------------
TOTAL INVESTMENTS $ 196,992 $ 161,575
------------- ------------
Cash and cash equivalents $ 10,320 $ 7,339
Accrued investment income 3,132 2,641
Deferred acquisition costs (note 4) 449,332 364,983
Receivable from affiliates - 4,605
Other assets 6,360 9,626
Due from reinsurers 641,858 553,834
Separate account assets 12,188,420 9,529,160
------------- ------------
TOTAL ASSETS $ 13,496,414 $ 10,633,763
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY ($ thousands)
LIABILITIES:
Policyholder liabilities and accruals $ 102,252 $ 92,750
Payable to affiliates 4,644 -
Notes payable to affiliates (note 9) 241,419 183,955
Deferred income taxes (note 5) 23,777 16,428
Other liabilities 25,980 27,862
Due to reinsurers 655,892 574,882
Separate account liabilities 12,188,420 9,529,160
------------- ------------
TOTAL LIABILITIES $ 13,242,384 $ 10,425,037
------------- ------------
SHAREHOLDER'S EQUITY:
Common stock (note 7) $ 2,600 $ 2,600
Additional paid-in capital 179,053 179,053
Retained earnings 70,293 25,873
Accumulated other comprehensive income 2,084 1,200
------------- ------------
TOTAL SHAREHOLDER'S EQUITY $ 254,030 $ 208,726
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 13,496,414 $ 10,633,763
============= =============
</TABLE>
See accompanying notes.
<PAGE> 57
MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
($ thousands)
<TABLE>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Fees from separate accounts and policyholder funds $ 166,498 $ 126,636 $ 95,323
Advisory fees and other distribution revenues 94,821 67,678 46,233
Net investment income (note 3) 12,178 7,906 5,452
Net realized investment gains (note 3) 719 531 764
----------- ---------- ----------
TOTAL REVENUE $ 274,216 $ 202,751 $ 147,772
----------- ---------- ----------
BENEFITS AND EXPENSES:
Policyholder benefits and claims $ 4,885 $ 4,986 $ 4,242
Amortization of deferred acquisition costs (note 4) 53,499 40,649 30,830
Other insurance expenses (note 10) 135,624 100,385 71,255
Financing costs 12,497 14,268 15,821
----------- ---------- ----------
TOTAL BENEFITS AND EXPENSES $ 206,505 $ 160,288 $ 122,148
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
$ 67,711 $ 42,463 $ 25,624
----------- ---------- ----------
INCOME TAX EXPENSE (NOTE 5) $ 23,873 $ 15,044 $ 9,079
----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS $ 43,838 $ 27,419 $ 16,545
----------- ---------- ----------
Discontinued operations (note 15):
Loss from operations, net of tax $ - $ (141) $ (810)
Gain on disposal, net of tax $ 582 $ 5,955 $ -
----------- ---------- ----------
NET INCOME $ 44,420 $ 33,233 $ 15,735
----------- ---------- ----------
</TABLE>
See accompanying notes.
<PAGE> 58
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL
COMMON ADDITIONAL EARNINGS COMPREHENSIVE SHAREHOLDER'S
($thousands) STOCK PAID-IN CAPITAL (DEFICIT) INCOME EQUITY
------- --------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $2,600 $113,322 $(23,095) $ 2,430 $ 95,257
Capital contribution - 18,000 - - 18,000
Comprehensive income (note 2) - - 15,735 (1,921) 13,814
------- -------- -------- -------- ----------
BALANCE, DECEMBER 31, 1996 $2,600 $131,322 $ (7,360) $ 509 $ 127,071
Capital contribution - 47,731 - - 47,731
Comprehensive income (note 2) - - 33,233 691 33,924
------- -------- -------- -------- ----------
BALANCE, DECEMBER 31, 1997 $2,600 $179,053 $25,873 $ 1,200 $ 208,726
Comprehensive income (note 2) - - 44,420 884 45,304
------- -------- -------- -------- ----------
BALANCE, DECEMBER 31, 1998 $2,600 $179,053 $ 70,293 $ 2,084 $ 254,030
------- -------- -------- -------- ----------
</TABLE>
See accompanying notes
<PAGE> 59
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
($ thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 44,420 $ 33,233 $ 15,735
Adjustments to reconcile net income to
net cash used in operating activities:
Write-down of foreclosed real estate - - 342
Amortization of bond discount and premium 685 401 197
Benefits to policyholders 4,885 4,986 4,242
Gain on interest rate swap - - (1,632)
Provision for deferred income tax 6,872 15,767 7,614
Provision for deferred income tax included in discontinued operations - - 331
Net realized investment gains (719) (531) (764)
Amortization of deferred acquisition costs 53,499 40,649 30,830
Amortization of deferred acquisition costs included in discontinued - 1,707 2,214
operations
Policy acquisition costs deferred (138,527) (123,965) (89,535)
Gain on disposal of discontinued operations - (9,394) -
Changes in assets and liabilities:
Accrued investment income (491) (835) 146
Other assets 3,266 (1,396) 2,061
Receivable from affiliates 4,605 (4,605) -
Payable to affiliates 4,644 (1,462) (4,204)
Other liabilities (1,882) 6,642 (1,789)
----------- -------- ---------
Net cash used in operating activities $ (18,743) $(38,803) $ (34,212)
----------- -------- ---------
INVESTING ACTIVITIES:
Fixed maturity securities sold, matured or repaid $ 37,694 $ 74,626 $ 41,269
Fixed maturity securities purchased (50,056) (118,765) (48,300)
Equity securities sold - 1 12,738
Equity securities purchased - (250) (6,034)
Foreclosed real estate sold - 2,268 1,602
Disposal of discontinued operations - 16,338 -
Net change in short-term investments (19,082) (10,697) (3,984)
Policy loans advanced, net (1,899) (2,639) (570)
----------- -------- ---------
Cash used in investing activities $ (33,343) $(39,118) $ (3,279)
----------- -------- ---------
FINANCING ACTIVITIES:
Net reinsurance consideration $ (7,014) $(5,443) $ (4,116)
Deposits and interest credited to policyholder funds 15,551 20,607 20,923
Return of policyholder funds (10,934) (15,462) (24,658)
Increase in notes payable to affiliates 57,464 25,754 138,201
Notes payable repaid - - (109,867)
Capital contribution by Parent - 47,731 18,000
----------- -------- ---------
Cash provided by financing activities $ 55,067 $ 73,187 $ 38,483
----------- -------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year 2,981 (4,734) 992
Balance, beginning of year 7,339 12,073 11,081
----------- -------- ---------
BALANCE, END OF YEAR $ 10,320 $ 7,339 $ 12,073
----------- -------- ---------
</TABLE>
See accompanying notes.
<PAGE> 60
The Manufacturers Life Insurance Company of North America
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION
The Manufacturers Life Insurance Company of North America (formerly North
American Security Life Insurance Company and hereinafter referred to as
"MNA"), is a wholly-owned subsidiary of Manulife-Wood Logan Holding Co.,
Inc. (formerly NAWL Holding Company, Inc. and hereinafter referred to as
"MWL"). MWL is 62.5% owned by The Manufacturers Life Insurance Company
(USA) ("ManUSA"), 22.5% by MRL Holding, LLC, ("MRL") and 15% by minority
interest shareholders. ManUSA and MRL are indirectly wholly-owned
subsidiaries of The Manufacturers Life Insurance Company ("Manulife
Financial"), a federally chartered Canadian mutual life insurance company.
MNA owns 100% of The Manufacturers Life Insurance Company of New York
(formerly First North American Life Assurance Company, hereinafter "MNY")
and is the managing member with a 90% interest in Manufacturers Securities
Services, LLC ("MSS"). MNY owns a 10% interest in MSS. MNA, MNY and MSS are
hereinafter referred to collectively as "the Company".
MNA issues individual and group annuity contracts in forty-eight states,
excluding New York and New Hampshire. Prior to July 1, 1998, MNA also
issued individual variable life insurance contracts. MNY issues individual
and group annuity contracts and individual life insurance contracts in New
York. Amounts invested in the fixed portion of the contracts are allocated
to the general accounts of the Company or non-insulated separate accounts
of the Company. Amounts invested in the variable portion of the contracts
are allocated to the separate accounts of the Company. Each of these
separate accounts invests in shares of the various portfolios of the
Manufacturers Investment Trust (formerly NASL Series Trust and hereinafter
referred to as "MIT"), a no-load, open-end investment management company
organized as a Massachusetts business trust, or in open-end investment
management companies offered and managed by unaffiliated third parties.
Prior to October 1, 1997, NASL Financial Services Inc. ("NASL Financial"),
a subsidiary of MNA, acted as investment adviser to MIT and as principal
underwriter of the variable contracts issued by the Company. Effective
October 1, 1997, MSS, the successor to NASL Financial, replaced NASL
Financial as the investment advisor to MIT and as the principal underwriter
of all variable contracts issued by MNA. MSS also acts as the principal
underwriter for the variable contracts and is the exclusive distributor for
all contracts issued by MNY
On October 31, 1998, MNA transferred a 10% interest in the members' equity
of MSS to MNY as a contribution of capital valued at $175.
<PAGE> 61
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting
principles ("GAAP").
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those
estimates.
B) RECENT ACCOUNTING STANDARDS
i) During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income", SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose annual
financial statements. Comprehensive income includes all changes in
shareholder's equity during a period except those resulting from
investments by and distributions to shareholders. The adoption of SFAS
No. 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity
of the Company.
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
NET INCOME $ 44,420 $ 33,233 $ 15,735
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) arising during the period 1,351 1,036 (1,424)
Less:
Reclassification adjustment for realized gains included
in net income 467 345 497
-------- --------- --------
Other comprehensive income (loss) 884 691 (1,921)
-------- --------- --------
COMPREHENSIVE INCOME $ 45,304 $ 33,924 $ 13,814
-------- --------- --------
</TABLE>
Other comprehensive income (loss) is reported net of taxes of $476,
$372, and ($1,034) for 1998, 1997, and 1996, respectively.
ii) During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the disclosure of information about the
Company's operating segments, including disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS
No. 131 did not affect results of operations or financial position,
nor did it affect the manner in which the Company defines its
operating segments. The Company reports three business segments:
Annuities, Savings and Retirement Services, and Life Insurance.
<PAGE> 62
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Annuities segment consists of annuity contracts that provide the
customer with the opportunity to invest in mutual funds managed by
independent investment managers and the Company or in the general accounts
of the Company, with investment returns accumulating on a tax-deferred
basis. The Savings and Retirement Services segment offers 401(k) products
to customers in the State of New York. The Individual Life Insurance
segment offers traditional non-participating life insurance to the New York
market. The Savings and Retirement Services segment was launched in mid -
1998 and the Individual Life Insurance segment was launched in late 1997.
Both segments are considered to be in the start-up phase. No significant
assets or revenues have been generated to date in these two segments.
Start-up costs, on a pre-tax basis, reported for these two segments totaled
approximately $534 and $2,399, respectively, in 1998 and $1,551 for the
Individual Life Insurance segment in 1997.
In 1997 and 1996, the Company reported two business segments: Annuities and
Mutual Fund Operations. The Company sold its mutual fund operations in 1997
as described further in Note 15 of these financial statements.
C) INVESTMENTS
The Company classifies all of its fixed maturity securities as
available-for-sale and records these securities at fair value.
Realized gains and losses on sales of securities classified as
available-for-sale are recognized in net income using the specific
identification method. Changes in the fair value of securities
available-for-sale are reflected directly in accumulated other
comprehensive income after adjustments for deferred taxes and deferred
acquisition costs. Discounts and premiums on investments are amortized
using the effective interest method.
The cost of fixed maturity securities 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 maturity securities
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.
Policy loans are reported at aggregate unpaid balances which
approximate fair value.
Short-term investments, which include investments with maturities of
less than one year and greater than 90 days at the date of
acquisition, are reported at amortized cost which approximates fair
value.
<PAGE> 63
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D) 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.
E) DEFERRED ACQUISITION COSTS (DAC)
Commissions, net of commission allowances for reinsurance ceded, and
other expenses which vary with and are primarily related to the
production of new business are deferred to the extent recoverable and
included as an asset. Acquisition costs associated with annuity
contracts and investment pension contracts are being amortized
generally in proportion to the present value of expected gross profits
from surrender charges and investment, mortality and expense margins.
The amortization is adjusted retrospectively when estimates of current
or future gross profits are revised. DAC associated with traditional
non-participating individual insurance policies is charged to expense
over the premium paying period of the related policies. DAC is
adjusted for the impact on estimated future gross profits assuming the
unrealized gains or losses on securities had been realized at
year-end. The impact of any such adjustments is included in net
unrealized gains (losses) in accumulated other comprehensive income.
DAC is reviewed annually to determine recoverability from future
income and, if not recoverable, it is immediately expensed.
F) POLICYHOLDER LIABILITIES
Policyholder liabilities equal the policyholder account value for the
fixed portions of annuity, variable life and investment pension
contracts with no substantial mortality or morbidity risk. Account
values are increased for deposits received and interest credited and
are reduced by withdrawals. For traditional non-participating life
insurance policies, policyholder liabilities are computed using the
net level premium method and are based upon estimates as to future
mortality, persistency, maintenance expenses and interest rate yields
that are applicable in the year of issue. The assumptions include a
provision for the risk of adverse deviation.
G) SEPARATE ACCOUNTS
Separate account assets and liabilities that are reported in the
accompanying balance sheets represent investments in MIT, which are
mutual funds that are separately administered for the exclusive
benefit of the policyholders of the Company and its affiliates, or
open-end investment management companies offered and managed by
unaffiliated third parties, which are mutual funds that are separately
administered for the benefit of the Company's policyholders and other
contract owners. These assets and liabilities are reported at fair
value. The policyholders, rather than the Company, bear the investment
risk. The operations of the separate accounts are not included in the
accompanying financial statements. Fees charged on separate account
policyholder funds are included in revenues.
<PAGE> 64
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H) REVENUE RECOGNITION
Fee income from separate accounts, annuity contracts and investment
pension contracts consists of charges for mortality, expenses and
surrender and administration charges that have been assessed against
the policyholder account balances. Premiums on traditional
non-participating life insurance policies are recognized as revenue
when due and currently are included in Fees from Separate Accounts and
Policyholder Liabilities in the statements of income. Investment
income is recorded as revenue when due.
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 the North American Funds ("NAF") through October 1,
1997, the date the Company sold NAF. Subadvisor compensation for MIT
is included in other insurance expenses.
I) POLICYHOLDER BENEFITS AND CLAIMS
Benefits for annuity contracts and investment pension contracts
include interest credited to policyholder account balances and benefit
claims incurred during the period in excess of policyholder account
balances.
J) FINANCING AGREEMENTS
MNA has entered into various financing agreements with reinsurers and
an affiliated company. All assets and liabilities related to these
contracts are reported on a gross basis. Due to the nature of MNA's
products, these agreements are accounted for under the deposit method
whereby the net premiums paid to the reinsurers are recorded as
deposits.
K) 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." 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.
L) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
<PAGE> 65
3. INVESTMENTS AND INVESTMENT INCOME
A) FIXED MATURITY SECURITIES
At December 31, 1998, the amortized cost and fair value of fixed maturity
securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR VALUE
AS AT DECEMBER 31, GAINS LOSSES
($ thousands) 1998 1997 1998 1997 1998 1997 1998 1997
--------- -------- ------- ------- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government $ 18,266 $ 14,333 $ 1,144 $ 566 ($28) ($13) $ 19,382 $ 14,886
Corporate 100,705 110,191 3,376 1,905 (35) (23) 104,046 112,073
Mortgage-backed 16,812 10,455 131 74 (68) (3) 16,875 10,526
Foreign governments 16,129 4,535 151 194 (8) - 16,272 4,729
States/political subdivisions 1,057 1,059 111 34 - - 1,168 1,093
--------- -------- ------- ------- ----- ----- --------- ---------
Total fixed maturity securities $ 152,969 $140,573 $ 4,913 $2,773 ($139) ($39) $ 157,743 $ 143,307
--------- -------- ------- ------- ----- ----- --------- ---------
</TABLE>
Proceeds from sales of fixed maturity securities during 1998 were
$18,780 (1997 $53,325; 1996 $15,152).
The contractual maturities of fixed maturity securities at December
31, 1998 are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
<TABLE>
<CAPTION>
($ thousands) AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
FIXED MATURITY SECURITIES
One year or less $ 23,380 $23,454
Greater than 1; up to 5 years 69,250 71,105
Greater than 5; up to 10 years 24,610 25,815
Due after 10 years 18,917 20,494
Mortgage-backed securities 16,812 16,875
-------- -------
TOTAL FIXED MATURITY SECURITIES $152,969 $157,743
-------- --------
</TABLE>
Investments with a fair value of $6,105 and $6,284 at December 31,
1998 and 1997, respectively, were on deposit with, or in custody
accounts on behalf of, state insurance departments to satisfy
regulatory requirements.
<PAGE> 66
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
B) INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Fixed maturity securities $9,904 $ 7,250 $5,197
Equity securities - - 35
Short-term investments 2,503 1,126 1,187
Other invested assets 19 - -
Foreclosed real estate - - 433
------- ------- ------
Gross investment income 12,426 8,376 6,852
------- ------- ------
Investment expenses (248) (470) (1,400)
------- ------- ------
NET INVESTMENT INCOME $12,178 $ 7,906 $5,452
======= ======= ======
</TABLE>
The gross realized gains and losses on the sales of investments were
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Fixed maturity securities:
Gross realized gains $724 $788 $430
Gross realized losses (5) (7) (4)
Equity securities
Gross realized gains - - 988
Gross realized losses - (250) (15)
Foreclosed real estate
Gross realized losses - - (635)
---- ---- ----
NET REALIZED GAIN $719 $531 $764
==== ==== ====
</TABLE>
4. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Balance at January 1, $ 364,983 $ 290,610 $ 234,715
Capitalization 138,527 123,965 89,535
Amortization (53,499) (40,649) (30,830)
Amortization included in discontinued
operations - (1,707) (2,214)
Amortization included in gain on disposal
of discontinued operations - (6,943) -
Effect of net unrealized gains on
securities available for sale (679) (293) (596)
----------- ----------- ---------
BALANCE AT DECEMBER 31 $ 449,332 $ 364,983 $ 290,610
=========== =========== =========
</TABLE>
To date, the DAC balance is primarily attributable to the Annuities
segment.
5. INCOME TAXES
The components of income tax expense from continuing operations were as
follows:
FOR THE YEARS ENDED DECEMBER 31
<PAGE> 67
<TABLE>
<CAPTION>
($ thousands) 1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Current expense (benefit) $ 17,001 $ (723) $ 1,465
Deferred expense 6,872 15,767 7,614
TOTAL EXPENSE $ 23,873 $ 15,044 $ 9,079
========= ======== ========
</TABLE>
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
AS AT DECEMBER 31
($ thousands) 1998 1997
--------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Financing arrangements $ 1,289 $ 2,699
Interest on notes payable - 1,283
Guaranty fund assessment liabilities 315 315
Real estate 571 608
Other 169 117
--------- ----------
Total deferred tax assets 2,344 5,022
--------- ----------
DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs (22,017) (18,430)
Unrealized gains on securities available-for-sale (1,122) (646)
Other (2,982) (2,374)
--------- ----------
Total deferred tax liabilities (26,121) (21,450)
--------- ----------
NET DEFERRED TAX LIABILITY $ (23,777) $ (16,428)
========= ==========
</TABLE>
The Company is a member of the MWL affiliated group, filing a consolidated
federal income tax return. MNA and MNY file separate state income tax
returns. The method of allocation between the companies is subject to a
written tax sharing agreement under which the tax liability is allocated to
each member of the group 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 MNA or MNY
will not be more than either company would have paid on a separate return
basis. Settlements of taxes are made through an increase or reduction to
the payable to parent, subsidiaries and affiliates which are settled
periodically.
The Company made estimated tax payments of $12,516, $531 and $0 in 1998,
1997 and 1996, respectively.
<PAGE> 68
6. FINANCING AND REINSURANCE AGREEMENTS
The financing agreements entered into with reinsurance companies relate
primarily to the products sold by MNA. Most of MNA'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 1998, 1997 and 1996 unless
otherwise indicated.
MNA has entered into an indemnity coinsurance agreement with an
unaffiliated reinsurer to reinsure 100% of all contractual liabilities
arising from the fixed portion of both in-force and new variable annuity
business written by MNA prior to December 31, 1998. Under this agreement,
the reinsurer receives the fixed portion of all premiums and transfers
received by MNA. The reinsurer reimburses MNA for all claims and provides
expense allowances to cover commissions and other costs associated with the
reinsured business.
MNA has treaties with two unaffiliated reinsurers to reinsure its Minimum
Death Benefit Guarantee risk for new business through June 30, 1998. Each
reinsurer has assumed 50% of the risk. In addition, MNA reinsured 50% of
its risk related to the waiving of surrender charges at death with one of
these reinsurers. MNA 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 July, 1, 1998, the treaties were amended to
divide the risks between the two unaffiliated reinsurers and an affiliated
reinsurer for new business based upon specific products.
MNA has a treaty with an unaffiliated reinsurer to reinsure a 50% quota
share of the variable portion of MNA's variable life insurance contracts.
In addition, the reinsurer assumes 100% of this product's net amount at
risk in excess of MNA's retention limit of $100 on a YRT basis.
MNA cedes 95% of the variable portion of certain annuity contracts written
prior to December 31, 1996 to an unaffiliated reinsurer under a modified
coinsurance agreement. At the inception of the contract, MNA received
ceding commissions which were recorded as surplus relief. The outstanding
reinsurance payable related to this agreement was $3,053 and $7,156 at
December 31, 1998 and 1997, respectively.
<PAGE> 69
6. FINANCING AND REINSURANCE AGREEMENTS (CONTINUED)
MNA has modified coinsurance agreements with two unaffiliated life
insurance companies to reinsure a quota share of all elements of risk under
the variable portion of certain policy forms for business written by
brokers of their affiliated broker dealers. The quota share reinsured
varies depending on policy form and the issue date of the business. The
second agreement was established in 1997.
During 1998, MNY entered into reinsurance agreements with various
reinsurers to reinsure face amounts in excess of $100 for its traditional
non-participating insurance product. To date, there have been no
reinsurance recoveries under these agreements.
In the event of insolvency of a reinsurer, the Company remains primarily
liable to its policyholders. Failure of reinsurers to honor their
obligations could result in losses to the Company and, accordingly, the
Company periodically monitors the financial condition of its reinsurers.
The Company has not entered into any reinsurance agreements in which the
reinsurer may unilaterally cancel any reinsurance for reasons other than
nonpayment of premiums or other similar credits or a significant change in
the ownership of the Company. The Company does not have any reinsurance
agreements in effect under which the amount of losses paid or accrued
through December 31, 1998 would result in a payment to the reinsurer of
amounts which, in the aggregate and allowing for offset of mutual credits
from other reinsurance agreements with the same reinsurer, exceed the total
direct premiums collected under the reinsured policies.
7. SHAREHOLDER'S EQUITY
The Company has one class of capital stock:
<TABLE>
AS AT DECEMBER 31:
($ thousands) 1998 1997
------- -------
<S> <C> <C>
AUTHORIZED:
3,000 Common shares, Par value $1,000
ISSUED AND OUTSTANDING:
2,600 Common shares $ 2,600 $ 2,600
</TABLE>
Generally, the net assets of MNA and MNY 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.
<PAGE> 70
7. SHAREHOLDER'S EQUITY (CONTINUED)
Net income (loss) and capital and surplus, as determined in accordance with
statutory accounting principles for MNA and MNY were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
------- -------- ------
<S> <C> <C> <C>
MNA:
Net income $28,067 $ 22,259 $3,067
Net capital and surplus 157,940 139,171 69,554
MNY:
Net income (loss) (5,678) (1,562) 231
Net capital and surplus 62,881 68,336 22,265
------- -------- ------
</TABLE>
State regulatory authorities prescribe statutory accounting practices that
differ in certain respects from generally accepted accounting principles
followed by stock life insurance companies. The significant differences
relate to investments, deferred acquisition costs, deferred income taxes,
non-admitted asset balances and reserve calculation assumptions.
MNA'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, 1998
and 1997, the net capital of each of the broker dealers exceeded the SEC's
minimum capital requirements.
8. RELATED-PARTY TRANSACTIONS
The Company utilized various services provided by Manulife Financial in
1998, 1997 and 1996, such as legal, personnel, investment accounting and
other corporate services. The charges for these services were approximately
$13,317, $8,229 and $6,053 in 1998, 1997 and 1996, respectively. At
December 31, 1998 and 1997, the Company had a net liability to MLI for
these services and interest accrued on notes payable of $180 and $2,079,
respectively. At December 31, 1998 and 1997, the payable is offset by a
receivable from MIT and MLI for expenses paid on their behalf of $792 and
$8,251, respectively. In addition, the Company has an intercompany payable
to MWL relating to federal income taxes of $5,256 and $1,567 reflected in
the intercompany payable at December 31, 1998 and 1997, respectively.
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, 5, 9,
11, and 13 for additional related-party transactions).
<PAGE> 71
9. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT
MNA has promissory notes from ManUSA for $221,000 including an additional
borrowing of $57,500 during 1998. Interest on the loan is calculated at a
fluctuating rate equal to LIBOR plus 32.5 basis points and is payable in
quarterly installments. Principal and accrued interest are payable within
45 days of demand. Accrued interest payable at December 31, 1998 and 1997
is $419 and $455, respectively.
MNA has a surplus note of $20,000 with interest at 8% due to ManUSA. The
note and accrued interest are subordinated to payments due to policyholders
and other claimants. Principal and interest payments and interest accruals
can be made only upon prior approval of the Insurance Department of the
State of Delaware. Interest accrued at December 31, 1998 and 1997 was $0
and $3,191, respectively.
MNA and MNY have unsecured lines of credit with State Street Bank and Trust
totaling $15 million, bearing interest at the bank's money market rate plus
50 basis points. There were no outstanding advancements under the lines of
credit at December 31, 1998 and 1997.
Interest expense and interest paid in 1998 were $13,634 and $16,861,
respectively (1997 $11,073 and $9,354; 1996 $8,775 and $11,727).
10. OTHER INSURANCE EXPENSES
Other insurance expenses were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Selling and administrative expenses $ 49,732 $ 42,581 $29,207
Subadvisory fees 38,701 26,364 15,883
General operating expenses 47,191 31,440 26,165
-------- -------- -------
TOTAL
$135,624 $100,385 $71,255
======== ======== =======
</TABLE>
11. EMPLOYEE BENEFITS
A) EMPLOYEE RETIREMENT PLAN
Prior to July 1, 1998, MNA and MNY participated in a non-contributory
defined benefit pension plan (the "Nalaco Plan") sponsored by Manulife
Financial, covering its employees. A similar plan (the "Manulife
Plan") also existed for ManUSA. Both plans provided pension benefits
based on length of service and final average earnings. Vested benefits
are fully funded; current pension costs are funded as they accrue.
<PAGE> 72
11. EMPLOYEE BENEFITS (CONTINUED)
Effective July 1, 1998, the Nalaco Plan was merged into the Manulife Plan
as approved by the Board of Directors of Manulife Financial. The merged
plan was then restated as a cash balance pension plan entitled, "The
Manulife Financial U.S. Cash Balance Pension Plan" ("Cash Balance Plan").
Participants in the two prior plans ceased accruing benefits under the old
plan effective June 30, 1998, and became participants in the Cash Balance
Plan on July 1, 1998. Also effective July 1, ManUSA became the sponsor of
the Cash Balance Plan. Each participant who was a participant in one of the
prior plans received an opening account balance equal to the present value
of their June 30, 1998 accrued benefit under the prior plan, using Pension
Benefit Guaranty Corporation (PBCG) rates. Future contribution credits
under the Cash Balance Plan vary by service, and interest credits are a
function of interest rate levels. Pension benefits are provided to those
participants after three years of vesting service, and the normal
retirement benefit is actuarially equivalent to the cash balance account at
normal retirement date. The normal form of payment under the Cash Balance
Plan is a life annuity with various optional forms available.
Actuarial valuation of accumulated plan benefits are based on projected
salaries and best estimates of investment yields on plan assets, mortality
of participants, employee termination and ages at retirement. Pension costs
relating to current service and amortization of experience gains and losses
are amortized to income over the estimated average remaining service lives
of the participants. No pension expense was recognized by the sponsor in
1998, 1997, or 1996 because the plan was subject to the full funding
limitation under the Internal Revenue Code.
At December 31, 1998, the projected benefit obligation based on an assumed
interest rate of 6.5% was $51,757. The fair value of plan assets invested
in ManUSA's general fund deposit administration insurance contracts and in
an investment portfolio of equities and fixed income securities managed by
an affiliate were $52,541 and $32,145, respectively.
Prior to July 1, 1998, MNA also participated in an unfunded Supplemental
Executive Retirement Plan (Manulife SERP) sponsored by Manulife Financial
for executives. This was a non qualified plan that provides defined pension
benefits in excess of limits imposed by the law to those retiring after age
50 with 10 or more years of vesting service. The SERP covers selected
executives of MNA. Pension benefits are provided to those participants
after 5 years of vesting service, and the pension benefit is a final
average benefit based on the executive's highest 5-year average earnings.
Compensation is not limited, and benefits are not restricted by the
Internal Revenue Code Section 415.
<PAGE> 73
11. EMPLOYEE BENEFITS (CONTINUED)
Effective July 1, 1998, the Manulife SERP was restated to become a
supplemental cash balance plan, and each participant in the SERP who
became a participant in the restated plan was provided with an opening
account balance equal to the present value of their June 30, 1998
accrued benefit under the SERP, using PBGC rates. Future contribution
credits vary by service, and interest credits are a function of
interest rate levels. These annual contribution credits are made in
respect of the participant's compensation that is in excess of the
limit in Internal Revenue Code Section 401(a)(17). In addition, a one
time contribution may be made for a participant if it is determined at
the time of their termination of employment that the participant's
pension benefit under the Cash Balance Plan is limited by Internal
Revenue Code Section 415. Together, these contributions serve to
restore to the participant the benefit that they would have been
entitled to under the Cash Balance Plan's benefit formula but for the
limitation in Internal Revenue Code Sections 401(a)(17) and 415.
Benefits are provided to those participants after three years. The
default form of payment under the plan is a lump sum, although
participants may elect to receive payment in the form of an annuity
provided that such election is made within the time period prescribed
in the plan. If an annuity form of payment is elected, the amount
payable is equal to the actuarial equivalent of the participant's
balance under the supplemental Cash Balance Plan, using the factors and
assumptions for determining immediate annuity amounts applicable to the
participant under the qualified Cash Balance Plan.
b) 401(K) PLAN
Prior to July 1, 1998, the Company also sponsored a defined
contribution plan, the North American Security Life 401(k) Savings
Plan, which was subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). A similar plan, the Manulife
Financial 401K Savings Plan, also existed for employees of ManUSA.
These two plans were merged on July 1, 1998 into one defined
contribution plan sponsored by ManUSA, as approved by the Board of
Directors on March 26, 1998. The Company contributed $285, $353, and
$307 in 1998, 1997, and 1996, respectively.
c) POSTRETIREMENT BENEFIT PLAN
In addition to the retirement plan, the Company participates in the
postretirement benefit plan of ManUSA which provides retiree medical
and life insurance benefits to those who have attained age 55 with 10
or more years of service. The plan provides medical coverage for
retirees and spouses under age 65. When the retirees or the covered
dependents reach age 65, Medicare provides primary coverage and the
plan provides secondary coverage. There is no contribution for post-age
65 coverage, and no contributions are required for retirees for life
insurance coverage. The plan is unfunded.
The postretirement benefit cost to the Company, which includes the
expected cost of postretirement benefits for newly eligible employees
and for vested employees, interest cost, and gains and losses arising
from differences between actuarial assumptions and actual experience,
is accounted for by the plan sponsor, ManUSA.
<PAGE> 74
12. LEASES
The Company leases its office space and various office equipment under
operating lease agreements. For the years ended December 31, 1998, 1997
and 1996, the Company incurred rent expense of $1,617, $1,316 and
$1,224, respectively. The Company's current office space lease expires
in 2002. 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>
Year ended: Minimum Lease Payments
- -------------------------------------------------
<S> <C>
1999 $1,261
2000 1,197
2001 1,197
2002 198
- -------------------------------------------------
Total $3,853
- -------------------------------------------------
</TABLE>
13. GUARANTEE AGREEMENT
Pursuant to a guarantee agreement, Manulife Financial 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 MNA. The guarantee
covers the outstanding fixed portion of variable annuity contracts,
including those issued prior to the date of the guarantee agreement.
14. INTEREST RATE SWAP
MNA 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 MNA. This interest rate swap
was prematurely terminated in 1996 concurrent with the restructuring of
MNA's revolving line of credit, resulting in a gain of $1,632 recorded
as an offset to interest expense.
<PAGE> 75
15. DISCONTINUED OPERATIONS
On May 6, 1997, MNA signed a letter of intent to sell its 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, required 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. In 1998, related to the
sale, the Company received a contingent payment of $1,000, before
income taxes, less an adjustment of $105 to the final settlement of the
purchase price. For 1998 and 1997, the Company realized a gain of $895
and $9,161, before applicable taxes of $313 and $3,206, respectively.
Included in the gain for 1997 is a provision of $10, before applicable
taxes of $3, for the loss from continuing operations during the
phase-out period. Expenses of $223 in 1997 were incurred on the sale
and netted against the realized gain.
The operating results related to discontinued operations are summarized
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1997 1996
-------------------------------------------------------------------------------------
Advisory fees, commissions
<S> <C> <C>
and distribution revenues $ 4,605 $ 12,445
-------------------------------------------------------------------------------------
Loss from operations before provision for
income (tax) benefit $ (217) $ (1,246)
Provision for income (tax) benefit:
Current 76 766
Deferred (330)
-------------------------------------------------------------------------------------
76 436
-------------------------------------------------------------------------------------
Loss from operations, net of tax $ (141) $ (810)
-------------------------------------------------------------------------------------
</TABLE>
<PAGE> 76
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ----------------------------- -------------------------------
($ thousands) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------------------------------- ---------------- ------------ ----------------- -------------
ASSETS:
<S> <C> <C> <C> <C>
Fixed maturity securities 157,743 157,743 143,307 143,307
Short-term investments 34,074 34,074 14,992 14,992
Policy loans 5,175 5,175 3,276 3,276
Cash and cash equivalents 10,320 10,320 7,339 7,339
Due from reinsurers 641,858 641,858 553,834 553,834
LIABILITIES:
Policyholder liabilities and 102,252 98,312 92,750 87,375
accruals
Due to reinsurers 655,892 655,892 574,882 574,882
Notes payable to affiliates 241,419 241,419 183,955 183,955
---------------------------------------- ---------------- ------------ ----------------- -------------
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are obtained from an independent pricing service.
Short-Term Investments and Cash and Cash Equivalents: Carrying values
approximate fair values.
Policy Loans: Carrying values approximate fair values.
Due from Reinsurers: Fair value is equal to deposits made under the
contract and approximates the carrying value.
Policyholder Liabilities and Accruals: 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.
Due 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.
<PAGE> 77
17. CONTINGENCIES
The Company is subject to various lawsuits that have arisen in the
course of its business. Contingent liabilities arising from litigation,
income taxes and other matters are not considered material in relation
to the financial position of the Company.
18. UNCERTAINTY DUE TO THE YEAR 2000 RISK (UNAUDITED)
The Year 2000 risk is the result of computer programs being written
using two digits, rather than four, to define the applicable year. Any
of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. The effects of the Year 2000 risk may be experienced before, on,
or after January 1, 2000 and, if not addressed, could result in systems
failures or miscalculations causing disruptions of normal business
operations. It is not possible to be certain that the Company's Year
2000 program will fully resolve all aspects of the Year 2000 risk,
including those related to third parties.
A full discussion of the Company's Year 2000 program and Year 2000
review is contained in the Management's Discussion and Analysis Section
of the Company's Annual Report on Form
10-K.
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE> 79
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 60,606.06
Printing $ 5,000.00*
Edgarization Expenses $ 4,000.00*
Accounting fees and expenses $ 20,000.00*
Legal fees and expenses $ 5,000.00*
</TABLE>
*Estimate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 9 of the Articles of Incorporation of the Company provides as follows:
NINTH: A director of this corporation shall not be liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a director
except to the extent such exemption from liability or limitation thereof is not
permitted under the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended. Any repeal or modification of the foregoing
sentence shall not adversely affect any right or protection of a director of the
corporation existing hereunder with respect to any act or omission occurring
prior to such repeal or modification.
Article XIV of the By-laws of the Company provides as follows:
Each Director or officer, whether or not then in office, shall be
indemnified by the Company against all costs and expenses reasonably incurred by
or imposed upon him or her, including legal fees, in connection with or
resulting from any claim, action, suit or proceeding, whether civil, criminal or
administrative, in which he or she may become involved as a party or otherwise,
by reason of his or her being or having been a Director or officer of the
Company.
(1) Indemnity will not be granted to any Director or officer with
respect to any claim, action, suit or proceeding which shall be brought against
such Director or officer by or in the right of the Company, and
(2) Indemnification for amounts paid and expenses incurred in settling
such action, claim, suit or proceeding, will not be granted, until it shall be
determined by a disinterested majority of the Board of Directors or by a
majority of any disinterested committee or group of persons to whom the question
may be referred by the Board, that said Director or officer did indeed act in
good faith and in a manner he or she reasonably believed to be in, or not
adverse, to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonably cause to believe that his or her
conduct was legal, and that the payment of such costs, expenses, penalties or
fines is in the interest of the Company, and not contrary to public policy or
other provisions of law.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendre or its equivalent, shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in, or not adverse, to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Indemnification shall be made by the corporation upon determination by a
disinterested majority of the Board of Directors or of a majority of any
disinterested committee or group or persons to whom the question may be referred
to by said Board, that the person did indeed act in good faith and in a manner
he or she reasonably believed to be in, or not adverse, to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
reasonably cause to believe that his or her conduct was legal.
<PAGE> 80
The foregoing right to indemnity shall not be exclusive of any other
rights to which such Director or officer may be entitled as a matter of law.
The foregoing right to indemnity shall also extend to the estate of any
deceased Director or officer with respect to any such claim, action, suit or
proceeding in which such Director or officer or his or her estate may become
involved by reason of his or her having been a Director or officer of the
Company, and subject to the same conditions outlined above.
Section IX, paragraph D of the Promotional Agent Agreement among the Company,
Manufacturers Securities Services, LLC, formerly NASL Financial Services, Inc.
("Manulife Securities") and Wood Logan Associates, Inc. (referred to therein as
"Promotional Agent") provides as follows:
a. Manulife Securities and the Company agree to indemnify and hold harmless
Promotional Agent, its officers, directors and employees against any and
all losses, claims, damages or liabilities to which they may become subject
under the Securities Act of 1933 ("1933 Act"), the 1934 Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact or any omission or alleged
omission to state a material fact required to be stated or necessary to
make the statements made not misleading in any registration statement for
the Contracts filed pursuant to the 1933 Act or any prospectus included as
a part thereof, as from time to time amended and supplemented, or any
advertisement or sales literature approved in writing by Manulife
Securities or Security Life pursuant to Section VI, paragraph B of this
Agreement.
b. Promotional Agent agrees to indemnify and hold harmless Manulife Securities
and the Company, their officers, directors and employees against any and
all losses, claims, damages or liabilities to which they may become subject
under the 1933 Act, the 1934 Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon: (i) any oral or written misrepresentation by Promotional Agent
or its officers, directors, employees or agents unless such
misrepresentation is contained in any registration statement for the
Contracts or Fund shares, any prospectus included as a part thereof, as
from time to time amended and supplemented, or any advertisement or sales
literature approved in writing by Manulife Securities pursuant to Section
VI, paragraph B of this Agreement or, (ii) the failure of Promotional Agent
or its officers, directors, employees or agents to comply with any
applicable provisions of this Agreement.
Notwithstanding the foregoing, Registrant hereby makes the following undertaking
pursuant to Rule 484 under the Securities Act of 1933:
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 81
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
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). Manufacturers Securities Services,
LLC, the successor to NASL Financial Services, Inc., 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 invested. As of
December 31, 1998 the total variable assets in the Venture Group Annuity was
$120,748,895.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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/
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 - 6/
4(ii) Form of Group Single Payment Deferred Fixed Annuity Non-Participating Contract -
6/
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
4(iii) Individual Retirement Annuity Endorsement - 6/
4(iv) ERISA Tax-Sheltered Annuity Endorsement - 6/
4(v) Tax-Sheltered Annuity Endorsement - 6/
4(vi) Section 401 Plans Endorsement - 6/
4(vii) Name Change Endorsement 4/
5 Opinion and Consent of James D. Gallagher, Esq. - 9/
6 Not Applicable
7 Not Applicable
8 Not Applicable
9 Not Applicable
10(i) Form of Selling Agreement between The Manufacturers Life Insurance Company of
North America, Manufacturers Securities Services, LLC, Selling Broker-Dealer and
General Agent 1/
10(ii) Reinsurance and Guaranteed Death Benefits Agreement between the Company and
Connecticut General Life Insurance Company 5/
10(iii) Reinsurance Agreement between the Company and PaineWebber Life Insurance Company 5/
10(iv) Coinsurance Agreement between the Company and Peoples Security Life Insurance
Company - 7/
10(v) Reinsurance and Accounts Receivable Agreements between the Company and ITT
Lyndon Life - 7/
10(vi) Automatic Modified -Coinsurance Reinsurance Agreement between the Company and
Transamerica Occidental Life Insurance Company - 7/
10(vii) Automatic Yearly Renewable Term Reinsurance Agreement between the Company and
Transamerica Occidental Life Insurance Company - 7/
10(viii) Amendment No. 1 to the Variable Annuity Guaranteed Death Benefit Reinsurance
Agreement between the Company and Connecticut General Life Insurance Company -7/
10(ix) Coinsurance Agreement between the Company and The Manufacturers Insurance
Company (USA) 8/
11 Not Applicable
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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 owned subsidiaries: Manufacturers Securities
Services, LLC and The Manufacturers Life Insurance Company of New York
22 Not Applicable
23 Consent of Ernst & Young LLP 9/
24(i) Power of Attorney - John D. Richardson, Director and Chairman of the Company 2/
24(ii) Power of Attorney - David W. Libbey, Principal Financial Officer of the Company 3/
24(iii) Power of Attorney - Peter Hutchison, Director of the Company 1/
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule 9/
28 Not Applicable
</TABLE>
1/ Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement on Form N-4, file number 33-76162, filed February 25, 1998 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.
<PAGE> 84
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 Registration Statement on Form N-4, file
number 33-76162, filed March 1, 1996 on behalf of The Manufacturers Life
Insurance Company of North America Separate Account A.
6/ Incorporated by reference to Registration Statement on Form S-1, file
number 333-6011, filed June 14, 1996 on behalf of The Manufacturers Life
Insurance Company of North America.
7/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1, file number 33-6011, filed January 29,
1997
8/ Incorporated by reference to Form 10K, file number 333-6011, filed March
26, 1999 on behalf of The Manufacturers Life Insurance Company of North
America
9/ Filed herewith
(b) FINANCIAL STATEMENT SCHEDULES
Schedule I - Summary of Investments
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
<PAGE> 85
The Manufacturers Life Insurance Company of North America
Schedule I - Summary of Investments
December 31, 1998
($ Thousands)
<TABLE>
<CAPTION>
Amount Shown in the
Fair Consolidated Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturities:
United States Government $ 18,266 $ 19,382 $ 19,382
Corporate debt securities 100,705 104,046 104,046
Mortgage-backed securities 16,812 16,875 16,875
Foreign Governments 16,129 16,272 16,272
States / Political subdivisions 1,057 1,168 1,168
---------- ---------- ----------
Total fixed maturities $ 152,969 $ 157,743 $ 157,743
========== ========== ==========
Policy loans 5,175 5,175
Short-term investments 34,074 34,074
---------- ----------
Total investments $ 192,218 $ 196,992
========== ==========
</TABLE>
<PAGE> 86
The Manufacturers Life Insurance Company Of North America
Schedule III - Supplementary Insurance Information
($ Thousands)
<TABLE>
<CAPTION>
Future Policy Other Benefits,
Benefits Policy Claims Amortization
Deferred Losses,Claims Claims and Net Losses and of Deferred
Acquisition and Loss Unearned Benefits Premium Investment Settlement Acquisition
Segment Costs Expenses Premiums Payable Revenue Income Expenses Costs* Expenses*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Annuities $449,281 $102,720 - - - $12,148 $4,877 $53,493 $132,691
Savings and
Retirement
Services - 525 - - - 28 8 - 534
Life Insurance 51 7 - - - 2 - 6 2,399
------- ------- -- -- -- ------ ----- ------ -------
Total $449,332 $102,252 - - - $12,178 $4,885 $53,499 $135,624
======= ======= == == == ====== ===== ====== =======
1997
Annuities $364,984 $92,750 - - - $ 7,906 $4,986 $40,649 $100,385
Mutual funds - - - - - - - 1,707 9,836
------- ------- -- -- -- ------ ----- ------ -------
Total $364,984 $92,750 - - - $ 7,906 $4,986 $42,356 $110,221
======= ======= == == == ====== ===== ====== =======
1996
Annuities $283,420 $82,619 - - - $ 5,452 $4,242 $30,830 $ 71,255
Mutual funds 7,190 - - - - - - 2,214 11,730
------- ------- ------ ----- ------ -------
Total $290,610 $82,619 - - - $ 5,452 $4,242 $33,044 $ 82,985
======= ======= == == == ====== ===== ====== =======
</TABLE>
[FN]
* For 1997 and 1996 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
</FN>
<PAGE> 87
The Manufacturers 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, 1998
Life insurance inforce $269,738 $170,655 - $99,083 0%
Insurance premiums life - - - - 0%
------- ------- -- ------ -
Total - - - - 0%
======= ====== == ====== =
Year ended December 31, 1997
Life insurance inforce $151,259 $ 84,130 - $67,129 0%
Insurance premiums life - - - - 0%
------- ------- -- ------ -
Total - - - - 0%
======= ====== == ====== =
Year ended December 31, 1996
Life insurance inforce $45,597 $23,932 - $21,665 0%
Insurance premiums life - - - - 0%
------- ------- -- ------ -
Total - - - - 0%
======= ====== == ====== =
</TABLE>
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this amendment to its Registration Statement to be signed
on its behalf, by the undersigned, thereunto duly authorized in the City of
Boston and Commonwealth of Massachusetts on this 1st day of April, 1999.
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF NORTH AMERICA
(Registrant)
By: /s/ Ted Kilkuskie
--------------------------------
Ted Kilkuskie, President
Attest:
/s/ James D. Gallagher
- --------------------------------
James D. Gallagher, Secretary
<PAGE> 89
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement 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 Director and Chairman **
- ---------------------------- of the Board
John D. DesPrez III
/s/ Theodore F. Kilkuskie Director and President **
- --------------------------- (Principal Executive Officer)
Theodore F. Kilkuskie
* Director **
- ---------------------------
John D. Richardson
/s/ David W. Libbey Vice President and **
- --------------------------- Treasurer (Principal
David W. Libbey Financial Officer)
*By: /s/ James D. Gallagher **
-------------------------
James D. Gallagher
Attorney-in-Fact
Pursuant to Powers April 1, 1999
of Attorney
</TABLE>
<PAGE> 90
EXHIBIT INDEX
Exhibit No. Description
5 Opinion and Consent of James D. Gallagher, Esq.
23(i) Consent of Ernst & Young LLP
27 Financial Data Schedule
<PAGE> 1
Exhibit 5
The Manufacturers Life Insurance
Company of North America
116 Huntington Avenue
Boston, MA 02116
April 1, 1999
To whom it may concern,
I consent to the reference to my name under the caption "Legal Matters" in the
prospectus contained in Post-Effective Amendment No. 3 to the Registration
Statement on Form S-1 of The Manufacturers Life Insurance Company of North
America, File No. 333-6011, to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933.
Very truly yours,
/s/ James D. Gallagher
James D. Gallagher
Vice President, Secretary
and General Counsel
<PAGE> 1
Exhibit 23(i)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our report dated February 22, 1999, in Post
Effective Amendment No. 3 to the Registration Statement (Form S-1 File No.
333-6011) of The Manufacturers Life Insurance Company of North America
(formerly North American Security Life Insurance Company and hereinafter
referred to as the Company).
Our audit also included the financial statement schedules of the Company listed
in Item 16(b). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 157,743
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 196,992
<CASH> 10,320
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 449,332
<TOTAL-ASSETS> 13,496,414
<POLICY-LOSSES> 102,252
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 12,188,420
<NOTES-PAYABLE> 241,419
<COMMON> 2,600
0
0
<OTHER-SE> 251,430
<TOTAL-LIABILITY-AND-EQUITY> 13,496,414
0
<INVESTMENT-INCOME> 12,178
<INVESTMENT-GAINS> 719
<OTHER-INCOME> 261,319
<BENEFITS> 4,885
<UNDERWRITING-AMORTIZATION> 53,499
<UNDERWRITING-OTHER> 135,624
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