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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-6011
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Annuity Service Office: Mailing Address:
500 Boylston Street Post Office Box 9230
Suite 400 Boston, Massachusetts
Boston, Massachusetts 02116-3739 02205-9230
(617) 663-3000
(800) 344-1029
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THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
VENTURE MVA
DEFERRED FIXED ANNUITY CONTRACT
NON-PARTICIPATING
This prospectus describes Venture Market Value Adjusted Annuity
("VENTURE MVA"), a single payment deferred fixed annuity contract. Venture MVA
is offered by The Manufacturers Life Insurance Company of North America ("WE",
"US" or the "COMPANY").
The prospectus describes both an individual deferred annuity contract
and a participating interest in a group deferred annuity contract. Both are
designed to provide retirement income pursuant to either non-qualified
retirement plans or plans qualifying for special income tax treatment under the
Internal Revenue Code of 1986, as amended (the "CODE"). As used herein, "YOU"
refers to the owner of a contract.
- You make a single purchase payment for the contract.
-- The minimum purchase payment is $5,000.
-- The maximum purchase payment (without our prior
approval) is $500,000.
- You may not make additional purchase payments for a
contract but may purchase additional contracts at the then
prevailing rates and terms.
- You designate the guarantee period to which we allocate
your purchase payment.
- You select one or more annuity options or an alternate
form of settlement acceptable to us.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE CONTRACT THAT A PROSPECTIVE PURCHASER SHOULD KNOW
BEFORE INVESTING.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, THE CONTRACT
OWNER BEARS THE INVESTMENT RISK THAT THE GUARANTEED INTEREST RATES OFFERED BY US
AT THE TIME OF WITHDRAWAL, TRANSFER OR THE START OF ANNUITY PAYMENTS MAY BE
HIGHER THAN THE GUARANTEED INTEREST RATE APPLIED TO THE CONTRACT WITH THE RESULT
THAT THE AMOUNT YOU RECEIVE UPON WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY BE
REDUCED BY THE MARKET VALUE ADJUSTMENT AND MAY BE LESS THAN YOUR ORIGINAL
INVESTMENT IN THE CONTRACT. SEE "MARKET VALUE ADJUSTMENT" ON PAGE 15 OF THIS
PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, (THE "SEC"). NEITHER THE SEC NOR ANY STATE HAS DETERMINED
WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY.
The date of this prospectus is May 1, 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SPECIAL TERMS.................................................................................... 4
SUMMARY.......................................................................................... 6
GENERAL INFORMATION ABOUT THE COMPANY............................................................ 8
AVAILABLE INFORMATION............................................................................ 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................. 9
DETAILED DESCRIPTION OF THE CONTRACT............................................................. 9
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT.................................................. 9
ACCUMULATION PROVISIONS..................................................................... 9
Purchase Payment........................................................................ 9
Guarantee Periods....................................................................... 10
Transfers Among Guarantee Periods....................................................... 10
Telephone Transactions.................................................................. 10
Renewals................................................................................ 10
Withdrawals............................................................................. 10
Death Benefit Before Maturity Date...................................................... 11
ANNUITY PROVISIONS.......................................................................... 12
General................................................................................. 12
Annuity Options......................................................................... 12
Death Benefit on or After Maturity Date................................................. 13
OTHER CONTRACT PROVISIONS................................................................... 13
Ten Day Right to Review................................................................. 13
Ownership............................................................................... 14
Beneficiary............................................................................. 14
Annuitant............................................................................... 14
Modification............................................................................ 14
Our Approval............................................................................ 15
Discontinuance of New Owners............................................................ 15
MARKET VALUE ADJUSTMENT..................................................................... 15
CHARGES AND DEDUCTIONS...................................................................... 16
Withdrawal Charge....................................................................... 16
Reduction or Elimination of Withdrawal Charge........................................... 16
Taxes................................................................................... 17
Administration Fee...................................................................... 17
REINSURANCE...................................................................................... 17
ADDITIONAL INFORMATION ABOUT MANULIFE NORTH AMERICA.............................................. 18
Description of Business..................................................................... 18
Management Discussion & Analysis............................................................ 18
Selected Financial Data..................................................................... 23
The Manufacturers Life Insurance Company of North America Separate Account D................ 23
Distribution of the Contract................................................................ 23
Confirmation Statements..................................................................... 24
Legal Proceedings........................................................................... 24
Legal Matters............................................................................... 24
Independent Auditors........................................................................ 24
Notices and Reports to Contract Owners...................................................... 24
Contract Owner Inquiries.................................................................... 24
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
FEDERAL TAX MATTERS.............................................................................. 24
Introduction................................................................................ 24
Our Tax Status.............................................................................. 24
Taxation of Annuities in General............................................................ 25
Qualified Retirement Plans.................................................................. 27
Federal Income Tax Withholding.............................................................. 30
GENERAL MATTERS.................................................................................. 30
Restrictions Under the Texas Optional Retirement Program.................................... 30
APPENDIX A - EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE........................................ A-1
APPENDIX B - MARKET VALUE ADJUSTMENT EXAMPLES.................................................... B-1
APPENDIX C - STATE PREMIUM TAXES................................................................. C-1
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
MVA.PRO5/2000
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SPECIAL TERMS
Annuitant Any individual person or persons to
whom annuity payments are made and
whose life is used to determine the
duration of annuity payments involving
life contingencies. The annuitant is as
designated on the contract or
certificate specifications page or in
the application, unless changed.
Annuity Option One of several alternative methods by
which payment of the proceeds may be
made.
Beneficiary The individual person, persons, or
entity to whom we pay the death benefit
proceeds following the death of the
owner, or in certain circumstances, an
annuitant.
Certificate For a group contract, the documents we
issued to each owner which summarize
the owner's rights and benefits under
the contract.
Contingent The individual person, persons or
Beneficiary entity who becomes the beneficiary if
the beneficiary is not alive.
Contract For an individual contract, the
individual annuity contract. For a
group contract, the certificate
evidencing a participating interest in
the group annuity contract. Any
reference in this prospectus to
"contract" includes the underlying
group annuity contract.
Contract For an individual contract, the
Anniversary anniversary of the contract date. For a
group contract, the anniversary of the
date we issue a certificate under the
contract.
Contract Date In the case of an individual annuity
contract, the date we issue the
contract as designated on the contract
specifications page. In the case of a
group annuity contract, the effective
date of participation under the group
annuity contract as designated in the
certificate specifications page.
Contract Value The sum of the net purchase payment for
the contract and accrued interest, less
the sum of any withdrawals and any
administration fee, adjusted for any
transfer market value adjustment.
Contract Year The period of twelve consecutive months
beginning on the contract date,
certificate date in the case of a group
contract, or any anniversary thereafter.
Code The Internal Revenue Code of 1986, as
amended.
Due Proof of Death We require due proof of death upon the
death of the owner or annuitant, as
applicable. We must receive one of the
following at our Annuity Service Office:
(a) a certified copy of a death
certificate;
(b) a certified copy of a decree of a
court of competent jurisdiction
as to the finding of death; or
(c) any other proof satisfactory to us.
We will pay death benefits within seven
days after we receive due proof of death
and all required claim forms at our
Annuity Service Office.
Fixed Account The Manufacturers Life Insurance Company
of North America Separate Account D,
which is one of our separate accounts.
Fixed Annuity An annuity option with payments which
are predetermined and guaranteed as to
dollar amount.
General Account All of our assets other than assets in
our separate accounts.
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Group Holder In the case of a group annuity contract,
the person, persons or entity to whom we
issue the contract.
Gross Withdrawal Value The portion of the contract value
specified by the owner for a full or
partial withdrawal. Such amount is
determined prior to the application of
any withdrawal charge, annual
administration fee and market value
adjustment.
Initial Guarantee Period The period of time during which the
initial guaranteed interest rate is in
effect.
Initial Guaranteed Interest Rate The compound annual rate used to
determine the interest earned on the net
purchase payment during the initial
guarantee period.
Market Value Adjustment An adjustment we make to amounts that
are withdrawn, transferred or annuitized
prior to the end of the guarantee
period. It may increase or decrease the
amount available for transfer,
withdrawal or annuitization.
Maturity Date The date on which annuity benefits
commence. It is the date specified on
the contract specifications page,
unless changed.
Net Purchase Payment The purchase payment less the amount of
premium tax, if any, deducted from the
payment.
Non-Qualified Certificates Certificates issued under non-qualified
contracts.
Non-Qualified Contracts Contracts which are not issued under
qualified plans.
Owner or In the case of an individual contract,
Contract Owner the individual person, persons or entity
entitled to the ownership rights under
the contract. In the case of a group
annuity contract, the individual person,
persons or entity named in a certificate
and entitled to all of the ownership
rights under the contract not expressly
reserved to the group holder. The owner
is as designated on the contract or
certificate specifications page or in
the application, unless changed.
Payment or An amount paid by a contract owner to us
Purchase Payment as consideration for the benefits
provided by the contract.
Qualified Certificates Certificates issued under qualified
contracts.
Qualified Contracts Contracts issued under qualified plans.
Qualified Plans Retirement plans which receive favorable
tax treatment under Section 401, 403,
408, 408A or 457 of the Code.
Renewal Amount The contract value at the end of the
initial guarantee period or at the end
of a renewal guarantee period.
Renewal Guarantee Period The period of time during which a
renewal guaranteed interest rate is in
effect.
Renewal Guaranteed Interest Rate The compound annual rate used to
determine the interest earned on a
renewal amount during a renewal
guarantee period. In no event shall this
rate be less than 3%.
Separate Account A segregated account of ours that is
not commingled with our general assets
and obligations.
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SUMMARY
DESCRIPTION OF THE CONTRACT
The Contract. The contract is a single purchase payment deferred fixed
annuity contract. It provides for the accumulation of the contract value and the
payment of annuity benefits on a fixed basis. This prospectus describes
participating interests in both group deferred annuity contracts and individual
deferred annuity contracts. For information on eligible groups for the group
deferred annuity contracts, see "ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT."
- Participation in a group contract will be separately accounted
for by the issuance of a certificate evidencing the owner's
interest under the contract.
- Ownership of an individual contract will be evidenced by the
issuance of an individual annuity contract.
The certificate and individual annuity contract are both hereafter
referred to as the "contract."
Retirement Plans. We may issue the contract pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Code. Qualified plans include individual retirement accounts
and annuities (including Roth IRAs), pension and profit-sharing plans for
corporations and sole proprietorships/partnerships ("H.R. 10" and "Keogh"
plans), tax-sheltered annuities, and state and local government deferred
compensation plans (see "QUALIFIED RETIREMENT PLANS"). If you are considering
purchasing a contract for use in connection with a qualified plan, you should
consider, in evaluating the suitability of the contract, that it allows only a
single premium purchase payment in an amount of at least $5,000.
Purchase Payments. You make your purchase payment to us at our Annuity
Service Office. We allocate your purchase payment to the guarantee period which
you designate.
- The minimum purchase payment for a contract is $5,000.
- The maximum purchase payment which you may make without our
prior approval is $500,000.
While we will not accept additional purchase payments for a contract,
you may purchase additional contracts at the then prevailing rates and terms.
Prior to the maturity date and at our option, we may cancel a contract
after the second contract anniversary if both (i) the total purchase payment
made, less any withdrawals, is less than $2,000; and (ii) the higher of the
contract value or the amount available upon total withdrawal is less than
$2,000. This cancellation privilege may vary in certain states to comply with
the requirements of their insurance laws and regulations (see "PURCHASE
PAYMENTS").
Guarantee Periods. We currently offer ten guarantee periods under the
contract: one year through ten years. We may offer additional guarantee periods
for any yearly period from one to twenty years (see "GUARANTEE PERIODS").
Transfers Among Guarantee Periods. Before the maturity date, you may
transfer the entire contract value to a different guarantee period at any time
by giving us written notice or by telephone if you have authorized us in writing
to accept telephone transfer requests.
- You may transfer amounts only once per contract year.
- You must transfer the entire amount of the account.
Amounts transferred will be subject to a transfer market value
adjustment (see "TRANSFERS AMONG GUARANTEE PERIODS").
Telephone Transactions. You may request transfers or withdrawals by
telephone (see "TELEPHONE TRANSACTIONS").
Renewals. At the end of a guarantee period, you may choose a renewal
guarantee period from any of the then existing guarantee period options, at the
then current interest rates (see "RENEWALS").
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Withdrawals. Before the earlier of the maturity date or the death of
the contract owner, you may withdraw all or a portion of the contract value.
- You must withdraw at least $300 or, if less, the entire
contract value.
- If a partial withdrawal (plus any applicable withdrawal charge
and after giving effect to any market value adjustment)
reduces the contract value to less than $300, we will treat
the partial withdrawal as a total withdrawal.
We may impose a withdrawal charge and market value adjustment (see
"WITHDRAWALS"). A withdrawal may be subject to income tax and a 10% penalty tax
(see "FEDERAL TAX MATTERS").
Confirmation Statements. We will send you confirmation statements for
certain transactions in your account. You should carefully review these
statements to verify their accuracy and should report any mistake immediately to
our Annuity Service Office. If you fail to report any mistake to the Annuity
Service Office within 60 days of the mailing of the confirmation statement, you
will be deemed to have ratified the transaction.
Death Benefits. We will pay the death benefit to the beneficiary if any
contract owner dies before the maturity date. The death benefit equals the
contract value. If there is a surviving contract owner, that contract owner will
be deemed to be the beneficiary. No death benefit is payable on the death of any
annuitant, except that if any contract owner is not a natural person, we will
treat the death of any annuitant as the death of an owner.
We will determine the death benefit as of the date we receive written
notice and proof of death and all required claim forms at our Annuity Service
Office.
Annuity Payments. We offer a variety of fixed annuity options. Periodic
annuity payments will begin on the maturity date. You select the maturity date,
frequency of payment and annuity option (see "ANNUITY PROVISIONS").
Ten Day Review. Within 10 days of your receipt of a contract, you may
cancel the contract by returning it to us or our agent (see "TEN DAY RIGHT TO
REVIEW").
Market Value Adjustment. We will adjust any amount withdrawn,
transferred or annuitized prior to the end of either the initial guarantee
period or a renewal guarantee period by the market value adjustment factor
described under "MARKET VALUE ADJUSTMENT."
Withdrawal Charge. If you make a withdrawal from the contract before
the maturity date and during the first seven contract years, we may assess a
withdrawal charge (contingent deferred sales charge) against amounts withdrawn.
There is never a withdrawal charge after seven complete contract years or with
respect to certain free withdrawal amounts. The amount of the withdrawal charge
and when it is assessed are discussed under "CHARGES AND DEDUCTIONS - Withdrawal
Charge."
Tax Deferral. The status of the contract as an annuity generally allows
all earnings on the underlying investments to be tax-deferred until withdrawn or
until annuity payments begin (see "FEDERAL TAX MATTERS"). This tax deferred
treatment may be beneficial to you in building assets in a long-term investment
program.
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GENERAL INFORMATION ABOUT THE COMPANY
The Company is a stock life insurance company organized under the laws
of Delaware in 1979. Our principal office is located at 500 Boylston Street,
Suite 400, Boston, Massachusetts 02116-3739. Our ultimate parent is Manulife
Financial Corporation ("MFC"), a publicly traded company, based in Toronto,
Canada. MFC is the holding company of The Manufacturers Life Insurance Company
and its subsidiaries, collectively known as MANULIFE FINANCIAL.
Our majority owned subsidiary, Manufacturers Securities Services, LLC
("MSS"), acts as principal underwriter of the contracts which we issue. MSS has
entered into a promotional agent agreement with Manulife Wood Logan, Inc. to act
as the non-exclusive agent for the promotion of our insurance contract sales.
We also have an insurance subsidiary, The Manufacturers Life Insurance
Company of New York ("MANULIFE NEW YORK") which is licensed to conduct business
in the State of New York.
Our financial ratings are as follows:
A++ A.M. Best
Superior in financial strength; 1st category of 15
AAA Duff & Phelps
Highest in claims paying ability; 1st category of 18
AA+ Standard & Poor's
Very strong in financial strength; 2nd category of 21
Aa2 Moody's
Excellent in financial strength; 3rd category of 21
These ratings, which are current as of the date of this prospectus and are
subject to change, are assigned as a measure of our ability to honor the death
benefit, fixed account guarantees and life annuitization guarantees but not
specifically to our products, the performance (return) of these products, the
value of any investment in these products upon withdrawal or to individual
securities held in any portfolio.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 as amended, (the "1934 Act"). Accordingly, we file reports
and other information with the SEC. You may read and copy (at prescribed rates)
such reports and other information at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 75 Park Place, New York, N.Y. 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661-2511. You may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC.
We have filed a registration statement with the SEC under the
Securities Act of 1933, as amended, (the "1933 Act") relating to the contracts
offered by this prospectus. This prospectus has been filed as part of the
registration statement but does not contain all the information included in the
registration statement and its exhibits. Additionally, statements in this
prospectus about the content of the contracts and other legal instruments are
only summaries. For a complete statement of the terms of these documents, you
should refer to the registration statement and its exhibits. You may inspect and
copy the registration statement and its exhibits at the offices of the SEC as
described in the preceding paragraph.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the fiscal year ended December 31,
1999 previously filed by us with the SEC under the Securities Exchange Act of
1934 is incorporated herein by reference.
We will provide without charge to each person to whom a copy of this
prospectus has been delivered, upon written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this prospectus, other than exhibits to such document. Requests for such
copies should be directed to The Manufacturers Life Insurance Company of North
America, Post Office Box 9230, Boston, Massachusetts 02205-9230, telephone (800)
344-1029.
DETAILED DESCRIPTION OF THE CONTRACT
ELIGIBLE GROUPS FOR GROUP ANNUITY CONTRACT
We may issue the group deferred annuity contract to fund plans
qualifying for special income tax treatment under the Code. Qualified plans
include individual retirement accounts and annuities, pension and profit-sharing
plans for corporations and sole proprietorships/partnerships ("H.R. 10" and
"Keogh" plans), tax-sheltered annuities, and state and local government deferred
compensation plans. If you are considering purchasing a contract for use in
connection with a qualified plan, you should consider, in evaluating the
suitability of the contract, that it allows only a single premium purchase
payment in an amount of at least $5,000 (see "QUALIFIED RETIREMENT PLANS"). The
group deferred annuity contract is also designed for use with non-qualified
retirement plans, such as payroll savings plans and such other groups (trusteed
or non-trusteed) as may be eligible under applicable law. Group deferred annuity
contracts have been issued to the Venture Trust, a trust established with United
Missouri Bank, N.A., Kansas City, Missouri, as group holder for groups comprised
of persons who have brokerage accounts with brokers having selling agreements
with MSS, the principal underwriter of the contracts.
An eligible member of a group to which a contract has been issued may
become an owner under the contract by submitting a completed application, if
required by us, and a minimum purchase payment. We will issue a certificate
summarizing the rights and benefits of the owner under the contract to an
applicant acceptable to us. We reserve the right to decline to issue a
certificate to any person in our sole discretion.
All rights and privileges under the contract may be exercised by each
owner as to such owner's interest unless expressly reserved to the group holder.
However, provisions of any plan in connection with which we issue the contract
may restrict an owner's ability to exercise such rights and privileges.
ACCUMULATION PROVISIONS
PURCHASE PAYMENT
You make your purchase payment to us at our Annuity Service Office. The
minimum purchase payment for a contract is $5,000. The maximum purchase payment
which you may make without our prior approval is $500,000. We allocate the
entire purchase payment to the guarantee period which you select. We will not
accept additional purchase payments for a contract. You may, however, purchase
additional contracts at the then prevailing rates and terms.
Prior to the maturity date and following the second contract
anniversary, we may, at our option, cancel a contract. We may cancel a contract
if both:
- the total purchase payment made, less any withdrawals, is less
than $2,000; and
- the higher of the contract value or the amount available upon
total withdrawal is less than $2,000.
This cancellation privilege may vary in certain states in order to
comply with the requirements of insurance laws and regulations in such states.
If we cancel a contract, we will pay you the higher of the contract value and
any annual administration fee or the amount available upon total withdrawal. The
amount paid will be treated as a withdrawal for federal tax purposes and thus
may be subject to income tax and to a 10% penalty tax. (See "FEDERAL TAX
MATTERS")
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GUARANTEE PERIODS
Currently, we offer ten guarantee periods: one year through ten years.
We may offer additional guarantee periods for any yearly period from one to
twenty years. The contract provides for the accumulation of interest on the
purchase payment at guaranteed rates for the duration of the guarantee period.
From time to time, we may offer customers of certain broker-dealers special
initial guaranteed interest rates which are higher than the initial guaranteed
interest rate offered to the general public. In consideration of these higher
interest rates, commissions to these broker-dealers may be reduced. We determine
from time-to-time in accordance with market conditions the renewal guaranteed
interest rate on a renewal amount allocated or transferred to a renewal
guarantee period. Under certain circumstances, we may offer a rate in excess of
the renewal guaranteed rate for the first year only of a renewal guarantee
period. The renewal guaranteed interest rate will in no event be less than 3%.
We guarantee the interest rate for the duration of the guarantee period and may
not change it.
TRANSFERS AMONG GUARANTEE PERIODS
Before the maturity date and subject to the following conditions, you
may transfer the entire contract value to a different guarantee period at any
time by giving us written notice or by telephone if you have authorized us in
writing to accept telephone transfer requests:
- you may transfer amounts only once per contract year; and
- you must transfer the entire contract value.
Amounts transferred will be subject to a transfer market value
adjustment. The amount which you request to transfer will be multiplied by the
market value adjustment factor to determine the transferred amount (see "MARKET
VALUE ADJUSTMENT"). We may modify or terminate the transfer privilege at any
time in accordance with applicable law.
TELEPHONE TRANSACTIONS
You may request transfers or withdrawals by telephone if you elect that
option on an appropriate authorization form provided by us. We will not be
liable for following telephone instructions that we reasonably believe to be
genuine. We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; such procedures include asking you, upon
telephoning a request, to provide certain identifying information. We may be
liable for any losses due to unauthorized or fraudulent instructions only where
we fail to employ our procedures properly. For your and our protection, we will
tape record all such conversations. All telephone transactions will be followed
by a confirmation statement of the transaction.
RENEWALS
At the end of a guarantee period, you may choose a renewal guarantee
period from any of the then existing guarantee periods at the then current
interest rate, all without the imposition of any charge. You may not select a
guarantee period that would extend beyond the maturity date. For a renewal
within one year of the maturity date, the only option available to you is to
have interest accrued up to the maturity date at the then current interest rate
for one-year guarantee periods.
If you do not specify the renewal guarantee period you desire, we will
select the same guarantee period that has just expired, provided that such
period does not extend beyond the maturity date. If a renewal would extend
beyond the maturity date, we will select the longest period that will not extend
beyond such date. For a renewal within one year of the maturity date, we will
credit interest up to the maturity date at the then current interest rate for
one-year guarantee periods.
WITHDRAWALS
Prior to the earlier of the maturity date or the death of the contract
owner, you may withdraw all or a portion of the contract value by written
request, complete with all necessary information, to our Annuity Service Office.
For certain qualified contracts, the Code and regulations promulgated by the
Treasury Department may require the consent of a qualified plan participant's
spouse to an exercise of the withdrawal right.
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If you request a total withdrawal of the contract value, we will, as of
the date we receive the request at our Annuity Service Office, cancel the
contract and pay the following amount:
C + [(A - B - C) x D], where:
A = the gross withdrawal value reduced by any
applicable annual administration fee;
B = the withdrawal charge;
C = the free withdrawal amount; and
D = the market value adjustment factor.
(See "CHARGES AND DEDUCTIONS" and "MARKET VALUE ADJUSTMENT")
If you request a partial withdrawal, we will use the above formula and
the gross withdrawal value to determine the amount payable. Partial withdrawals
will be subject to market value adjustments and possible withdrawal charges. We
will deduct the gross withdrawal value from the contract value. The gross
withdrawal value may not exceed the contract value.
We may defer the payment of a full or partial withdrawal for not more
than six months (or the period permitted by applicable state law if shorter)
from the date we receive the withdrawal request. If we defer payments for 30
days or more, we will credit the amount deferred with interest at a rate not
less than 3% per year or as determined by applicable state law. We will not,
however, defer payment for more than 30 days for any withdrawal effective at the
end of any guarantee period.
There is no limit on the frequency of partial withdrawals. However, the
amount withdrawn must be at least $300 or, if less, the entire contract value.
If a partial withdrawal plus any applicable withdrawal charge, after giving
effect to any market value adjustment, would reduce the contract value to less
than $300, we will treat the partial withdrawal as a total withdrawal of the
contract value.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances (see "FEDERAL
TAX MATTERS").
Telephone Redemptions. You may request the option to withdraw a portion
of the contract value by telephone by completing the application described under
"Telephone Transactions" above. We reserve the right to impose maximum
withdrawal amounts and procedural requirements regarding this privilege.
DEATH BENEFIT BEFORE MATURITY DATE
In General. The following discussion applies principally to contracts
that are not issued in connection with qualified plans, i.e., a "NON-QUALIFIED
CONTRACT." The requirements of the tax law applicable to qualified plans, and
the tax treatment of amounts held and distributed under such plans, are quite
complex. Accordingly, if you are considering using the contract in connection
with a qualified plan, you should seek competent legal and tax advice regarding
the suitability of the contract for the particular situation and the
requirements governing the distribution of benefits, including death benefits,
from a contract used in the plan.
Determination of Death Benefit. We will determine the death benefit on
the date we receive written notice and proof of death, as well as all required
claims forms, at our Annuity Service Office. No person is entitled to the death
benefit until this time.
Amount and Payment of Death Benefit. We will pay a death benefit equal
to the contract value to the beneficiary if any contract owner dies before the
maturity date. If there is a surviving contract owner, that contract owner will
be deemed to be the beneficiary. No death benefit is payable on the death of any
annuitant, except that if any contract owner is not a natural person, the death
of any annuitant will be treated as the death of an owner. On the death of the
last surviving annuitant, the contract owner, if a natural person, will become
the annuitant unless the contract owner designates another person as the
annuitant.
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The death benefit may be taken immediately in the form of a lump sum.
If the death benefit is not taken immediately, the contract will continue
subject to the following:
(1) the beneficiary will become the contract owner;
(2) if the beneficiary is not the deceased owner's spouse, we
will distribute the contract owner's entire interest in
the contract within five years of the owner's death or,
alternatively, as an annuity (under one of the annuity
options described below) beginning within one year of the
owner's death and payable over the life of the beneficiary
or over a period not extending beyond the life expectancy
of the beneficiary.
If the beneficiary dies before distributions described in "(2)" above
are completed, we will distribute the entire remaining contract value in a lump
sum immediately. If the owner's spouse is the beneficiary, the spouse continues
the contract as the new owner. In such a case, the distribution rules described
in "(2)" which apply when a contract owner dies will apply when the spouse, as
the owner, dies.
If any annuitant is changed and any contract owner is not a natural
person, we will distribute the entire interest in the contract to the contract
owner within five years.
We will pay death benefits within seven days of the date we determine
the amount of the death benefit, as described above. We may postpone such
payment under the same circumstances that we may postpone the payment of
withdrawals (see "WITHDRAWALS").
ANNUITY PROVISIONS
GENERAL
You may apply the proceeds of the contract payable on death, withdrawal
or the contract maturity date to the annuity options described below, subject to
the distribution of death benefit provisions (see "DEATH BENEFIT BEFORE MATURITY
DATE").
Generally, annuity benefits under the contract will begin on the
maturity date. The maturity date is the date specified on the contract
specifications page, unless changed. If no date is specified, the maturity date
is the maximum maturity date. The maximum maturity date is the first day of the
month following the later of the 85th birthday of the annuitant or the tenth
contract anniversary. You may specify a different maturity date at any time by
written request at least one month before both the previously specified and the
new maturity date. Without our consent, the new maturity date may not be later
than the maximum maturity date. The occurrence or scheduled occurrence of
maturity dates when the annuitant is at an advanced age, e.g., past age 85, may
in some circumstances have adverse income tax consequences (see "FEDERAL TAX
MATTERS"). Distributions from qualified contracts may be required before the
maturity date.
You may select the frequency of annuity payments. However, if the
contract value at the maturity date is such that a monthly payment would be less
than $20, we may pay the higher of contract value and any annual administration
fee or the amount available upon total withdrawal in one lump sum to the
annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed basis.
When you purchase a contract, and on or before the maturity date, you may select
one or more of the annuity options described below or choose an alternate form
of settlement acceptable to us. If you do not select an annuity option, we will
provide as a default option that annuity payments be made for a period certain
of ten years and continue thereafter during the lifetime of the annuitant.
Treasury Department regulations may preclude the availability of certain annuity
options in connection with certain qualified contracts. After the maturity date,
the annuity option selected may not be changed.
We guarantee the following annuity options in the contract.
- Option 1(a): Non-Refund Life Annuity. We will make annuity
payments during the lifetime of the annuitant. No payments are
due after the death of the annuitant. Since we do not
guarantee that any minimum number of payments will be made, an
annuitant may receive only one payment if the annuitant dies
prior to the date the second payment is due.
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- Option 1(b): Life Annuity with Payments Guaranteed for 10
Years. We will make annuity payments for at least 10 years and
continuing thereafter during the lifetime of the annuitant.
Since we guarantee payments for 10 years, we will make annuity
payments to the end of such period even if the annuitant dies
prior to the end of the tenth year.
- Option 2(a): Joint & Survivor Non-Refund Life Annuity. We will
make annuity payments during the lifetimes of the annuitant
and a designated co-annuitant. No payments are due after the
death of the last survivor of the annuitant and co-annuitant.
Since we do not guarantee that any minimum number of payments
will be made, an annuitant or co-annuitant may receive only
one payment if the annuitant and co-annuitant die prior to the
date the second payment is due.
- Option 2(b): Joint & Survivor Life Annuity with Payments
Guaranteed for 10 Years. We will make annuity payments for at
least 10 years and continuing thereafter during the lifetimes
of the annuitant and a designated co-annuitant. Since we
guarantee payments for 10 years, we will make annuity payments
to the end of such period even if both the annuitant and the
co-annuitant die prior to the end of the tenth year.
In addition to the foregoing annuity options which we are contractually
obligated to offer at all times, we currently offer the following annuity
options. We may cease offering the following annuity options at any time and may
offer other annuity options in the future.
- Option 3: Life Annuity with Payments Guaranteed for 5, 15 or
20 Years. We will make annuity payments guaranteed for 5, 15
or 20 years and continuing thereafter during the lifetime of
the annuitant. Since we guarantee payments for the specific
number of years, we will make annuity payments to the end of
the last year of the 5, 15 or 20 year period.
- Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity.
We will make full annuity payments during the joint lifetime
of the annuitant and a designated co-annuitant and two-thirds
payments during the lifetime of the survivor. Since we do not
guarantee that any minimum number of payments will be made, an
annuitant or co-annuitant may receive only one payment if the
annuitant and co-annuitant die prior to the date the second
payment is due.
- Option 5: Period Certain Only Annuity for 5, 10, 15 or 20
Years. We will make annuity payments for a 5, 10, 15 or 20
year period and no payments thereafter.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If you have selected an annuity option providing for payments for a
guaranteed period, and the annuitant dies on or after the maturity date, we will
make the remaining guaranteed payments to the beneficiary. We will make any
remaining payments at least as rapidly as under the method of distribution being
used as of the date of the annuitant's death. If no beneficiary is living, we
will commute any unpaid guaranteed payments to a single sum (on the basis of the
interest rate used in determining the payments) and pay that single sum to the
estate of the last to die of the annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
You may cancel the contract by returning it to our Annuity Service
Office or agent within ten days after receipt of the contract. Within seven days
after we receive the returned contract, we will refund the payment made for the
contract.
We do not impose any withdrawal charge upon return of the contract
within the ten day right to review period. The ten day right to review may vary
in certain states in order to comply with the requirements of insurance laws and
regulations in such states. When we issue the contract as an individual
retirement annuity under Section 408 or 408A of the Code, during the first seven
days of the ten day period we will return the contract value if this is greater
than the amount otherwise payable.
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OWNERSHIP
In the case of an individual annuity contract, the contract owner is
the person entitled to exercise all rights under the contract. In the case of a
group annuity contract, the contract is owned by the group holder; however, all
contract rights and privileges not expressly reserved to the group holder may be
exercised by each certificate owner as to such owner's interest as specified in
his or her certificate. Prior to the maturity date, the contract owner is the
person designated in the contract specifications page or as subsequently named.
On and after the maturity date, the annuitant is the contract owner. If amounts
become payable to any beneficiary under the contract, the beneficiary is the
contract owner.
In the case of non-qualified contracts, you may change the ownership of
or collaterally assign the contract at any time prior to the maturity date,
subject to the rights of any irrevocable beneficiary. Assigning a contract, or
changing the ownership of a contract, may be treated as a distribution of the
contract value for federal tax purposes (see "FEDERAL TAX MATTERS").
You must make any request for a change of ownership or assignment in
writing, and we must approve your request If approved by us, any assignment and
any change will be effective as of the date we receive your request at our
Annuity Service Office. We assume no liability for any payments made or actions
taken before we approve a change or accept an assignment and no responsibility
for the validity or sufficiency of any assignment. If you make an absolute
assignment, it will revoke the interest of any revocable beneficiary.
In the case of qualified contracts, ownership of the contract generally
may be transferred only by the trustee of an exempt employees' trust which is
part of a retirement plan qualified under Section 401 of the Code or as
otherwise permitted by applicable Internal Revenue Service ("IRS") regulations.
Subject to the foregoing, a qualified contract may not be sold, assigned,
transferred, discounted or pledged as collateral for a loan or as security for
the performance of an obligation or for any other purpose to any person other
than us.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the
contract specifications page or as subsequently named. However, if there is a
surviving contract owner, that person will be treated as the beneficiary. You
may change the beneficiary subject to the rights of any irrevocable beneficiary.
You must make any request for a change in writing. We must approve such a
request and, if approved by us, the change will be effective as of the date on
which we receive your request. We assume no liability for any payments made or
actions taken before we approve the change. If no beneficiary is living, the
contingent beneficiary will be the beneficiary. The interest of any beneficiary
is subject to that of any assignee. If no beneficiary or contingent beneficiary
is living, the beneficiary is the estate of the deceased contract owner. In the
case of certain qualified contracts, Treasury Department regulations prescribe
certain limitations on the designation of a beneficiary.
ANNUITANT
The annuitant is any natural person or persons to whom we will make
annuity payments and whose life is used to determine the duration of annuity
payments involving life contingencies. If you name more than one person as an
"annuitant," the second person named will be referred to as "co-annuitant." The
annuitant is as designated on the contract specifications page or in the
application, unless changed.
On the death of the annuitant, the co-annuitant, if living, becomes the
annuitant. If there is no living co-annuitant, the owner becomes the annuitant.
In the case of certain qualified contracts, there are limitations on the ability
to designate and change the annuitant and the co-annuitant.
MODIFICATION
We will not change or modify the contract without the consent of the
owner or group holder, as applicable, except to the extent necessary to conform
to any applicable law or regulation or any ruling issued by a government agency.
However, on 60 days notice to the group holder, we may change the withdrawal
charges, administration fees, free withdrawal percentage, annuity purchase rate
and the market value adjustment as to any certificates issued after the
effective date of the modification. We will interpret the provisions of the
contract so as to comply with the requirements of Section 72(s) of the Code.
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OUR APPROVAL
We may accept or reject a contract application in our sole discretion.
DISCONTINUANCE OF NEW OWNERS
In the case of a group annuity contract, we may, on 30 days notice to
the group holder, limit or discontinue acceptance of new applications and the
issuance of new certificates under a contract.
MARKET VALUE ADJUSTMENT
If you withdraw, transfer or annuitize any amount prior to the end of
either the initial guarantee period or a renewal guarantee period, we will
adjust such amount by the market value adjustment factor described below.
The market value adjustment factor is determined by the following
formula: ((1+i)/(1+j))n/12 where:
i - The initial guaranteed interest rate or renewal
guaranteed interest rate currently being earned on the
contract.
j - The guaranteed interest rate available, on the date we
process the request, for a guarantee period with the same
length as the period remaining in the initial guarantee
period or renewal guarantee period. If the guarantee period
of this length is not available, we will choose our
guarantee period with the next highest duration.
n - The number of complete months remaining to the end of the
initial guarantee period or renewal guarantee period.
We will make no market value adjustment in the following situations:
- the death of the contract owner;
- the withdrawal of amounts within one month before the end
of the guarantee period; and
- the withdrawal of amounts in any contract year that do not
exceed 10% of total purchase payments less any prior
partial withdrawals in that year.
The market value adjustment reflects the relationship between the
initial guaranteed interest rate or the renewal guaranteed interest rate
applicable to the contract and the then current available guaranteed interest
rate. Generally, if the initial guaranteed interest rate or the renewal
guaranteed interest rate is lower than the then current available guaranteed
interest rate, then the effect of the market value adjustment will be to reduce
the amount withdrawn, transferred or annuitized. Similarly, if the initial
guaranteed interest rate or the renewal guaranteed interest rate is higher than
the then current available guaranteed interest rate, then the effect of the
market value adjustment will be to increase the amount withdrawn, transferred or
annuitized. The greater the difference in these interest rates the greater the
effect of the market value adjustment.
The market value adjustment is also affected by the amount of time
remaining in the guarantee period. Generally, the longer the time remaining in
the guarantee period, the greater the effect of the market value adjustment on
the amount withdrawn, transferred or annuitized. This is because the longer the
time remaining in the guarantee period, the higher the compounding factor `n' in
the market value adjustment factor.
The cumulative effect of the market value adjustment and withdrawal
charges could result in your receiving total withdrawal proceeds of less than
your purchase payment.
BECAUSE OF THE MARKET VALUE ADJUSTMENT PROVISION OF THE CONTRACT, YOU
BEAR THE INVESTMENT RISK THAT THE CURRENT AVAILABLE GUARANTEED INTEREST RATE
OFFERED BY US AT THE TIME OF WITHDRAWAL, TRANSFER OR ANNUITIZATION MAY BE HIGHER
THAN THE INITIAL OR RENEWAL GUARANTEE INTEREST RATE APPLICABLE TO THE CONTRACT
WITH THE RESULT THAT THE AMOUNT YOU RECEIVE UPON A WITHDRAWAL, TRANSFER OR
ANNUITIZATION MAY BE SUBSTANTIALLY REDUCED.
For more information on the market value adjustment, including examples
of its calculation, see APPENDIX B.
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CHARGES AND DEDUCTIONS
WITHDRAWAL CHARGE
If you make a withdrawal from the contract before the maturity date, we
may assess a withdrawal charge (contingent deferred sales charge) against
amounts withdrawn during the first seven contract years. There is never a
withdrawal charge after seven complete contract years or with respect to certain
free withdrawal amounts described below. The amount of the withdrawal charge and
when it is assessed are discussed below:
(1 In any contract year, the free withdrawal amount for that
year is the excess of (i) over (ii), where (i) is 10% of
the purchase payment and (ii) is all prior partial
withdrawals in that contract year. You may withdraw free
withdrawal amounts without the imposition of a withdrawal
charge.
(2) If you make a withdrawal at the end of the initial
guarantee period, we will not apply a withdrawal charge
provided such withdrawal occurs on or after the end of the
third contract year. If you make a withdrawal at the end
of any other guarantee period, we will not apply a
withdrawal charge provided such withdrawal occurs on or
after the end of the fifth contract year. We must receive
your written request for withdrawal at the end of a
guarantee period during the 30 day period preceding the
end of that guarantee period.
(3) We calculate the amount of the withdrawal charge by
multiplying the gross withdrawal value, less any
administration fee and free withdrawal amount, by the
applicable withdrawal charge percentage obtained from the
table below.
NUMBER OF COMPLETED WITHDRAWAL CHARGE
CONTRACT YEARS PERCENTAGE
-----------------------------------------------------
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
(4) We generally do not assess any withdrawal charge on
distributions made as a result of the death of the
contract owner or, if applicable, the annuitant (see
"Death Benefit Before Maturity Date - Amount and Payment
of Death Benefit").
We will use the amount collected from the withdrawal charge to
reimburse us for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see APPENDIX A.
We may subject withdrawals to a market value adjustment in addition to the
withdrawal charge described above (see "MARKET VALUE ADJUSTMENT").
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGE
We may from time to time reduce or eliminate the amount of the
withdrawal charge on a contract or the period to which it applies when contracts
are sold to certain individuals or groups of individuals in a manner that
results in savings of sales expenses. When considering whether to reduce or
eliminate the sales charge or the period to which it applies, we will consider
such factors as:
- the size and type of group,
- the amount of the single premium, and/or
- other transactions where sales expenses are reduced.
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Withdrawals may be subject to income tax to the extent of earnings
under the contract and, if made prior to age 59 1/2, generally will be subject
to a 10% IRS penalty tax (see "FEDERAL TAX MATTERS - Taxation of Partial and
Full Withdrawals").
TAXES
We reserve the right to charge or provide for certain taxes against
purchase payments, contract values, death benefits or annuity payments. Such
taxes may include premium taxes or other taxes levied by any government entity
which we determine to have resulted from the:
- establishment or maintenance of the Fixed Account,
- receipt by us of purchase payments,
- issuance of the contracts,
- commencement or continuance of annuity payments under the
contracts, or
- death of the owner or annuitant.
In addition, we will withhold taxes to the extent required by
applicable law.
Except for residents of those states which apply premium taxes upon
receipt of purchase payments, we will deduct premium taxes from the contract
value used to provide for annuity payments. For residents of those states which
apply premium taxes upon receipt of purchase payments, we will deduct premium
taxes upon payment of any withdrawal or death benefits or upon any
annuitization. The amount deducted will depend on the premium tax assessed in
the applicable state. State premium taxes currently range from 0% to 3.5%
depending on the jurisdiction and the tax status of the contract and are subject
to change by the legislature or other authority (see "APPENDIX C: STATE PREMIUM
TAXES").
ADMINISTRATION FEE
To compensate us for assuming certain administrative expenses, we
reserve the right to charge an annual administration fee. Prior to the maturity
date, we will deduct the administration fee on the last day of each contract
year. If you surrender the contract for its contract value on any date other
than the last day of any contract year, we will deduct the full amount of the
administration fee from the amount paid. We are not currently assessing an
administration fee.
REINSURANCE
We have entered into an indemnity coinsurance agreement with Peoples
Security Life Insurance Company ("PEOPLES") to reinsure fixed annuity business
written by us prior to January 1, 1999 for the product described in this
prospectus.
The indemnity aspects of the agreement provide that we remain liable
for the contractual obligations whereas Peoples agrees to indemnify us for any
contractual claims incurred. The coinsurance aspects of the agreement require
that we transfer to Peoples an agreed upon percentage (currently, 100%) of
assets backing the fixed annuity premiums received by us for fixed annuity
contracts. Peoples reimburses us for a percentage of claims and provides expense
allowances to cover commission and other costs associated with this fixed
annuity business. Peoples' contractual liability runs solely to us, and no
contract owner has any right of action against Peoples.
Peoples is responsible for investing the fixed annuity premiums
received and is at risk for any potential investment gains and losses. Under
this agreement, we will continue to administer the fixed annuity business for
which we will earn an expense allowance. We have set up a reserve to recognize
that expense allowances received from Peoples under this indemnity coinsurance
agreement do not fully reimburse us for overhead expenses allocated to this
fixed annuity line of business.
For fixed annuity business written by us on or after January 1, 1999,
The Manufacturers Life Insurance Company (U.S.A.) reinsures certain amounts with
respect to the contract described in this prospectus under a reinsurance
agreement with substantial similar terms to the Peoples Reinsurance Agreement.
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ADDITIONAL INFORMATION ABOUT MANULIFE NORTH AMERICA
DESCRIPTION OF BUSINESS
PRODUCT LINES
We issue fixed and variable annuity contracts. We allocate amounts
invested in the fixed portion of the contracts either to our general account or,
in the case of the contract described in this prospectus, to a non-unitized
separate account. Amounts invested in the variable portion of the contracts are
allocated to our separate accounts (excluding the Fixed Account). We invest
separate account assets (other than the separate account described in this
prospectus) in shares of Manufacturers Investment Trust (formerly NASL Series
Trust) ("MIT"), a no-load, open end management investment company organized as a
Massachusetts business trust.
As of December 31, 1999, we were licensed to sell fixed and variable
annuity and variable life insurance contracts in all states except New Hampshire
and New York. Our wholly owned subsidiary, Manulife New York, which we
established in 1992, is licensed to sell fixed and variable annuity and variable
life insurance contracts in New York.
PROPERTY AND OFFICE LOCATION
Our office is located at 500 Boylston Street, Suite 400, Boston,
Massachusetts 02116 where we lease office space. We do not own any real property
which we use for business purposes.
MANAGEMENT DISCUSSION & ANALYSIS
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.
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 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
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Company paid an additional $14.4 million of sub-advisory expenses during 1999.
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 primarily 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 due to the higher asset base. 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.
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
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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.
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
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<PAGE> 21
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.
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.
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.
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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.
REGULATION
The Company is subject to the laws of the state of Delaware governing
insurance companies and to the regulation of the Delaware Insurance Department.
Manulife New York is subject to the laws and regulation of the State of New
York. In addition, the Company is subject to regulation under the insurance laws
of other jurisdictions in which the Company operates. Regulation by each
insurance department includes periodic examination 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
Company's operations is conducted periodically by the Delaware insurance
department (The New York Insurance Department for Manulife New York.)
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.
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Under Accounting Principles
Generally Accepted in the
United States:
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>
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA SEPARATE ACCOUNT D
We established The Manufacturers Life Insurance Company of North
America Separate Account D (formerly NASL Fixed Account) (the "FIXED ACCOUNT")
in 1996 as a separate account under Delaware law. It is not a registered
investment company. The Fixed Account holds assets that are segregated from all
of our other assets. The Fixed Account is currently used only to support the
obligations under the contracts offered by this prospectus. These obligations
are based on interest rates credited to the contracts and do not depend on the
investment performance of the Fixed Account. Any gain or loss in the Fixed
Account accrues solely to us and we assume any risk associated with the
possibility that the value of the assets in the Fixed Account might fall below
the reserves and other liabilities that must be maintained. Should the value of
the assets in the Fixed Account fall below reserve and other liabilities, we
will transfer assets from our general account to the Fixed Account to make up
the shortfall. We reserve the right to transfer to our general account any
assets of the Fixed Account in excess of such reserves and other liabilities and
to maintain assets in the Fixed Account which support any number of annuities
which we offer or may offer. The assets of the Fixed Account are not insulated
from the claims of our creditors and may be charged with liabilities which arise
from other business which we conduct. Thus we may, at our discretion if
permitted by applicable state law, transfer existing Fixed Account assets to, or
place future Fixed Account allocations in, the general account for purposes of
administration.
We will invest the assets of the Fixed Account in those assets which we
select and which are permitted by applicable state laws for separate account
investment. As noted above under "REINSURANCE," two reinsurers are responsible
for investing an agreed upon percentage (currently, 100%) of the assets in the
Fixed Account.
DISTRIBUTION OF THE CONTRACT
Our majority-owned subsidiary, MSS, a Delaware limited liability
company with offices at 73 Tremont Street, Boston, Massachusetts 02108, is the
principal underwriter of the contracts. It also provides advisory services to
MIT. MSS is a broker-dealer registered under the 1934 Act and a member of the
National Association of Securities Dealers, Inc. ("NASD"). MSS has entered into
a non-exclusive promotional agent agreement with Manulife Wood Logan. Manulife
Wood Logan is a broker-dealer registered under the 1934 Act and a member of the
NASD.
The contracts will be sold by registered representatives of
broker-dealers authorized by MSS to sell them. Such registered representatives
will also be our licensed insurance agents. Under the promotional agent
agreement, Manulife Wood Logan will recruit and provide sales training and
licensing assistance to such registered representatives and will prepare sales
and promotional materials for our approval. MSS will pay distribution
compensation to selling brokers in varying amounts which under normal
circumstances are not expected to exceed 5% of purchase payments. MSS may from
time to time pay additional compensation pursuant to promotional contests.
Additionally, in some circumstances, MSS will provide reimbursement of certain
sales and marketing expenses. MSS will pay the promotional agent for providing
marketing support for the distribution of the contracts.
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<PAGE> 24
CONFIRMATION STATEMENTS
We will send you confirmation statements for certain transactions in
your account. You should carefully review these statements to verify their
accuracy and should immediately report any mistake to our Annuity Service
Office. If you fail to notify our Annuity Service Office of any mistake within
60 days of the mailing of the confirmation statement, you will be deemed to have
ratified the transaction.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation, to which we or any of our subsidiaries is a party or to
which any of our or their property is subject. To the best of our knowledge, no
such proceedings are contemplated by any governmental authority.
LEGAL MATTERS
James D. Gallagher, Esq., our Vice President, Secretary and General
Counsel, has passed upon all matters of applicable state law pertaining to the
contract, including our right to issue the contract.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company at December 31,
1999 and 1998, and for each of the three years in the period ended December 31,
1999 appearing in this Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
NOTICES AND REPORTS TO CONTRACT OWNERS
At least once each contract year, we will send you a statement showing
the contract value of the contract as of the date of the statement. The
statement will also show premium payments and any other information required by
any applicable law or regulation.
CONTRACT OWNER INQUIRIES
You should direct all inquiries to our Annuity Service Office at P.O.
Box 9230, Boston, Massachusetts 02205-9230.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the contracts is
unclear in certain circumstances, and you should consult a qualified tax adviser
with regard to the application of law to individual circumstances. This
discussion is based on the Code, Treasury Department regulations, and
interpretations existing on the date of this prospectus. These authorities,
however, are subject to change by Congress, the Treasury Department, and
judicial decisions. This discussion does not address state or local tax
consequences associated with the purchase of the contracts.
WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT, FEDERAL, STATE OR
LOCAL, OF ANY CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
OUR TAX STATUS
We are taxed as a life insurance company under the Code. The assets in
the separate accounts are owned by us, and the income derived from such assets
is includible as income for federal income tax purposes.
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<PAGE> 25
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in contract value is generally not taxable to you as the contract owner
or to the annuitant until received, either in the form of annuity payments as
contemplated by the contracts, or in some other form of distribution. However,
this rule applies only if the contract owner is an individual.
As a general rule, deferred annuity contracts held by "non-natural
persons," such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal income tax
purposes. The income on such contracts (as defined in the tax law) is taxed as
ordinary income that is received or accrued by the owner during the taxable
year. There are several exceptions to this general rule for non-natural contract
owners. First, annuity contracts will generally be treated as held by a natural
person if the nominal owner is a trust or other entity which holds the contract
as an agent for a natural person. However, this exception will not apply in the
case of any employer which is the nominal owner of an annuity contract under a
non-qualified deferred compensation arrangement for its employees.
Other exceptions to the general rule for non-natural contract owners
will apply with respect to:
- annuity contracts acquired by an estate of a decedent by
reason of the death of the decedent,
- annuity contracts issued in connection with certain
qualified retirement plans,
- annuity contracts purchased by employers upon the
termination of certain qualified retirement plans,
- certain annuity contracts used in connection with
structured settlement agreements, and
- annuity contracts purchased with a single premium when the
annuity starting date is no later than a year from
purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually,
during the annuity period.
In addition to the foregoing, if the contract's maturity date occurs,
or is scheduled to occur, at a time when the annuitant is at an advanced age,
such as over age 85, it is possible that the owner will be taxable currently on
the annual increase in the contract value.
The remainder of this discussion assumes that the contract will
constitute an annuity for federal tax purposes.
TAXATION OF PARTIAL AND TOTAL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the owner's contract value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
total withdrawal, amounts received are includible in income to the extent they
exceed the "investment in the contract." For these purposes the "investment in
the contract" at any time equals the total of the purchase payments made under
the contract to that time (to the extent such payments were neither deductible
when made nor excludable from income as, for example, in the case of certain
employer contributions to qualified contracts) less any amounts previously
received from the contract which were not included in income.
Other than in the case of qualified contracts (which generally cannot
be assigned or pledged), any assignment or pledge (or agreement to assign or
pledge) any portion of the contract value is treated as a withdrawal of such
amount or portion. The investment in the contract is increased by the amount
includible in income with respect to such assignment or pledge, though it is not
affected by any other aspect of the assignment or pledge (including its
release). If you transfer your interest in a contract without adequate
consideration to a person other than your spouse (or a former spouse incident to
divorce), you will be taxed on the difference between your contract value and
the investment in the contract at the time of transfer. In such case, the
transferee's investment in the contract will be increased to reflect the
increase in the transferor's income.
There is some uncertainty regarding the treatment of the market value
adjustment for purposes of determining the amount includible in income as a
result of any partial withdrawal, assignment or pledge, or transfer
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<PAGE> 26
without adequate consideration. Congress has given the Internal Revenue Service
("IRS") regulatory authority to address this uncertainty. However, as of the
date of this prospectus, the IRS has not issued any regulations addressing these
determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary
income is equal to the excess of the payment over the exclusion amount. The
exclusion amount is the amount determined by multiplying (1) the payment by (2)
the ratio of the investment in the contract, adjusted for any period certain or
refund feature, to the total expected value of annuity payments for the term of
the contract (determined under Treasury Department regulations). A simplified
method of determining the taxable portion of annuity payments applies to
contracts issued in connection with certain qualified plans other than IRAs.
Once the total amount of the investment in the contract is excluded
using this ratio, annuity payments will be fully taxable. If annuity payments
cease because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his or her last taxable year.
There may be special income tax issues present in situations where the
owner and the annuitant are not the same person or are not married. You should
consult a tax adviser in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of an
owner or the annuitant. Prior to the maturity date, such death benefit proceeds
are includible in income as follows:
- if distributed in a lump sum, they are taxed in the same
manner as a full withdrawal, as described above, or
- if distributed under an annuity option, they are taxed in
the same manner as annuity payments, as described above.
After the maturity date, where a guaranteed period exists under an
annuity option and the annuitant dies before the end of that period, payments
made to the beneficiary for the remainder of that period are includible in
income as follows:
- if received in a lump sum, they are includible in income
to the extent that they exceed the unrecovered investment
in the contract at that time, or
- if distributed in accordance with the existing annuity
option selected, they are fully excludable from income
until the remaining investment in the contract is deemed
to be recovered, and all annuity payments thereafter are
fully includible in income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a contract has not been issued in connection with a qualified
plan, there generally is a 10% penalty tax on the taxable amount of any payment
from the contract. This penalty is not applicable if the payment is:
- received on or after the owner reaches age 59 1/2;
- attributable to the owner becoming disabled (as defined in
the tax law);
- made on or after the death of the owner or, if the owner
is not an individual, on or after the death of the primary
annuitant (as defined in the tax law);
- made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life
expectancy) of the owner or the joint lives (or joint life
expectancies) of the owner and a "designated beneficiary"
(as defined in the tax law), or
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<PAGE> 27
- made under a contract purchased with a single premium when
the maturity date is no later than a year from purchase of
the contract and substantially equal periodic payments are
made, not less frequently than annually, during the
annuity period.
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an
annuity payment or a withdrawal from a contract that is includible in income by
combining some or all of the annuity contracts owned by an individual which are
not issued in connection with a qualified plan. For example, if you purchase a
contract offered by this prospectus and also purchase at approximately the same
time an immediate annuity, the IRS may treat the two contracts as one contract.
In addition, if you purchase two or more deferred annuity contracts
from the same insurance company (or its affiliates) during any calendar year,
all such contracts will be treated as one contract for purposes of determining
whether any payment not received as an annuity (including withdrawals prior to
the maturity date) is includible in income. Thus, if during a calendar year you
buy two or more of the contracts offered by this prospectus (which might be
done, for example, in order to invest amounts in different guarantee periods),
all of such contracts would be treated as one contract in determining whether
withdrawals from any of such contracts are includible in income.
The effects of such aggregation are not always clear and depend on the
circumstances. However, aggregation could affect the amount of a withdrawal that
is taxable and the amount that might be subject to the 10% penalty tax described
above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE
BENEFIT OF CERTAIN NON-NATURAL PERSONS
In the case of contracts issued after June 8, 1997 to a non-natural
taxpayer (such as a corporation or a trust), or held for the benefit of such an
entity, a portion of otherwise deductible interest may not be deductible by the
entity, regardless of whether the interest relates to debt used to purchase or
carry the contract. However, this interest deduction disallowance does not
affect contracts where the income on such contracts is treated as ordinary
income that is received or accrued by the owner during the taxable year.
Entities that are considering purchasing the contract, or entities that will be
beneficiaries under a contract, should consult a tax adviser.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The contracts are also designed for use in connection with certain
types of qualified retirement plans which receive favorable treatment under the
Code. Numerous special tax rules apply to participants in such qualified plans
and to contracts used in connection with such qualified plans. In this
prospectus we provide only general information about the use of the contract
with the various types of qualified plans. Persons intending to use the contract
in connection with a qualified plan should seek competent advice.
The tax rules applicable to qualified plans vary according to the type
of plan and the terms and conditions of the plan itself. For example, for both
withdrawals and annuity payments under certain qualified contracts, there may be
no "investment in the contract" and the total amount received may be taxable.
Both the amount of the contribution that may be made, and the tax deduction or
exclusion that the owner may claim for such contribution, are limited under
qualified plans. If you are considering purchasing a contract for use in
connection with a qualified retirement plan, you should consider, in evaluating
the suitability of the contract, that the contract allows only a single premium
purchase payment in an amount of at least $5,000. If this contract is used in
connection with a qualified plan, the owner and annuitant must be the same
individual. If a co-annuitant is named, all distributions made while the
annuitant is alive must be made to the annuitant. Also, if a co-annuitant is
named who is not the annuitant's spouse, the annuity options which are available
may be limited, depending on the difference in ages between the annuitant and
co-annuitant. Furthermore, the length of any guarantee period may be limited in
some circumstances to satisfy certain minimum distribution requirements under
the Code.
Additionally, for contracts issued in connection with qualified plans
subject to the Employee Retirement Income Security Act, the spouse or ex-spouse
of the owner will have rights in the contract. In such a case, the owner may
need the consent of the spouse or ex-spouse to a change annuity options or make
a withdrawal from the contract.
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<PAGE> 28
In addition, special rules apply to the time at which distributions
must commence and the form in which the distributions must be paid. For example,
failure to comply with minimum distribution requirements applicable to qualified
plans will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the qualified plan. In the case of Individual
Retirement Accounts ("IRAs") (other than Roth IRAs), distributions of minimum
amounts (as specified in the tax law) must generally commence by April 1 of the
calendar year following the calendar year in which the owner attains age 70 1/2.
In the case of certain other qualified plans, distributions of such minimum
amounts generally must commence by the later of this date or April 1 of the
calendar year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment
from certain qualified contracts. (The amount of the penalty tax is 25% of the
taxable amount of any payment received from a "SIMPLE retirement account" during
the 2-year period beginning on the date the individual first participated in any
qualified salary reduction agreement (as defined in the tax law) maintained by
the individual's employer.) There are exceptions to this penalty tax which vary
depending on the type of qualified plan. In the case of an IRA, including a
"SIMPLE IRA," exceptions provide that the penalty tax does not apply to a
payment (a) received on or after the owner reaches age 59 1/2, (b) received on
or after the owner's death or because of the owner's disability (as defined in
the tax law), or (c) made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life expectancy) of the
owner or for the joint lives (or joint life expectancies) of the owner and
designated beneficiary (as defined in the tax law). These exceptions, as well as
certain others not described herein, generally apply to taxable distributions
from other qualified plans (although, in the case of plans qualified under
sections 401 and 403, exception "c" above for substantially equal periodic
payments applies only if the owner has separated from service). In addition, the
penalty tax does not apply to certain distributions from IRAs taken after
December 31, 1997 which are used for qualified first time home purchases or for
higher education expenses. Special conditions must be met to qualify for these
two exceptions to the penalty tax. If you wish to take a distribution from an
IRA for these purposes, you should consult your tax adviser.
When issued in connection with a qualified plan, a contract will be
amended as generally necessary to conform to the requirements of the plan.
However, owners, annuitants, and beneficiaries are cautioned that the rights of
any person to any benefits under qualified plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the contract. In addition, we will not be bound by terms and conditions of
qualified plans to the extent such terms and conditions contradict the contract,
unless we consent.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which we may issue a contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits
eligible individuals to contribute to an individual retirement program known as
an IRA. IRAs are subject to limits on the amounts that may be contributed and
deducted, the persons who may be eligible and on the time when distributions may
commence. Also, distributions from certain qualified plans may be "rolled over"
on a tax-deferred basis into an IRA. The contract may not be used in connection
with an "Education IRA" under Section 530 of the Code.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code
allows employers to establish simplified employee pension plans for their
employees, using the employees' IRAs for such purposes, if certain criteria are
met. Under these plans the employer may, within specified limits, make
deductible contributions on behalf of the employees to IRAs. Employers intending
to use the contract in connection with such plans should seek competent advice.
SIMPLE IRAS. Section 408(p) of the Code permits certain small employers
to establish "SIMPLE retirement accounts," including SIMPLE IRAs, for their
employees. Under SIMPLE IRAs, certain deductible contributions are made by both
employees and employers. SIMPLE IRAs are subject to various requirements,
including limits on the amounts that may be contributed, the persons who may be
eligible, and the time when distributions may commence.
28
<PAGE> 29
ROTH IRAS. Section 408A of the Code permits eligible individuals to
contribute to a type of IRA known as a "Roth IRA." Roth IRAs are generally
subject to the same rules as non-Roth IRAs, but differ in certain respects.
Among the difference are that contributions to a Roth IRA are not
deductible and "qualified distributions" from a Roth IRA are excluded from
income. A qualified distribution is a distribution that satisfies two
requirements. First, the distribution must be made in a taxable year that is at
least five years after the first taxable year for which a contribution to any
Roth IRA established for the owner was made. Second, the distribution must be:
- made after the owner attains age 59 1/2;
- made after the owner's death;
- attributable to the owner being disabled; or
- a qualified first-time homebuyer distribution within the meaning
of Section 72(t)(2)(F) of the Code.
In addition, distributions from Roth IRAs need not commence when the
owner attains age 70 1/2. A Roth IRA may accept a "qualified rollover
contribution" from a non-Roth IRA but a Roth IRA may not accept rollover
contributions from other qualified plans.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
contract in order to provide benefits under the plans.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the contracts.
Section 403(b) policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings in such years on amounts held as of the last year beginning before
January 1, 1989. These amounts can be paid only if the employee has reached age
59 1/2, separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship are
limited to actual contributions; earnings thereon cannot be distributed on
account of hardship. Amounts subject to the withdrawal restrictions applicable
to Section 403(b)(7) custodial accounts may be subject to more stringent
restrictions. (These limitations on withdrawals do not apply to the extent we
are directed to transfer some or all of the contract value to the issuer of
another tax-sheltered annuity or into a Section 403(b)(7) custodial account.)
DIRECT ROLLOVER RULES
In the case of contracts used in connection with a pension,
profit-sharing, or annuity plan qualified under Sections 401(a) or 403(a) of the
Code, or in the case of a Section 403(b) tax sheltered annuity, any "eligible
rollover distribution" from the contract will be subject to direct rollover and
mandatory withholding requirements. An eligible rollover distribution generally
is any taxable distribution from a qualified pension plan under Section 401(a)
of the Code, qualified annuity plan under Section 403(a) of the Code, or Section
403(b) tax sheltered annuity or custodial account, excluding certain amounts
(such as minimum distributions required under Section 401(a)(9) of the Code,
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more, and hardship
distributions).
Under these requirements, withholding at a rate of 20% will be imposed
on any eligible rollover distribution. In addition, the participant in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply if,
instead of receiving the eligible rollover distribution, the participant elects
to have amounts directly transferred to certain qualified retirement plans (such
as to an IRA). Prior to receiving an eligible rollover distribution, a notice
will be provided explaining generally the direct rollover and mandatory
withholding requirements and how to avoid the 20% withholding by electing a
direct rollover.
29
<PAGE> 30
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the U.S. government a part of the taxable
portion of each distribution made under a contract unless the distributee
notifies us at or before the time of the distribution that he or she elects not
to have any amounts withheld. In certain circumstances, we may be required to
withhold tax. The withholding rates applicable to the taxable portion of
periodic annuity payments are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the maturity
date and rollovers from non-Roth IRAs to Roth IRAs) is 10%. As described above,
the withholding rate applicable to eligible rollover distributions is 20%.
GENERAL MATTERS
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in
the Texas Optional Retirement Program ("ORP") to withdraw their interest in a
deferred annuity contract issued under the ORP only upon:
(1) termination of employment in the Texas public institutions
of higher education,
(2) retirement,
(3) death, or
(4) the participant's attainment of age 70 1/2.
Accordingly, before we may distribute any amounts from the contract, a
participant in the ORP must furnish us proof that one of the four events has
occurred. The foregoing restrictions on withdrawal do not apply if a participant
in the ORP transfers his or her contract value to another contract or another
qualified custodian during the period of participation in the ORP.
30
<PAGE> 31
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
EXAMPLE 1 - Assume you make a single payment of $50,000 into the contract, there
are no transfers or partial withdrawals and your withdrawal is not made at the
end of a guarantee period. The table below illustrates three examples of the
withdrawal charges that we would impose if the contract were completely
withdrawn during the contract year shown, based on hypothetical contract values
and assuming no market value adjustment.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL FREE AMOUNT SUBJECT CHARGE
CONTRACT CONTRACT WITHDRAWAL TO WITHDRAWAL ------------------------
YEAR VALUE AMOUNT CHARGE PERCENT AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 55,000 5,000(a) 50,000 6% 3,000
6 60,000 5,000(b) 55,000 2% 1,100
8 70,000 5,000 0(c) 0% 0
</TABLE>
(a) During any contract year the free withdrawal amount is 10% of the
single payment made under the contract less any prior partial
withdrawals in that contract year. Ten percent of payments less prior
withdrawals equals $5,000 ($5,000-0). Consequently, on total
withdrawal, you withdraw $5,000 without imposition of the withdrawal
charge, and we assess the withdrawal charge against the remaining
balance of $50,000 (contract value less free withdrawal amount).
(b) The free withdrawal amount is again equal to $5,000, and we apply the
withdrawal charge to the remaining balance of $55,000 (contract value
less free withdrawal amount).
(c) There is no withdrawal charge after seven contract years.
EXAMPLE 2 - Assume you make a single payment of $50,000 into the contract and
that no transfers are made. The table below illustrates two partial withdrawals
of $2,000 and $7,000 made during the third contract year and assumes no market
value adjustment applies.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL PARTIAL FREE AMOUNT SUBJECT CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL TO WITHDRAWAL --------------------------
VALUE REQUESTED AMOUNT CHARGE PERCENTAGE AMOUNT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
65,000 2,000 2,000(a) 0 5% 0
63,000 7,000 3,000(b) 4,000 5% 200
</TABLE>
(a) The free withdrawal amount during any contract year is 10% of the
single payment made under the contract less any prior withdrawals in
that contract year. Ten percent of the payment less prior withdrawals
equals $5,000 ($5,000-0). The amount requested ($2,000) is less than
the free withdrawal amount; therefore, no withdrawal charge applies.
(b) Since $2,000 has already been withdrawn in the current contract year,
the remaining free withdrawal amount during the third contract year is
$3,000. The $7,000 partial withdrawal will consist of $3,000 free of
withdrawal charge, and the remaining $4,000 will be subject to a
withdrawal charge.
We may subject withdrawals to a market value adjustment in addition to
the withdrawal charge described above (see "MARKET VALUE ADJUSTMENT").
A-1
<PAGE> 32
APPENDIX B
MARKET VALUE ADJUSTMENT EXAMPLES
We determine the market value adjustment factor by the following
formula: ((1+i)/(1+j)) n/12 where:
i - The initial guaranteed interest rate or renewal guaranteed
interest rate currently being earned on the contract.
j - The guaranteed interest rate available, on the date the
request is processed by the Company, for a guarantee period
with the same length as the period remaining in the initial
renewal guarantee period or RENEWAL guarantee period. If the
guarantee period of this length is not available, the
guarantee period with the next highest duration which is
maintained by the Company will be chosen.
n - The number of complete months remaining to the end of the
initial guarantee period or renewal guarantee period.
EXAMPLE 1
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest
rate 5.00% per annum
Guaranteed interest rate for
three year guarantee period 6.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of
contract year 3 =$100,000 x 1.05(2.5)=$112,972.63
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment = ((1+i)/(1+j))n/12
factor i = .05
j = .06
n = 30
= (1.05/1.06)30/12
= 0.9765817
Amount transferred to a
different guarantee period =$112,972.63 x 0.9765817
=$110,327.00
B-1
<PAGE> 33
EXAMPLE 2
Payment $100,000
Initial guarantee period 5 years
Initial guaranteed interest 5.00% per annum
rate
Guaranteed interest rate for
three year guarantee period 4.00% per annum
Transfer to a different
guarantee period middle of contract year 3
Contract value at middle of =$100,000 x 1.05(2.5)=$112,972.63
contract year 3
Amount transferred to a
different guarantee period =$112,972.63 x market value adjustment factor
Market value adjustment
factor = ((1+i)/(1+j))n/12
i = .05
j = .04
n = 30
= (1.05/1.04)30/12
= 1.0242121
Amount transferred to a
different guarantee period =$112,972.63 x 1.0242121
=$115,707.93
B-2
<PAGE> 34
APPENDIX C
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
- --------------------------------------------------------------------------------
CALIFORNIA......................... .50% 2.35%
MAINE .......................... .00% 2.00%
NEVADA .......................... .00% 3.50%
PUERTO RICO........................ 1.00% 1.00%
SOUTH DAKOTA*...................... .00% 1.25%
WEST VIRGINIA...................... 1.00% 1.00%
WYOMING .......................... .00% 1.00%
* Premium tax paid upon receipt of premium (no tax at annuitization if tax paid
on premium at issue).
C-1
<PAGE> 35
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF NORTH AMERICA
Years ended December 31, 1999, 1998 and 1997
<PAGE> 36
The Manufacturers Life Insurance Company of North America
Audited Consolidated
Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors.................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................3
Consolidated Statements of Changes in Shareholder's Equity.....................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
<PAGE> 37
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. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 2000
1
<PAGE> 38
THE MANUFACTURERS LIFE INSURANCE COMPANY OF NORTH AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31
ASSETS ($ thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
<S> <C> <C>
Fixed-maturity securities available-for-sale, at fair value (note 3)
(amortized cost: 1999 $156,382; 1998 $152,969) $ 152,922 $ 157,743
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.
2
<PAGE> 39
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.
3
<PAGE> 40
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.
4
<PAGE> 41
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
operations - - 1,707
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.
5
<PAGE> 42
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.
6
<PAGE> 43
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.
7
<PAGE> 44
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.
8
<PAGE> 45
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.
9
<PAGE> 46
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.
l) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
10
<PAGE> 47
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 UNREALIZED UNREALIZED FAIR
AS AT DECEMBER 31, COST GAINS LOSSES VALUE
($ 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
-----------------------------------------------------------------------------------------------------------
FIXED-MATURITY SECURITIES
<S> <C> <C>
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 $6,105 at
December 31, 1999 and 1998, respectively, were on deposit with, or in
custody accounts on behalf of, state insurance departments to satisfy
regulatory requirements.
11
<PAGE> 48
3. INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
b) INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS
Income by type of investment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ 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
-----------------------------------------------------------------------------------------------------------
Fixed-maturity securities:
<S> <C> <C> <C>
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 $372 for 1999, 1998, and 1997,
respectively.
12
<PAGE> 49
5. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ 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 operations - - (1,707)
Amortization included in gain on disposal of
discontinued operations - - (6,943)
Effect of net unrealized losses (gains) on
securities available-for-sale 2,033 (679) (293)
-----------------------------------------------------------------------------------------------------------
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>
13
<PAGE> 50
6. INCOME TAXES (CONTINUED)
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.
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-
14
<PAGE> 51
7. FINANCING AND REINSURANCE AGREEMENTS (CONTINUED)
based premium, the level of which varies with both the amount of
exposure to this risk and the realized experience.
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>
In December 1999, the Company received a capital contribution of
$28,049 from MWLH.
In October 1997, the Company received a capital contribution of $47,731
from MWLH to support expansion of its New York operations.
15
<PAGE> 52
8. SHAREHOLDER'S EQUITY (CONTINUED)
The net assets of MNA and MNY available to MWLH as dividends are
generally limited to, and cannot be made except from, earned statutory
basis profits. The maximum amount of dividends that may be paid by life
insurance companies without prior approval of the Insurance
Commissioners of the States of Delaware and New York is subject to
restrictions relating to statutory surplus and net gain from operations
on a statutory basis.
Net (loss) income and capital and surplus, as determined in accordance
with statutory accounting principles for MNA and MNY were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
($ 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.
16
<PAGE> 53
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>
17
<PAGE> 54
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.
18
<PAGE> 55
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.
19
<PAGE> 56
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:
YEAR ENDED: MINIMUM LEASE PAYMENTS
------------------------------------------------------
2000 4,028
2001 4,012
2002 4,008
2003 3,994
2004 and after 19,234
-------------------------------------------------------
Total $35,276
=======================================================
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 $223 in 1997 were incurred on the sale
and netted against the realized gain.
20
<PAGE> 57
15. DISCONTINUED OPERATIONS (CONTINUED)
The operating results related to discontinued operations are summarized
as follows:
FOR THE YEAR ENDED DECEMBER 31
($ thousands) 1997
----------------------------------------------------------------
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)
----------------------------------------------------------------
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
accruals 139,764 137,717 102,252 98,312
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.
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<PAGE> 58
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.
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