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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, 1999
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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.)
500 Boylston Street
Suite 400
Boston, Massachusetts 02116
(Address of principal executive offices)
(617) 663-3000
(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
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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, 1999 was 2,600.
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PART 1
Item 1 -- Business
Description of Company, Reportable Segments and Products
The Registrant, The Manufacturers Life Insurance Company of North America
("MNA"), (which includes two subsidiaries, The Manufacturers Life Insurance
Company of New York ("MNY") and Manufacturers Securities Services, LLC ("MSS"),
hereinafter with MNA referred to collectively as the "Company"), is a stock life
insurance company organized under the laws of Delaware in 1979. MNA's principal
office is located at 500 Boylston Street, Suite 400, Boston, Massachusetts
02116. MNA is a wholly-owned subsidiary of Manulife-Wood Logan Holding Co., Inc.
("MWLH"). MWLH is an indirect wholly-owned subsidiary of The Manufacturers Life
Insurance Company ("MLI"); prior to June 1, 1999, MLI indirectly owned 85% of
MWLH, and minority shareholders associated with MWLH owned the remaining 15%.
MLI is a wholly-owned subsidiary of Manulife Financial Corporation ("MFC"), a
publicly traded company, based in Toronto, Canada. MFC and its subsidiaries are
known collectively as "Manulife Financial."
MNY is a stock life insurance company organized under the laws of New York in
1992. MNY is licensed to conduct business in the State of New York. MSS, a
Delaware limited liability company that MNA controls, is a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. MSS acts as investment adviser
to the Manufacturers Investment Trust ("MIT"), a no-load, open-end management
investment company organized as a Massachusetts business trust and as principal
underwriter of the Company's variable annuity and life insurance contracts. MSS
has entered into a non-exclusive promotional agent agreement with Manulife-Wood
Logan Co., Inc. (formerly Wood Logan Associates, Inc. and hereinafter referred
to as "MWL"). 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 adviser to North American Funds ("NAF"), a no-load, open-end
management investment company organized as a Massachusetts business trust.
In 1999, the Company's ultimate parent, MFC, became a publicly traded company.
Part of MFC's external reporting includes a discussion of its operations
presented separately for wealth management and insurance. For 1999, the Company
has realigned its definition of its operations to match those of MFC. The
Company's operations are now classified as either wealth management or insurance
in comparison to the 1998 classification of annuities, pensions and insurance.
Through its wealth management operations, the Company offers wealth management
products and services in the form of individual and group annuities as well as
401(k) pension products. Through its insurance operations, the Company offers
traditional life insurance products. The Company's reportable operations have
been determined based on differences in product features and distribution, and
are consistent with the Company's management structure.
MNA is licensed to sell fixed and variable annuities, traditional life and
variable life insurance (discontinued sales on July 1, 1998), in all states
except New Hampshire and New York. MNY is licensed to sell fixed and variable
annuities, pension products and traditional life insurance in New York only.
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 sub-account of which invests in shares of
one of the portfolios of MIT or in open-end management investment 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.
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During 1997, the Company sold its mutual fund business which consisted solely of
NAF, a group of thirteen mutual funds, to an unrelated party. In 1997 and 1998,
pursuant to an expanded plan of operations for MNY, the Company began selling
insurance products and pension products in the State of New York.
The remainder of Item 1 will focus solely on the wealth management operations of
the Company due to the limited assets and revenues associated with the Company's
insurance operations which are in a developmental stage.
Wealth Management Operations:
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(R), Venture Vision(R) and Venture
Vantage(R). 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 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-Adjusted Annuity which offers only fixed investment options and
imposes a market value adjustment upon surrender.
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 generally not subject to federal or
state income tax. Proceeds payable on death from a life insurance policy may
also be 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 untaxed return
component of such payments is taxed at the time of receipt as ordinary income.
The Company began to sell pension products in 1998. No significant revenues were
generated from the sales of these products in either 1998 or 1999.
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 high 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 offers 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 sixteen investment management firms provide investment
management expertise to the forty-one variable investment options, including
five Lifestyle portfolios which are "funds of funds". The Lifestyle investment
options strategically allocate deposits over various investment disciplines with
the goal of matching return to the risk profile of the policyholder. The ability
to provide superior investment returns under the variable options is essential
to the retention of assets.
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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 (dependent upon the policy) are designed to
compensate the Company for the accelerated recognition of policy acquisition
costs. The contingent deferred sales charge acts as a deterrent against
policyholders surrendering their 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 minimum death
benefits to policyholders. For issue ages 80 and younger Venture guarantees the
greater of deposits or a locking of any investment gains on a yearly basis up to
attained age 80. Venture Vision provides a minimum death benefit equal to
deposits indexed at 5% per annum up to a maximum of twice the original deposit
for issues up to age 80. Venture Vantage provides a minimum death benefit equal
to the larger of deposits or the contract value on the ninth contract
anniversary. The minimum death benefits are designed to provide long-term value
to policyholders and to facilitate asset retention.
The Company, along with MLI, enjoys strong financial ratings that enhance its
ability to attract new sales and retain assets. Distributors and consumers of
variable and fixed annuity products utilize the relative financial strength
ratings as a criteria in choosing an annuity carrier. The Company is rated A++
(Superior) by A.M. Best, AA+ (Very Strong) by Standard and Poor's ("S&P") and
Aa2 (Excellent) by Moody's as to the relative financial strength of the Company.
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. The Company's administrative unit operates in
a paper-less environment employing optical imaging systems and electronic
communication with both policyholders and distributors.
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 Total
Reference survey conducted by Variable Annuity Research and Data Services, sales
grew 21% in 1999 over 1998 with total 1999 sales of $120.8 billion. The Company,
with 1999 total sales of $3.5 billion captured market share of 2.87%, ranking it
13th for variable annuity products issued in the United States. All sales and
marketing activities are conducted through MWL which employs a team of
wholesalers soliciting broker-dealer firms across the United States. The
Company's annuity sales are distributed through four different channels
including wirehouses, regional brokerage firms, financial planners, and banks.
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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 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 investments permitted. The Company's books and
accounts are subject to review by each insurance department and other
supervisory agencies at all times, and the Company files annual statements with
these agencies. A full examination of the MNA's operations is conducted
periodically by the Delaware insurance department (The New York Insurance
Department for MNY.)
Several insurers affiliated with the Company, The Manufacturers Life Insurance
Company (U.S.A.) ("ManUSA") and The Manufacturers Life Insurance Company of
America ("ManAmerica"), are domiciled in Michigan and therefore 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 ManUSA. 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 MWL are
primarily regulated by Delaware but may also be subject to Michigan regulation
if the transaction involves ManUSA or ManAmerica.
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.
Forward-looking Statements
Certain information included herein is forward-looking with respect to the
Company, including its business operations and strategy and financial
performance and condition. These statements generally can be identified by the
use of forward-looking words such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe" or "continue" or the negative thereof or
similar variations. Although management believes that the expectations reflected
in such forward-looking statements are reasonable, such statements involve risks
and uncertainties and actual results may differ materially from those expressed
or implied by such forward-looking statements. Important factors that could
cause actual results to differ materially from the Company's expectations
include among other things, general economic and market factors, including
interest rates, business competition and changes in government regulations or in
tax laws.
Item 2 -- Properties
The Registrant owns no property.
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Item 3. Legal Proceedings
Nothing to report.
Item 4 -- Submission of Matters to a Vote of Security Holders
Nothing to report.
PART II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters
MWLH is the sole record holder of the MNA's shares. Therefore, there is no
public trading market for MNA's common stock. MNA has declared no cash dividends
on its common stock at any time during the two most recent fiscal years.
MNA 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 MWL is the promotional agent. There are no maximum or minimum purchase
payments required to establish a contract. The value of a contract will vary
according to the investment performance, charges and expenses of the
sub-accounts in which the contract is vested. As of December 31, 1999, the total
variable assets in the Venture Group Annuity was $112,098,563.
Item 6 -- Selected Financial Data
<TABLE>
<CAPTION>
For the Years Ended December 31
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1999 1998 1997 1996 1995
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(in thousands)
Under Accounting Principles Generally
Accepted in the United States:
<S> <C> <C> <C> <C> <C>
Total Revenues $ 353,523 $ 274,216 $ 202,751 $ 147,772 $ 143,896
Net Income 59,852 44,420 33,233 15,735 11,032
Total Separate Account Assets 16,022,215 12,188,420 9,529,160 6,820,599 5,131,536
Total Assets 17,726,298 13,496,414 10,633,763 7,811,370 6,244,352
Shareholder's Equity 337,243 254,030 208,726 127,070 95,256
</TABLE>
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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.
The Company's primary source of earnings is from the sale of individual annuity
products within its wealth management operations. As such, the remainder of this
discussion will be limited to the results of operations from the sale of these
products except as noted. Earnings from the sale of individual annuity products
are comprised of fees assessed against policyholder account balances included in
the Company's separate accounts including: mortality and expense risks charges,
surrender charges and an annual administrative charge. In addition, a spread is
earned 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.
REVIEW OF CONSOLIDATED OPERATING RESULTS
1999 Compared to 1998
The Company recorded net income from continuing operations of $59.9 million in
1999 versus $43.8 million in 1998, an increase of $16.1 million or 37%. The
increase was primarily a result of fee income earned on additional separate
account assets and higher advisory fees earned during 1999 associated with the
assets held in MIT. Separate account assets and total assets grew by 31% during
1999. This growth is attributed to record sales of $3.5 billion for 1999
compared to 1998 sales of $2.4 billion and strong equity market performance
during 1999. Total fees, including advisory fees, generated by separate accounts
and policyholder funds increased by $79.6 million or 30% in 1999.
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The Company incurred total benefits and expenses in 1999 of $261.0 million, an
increase of $54.5 million, or 26% compared to 1998. The additional expenses
primarily reflect an increase in non-capitalized acquisition expenses,
increasing sub-advisory expenses associated with additional assets in MIT, and
higher financing costs which were offset by a decrease in Deferred Acquisition
Costs (DAC) amortization. The amortization of DAC was reduced by $8.9 million
during 1999 due primarily to improved investment performance of the Company's
Separate Account Assets compared to 1998. It is this asset base against which
fees are assessed. Higher projected fees due to improved annual investment
results compared to 1998 resulted in reduced DAC amortization for the year. The
Company paid an additional $14.4 million of sub-advisory expenses during 1999
due to the higher asset base. The Company's commission financing loans increased
by approximately $70.1 million over December 31, 1998 levels resulting in
additional financing costs.
1998 Compared to 1997
The Company recorded net income from continuing operations of $43.8 million in
1998 versus $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
reflect an increase in non-capitalized acquisition expenses, increasing
sub-advisory expenses associated with additional assets in MIT, higher financing
costs, an increase in DAC amortization and additional start-up expenses
associated with expanding the Company's operations in New York. The amortization
of DAC was increased by $12.9 million during 1998 due primarily to lower
investment returns associated with the Company's Separate Account Assets
compared to 1997. It is this asset base against which fees are assessed. Lower
projected fees due to the yearly results compared to that of 1997 resulted in an
increased DAC amortization for the year. The Company paid an additional $12.3
million of sub-advisory expenses during 1999. The Company's commission financing
loans increased by approximately $57.5 million over December 31, 1997 levels
resulting in additional financing costs.
The discontinued mutual fund operation, under the terms of the sale agreement
concluded in 1997, received a contingent payment of $1.0 million on October 1,
1998. After taxes and an adjustment to the final sales price, an additional $0.6
million gain on sale was recorded in 1998 compared to net income of $5.8
million, including a $5.9 million gain on sale, in 1997.
FINANCIAL POSITION
1999 Compared to 1998
Total assets increased from $13.5 billion at December 31, 1998 to $17.7 billion
at December 31, 1999, an increase of $4.2 billion or 31%. Separate account
assets increased by 31% in 1999 compared to 1998 and represent 90% of total
assets as the Company continues to focus on its variable option annuity
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 DAC asset grew by 46% as the Company
experienced record sales volumes during 1999 and deferred the related costs, net
of current amortization, associated with those sales. Due from reinsurers
increased $155.9 million as a result of higher fixed deferred account values
related to dollar cost averaging promotions offered to policyholders.
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Total liabilities increased proportionately with the growth in the related
assets during 1999, primarily in the Company's separate accounts. During 1999,
the Company borrowed an additional $70.1 million from MLI to support its record
sales volumes and related acquisition expenses. Amount payable to reinsurers
increased by $152.7 million primarily as a result of higher fixed annuity
deposits and increased account values associated with the policies reinsured
under a fixed annuity coinsurance agreement.
The growth in retained earnings is primarily due to net income from operations
of $59.9 million. In addition, accumulated other comprehensive income decreased
$4.7 million due to the lower market value of invested assets at December 31,
1999. The Company received a capital contribution of $28.1 million from MWLH
during December 1999 to support the Company's surplus position for NAIC
Statutory purposes which incurs a surplus drain as the Company increases its
sales volumes.
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 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 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 MLI 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 a fixed annuity coinsurance agreement.
The growth in retained earnings is due to net income from operations of $44.4
million. In addition, accumulated other comprehensive income increased $0.9
million due to the higher market value of invested assets at December 31, 1998.
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 have not fluctuated 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. Starting in 1996, substantially all variable account acquisition
costs are financed through borrowing from MLI and internally generated cash
flows.
The Company maintains a prudent amount invested in cash and short term
investments. At the end of 1999, this amounted to $69.1 million or 30% of total
investments compared to $ 44.4 million in 1998 or 21%. In addition, the
Company's liquidity is managed by maintaining an easily marketable portfolio of
fixed maturity securities. Because of the Company's expanding business,
acquisition costs will not only result in losses from operations, but will also
create a cash flow strain. The Company on an annual basis forecasts its capital
and financing requirements to support its operations. The Company looks to MLI
for the necessary capital or financing to support the Company's growth.
The Company's net cash flows from operating activities were ($94.7) million,
($18.7) million and ($38.8) million for the years ended December 31, 1999, 1998
and 1997, 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 ($13.5) million,
($33.3) million and ($39.1) million for the years ended December 31, 1999, 1998
and 1997, respectively. The decrease in cash flows for 1999 and 1998 resulted
primarily from fixed maturity securities maturing or sold offset by 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 a capital infusion of $47.7 million and were
partially offset by the disposal of the mutual fund operation in 1997 along with
the disposal of foreclosed real estate.
The Company's net cash flows from financing activities were $125.7 million,
$55.1 million, and $73.2 million, for the years ended December 31, 1999, 1998
and 1997, respectively. The increase in net cash flows for all three years is
primarily related to additional borrowings from MLI to support the Company's
growth. Net deposits to policyholder funds for 1999, 1998 and 1997 and capital
contributions in 1999 and 1997 also contributed additional cash to the Company.
Offsetting the cash flows for all three years were reinsurance costs.
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.
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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, 1999 the Company's capital and
surplus balances exceeded all such required minimums.
IMPACT OF YEAR 2000
The year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The systems used by the Company have been assessed as part of a
comprehensive written plan conducted by Manulife Financial Corporation
(collectively with its subsidiaries "Manulife Financial"), to ensure that
computer systems and processes of Manulife Financial and its subsidiaries,
including the Company, are year 2000 compliant. Although the change in date has
occurred and management believes that its systems are year 2000 compliant, it is
not possible to conclude that all aspects of the year 2000 issue that may affect
the entity, including those related to customers, suppliers, or other third
parties, have been fully resolved.
Manulife Financial estimates the total cost of its year 2000 project will be
approximately $60.5 million*, of which $59.9 million* has been incurred through
December 31, 1999. In addition, previously unbudgeted costs associated with the
start up of a new joint venture in Japan in April 1999 are estimated to be $4.1
million*, of which approximately $3.8 million* was incurred through December 31,
1999. These previously unbudgeted costs have been shared by Manulife Financial
and its joint venture partner. Actual costs incurred for the year 2000 project
are not expected to be materially higher than estimated. Manulife Financial's
year 2000 costs were $10.6 million* for 1999, excluding the total joint venture
costs, and $34.7 million* for 1998.
* All figures are shown in US dollars converted from Canadian dollars using the
average exchange rate of 1.49 in effect for the year ended December 31, 1999.
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
The Company earns asset based fees based on the asset levels invested in the
separate accounts. As a result, the Company is subject to 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
related to in force separate account contracts at December 31, 1999, if the
decline existed throughout 2000, would adversely affect the Company's asset
based fees for 2000 by $31 million.
11
<PAGE> 12
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 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 durations of its assets and liabilities at December 31, 1999,
management estimates that a 100 basis point immediate, parallel increase in
interest rates for the entire year of 2000 would decrease the fair value of its
general account assets by approximately $2.3 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 AND SCHEDULES
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF NORTH AMERICA
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
WITH REPORT OF INDEPENDENT AUDITORS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...................................................................14
Audited Consolidated Financial Statements
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, (the Company), as of
December 31, 1999 and 1998, 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, 1999. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These consolidated
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and
1998, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when consolidated 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 28, 2000 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) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Fixed-maturity securities available-for-sale, at fair value (note 3) $ 152,922 $ 157,743
(amortized cost: 1999 $156,382; 1998 $152,969)
Short-term investments 41,311 34,074
Policy loans 7,049 5,175
- --------------------------------------------------------------------------------------------------------------------
Total investments $ 201,282 $ 196,992
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 27,790 $ 10,320
Accrued investment income 2,630 3,132
Deferred acquisition costs (note 5) 655,294 449,332
Other assets 19,341 6,360
Due from reinsurers 797,746 641,858
Separate account assets 16,022,215 12,188,420
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 17,726,298 $ 13,496,414
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY ($ thousands)
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Policyholder liabilities and accruals $ 139,764 $ 102,252
Payable to affiliates 10,267 4,388
Notes payable to affiliates (note 10) 311,100 241,000
Deferred income taxes (note 6) 46,533 23,777
Other liabilities 50,577 26,655
Due to reinsurers 808,599 655,892
Separate account liabilities 16,022,215 12,188,420
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 17,389,055 $ 13,242,384
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock (note 8) $ 2,600 $ 2,600
Additional paid-in capital (note 8) 207,102 179,053
Retained earnings 130,145 70,293
Accumulated other comprehensive (loss) income (2,604) 2,084
- --------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY $ 337,243 $ 254,030
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 17,726,298 $ 13,496,414
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
15
<PAGE> 16
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
- --------------------------------------------------------------- ----------------- ------------------- ----------------
<S> <C> <C> <C>
REVENUES:
Fees from separate accounts and policyholder funds $ 218,231 $ 166,498 $ 126,636
Advisory fees and other distribution revenues 122,662 94,821 67,678
Premiums 175 - -
Net investment income (note 3) 12,721 12,178 7,906
Net realized investment (losses) gains (note 3) (266) 719 531
- --------------------------------------------------------------- ----------------- ------------------- ----------------
TOTAL REVENUE $ 353,523 $ 274,216 $ 202,751
- --------------------------------------------------------------- ----------------- ------------------- ----------------
BENEFITS AND EXPENSES:
Policyholder benefits and claims $ 6,735 $ 4,885 $ 4,986
Amortization of deferred acquisition costs (note 5) 44,554 53,499 40,649
Other insurance expenses (note 11) 192,834 135,624 100,385
Financing costs 16,842 12,497 14,268
- --------------------------------------------------------------- ----------------- ------------------- ----------------
TOTAL BENEFITS AND EXPENSES $ 260,965 $ 206,505 $ 160,288
- --------------------------------------------------------------- ----------------- ------------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ 92,558 $ 67,711 $ 42,463
- --------------------------------------------------------------- ----------------- ------------------- ----------------
- --------------------------------------------------------------- ----------------- ------------------- ----------------
INCOME TAX EXPENSE (NOTE 6) $ 32,706 $ 23,873 $ 15,044
- --------------------------------------------------------------- ----------------- ------------------- ----------------
- --------------------------------------------------------------- ----------------- ------------------- ----------------
NET INCOME FROM CONTINUING OPERATIONS $ 59,852 $ 43,838 $ 27,419
- --------------------------------------------------------------- ----------------- ------------------- ----------------
Discontinued operations (note 15):
Loss from operations, net of tax $ - $ - $ (141)
Gain on disposal, net of tax $ - $ 582 $ 5,955
- --------------------------------------------------------------- ----------------- ------------------- ----------------
NET INCOME $ 59,852 $ 44,420 $ 33,233
- --------------------------------------------------------------- ----------------- ------------------- ----------------
</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) (LOSS) INCOME EQUITY
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $2,600 $131,322 $(7,360) $ 509 $ 127,071
Capital contribution (note 8) - 47,731 - - 47,731
Comprehensive income (note 4) - - 33,233 691 33,924
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $2,600 $179,053 $25,873 $ 1,200 $ 208,726
Comprehensive income (note 4) - - 44,420 884 45,304
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $2,600 $179,053 $70,293 $ 2,084 $ 254,030
Capital contribution (note 8) - 28,049 - - 28,049
Comprehensive income (loss) (note 4) - - 59,852 (4,688) 55,164
-------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $2,600 $207,102 $130,145 $ (2,604) $ 337,243
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
17
<PAGE> 18
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
- ---------------------------------------------------------------------------- -------------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 59,852 $ 44,420 $ 33,233
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of bond discount and premium 747 685 401
Benefits to policyholders 6,735 4,885 4,986
Provision for deferred income tax 24,269 6,872 15,767
Net realized investment losses (gains) 266 (719) (531)
Amortization of deferred acquisition costs 44,554 53,499 40,649
Amortization of deferred acquisition costs included in discontinued - - 1,707
operations
Policy acquisition costs deferred (248,483) (138,527) (123,965)
Gain on disposal of discontinued operations - - (9,394)
Changes in assets and liabilities:
Accrued investment income 502 (491) (835)
Other assets (12,981) 3,266 (1,396)
Receivable from affiliates - 4,605 (4,605)
Payable to affiliates 5,879 4,644 (1,462)
Other liabilities 23,922 (1,882) 6,642
- ---------------------------------------------------------------------------- -------------- ---------- -----------
Net cash used in operating activities $ (94,738) $(18,743) $(38,803)
- ---------------------------------------------------------------------------- -------------- ---------- -----------
INVESTING ACTIVITIES:
Fixed-maturity securities sold, matured or repaid $ 95,139 $ 37,694 $ 74,626
Fixed-maturity securities purchased (99,565) (50,056) (118,765)
Equity securities sold - - 1
Equity securities purchased - - (250)
Foreclosed real estate sold - - 2,268
Disposal of discontinued operations - - 16,338
Net change in short-term investments (7,237) (19,082) (10,697)
Policy loans advanced, net (1,874) (1,899) (2,639)
- ---------------------------------------------------------------------------- -------------- ---------- -----------
Cash used in investing activities $ (13,537) $(33,343) $ (39,118)
- ---------------------------------------------------------------------------- -------------- ---------- -----------
FINANCING ACTIVITIES:
Net reinsurance consideration $ (3,181) $ (7,014) $ (5,443)
Deposits to policyholder funds 50,351 15,551 20,607
Return of policyholder funds (19,574) (10,934) (15,462)
Increase in notes payable to affiliates 70,100 57,464 25,754
Capital contribution by Parent 28,049 - 47,731
- ---------------------------------------------------------------------------- -------------- ---------- -----------
Cash provided by financing activities $ 125,745 $ 55,067 $ 73,187
- ---------------------------------------------------------------------------- -------------- ---------- -----------
CASH AND CASH EQUIVALENTS:
Increase (decrease) during the year 17,470 2,981 (4,734)
Balance, beginning of year 10,320 7,339 12,073
- ---------------------------------------------------------------------------- -------------- ---------- -----------
BALANCE, END OF YEAR $ 27,790 $ 10,320 $ 7,339
- ---------------------------------------------------------------------------- -------------- ---------- -----------
</TABLE>
See accompanying notes.
18
<PAGE> 19
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION
The Manufacturers Life Insurance Company of North America (hereinafter
referred to as "MNA"), is a wholly-owned subsidiary of Manulife-Wood
Logan Holding Co., Inc. (hereinafter referred to as "MWLH"). MWLH is an
indirect wholly-owned subsidiary of The Manufacturers Life Insurance
Company ("MLI"); prior to June 1, 1999, MLI indirectly owned 85% of
MWLH, and minority shareholders associated with MWLH owned the
remaining 15%. MLI is a wholly-owned subsidiary of Manulife Financial
Corporation, a publicly traded company. Manulife Financial Corporation
and its subsidiaries are known collectively as "Manulife Financial."
MNA owns 100% of The Manufacturers Life Insurance Company of New York
(hereinafter referred to as "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 noninsulated 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
(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 adviser 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") in the United States and include the accounts and
operations, after intercompany eliminations, of the Company and its
majority and wholly-owned subsidiaries, MSS and MNY.
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) In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. Contracts that contain embedded derivatives, such as
certain insurance contracts, are also addressed by the Statement. SFAS
No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. In July 1999, the FASB issued
Statement 137, which delayed the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The Company is evaluating
the accounting implications of SFAS No. 133 and has not determined its
potential impact on the Company's results of operations or its
financial condition.
ii) In December 1997, the American Institute of Certified Public
Accountant's Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." SOP 97-3 provides
guidance on the recognition and measurement of liabilities for various
assessments related to insurance activities, including those by state
guaranty funds. The Company adopted SOP 97-3 during 1999. Prior to the
adoption of SOP 97-3, the Company expensed and recognized liabilities
for such assessments on a "pay-as-you-go" basis. The effect of adopting
SOP 97-3 did not have a material impact on the results of operations
and financial condition of the Company for the year ended December 31,
1999.
iii) In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires the capitalization of certain costs incurred in connection
with developing or obtaining internal-use software. The Company adopted
SOP 98-1 during 1999. Prior to the adoption of SOP 98-1, the Company
expensed internal-use software-related costs as incurred. The effect of
adopting the SOP 98-1 was to increase net income by $1,039 for the year
ended December 31, 1999.
20
<PAGE> 21
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
D) CASH EQUIVALENTS
The Company considers all liquid debt instruments purchased with a
maturity date of three months or less at acquisition to be cash
equivalents. Cash equivalents are stated at cost plus accrued interest,
which approximates fair value.
21
<PAGE> 22
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
nonparticipating 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 nonparticipating 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 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
nonparticipating life insurance policies are recognized as revenue when
due. Investment income is recorded as revenue when due.
MSS and formerly NASL Financial (collectively the Adviser) are
responsible for managing the corporate and business affairs of MIT and
act as investment adviser to MIT. As compensation for its investment
advisory services, the Adviser receives advisory fees based on the
daily average net assets of the portfolios. The Adviser, as part of its
advisory services, is responsible for selecting and compensating
subadvisers 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 subadviser compensation
from the North American Funds ("NAF") through October 1, 1997, the date
the Company sold NAF. Subadviser 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.
23
<PAGE> 24
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. INVESTMENTS AND INVESTMENT INCOME
A) FIXED-MATURITY SECURITIES
At December 31, 1999, 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 LOSSES FAIR VALUE
AS AT DECEMBER 31, GAINS
($ thousands) 1999 1998 1999 1998 1999 1998 1999 1998
------------------------------ ---------- ---------- -------- ------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government $ 28,634 $ 18,266 $ 94 $1,144 $ (740) $ (28) $ 27,988 $ 19,382
Corporate 92,532 100,705 122 3,376 (2,486) (35) 90,168 104,046
Mortgage-backed 28,234 16,812 27 131 (406) (68) 27,855 16,875
Foreign governments 5,924 16,129 23 151 - (8) 5,947 16,272
States/political subdivisions 1,058 1,057 - 111 94) - 964 1,168
------------------------------ ---------- ---------- -------- ------- --------- -------- --------- ---------
TOTAL FIXED-MATURITY $ 156,382 $152,969 $ 266 $4,913 $(3,726) $(139) $152,922 $157,743
SECURITIES
------------------------------ ---------- ---------- -------- ------- --------- ------- --------- ---------
</TABLE>
Proceeds from sales of fixed-maturity securities during 1999 were
$81,874 (1998, $23,780; 1997, $53,325).
The contractual maturities of fixed-maturity securities at December 31,
1999 are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
<TABLE>
<CAPTION>
($ thousands) AMORTIZED COST FAIR VALUE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIXED-MATURITY SECURITIES
One year or less $ 42,477 $ 42,567
Greater than 1; up to 5 years 49,172 48,582
Greater than 5; up to 10 years 18,299 17,505
Due after 10 years 18,200 16,413
Mortgage-backed securities 28,234 27,855
-----------------------------------------------------------------------------------------------------------
TOTAL FIXED-MATURITY SECURITIES $156,382 $152,922
-----------------------------------------------------------------------------------------------------------
</TABLE>
Fixed-maturity securities with a fair value of $6,108 and $6,105 at
December 31, 1999 and 1998, respectively, were on deposit with, or in
custody accounts on behalf of, state insurance departments to satisfy
regulatory requirements.
24
<PAGE> 25
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
B) INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturity securities $9,945 $ 9,904 $7,250
Short-term investments 2,960 2,503 1,126
Other invested assets - 19 -
-----------------------------------------------------------------------------------------------------------
Gross investment income 12,905 12,426 8,376
-----------------------------------------------------------------------------------------------------------
Investment expenses (184) (248) (470)
-----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $12,721 $ 12,178 $7,906
-----------------------------------------------------------------------------------------------------------
</TABLE>
The gross realized gains and losses on the sales of investments were as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturity securities:
Gross realized gains $311 $724 $788
Gross realized losses (577) (5) (7)
Equity securities
Gross realized losses - - (250)
-----------------------------------------------------------------------------------------------------------
NET REALIZED (LOSS) GAIN ($266) $719 $531
-----------------------------------------------------------------------------------------------------------
</TABLE>
4. COMPREHENSIVE INCOME
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
---------------------------------------------------------------- -------------- ------------ -------------
<S> <C> <C> <C>
NET INCOME $ 59,852 $ 44,420 $ 33,233
---------------------------------------------------------------- -------------- ------------ -------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Unrealized holding (losses) gains arising during the period (4,861) 1,351 1,036
Less:
Reclassification adjustment for realized (losses) gains
included In net income (173) 467 345
---------------------------------------------------------------- -------------- ------------ -------------
Other comprehensive (loss) income (4,688) 884 691
---------------------------------------------------------------- -------------- ------------ -------------
COMPREHENSIVE INCOME $ 55,164 $ 45,304 $ 33,924
---------------------------------------------------------------- -------------- ------------ -------------
</TABLE>
Other comprehensive (loss) income is reported net of income taxes
(benefit) of $(1,513), $476, and $372 for 1999, 1998, and 1997,
respectively.
25
<PAGE> 26
5. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
----------------------------------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance at January 1 $ 449,332 $ 364,983 $ 290,610
Capitalization 248,483 138,527 123,965
Amortization (44,554) (53,499) (40,649)
Amortization included in discontinued - - (1,707)
operations
Amortization included in gain on disposal of - - (6,943)
discontinued operations
Effect of net unrealized losses (gains) on 2,033 (679) (293)
securities available-for-sale
----------------------------------------------- -------------------- ------------------- ------------------
BALANCE AT DECEMBER 31 $ 655,294 $ 449,332 $ 364,983
----------------------------------------------- -------------------- ------------------- ------------------
</TABLE>
6. INCOME TAXES
The components of income tax expense from continuing operations were as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
----------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Current expense (benefit) $ 8,437 $ 17,001 $ (723)
Deferred expense 24,269 6,872 15,767
----------------------------------------------------- ----------------- ----------------- -----------------
TOTAL EXPENSE $ 32,706 $ 23,873 $15,044
----------------------------------------------------- ----------------- ----------------- -----------------
</TABLE>
Significant components of the Company's net deferred tax liability are
as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31
($ thousands) 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Financing arrangements $ 136 $ 1,289
Unrealized losses on securities available for sale 1,048 -
-----------------------------------------------------------------------------------------------------------
Gross deferred tax assets 1,184 1,289
Valuation allowance (657) -
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets 527 1,289
-----------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred policy acquisition costs (43,559) (22,017)
Unrealized gains on securities available-for-sale - (1,122)
Other (3,501) (1,927)
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (47,060) (25,066)
-----------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ (46,533) $ (23,777)
-----------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, the Company had $3,460 of unrealized capital
losses in its available-for-sale portfolio. Under federal tax law,
utilization of these capital losses, when realized, is limited to use
as an offset against capital gains. The Company believes that it is
more likely than not that it will be unable to realize the benefit of
the full deferred tax asset related to the net unrealized capital
losses. The Company has therefore, established a valuation allowance
for the amount in excess of the available capital gains. The Company
believes that it will realize the full benefit of its remaining
deferred tax assets.
26
<PAGE> 27
6. INCOME TAXES (CONTINUED)
The Company is a member of the MWLH-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 $11,077, $12,516 and $531 in
1999, 1998 and 1997, respectively.
7. 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.
The Company has entered into two indemnity coinsurance agreements to
reinsure 100% of all contractual liabilities arising from the fixed
portion of both in-force and new variable annuity business written by
the Company. Under these agreements, each reinsurer, one unaffiliated
and one affiliated, receives the fixed portion of all premiums and
transfers received by the Company. Each reinsurer reimburses the
Company for all claims and provides expense allowances to cover
commissions and other costs associated with the reinsured business.
The Company has modified coinsurance agreements with two unaffiliated
life insurance companies. The treaties cover the quota share of all
elements of risk under the variable portion of certain variable annuity
policy forms. Another treaty, recaptured in 1999, with an unaffiliated
life insurance company covered the variable portion of certain annuity
contracts written prior to December 31, 1996.
The Company has treaties with three reinsurers, two unaffiliated and
one affiliated, to reinsure its Minimum Death Benefit Guarantee risk.
In addition, the Company reinsures a portion of its risk related to
waiving surrender charges at death. The Company is paying the
reinsurers an asset- based premium, the level of which varies with both
the amount of exposure to this risk and the realized experience.
27
<PAGE> 28
7. FINANCING AND REINSURANCE AGREEMENTS (CONTINUED)
The Company has a treaty with an unaffiliated reinsurer to reinsure a
quota share of the variable portion of the Company's variable life
insurance contracts. In addition, the reinsurer assumes the product's
net amount at risk in excess of the Company's retention limit on a
yearly renewable term basis.
During 1998, MNY entered into reinsurance agreements with various
reinsurers to reinsure face amounts in excess of $100 for its
traditional nonparticipating insurance product. To date, there have
been no reinsurance recoveries under these agreements.
In the event of insolvency of a reinsurer, the Company remains
primarily liable to its policyholders. Failure of reinsurers to honor
their obligations could result in losses to the Company and,
accordingly, the Company periodically monitors the financial condition
of its reinsurers.
The Company has not entered into any reinsurance agreements in which
the reinsurer may unilaterally cancel any reinsurance for reasons other
than nonpayment of premiums or other similar credits or a significant
change in the ownership of the Company. The Company does not have any
reinsurance agreements in effect under which the amount of losses paid
or accrued through December 31, 1999 would result in a payment to the
reinsurer of amounts which, in the aggregate and allowing for offset of
mutual credits from other reinsurance agreements with the same
reinsurer, exceed the total direct premiums collected under the
reinsured policies.
8. SHAREHOLDER'S EQUITY
The Company has one class of capital stock:
<TABLE>
<CAPTION>
AS AT DECEMBER 31:
($ thousands) 1999 1998
---------------------------------------------------------------- -------------------------- ----------------
<S> <C> <C>
AUTHORIZED:
3,000 Common shares, par value $1,000
ISSUED AND OUTSTANDING:
2,600 Common shares $ 2,600 $2,600
---------------------------------------------------------------- -------------------------- ----------------
</TABLE>
28
<PAGE> 29
8. SHAREHOLDER'S EQUITY (CONTINUED)
In December 1999, the Company received a capital contribution of
$28,049 from MWLH.
In October 1997, the Company received a capital contribution of $47,731
from MWLH to support expansion of its New York operations.
The net assets of MNA and MNY available to MWLH as dividends are
generally limited to, and cannot be made except from, earned statutory
basis profits. The maximum amount of dividends that may be paid by life
insurance companies without prior approval of the Insurance
Commissioners of the States of Delaware and New York is subject to
restrictions relating to statutory surplus and net gain from operations
on a statutory basis.
Net (loss) income and capital and surplus, as determined in accordance
with statutory accounting principles for MNA and MNY were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MNA:
Net (loss) income $ (2,524) $ 28,067 $ 22,259
Net capital and surplus 171,094 157,940 139,171
MNY:
Net income (loss) 932 (5,678) (1,562)
Net capital and surplus 63,470 62,881 68,336
-----------------------------------------------------------------------------------------------------------
</TABLE>
State regulatory authorities prescribe statutory accounting practices
that differ in certain respects from accounting principles generally
accepted in the United States followed by stock life insurance
companies. The significant differences relate to investments, deferred
acquisition costs, deferred income taxes, nonadmitted asset balances
and reserve calculation assumptions.
MNA's broker dealer subsidiary, MSS, is subject to the Securities and
Exchange Commission's (SEC) "Net Capital Rule" as defined under rule
15c3-1. At December 31, 1999 and 1998, the net capital of the broker
dealer exceeded the SEC's minimum capital requirements.
9. RELATED-PARTY TRANSACTIONS
The Company utilized various services provided by MLI in 1999, 1998 and
1997, such as legal, personnel, investment accounting and other
corporate services. The charges for these services were approximately
$11,751, $12,752 and $8,229 in 1999, 1998 and 1997, respectively. At
December 31, 1999 and 1998, the Company had a net liability to MLI for
these services and interest accrued on notes payable of $8,341 and
$180, respectively. At December 31, 1999 and 1998, the payable is
offset by a receivable from MIT and MLI for expenses paid on their
behalf of $434 and $792, respectively. In addition, the Company has an
intercompany payable to MWLH relating to federal income taxes of $2,360
and $5,000 reflected in the intercompany payable at December 31, 1999
and 1998, respectively.
29
<PAGE> 30
9. RELATED-PARTY TRANSACTIONS (CONTINUED)
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, 6, 7, 8, 10, 12, 13 and 14 for additional related-party
transactions).
10. NOTES PAYABLE TO AFFILIATES AND LINES OF CREDIT
MNA has promissory notes from The Manufacturers Life Insurance Company
(U.S.A.) ("ManUSA") for $291,100 including an additional borrowing of
$70,100 during 1999. 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, 1999
and 1998 is $834 and $419, 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.
MNA and MNY have unsecured lines of credit with State Street Bank and
Trust Company totaling $15,000, bearing interest at the bank's money
market rate plus 50 basis points. There were no outstanding advances
under the lines of credit at December 31, 1999 and 1998.
Interest expense and interest paid in 1999 were $15,546 and $15,250,
respectively (1998 $13,506 and $16,861; 1997 $10,887 and $9,354).
11. OTHER INSURANCE EXPENSES
Other insurance expenses were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ thousands) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Selling and administrative expenses $69,757 $49,732 $42,581
Subadvisory fees 53,118 38,701 26,364
General operating expenses 69,959 47,191 31,440
-----------------------------------------------------------------------------------------------------------
TOTAL
$192,834 $135,624 $100,385
-----------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 31
12. EMPLOYEE BENEFITS
A) EMPLOYEE RETIREMENT PLAN
Prior to July 1, 1998, MNA and MNY, participated in a noncontributory
defined benefit pension plan (the Nalaco Plan) sponsored by MLI,
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 were fully funded;
current pension costs were funded as they accrue.
Effective July 1, 1998, the Nalaco Plan was merged into the Manulife
Plan as approved by the Board of Directors of MLI. 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 rates (PBCG). Future contribution credits under the Cash
Balance Plan vary by service, and interest credits are a function of
the 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 1999, 1998 or 1997 because the plan
was subject to the full funding limitation under the Internal Revenue
Code.
At December 31, 1999, the projected benefit obligation based on an
assumed interest rate of 7.5% was $68,410. The fair value of plan
assets invested in ManUSA's general fund deposit administration
insurance contracts was $86,777.
Prior to July 1, 1998, MNA also participated in an unfunded
Supplemental Executive Retirement Plan (Manulife SERP) sponsored by MLI
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, and the
pension benefit is a final average benefit based on the executive's
highest 5-year average earnings. Compensation was not limited by, and
benefits were not restricted by the Internal Revenue Code Section 415.
31
<PAGE> 32
12. EMPLOYEE BENEFITS (CONTINUED)
A) EMPLOYEE RETIREMENT PLAN (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 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 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 $300, $285 and
$353 in 1999, 1998 and 1997, respectively.
C) OTHER POSTRETIREMENT BENEFIT PLAN
In addition to the retirement plan, the Company participates in the
other postretirement benefit plan of ManUSA which provides retiree
medical and life insurance benefits to those who have attained age 55
with ten or more years of service. The plan provides the 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 other postretirement benefit cost of 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
13. LEASES
In January 1999, ManUSA entered into a new sublease agreement on behalf
of the Company. In September 1999, the Company surrendered its old
office space and was released from its lease commitment. The Company
moved into the new office space in September 1999 with payments to the
landlord commencing January 1, 2000. The free rent from September to
December 1999 is being amortized over the term of the lease. For the
years ended December 31, 1999, 1998 and 1997, the Company incurred rent
expenses of $3,105, $1,617 and, $1,316, respectively. The Company also
leases various office equipment under operating lease agreements.
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>
2000 4,028
2001 4,012
2002 4,008
2003 3,994
2004 and after 19,234
------------------------------------------------------
Total $35,276
------------------------------------------------------
</TABLE>
14. GUARANTEE AGREEMENT
Pursuant to a guarantee agreement, MLI unconditionally guarantees that
it will, on demand, make funds available to the Company for the timely
payment of contractual claims made under the fixed portion of the
variable annuity contracts issued by MNA. The guarantee covers the
outstanding fixed portion of variable annuity contracts, including
those issued prior to the date of the guarantee agreement.
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 $223 in 1997 were incurred on the sale
and netted against the realized gain.
33
<PAGE> 34
15. DISCONTINUED OPERATIONS (CONTINUED)
The operating results related to discontinued operations are summarized
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
($ thousands) 1997
------------------------------------------ -------------------
<S> <C>
Advisory fees, commissions
and distribution revenues $ 4,605
------------------------------------------ -------------------
Loss from operations before income tax $ (217)
benefit
Income tax benefit 76
------------------------------------------ -------------------
Loss from operations, net of tax $ (141)
------------------------------------------ -------------------
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ----------------------------- -------------------------------
($ thousands) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------------------------------- ---------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed-maturity securities 152,922 152,922 157,743 157,743
Short-term investments 41,311 41,311 34,074 34,074
Policy loans 7,049 7,049 5,175 5,175
Cash and cash equivalents 27,790 27,790 10,320 10,320
Due from reinsurers 797,746 797,746 641,858 641,858
Separate account assets 16,022,215 16,022,215 12,188,420 12,188,420
LIABILITIES:
Policyholder liabilities and 139,764 137,717 102,252 98,312
accruals
Due to reinsurers 808,599 808,599 655,892 655,892
Notes payable to affiliates 311,100 311,100 241,000 241,000
Separate account liabilities 16,022,215 16,022,215 12,188,420 12,188,420
---------------------------------------- ----------- ----------- ----------- ------------
</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.
34
<PAGE> 35
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Due from Reinsurers: Fair value is equal to deposits made under the
contract and approximates the carrying value.
Separate Account Assets and Liabilities: The carrying amounts in the
balance sheet for separate account assets and liabilities approximate
their fair 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.
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.
35
<PAGE> 36
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Nothing to report.
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:
Name Position with the Company Principal Occupation
James R. Boyle Director* and President President of the Company,
Age: 40 July 1999 to present; Senior
Vice President, US
Annuities, Manulife
Financial, July 1999 to
present; Vice President,
Institutional Markets,
Manulife Financial, May 1998
to June 1999; Vice
President, Administration of
the Company, September 1996
to May 1998; Vice President,
Treasurer and Chief
Administrative Officer,
North America Funds, June
1994 to September 1996.
John D. DesPrez III Director* and Chairman of Executive Vice President,
Age: 43 the Board U.S. Operations, Manulife
Financial, January 1999 to
date; Senior Vice President,
US Annuities, Manulife
Financial, September 1996 to
December, 1998; President of
the Company, September 1996
to December, 1998; Vice
President, Mutual Funds,
Manulife Financial, January
1995 to September 1996.
John D. Richardson Director* Senior Executive Vice
Age: 62 President, U.S. Operations,
Manulife Financial, January
1999 to date; Executive Vice
President and General
Manager, U.S. Operations,
Manulife Financial, January
1995 to January 1999.
Robert Boyda Vice President, Investment Vice President, Investment
Age: 43 Management Services Management Services of the
Company, January 1997 to
present; Vice President,
Investment Management
Services, Manulife
Financial, July 1998 to
present; Assistant Vice
President, Investment
Management Services,
Manulife Financial August
1994 to January 1997;
General Manager, Retail
Banking, CIBC, January 1987
to April 1994.
36
<PAGE> 37
Name Position with the Company Principal Occupation
James D. Gallagher Vice President, Secretary Vice President, Legal
Age: 45 and General Counsel Services, Manulife
Financial, January 1996 to
date; President, The
Manufacturers Life Insurance
Company of New York, August
1999 to present; Vice
President, Secretary and
General Counsel of the
Company, June 1994 to date.
Kevin Hill Vice President, Business Vice President, Business
Age: 34 Implementation Implementation of the
Company, October 1999 to
present; Assistant Vice
President, Project
Management and Annuity
Operations of the Company,
May 1996 to October 1999;
Director, Support Services
of the Company, October 1994
to June 1996.
Brian A. Kroll Vice President, Product Vice President, Product
Age: 38 Development Development of the Company,
October 1999 to present;
Assistant Vice President,
Product Development of the
Company, November 1994 to
September 1999.
David W. Libbey Vice President, Treasurer, Vice President, Treasurer
Age: 52 and Chief Financial Officer and Chief Financial Officer
of the Company, December
1997 to present; Vice
President, Finance, US
Annuities, Manulife
Financial, June 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.
Jonnie M. Smith Vice President, Customer Vice President, Customer
Age: 51 Service and Administration Service and Administration
of the Company, October 1999
to present; Vice President,
Annuity Customer Services
and Operations, New England
Financial, July 1983 to
September 1999.
Janet Sweeney Vice President, Corporate Vice President, Human
Age: 49 Services Resources, U.S. Operations,
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 Vice President and Chief
Age: 44 Actuary Financial Officer, U.S.
Operations, Manulife
Financial, January 1996 to
present; Vice President and
Chief Actuary of the
Company, January 1986 to
present.
37
<PAGE> 38
Item 11 - Executive Compensation of the Registrant (also referred to as "MNA")
MNA's executive officers may also serve as officers of one or more of Manulife
Financial's affiliates. Allocations have been made as to such officers' time
devoted to duties as executive officers of MNA. The following table shows the
allocated compensation paid or awarded to or earned by MNA's Chief Executive
Officer for services provided to MNA and any other executive officer who had
allocated cash compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- ---------------------- ------- ----------- ----------- ------------ ----------- ------------- ----------- ----------
Name and Principal Year Salary Bonus(2) Other Restricted Securities LTIP All Other
Position Annual Stock Underlying Payout Compensa-
Compensa- Award(s) Options/ tion(5)
tion(3) SARs
- ---------------------- ------- ----------- ----------- ------------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James R. Boyle, 1999 $ 70,175 $ 83,994 $ 2,864 N/A N/A $116,525(4) $1,563
President(1)
John D. DesPrez III, 1999 $ 83,462 $104,688 $ 2,335 N/A N/A $215,625(4) $1,512
Chairman
Theodore F. 1999 $109,052 $ 94,302 $16,404 N/A N/A $ 9,330 $ 911
Kilkuskie, Former
President1
David W. Libbey, 1999 $133,230 $ 84,807 $ 8,868 N/A N/A N/A $2,395
Vice President,
Treasurer
Brian A. Kroll, 1999 $120,019 $ 44,177 $ 5,629 N/A N/A N/A $4,650
Vice President,
Product Development
Kevin S. Hill, 1999 $ 94,419 $ 41,900 $12,901 N/A N/A N/A $2,727
Vice President,
Business
Implementation
</TABLE>
1 Mr. Kilkuskie resigned and Mr. Boyle was elected President in July 1999.
2 Bonus for 1999 performance paid in 2000.
3 Does not include group health insurance since the plans are the same for all
salaried employees.
4 These amounts represent allocation of one half of payments Mr. DesPrez and Mr.
Boyle were entitled to receive through an arrangement available to them in
respect of the Company's purchase in 1999 of the shares of Manulife-Wood Logan
Holding Co., Inc. ("MWLH") that the Company did not already own. The other
half of the payments will be made to Mr. DesPrez & Mr. Boyle in June 2000. Mr.
DesPrez's and Mr. Boyle's participation in this arrangement was developed in
order to better align Mr. DesPrez's and Mr. Boyle's interests with those of
MWLH. Under this arrangement, Mr. DesPrez and Mr. Boyle have forfeited their
rights to receive any grants or payments under the current LTIP. As a result,
Mr. DesPrez and Mr. Boyle are not listed in the table "Long Term Incentive
Plan - Awards in Most Recently Completed Financial Year."
38
<PAGE> 39
5 Other Compensation includes the value of term life insurance premiums paid by
Manulife Financial 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 "MRCC") of the Board of
Directors is comprised of five external directors. The MRCC's principal mandate
is to approve the appointment, succession and remuneration of the Company's
Executive Vice Presidents and Senior Vice Presidents, including the Named
Executive Officers, excluding the President and Chief Executive Officer. The
MRCC also approves the compensation philosophy, policies and programs for all
other officers as well as the annual review of the Company's Annual Incentive
Plan awards, Long Term Incentive Plan grants and all Company pension plans.
The Corporate Governance and Nominating Committee of the Board of Directors
makes recommendations with respect to the compensation of the President and
Chief Executive Officer within the policies established by the MRCC, which are
reviewed and approved by the entire Board.
The Company's executive compensation policies are designed to recognize and
reward performance as well as to attract, retain, develop and motivate
employees. The MRCC seeks to align management compensation with shareholders'
interests and Company performance and to ensure that the total compensation
package is competitive with the median of the Company's comparator group. The
comparator group is comprised of major North American financial institutions
with emphasis on the five Schedule I Canadian banks and major North American
life insurance companies. Further, the Company ensures that its compensation
levels are competitive within local markets outside of Canada.
The Company's executive compensation program is comprised of three key
components: base salary, annual incentives and long term incentives.
SALARY
The Committee approves the salary ranges and salary increase levels for all of
Manulife Financial'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 Financial operates. Salary increases for Manulife Financial's
officers have been consistent with the salary increase programs approved for all
employees.
In establishing Manulife Financial's competitive position and developing annual
salary increase programs, Manulife Financial uses several annual surveys as
prepared by independent compensation consulting firms with reference to publicly
disclosed information.
ANNUAL INCENTIVE PLAN
Manulife Financial's Annual Incentive Plan ("AIP") provides executive officers
of Manulife Financial 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 Financial's comparator
groups;
(ii) supports, and aligns, with Manulife Financial's strategic
objectives; and
(iii) recognizes and rewards individual contributions and value
creation.
In conducting these reviews, Manulife Financial obtains advice from independent,
external consultants.
39
<PAGE> 40
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 $)(3)
Securities Performance or Other ------------------------------------------
Units or Other Period Until Threshold Maximum
Name Rights (#)(1) Maturation or Payout(2) ($ or #) Target ($ or #)(4) ($ or #)
---- --------------- ------------------------ ------------ ------------------ --------
<S> <C> <C> <C> <C> <C>
Theodore F. Kilkuskie 19,487 Jan. 1, 2003 N/A $70,199 N/A
David W. Libbey 4,980 Jan. 1, 2003 N/A $17,940 N/A
Brian A. Kroll no 1999 LTIP grant as was only promoted in late 1999
Kevin S. Hill no 1999 LTIP grant as was only promoted in late 1999
</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 Financial.
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 Financial'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 Financial and to provide an opportunity to share
in value creation as measured by changes in Manulife Financial's statutory
surplus. The LTIP is an appreciation rights plan which requires that a
substantial portion of any accumulated gain remain invested with Manulife
Financial during the participant's career with Manulife Financial.
The Committee reviews the LTIP on an annual basis having regard to Manulife
Financial'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.
40
<PAGE> 41
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 Financial'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%.
U.S. RETIREMENT PLANS
The executives of MNA earn pension benefits pursuant to their plan membership in
The Manulife Financial U.S. Cash Balance Plan. In addition they are also
eligible for benefits under The Manulife Financial U.S. Supplemental Cash
Balance Plan. They can also participate in the Manulife Financial 401(k) Savings
Plan.
The Manulife Financial Cash Balance Plan
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 $160,000 for 1999. Employees are vested after 3 years of
vesting service. Normal retirement age is 65. Pension benefits are provided to
those who terminate after three years of vesting service, and the normal
retirement benefit is actuarially equivalent to the cash balance account at
normal retirement date. Early benefits are actuarially equivalent to the normal
retirement benefits but are subsidized for participants who had attained age 45
and completed 5 or more years of vesting service on July 1, 1998 and who
terminate employment after attaining age 50 and completing 10 years of service.
The normal form of payment under the Cash Balance Plan is a life annuity, with
various optional forms available, including a lump sum equal to the cash balance
account.
COMPANY CONTRIBUTION CREDITS
Completed Years of Cash Balance Service
Credits As of December 31 Percentage of Eligible Pay
Less than 6 4%
6, but less than 11 5%
11, but less than 16 7%
16, but less than 21 9%
21 or more 11%
41
<PAGE> 42
Projected Cash Balance Plan pension benefits at age 65 payable as an annual life
annuity
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------------------------
15 20 25 30 35
------ ------ ------ ------ ------
Renumeration ($) $ $ $ $ $
- ---------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
$150,000 15,010 26,202 42,254 63,156 90,372
175,000 16,011 27,948 45,071 67,366 96,397
200,000 16,011 27,948 45,071 67,366 96,397
225,000 16,011 27,948 45,071 67,366 96,397
250,000 16,011 27,948 45,071 67,366 96,397
300,000 16,011 27,948 45,071 67,366 96,397
400,000 16,011 27,948 45,071 67,366 96,397
500,000 16,011 27,948 45,071 67,366 96,397
</TABLE>
The Manulife Financial U.S. Supplemental Cash Balance Plan
In addition to their pension plan benefits, executives officers 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. During the period of an executive's active participation
in the plan, annual company contributions are made with respect to the portion
of the executive's earnings which is in excess of $160,000 for 1999 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 his or her 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 benefits they would have been entitled
to but for the limitations, in Internal Revenue Code Sections 401(a) (17) and
415. Benefits are provided to those who terminate after three years. The default
form of payment under the plan is a lump sum, although participants may elect to
receive payment in the form of an annuity provided that such election is made
within the time prescribed in the plan.
<TABLE>
<CAPTION>
Completed Years of Cash Balance Service Percentage of Eligible Pay up Pay Percentage of Eligible Pay over
Credits As of December 31 to $200,000 $200,000
<S> <C> <C>
Less than 6 4% 4%
6, but less than 11 5% 5%
11, but less than 16 7% 5%
16, but less than 21 9% 5%
21 or more 11% 5%
</TABLE>
42
<PAGE> 43
Projected Supplemental pension benefits at age 65 payable as an annual life
annuity
SUPPLEMENTAL
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------
15 20 25 30 35
------ ------ ------ ------- -------
Renumeration ($) $ $ $ $ $
- ---------------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
$150,000 0 0 0 0 0
175,000 1,501 2,620 4,225 6,316 9,037
200,000 4,003 6,987 11,268 16,842 24,099
225,000 6,258 10,540 16,510 24,284 34,407
250,000 8,513 14,093 21,753 31,727 44,714
300,000 13,023 21,198 32,238 46,612 65,330
400,000 22,043 35,409 53,208 76,383 106,560
500,000 31,064 49,620 74,178 106,154 147,790
</TABLE>
Projected Cash Balance and Supplemental pension benefits at age 65 payable as an
annual annuity
COMBINED
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------
15 20 25 30 35
------ ------ ------- ------- -------
Renumeration ($) $ $ $ $ $
- ---------------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
$150,000 15,010 26,202 42,254 63,156 90,372
175,000 17,512 30,568 49,296 73,682 105,434
200,000 20,014 34,935 56,339 84,208 120,496
225,000 22,269 38,488 61,581 91,650 130,804
250,000 24,524 42,041 66,824 99,093 141,111
300,000 29,034 49,146 77,309 113,978 161,727
400,000 38,054 63,357 98,279 143,749 202,957
500,000 47,075 77,568 119,249 173,520 244,187
</TABLE>
Messrs. Boyle, DesPrez, Kilkuskie, Libbey, Kroll and Hill have 7.583, 9.0,
4.583, 2.583, 5.083 and 6.5 years of credited service respectively as at
December 31, 1999.
The Manulife Financial U.S. 401(k) Savings Plan
In addition, to the above plans a 401(k) Savings Plan is offered. The plan
allows employees of MNA to contribute on a pre-tax basis 1% to 15% of their
earnings up to the limits imposed by the Internal Revenue Code. The yearly
maximum an employee can contributed is $10,000 for 1999. The Company matches 50%
of the first 6% of contributions. Employees become 100% vested in the employer
matching contributions as outlined in the vesting schedule below. Additionally
they become 100% vested if they retire on or after age 65, become disabled or
die.
Years of Vesting Service Vested Percentage
Less than 2 years 0%
2 years but less than 3 50%
3 years and thereafter 100%
43
<PAGE> 44
EMPLOYMENT AGREEMENTS
In September 1999, a Change in Control Agreement was entered into by The
Manufacturers Life Insurance Company (The Parent Company) and Mr. John D.
DesPrez. The purpose of this Agreement is to protect shareholder interests by
eliminating the distractions of a change in control on key employees of the
Company, allowing such key employees to focus on the business of the Company by
providing security and incentives to remain with the Company.
For the purpose of the Agreements, "Change in Control" is defined as follows:
o an acquisition of 20 per cent of The Parent Company's voting shares;
o a majority change in the Board of Directors of the Parent Company; or
o the entering into of a Management Agreement with another insurance company
or financial institution whereby the management of Manulife Financial
Corporation or The Parent Company is transferred to such insurance company
or financial institution.
The Change in Control provisions will be triggered under the following
circumstances:
o for Mr. DesPrez, an involuntary or constructive termination within a
specified protection window following a Change in Control.
The Change in Control severance benefits will be paid as a lump sum at two times
the annual compensation (base salary and annual incentive only) for Mr.
DesPrez,. At the time of Change in Control, long term incentives and retirement
benefits will vest. In addition, welfare benefits will continue for the number
of years equal to the severance multiple upon a Change in Control related
termination.
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>
Common Stock MWLH 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.
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:
44
<PAGE> 45
a. Report of Ernst & Young LLP, Independent Auditors, dated February 28,
2000.
b. Consolidated Balance Sheets at December 31, 1999 and 1998.
c. Consolidated Statement of Income for the Years ended December 31, 1999,
1998 and 1997.
d. Consolidated Statements of Changes in Shareholder's Equity for the
Years ended December 1999, 1998 and 1997.
e. Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
f. Notes to Financial Statements - December 31, 1999.
(2) Financial Statement Schedules:
a. Schedule I - Summary of Investments - Other than Investments in Related
Parties
b. Schedule III - Supplementary Insurance Information
c. Schedule IV - Reinsurance
(3) Exhibits (the Registrant is also referred to as the "Company")
- ------------------- ------------------------------------------------------------
Exhibit No. Description
- ------------------- ------------------------------------------------------------
1(a) Underwriting Agreement between the Company and Manufacturers
Securities Services, LLC, formerly NASL Financial Services,
Inc. (Underwriter) - Incorporated by reference to Exhibit
(b)(3)(i) to Form N-4, file number 33-76162, filed March 1,
1999.
1(b)i Promotional Agent Agreement between Manufacturers Securities
Services, LLC, formerly NASL Financial Services, Inc.
(Underwriter), the Company and Manulife Wood Logan, Inc.
(formerly Wood Logan Associates, Inc.) Associates, Inc.
(Promotional Agent) - 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.
1(b)ii Amendment to Promotional Agent Agreement - 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 Not Applicable
3(i)(a) Certificate of Incorporation of the Company - 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.
3(i)(b) Certificate of Amendment of Certificate of Incorporation of
the Company, Name Change, July 1984 - 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.
3(i)(c) Certificate of Amendment of Certificate of Incorporation of
the Company, Authorization of Capital, December 1994 -
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.
3(i)(d) Certificate of Amendment of Certificate of Incorporation of
the Company, Name Change, March 1997 - 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.
45
<PAGE> 46
3(i)(e) Certificate of Amendment of Certificate of Incorporation of
the Company, Registered Agent, July 1997 - 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.
3(ii) Amended and Restated By-Laws of the Company - 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(i) Form of Individual Single Payment Deferred Fixed Annuity
Non-Participating Contract - Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-1, file number
33-6011, filed June 14, 1996
4(ii) Form of Group Single Payment Deferred Fixed Annuity
Non-Participating Contract - Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-1, file number
33-6011, filed June 14, 1996
4(iii) Individual Retirement Annuity Endorsement - Incorporated by
reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
4(iv) ERISA Tax-Sheltered Annuity Endorsement - Incorporated by
reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
4(v) Tax-Sheltered Annuity Endorsement - Incorporated by
reference to Exhibit 4 to Registration Statement on Form
S-1, file number 33-6011, filed June 14, 1996
4(vi) Section 401 Plans Endorsement - Incorporated by reference to
Exhibit 4 to Registration Statement on Form S-1, file number
33-6011, filed June 14, 1996
5 Opinion and Consent of James D. Gallagher, Esq. -
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
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 -
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
(10)(ii) Reinsurance and Guaranteed Death Benefits Agreement between
the Company and Connecticut General Life Insurance Company -
Incorporated by reference to Exhibit (b)(7)(i) to
Registration Statement on Form N-4, file number 33-76162,
filed March 1, 1996
(10)(iii) Reinsurance Agreement between the Company and PaineWebber
Life Insurance Company - Incorporated by reference to
Exhibit (b)(7)(iii) to Registration Statement on Form N-4,
file number 33-76162, filed March 1, 1996
(10)(iv) Coinsurance Agreement between the Company and Peoples
Security Life Insurance Company - 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
(10)(v) Reinsurance and Accounts Receivable Agreements between the
Company and ITT Lyndon Life - 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
46
<PAGE> 47
(10)(vi) Automatic Modified -Coinsurance Reinsurance Agreement
between the Company and Transamerica Occidental Life
Insurance Company - 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
(10)(vii) Automatic Yearly Renewable Term Reinsurance Agreement
between the Company and Transamerica Occidental Life
Insurance Company - 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
(10)(viii) Amendment No. 1 to the Variable Annuity Guaranteed Death
Benefit Reinsurance Agreement between the Company and
Connecticut General Life Insurance Company - 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
(10)(ix) Coinsurance Agreement between the Company and The
Manufacturers Life Insurance Company (USA) Incorporated by
reference to Form 10K, file number 812-06037, filed March
31, 1998 on behalf of The Manufacturers Life Insurance
Company of North America
11 Not Applicable
12 Not Applicable
13 Not Applicable
14 Not Applicable
15 Not Applicable
16 Not Applicable
17 Not Applicable
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 The Company has the following wholly owned subsidiaries:
Manufacturers Securities Services, LLC and The Manufacturers
Life Insurance Company of New York
22 Not Applicable
23(i) Not Applicable
23(ii) Not Applicable
24 (i) Power of Attorney - John D. Richardson, Director and
Chairman of the Company - 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.
24(ii) Power of Attorney - David W. Libbey, Principal Financial
Officer of the Company - 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.
47
<PAGE> 48
24(iii) Power of Attorney - Peter Hutchison, Director of the Company
- 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.
24(iv) Power of Attorney - John D. DesPrez III - Incorporated by
reference to Exhibit (14)(iv) to post-effective amendment
no. 1 to Form N-4, file number 333-38081 filed April 19,
1999.
25 Not Applicable
26 Not Applicable
27 Financial Data Schedule - Filed herein.
28 Not Applicable
(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.
48
<PAGE> 49
FINANCIAL STATEMENT SCHEDULES
49
<PAGE> 50
The Manufacturers Life Insurance Company of North America
Schedule I - Summary of Investments
December 31, 1999
($ Thousands)
<TABLE>
<CAPTION>
Amount Shown in the
Consolidated Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturities:
United States Government $ 28,634 $ 27,988 $ 27,988
Corporate debt securities 92,532 90,168 90,168
Mortgage-backed securities 28,234 27,855 27,855
Foreign Governments 5,924 5,947 5,947
States / Political subdivisions 1,058 964 964
------------------------- ------------------------ ----------------------
Total fixed maturities $156,382 $152,922 $152,922
========================= ======================== ======================
Policy loans 7,049 7,049
Short-term investments 41,311 41,311
------------------------- ----------------------
Total investments $204,742 $201,282
========================= ======================
</TABLE>
50
<PAGE> 51
The Manufacturers Life Insurance Company of North America
Schedule III - Supplementary Insurance Information
($ 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
Segments Costs Expenses Premiums Payable Revenue Income Expenses Costs* Expenses*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Wealth
Management 654,336 139,561 - - - 12,514 6,735 44,474 192,452
Insurance 958 203 - - 175 207 - 80 382
-------------------------------------------------------------------------------------------------------------------
Total 655,294 139,764 - - 175 12,721 6,735 44,554 192,834
===================================================================================================================
1998
Wealth
Management 449,281 102,245 - - - 12,176 4,885 53,493 133,255
Insurance 51 7 - - - 2 - 6 2,399
-------------------------------------------------------------------------------------------------------------------
Total 449,332 102,252 - - - 12,178 4,885 53,499 135,624
===================================================================================================================
1997
Wealth
Management 364,984 92,750 - - - 7,906 4,986 42,356 110,221
-------------------------------------------------------------------------------------------------------------------
Total 364,984 92,750 - - - 7,906 4,986 42,356 110,221
===================================================================================================================
</TABLE>
* For 1997, mutual fund business related items are included in discontinued
operations.
51
<PAGE> 52
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
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Life insurance inforce 374,308 263,621 - 110,687 0%
===========================================================================
Insurance premiums life 0%
504 329 - 175
===========================================================================
Year ended December 31, 1998
Life insurance inforce 269,738 170,655 - 99,083 0%
===========================================================================
Insurance premiums life - - - - 0%
===========================================================================
Year ended December 31, 1997
Life insurance inforce 151,259 84,130 - 67,129 0%
===========================================================================
Insurance premiums life - - - - 0%
===========================================================================
</TABLE>
52
<PAGE> 53
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/JAMES R. BOYLE
-------------------------------------------------------
James R. Boyle, Principal Executive Officer
By: /s/DAVID W. LIBBEY
-------------------------------------------------------
David W. Libbey, Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: March 30, 2000
53
<PAGE> 54
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 on the 30th day of March, 2000.
SIGNATURE TITLE
*
- ------------------------------------
John D. DesPrez, III Director and Chairman of the Board
/s/JAMES R. BOYLE
- ------------------------------------
James R. Boyle President and Director (Principal
Executive Officer)
*
- ------------------------------------
John D. Richardson Director
/s/DAVID W. LIBBEY
- ------------------------------------
David W. Libbey Vice President, Treasurer and Chief
Financial Officer (Principal and
Accounting Officer)
/s/ DAVID W. LIBBEY
- ------------------------------------
*By David W. Libbey
Attorney-in-Fact Pursuant to
Powers of Attorney
54
<PAGE> 55
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
55
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 152,922
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 201,282
<CASH> 27,790
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 655,294
<TOTAL-ASSETS> 17,726,298
<POLICY-LOSSES> 139,764
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 16,022,215
<NOTES-PAYABLE> 311,100
0
0
<COMMON> 2,600
<OTHER-SE> 334,643
<TOTAL-LIABILITY-AND-EQUITY> 17,726,298
175
<INVESTMENT-INCOME> 12,721
<INVESTMENT-GAINS> (266)
<OTHER-INCOME> 340,893
<BENEFITS> 6,735
<UNDERWRITING-AMORTIZATION> 44,554
<UNDERWRITING-OTHER> 192,834
<INCOME-PRETAX> 92,558
<INCOME-TAX> 32,706
<INCOME-CONTINUING> 59,852
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,852
<EPS-BASIC> 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
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