<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF l934
for the fiscal year ended December 31, 1997
Commission File Number: 33-57020
THE MANUFACTURERS LIFE
INSURANCE COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of incorporation or organization)
23-2030787
(I.R.S. Employer Identification No.)
500 N. Woodward Avenue
Bloomfield Hills, Michigan 48304
(Address of Principal executive offices)
(416) 926-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) or 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part II of this
Form 10-K or any amendment to this Form 10-K. [X]
No shares of voting stock are held by nonaffiliates of the Registrant.
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's sole class of common stock, as
of December 31, 1997 is 4,501,860
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part K, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
None.
1
<PAGE> 2
PART I
Item 1. - BUSINESS
The Registrant is an indirect wholly-owned subsidiary of The Manufacturers Life
Insurance Company, a mutual insurance company organized under laws of Canada.
The Registrant's primary purpose is to issue and sell variable universal life
and variable annuity products in the United States. The Registrant also has
branch operations in Taiwan to develop and market traditional insurance for the
Taiwanese market.
Item 2. - PROPERTIES
The Registrant owns no property.
Item 3. - LEGAL PROCEEDINGS
Nothing to report.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An action by unanimous consent of the sole stockholder of the Company with
regard to elect and appoint Sandra M. Cotter, James D. Gallagher, Bruce Gordon,
Donald A. Guloien, Theodore Kilkuskie Jr., Joseph J. Pietroski, and John D.
Richardson as the Board of Directors of the Company, was approved on May 30,
1997.
2
<PAGE> 3
PART II
Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant is a wholly-owned subsidiary of The Manufacturers Life Insurance
Company (U.S.A.), which is the sole record holder of the Registrant's shares.
Therefore, there is no public trading market for the Registrant's common stock.
The Registrant has declared no cash dividends on its common stock at any time
during the two most recent fiscal years.
Item 6. - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------------------------------------------
1997 1996 1995 1994 1993*
(in thousands)
<S> <C> <C> <C> <C> <C>
Under Generally Accepted Accounting Principles:
Total Revenues $ 56,226 $ 73,532 $ 62,174 $ 60,322
Net Loss 3,636 8,407 6,846 6,726
Total Assets 1,166,611 1,062,603 854,814 654,968
Long Term Obligations 41,500 8,500 167,390 159,019
Capital and Surplus 106,769 116,630 110,520 101,839
</TABLE>
* Selected financial data under generally accepted accounting principles is not
available for the 1993 fiscal year. See Management's Discussion and Analysis and
Notes to the Consolidated Financial Statements for additional information.
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
(in thousands)
<S> <C> <C> <C> <C> <C>
Under Statutory Principles:**
Total Revenues $ 229,080 $ 202,666 $ 165,756 $ 197,426 $ 129,272
Net Loss 2,550 15,961 13,705 19,661 13,277
Total Assets 1,028,360 795,083 588,742 403,086 253,392
Long Term Obligations 33,000 -- -- -- --
Capital and Surplus 56,598 76,202 56,298 49,396 50,656
</TABLE>
** Statutory accounting principles differ in certain respects from generally
accepted accounting principles. The significant differences relate to
consolidation accounting, investments, deferred acquisition costs, deferred
income taxes, non-admitted asset balances, surplus notes and reserve calculation
assumptions.
All information presented elsewhere in this document is presented under
generally accepted accounting principles.
3
<PAGE> 4
Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following analysis of the consolidated results of operations and financial
condition of The Manufacturers Life Insurance Company of America (the "Company"
or ManAmerica") should be read in conjunction with the Consolidated Financial
Statements and the related Notes to Consolidated Financial Statements.
CORPORATE STRUCTURE AND OVERVIEW
The Company is a direct wholly-owned U.S. subsidiary of The Manufacturers Life
Insurance Company (U.S.A.) ("ManUSA"), which in turn is a direct wholly-owned
subsidiary of the Manulife Reinsurance Corporation (U.S.A.) ("MRC"). MRC is an
indirectly wholly-owned subsidiary of The Manufacturers Life Insurance Company
("Manulife Financial"), a Canadian mutual insurance company. Manulife Financial,
with consolidated assets under management of $79.7 billion ($Can), actively
operates in thirteen countries worldwide. Manulife Financial has been doing
business in the United States since 1903.
Manulife Financial and its subsidiaries have consistently received excellent
ratings from Standard & Poor's Insurance Rating Service, A. M. Best Company,
Moody's Investors Service Inc. and Duff & Phelps Credit Rating Co.
The Company is active in two distinct businesses:
a) Domestically, the sale of Variable Insurance Products
b) Internationally, the sale of participating insurance products
through Branch Operations in Taiwan
Variable Products
During the last four years the company has grown significantly through the
successful growth in variable insurance sales. This growth reflects:
a) continuing shift in consumer preference as they seek greater
control over their investment decision making,
b) more active marketing and sales practices by the company,
c) increased consumer acceptance of this product due to
increasing estate planning needs.
This growth continued in 1997 with variable universal life deposits being 128%
of the 1996 deposits. The Company's introduction in 1997 of a corporate-owned
(COLI) Variable Universal Life contract together with the addition of nineteen
new investment accounts have been positively received. During the same period
the separate account assets grew from $668 million to $897 million.
In particular, the new investment accounts increased available investment
options while providing policyholders with the ability to increase
diversification not only by investment type but also by portfolio management
style. Prior to December 31, 1996 the assets in the Company's Separate Accounts
invested in shares of the Manulife Series Fund, Inc. On December 31, 1996 the
Manulife Series Fund, Inc. was merged with the Manufacturers Investment Trust
(formerly named NASL Series Trust). The reorganization enabled policyholders to
have access to a broader group of high profile external fund managers and to
take advantage of an investment management approach known as managing to the
"Efficient Frontier" in which investors' assets are allocated amongst a broad
mix of investment choices consistent with their risk tolerance levels. This
change makes most of the Manufacturers Investment Trust fund options available
as investment options in most of the variable policies issued by the Company. We
remain positive about the future growth and profitability from this product
line.
Variable annuity deposits during 1997 were 32% of 1996 deposit levels. The
Company de-emphasized the sale of variable annuities and concentrated on the
sale of estate planning variable life products which is more consistent with its
client and producer base.
Variable annuities for Manulife Financial are currently being marketed through
an affiliated company, The Manufacturers Life Insurance Company of North
America, formerly North American Security Life Insurance Company, ("Manulife
North America").
Taiwan
The Company entered Taiwan in 1992 as a start-up venture to sell traditional
insurance products through its Taiwan branch. During 1995 the Company commenced
full operations that resulted in significant expenditures on agent recruitment
and training. In 1996 Taiwan's operating losses increased as a result of costs
associated with recruitment and training. Although management expected losses,
the magnitude was not acceptable. In late 1996, a new General Manager was
appointed and
4
<PAGE> 5
transferred to Taiwan with the mandate to slow growth and focus more selectively
on real strategic opportunities. Significant improvements were seen in 1997 with
a decrease in the net loss reported. The currency crisis experienced in Asia in
the fourth quarter of 1997 impacted the Taiwan branch operations through higher
lapses as policyholders had difficulty paying premiums largely denominated in
U.S. dollars. Nonetheless, the Company continues to anticipate a large potential
for this market.
In addition to the above businesses, the Company assumes reinsurance from its
Parent Company, ManUSA. The Company reinsures an inforce individual
participating life insurance block of business which does not include any new
business.
RECENT DEVELOPMENTS
Manufacturers Life Mortgage Securities Corporation
In October 1997, the Company's indirect wholly-owned subsidiary, Manufacturers
Life Mortgage Securities Corporation, ("MLMSC"), which was an issuer of
mortgage-backed U.S. dollar bonds, was absorbed into Manulife Holding
Corporation, a wholly-owned holding company for a number of U.S. non-insurance
subsidiaries primarily supporting variable products. See notes 2 and 5 to the
consolidated financial statements for additional information.
Adoption of Generally Accepted Accounting Principles
During 1996, the Company adopted generally accepted accounting principles
("GAAP") in conformity with the requirements of the Financial Accounting
Standards Board. Prior to 1996, the Company prepared its financial statements in
conformity with statutory accounting practices prescribed or permitted by the
Insurance Department of the State of Michigan which were considered GAAP for
mutual life insurance companies and their wholly-owned direct and indirect
subsidiaries. As discussed in note 2 to the consolidated financial statements,
the effect of the adoption of GAAP has been reflected retroactively and the
previously issued 1995 financial statements have been restated for the change. A
description of the accounting policies can be found in note 3 to the
consolidated financial statements.
Demutualization
On January 20, 1998, the Board of Directors of Manulife asked the management of
Manulife to prepare a plan for conversion of Manulife from a mutual life
insurance company to an investor-owned, publicly-traded stock company. Any
demutualization plan for Manulife is subject to the approval of the Manulife
Board of Directors and policyholders as well as regulatory approval.
FORWARD-LOOKING STATEMENTS
Certain information included herein is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited to,
statements concerning anticipated operating results, financial resources, growth
in existing markets and the impact of the year 2000. Such forward-looking
information involves important risks and uncertainties that could significantly
affect actual results and cause them to differ materially from expectations
expressed herein. These risks and uncertainties include changes in general
economic conditions, the effect of regulatory, tax and competitive changes in
the environment in which the Company operates, fluctuations in interest rates,
performance of financial markets and the Company's ability to achieve
anticipated levels of earnings.
5
<PAGE> 6
REVIEW OF CONSOLIDATED OPERATING RESULTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Financial Summary (In '000's) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums $ 5,334 $ 12,898 $ 15,293
Fee Income 41,955 40,434 24,986
Net Investment Income 8,275 19,651 18,729
Other Revenues 544 668 82
Realized Capital Gains (Losses) 118 (119) 3,084
- ---------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 56,226 $ 73,532 $ 62,174
- ---------------------------------------------------------------------------------------------------------------------------
Policyholder Benefits $ 6,733 $ 14,473 $ 16,905
Operating Costs and Expenses 41,742 34,581 30,728
Policyholder Dividends 1,416 872 1,886
- ---------------------------------------------------------------------------------------------------------------------------
Loss Before Taxes (4,113) (12,316) (10,806)
Income Tax Benefit 477 3,909 3,960
Net Loss (3,636) (8,407) (6,846)
- ---------------------------------------------------------------------------------------------------------------------------
General Account Assets 269,567 394,509 374,409
Separate Account Assets 897,044 668,094 480,405
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets 1,166,611 $1,062,603 $854,814
- ---------------------------------------------------------------------------------------------------------------------------
General Account Liabilities 162,798 $ 277,879 $263,889
Separate Account Liabilities 897,044 668,094 480,405
- ---------------------------------------------------------------------------------------------------------------------------
Capital and Surplus $106,769 $116,630 $110,520
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET LOSS
The Company reported a consolidated net loss in 1997 of $3.6 million, compared
to the 1996 net loss of $8.4 million ($6.8 million net loss in 1995). The main
contributors to these losses were as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US Operations $(0.8) $ 9.1 $ 2.5
Taiwan Operations (2.8) (17.5) (9.3)
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS $ 3.6 $ 8.4 $ 6.8
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net loss from U.S. operations in 1997 of $0.8 million compared to a net
income in 1996 of $9.1 million was a result of a significant increase in
operating costs and expenses in 1997. This was directly attributable to new
business strain on dramatically increased variable universal life contract sales
for which deposits increased 28% over 1996 levels. The improvement in net income
in 1996 compared to 1995 was a result of increased policy fees which more than
offset costs associated with increased sales.
The net loss from Taiwan operations decreased to $2.8 million in 1997 from $17.5
million in 1996 (a $9.3 million net loss in 1995). The increased net loss in
1996 was a result of significant start-up costs incurred in Taiwan, particularly
associated with producer recruitment. In 1997, as discussed earlier,
improvements were made in the Taiwan branch operations to rationalize the
operations, slow the sales growth and related production costs, and to instead
focus on strategic growth. Lower sales significantly reduced the level of
commissions and expenses incurred.
PREMIUMS
Premium revenue for 1997 was $5.3 million compared to $12.9 million in 1996
($15.3 million in 1995). Of the total, premiums related to sales of traditional
life insurance contracts in Taiwan in 1997, 1996 and 1995 were $4.8 million,
$12.2 million and $9.3 million respectively. The decrease in premiums reported
in Taiwan in 1997 are a result of the more focused strategic growth discussed
previously whereas the increase in 1996 over 1995 reflected the initially
growing operation. Premiums
6
<PAGE> 7
related to U.S. operations decreased to $0.5 million in 1997 from $0.7 million
in 1996 and $6.0 million in 1995. The U.S. premiums relate solely to a block of
Corporate-owned life insurance business assumed from ManUSA for which the
initial premium assumed of $25.4 million was received in 1994, with very little
renewal premium received thereafter.
Total general account and separate account deposits not included in premiums
above were as follows:
<TABLE>
<CAPTION>
(In '000's) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Variable Life Insurance $185,355 $144,438 $108,323
Variable Annuities 11,598 36,130 37,834
- ----------------------------------------------------------------------------------------------
TOTAL $196,953 $180,568 $146,157
- ----------------------------------------------------------------------------------------------
</TABLE>
The growth in variable life insurance deposits continued while single premium
variable annuity premiums continued to decrease in 1997 and 1996. The deposit
growth for variable life is consistent with the Company's commitment to develop
variable core "estate/business planning products". A survivorship variable
universal life product launched in late 1995 showed significant growth in 1996
which continued throughout 1997 along with the growth due to the new COLI
variable universal life contract in 1997. With the merger of Manulife Financial
and North American Life Assurance Company in 1996, the sale of variable
annuities in the Company was de-emphasized in October 1997 and all variable
annuity sales will be made through an affiliated company, Manulife North
America.
FEE INCOME
Fee income for 1997 was $42 million, compared to $40.4 million in 1996 ($25
million in 1995). Strong investment performance in 1997 and 1996 and a growing
maturing block of in-force business resulted in higher separate account values
and, therefore, higher fee income, which is earned on a percentage of the net
value of invested assets in the separate account portfolios. The variable
universal life and annuity business accounted for 84% of the fee income earned
by the Company in 1997 compared to 85% in 1996 and 94% in 1995. The remainder of
the fee income is derived through investment management fees.
NET INVESTMENT INCOME
Net investment income was $8.3 million in 1997 compared to $19.7 million in 1996
($18.7 million in 1995). The decrease in 1997 is due to the maturity of a $171.7
million guaranteed annuity contract in March 1997 on which interest of
approximately $13.2 million was reported in 1996. The increase in 1996 compared
to 1995 is due to the strengthening of the stock market in 1996.
REALIZED CAPITAL GAINS
In 1997, the Company had realized capital gains of $0.1 million, compared to
losses of $0.1 million in 1996 ($3.1 million realized gains in 1995). The
Company occasionally sells bonds to provide cash flow and the realized gains or
losses are a result of this activity and will vary as interest rates fluctuate
from year to year.
POLICYHOLDER BENEFITS
Policyholder benefits decreased to $6.7 million in 1997, compared to $14.5
million in 1996 ($16.9 million in 1995). The decrease in 1997 is a direct result
of the reduction in activity and death claims experience in Taiwan. Death claims
experience in 1996 was favorable compared to expected levels and to prior years.
OPERATING COSTS AND EXPENSES
Operating costs and expenses, net of deferrable acquisition expenses, increased
to $41.7 million in 1997 compared to $34.6 million in 1996 ($30.7 million in
1995). The increase in 1997 and 1996 is due to non-deferrable expenses incurred
in connection with the development of two new products, a COLI variable
universal life contract in 1997 and a survivorship variable life contract in
1996 as discussed previously.
7
<PAGE> 8
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
The Company had total consolidated assets of $1,167 million at December 31,
1997, an increase of $104 million or 9.8% from 1996. This change is principally
a result of separate account asset growth of $229 million due to strong
investment performance of the underlying investment funds, continued consumer
preference for participation in the stock market through separate accounts, and
the additional product offerings and investment options introduced in 1997,
offset by a reduction in general account assets due to the maturity and
repayment of MLMSC's mortgage-backed bonds.
INVESTMENTS
The following table outlines by type of investment the carrying value of the
general account investment portfolio of the Company:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Investment Type (In '000's) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $ 67,893 $ 51,708
Equities 19,460 21,572
Mortgage loans 131 645
Policy Loans 14,673 9,822
Cash and Short-Term Investments 22,012 17,493
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $124,169 $101,240
- ------------------------------------------------------------------------------------------
</TABLE>
General account investments increased by $22.9 million or 22.6% from 1996. This
change is due to an increase in fixed maturities of $16.2 million and cash and
short-term investments of $4.5 million. In the fourth quarter of 1997,
ManAmerica borrowed $33 million from its parent, ManUSA, to provide additional
liquidity and to meet the costs of new business strain resulting from
significant COLI sales.
FIXED MATURITIES
The Company's fixed maturity bond portfolio of $67.9 million represents 55% of
investments at the end of 1997, compared to 51% at the end of 1996.
As at December 31, 1997, 97.5% of the bond portfolio was rated "A" or higher,
and 100% was rated investment grade, "BBB" or higher. The corresponding
percentages at the end of 1996 were 85.9% and 97.5%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fixed maturities by Investment Grade
(In '000's) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA $52,496 77.2% $16,953 32.7%
AA 516 1.0% 5,483 10.6%
A 13,167 19.3% 21,973 42.5%
BBB 1,714 2.5% 6,032 11.7%
BB & lower, and unrated - - 1,267 2.5%
- ----------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $67,893 $51,708
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
EQUITY SECURITIES
The Company's equity portfolio of $19.5 million represents 16% of investments at
the end of 1997, compared to 21% at the end of 1996. The equities consist
entirely of investments in mutual funds sponsored by an affiliate.
8
<PAGE> 9
POLICY LOANS
Policy loans represented 12% of investments at December 31, 1997, compared to
10% in 1996. Most individual life insurance policies provide the individual
policyholder with the right to obtain a policy loan from the Company. Such loans
are made in accordance with the terms of the respective policies, are carried at
the unpaid balance, and are fully secured by the cash surrender value of the
policies on which the respective loans are made.
IMPAIRED ASSETS
Allowances for losses on investments are established when an asset or portfolio
of assets becomes impaired as a result of deterioration in credit quality to the
extent that there is no longer assurance of timely realization of the carrying
value of assets and related investment income. The carrying value of an impaired
asset is reduced to the net realizable value of the asset at the time of
recognition of impairment.
The Company had no provisions for impairments as at December 31, 1997 and 1996.
GUARANTEED ANNUITY CONTRACTS
The Guaranteed Annuity Contract of $171.7 million held by MLMSC with the
Company's parent, ManUSA matured on March 1, 1997, the same date that the
mortgage backed security issued by MLMSC matured and was repaid, resulting in a
decrease in general account assets in 1997.
POLICYHOLDER LIABILITIES
The following table shows the distribution of Policyholder Liabilities and
Separate Account Liabilities by line of business at December 31:
<TABLE>
<CAPTION>
Policyholder Liabilities (In '000's) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Life Insurance:
Taiwan $ 13,291 $ 15,305
Reinsurance 40,975 44,497
Variable Life 40,211 32,113
- ----------------------------------------------------------------------------------------
TOTAL $ 94,477 $ 91,915
- ----------------------------------------------------------------------------------------
Separate Account Liabilities (In '000's) 1997 1996
- ----------------------------------------------------------------------------------------
Variable Life Insurance $603,732 $399,403
Variable Annuities 293,312 268,691
- ----------------------------------------------------------------------------------------
TOTAL $897,044 $668,094
- ----------------------------------------------------------------------------------------
</TABLE>
Separate account liabilities are $897 million, an increase of 34% over 1996.
This reflects the growing popularity of variable products in the marketplace and
the increase in existing fund values due to the increase in the stock market in
1997 and sales of the new COLI product.
Taiwan reserves decreased in 1997 due to the higher lapses and slower growth.
ASSET/LIABILITY MANAGEMENT
The Company has established a target portfolio mix which takes into account the
risk attributes of the liabilities supported by the assets, expectations of
market performance, and a generally conservative investment philosophy.
Preservation of capital and maintenance of income flows are key objectives.
9
<PAGE> 10
LIQUIDITY AND CAPITAL REQUIREMENTS
The General account liabilities consist of traditional insurance whose liquidity
requirements do not fluctuate significantly from one year to the next. The
majority of the Company's cash flows arise from policyholder transactions
related to the Separate account, and, as such, the assets and liabilities of
these products are exactly matched.
The Company maintains a prudent amount invested in cash and short term
investments. At the end of 1997, this amounted to $22 million or 17.7% of total
investments compared to $17.5 million in 1996 or 17.3%. In addition, the
Company's liquidity is managed by maintaining an easily marketable portfolio of
fixed maturities. Because of the excess of expense over income, which arises
from the cost of new policy issues, the continued success in generating sales
will not only result in losses in the results from operations, but will create a
cash flow strain as well. The Company's consolidated statements of cash flows
indicates this in that operating activities used cash of $24.7 million and $20.5
million in 1997 and 1996 respectively compared to $29.6 million in 1995. As a
result, the Company looks to its parent, ManUSA, for the necessary capital to
support its operations. In 1995 a surplus note for $8.5 million was issued to
the Company from ManUSA. In 1996, a $15 million contribution of capital was made
to the Company by its Parent to provide further liquidity. In December 1997, the
Company borrowed $33 million from ManUSA pursuant to a promissory note maturing
on February 1, 2007. Manulife Financial provides a claims paying guarantee to
the Company's U.S. policyholders.
The Company has no material commitments for capital expenditures.
CAPITAL REQUIREMENTS AND SOLVENCY PROTECTION
In order to enhance the regulation of insurer solvency, the NAIC enforces
minimum Risk Based Capital (RBC) requirements. The requirements are designed to
monitor capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. The RBC model law required that life
insurance companies report on a formula-based RBC standard which is calculated
by applying factors to various assets, 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.
RISK MANAGEMENT PRACTICES AND PROCEDURES
Risk management is a fundamental component in the Company's financial strength
and stability, and is essential to its continuing success. The Company is
committed to comprehensive risk management policies and procedures which measure
and control risk in all of its business activities and allow for periodic
reviews by internal and external auditors and regulators.
The key risks faced by the Company are currency risk, credit, claims, pricing
and business risks. The nature of these risks and how they are managed is
explained in the following sections.
CURRENCY RISK
The Company's policy of matching assets with related liabilities by currency
limits it's exposure to foreign currency movements to a minimal level. The
currency exposure on surplus is proportional to the underlying liabilities, thus
insulating the Company's "surplus to liability" ratios from changes in foreign
currency exchange rates.
As a result of the Company's foreign currency policy, the impact of the current
foreign exchange crisis in Asia on the Company's earnings was minimal although
the Company recognizes that the economic value of the Taiwan branch was affected
by the economic and currency developments in these markets.
CREDIT RISK
Credit risk is the risk that a party to a financial instrument will fail to
fully honor its financial obligations to the Company. Senior management within
the Investments operations establishes policies and procedures for the
management of credit risk which limits concentration by issuer, connections,
rating sector and geographic region. Limits are placed on all personnel in
10
<PAGE> 11
terms of ability to commit the Company to credit instruments. Credit and
commitment exposures are monitored using a rigorous reporting process and are
subject to a formal quarterly review.
CLAIMS RISK
The Company is always subject to the risk of change in the life expectancy of
the population. Claims trends are therefore monitored on an ongoing basis. The
Company uses both its own and industry experience to develop estimates of future
claims.
The management of ongoing claims risk for an insurer includes establishing
appropriate criteria to determine the insurability of applicants as well as
managing the exposure to large dollar claims. Underwriting standards have been
established to manage the insurability of applicants. Management performs
periodic reviews to ensure compliance with standards.
Exposure to large claims is managed by establishing policy retention limits.
Policies in excess of the limits are reinsured with MRC. Underwriting standards
and policy retention limits are reviewed on a periodic basis.
PRICING RISK
The process of pricing products includes the estimation of many factors
including future investment yields, mortality and morbidity experience,
expenses, rates of policy surrender, and taxes. Pricing risk is the risk that
actual experience in the future will not develop as estimated in pricing. Some
products are designed such that adjustments to premiums or benefits can be made
for experience variations, while for other products no such changes are
possible.
The Company manages pricing risks by setting standards and guidelines for
pricing. These standards and guidelines cover pricing methods and assumption
setting, profit margin objectives, required scenario analysis, and
documentation. They also address the areas of pricing software, approved pricing
personnel, and pricing approvals. These standards and guidelines ensure that an
appropriate level of risk is borne by the Company and that an appropriate return
is provided to the policyholders.
During 1997, enhancements were introduced to the pricing risk management
process, including completion of an annual compliance self-assessment by all
business units and the conducting of full audits of business unit pricing
operations on a rotating basis, with all units expected to be audited over a
three to five year cycle.
BUSINESS RISK
Business risk comprises operating risk as well as other risks. Operating risk is
the exposure to inadequate internal controls, including inadequate control of
risk management. Other risks include legal, political, competitive and
environmental risks. Business risks expose the Company to potential loss of
earnings.
The Company manages operating risks by establishing appropriate internal control
policies and procedures. The Company centrally manages business risk using risk
identification and compliance monitoring processes. Diversification of
businesses is an integral part of the Company's business risk management
strategy.
A controllership function has been established in each operation and is
responsible for day-to-day management of operating risk including compliance
with Company control policies.
The Company has coordinated its operational compliance departments under the
supervision of its corporate legal function. This structure ensures compliance
with all legal and regulatory requirements in all jurisdictions in which the
Company does business. All customer-related communications, product brochures
and selling tools, and procedures for compliance therewith, are subject to
review by the compliance function. Compliance is monitored on an ongoing basis.
IMPACT OF YEAR 2000
Preparing computer systems to deal with the Year 2000 risk has become a major
issue for businesses throughout the world. Within the Manulife Financial group,
a group-wide program has been underway since 1996 to make all critical systems
compliant by the end of 1998 and other systems compliant by the end of 1999.
Included in this program are all systems applicable to and shared by the Company
with Manulife Financial. Based on a detailed assessment, Manulife Financial
determined that a portion of its software needs to be modified or replaced so
that its computer systems will function properly into the Year 2000 and beyond.
Like most companies, the Year 2000 issue represents a significant challenge for
Manulife
11
<PAGE> 12
Financial and extensive resources have been dedicated to modifying existing
software and to converting to new software. However, there can be no assurances
that Manulife Financial's systems, nor those of other companies on which
Manulife Financial relies, will be fully converted on a timely basis and
therefore that all adverse effect on the Company due to the Year 2000 risk will
be avoided. Manulife Financial is presently consulting with vendors, customers,
subsidiaries, third-parties and other businesses with which it deals to ensure
that no material aspect of its, or the Company's, operations will be hindered by
the Year 2000 risk.
The costs of the project and the date on which Manulife Financial plans to
complete the modifications are based on management's best estimates and are
subject to some uncertainty. Manulife Financial is using both internal and
external resources to reprogram, or replace, and test the software for Year 2000
modifications. The total cost of this program to Manulife Financial is estimated
to be $64 million, comprised of $55 million for specifically budgeted programs
and $9 million for general contingencies. Manulife Financial has incurred $15
million as at December 31, 1997 of which the Company will receive an allocation
due to its shared systems. The costs allocated are not expected to have a
material effect on the net operating income of the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Following Page
12
<PAGE> 13
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...................................................................14
Audited Consolidated Financial Statements........................................................15
Consolidated Balance Sheets.................................................................15
Consolidated Statements of Income...........................................................16
Consolidated Statements of Changes in Capital And Surplus...................................17
Consolidated Statements of Cash Flows.......................................................18
Notes to Consolidated Financial Statements.......................................................19
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Manufacturers Life Insurance Company of America
We have audited the accompanying consolidated balance sheets of The
Manufacturers Life Insurance Company of America as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in capital and
surplus and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Manufacturers
Life Insurance Company of America at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
March 20, 1998 Ernst & Young LLP
14
<PAGE> 15
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at December 31
ASSETS ($ thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value: (note 4)
Fixed maturity (amortized cost: 1997 $66,565; 1996 $50,456) $ 67,893 $ 51,708
Equity (cost: 1997 $20,153; 1996 $19,450) 19,460 21,572
Mortgage loans 131 645
Policy loans 14,673 9,822
Cash and short-term investments 22,012 17,493
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 124,169 $ 101,240
- --------------------------------------------------------------------------------------------------------------
Guaranteed annuity contracts (note 5) $ -- $ 171,691
Deferred acquisition costs (note 6) 130,355 102,610
Income taxes recoverable 5,679 10,549
Deferred income taxes (note 7) -- 1,041
Other assets 9,364 7,378
Separate account assets 897,044 668,094
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,166,611 $ 1,062,603
- --------------------------------------------------------------------------------------------------------------
LIABILITIES, CAPITAL AND SURPLUS ($ thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
Liabilities:
Policyholder liabilities and accruals $ 94,477 $ 91,915
Bonds payable (note 5) -- 158,760
Notes payable (note 8) 41,500 8,500
Due to affiliates 13,943 11,122
Deferred income taxes (note 7) 1,174 --
Other liabilities 11,704 7,582
Separate account liabilities 897,044 668,094
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 1,052,842 $ 945,973
- --------------------------------------------------------------------------------------------------------------
Capital and Surplus:
Common shares (note 9) $ 4,502 $ 4,502
Preferred shares (note 9) 10,500 10,500
Contributed surplus 98,569 98,569
Retained earnings (deficit) (1,910) 1,726
Foreign currency translation adjustment (5,272) --
Net unrealized gains on securities
available-for-sale (note 4) 380 1,333
- --------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL AND SURPLUS $ 106,769 $ 116,630
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, CAPITAL AND SURPLUS $ 1,166,611 $ 1,062,603
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Premiums $ 5,334 $12,898 $15,293
Fee income 41,955 40,434 24,986
Net investment income (note 4) 8,275 19,651 18,729
Realized investment gains (losses) 118 (119) 3,084
Other 544 668 82
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $56,226 $73,532 $62,174
- ------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Policyholder benefits and claims $ 6,733 $14,473 $16,905
Operating costs and expenses 41,742 34,581 30,728
Commissions 2,838 10,431 5,859
Amortization of deferred acquisition costs (note 6) 4,860 13,240 5,351
Interest expense 2,750 12,251 12,251
Policyholder dividends 1,416 872 1,886
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 60,339 85,848 72,980
- ------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (4,113) (12,316) (10,806)
- ------------------------------------------------------------------------------------------------------------------------------
INCOME TAX BENEFIT (note 7) 477 3,909 3,960
- ------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3,636) $(8,407) $(6,846)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
Net
Unrealized Foreign Total
Retained Gains (losses) Currency Capital
For the years ended December 31 Capital Contributed Earnings on Securities Translation And
($ thousands) Stock Surplus (Deficit) Available-for-Sale Adjustment Surplus
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Balance, January 1 $15,002 $98,569 $ 1,726 $ 1,333 - $116,630
Net loss during the year (3,636) (3,636)
Change in unrealized gain(loss),
net of taxes (note 4) (953) (953)
Other (5,272) (5,272)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 (Note 9) $15,002 $98,569 $ (1,910) $ 380 $(5,272) $106,769
- ----------------------------------------------------------------------------------------------------------------------------
1996
Balance, January 1 $15,002 $83,569 $10,133 $ 1,816 - $110,520
Net loss during the year (8,407) (8,407)
Change in unrealized gain(loss),
net of taxes (note 4) (483) (483)
Issuance of shares (note 9) 15,000 15,000
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $15,002 $98,569 $ 1,726 $ 1,333 - $116,630
- ----------------------------------------------------------------------------------------------------------------------------
1995
Balance, January 1 $15,002 $70,999 $16,979 $(1,141) - $101,839
Net loss during the year (6,846) (6,846)
Change in unrealized gain(loss),
net of taxes 2,957 2,957
Issuance of shares (note 9) 12,570 12,570
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $15,002 $83,569 $ 10,133 $ 1,816 - $110,520
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 18
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Loss $ (3,636) $ (8,407) $ (6,846)
Adjustments to reconcile net loss to net cash used in operating
activities:
Additions (decreases) to policy liabilities (2,147) 3,287 7,329
Deferred acquisition costs (33,544) (36,024) (28,147)
Amortization of deferred acquisition costs 4,860 13,240 5,351
Realized (gains) losses on investments (118) 119 (3,084)
Decreases to deferred income taxes 2,730 777 1,168
Other 7,144 6,540 (5,336)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (24,711) $ (20,468) $(29,565)
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Fixed maturity securities sold $ 73,772 $ 120,234 $ 67,507
Fixed maturity securities purchased (89,763) (108,401) (76,402)
Equity securities sold 10,586 25,505 6,500
Equity securities purchased (11,289) (22,203) (1,726)
Mortgage loans repaid 514 6,669 77,086
Policy loans advanced (4,851) (2,867) (2,461)
Guaranteed annuity contracts 171,691 (16,356) (79,710)
- -----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities $ 150,660 $ 2,581 $ (9,206)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Receipts from variable life and annuity policies
credited to policyholder account balances $ 7,582 $ 5,493 $ 9,017
Withdrawals of policyholder account balances on
variable life and annuity policies (3,252) (2,994) (3,173)
Bonds payable repaid (158,760) - -
Issuance of shares - 15,000 12,570
Issuance of promissory note 33,000 - -
Issuance of surplus notes - - 8,500
- -----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities $(121,430) $ 17,499 $ 26,914
- -----------------------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments:
Increase (decrease) during the year 4,519 (388) (11,857)
Balance, beginning of year 17,493 17,881 29,738
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 22,012 $ 17,493 $ 17,881
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 19
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION
The Manufacturers Life Insurance Company of America ("ManAmerica" or
the "Company") is a wholly-owned subsidiary of The Manufacturers Life
Insurance Company (U.S.A.) ("ManUSA" or the "Parent"), which is in turn
an indirectly owned subsidiary of The Manufacturers Life Insurance
Company ("Manulife Financial"), a Canadian-based mutual life insurance
company. The Company markets variable annuity and variable life
products in the United States and traditional insurance products in
Taiwan.
2. BASIS OF PRESENTATION
a) Adoption of Generally Accepted Accounting Principles
The accompanying consolidated financial statements of The Manufacturers
Life Insurance Company of America and its wholly-owned subsidiaries
have been prepared in accordance with generally accepted accounting
principles ("GAAP").
Prior to 1996, the Company prepared its financial statements in
conformity with statutory accounting practices prescribed or permitted
by the Insurance Department of the State of Michigan which practices
were considered GAAP for mutual life insurance companies and their
wholly-owned direct and indirect subsidiaries. Financial Accounting
Standard Board Interpretation 40, "Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises"
("FIN 40") as amended, which is effective for 1996 annual financial
statements and thereafter, no longer permits statutory based financial
statements to be described as being prepared in conformity with GAAP.
Accordingly, the Company has adopted GAAP including Statement of
Financial Accounting Standards 120 ("FAS 120"), "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", which
addresses the accounting for long-duration insurance and reinsurance
contracts, including all participating business.
Pursuant to the requirements of FIN 40 and FAS 120, the effect of the
changes in accounting have been applied retroactively and the
previously issued 1995 financial statements have been restated for the
change.
The adoption had the effect of increasing net income for 1995 by
approximately $6,859.
b) Recent Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 129 "Disclosure
of Information about Capital Structure," FAS No. 130 "Reporting
Comprehensive Income," and FAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." These new accounting standards,
which will be effective for the 1998 financial statements, will result
primarily in additional disclosures in the Company's financial
statements and are not expected to have a material effect on the
Company's financial position and results of operations.
c) Reorganization
On December 20, 1995, Manulife Reinsurance Corporation (U.S.A.) ("MRC")
transferred to the Company all of the common and preferred shares of
Manufacturers Adviser Corporation ("MAC"), an investment adviser
registered under the Investment Advisers Act of 1940.
On December 31, 1996, ManUSA transferred to the Company all of the
common and preferred shares of Manulife Holding Corporation ("Holdco"),
an investment holding company. Holdco has primarily two wholly-owned
19
<PAGE> 20
subsidiaries, ManEquity Inc., a registered broker/dealer, and the
Manufacturers Life Mortgage Securities Corporation ("MLMSC"), an issuer
of mortgage-backed US Dollar bonds. The Company then transferred all
the common and preferred shares of MAC to Holdco for two shares of $1
common stock of Holdco.
These transfers have been accounted for using the pooling-of-interests
method of accounting. Under this method, the assets, liabilities,
capital and surplus, revenues and expenses of each separate entity are
combined retroactively at their historical carrying values to form the
financial statements of the Company for all periods presented to give
effect to the reorganization as if the structure in place at December
31, 1996 had been in place as of the earliest period presented in these
consolidated financial statements. The accounts of all subsidiary
companies are therefore combined and all significant inter-company
balances and transactions are eliminated on combination. In addition,
the capital and surplus of the Company has been restated retroactively
to reflect the capital structure in place at December 31, 1996.
The revenues and net income reported by the separate entities and the
combined amounts presented in the accompanying consolidated financial
statements are as follows:
For the years ended December 31
<TABLE>
<CAPTION>
($ thousands) 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
ManAmerica $54,404 $45,655
Holdco 15,543 13,828
MAC 3,585 2,691
---------------------------------------------------------------------------------
TOTAL REVENUE $73,532 $62,174
---------------------------------------------------------------------------------
Net Income (loss):
ManAmerica $(8,676) $(7,402)
Holdco (670) (10)
MAC 939 566
---------------------------------------------------------------------------------
TOTAL NET LOSS $(8,407) $(6,846)
---------------------------------------------------------------------------------
</TABLE>
In October 1997, MLMSC was absorbed into Holdco subsequent to the
maturity and repayment of the mortgage-backed US dollar bonds. All
assets and liabilities of MLMSC were transferred to Holdco at their
respective book values.
3. SIGNIFICANT ACCOUNTING POLICIES
a) Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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) Investments
The Company classifies all of its fixed maturity and equity 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 surplus after adjustments
for deferred taxes and deferred acquisition costs. Discounts and
premiums on investments are amortized using the effective interest
method.
Mortgage loans are reported at amortized cost, net of a provision for
losses. The provision for losses is established for mortgage loans
which are considered to be impaired when the Company has determined
that it is probable that all amounts due under contractual terms will
not be collected. Impaired loans are reported at the lower of unpaid
principal or fair value of the underlying collateral.
Policy loans are reported at aggregate unpaid balances which
approximate fair value.
20
<PAGE> 21
Short-term investments include investments with maturities of less than
one year at the date of acquisition.
c) Deferred Acquisition Costs (DAC)
Commissions 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. DAC associated with variable
annuity and variable life insurance contracts is charged to expense in
relation to the estimated gross profits of those contracts. The
amortization is adjusted retrospectively when estimates of current or
future gross profits are revised. DAC associated with traditional life
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 Capital and
Surplus. DAC is reviewed annually to determine recoverability from
future income and, if not recoverable, it is immediately expensed.
d) Policyholder Liabilities
For variable annuity and variable life contracts, reserves equal the
policyholder account value. Account values are increased for deposits
received and interest credited and are reduced by withdrawals,
mortality charges and administrative expenses charged to the
policyholders. Policy charges which compensate the Company for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DAC.
Policyholder liabilities for traditional life insurance policies sold
in Taiwan are computed using the net level premium method and are based
upon estimates as to future mortality, persistency, maintenance expense
and interest rate yields that were established in the year of issue.
e) Separate Accounts
Separate account assets and liabilities represent funds that are
separately administered, principally for variable annuity and variable
life contracts, and for which the contract holder, rather than the
Company, bears the investment risk. Separate account contract holders
have no claim against the assets of the general account of the Company.
Separate account assets are recorded at market value. Operations of the
separate accounts are not included in the accompanying financial
statements.
f) Revenue Recognition
Fee income from variable annuity and variable life insurance policies
consists of policy charges for the cost of insurance, expenses and
surrender charges that have been assessed against the policy account
balances. Policy charges that are designed to compensate the company
for future services are deferred and recognized in income over the
period benefited, using the same assumptions used to amortize DAC.
Premiums on long-duration life insurance contracts are recognized as
revenue when due. Investment income is recorded when due.
g) Expenses
Expenses for variable annuity and variable life insurance policies
include interest credited to policy account balances and benefit claims
incurred during the period in excess of policy account balances.
h) Reinsurance
The Company is routinely involved in reinsurance transactions in order
to minimize exposure to large risks. Life reinsurance is accomplished
through various plans including yearly renewable term, co-insurance and
modified co-insurance. Reinsurance premiums and claims are accounted
for on a basis consistent with that used in accounting for the original
policies issued and the terms of the reinsurance contracts. Premiums
and claims are reported net of reinsured amounts. Amounts paid with
respect to ceded reinsurance contracts are reported as reinsurance
receivables in other assets.
21
<PAGE> 22
i) Foreign Exchange
The Company's Taiwanese branch balance sheet and statement of income
are translated at the current exchange and average exchange rates for
the year respectively. The resultant translation adjustments are
included as a separate component in capital and surplus. In prior
years, there were no reported translation adjustments as there were no
significant movements in foreign currency exchange rates.
j) Income Tax
Income taxes have been provided for in accordance with Statement of
Financial Accounting Standards 109 ("FAS109") "Accounting for Income
Taxes." The Company joins ManUSA, MRC, Capitol Bankers Life Insurance
Company and Manulife Reinsurance Limited ("MRL") in filing a U.S.
consolidated income tax return as a life insurance group under
provisions of the Internal Revenue Code. In accordance with an income
tax sharing agreement, the Company's income tax provision (or benefit)
is computed as if the Company filed a separate income tax return. Tax
benefits from operating losses are provided at the U.S. statutory rate
plus any tax credits attributable to the Company, provided the
consolidated group utilizes such benefits currently. Deferred income
taxes result from temporary differences between the tax basis of assets
and liabilities and their recorded amounts for financial reporting
purposes. Income taxes recoverable represents amounts due from ManUSA
in connection with the consolidated return.
4. INVESTMENTS AND INVESTMENT INCOME
a) Fixed Maturity and Equity Securities
At December 31, 1997, all fixed maturity and equity securities have
been classified as available-for-sale and reported at fair value. The
amortized cost and fair value is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Gains Unrealized Fair Value
As at December 31, Losses
($ thousands) 1997 1996 1997 1996 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
U.S. government $51,694 $ 9,219 $ 937 $ 386 $ (135) $ (98) $52,496 $ 9,507
Foreign governments 6,922 9,227 203 221 (14) (8) 7,111 9,440
Corporate 7,949 32,010 415 981 (78) (230) 8,286 32,761
----------------------------------------------------------------------------------------------------------------
Total fixed maturity $66,565 $50,456 $1,555 $1,588 $ (227) $(336) $67,893 $51,708
securities
Equity securities $20,153 $19,450 $1,496 $2,134 $(2,189) $ (12) $19,460 $21,572
----------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturity securities during 1997 were
$73,772 (1996 $120,234; 1995 $67,507). Gross gains of $955 and gross
losses of $837 were realized on those sales (1996 $1,858 and $1,837;
1995 $2,630 and $218 respectively).
Proceeds from sale of equity securities during 1997 were $10,586 (1996
$25,505; 1995 $6,500). Gross gains of $NIL and gross losses of $NIL
were realized on those sales (1996 $NIL and $140; 1995 $785 and $113
respectively).
The contractual maturities of fixed maturity securities at December 31,
1997 are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
22
<PAGE> 23
<TABLE>
<CAPTION>
($ thousands) Amortized cost Fair Value
-----------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities
One year or less $ 1,654 $ 1,651
Greater than 1; up to 5 years 3,876 3,953
Greater than 5; up to 10 years 50,353 50,655
Due after 10 years 10,682 11,634
-----------------------------------------------------------------------------------
TOTAL FIXED MATURITY SECURITIES $66,565 $67,893
-----------------------------------------------------------------------------------
</TABLE>
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE
Net unrealized gains (losses) on fixed maturity and equity securities
included in capital and surplus were as follows:
<TABLE>
<CAPTION>
As at December 31
($ thousands) 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 3,051 $ 3,722
Gross unrealized losses (2,416) (348)
DAC and other fair value adjustments (50) (1,321)
Deferred income taxes (205) (720)
----------------------------------------------------------------------------------------------------
NET UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE
$ 380 $ 1,333
----------------------------------------------------------------------------------------------------
</TABLE>
b) Investment Income
Income by type of investment was as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $4,545 $ 4,447 $ 4,430
Mortgage loans 67 278 3,076
Equity securities 331 671 646
Guaranteed annuity contracts 2,796 13,196 9,691
Other investments 705 1,419 1,235
----------------------------------------------------------------------------------------------
Gross investment income 8,444 20,011 19,078
----------------------------------------------------------------------------------------------
Investment expenses 169 360 349
----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $8,275 $19,651 $18,729
----------------------------------------------------------------------------------------------
</TABLE>
5. GUARANTEED ANNUITY CONTRACTS AND BONDS PAYABLE
The Company's wholly-owned subsidiary, Manufacturers Life Mortgage
Securities Corporation, has historically invested amounts received as
repayments of mortgage loans in annuities issued by ManUSA. These
annuities were collateral for the 8 1/4 % mortgage-backed bonds
payable. On March 1, 1997 the annuities matured and the proceeds were
used to repay the bonds payable.
In October 1997, MLMSC was absorbed into Manulife Holding Corporation.
23
<PAGE> 24
6. DEFERRED ACQUISITION COSTS
The components of the change in DAC were as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, $102,610 $ 78,829 $ 60,124
Capitalization 33,544 36,024 28,147
Accretion of interest 9,357 6,344 4,992
Amortization (16,864) (19,159) (10,852)
Effect of net unrealized gains (losses)
on securities available for sale 1,268 996 (4,091)
Other 440 (424) 509
-------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 $130,355 $ 102,610 $ 78,829
-------------------------------------------------------------------------------------------------------
</TABLE>
7. INCOME TAXES
Components of income tax benefit were as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current expense (benefit) $(3,207) $(4,686) $(5,128)
Deferred expense (benefit) 2,730 777 1,168
------------------------------------------------------------------------------------------
TOTAL BENEFIT $ (477) $(3,909) $(3,960)
------------------------------------------------------------------------------------------
</TABLE>
The Company's deferred income tax liability, which results from tax
effecting the differences between financial statement values and tax
values of assets and liabilities at each balance sheet date, relates to
the following:
<TABLE>
<CAPTION>
As at December 31
($ thousands) 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Differences in computing policy reserves $34,291 $28,508
Policyholder dividends payable 240 283
Investments 793 -
-------------------------------------------------------------------------------------
Deferred tax assets $35,324 $28,791
-------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs $30,682 $25,522
Investments 166 928
Other deferred tax liabilities 5,650 1,300
-------------------------------------------------------------------------------------
Deferred tax liabilities 36,498 27,750
-------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS (LIABILITIES) $(1,174) $ 1,041
-------------------------------------------------------------------------------------
</TABLE>
The Company and its US insurance affiliates have available capital loss
carryforwards of $4,800 which will begin to expire in 1999 and can only
be used by Capitol Bankers Life Insurance Company.
8. NOTES PAYABLE
a) The Company has an outstanding surplus debenture in the amount
of $8,500 plus interest at 6.7% issued on December 31, 1995 to
ManUSA which matures on December 31, 2005. Payments of
principal and interest cannot be made without prior approval
of the Insurance Commissioner of the State of Michigan and the
Company's Board of Directors, and to the extent the Company
has sufficient unassigned surplus on a statutory basis
available for such payment.
24
<PAGE> 25
b) The Company has an outstanding promissory note in the amount
of $33,000 plus interest at 6.95% issued on December 5, 1997
payable to ManUSA which matures on February 1, 2007.
9. CAPITAL AND SURPLUS
The Company has two classes of capital stock, as follows:
<TABLE>
<CAPTION>
As at December 31:
($ thousands) 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Authorized:
5,000,000 Common shares, Par value $1.00
5,000,000 Preferred shares, Par value $100.00
Issued and Outstanding:
4,501,860 Common shares $ 4,501,860 $ 4,501,860
105,000 Preferred shares 10,500,000 10,500,000
-----------------------------------------------------------------------------------
TOTAL $15,001,860 $15,001,860
-----------------------------------------------------------------------------------
</TABLE>
During 1996, the Company issued two common shares to its Parent Company
in return for a capital contribution of $15,000.
During 1995, the Company issued one common share to its Parent Company
in return for a capital contribution of $12,570.
The Company is subject to statutory limitations on the payment of
dividends to its Parent. Under Michigan Insurance Law, the payment of
dividends to shareholders is restricted to the surplus earnings of the
Company, unless prior approval is obtained from the Michigan Insurance
Bureau.
The aggregate statutory capital and surplus of the Company at December
31, 1997 was $56,598 (1996 $76,202). The aggregate statutory net loss
of the Company for the year ended 1997 was $2,550 (1996 $15,961; 1995
$13,705). State regulatory authorities prescribe statutory accounting
practices that differ in certain respects from generally accepted
accounting principles followed by stock life insurance companies. The
significant differences relate to investments, deferred acquisition
costs, deferred income taxes, non-admitted asset balances and reserve
calculation assumptions.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and the estimated fair values of certain of the
Company's financial instruments at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
($ thousands) Carrying Value Fair Value
------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Fixed maturity and equity securities $87,353 $87,353
Mortgage loans 131 131
Policy loans 14,673 14,673
Liabilities:
Promissory note 33,000 33,000
Surplus note 8,500 8,220
------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
values of the above financial instruments:
FIXED MATURITY AND EQUITY SECURITIES: Fair values of fixed maturity and
equity securities were based on quoted market prices, where available.
Fair values were estimated using values obtained from independent
pricing services.
25
<PAGE> 26
MORTGAGE LOANS: Fair value of mortgage loans was estimated using
discounted cash flows using contractual maturities and discount rates
that were based on U.S. Treasury rates for similar maturity ranges,
adjusted for risk, based on property type.
POLICY LOANS: Carrying values approximate fair values.
PROMISSORY NOTE: Carrying value approximates fair value.
SURPLUS NOTE: Fair value was estimated using current interest rates
that were based on U.S. Treasuries for similar maturity ranges.
11. RELATED PARTY TRANSACTIONS
The Company has a formal service agreement with Manulife Financial
which can be terminated by either party upon two months' notice. Under
the Agreement, the Company will pay direct operating expenses incurred
each year by Manulife Financial on its behalf. Services provided under
the agreement include legal, actuarial, investment, data processing and
certain other administrative services. Costs incurred under this
agreement were $30,873, $26,982 and $23,210 in 1997, 1996 and 1995
respectively. In addition, there were $11,249, $6,934 and $5,052 of
agents bonuses allocated to the Company during 1997, 1996 and 1995,
respectively, which are included in commissions.
The Company has several reinsurance agreements with affiliated
companies which may be terminated upon the specified notice by either
party. These agreements are summarized as follows:
(a) The Company assumes two blocks of insurance from ManUSA under
coinsurance treaties. The Company's risk is limited to $100,000 of
initial face amount per claim plus a pro-rata share of any
increase in face amount.
(b) The Company cedes the risk in excess of $25,000 per life to MRC
under the terms of an automatic reinsurance agreement
(c) The Company cedes a substantial portion of its risk on its
Flexible Premium Variable Life policies to MRC under the terms of
a stop loss reinsurance agreement.
Selected amounts relating to the above treaties reflected in the
financial statements are as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life and annuity premiums assumed $ 509 $ 676 $ 5,959
Life and annuity premiums ceded 1,157 - -
Policy reserves assumed 40,975 44,497 47,386
Policy reserves ceded 130 304 3,838
----------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts to affiliates
were $3,972, $NIL and $NIL during 1997, 1996 and 1995 respectively.
The Company markets variable life insurance and variable annuity
products through Separate Accounts which use Manufacturers Investment
Trust (formerly NASL Series Trust) as its investment vehicle. The
Manufacturers Investment Trust is an entity sponsored by an affiliated
company, The Manufacturers Life Insurance of North America (formerly
North American Security Life Insurance Company).
Manulife Financial provides a claims paying guarantee to the Company's
U.S. policyholders.
26
<PAGE> 27
12. REINSURANCE
In the normal course of business, the Company assumes and cedes
reinsurance as a party to several reinsurance treaties with major
unrelated insurance companies. The Company remains liable for amounts
ceded in the event that reinsurers do not meet their obligations.
The effects of reinsurance on premiums were as follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums $8,572 $12,998 $ 9,809
Reinsurance ceded 2,590 776 475
---------------------------------------------------------------------------------------
TOTAL PREMIUMS $5,982 $12,222 $ 9,334
---------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $909, $357
and $170 during 1997, 1996 and 1995 respectively.
13. FOREIGN OPERATIONS
The Company markets traditional life insurance products in Taiwan
through its Taiwanese Branch. The carrying amount of net assets located
in Taiwan as at December 31, 1997 and 1996 was $6,006 and $15,080
respectively.
The net income (loss) related to the Taiwan and U.S. business was as
follows:
<TABLE>
<CAPTION>
For the years ended December 31
($ thousands) 1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taiwan $(2,835) $(17,530) $ (9,332)
U.S. (801) 9,123 2,486
-------------------------------------------------------------------------------------------
TOTAL $(3,636) $ (8,407) $ (6,846)
-------------------------------------------------------------------------------------------
</TABLE>
14. 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.
27
<PAGE> 28
FINANCIAL STATEMENT SCHEDULES
28
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
The Board Of Directors
The Manufacturers Life Insurance Company Of America
We have audited the financial statements of The Manufacturers Life Insurance
Company of America as of December 31, 1997 and 1996 and 1995 and for each of the
three years in the period ended December 31, 1997 and have issued our current
year report thereon dated March 20, 1998 (included elsewhere in this Annual
Report on Form 10-K). Our audits also included the financial statement schedules
listed in this Annual Report on Form 10-K. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Philadelphia, Pennsylvania Ernst & Young LLP
March 20, 1998
29
<PAGE> 30
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
($THOUSANDS)
<TABLE>
<CAPTION>
Amount
Market Shown in the
Type of Investment Cost Value Balance Sheet
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
United States Government $ 51,694 $ 52,496 $ 52,496
Foreign Governments 6,922 7,111 7,111
Corporate 7,949 8,286 8,286
- --------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 66,565 $ 67,893 $ 67,893
- --------------------------------------------------------------------------------------------------------------
Equity Securities:
Common stocks - other 20,153 19,460 19,460
Mortgage loans 131 131
Policy loans 14,673 14,673
Cash and short term investments 22,012 22,012
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $123,534 $ 87,353 $124,169
==============================================================================================================
</TABLE>
30
<PAGE> 31
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
($ THOUSANDS)
<TABLE>
<CAPTION>
Future
Policy Other
Benefits Policy
Deferred Losses, Claims Claims and Net
Acquisition and Unearned Benefits Premium Investment
Segment Costs Loss Expenses Premiums Payable Revenue Income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997:
Life Insurance and $130,355 $91,994 $674 $1,809 $ 5,334 $ 5,103
annuities
Other (incl. non- - - - - - 3,172
life subsidiaries)
- ---------------------------------------------------------------------------------------------------------------------------
Total $130,355 $91,994 $674 $1,809 $ 5,334 $ 8,275
===========================================================================================================================
1996:
Life Insurance and $102,610 $91,915 $635 $ 379 $12,898 $ 6,141
annuities
Other (incl. non- - - - - - 13,510
life subsidiaries)
- ---------------------------------------------------------------------------------------------------------------------------
Total $102,610 $91,915 $635 $ 379 $12,898 $19,651
===========================================================================================================================
1995:
Life Insurance and $ 78,829 $86,129 $642 $ 582 $15,293 $ 5,841
annuities
Other (incl. non- - - - - - 12,888
life subsidiaries)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 78,829 $86,129 $642 $ 582 $15,293 $18,729
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Benefits, Claims
Losses and Other
Settlement Operating
Segment Expenses Expenses
- --------------------------------------------------------------
<S> <C> <C>
1997:
Life Insurance and $ 6,733 $46,968
annuities
Other (incl. non- - 2,472
life subsidiaries)
- --------------------------------------------------------------
Total $ 6,733 $49,440
==============================================================
1996:
Life Insurance and $14,473 $52,067
annuities
Other (incl. non- - 6,185
life subsidiaries)
- --------------------------------------------------------------
Total $14,473 $58,252
==============================================================
1995:
Life Insurance and $16,905 $37,151
annuities
Other (incl. non- - 4,787
life subsidiaries)
- --------------------------------------------------------------
Total $16,905 $41,938
==============================================================
</TABLE>
31
<PAGE> 32
THE MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
SCHEDULE IV -- REINSURANCE
($ THOUSANDS)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
- --------------------------------------------------------------------------------------------------------------------------
Gross Ceded to Assumed Percentage of
Amount Other from Other Net Amount
Companies Companies Amount Assumed to Net
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997: $9,834,590 $2,083,344 $84,172 $7,835,418 1.07%
Life insurance in force
=========================================================================================
Insurance Premiums:
Life $ 8,572 $ 3,747 $ 509 $ 5,334 9.54%
=========================================================================================
Year ended December 31,
1996: $7,700,816 $ 552,986 $98,741 $7,246,571 1.36%
Life insurance in force
=========================================================================================
Insurance Premiums:
Life $ 12,998 $ 776 $ 676 $ 12,898 5.24%
=========================================================================================
Year ended December 31,
1995: $5,140,950 $ 147,818 $97,908 $5,091,040 1.92%
Life insurance in force
=========================================================================================
Insurance Premiums:
Life $ 9,809 $ 475 $ 5,959 $ 15,293 38.97%
=========================================================================================
</TABLE>
32
<PAGE> 33
Item 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Nothing to Report
33
<PAGE> 34
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of the Company, together with their
principal occupations during the past five years, are as follows:
<TABLE>
<CAPTION>
Name (Age) Position with Manufacturers Life Principal Occupation
of America
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sandra M. Cotter (35) Director (since December 1992) Attorney -- 1989-present, Dykema,
Gossett
James D. Gallagher(42) Director, Secretary and Vice President, Secretary and
General Counsel General Counsel -- January 1997-
present, ManUSA; Vice President,
Legal Services U.S. Operations --
January 1996-present, The
Manufacturers Life Insurance
Company; Vice President, secretary
and General Counsel-- 1994-
present, The Manulife North
America; Vice President and
Associate General Counsel-- 1991-
1994, The Prudential Insurance
Company of America
Bruce Gordon (54) Director Since May 1996 Vice President, U.S. Operations-
Pensions -- 1990-present, The
Manufacturers Life Insurance
Company
Donald A. Guloien (41) President and Director (since Senior Vice President, Business
September 1990) Development -- 1994-to present,
The Manufacturers Life Insurance
Company; Vice President, U.S.
Individual Business --1990-1994
The Manufacturers Life Insurance
Company
Theodore Kilkuskie (42) Director Vice President, U.S. Individual
Insurance -- January 1997-present,
ManUSA; Vice President, U.S.
Individual Insurance -- June 1995-
present, The Manufacturers Life
Insurance Company; Executive Vice
President, Mutual Funds -- January
1995-May 1995, State Street
Research; Vice President, Mutual
Funds -- 1987-1994, Metropolitan
Life Insurance Company
Joseph J. Pietroski (59) Director (since July 1982) Senior Vice President, General
Counsel and Corporate Secretary --
1988-present, The Manufacturers
Life Insurance Company
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
<S> <C> <C>
John D. Richardson (60) Chairman and Director (since Senior Vice President, and General
January 1995) Manager, U.S. Operations -- 1995-
present, he Manufacturers Life
Insurance Company; Senior Vice
President and General Manager,
Canadian Operations -- 1992-1994
John R. Ostler (45) Vice President, Chief Actuary and Financial Vice President - 1992-
Treasurer present, The Manufacturers Life
Insurance Company
Douglas H. Myers (43) Vice President, Finance and Assistant Vice President and
Compliance, Controller Controller, U.S. Operations --
1988-present, The Manufacturers
Life Insurance Company
Victor Apps (49) Senior Vice President and General Senior Vice President and
Manager General Manager, Greater China
Division -- 1995-present, The
Manufacturers Life Insurance
Company; Vice President and
General Manager, Greater China
Division -- 1993-1995, The
Manufacturers Life Insurance
Company; International Vice
President, Asia Pacific
Division -- 1988-1993, The
Manufacturers Life Insurance
Company
Robert A. Cook (43) Vice President Vice President, Product
Management --1996-present, The
Manufacturers Life Insurance
Company; Sales and Marketing
Director, U.K. Division -- 1994-
1995, The Manufacturers Life
Insurance Company; Vice
President, Corporate Strategic
Review -- 1992-1993, The
Manufacturers Life Insurance
Company
</TABLE>
Item 11 - EXECUTIVE COMPENSATION
The company's executive officers may also serve as officers of one or more of
Manulife Financial's affiliates. Allocations have been made as to such officers'
time devoted to duties as executive officers of the Company. The following table
shows the allocated compensation paid or awarded to or earned by the Company's
Chief Executive Officer for services provided to the Company. No other executive
officer had allocated cash compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus Other Restricted Securities LTIP All Other
Principal Annual Stock Under-lying Payouts Compensation (1)
Position Compensation Award(s) Options/SARs
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald A. 1997 $8,732 $5,515 n/a n/a n/a n/a $12
Guloien,
President
</TABLE>
(1) Bonus for 1996 performance paid in 1997.
(2) Does not include group health insurance since the plans are the same for all
salaried employees. Other Annual Compensation disclosed only if the aggregate
value of the perquisite exceeded the lesser of $50,000 or 10% of salary and
bonus.
(3) Other Compensation includes the value of term life insurance premiums paid
by Manulife for the benefit of the executive officer and Company paid 401(k)
plan contributions. In prior years, this column included company paid pension
plan contributions but this year there were no company paid contributions since
the plan is overfunded.
35
<PAGE> 36
The Management Resources and Compensation Committee (the "Committee") of the
Board of Directors for Manulife Financial approves the compensation programs for
all officers as well as the annual review of Manulife Financial's Annual
Incentive Plan awards and Long-Term Incentive Plan grants. Executive officers
participate in certain plans sponsored by Manulife Financial.
Manulife Financial's executive compensation policies are designed to recognize
and reward individual performance as well as provide a total compensation
package which is competitive with the median of Manulife Financial's comparator
group.
Manulife Financial's officer compensation program is comprised of three key
components; base salary, annual incentive and long-term incentive.
SALARY
The Committee approves the salary ranges and salary increase levels for all Vice
Presidents and above based on competitive industry data for all markets in which
Manulife Financial operates. Salary increases to Manulife Financial's officers
and executives have been consistent with the salary increase programs approved
for all employees.
In establishing Manulife Financial's competitive position and developing annual
salary increase programs, Manulife Financial uses several annual surveys as
prepared by independent compensation consulting firms with reference to publicly
disclosed information.
The compensation of executive officers is determined by the individual to whom
the officer reports and is approved by Manulife Financial.
ANNUAL INCENTIVE PLAN
Manulife Financial's Annual Incentive Plan ("AIP") provides the opportunity to
earn incentive bonuses based on the achievement of pre-established corporate and
divisional earnings objectives and divisional and individual performance
objectives. The AIP uses earnings and performance measures to determine awards
with predetermined thresholds for each component as approved by the Committee
annually. Incentive award levels are established for each participant based on
organizational level. When corporate and divisional performance objectives are
significantly exceeded, a participant can receive up to a maximum of 150% to
200% of the established incentive award which would result in incentive award
levels ranging from 22.5% to 100% of base salary. For named Executive Officers,
incentive award levels range from 20-35% of base salary assuming achievement of
targeted performance objectives. If corporate and divisional performance
objectives are above or below targeted performance the incentive award is
adjusted according to plan guidelines.
LONG TERM INCENTIVE PLAN
<TABLE>
<CAPTION>
Estimated Future Payouts Under
Non-Securities-Price-Based Plans
(US $)(3)
-------------------------------------------
Performance or
Securities Units Other Period
or Other Rights Until Maturation Threshold Maximum
Name (#)(1) or Payout(2) ($ or #) Target ($ or #)(4) ($ or #)
- ------------- ---------------- ---------------- ---------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Don Guloien 837 Jan. 1, 2001 N/A $4,819 N/A
</TABLE>
Notes:
(1) Each grant has two components: Cash Appreciation Rights and Retirement
Appreciation Rights.
(2) The appreciation in the value of Cash Appreciation Rights are redeemed four
years following the grant date. Retirement Appreciation Rights are only
redeemed upon retirement or cessation of employment with the Company.
(3) Canadian dollars converted to US dollars using a book rate of 1.36.
(4) The target is calculated assuming Cash Appreciation Rights are exercised
in the fourth year. At that time 50% of the target is redeemed in cash and
the balance continues to appreciate until redeemed upon retirement or
cessation of employment.
All employees at the Vice President level and above are eligible to participate
in the Manulife Financial Long-Term Incentive Plan ("LTIP").
The purpose of the LTIP is to encourage senior officers to act in the long term
interests of Manulife Financial and to provide an opportunity to share in value
creation as measured by the changes in the Manulife Financial's statutory
surplus. The LTIP is an appreciation rights plan which requires that substantial
portion of any accumulated gain remain invested with Manulife Financial during
the participant's career with Manulife Financial.
The Committee reviews the LTIP on an annual basis with respect to Manulife
Financial's performance, targeted growth and competitive position. Based on
management's recommendations, the Committee approves certain officers for
participation in plan, when grants will be awarded, and the size and terms of
grant.
Grants are determined as a percentage of the participant's base salary or
Canadian job grade midpoint depending on organization level of the participant.
Each grant has two components: cash appreciation rights and retirement
appreciation rights which are granted in tandem on a one-for-one basis. Grants
appreciate proportionally to the statutory surplus of Manulife Financial. Cash
appreciation rights are
36
<PAGE> 37
exercised on the fourth anniversary of the grant whereas retirement appreciation
rights may only be exercised upon retirement. The net present value of the
payout opportunity after four years varies between 20% to 100% of base salary
depending on the organization level of the participant.
PERQUISITES
In addition to cash compensation, all officers are entitled to a standard
benefit package including medical, dental, pension, basic and dependent life
insurance, defined benefit plan and long and short-term disability coverage.
Canadian domiciled officers at the Vice President levels and above are eligible
to receive the Executive Flexible Spending Account. The objective of the program
is to assist and encourage the executive officer to represent the interests and
high standards of Manulife Financial, both from a business and a personal
perspective. The program's flexibility allows use of the allowance for benefit
choices from a comprehensive list of options, including: car, mortgage subsidy
and club memberships.
37
<PAGE> 38
CANADIAN STAFF PENSION PLAN
Canadian domiciled executive officers are eligible to participate in Manulife
Financial Canadian Staff Pension Plan and to receive supplemental pension
benefits. Under this plan and the supplemental pension benefit program, income
is payable for the life of the executive officer, with a guarantee of a minimum
of 120 monthly payments. Pensionable earnings for this purpose are calculated as
the highest average of the base earnings and bonuses earned over any 36
consecutive months. The pension benefit is determined by years of service
multiplied by the sum of 1.3% of pensionable earnings up to the average of the
last three years maximum pensionable earnings ("YMPE") and 2% of the excess of
pensionable earnings over the average YMPE, without regard to the maximum
pension limit for registered pension plans imposed by Revenue Canada.
38
<PAGE> 39
Employees hired after the age of 40 who become executive officers within one
year of hire may also receive a service credit equal to their actual period of
service, to a maximum of 10 years. Employees hired between the ages of 30 and 40
who similarly attain executive officer status are entitled to receive a
proportionately reduced benefit under this program.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years of Service
--------------------------------------------------------------------------------------
Remuneration ($) 15 20 25 30 35
- -----------------------------------------------------------------------------------------------------------------
$ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
125,000 24,810 33,079 41,349 49,619 57,889
- -----------------------------------------------------------------------------------------------------------------
150,000 30,324 40,432 50,540 60,649 70,757
- -----------------------------------------------------------------------------------------------------------------
175,000 35,839 47,785 59,732 71,678 83,624
- -----------------------------------------------------------------------------------------------------------------
200,000 41,354 55,138 68,923 82,707 96,492
- -----------------------------------------------------------------------------------------------------------------
225,000 46,868 62,491 78,114 93,737 109,360
- -----------------------------------------------------------------------------------------------------------------
250,000 52,383 69,844 87,305 104,766 122,227
- -----------------------------------------------------------------------------------------------------------------
300,000 63,413 84,550 105,688 126,825 147,963
- -----------------------------------------------------------------------------------------------------------------
400,000 85,471 113,962 142,452 170,943 199,433
- -----------------------------------------------------------------------------------------------------------------
500,000 107,530 143,374 179,217 215,060 250,904
- -----------------------------------------------------------------------------------------------------------------
600,000 129,589 172,785 215,982 259,178 302,374
- -----------------------------------------------------------------------------------------------------------------
700,000 151,648 202,197 252,746 303,296 353,845
- -----------------------------------------------------------------------------------------------------------------
800,000 173,707 231,609 289,511 347,413 405,315
- -----------------------------------------------------------------------------------------------------------------
900,000 195,765 261,021 326,276 391,531 456,786
- -----------------------------------------------------------------------------------------------------------------
1,000,000 217,824 290,432 363,040 435,649 508,257
=================================================================================================================
</TABLE>
Don Guloien, President and Chief Operating Officer, has 16.8 years of credited
service.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)
<TABLE>
<CAPTION>
Title of Class Name & Address of Amount & Nature of Percent of Class
Beneficial Owner Beneficial Ownership
<S> <C> <C> <C>
Common Manulife Reinsurance 4,501,860 shares 100%
Corporation
Preferred Manulife Reinsurance 105,000 100%
Corporation
</TABLE>
(b) Nothing to report.
(c) Nothing to report.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain officers and/or directors of the Company are also officers and/or
directors of ManEquity, Inc., an affiliated broker/dealer. ManEquity, Inc.
received, in 1996, compensation for the sale of variable products issued by the
Company in the amount of $21,492,659. Similar payments will be received in 1997.
Legal fees were paid to the firm of Dykema Gossett during the Company's last
fiscal year. A director of the Company is associated with that firm; however,
legal fees so paid did not exceed 5% of Dykema Gossett's consolidated gross
revenues during its last full fiscal year.
39
<PAGE> 40
PART IV
Item 14. - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Exhibits
(1) The following financial statements of the Registrant are filed as part of
this report:
a. Report of Independent Auditors dated March 13, 1998.
b. Balance Sheets at December 31, 1997 and 1996.
c. Statements of Income for the Years ended December 31, 1997, 1996 and 1995.
d. Statements of Changes in Capital and Surplus for the Years ended December 31,
1997, 1996 and 1995.
e. Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.
f. Notes to Financial Statement - December 31, 1997.
(2) Financial Statement Schedules:
a. Report of Independent Auditors dated March 13, 1998 on financial statement
schedules.
b. Schedule I - Summary of Investments - other than Investment in Related
Parties.
c. Schedule III - Supplemental Insurance Information.
d. Schedule IV - Reinsurance.
All other schedules are omitted because they are not required or the required
information is shown in the financial statements as notes thereto.
(b). The following exhibits are filed as part of this report by incorporation by
reference as indicated below.
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
WHERE EXHIBIT
EXHIBIT NO. DESCRIPTION LOCATED
- ----------- ----------- -------
<S> <C> <C>
(1) Not applicable
(2) None
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
WHERE EXHIBIT
EXHIBIT NO. DESCRIPTION LOCATED
- ----------- ----------- -------
<S> <C> <C>
(3) (a) (i) Restated Articles of Filed as Exhibit 3
Redomestication of The (A) (i) to Post-
Manufacturers Life Effective Amendment
Insurance Company of No. 6 on Form S-1
America** filed by The
Manufacturers Life
Insurance Company of
America on December
9, 1996 (File No.
33-57020)
(3) (b) (i) By-Laws of The Filed as Exhibit 3
Manufacturers Life (b) (i) to Post-
Insurance Company of Effective Amendment
America** No. 6 on Form S-1
filed by The
Manufacturers Life
Insurance Company of
America on December
9, 1996 (File No.
33-57020)
(4)(a) Form of Multi-Account Incorporated by reference
Flexible Variable Annuity to Exhibit (4)(a) to
Policy Pre-Effective Amendment
No. 1 on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on February
10, 1994 (File No. 33-57020).
(4)(b)(i) Individual Retirement Incorporated by reference
Annuity Rider to Exhibit (4)(b)(i)
to Pre-Effective Amendment No. 1
on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on February
10, 1994 (File No. 33-57020).
(4)(b)(i)(a) Trustee-Owned Policies Incorporated by reference
Annuity Rider to Exhibit (4)(b)(i)(a)
to Pre-Effective Amendment No.1
on Form S-1 filed by The
Manufacturers Life Insurance
Company of America on February
10, 1994 (File No. 33-57020).
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
WHERE EXHIBIT
EXHIBIT NO. DESCRIPTION LOCATED
- ----------- ----------- -------
<S> <C> <C>
(4)(b)(ii) Unisex Endorsement Incorporated by reference to
Exhibit (4)(b)(ii) to the
registration statement on Form
N-4 filed by The Manufacturers
Life Insurance Company of
America on January 13, 1993
(File No. 33-57018).
(4) (b) (iii) Endorsement 0646 Filed as Exhibit (4) (b) (iii) to
Form 10Q by The Manufacturers Life
Insurance Company of America on
August 14, 1997 (File No.
33-57020)
(5) Not Applicable
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10)(a) Reinsurance Agreement Incorporated by reference
to Exhibit (10)(a) to
Pre-Effective Amendment No. 1 on
Form S-1 filed by The
Manufacturers Life Insurance
Company of America on February
10, 1994 (File No. 33-57020).
(10)(b)(i) Service Agreement between Incorporated by reference
Manufacturers Life of to Exhibit (8)(a)
America and The Manu- to the registration state-
facturers Life ment on Form N-4 filed by
Insurance Company The Manufacturers Life
Insurance Company of America on
January 13, 1993 (File No.
33-57018).
(10)(b)(ii) Amendment to Service Incorporated by reference
Agreement to Exhibit (8)(b)
to the registration statement
on Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018).
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
WHERE EXHIBIT
EXHIBIT NO. DESCRIPTION LOCATED
- ----------- ----------- -------
<S> <C> <C>
(10)(b)(iii) Second Amendment to Incorporated by reference
Service Agreement to Exhibit (10)(b)(iii)
to the registration statement
on Form N-4 filed by The
Manufacturers Life Insurance
Company of America on April 29,
1994 (File No. 33-57018).
(10)(b)(iv) Service Agreement between Incorporated by reference
The Manufacturers Life to Exhibit (10)(b)(iv)
Insurance Company and to the registration state-
ManEquity, Inc. dated ment on Form N-4 filed by
January 2, 1991 as amended The Manufacturers Life
March 1, 1994 Insurance Company of
America on April 29, 1994
(File No. 33-57018).
(10)(c) Specimen Agreement between Incorporated by reference
ManEquity, Inc. and to Exhibit (3)(b)
registered representatives (i) to the registration
statement on Form N-4 filed by
The Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018).
(10)(d) Specimen Agreement between Incorporated by reference
ManEquity, Inc. and Dealers to Exhibit (3)(b) (ii) to
the registration statement
on Form N-4 filed by The
Manufacturers Life Insurance
Company of America on January
13, 1993 (File No. 33-57018).
(11) None
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) None
(16) Not Applicable
(17) Not Applicable
(18) None
(19) None
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
WHERE EXHIBIT
EXHIBIT NO. DESCRIPTION LOCATED
- ----------- ----------- -------
<S> <C> <C>
(20) Not Applicable
(21) Not Applicable
(22) None
(23)(a) None
(23)(c) None
(24) Power of Attorney Incorporated by reference to
Exhibit 12 to the post-
effective amendment No. 10 to
the registration statement on
Form S-6 filed by The
Manufacturers Life Insurance
Company of America on February
28, 1997 (File No. 33-52310)
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule Filed herewith
(28) Not Applicable
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No Annual Report covering the Registrant's last fiscal year or proxy material
has been or will be sent to Registrant's security holders.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE MANUFACTURERS LIFE INSURANCE
COMPANY OF AMERICA
(Registrant)
March 30, 1998 By: /s/ Donald A. Guloien
- ------------------------ -------------------------------------
Date DONALD A. GULOIEN
President & Director
(Principal Executive Officer)
Attest
/s/ James D. Gallagher
- ------------------------
JAMES D. GALLAGHER
Secretary
45
<PAGE> 46
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons in the capacities
indicated on this 30th day of March, 1998.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
*
- ----------------------------- Chairman and Director
JOHN D. RICHARDSON
*
- ----------------------------- President and Director
DONALD A. GULOIEN (Principal Executive Officer)
*
- ----------------------------- Director
SANDRA M. COTTER
/s/ James D. Gallagher
- ----------------------------- Director
JAMES D. GALLAGHER
*
- ----------------------------- Director
BRUCE GORDON
*
- ----------------------------- Director
JOSEPH J. PIETROSKI
*
- ----------------------------- Director
THEODORE KILKUSKIE, JR.
*
- ----------------------------- Vice President, Finance
DOUGLAS H. MYERS (Principal Financial and
Accounting Officer)
*/s/ James D. Gallagher
- ----------------------------
JAMES D. GALLAGHER
Pursuant to Power of Attorney
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial data schedule for year ended December 31, 1997
</TABLE>
47
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information from the registrant's
consolidated financial statements for the years ended December 31, 1996, 1995
and 1994 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 67,893
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 19,460
<MORTGAGE> 131
<REAL-ESTATE> 0
<TOTAL-INVEST> 124,169
<CASH> 22,012
<RECOVER-REINSURE> 373
<DEFERRED-ACQUISITION> 130,355
<TOTAL-ASSETS> 1,166,611
<POLICY-LOSSES> 94,477
<UNEARNED-PREMIUMS> 674
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 897,044
<NOTES-PAYABLE> 41,500
0
10,500
<COMMON> 4,502
<OTHER-SE> 91,767
<TOTAL-LIABILITY-AND-EQUITY> 1,166,611
5,334
<INVESTMENT-INCOME> 8,275
<INVESTMENT-GAINS> 118
<OTHER-INCOME> 544
<BENEFITS> 6,733
<UNDERWRITING-AMORTIZATION> 4,860
<UNDERWRITING-OTHER> 44,521
<INCOME-PRETAX> (4,113)
<INCOME-TAX> (477)
<INCOME-CONTINUING> (3,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,636)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
