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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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Securities and Exchange Commission File No. 812-06037
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
22-2265014
(I.R.S. Employer Identification No.)
116 Huntington Avenue
Boston, Massachusetts 02116
(Address of principal executive offices)
(617) 266-6008
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicated by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part II of this
Form 10-K or any amendment to this Form 10-K. [X]
No shares of voting stock are held by nonaffiliates of the Registrant.
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's sole class of common stock, as
of December 31, 1998 was 2,600.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART 1
Item 1 - Business
Description of Company, Reportable Segments and Products
The Registrant consists of The Manufacturers Life Insurance Company of North
America ("MNA"), The Manufacturers Life Insurance Company of New York ("MNY")
and Manufacturers Securities Services, LLC ("MSS") and is hereinafter referred
to collectively as the "Company". The Company's principal office is located at
116 Huntington Avenue, Boston, Massachusetts 02116 and is a wholly-owned
subsidiary of Manulife-Wood Logan Holding Co., Inc. ("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 is licensed to sell fixed and variable annuities,
traditional life and variable life insurance, and accident and health insurance
in all states except New Hampshire and New York. MNY is licensed to sell fixed
and variable annuities, traditional life insurance, and accident and health
insurance in New York only.
MNA is a stock life insurance company organized under the laws of Delaware in
1979 and has two subsidiaries, MNY and MSS. MNY is an insurance subsidiary
licensed to conduct business in the State of New York. MSS, a majority-owned
broker dealer, acts as investment advisor to the Manufacturers Investment Trust
("MIT"), a no-load, open-end investment management company organized as a
Massachusetts business trust and as the principal underwriter of the Company's
variable annuity and life insurance contracts and is the exclusive distributor
of its insurance products in New York. MSS is the successor to NASL Financial
Services, Inc. ("NASL Financial"), a broker dealer that conducted operations
until September 30, 1997, when it was reorganized into MSS. Prior to October 1,
1997, NASL Financial also acted as investment advisor to North American Funds
(NAF), a no-load, open-end management investment company organized as a
Massachusetts business trust.
Prior to 1998, the Company reported two segments, Annuities and Mutual Funds.
The Mutual Fund segment consisted solely of NAF, a group of thirteen mutual
funds. During 1997, the Company disposed of NAF to an unrelated party. In 1997
and 1998, pursuant to a revised plan of operations for MNY, the Company entered
the Savings and Retirement Services and Life Insurance businesses in the state
of New York. The Company now reports three segments: Annuities, Savings and
Retirement Services, and Life Insurance. The Company's reportable segments have
been determined based on differences in product features and distribution; the
segment definitions are also consistent with the Company's management structure.
No significant assets or revenues have been generated to date in the Savings and
Retirement Services and Life Insurance segments. However, start-up costs
reported for these two segments contributed to lower net income levels during
1998 and 1997.
Through its three segments, the Company issues individual and group annuity
contracts and life insurance contracts. Within its Annuities segment, the
Company issues fixed and variable annuities. Prior to July 1, 1998, the Company
also issued variable life insurance contracts within its Annuities segment.
Amounts invested in the fixed portion of the Company's contracts are allocated
to the general accounts of the Company or, in the case of the market value
adjusted annuity contract, to non-insulated separate accounts of the Company.
Amounts invested in the variable portion of the contracts are allocated to
separate accounts of the Company, each subaccount of which invests in shares of
one of the portfolios of MIT or in open-end investment management companies
offered and managed by unaffiliated third parties. As a result, the variable
annuity and life products provide returns based upon the returns of the
underlying mutual funds. Those returns will fluctuate based on market
performance and are not guaranteed.
The segment discussion below focuses solely on the Annuities segment due to the
limited assets, effects on net income, and revenues associated with the start-up
nature of the Savings and Retirement Services and Life Insurance segments.
ANNUITIES SEGMENT
Annuities provide insurance protection against the risk of outliving an
individual's income during his or her lifetime. Annuities also provide
tax-deferred savings during the accumulation savings phase and tax-favored
retirement income during the income phase. The Company's variable annuity sales
occur via its Venture annuity series: Venture, Venture Vision and Venture
Vantage. All three variable annuities offer multiple variable investment options
and one or more fixed investment options as well as competitive minimum death
benefit guarantees. In addition to the variable investment options, the Venture
series products offer multiple fixed investment options that guarantee the
interest rate return for the stated guaranteed duration. However, certain of the
Venture products impose a market value charge for premature withdrawals or
transfers prior to the end of the guaranteed
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duration. All Venture products impose an annual asset based fee on amounts held
in variable investment options and certain of those products contain a graded
contingent deferred sales charge. In addition to the variable Venture series,
the Company also sells the Venture Market Value Annuity which offers only fixed
investment options and imposes a market value adjustment upon surrender. Within
its Annuities segment, the Company also administers a closed block of modified
single premium variable life insurance product called Venture Life. Generally,
Venture Life was issued as a modified endowment contract ("MEC") which provides
tax treatment and product features which are similar to those of an annuity with
additional tax-efficient death proceeds features. For 1997, the last full year
for which the contract was sold, Venture Life sales were less than 2% of
Annuities segment sales.
Under current law, returns credited on annuities and life insurance policies
during the accumulation phase (the period during which interest is credited and
annuity payments have not yet begun) are not subject to federal or state income
tax. Proceeds payable on death from a life insurance policy are also free from
such taxes. At maturity or payment date of an annuity policy, the policyholder
is entitled to receive the original deposit plus accumulated returns. The
policyholder may elect to take this amount in either a lump sum or receive a
series of payments over a stated period of time. The return component of such
payments is taxed at the time of receipt as ordinary income.
Sales and Asset Retention
Annuity sales are primarily driven by the U.S. domestic and international equity
markets, distribution capabilities, attractive policy features and client
servicing capabilities. The variable options tend to be more attractive in low
interest rate environments as they provide potential for higher returns through
equity investments. For this potential higher return, the policyholder assumes
directly the investment risk of the underlying mutual funds. Higher interest
rate environments tend to favor the fixed investment options as the policyholder
may lock in guaranteed interest rates without assuming the investment risk
associated with variable investment options.
The Venture annuity series products offer a variety of investment options, death
benefit options, administrative features and customer services that enhance both
sales and asset retention. The variable investment options offered by the
Company employ a multi-manager approach through the use of subadvisers to the
underlying mutual funds. Currently fifteen investment management firms provide
investment management expertise to the thirty-five variable investment options.
The Company also offers five Lifestyle portfolios which are "funds of funds".
These variable investment options strategically allocate deposits over various
investment disciplines with the long-term goal of matching return to the risk
profile of the policyholder. The ability to provide superior investment returns
under the variable options is essential to the retention of assets.
Policyholders are permitted to withdraw all or part of their account value at
any time subject to possible contingent deferred sales charges and/or market
value charges. Such premature terminations result in a loss of the Company's
anticipated future earnings related to the annuity deposit and accelerated
recognition of expenses related to policy acquisition, principally commissions,
which are otherwise deferred and amortized over the life of the policy.
Contingent deferred sales charges, if imposed by the product, are designed to
compensate the Company for the accelerated recognition of those expenses and act
as a deterrent against policyholders surrendering their policies prematurely.
Generally, contingent deferred sales charges do not apply to withdrawals up to
the higher of 10% of payments or accumulated earnings. Market value charges are
imposed to offset the cost of selling depressed asset values in increasing
interest rate environments.
The Venture, Venture Vision and Venture Vantage annuities provide innovative
minimum death benefits to policyholders. For issue ages 80 and younger, Venture
and Venture Vision guarantee a death benefit equal to the greater of deposits
net of withdrawals or the highest account value on any contract anniversary
increased by subsequent deposits net of withdrawals, up to attained age 80.
Venture Vantage provides a minimum death benefit equal to the larger of deposits
net of withdrawals or the contract value on the ninth contract anniversary. The
minimum death benefits are designed to act as a deterrent to policyholders
surrendering their policies after the contingent deferred sales charge period
has expired.
The Company, along with its ultimate parent company Manulife Financial, enjoys
strong financial ratings that enhance its ability to attract new sales and
retain assets. Distributors and consumers of variable and fixed annuity products
have begun to utilize the relative financial strength ratings as a criteria in
choosing an annuity carrier. The Company has received financial strength ratings
of A++ (Superior) by A.M. Best, AA+ (Very Strong) by Standards and Poor's
("S&P") and Aa2 (Excellent) by Moody's Investor Services. The Company is rated
AAA (Highest) by Duff & Phelps in terms of the Company's ability to meet its
contractual obligations to its policyholders.
The ability to service policyholders in an effective, efficient and courteous
manner is an important success factor for sales and asset retention. The Company
has received high service ratings through independent surveys. To maintain this
level of service the Company has and will continue to make significant
investments in its infrastructure.
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Marketing and Distribution
The variable annuity market in the United States is relatively young and has
realized significant growth in the past few years. According to the Value Survey
conducted by Tillinghast, sales grew 16% in 1998 over 1997 with total 1998 sales
of $96.2 billion. The Company, with 1998 total sales of $2.4 billion, captured
market share of 2.44%, ranking it 16th for variable annuity products issued in
the United States. Wood Logan Associates, Inc. ("WLA"), a registered broker
dealer and an affiliate of the Company, provides sales and marketing services
through a team of wholesalers soliciting broker dealer firms across the United
States through wirehouses, regional brokerage firms, financial planners and
banks.
Percentage Sales of Annuities by Channel
For the years ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Wirehouse Firms 23.8% 21.9% 22.7%
Regional Brokerage Firms 16.5 19.6 24.4
Financial Planner Firms 48.5 46.7 42.2
Banks 11.2 11.8 10.7
----- ----- -----
Total 100.0% 100.0% 100.0%
</TABLE>
REGULATION
MNA is subject to the laws of the State of Delaware governing insurance
companies and to the regulation of the Delaware Insurance Department. MNY is
subject to the laws and regulation of the State of New York. In addition, the
Company is subject to regulation under the insurance laws of other jurisdictions
in which the Company operates. Regulation by each insurance department includes
periodic examination 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, including ManUSA, 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
Financial'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
Financial or any if its subsidiaries are primarily regulated by Delaware but may
also be subject to Michigan or New York 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 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.
On January 20, 1998, the Board of Directors of Manulife Financial asked its
management to prepare a plan for conversion from a mutual life insurance company
to an investor-owned, publicly-traded stock company. Any demutualization plan
for Manulife Financial is subject to the approval of its Board of Directors and
policyholders, as well as regulatory approval.
Item 2 - Properties
The Registrant owns no property.
Item 3. Legal Proceedings
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Nothing to report
Item 4 - Submission of Matters to a Vote of Security Holders
Nothing to report
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PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
MWL is the sole record holder of the Registrant's shares. Therefore, there is no
public trading market for Registrant's common stock. The Registrant has declared
no cash dividends on its common stock at any time during the two most recent
fiscal years.
The Company currently sells Venture Group Annuity, a flexible premium payment
deferred variable unallocated group annuity, to retirement plans that qualify
for special tax treatment under Section 401(a) of the Internal Revenue Code.
Sales of these securities are not required to be registered under the Securities
Act of 1933 (Section 3(a)(2) of this Act). MSS is the principal underwriter of
the contracts, and WLA provides sales and marketing services. There are no
maximum or minimum purchase payments required to establish a contract. The value
of a contract will vary according to the investment performance, charges and
expenses of the subaccounts in which the contract is vested. As of December 31,
1998, the total variable assets in the Venture Group Annuity was $120,748,895.
Item 6 - Selected Financial Data
<TABLE>
<CAPTION>
For the Years Ended December 31
---------------------------------------------------------------------------
1998 1997 1996 1995 1994*
---- ---- ---- ---- -----
(in thousands)
<S> <C> <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>
[FN]
* 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.
</FN>
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.
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<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 11,494,116 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>
[FN]
** 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.
</FN>
All information presented elsewhere in this document is presented under
generally accepted accounting principles.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
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 NAF, 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.
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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.
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 36% 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.
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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 Financial 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
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 56% during 1997. This increase is a result of a $47.7
million capital infusion in the fourth quarter of 1997 to support expansion of
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 Financial 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.
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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 Financial, 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 operations. The
Company looks to Manulife Financial 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 Financial 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.
10
<PAGE> 11
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 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 Financial"), to ensure that computer systems and
processes of Manulife Financial 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 Financial's systems Year 2000 compliant, a
program was instituted to modify or replace both Manulife Financial'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 first quarter
1999.
In addition to efforts directed at Manulife Financial's own systems, Manulife
Financial is presently consulting vendors, customers, and other third parties
with which it deals in an effort to ensure that no material aspect of Manulife
Financial'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 Financial 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 Financial's Year 2000 program has not fully resolved its
Year 2000 issues. The Year 2000 Project Management Office for Manulife
Financial'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 Financial'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 Financial's Year 2000 program, including consulting third parties
and its contingency planning, will avoid any material adverse effect on Manulife
Financial's operations, customer relations or financial condition. Manulife
Financial 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 Financial's
net operating income.
Item 7A. 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
11
<PAGE> 12
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.
Item 8 - Financial Statements and Supplementary Data
The Report of Independent Auditors and the Company's consolidated financial
statements attached hereto are incorporated herein. See following page.
12
<PAGE> 13
FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF NORTH AMERICA
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors 14
Audited Consolidated Financial Statements 15
Consolidated Balance Sheets 15
Consolidated Statements of Income 16
Consolidated Statements of Changes in Shareholder's Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
</TABLE>
13
<PAGE> 14
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. Our audit also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Boston, Massachusetts
February 22, 1999 Ernst & Young LLP
14
<PAGE> 15
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.
15
<PAGE> 16
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.
16
<PAGE> 17
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
17
<PAGE> 18
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.
18
<PAGE> 19
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 $175.
19
<PAGE> 20
2. SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have
been prepared in conformity with generally accepted accounting
principles ("GAAP").
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those
estimates.
B) RECENT ACCOUNTING STANDARDS
i) During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income", SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose annual
financial statements. Comprehensive income includes all changes in
shareholder's equity during a period except those resulting from
investments by and distributions to shareholders. The adoption of SFAS
No. 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity
of the Company.
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ 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.
20
<PAGE> 21
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.
21
<PAGE> 22
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.
22
<PAGE> 23
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.
23
<PAGE> 24
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 $6,284 at December 31,
1998 and 1997, respectively, were on deposit with, or in custody
accounts on behalf of, state insurance departments to satisfy
regulatory requirements.
24
<PAGE> 25
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
B) INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ 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 - (1,707) (2,214)
operations
Amortization included in gain on disposal - (6,943) -
of discontinued operations
Effect of net unrealized gains on (679) (293) (596)
securities available for sale
----------- ----------- ---------
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
25
<PAGE> 26
<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.
26
<PAGE> 27
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.
27
<PAGE> 28
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.
28
<PAGE> 29
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).
29
<PAGE> 30
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.
30
<PAGE> 31
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.
31
<PAGE> 32
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.
32
<PAGE> 33
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.
33
<PAGE> 34
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>
34
<PAGE> 35
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.
35
<PAGE> 36
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.
36
<PAGE> 37
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Nothing to report.
37
<PAGE> 38
PART III
Item 10 - Directors and Executive Officers of the Registrant (also referred to
as the "Company")
Officers and Directors of the Company
The directors and executive officers of the Company, together with their
principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
Name Position with the Company Principal Occupation
<S> <C> <C>
John D. DesPrez III Director* Executive Vice President, U.S. Operations,
Age: 42 Manulife Financial, December 1998 to present,Senior
Vice President, U.S. Annuities, Manulife Financial,
September 1996 to December 1998; Director and
President of the Company, September 1996 to
present; Vice President, Mutual Funds, Manulife
Financial, 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. Kilkuskie, Jr. President President, the Company and Senior Vice President, U.S.
Age: 43 Insurance, Manulife Financial, February 1998 to
December 1998, Vice President U.S. Insurance, June
1995 to February 1998, Executive Vice President Mutual
Fund Sales & Marketing, Metropoitan Life Insurance
Company, March 1994 to
June 1995.
Peter S. Hutchison Director* Senior Vice President, Corporate Taxation,
Age: 49 Manulife Financial, January 1996 to present; Director
of the Company January 1991 to present; Executive Vice
President and Chief Financial Officer, North American
Life, September 1994 to December 31, 1995; Senior
Vice President and Chief Actuary, North American Life
Assurance Company, April 1992 to August 1994.
John D. Richardson Director* and Chairman of the Board Senior Executive President and General Manager,
Age: 61 U.S. Operations, Manulife Financial, January 1995
to present; Director of Manulife Financial, January
1999 to present; Director and Chairman of the Board
of the Company, March 1997 to present; Senior Vice
President and General Manager, Canadian Operations,
Manulife Financial, June 1992 to January
1995.
Robert Boyda Vice President, Investment Vice President, Investment Management Services of
Age: 42 Management Services the Company, January 1997 to present; Assistant
Vice President, Management Service,
Manulife Financial, August 1994 to January 1997;
General Manager, Retail Banking, CIBC, January
1987 to April 1994.
James D. Gallagher Vice President, Secretary and Vice President, Legal Services U.S. Operations,
Age: 44 General Counsel Manulife Financial, January 1996 to present; Vice
President, Secretary and General Counsel of the
Company, June 1994 to present; Vice
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
<S> <C> <C>
President and Associate General Counsel, The
Prudential Insurance Company of America, 1990-1994.
Hugh C. McHaffie Vice President, U.S Annuities Vice President, Product and Development, Annuities,
Age: 40 Product and Development Manulife Financial, January 1996 to present; Vice
President U.S. Annuities Product and Development of
the Company August 1994 to present; Product
Development Executive of the Company, August 1990 to
August 1994.
David W. Libbey Vice President, Treasurer, and Vice President and Chief Financial Officer,
Age: 51 Chief Financial Officer Annuities, Manulife Financial, December 1997 to
present; Vice President, Treasurer and Chief
Financial Officer of the Company December 1997 to
present; Vice President, Finance of the Company
June 1997 to December 1997; Vice President & Actuary,
Paul Revere Insurance Group June 1970 to March 1997.
Janet Sweeney Vice President, Corporate Services Vice President, Human Resources, U.S. Operations,
Age: 48 Manulife Financial, January 1996 to present; Vice
President, Corporate Services of the Company,
January 1995 to present; Executive, Corporate
Services of the Company, July 1989 to December
1994.
John G. Vrysen Vice President and Chief Actuary Vice President and Chief Financial Officer, U.S.
Age: 43 Operations, Manulife Financial, January 1996 to
present; Vice President and Chief Actuary of the
Company, January 1986 to present.
William Hayward Vice President, Administration Vice President, Administration, the Company, June,
Age: 43 1998 to present; Vice President, Administration,
Allmerica Financial Services, August, 1994 to
May, 1998; Executive, Administration,
the Company (formerly, North American Security Life
Insurance Company) May, 1991 to August
1994.
Cindy Granata Vice President, Information Systems Vice President, Information Systems, the Company,
Age: 47 1998 to present; Director, Information Systems,
Allmerica Financial, 1996-1998; Assistant Vice
President, Strategic Planning, Massachusetts
Casualty Insurance Company, 1991-1996.
</TABLE>
Item 11 - Executive Compensation of the Registrant (also referred to as \
"Manulife North America")
Manulife North America'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 Manulife North America. The
following table shows the allocated compensation paid or awarded to or earned by
Manulife North America's Chief Executive Officer for services provided to
Manulife North America and any other executive officer who had allocated cash
compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Principal Year Salary Bonus(1) Other Restricted Securities LTIP All Other
Position Annual Stock Under-lying Payout Compensa-
Compensa- Award(s) Options/SARs tion(3)
tion(2)
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
<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 Manulife
North America participate in the following Manulife compensation programs.
40
<PAGE> 41
SALARY
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 $)3
Name Securities Performance or Threshold Target ($ or #)4 Maximum ($
Units or Other Other Period ($ or #) or #)
Rights (#)1 Until
Maturation or
Payout2
<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.
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.
41
<PAGE> 42
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.
US 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 Financial 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 Financial 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 Financial U.S. Supplemental Cash Balance Plan"; and, (iii) the two
401(k) plans (The Manulife Financial 401(k) Savings Plan and the North American
Security Life 401(k) Savings Plans) were merged and restated into The Manulife
Financial U.S. 401(k) Savings Plan.
The executives of Manulife North America are eligible to participate in the
three restated retirement plans as sponsored by The Manufacturer's Life
Insurance Company (U.S.A.).
42
<PAGE> 43
The Manulife Financial 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 $160,000 for 1998. Employees are vested after 3 years of
vesting service. Normal retirement age is 65. Pension benefits are provided to
those who terminate after three years of vesting service, and the normal
retirement benefit is actuarially equivalent to the cash balance account at
normal retirement date. Early benefits are actuarially equivalent to the normal
retirement benefits but are subsidized for participants who were age 45 and 5 or
more years of vesting service on July 1, 1998 and who terminate employment after
attaining age 50 and completing 10 years of service. For these grandfathered
participants, the prior early retirement factors under the Manulife Plan apply.
The normal form of payment under the Cash Balance Plan is a life annuity, with
various optional forms available, including a lump sum equal to the cash balance
account.
Company Contribution Credits
<TABLE>
<CAPTION>
Years of Vesting Service Percentage of Eligible Pay
<S> <C>
Less than 6 4%
6, but less than 11 5%
11, but less than 16 7%
16, but less than 21 9%
21 or more 11%
</TABLE>
Projected Cash Balance Plan pension benefits at age 65 payable as an annual life
annuity.
<TABLE>
<CAPTION>
Years of Service
Renumeration ($) 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>
The Manulife Financial U.S. Supplemental Cash Balance Plan
In addition to their pension plan benefits, executives are eligible for benefits
under The Manulife Financial 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 Financial 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
43
<PAGE> 44
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 $200,000
<S> <C> <C>
Less than 6 4% 4%
6, but less than 11 5% 5%
11, but less than 16 7% 5%
16, but less than 21 9% 5%
21 or more 11% 5%
</TABLE>
Projected Supplemental pension benefits at age 65 payable as an annual life
annuity
<TABLE>
<CAPTION>
Years of Service
Renumeration ($) 15 20 25 30 35
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
$150,000 0 0 0 0 0
175,000 1,696 3,018 4,966 7,602 11,166
200,000 4,523 8,048 13,244 20,271 29,776
225,000 7,081 12,178 19,501 29,404 42,797
250,000 9,639 16,309 25,757 38,536 55,818
300,000 14,756 24,570 38,271 56,801 81,861
400,000 24,990 41,092 63,298 93,330 133,946
500,000 35,224 57,615 88,325 129,859 186,031
</TABLE>
Projected Cash Balance and Supplemental pension benefits at age 65 payable as
an annual annuity.
<TABLE>
<CAPTION>
Years of Service
Renumeration ($) 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
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 Financial 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 Manulife North America 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.
44
<PAGE> 45
<TABLE>
<CAPTION>
Years of Vesting Service Vested Percentage
<S> <C>
Less than 2 years 0%
2 years but less than 3 50%
3 years and thereafter 100%
</TABLE>
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.
<TABLE>
<CAPTION>
Years of Service
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
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.
45
<PAGE> 46
EMPLOYMENT CONTRACT
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.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(a)
<TABLE>
<CAPTION>
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
-------------- ---------------- -------------------- ----------
<S> <C> <C> <C>
Common Stock MWL 2,600 shares 100%
</TABLE>
(b) Nothing to report
(c) Nothing to report
Item 13 - Certain Relationships and Related Transactions
Refer to Item 7 - Liquidity and Capital Resources
46
<PAGE> 47
PART IV
Item 14 - Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) The following consolidated financial statements of the Registrant are filed
as part of this report:
a. Report of Independent Auditors of Ernst & Young, LLP dated February 22,
1999.
b. Consolidated Balance Sheets at December 31, 1998 and1997.
c. Consolidated Statement of Income for the Years ended December 31, 1998,
1997 and 1996.
d. Consolidated Statements of Changes in Shareholder's Equity for the Years
ended December 1998, 1997 and 1996.
e. Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.
f. Notes to Financial Statements - December 31, 1998
(2) Financial Statement Schedules:
a. Schedule I - Summary of Investments - Other than Investments in Related
Parties.
b. Schedule III - Supplemental Insurance Information
c. Schedule IV - Reinsurance
(3) Exhibits (the Registrant is also referred to as the "Company")
<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/
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
3(i)(c) Certificate of Amendment of Certificate of
Incorporation of the Company, Authorization of
Capital, December 1994 3/
3(i)(d) Certificate of Amendment of Certificate of
Incorporation of the Company, Name Change, March
1997 4/
3(i)(e) Certificate of Amendment of Certificate of
Incorporation of the Company, Registered Agent,
July 1997 3/
3(ii) Amended and Restated By-Laws of the Company 3/
4(i) Form of Individual Single Payment Deferred Fixed
Annuity Non-Participating Contract - 10/
4(ii) Form of Group Single Payment Deferred Fixed Annuity
Non-Participating Contract - 10/
4(iii) Individual Retirement Annuity Endorsement - 10/
4(iv) ERISA Tax-Sheltered Annuity Endorsement - 10/
4(v) Tax-Sheltered Annuity Endorsement - 10/
4(vi) Section 401 Plans Endorsement - 10/
5 Opinion and Consent of James D. Gallagher, Esq. - 11/
6 Not Applicable
7 Not Applicable
8 Not Applicable
9 Not Applicable
10(i) - Form of broker-dealer agreement between the
Company, Manufacturers Securities Services,
LLC, formerly NASL Financial Services, Inc.
(underwriter), Wood Logan Associates, Inc.
(Promotional Agent) and broker-dealers 5/
(10)(ii)
- Reinsurance and Guaranteed Death Benefits
Agreement between the Company and Connecticut
General Life Insurance Company 8/
(10)(iii)
- Reinsurance Agreement between the Company and
PaineWebber Life Insurance Company 9/
(10)(iv)
- Coinsurance Agreement between the Company and
Peoples Security Life Insurance Company - 12/
(10)(v) - Reinsurance and Accounts Receivable Agreements
between the Company and ITT Lyndon Life - 12/
(10)(vi) - Automatic Modified -Coinsurance Reinsurance
Agreement between the Company and Transamerica
Occidental Life Insurance Company - 12/
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
(10)(vii) - Automatic Yearly Renewable Term Reinsurance
Agreement between the Company and Transamerica
Occidental Life Insurance Company - 12/
(10)(viii) Amendment No. 1 to the Variable Annuity Guaranteed
Death Benefit Reinsurance Agreement between the
Company and Connecticut General Life Insurance
Company -12/
Coinsurance Agreement between the Company and The
Manufacturers Life Insurance Company (USA) 13/
(10)(ix) Not Applicable
11 Not Applicable
12 Not Applicable
13 Not Applicable
14 Not Applicable
15 Not Applicable
16 Not Applicable
17 Not Applicable
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 The Company has the following subsidiaries:
Manufacturers Securities Services, LLC and The
Manufacturers Life Insurance Company of New York
22 Not Applicable
23(i) Not Applicable
23(ii) Not Applicable
24 (i) Power of Attorney - John D. Richardson, Director
and Chairman of the Company
24(ii) Power of Attorney - David W. Libbey, Principal
Financial Officer of the Company 3/
24(iii) Power of Attorney - Peter Hutchison, Director of
the Company 1/
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule - 13/
28 Not Applicable
</TABLE>
49
<PAGE> 50
1/ Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement on Form N-4, file number 33-76162, filed February 25, 1988 on
behalf of The Manufacturers Life Insurance Company of North America
Separate Account A.
2/ Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4, file number 33-76162, filed April 29, 1997 on behalf
of The Manufacturers Life Insurance Company of North America Separate
Account A.
3/ Incorporated by reference to Form 10Q, file number 812-06037, filed
November 14, 1997 on behalf of The Manufacturers Life Insurance Company of
North America.
4/ Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1, file number 333-6011, filed October 9, 1997 on
behalf of The Manufacturers Life Insurance Company of North America.
5/ Incorporated by reference to Exhibit (b)(3)(iii) to pre-effective amendment
no. 1 to Form N-4, file number 33-9960, filed February 2, 1987 on behalf of
the NASL Variable Account of the Company, now known as The Manufacturers
Life Insurance Company of North America Separate Account A
6/ not applicable
7/ not applicable
8/ Incorporated by reference to Exhibit (b)(7)(i) to Registration Statement on
Form N-4, file number 33-76162, filed March 1, 1996
9/ Incorporated by reference to Exhibit (b)(7)(iii) to Registration Statement
on Form N-4, file number 33-76162, filed March 1, 1996
10/ Incorporated by reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
11/ Incorporated by reference to Exhibit 5 to Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, file number 33-6011, filed January
29, 1997
12/ Incorporated by reference to Exhibits (10)(iv) through (10)(viii) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1,
file number 33-6011, filed January 29, 1997
13/ Filed herewith
50
<PAGE> 51
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No Annual Report covering the Registrant's last fiscal year or proxy material
has been or will be sent to Registrant's security holders.
51
<PAGE> 52
FINANCIAL STATEMENT SCHEDULES
52
<PAGE> 53
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>
53
<PAGE> 54
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>
54
<PAGE> 55
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>
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly authorized.
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
(Registrant)
By: /s/Theodore F. Kilkuskie
--------------------------------------------------
Theodore F. Kilkuskie, Principal Executive Officer
By:/s/David W. Libbey
--------------------------------------------------------------
David W. Libbey, Vice President, Treasurer and Chief Financial
Officer (Principal Financial Officer)
Date: March 29, 1999
56
<PAGE> 57
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons in the capacities with the
Registrant and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/John D. DesPrez III Director and Chairman of the Board **
- - ------------------------------------------- -------------------------
John D. DesPrez III Date
/s/Theodore F. Kilkuskie President and Director (Principal **
- - ------------------------------------------- Executive Officer) -------------------------
Theodore F. Kilkuskie Date
Director **
- - ------------------------------------------- -------------------------
*John D. Richardson Date
/s/David W. Libbey Vice President, Treasurer and Chief **
- - ------------------------------------------- Financial Officer (Principal and -------------------------
David W. Libbey Accounting Officer) Date
/s/James D. Gallagher **
- - ------------------------------------------- -------------------------
*By James D. Gallagher Date
Attorney-in-Fact Pursuant to Powers of
Attorney
**March 29, 1999
</TABLE>
57
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
10(ix) Coinsurance Agreement between the Company and The
Manufacturers Life Insurance Comany (USA)
27 Financial Data Schedule
</TABLE>
58
<PAGE> 1
Exhibit 10(ix)
59
<PAGE> 2
COINSURANCE AGREEMENT
Between
THE MANUFACTURERS LIFE INSURANCE COMPANY OF
NORTH AMERICA
and
THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.)
60
<PAGE> 3
10
- - -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Section 1. Definitions 63
Section 2. Reinsurance Coverage 64
Section 3. Representations and Warranties of the Company 64
Section 4. Representations and Warranties of the Reinsurer 65
Section 5. Conditions Precedent 65
Section 6. Payments by the Company 66
Section 7. Payments by the Reinsurer 66
Section 8. Expenses and Adjustments 67
Section 9. Payment Settlement Procedures and Reports 67
Section 10. Administration of Policies 68
Section 11. Notice and Settlement of Claims 68
Section 12. Interest Rate Committee 68
Section 13. Policy Changes and New Policy Forms 69
Section 14. Oversights 69
Section 15. Tax Matters 69
Section 16. Audit of Records and Procedures 70
Section 17. Arbitration 70
Section 18. Special Provisions 70
Section 19. Insolvency 70
Section 20. Offset 71
Section 21. Parties to Agreement 71
Section 22. Effective Date 71
Section 23. Entire Agreement 71
Section 24. Recapture of Reinsurance 71
Section 25. Termination 71
Section 26. Marketing Materials 72
Section 27. Severability of Provisions 72
Section 28. Counterparts 72
Section 29. Amendments 72
Section 30. No Waiver 72
Section 31. Confidentiality 73
Section 32. Governing Law 73
61
<PAGE> 4
- - -------------------------------------------------------------------------------
TABLE OF CONTENTS - Continued
PAGE
Schedules
Schedule A List of Policies Included 74
Schedule B Reinsured Policies 76
Schedule C Reimbursement of Costs 78
Schedule D Licenses - The Company 84
Schedule E Approvals - The Company 86
Schedule F Licenses - The Reinsurer 87
Schedule G Approvals - The Reinsurer 88
Schedule H Transfer Adjustments 89
Schedule I Daily Cash Settlement Procedure 98
Schedule J Daily Cash Settlement Information 99
Schedule K Monthly Cash Settlement Information 99
Schedule L Rules of the Company 105
62
<PAGE> 5
COINSURANCE AGREEMENT
Between
THE MANUFACTURERS LIFE INSURANCE COMPANY OF
NORTH AMERICA
hereinafter referred to as "the Company"
and
THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.)
hereinafter referred to as "the Reinsurer"
This Agreement, executed this 1st day of January, 1999 between the Company and
The Reinsurer as follows:
SECTION 1. - DEFINITIONS
"ACCOUNTING PERIOD": As provided in Section 9 hereof.
"AFFILIATES": Respectively, any Person which directly or indirectly controls, or
is under common control with, the Company, or any Person which directly or
indirectly controls, or is under common control with, or is controlled by, the
Reinsurer.
"BENEFIT PAYMENTS": Proceeds payable under a Reinsured Policy arising from:
annuitization; death of a Policy owner or annuitant; full or partial withdrawal
of amounts held in a Policy; or the maturity of a Policy. All such proceeds are
net of surrender charges, market value adjustments and Premium Taxes recovered.
"BUSINESS DAY": Any references to Business Day in this Agreement will mean the
days during which the Company is open for business.
"EFFECTIVE DATE": As provided in Section 22 hereof.
"EXPERIENCE REFUND": Any amount due from the Reinsurer to the Company in excess
of those provided for in Section 7 of this Agreement which is based solely on
the experience of the Reinsured Policies.
"GOVERNMENTAL AUTHORITY": Any nation or government, and province, state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial (including an arbitrator), regulatory or administrative functions of or
pertaining to government.
"MATERIAL ADVERSE EFFECT": In the case of either the Company or the Reinsurer,
as appropriate, a material adverse effect on (1) its Property, business,
operations, financial condition, liabilities or capitalization, individually or
together with their respective Affiliates taken as whole; (2) its ability to
perform its obligations under this Agreement; or (3) the validity or
enforceability of this Agreement.
"PERSON": Any natural person, corporation, partnership, business trust, limited
liability company, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or any other entity, whether acting in an
individual, fiduciary or other capacity.
"POLICY OR POLICIES": Fixed annuity contracts and variable annuity contracts
issued by the Company and covered by the terms of this Agreement as listed in
Schedule A..
"PREMIUM TAXES": State taxes levied as a percent of gross premiums received,
gross premium receipts, premiums collected, premiums collected or contracted
for, new renewal premiums, or premiums written.
"PROMOTIONAL BONUS": Those portions of new money interest rates, renewal
interest rates, settlement option rates, and annuity purchase rates for
Reinsured Policies designated by the Company that exceed the Reinsurer's
Supportable Rate.
"PROPERTY": Any right or interest in or to property of any kind whatsoever,
whether real, personal or mixed, and whether tangible or intangible.
63
<PAGE> 6
"REINSURANCE PREMIUMS": The premiums received by the Company with respect to
Reinsured Policies after the Effective Date and prior to termination of this
Agreement.
"REINSURED POLICY OR POLICIES": The quota share percentage of the portion of
Policies as defined in Schedule B.
"REINSURED POLICY EXPENSE ALLOWANCE": Reimbursement of costs related to
Reinsured Policies as set forth in Schedule C.
"REINSURER'S SUPPORTABLE RATE": New money interest rates, renewal interest
rates, settlement option rates, and annuity purchase rates for Reinsured
Policies agreed upon by a majority of the Reinsurer appointed membership of the
Interest Rate Committee provided in Section 12.
"REQUIREMENTS OF LAW": As to any Person, the certificate of limited partnership,
partnership agreement, charter and by-laws, or other organizational or governing
documents as such Person, and any treaty, constitution, law, rule, order,
regulation, statute, ordinance, code, decree, or determination of any
Governmental Authority, in each case applicable to, binding upon or affecting
any such Person or any of its Property or to which such Person or any of its
Property is subject.
"STATUTORY RESERVES:" The formula for reserves for the business reinsured under
the Agreement as calculated by the Company in accordance with the applicable
model regulations promulgated by the National Association of Insurance
Commissioners increased by any additional reserve required to meet statutory
valuation requirements for any state. Such reserves will be determined so as to
comply with applicable standards published by the American Academy of Actuaries
or by any state regulatory authority
"UNUSUAL EXPENSES OF LAW": As provided in Section 8 hereof.
SECTION 2. - REINSURANCE COVERAGE
(a) On the basis hereinafter stated, the Company's liability under the Policies
listed in Schedule A shall be reinsured with the Reinsurer automatically for
those portions of Policies as set forth in Schedule B for policies with an issue
date on or after the Effective Date of this Agreement as provided in Section 22
hereof.
(b) The liability of the Reinsurer for Policies shall begin simultaneously with
that of the Company but not prior to the Effective Date of this Agreement. In no
event shall reinsurance under this Agreement be in force and binding unless and
until the issuance and delivery of Policies underlying such reinsurance
constituted the doing of business in a state of the United States or the
District of Columbia in which the Company was properly licensed in good
standing.
(c) Reinsurance hereunder shall be coinsurance and shall follow the Policy forms
of the Company.
(d) The reinsurance under this Agreement with respect to any Policy shall be
maintained in force without reduction so long as and to the extent that the
liability of the Company under such Policy reinsured hereunder remains in force
without reduction, unless such reinsurance is terminated or reduced as provided
herein.
(e) Except as otherwise provided in this Agreement, the reinsurance provided
hereunder is subject to the same limitations and conditions to which the
Policies reinsured under this Agreement are subject.
(f) The Company shall notify the Reinsurer immediately, in writing, of any and
all investigations of the Company or its directors, principal officers or
shareholders conducted by a Governmental Authority.
(g) For purposes of this agreement, Product Exchanges, Internal Movements of
Money and Settlement Contracts are considered to be a new contract.
SECTION 3. - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Reinsurer that:
(a) The Company has furnished the Reinsurer with copies of all forms,
applications, rates, and values with respect to the Policies and shall keep the
Reinsurer informed with respect to any changes or modifications to such forms,
applications, rates or values in accordance with Section 13 herein.
64
<PAGE> 7
(b) The Company's authority to conduct an insurance business is in good standing
in all jurisdictions identified on Schedule D for the lines of business
identified therein and that it has not been placed in, nor does it have any
reason to believe that it is about to be placed in supervision, rehabilitation,
receivership, suspension or liquidation by any insurance department.
(c) The Company (1) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (2) has all necessary
corporate power and authority to entitle it to use its name, to own, lease or
otherwise hold its properties and assets, to carry on its business as currently
conducted, to perform its obligations, and (3) is in compliance with all
Requirements of Law, except to the extent that the failure to comply therewith
could not reasonably be expected to have a Material Adverse Effect.
(d) The Company has full corporate power and authority to execute, deliver and
perform its obligations under this Agreement, and has taken all necessary
corporate and other action to authorize the ceding of the Policies under the
terms of this Agreement. Except as shall have been obtained and set forth on
Schedule E, no consent or approval of any Person, no waiver of any right of
distraint or other similar right, and no consent, license, approval,
authorization or declaration of, filing with or other act by or in respect of
any Governmental Authority, was, is or will be required in connection with the
fulfillment of the Company's duties under this Agreement.
(e) This Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms.
(f) The Policies are in compliance with all applicable Requirements of Law and
are on forms approved in all material respects by the appropriate Governmental
Authorities except to the extent that failure to be in compliance therewith does
not have a Material Adverse Effect.
(g) There are no material misrepresentations or omissions contained in the
information provided to the Reinsurer prior to the date of this Agreement.
SECTION 4. - REPRESENTATIONS AND WARRANTIES OF THE REINSURER
The Reinsurer hereby represents and warrants to the Company that:
(a) The Reinsurer's authority to conduct an insurance business is in good
standing in all jurisdictions identified on Schedule F for the lines of business
identified therein and that it has not been placed in, nor does it have any
reason to believe that it is about to be placed in supervision, rehabilitation,
receivership, suspension or liquidation by any insurance department.
(b) The Reinsurer (1) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan, (2) has all necessary
corporate power and authority to entitle it to use its name, to own, lease or
otherwise hold its properties and assets, to carry on its business as currently
conducted, to perform its obligations, and (3) is in compliance with all
Requirements of Law, except to the extent that the failure to comply therewith
could not reasonably be expected to have a Material Adverse Effect.
(c) The Reinsurer has full corporate power and authority to execute, deliver and
perform its obligations under this Agreement, and has taken all necessary
corporate and other action to authorize the reinsurance of the Policies under
the terms of this Agreement. Except as shall have been obtained and set forth on
Schedule G, no consent or approval of any Person, no waiver of any right of
distraint or other similar right, and no consent, license, approval,
authorization or declaration of, filing with or other act by or in respect of
any Governmental Authority, was, is or will be required in connection with the
fulfillment of the Reinsurer's obligations under this Agreement.
(d) This Agreement has been duly executed and delivered by the Reinsurer and
constitutes the valid and legally binding obligation of the Reinsurer,
enforceable in accordance with its terms.
(e) There are no material misrepresentations or omissions contained in the
information provided to the Company prior to the date of this Agreement.
SECTION 5. - CONDITIONS PRECEDENT
65
<PAGE> 8
(a) The obligations of the Company and the Reinsurer hereunder are expressly
subject to the approvals of the insurance commissioners, directors, or
superintendents, as the case may be, of the insurance departments necessary for
the consummation of the reinsurance contemplated by this Agreement, and such
approvals shall be in full force and effect, and shall not impose upon either
the Company or the Reinsurer any material conditions or other requirements that
would impose upon either party any material additional costs.
(b) The obligations of the Reinsurer hereunder are expressly subject to the
Reinsurer not having discovered prior to the Closing Date material errors,
omissions or liabilities previously undisclosed to it in the due diligence
investigation and documentation furnished to the Reinsurer by the Company prior
to the date hereof.
(c) The obligations of the Company hereunder are expressly subject to the
Company not having discovered prior to the Closing Date material errors,
omissions or liabilities previously undisclosed to it in the due diligence
investigation and documentation furnished to the Company by the Reinsurer prior
to the date hereof.
SECTION 6. - PAYMENTS BY THE COMPANY
(a) Payment of Reinsurance Premiums
To effect or continue reinsurance with respect to Policies in force on
or after the Effective Date and prior to the termination of this Agreement, the
Company shall pay to the Reinsurer the Reinsurance Premiums.
(b) Promotional Bonus
The Company will pay the Reinsurer the cost assessed to the Company
under Section 18.
(c) Adjustments on Transfers
The Company will pay to the Reinsurer any amounts transferred to
Reinsured Policies, after the Effective Date, that were not previously Reinsured
Policies, less any transfer adjustments as determined in accordance with
Schedule H.
(d) Payment Procedures
All amounts payable by the Company to the Reinsurer under this Section
will be made in accordance with the terms and procedures set forth in Section 9
for payments required by this Agreement.
SECTION 7. - PAYMENTS BY THE REINSURER
(a) Benefits Payments
Benefit Payments will first be paid by the Company and the Reinsurer
will thereafter reimburse the Company for such Benefit Payments.
(b) Reinsured Policy Expense Allowances
The Reinsurer shall pay the Company the full amount of the Reinsured
Policy Expense Allowances as specified in Schedule C.
(c) Premium Taxes
The Reinsurer will reimburse the Company for Premium Taxes incurred by
the Company with respect to the Reinsured Policies.
(d) Policy Loans
66
<PAGE> 9
Loans on Policies will be paid by the Company to Contract owners and
the Reinsurer shall fund the Company for any such loans with respect to the
Reinsured Policies and the Company shall pay the Reinsurer interest and
principal with respect to such loans as such amounts are remitted by the Policy
owner.
(e) Adjustments on Transfers
The Reinsurer will pay to the Company any amounts transferred after the
Effective Date that were not previously Reinsured Policies to Reinsured
Policies, less any transfer adjustments as determined in accordance with
Schedule H.
(f) Payment Procedures
All amounts payable by the Reinsurer to the Company under this Section
will be made in accordance with the terms and procedures set forth in Section 9
for payments required by this Agreement.
SECTION 8. - EXPENSES AND ADJUSTMENTS
(a) The Reinsurer shall bear no part of the expenses incurred in connection with
the Policies reinsured hereunder, except as otherwise provided in this
Agreement.
(b) Any Unusual Expenses incurred by the Company in defending or investigating a
claim for Benefit Payments or in rescinding a Policy reinsured hereunder shall
be participated in by the Reinsurer in the same proportion as the Reinsured
Policy bears to the total liability under such Policy.
(c) For purposes of this Agreement, it is agreed that penalties, attorney's
fees, and interest that are imposed automatically by statute and that arise
solely out of a judgment rendered against the Company in a suit for Benefit
Payments shall be considered Unusual Expenses.
(d) The Reinsurer shall not pay the Company an Experience Refund under this
Agreement.
(e) In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as Unusual Expenses:
(1) routine investigative or administrative expenses;
(2) expenses, fees, settlements or judgments arising out of or in
connection with claims of entitlement to Benefit Payments which the Company
admits are payable;
(3) expenses, fees, settlements or judgments arising out of or in
connection with claims against the Company for punitive or exemplary damages;
and
(4) expenses, fees, settlements or judgments arising out of or in
connection with claims made against the Company and based on alleged or actual
bad faith, failure to exercise good faith, or tortious conduct.
(f) In the event that the coverage provided by Reinsured Policies is increased
or reduced because of a misstatement of age or sex, the reinsurance hereunder
shall increase or reduce proportionately.
SECTION 9. - PAYMENT SETTLEMENT PROCEDURES AND REPORTS
(a) Daily Cash Settlement
The Company and the Reinsurer will establish and maintain a daily cash
settlement procedure in accordance with the principles set forth in Schedule I,
using approximations where required, to cover substantially all of the amounts
due under this Agreement. The daily cash settlement procedures may be amended as
agreed by the parties to help minimize the amount of net settlements due at the
end of each Accounting Period.
(b) Payments Due
67
<PAGE> 10
Except as otherwise specifically provided herein, all amounts due to be
paid to either the Reinsurer or the Company shall be determined daily on a net
basis. If such amounts cannot be determined on any day on an exact basis, such
payments will be paid on an estimated basis and any final adjustments are to be
made within fifteen (15) days after each Accounting Period as defined in
subsection (d) below.
(c) Accounting Period
The Accounting Period for this Agreement shall be a calendar month. The
Company and the Reinsurer shall each reconcile the reinsurance transactions and
payments contemplated by this Agreement in accordance with Schedule H at the end
of each Accounting Period.
(d) Reports
The Reports prescribed in Schedule H will be provided by the Company to
the Reinsurer within fifteen (15) days of the end of each Accounting Period.
SECTION 10. - ADMINISTRATION OF POLICIES
(a) The Company will have the ultimate authority for the administration of the
Policies. Notwithstanding the foregoing, the Company will administer the
Policies pursuant to servicing standards mutually agreed upon by the Company and
the Reinsurer, and in no event shall the Company administer the Policies in any
manner that is not in accordance with all Requirements of Law and with standard
industry custom, except to the extent that the failure to be in accordance with
such Requirements of Law and standard industry custom would not have a Material
Adverse Effect.
(b) The Company will indemnify and hold harmless the Reinsurer, its officers,
directors, employees, and agents (each as "Indemnified Party") from, and shall
reimburse as Indemnified Party for, all loss arising out of any claim against
such Indemnified Party arising out of any action or failure to act by the
Company or its representatives in respect of the administration of the Policies.
For purposes of this subsection, "loss" shall include all fees, costs,
penalties, judgments and expenses of any kind reasonably incurred by an
Indemnified Party in investigating, preparing for, defending against or taking
any other action with respect to a threatened or asserted claim.
SECTION 11. - NOTICE AND SETTLEMENT OF CLAIMS
(a) The Company will promptly notify the Reinsurer in writing after receipt of
any information regarding a claim for Benefits Payments and the institution of
any legal proceeding in respect of such claim. The Reinsurer will be furnished
copies of any proofs or other documents bearing on such claim or proceeding upon
request.
(b) The Company will promptly notify the Reinsurer in writing or its intention
to contest any claims for Benefits Payments. The Reinsurer will accept the good
faith decision of the Company in settling any claim for Benefits Payments and
shall pay its share of net reinsurance liability upon receiving proper evidence
of the Company's having settled with the claimant. In no event will the
Reinsurer be required to reimburse the Company for any Benefits Payments greater
than those guaranteed by the Policies.
(c) If the Company should contest any claim or proceeding and the amount of net
liability thereby be reduced, or if at any time the Company should recover
monies from any third party in connection with or arising out of any claim
reinsured by the Reinsurer, the Reinsurer's liability hereunder shall be reduced
accordingly.
(d) Notwithstanding the foregoing, the Reinsurer shall have the right to consult
with the Company in respect of the handling of any claim and, at its own
expense, shall have the right to participate in the defense of any claim.
SECTION 12. - INTEREST RATE COMMITTEE
(a) An Interest Rate Committee will be established by the Reinsurer and the
Company. The Committee members will be selected from the Reinsurer's and the
Company's then-current employees or their respective affiliates' employees.
(b) The Committee will be authorized to determine interest rate crediting
methodologies and to recommend new money interest rates, renewal interest rates,
settlement option rates, and annuity purchase rates for the Policies. Such
methodologies and
68
<PAGE> 11
rates will be based on indices, or other information relevant to the appropriate
maturities of the Policies. The Company has the right to approve or reject all
rates recommended by the Committee. Any Promotional Bonus will be subject to the
terms of Section 18.
(c) The Committee will establish the procedures for its operations including,
but not limited to, determining the frequency of meetings, frequency of interest
rate reviews, maintenance of minutes for meetings of the Committee, and notice
requirements for any unscheduled meetings. Meetings will generally be conducted
by teleconference. A quorum for any meetings of the Committee will be at least
one representative from each of the Company and the Reinsurer. Members in
attendance may cast the votes of those absent members from their respective
group.
SECTION 13. - POLICY CHANGES AND NEW POLICY FORMS
(a) If any change is made with respect to any Policies, including but not
limited to changes in the terms and conditions of a Policy issued by the
Company, or a change in the method used to calculate the reserves on a Policy,
and such change affects Reinsured Policies, the Company will notify the
Reinsurer promptly in writing of such change.
(b) For purposes of this Agreement, any of the types of changes described in
subsection (a) above will be deemed to be the issuance of a new policy form by
the Company and policies issued by the Company on such new policy form will not
automatically be considered Policies subject to this Agreement. The Reinsurer,
in its full and unfettered discretion, will decide whether the policies
utilizing the new policy form will be Policies subject to this Agreement and the
Company shall be bound by the Reinsurer's decision. The Reinsurer shall inform
the Company whether the Reinsurer wishes to include policies utilizing the new
policy form as Policies subject to this Agreement within 30 days of the notice
provided to the Reinsurer by the Company pursuant to Section 13(a) hereof.
SECTION 14. - OVERSIGHTS
(a) If either the Company or the Reinsurer shall unintentionally perform an
obligation incorrectly or fail to perform an obligation under this Agreement or
perform an obligation incorrectly, such error or omission shall be corrected as
soon as reasonably possible after its discovery and both the Company and the
Reinsurer will be restored to the positions they would have been in had no such
error or omission occurred. For purposes of this Agreement, errors and omissions
are defined as clerical mistakes made inadvertently and exclude errors of
judgment and all other forms of errors or omissions.
SECTION 15. - TAX MATTERS
(a) Pursuant to IRC Section 848, insurance companies are required to capitalize
and amortize specified policy acquisition expenses. The amount capitalized is
determined by proxy based on a percentage of "reinsurance premiums" as defined
by the IRS regulations relating to IRC Section 848. At the Reinsurer's request,
the Company will reimburse the Reinsurer for any positive timing cost to the
Reinsurer which results from the application of IRC Section 848 to the Policies
reinsured under this Agreement and which the Reinsurer considers material. At
the Company's request, the Reinsurer will reimburse the Company for the absolute
value of any negative timing cost to the Company which results from the
application of IRC Section 848 to the Policies reinsured under this Agreement
and which the Company considers material.
(b) The Company and the Reinsurer agree that the party with net positive
consideration under this Agreement will capitalize specified Policy acquisition
expenses with respect to the Policies reinsured under this Agreement without
regard to the general deductions limitation of IRC Section 848(c)(1). The
Company and the Reinsurer will exchange information pertaining to the amount of
net cash consideration under this Agreement each year to ensure consistency. The
Company will submit a schedule to the Reinsurer by May 1st of each year showing
its calculation of the net consideration for the preceding taxable year. The
Reinsurer may contest the calculation in writing within thirty (30) days of
receipt of the Company's schedule. Any difference will be resolved between the
parties so that consistent amounts are reported on the respective tax returns
for the preceding taxable year. This election to capitalize specified Policy
acquisition expenses without regard to the general deductions limitation is
effective for all taxable years during which this Agreement remains in effect.
69
<PAGE> 12
SECTION 16. - AUDIT OF RECORDS AND PROCEDURES
(a) The Reinsurer and the Company each shall have the right during normal
business hours and at reasonable intervals, to audit, at the office of the
other, all records and procedures relating to reinsurance under this Agreement.
Books and records shall be maintained in accordance with prudent standards of
insurance company record keeping and must be retained for a period of at least
seven (7) years from the date of creation.
SECTION 17. - ARBITRATION
(a) It is the intention of the parties that the customs and usages of the
business of reinsurance shall be given full effect in the interpretation of this
Agreement. The parties shall act in all things with the highest good faith. A
dispute or difference between the parties with respect to the operation or
interpretation of this Agreement on which an amicable understanding cannot be
reached, including but not limited to claims for rescission of the Agreement,
shall be decided by arbitration. The arbitrators are empowered to decide all
questions or issues and shall be free to reach their decisions from the
standpoint of equity and customary practices of the insurance and reinsurance
industry rather than from that of strict law.
(b) To initiate arbitration, a party shall send by certified mail, return
receipt requested, to the other party's home office a notice demanding
arbitration. The notice shall include the issues for decision and the remedies
sought. The party receiving the notice shall thereafter have thirty days within
which to respond in writing.
(c) There shall be three arbitrators who shall be active or retired officers of
life insurance companies other than the contracting companies or their
affiliates. Each of the contracting companies shall appoint one of the
arbitrators and these two arbitrators shall select the third. In the event that
either contracting company should fail to choose an arbitrator within thirty
days after the response to the demand for arbitration, the other contracting
company may choose two arbitrators, who shall in turn choose a third arbitrator
before entering arbitration. If the two arbitrators are unable to agree upon the
selection of a third arbitrator within thirty days following their appointment,
each arbitrator shall nominate three candidates within ten days thereafter, two
of whom the other shall decline and the decision shall be made by drawing lots.
(d) The decision in writing of any two arbitrators when filed with the parties
hereof, shall be final and binding on both parties. Judgment may be entered upon
the final decision of the arbitrators in any court having competent
jurisdiction. Each party shall bear the expense of its own arbitrator, and with
the other party shall bear equally the expense of the third arbitrator and of
the arbitration.
(e) In the event of arbitration, the arbitration hearing shall take place in
Boston, Massachusetts, unless another location is agreed to in writing by both
the Company and the Reinsurer.
(f) This Section 17 constitutes a separate and independent agreement between the
Company and the Reinsurer and shall remain in force even after termination of
this Agreement and even if the Agreement is found wholly or partially void or is
disputed. The arbitrators shall decide upon the validity of this Agreement and,
in case of its invalidity, upon any dispute between the parties.
SECTION 18. - SPECIAL PROVISIONS
Promotional Bonus
On a case by case basis, the Reinsurer will determine the extent to
which it will share in the costs, if any, associated with a Promotional Bonus.
If a Promotional Bonus is offered by the Company without the Reinsurer's prior
written approval and agreement to share the cost of such Promotional Bonus, then
the Company shall be assessed the full amount of costs associated with the
Promotional Bonus.
SECTION 19. - INSOLVENCY
(a) In the event of the insolvency of the Company, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of the
Company, without diminution or increase because of the insolvency of the
Company.
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<PAGE> 13
(b) In the event of insolvency of the Company, the liquidator, receiver, or
statutory successor shall give the Reinsurer written notice of the pendency of a
claim on a Reinsured Policy within a reasonable time after such claim is filed
in the insolvency proceeding. During the pendency of any such claim, the
Reinsurer may investigate such claim and interpose in the name of the Company
(its liquidator, receiver or statutory successor), but at its own expense, in
the proceeding where such claim is to be adjudicated any defense or defenses
which the Reinsurer may deem available to the Company or its liquidator,
receiver or statutory successor.
(c) The expense thus incurred by the Reinsurer shall be chargeable, subject to
court approval, against the Company as part of the expense of liquidation to the
extent of a proportionate share of the benefit which may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer. Where two or more
reinsurers are participating in the same claim and a majority in interest elect
to interpose a defense or defenses to any such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expenses had been incurred by the Company.
SECTION 20. - OFFSET
(a) Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or where incurred, in favor of or against either
the Company or the Reinsurer with respect to this Agreement or with respect to
any other claim of one party against the other under this Agreement or any other
Agreement between the parties are deemed mutual debts or credits, as the case
may be, and shall be set off dollar for dollar, and only the balance shall be
allowed or paid, regardless of the solvency of either party.
SECTION 21. - PARTIES TO AGREEMENT
(a) This is an Agreement for coinsurance solely between the Company and the
Reinsurer. The acceptance of reinsurance hereunder shall not create any right or
legal relation whatsoever between the Reinsurer and the insured or the
beneficiary under any Policy, and the Company shall be and remain solely liable
to such insured or beneficiary under any such Policy.
(b) This Agreement may not be assigned by either party without the prior written
approval of the other party. However, the Reinsurer reserves the right to
retrocede the reinsurance assumed under this Agreement to one or more of its
affiliated insurance companies. Except for the foregoing, the Reinsurer shall
not retrocede the Policies reinsured hereunder without the prior written
authorization by the Company.
SECTION 22. - EFFECTIVE DATE
(a) The Effective Date for the reinsurance provided under this Agreement shall
be January 1, 1999.
SECTION 23. - ENTIRE AGREEMENT
(a) This Agreement constitutes the entire agreement between the Company and the
Reinsurer with respect to the risks reinsured hereunder and there are no
understandings between the parties other than as expressed in this Agreement.
SECTION 24. - RECAPTURE OF REINSURANCE
(a) Once each calendar year, the Company shall have the option to recapture
existing contracts reinsured hereunder. If the Company elects to recapture,
recapture will occur subject to a mutually acceptable schedule determined at the
time recapture is elected.
SECTION 25. - TERMINATION
(a) This Agreement may be terminated at any time by either the Reinsurer or the
Company upon six (6) months written notice with respect to reinsurance of
Policies not yet placed in force. Upon termination pursuant to this subsection
(a), the Reinsured Portions of Policies in force at the time of termination
shall continue to be reinsured pursuant to the terms of this Agreement. The
payment of Reinsurance Premiums by the Company to the Reinsurer in respect of
Reinsured Portions shall be a condition precedent to the liability of the
Reinsurer in respect of those Reinsured Portions.
(b) At the end of any Accounting Period, this Agreement shall automatically
terminate if none of the Policies reinsured hereunder are in force.
71
<PAGE> 14
(c) The failure to make payments in accordance with Section 9 shall permit the
aggrieved party to terminate this Agreement with respect to all Policies
following thirty (30) days written notice to the party in default provided the
party in default has not cured such default within that notice period.
SECTION 26. - MARKETING MATERIALS
(a) No marketing materials, prospectuses, broker communications or other
communications of the Company or the Reinsurer which refer to the other party
hereto shall be distributed in any manner without the prior approval of such
other party.
SECTION 27. - SEVERABILITY OF PROVISIONS
(a) If any provision of this Agreement is declared null and void by any
Government Authority, each party will have the right to terminate this Agreement
upon five (5) days written notice to the other party. Upon such termination the
Reinsurer shall transfer to the Company a total amount, in cash or assets having
fair market value acceptable to the Company, equal to the net consideration with
respect to the Reinsured Portions in effect as of the effective date of such
termination. Upon transfer pursuant to this section 27, the Reinsurer shall have
no liability whatsoever with respect to such reinsurance.
SECTION 28. - COUNTERPARTS
(a) This Agreement may be executed in several counterparts and each shall have
the same force and effect as an original.
SECTION 29. - AMENDMENTS
(a) Any amendment, alteration, modification, variation or addition to this
Agreement shall only be valid if in writing and executed by both parties hereto.
SECTION 30. - NO WAIVER
(a) The failure of any party to enforce at any time any of the provisions of
this Agreement shall in no way be construed to be a waiver of such provisions,
nor in any way to affect the validity of this Agreement, or any part thereof, or
the rights of any party to thereafter enforce each and every provision.
72
<PAGE> 15
SECTION 31. - CONFIDENTIALITY
(a) The Reinsurer or the Company, as the case may be, will handle confidential
information received from the other party in accordance with standards of care
and confidentiality that it applies to its own records, trade secrets and
proprietary information.
SECTION 32. - GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Delaware.
IN WITNESS WHEREOF, THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
and THE MANUFACTURERS LIFE INSURANCE COMPANY (U.S.A.) have by their respective
officers executed this Agreement in duplicate on the date first mentioned above.
THE MANUFACTURERS LIFE THE MANUFACTURERS LIFE
INSURANCE COMPANY OF NORTH INSURANCE COMPANY (U.S.A.)
AMERICA
________________________________ ________________________________
By By
________________________________ ________________________________
Title Title
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<PAGE> 16
THE MANUFACTURERS LIFE INSURANCE COMPANY OF
NORTH AMERICA
COINSURANCE AGREEMENT
SCHEDULE A
THE REINSURED THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA PRODUCTS
UNDER THIS AGREEMENT ARE LISTED BELOW.
STANDARD
POLICY FORM CODE* PRODUCT ADMINISTRATIVE CODE
DEFERRED ANNUITIES AND ANNUITIZATIONS WITH FIXED PAYOUT OPTIONS
Venture Fixed Annuity
204-FA VEN 4
Venture Variable Annuity (Annuitizations with fixed payout options only)
200-VA VEN 1
203-VA VEN 3
Venture Variable Annuities - Fixed Options
207-VFA VEN 7
207-VFA OWN 7
VFA.CONT, VFA.CERT VEN 8
207-VFA VEN 17
VFA.CONT,VFA.CERT VEN 18
VENTURE.001, VENTURE.005 VEN 20
VENTURE.001, VENTURE.005 VEN 21
VENTURE.003, VENTURE.004 VEN 22
VENTURE.003, VENTURE.004 VEN 23
VENTURE.001, VENTURE.005 VEN 25
VENTURE.003, VENTURE.004 VEN 26
207-VFA VEN 27
VENTURE.001, VENTURE.005 MLL 25
VENTURE.003, VENTURE.004 MLL 26
207-VFA MLL 27
Venture Vision Product - Fixed Options
VEN 10 VIS 5, VIS 6
VISION.001 VIS 25, VIS 26
Venture Vantage Product - Fixed Options
VENTURE.015 VTG20, VTG21,
VTG25
Venture Group Unallocated Annuities - Fixed Options only All Product
UGA Administrative
codes starting
with "G"
Venture Market Value-adjusted Annuity
VENTURE.010, VENTURE.030, All Product
VENTURE.031 Administrative
codes starting
with "MVA"
Manulife Venture Rollover Annuities - Fixed Options
VENTURE.025, VENTURE.026 MRPG01
207-VFA MRP07
207-VFA MRP17
VENTURE.001, VENTURE.005 MRP20
VENTURE.001, VENTURE.005 MRP21
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<PAGE> 17
VENTURE.003, VENTURE.004 MRP22
VENTURE.003, VENTURE.004 MRP23
VENTURE.001, VENTURE.005 MRP25
VENTURE.003, VENTURE.004 MRP26
207-VFA MRP27
IMMEDIATE PAYOUT ANNUITIES (FIXED OPTIONS ONLY)
206-IA VEN 6 Fixed
Immediate
*Slight variations to the identified policy form codes may exist by state.
75
<PAGE> 18
THE MANUFACTURERS LIFE INSURANCE COMPANY OF
NORTH AMERICA
COINSURANCE AGREEMENT
SCHEDULE B
THE REINSURED THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA RELATED
PRODUCT COINSURANCE PERCENTAGES ARE LISTED BELOW. THIS AGREEMENT COVERS THE
FIXED ACCOUNT OPTIONS IN BOTH THE ACCUMULATION (DEFERRED ) AND PAYOUT PHASES OF
THESE CONTRAST. THE LOAN COLLATERAL ACCOUNT UNDER A CONTRACT SHALL BE INCLUDED
AS A FIXED ACCOUNT OPTION.
PRODUCT ADMINISTRATIVE CODE COINSURANCE PERCENTAGE
DEFERRED ANNUITIES AND ANNUITIZATIONS WITH FIXED PAYOUT OPTIONS
Venture Fixed Annuity
VEN 4 100%
Venture Variable Annuity (Annuitizations with fixed payout options only)
VEN 1 100%
VEN 3 100%
Venture Variable Annuities - Fixed Options
VEN 7 100%
OWN 7 100%
VEN 8 100%
VEN 17 100%
VEN 18 100%
VEN 20 100%
VEN 21 100%
VEN 22 100%
VEN 23 100%
VEN 25 100%
VEN 26 100%
VEN 27 100%
MLL 25 100%
MLL 26 100%
MLL 27 100%
Venture Vision Product - Fixed Options
VIS 5, VIS 6 100%
VIS 25, VIS 26 100%
Venture Vantage Product - Fixed Options
VTG 20, VTG21, VTG 25 100%
Venture Group Unallocated Annuities - Fixed Options only
All Product Administrative
codes starting with "G" 100%
Venture Market Value-adjusted Annuity
All Product Administrative
codes starting with "MVA" 100%
Manulife Venture Rollover Annuities - Fixed Options
MRPG01 100%
MRP07 100%
MRP17 100%
MRP20 100%
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<PAGE> 19
MRP21 100%
MRP22 100%
MRP23 100%
MRP25 100%
MRP26 100%
MRP27 100%
IMMEDIATE PAYOUT ANNUITIES (FIXED OPTIONS ONLY)
VEN 6 Fixed Immediate 100%
77
<PAGE> 20
SCHEDULE C: COMPENSATION ALLOWANCE
[INTENTIONALLY OMITTED]
78
<PAGE> 21
THE MANUFACTURERS LIFE INSURANCE COMPANY OF
NORTH AMERICA
COINSURANCE AGREEMENT
SCHEDULE D
INSURANCE LICENSES
<TABLE>
<CAPTION>
EXPIRATION
DATE OF
STATE: CERTIFICATE: COVERAGE:
- - ------ ------------ ---------
<S> <C> <C>
Alabama Permanent Life, Disability and Annuities and
Variable Authority
Alaska Permanent Life (includes Annuities and Disability),
Variable Annuities and Variable
Life
Arizona Permanent Life (includes Annuities), Disability and
Variable Authority
Arkansas Permanent Life, (includes Annuities) Disability,
Variable Annuities and Variable Life
California Permanent Life (includes Annuities), Disability
and Variable Annuities
Colorado Permanent Life, Annuities, Health and Accident,
Credit Life, Credit Accident &
Health, Group Life, Variable Annuities
Connecticut 5/95 Life, (includes Annuities) Variable
Annuities and Reinsurance
D.C. 5/1/95 Life, Annuities (individual, group and
variable), and Group Life
Delaware Permanent Life (includes Annuities), Health, Credit
life, Credit Health, Variable
Annuities and Variable Life
Florida Permanent Life, Annuities, Group Life and Variable Annuities
Georgia 6/30/95 Life (includes Annuities), Health and
Accident and Variable Authority
Hawaii Permanent Life (includes Annuities) and Variable Authority
Idaho Permanent Life (includes Annuities and Disability)
and Variable Authority
Illinois 7/95 Life (includes Annuities), Accident and
Health and Variable Products
Indiana Permanent Life, Annuities, Variable Annuities and
Variable Life
Iowa 6/95 Life (includes Annuities, Variable Life,
Variable Annuities, and Credit
Life), Individual Accident, Individual
Accident and Health, Group
Accident and Health, Individual Hospital
and Medical Expenses
Kansas Permanent Life (includes Annuities) and Variable Authority
Kentucky Permanent Life, Annuities and Variable Authority
Louisiana Permanent Life (includes Annuities), Health,
Accident and Variable Authority
Maine Life (includes annuties and variable
annuities) Health and Variable Life
</TABLE>
COINSURANCE AGREEMENT
SCHEDULE D (CONTINUED)
INSURANCE LICENSES
<TABLE>
<S> <C> <C>
Maryland 6/30/95 Life (includes Annuities), Health, Variable
Annuities and Variable Life
Massachusetts 6/30/95 Life (includes Annuities), Health, Accident
and Variable Annuities
Michigan Permanent Life (includes Annuities), Disability and
Variable Annuities
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C> <C>
Minnesota 6/1/95 Life, Annuities and Variable Contracts
Mississippi 1/1/95 Life (includes Annuities), Variable Contracts
Missouri Permanent Life (includes Annuities) and Variable Contracts
Montana Permanent Life (includes Annuities), Disability and
Variable Annuities
Nebraska 4/95 Life (includes Annuities), Health,
Accident, Variable Annuities and
Variable Life
Nevada Permanent Life (including Variable Annuities and
Variable Life)
New Hampshire None
New Jersey 5/1/95 Life, Health, Annuities and Variable Contracts
New Mexico Permanent Life (includes Annuities), Health and
Variable Annuities
North Carolina 6/30/95 Life, Annuities (includes Variable Annuities)
North Dakota Permanent Life and Annuities, Health, Accident,
Variable Annuities and Variable Life
Ohio 7/1/95 Life, Accident, Health, Disability,
Annuities and Variable authority
Oklahoma 2/28/95 Life (includes Annuities), Health and
Accident, Variable Annuities and
Variable Life
Oregon Permanent Life (includes Annuities), Health and
Variable products authority
Pennsylvania 3/31/95 Life, Annuities, Variable Life and
Variable Annuities
Puerto Rico 6/30/95 Life (includes Annuities), Disability and
Variable Annuities
Rhode Island Life, Health, Variable Annuities and Variable Life
South Carolina Permanent Life (includes Annuities), Accident and
Health and Variable Contracts
South Dakota Permanent Life (includes Annuities), Variable Annuities
and Variable Life
Tennessee Permanent Life (includes Annuities) and Variable Contracts
Texas Permanent Life (includes Annuities), Accident and
Health, Variable Annuities
</TABLE>
COINSURANCE AGREEMENT
SCHEDULE D (CONTINUED)
INSURANCE LICENSES
<TABLE>
<S> <C> <C>
Utah 3/1/95 Life, Disability, Annuities, Variable Life
and Variable Annuities
Vermont Permanent Life, Annuities (includes variable), and
Variable Life
Virginia 6/30/95 Life, Individual Accident & Health,
Annuities, Credit Life, Credit Accident and Health,
Variable Life and Variable Annuities
Washington Permanent Life (includes Annuities), Variable
Life and Variable Annuities
West Virginia 5/31/95 Life (includes Annuities and Disability),
Variable authority
Wisconsin Permanent Life and Annuities, Disability, Variable Life
and Variable Annuities
Wyoming Permanent Life (includes Annuities) and Variable Contracts
</TABLE>
85
<PAGE> 23
COINSURANCE AGREEMENT
SCHEDULE E
DELAWARE DEPARTMENT OF INSURANCE
86
<PAGE> 24
COINSURANCE AGREEMENT
SCHEDULE F
JURISDICTIONS AND LINES OF BUSINESS THEREIN
87
<PAGE> 25
COINSURANCE AGREEMENT
SCHEDULE G
NONE
88
<PAGE> 26
COINSURANCE AGREEMENT
SCHEDULE H
TRANSFER OF ADJUSTMENTS
[INTENTIONALLY OMITTED]
89
<PAGE> 27
Coinsurance Agreement
Schedule I
The following reports and data feeds are to be provided by the Company to the
Reinsurer. The data contents will only include information related to the
reinsured business.
I. Daily Reports
Daily cash settlement statement (Schedule J) by 4:00 p.m. on
the following business day.
II. Month end reports and data feeds1
A. By the third business day after month end
o Liability database reserve feed2
o Annuitized census data feed3
o Liability database and accounting activity
data feeds4
o Policy loan progressions, reports and
reconciliations
B. By the fourth business day after month end
o Month end ceding statement data feed
(Schedule K)
o Exhibits and supporting data for the
computation of the
Policy Expense Allowances (as defined in
Schedule C) and
the Adjustments on Transfers (as defined in
Schedule H).
o Statutory reserve summary by product and by
company
o Progression of Deferred Account
Values/Annuitized Reserves
by product and by company showing specific
transactions
(month only and year to date).
- - ----------------
1 Based upon technology and business reporting needs, the content, format,
and interim report/file substitutes will be negotiated as needed by the
appropriate Accounting and Valuation staff of the Reinsurer and the Company.
2 At a minimum, they will contain the following Company information on a
policy level basis: For the deferred business: (a) ending account value,
by fund option, duration and interest rate; (b) surrender charges; (c)
owner and annuitant age and (d) plan code.
3 For the annuitized business: ending policy census data including
annuity option; annuitant date of birth, rated age, and sex; annuity payment
frequency, amount, option, and date of first and last payments; cost of living
adjustments; pricing date; issue date; unloaded net premium and expense
loads; state; and reserve valuation modes and rates.
4 At a minimum, they will contain the following Company information on a
policy level basis for both deferred and annuitized business: ceding statement
activity for the period for each plan code segregated by qualified vs.
nonqualified, individual vs. group and by state.
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<PAGE> 28
Coinsurance Agreement
Schedule J
Daily Cash Settlement Information
Company: ___________
For Activity of: _____________
<TABLE>
<CAPTION>
Daily Month to Quarter Year to
Activity Date to date date
Deferred Activity Only
<S> <C> <C> <C> <C>
(1) New Policy Premium
(2) Transfer/Exchanges from Variables
(a) Transfers from Variable to Fixed
(b) Product Exchanges from Variable to Fixed
(c) Total Transfers in [(2a)+(2b)]
(3) Total Inflow to Fixed [(1)+(2c)]
(4) Partial withdrawals (including SWIP's)
(5) Full Terminations (Account Value only)
(6) Transfers/Exchanges from Fixed
(a) Transfers from Fixed to Variable
(b) Product Exchanges from Fixed to Variable
(c) Total Transfers Out [(6a)+(3b)]
(7) Death Benefit (Account Value Only)
(8) Market Value Adjustments Collected
(9) Surrender Charges Collected
(10) Total Outflow from Fixed
[(4)+(5)+(6c)+(7)-(8)-(9)]
(11) Net Fixed Cashflow [(3)-(10)]
(12) Allowances
(a) Commissions Paid (see schedule)
(b) Issue Expenses [.38% x (1)] (est.)
(c) Maintenance Expenses [$5,000 per day] (est.)
(d) Transfer settlement [.05 x ((2c) - (6c))] (est.)
(e) Total allowances [(12a)+(12b)+(12c)+(12d)]
(13) CASH DUE TO (FROM) PSI [(11) - (12e)]
</TABLE>
Prepared by: __________________________
Approved by: __________________________
Date Prepared: __________________________
Coinsurance Agreement
Schedule K
Monthly Cash Settlement Information
99
<PAGE> 29
Company: ___________
For Activity of: _____________
<TABLE>
<CAPTION>
Month to Quarter Year to
Date to date date
<S> <C> <C> <C>
(A) Deferred Activity Only
(1) New Policy Premium
(2) Transfer/Exchanges from Variables
(a) Transfers from Variable to Fixed
(b) Product Exchanges from Variable to Fixed
(c) Total Transfers In [(2a)+(2b)]
(3) Total Inflow to Fixed [(1)+(2c)]
(4) Partial withdrawals (including SWIP's)
(5) Full Terminations (Account Value only)
(6) Transfers/Exchanges from Fixed
(a) Transfers from Fixed to Variable
(b) Product Exchanges from Fixed to Variable
(c) Total Transfers Out [(6a)+(6b)]
(7) Death Benefit (Account Value only)
(8) Market Value Adjustments Collected
(a) Collected
(b) Waived
(c) Total [(8a) +(8b)]
(9) Surrender Charges Collected
(a) Collected on Withdrawal
(b) Collected on Death
(c) Waived
(d) Total [(8a)+(8b)+(8c)]
(10) Total Outflow from Fixed [(4)+(5)+(6c)+(7)-(8c)-(8d)]
(11) Net Fixed Deferred Cashflow [(3)-(10)]
</TABLE>
100
<PAGE> 30
COINSURANCE AGREEMENT
SCHEDULE K (CONTINUED)
MONTHLY CASH SETTLEMENT INFORMATION
<TABLE>
<CAPTION>
Month to Quarter Year to
Date to date date
-------- ------- -------
<S> <C> <C> <C> <C>
(B) PAYOUT ACTIVITY
(1) Annuitized Funds (Account Value)
(a) Immediate Annuity Premium
(b) Variable to Fixed Annuitizations
(c) Fixed to Variable Annuitizations
(d) Total Annuitized Funds [(1a)+(1b)-(1c)]
(2) Premium Taxes (Back & Front-end)
(a) Immediate Annuity
(b) Var/Fixed Settlement Annuity
(c) Fixed/Fixed Settlement Annuity
(d) Total [(2a)+(2b)+(2c)]
(3) Benefit Payments
(a) Immediate Annuity - Regular
(b) Immediate Annuity - Commuted (Deaths)
(c) Settlement Annuity - Regular (d)
Settlement Annuity - Commuted (Deaths) (e)
Total Benefits [(3a)+(3b)+(3c)+(3d)]
(4) Net Payout Annuity Activity [(1d)-(2d)-(3a)]
(C) CAN'T READ FROM COPY
(1) Agent Compensation
(a) Commissions Paid (see schedule)
(b) Commissions Charged-back (see schedule)
(c) Renewal Comm. Adj. (see schedule)
(d) High Age Adj. (see schedule)
(e) Trails Paid (see schedule)
(f) Total Compensation [(1a)-(1b)+(1c)-(1d)+(1e)]
(2) Issue Expenses (see schedule)
(3) Maintenance Expenses (see schedule)
(4) Transfer Allowance on Net Fund Transfers to Fixed
(including loans - see schedule)
(5) Transfer Allowance on Net Product Exchanges to Fixed
(see schedule)
(6) Premium Tax Reimbursement
(7) Total Allowances [(1f)+(2)+(3)+(4)+(5)+(6)]
</TABLE>
101
<PAGE> 31
COINSURANCE AGREEMENT
SCHEDULE K (CONTINUED)
MONTHLY CASH SETTLEMENT INFORMATION
<TABLE>
<CAPTION>
Month to Quarter Year to
Date to date date
-------- ------- -------
<S> <C> <C> <C>
(D) OTHER ACTIVITY
(1) Excess Interest Credited
(2) Policy Loans
(a) Loan Principal Paid Back to Fixed
(b) Loan Interest Paid Back to Fixed
(c) New Loans from Fixed
(d) Interest on Variable Paybacks
(e) Interest Capitalized on Variable Loans
(f) Int. Credited on Loans from Var.
(g) Reduction due Fixed & Variable Decrements (asset fund)
(h) Net Loan Cashflow [(2a)+(2b)-(2c)+(2d)+(2e)-(2f)+(2g)]
(3) Total Other Activity [(1)+(2f)]
(E) CASH DUE TO (FROM) PSI [(A11)+(B4)-(C7)+(D3)]
(F) CASH PAID TO (FROM) PSI DURING MONTH
(G) MONTHLY TRUE-UP [(E)-(F)]
(H) SUMMARY RECONCILIATION OF DAILY AND MONTHLY DEFERRED ANNUITY ACTIVITY
(1) True-up of daily items (monthly deferred annuity and allowances)
[(A1)+(A2c)-(A4)-(A5)-(A6c)-(A7)+(A8a)+(A9a)-(C1a)-(C2)-(C3)-(C4)-(C5)]
(2) Cash Paid to(from) PSI During Month
(3) Difference [(H1)-(H2)]*
</TABLE>
*See attached explanation if these items are not equal
102
<PAGE> 32
COINSURANCE AGREEMENT
SCHEDULE K (CONTINUED)
MONTHLY CASH SETTLEMENT INFORMATION
(I) ITEMIZED RECONCILIATION OF DAILY AND MONTHLY DEFERRED ANNUITY ACTIVITY
<TABLE>
<CAPTION>
{i} {ii}
Cumulative Monthly
Daily True-up
---------- -------
<S> <C> <C>
(1) Transfers/Exchanges from Variable
(a) Transfers from Variable to Fixed
(b) Product Exchanges from Variable to Fixed
(c) Total Transfers In [(1a)+(1b)]
(2) Transfers/Exchanges from Fixed
(a) Transfers from Fixed to Variable
(b) Product Exchanges from Fixed to Variable
(c) Total Transfers Out [(2a)+(2b)]
(3) Allowances
(a) Commissions Paid
(b) Issue Expenses
(c) Maintenance Expenses
(d) Transfer Settlement
(e) Total
(4) Total [(I1)-(I2)-(I3)]
(5) Variances
(line 4 column (i) less column (ii)
</TABLE>
Prepared by: _________________________
Approved by: _________________________
Date Prepared: _________________________
103
<PAGE> 33
COINSURANCE AGREEMENT
SCHEDULE K (CONTINUED)
DAILY CASH SETTLEMENT INFORMATION
Company: ___________
For Activity of: _____________
<TABLE>
<CAPTION>
Month to Quarter Year to
Date to date date
-------- ------- -------
<S> <C> <C> <C>
(1) Fixed to Fixed Transfers/Exchanges
(a) Transfers from Fixed to Fixed
(b) Product Exchanges from Fixed to Fixed
(c) Fixed/Fixed Annuitizations (account value)
(2) Admin Fees Collected
(3) Deferred Annuity Interest Credited
(4) Number of Policies in Force
(a) Deferred
(b) Payout
(5) Fixed Premiums in Suspense (detail attached)
(6) Fixed Account Claims not yet Processed
(7) Policy Loan Reconciliation - Collateral Account
(a) Collateral Account at Beg. of Period
(b) New Loans Taken
(c) Reduction due to Surrender
(d) Reduction due to Maturity
(e) Reduction due to Annuitization
(f) Reduction due to death
(g) Principal Repaid
(h) Interest Credited to Collateral Account
(i) Interest Capitalized due Non-payment
(j) Collateral Account at End of Period
[(7a)+(7b)-(7c)-(7d)-(7e)-(7f)-(7g)-(7h)+(7i)]
(k) Change in Collateral Account [(7j)-(7a)]
(l) Interest Expense Accrued but not Credited to Collateral Fund
(8) Policy Loan Reconciliation - Asset Fund
(a) Asset Fund at Beg. of Period
(b) New Loans Taken
(c) Reduction due to Surrender
(d) Reduction due to Maturity
(e) Reduction due to Annuitization
(f) Reduction due to Death
(g) Principal Repaid
(h) Interest Capitalized
(i) Asset Fund End of Period
[(7a)+(7b)-(7c)-(7d)-(7e)-(7f)-(7g)+(7h)]
(j) Int. Inc. Accrued but not cap. on Asset Fund
</TABLE>
Prepared by: _______________________
Approved by: _______________________
Date Prepared: _______________________
104
<PAGE> 34
COINSURANCE AGREEMENT
SCHEDULE L
RULES OF THE COMPANY
The reinsured, The Manufacturers Life Insurance Company of North
America, will achieve the service standards set forth below when dealing with
Reinsured Portions of Policies reinsured under this Agreement.
The Manufacturers Life Insurance Company of North America will:
1) Answer telephones within 30 seconds of the call being received during
Business Days;
2) Issue new Policies within 2 full Business Days of all requirements needed
to issue a Policy having been received by MNA at its office in Boston,
Massachusetts;
3) Complete processing of Policy terminations and withdrawals within 2 full
Business Days of all requirements needed for such transactions having been
received by MNA at its office in Boston, Massachusetts;
4) Complete processing of all non-financial Policy changes within 5 full
business Days of all requirements needed for such transactions having been
received by MNA at its office in Boston, Massachusetts; and
5) Send Letters of Acceptance regarding 1035 exchanges within 5 full Business
Days of receipt by MNA at its office in Boston, Massachusetts.
6) Release commission payments to Broker Dealers within 2 full Business Days
of receipt of Commission Statements/Checks by MNA at its office in Boston,
Massachusetts.
MNA will meet the above standards, on average, 90% of the time.
In any event, MNA will employ service standards for the Reinsured Portions at
least at the same target level as those used for the Policies in their entirety.
Target is defined in the MNA Incentive Pay Plan for Annuity Customer Service. In
the event targets are revised, MNA will notify Peoples in writing within 30 days
of any such revisions becoming effective.
105
<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
<INCOME-PRETAX> 67,711
<INCOME-TAX> 23,873
<INCOME-CONTINUING> 43,838
<DISCONTINUED> 582
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,420
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
